As filed with the Securities and Exchange Commission on February 27, 201522, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM 20-F
(Mark One)
FORM 20-F
(Mark One) |
| | |
| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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| OR | |
x
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 20142017 |
OR
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| OR | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
For the transition period from _____ to _____
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| OR | |
| o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number: 001-09531
TELEFÓNICA, S.A.
(Exact name of Registrant as specified in its charter)
KINGDOM OF SPAIN
(Jurisdiction of incorporation or organization)
Distrito Telefónica, Ronda de la Comunicación, s/n
28050 Madrid, Spain
(Address of principal executive offices)
Consuelo Barbé Capdevila, Securities Market and Corporate Governance Legal Department
Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel. +34 91 482 3733, Fax. +34 91 482 3817, e-mail: amv@telefonica.com
Pablo Eguiron Vidarte, Head of Investor Relations
Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain
Tel. +34 91 482 8700, Fax. +34 91 482 8600, e-mail: ir@telefonica.com
(Name, Telephone, E-MailE-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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| | |
| Title of each class | | Name of each exchange on which registered |
Ordinary Shares, nominal value 1.00 euro per share* American Depositary Shares, each representing one Ordinary Share | | New York Stock Exchange New York Stock Exchange |
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Guarantees** by Telefónica, S.A. of the $1,250,000,000 Fixed Rate Notes Due 2015; $900,000,000 Fixed Rate Guaranteed Senior Notes Due 2015; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $500,000,000 Floating Rate Guaranteed Senior Notes Due 2017; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2018; $1,000,000,000 Fixed Rate Notes Due 2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2023; $1,500,000,000 Fixed Rate Senior Notes Due 2027; $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036; $2,500,000,000 Fixed Rate Senior Notes Due 2047; each of Telefónica Emisiones, S.A.U.;, and of the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2030 of Telefónica Europe, B.V. | New York Stock Exchange |
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* |
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| ● | Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange. |
** |
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| ● | Not for trading, but only in connection with the listing of the $1,250,000,000 Fixed Rate Notes Due 2015; $900,000,000 Fixed Rate Guaranteed Senior Notes Due 2015; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2016; $700,000,000 Fixed Rate Guaranteed Senior Notes Due 2017; $500,000,000 Floating Rate Guaranteed Senior Notes Due 2017; $1,250,000,000the$1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2018; $1,000,000,000 Fixed Rate Notes Due 2019; $1,400,000,000 Fixed Rate Guaranteed Senior Notes Due 2020; $1,500,000,000 Fixed Rate Guaranteed Senior Notes Due 2021; $750,000,000 Fixed Rate Guaranteed Senior Notes Due 2023; and$1,500,000,000 Fixed Rate Senior Notes Due 2027; $2,000,000,000 Fixed Rate Guaranteed Senior Notes Due 2036;2036 and$2,500,000,000 Fixed Rate Senior Notes Due 2047; each of Telefónica Emisiones, S.A.U., and the $1,250,000,000 Fixed Rate Guaranteed Senior Notes Due 2030 of Telefónica Europe, B.V. (each a wholly-owned subsidiary of Telefónica, S.A.)
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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
The number of outstanding shares of each class of capital stock of Telefónica, S.A. at December 31, 20142017 was:
Ordinary Shares, nominal value 1.00 euro per share: 4,657,204,330
5,192,131,686
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes xNo o
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 oNo x
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 xNo o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer or an emerging growth company. See definitionthe definitions of “large accelerated filer”, “accelerated filer” and “large accelerated filer”“emerging growth company” in Rule 12b-2 of the Securities Exchange Act.Act (Check one):
Large accelerated filer xAccelerated filer oNon-accelerated filero |
| | | |
Large Accelerated Filer x | Accelerated Filer o | Non-accelerated Filer o | 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.0
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:
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| |
U.S. GAAP ox
| International Financial Reporting Standards as Issuedissued by the internationalInternational Accounting Standards BoardxOther o |
If “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 oItem 18o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).
This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report can be identified, in some instances, by the use of words such as “will,” “shall,” “target,” “expect,” “aim,” “hope,” “anticipate,” “should,” “may,” “might,” “assume,” “estimate,” “plan,” “intend,” “believe” and similar language or other formulations of a similar meaning or, in each case, the negative formulations thereof. Other forward-looking statements can be identified in the context in which the statements are made or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:
the effect on our results of operations of competition in telecommunications markets;
| · | the effect on our results of operations of competition in telecommunications markets; |
trends affecting our business financial condition, results of operations or cash flows;ongoing or future acquisitions, investments or divestments;
| · | trends affecting our business financial condition, results of operations or cash flows; |
our capital expenditures plan;our estimated availability of funds;
| · | acquisitions, investments or divestments which we may make in the future; |
our ability to repay debt with estimated future cash flows;our shareholder remuneration policies;
| · | our capital expenditures plan; |
supervision and regulation of the telecommunications sectors where we have significant operations;our strategic partnerships;
| · | our estimated availability of funds; |
the potential for growth and competition in current and anticipated areas of our business; and | · | our ability to repay debt with estimated future cash flows; |
| · | our shareholder remuneration policies; |
| · | supervision and regulation of the telecommunications sectors where we have significant operations; |
| · | our strategic partnerships; and |
| · | the potential for growth and competition in current and anticipated areas of our business. |
the outcome of pending or future litigation or other legal proceedings.
Such forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties, and actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. The risks and uncertainties involved in our businesses that could affect the matters referred to in such forward-looking statements include but are not limited to:
changes in general economic, business or political conditions in the domestic or international markets in which we operate or have material investments that may affect demand for our services;
| · | changes in general economic, business or political conditions in the domestic or international markets in which we operate or have material investments that may affect demand for our services; |
exposure to currency exchange rates, interest rates or credit risk related to our treasury investments or in some of our financial transactions;existing or worsening conditions in the international financial markets;
| · | exposure to currency exchange rates, interest rates or credit risk related to our treasury investments or in some of our financial transactions; |
the impact of new accounting standards current, pending or future legislation and regulation in countries where we operate, as well as any failure to renew or obtain the necessary licenses, authorizations and concessions to carry out our operations and the impact of limitations in spectrum capacity;compliance with anti-corruption laws and regulations and economic sanctions programs;
| · | existing or worsening conditions in the international financial markets; |
customers’ perceptions of services offered by us;the potential effects of technological changes and sector trends;
| · | the impact of current, pending or future legislation and regulation in countries where we operate, as well as any failure to renew or obtain the necessary licenses, authorizations and concessions to carry out our operations and the impact of limitations in spectrum capacity; |
failure of suppliers to provide necessary equipment and services on a timely basis;the impact of unanticipated network interruptions including due to cyber-security actions;
| · | compliance with anti-corruption laws and regulations and economic sanctions programs; |
the effect of reports suggesting that electromagnetic fields may cause health problems;
| · | customers’ perceptions of services offered by us; |
the impact of impairment charges on our goodwill and assets as a result of changes in the regulatory, business, economic or political environment;potential liability resulting from our internet access and hosting services arising from illegal or illicit use of the internet, including the inappropriate dissemination or modification of consumer data; and
| · | the actions of existing and potential competitors in each of our markets as well as the potential effects of technological changes; |
| · | failure of suppliers to provide necessary equipment and services on a timely basis; |
| · | the impact of unanticipated network interruptions including due to cyber-security actions; |
| · | the effect of reports suggesting that electromagnetic fields may cause health problems; |
| · | the impact of impairment charges on our goodwill and assets as a result of changes in the regulatory, business or political environment; |
| · | potential liability resulting from our internet access and hosting services arising from illegal or illicit use of the internet, including the inappropriate dissemination or modification of consumer data; and |
| · | the outcome of pending or future litigation or other legal proceedings. |
Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date of this Annual Report. We do not undertake any obligation to update any forward-looking statements that may be made to reflect events or circumstances after the date of this Annual Report including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
Our ordinary shares, nominal value 1.00 euro per share, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges (collectively, the “Spanish Stock Exchanges”) and are quoted through the Automated Quotation System under the symbol “TEF.” They are also listed on the London and Buenos Aires stock exchanges. American Depositary Shares (“ADSs”), each representing the right to receive one ordinary share, are listed on the New York Stock Exchange and on the Lima Stock Exchange. ADSs are evidenced by American Depositary Receipts (“ADRs”) issued under a Deposit Agreement with Citibank, N.A., as Depositary.
As used herein, “Telefónica,” “Telefónica Group,” “Group”, the “Company” and terms such as “we,” “us” and “our” mean Telefónica, S.A. and its consolidated subsidiaries, unless the context requires otherwise.
As used herein, “Atento” means Atento Holding, Inversiones y Teleservicios, S.A. and its consolidated subsidiaries, unless the context requires otherwise.
Below are definitions of certain technical terms used in this Annual Report:
"“Access”Access" refers to a connection to any of the telecommunications services offered by us. We present our customer base using accesses as a data point because the integration of telecommunications services in bundled service packages has changed the way residential and corporate customers contract for our services.Telefónica. A single fixed customer may contract for multiple services, and we believeTelefónica believes that it is more useful to count the number of accesses a customer has contracted for, than to merely count the number of ourits customers. For example, a customer that has fixed line telephony service and broadband service is counted as two accesses rather than as one customer. For mobile customers, we count each active SIM as an access regardless of the number of services contracted through the SIM, e.g. voice and data.
"“ARPU”ARPU" is the average revenues per user per month. ARPU is calculated by dividing total gross service revenues (excluding inbound roaming revenues) from sales to customers for the preceding 12 months by the weighted average number of accesses for the same period, and then dividing by 12.
"“Bundles”Bundles" refer to combination products that combine fixed services (wirelines, broad bandsbroadbands and television) and mobile services.
"“Churn”Churn" is the percentage of disconnections over the average customer base duringin a given period.
"“Cloud computing”computing" is the delivery of computing as a service rather than a product, whereby shared resources, software and information are provided to computers and other devices as a utility over a network (typically the Internet).
"“Commercial activity”activity" includes the addition of new lines, replacement of handsets migrations and changes in types of contracts.migrations.
"“Data ARPU”ARPU" is the average data revenues per user per month. Data ARPU is calculated by dividing total data revenues (from sources such as Short Message Service (SMS)("SMS"), Multimedia Messaging Services (MMS)("MMS"), other mobile data services such as mobile connectivity and mobile internet,Internet, premium messaging, downloading ringtones and logos, mobile mail and wireless application protocol (WAP)("WAP") connectivity from sales to customers for the preceding 12 monthsa given period by the weighted average number of accesses for the same period, and then dividing by 12.the relevant period.
"“Data revenues”revenues" include revenues from SMS, MMS, other mobile data services such as mobile connectivity and mobile internet,Internet, premium messaging, downloading ringtones and logos, mobile mail and WAP connectivity from sales to customers.
"“Data traffic”traffic" includes all traffic from Internet access, messaging (SMS, MMS) and connectivity services that is transported by the networks owned by Telefónica.
"FaasT" is a cybersecurity technology that scans an organization's system 24 hours a day, seven days a week, in order to prevent cybernetic attacks.
"“Final client accesses”accesses" means accesses provided directly to residential and corporate clients.
"“Fixed telephony accesses”accesses" includes public switched telephone network, or PSTN, lines (including public use telephony), and integrated services digital network, or ISDN, lines and circuits. For purposesthe purpose of calculating ourTelefónica's number of
fixed line accesses, we multiply ourTelefónica multiplies its lines in service as follows: PSTN (x1); basic ISDN (x1); and primary ISDN (x30, x20 or x10); 2/6 digital accesses (x30).
""Fixed termination rates"is an established fixed network tariff that applies when a customer makes a call to someone in a network operated by another operator.
"“FTTx”FTTx" is a generic term for any broadband network architecture that uses optical fiber to replace all or part of the metal local loop typically used forloop.
"FWA" means the last mile of telecommunications wiring.fixed broadband service supported on fixed wireless technology (fixed telephony service with mobile technology).
"“Gross adds”adds" means the gross increase in the customer base measured in terms of accesses in a period.
"“HDTV” HDTV" or "high"high definition TV"TV" has at least twice the resolution of standard definition television (SDTV), allowing it to show much more detail than an analog television or digital versatile disc (DVD).
"Hybrid/Control Customer" is a contractual relationship with the customer, where the customer has a postpaid line; if the customer consumes more traffic than the pre-established limit the excess will be billed according to the pre-negotiated tariffs and requires the customer to top up.
"“Incoming revenues”revenues" refers to the interconnection revenues derived from the completion of calls made from outside mobile or fixed carriers into Telefónica´snica's network.
"“Interconnection revenues”revenues" means revenues received from other operators which use ourTelefónica's networks to connect to ouror finish their calls and SMS or to connect to their customers.
"“Internet and data accesses”accesses / Fixed Broadband (FBB)" include broadband accesses(including (including retail asymmetrical digital subscriber line “ADSL,”"ADSL," very high bit-rate digital subscriber line “VDSL”"VDSL", satellite, fiber optic and circuits over 2 Mbps),narrowband accesses(Internet (Internet service through the PSTN lines) and the remaining non-broadband final clientcustomer circuits. Internet and data accesses also include “Naked ADSL”"Naked ADSL", which allows customers to subscribe for a broadband connection without a monthly fixed line fee.
"“IPTV”IPTV" (Internet Protocol Television) refers to distribution systems for television subscription signals or video using broadband connections over the IP protocol.
"“ISP”ISP" means Internet service provider.
"“IT”IT",or information technology, is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications.
"Latch", is a cybernetic application, protecting accounts and on-line services.
"“Local loop”loop" means the physical circuit connecting the network termination point at the subscriber’ssubscriber's premises to the main distribution frame or equivalent facility in the fixed public telephone network.
"“LTE”LTE" means Long Term Evolution, a 4G mobile access technology.
"“M2M”M2M",or machine to machine, refers to technologies that allow both mobile and wired systems to communicate with other devices of the same ability.
"“Market share”share" is the percentage ratio of the number of final accesses or operator revenues over the existing total market in an operating area.area.
"Metashield" is a cybernetic product for protecting metadata (information on data) in digital documents and archives.
"“Mobile accesses”accesses" includes accesses to the mobile network for voice and/or data services (including connectivity). Mobile accesses are categorized into contract and prepaypre-pay accesses.
“Mobile broadband”includes "Mobile Internetbroadband (internet" includes Mobile Internet (Internet access from devices also used to make voice calls such as smartphones), and Mobile Connectivity (internet (Internet access from devices that complement fixed broadband, such as PC Cards/dongles, which enable large amounts of data to be downloaded on the move).
"“MTR”MTR" means mobile termination rate, which is the charge per minute or SMS paid by a telecommunications network operator when a customer makes a call to another network operator.
"“MVNO”MVNO" means mobile virtual network operator, which is a mobile operator that is not entitled to use spectrum for the provision of mobile services. Consequently, an MVNO must subscribe to an access agreement with a mobile
network operator in order to provide mobile access to their customers. An MVNO pays a determined tariff to such mobile network operator for using the infrastructure to facilitate coverage to their customers.
“Net adds”adds" means the difference between the customer bases measurednumber of new accesses in terms of accesses at the end of the period and the beginning of thea certain period.
"“Non SMS data revenues”revenues" means data revenues excluding SMS revenues.
"“OTT services”services" or “over"over the top services”services" means services provided through the Internet (such as television)television and video streaming).
"“Outgoing revenues”revenues" refers to mobile voice or data revenues (SMS, MMS) derived from our consumers´Telefónica's consumers' consumed service.
"“P2P SMS”SMS" means person to person short messaging service (usually sent by mobile customers).
"“Pay-TV”Pay-TV" includes cable TV, direct to home satellite TV, or DTH, and Internet Protocol TV, or IPTV.
"p.p." means percentage points.
"“Revenues”Revenues" means net sales and revenues from rendering of services.
"“Service revenues”revenues" means revenues less revenues from handset sales. Service revenues are mainly related to telecommunications services, especially voice revenues and data revenues (SMS and data traffic download and upload revenues) consumed by ourTelefónica's customers.
"“SIM”SIM" means subscriber identity module, a removable intelligent card used in mobile handsets, USB modems, etc. to identify the user in the network.
"Tacyt" is a cybersecurity tool that supervises, stores, analyses, correlates and classifies mobile applications.
"“Unbundled local loop”loop", or ”ULL”"ULL" includes accesses to both ends of the copper local loop leased to other operators to provide voice and DSL services (fully unbundled loop, fully UL)ULL) or only DSL service (shared unbundled loop, “shared UL”"shared ULL").
"“Voice Traffic”Traffic" means voice minutes used by ourTelefónica's customers over a given period, both outbound and inbound.
"“VoIP”VoIP" means voice over Internet protocol.
"“Wholesale accesses”accesses" means accesses we provideTelefónica provides to ourits competitors, who then sell services over such accesses to their residential and corporate clients.
"“Wholesale ADSL”ADSL" means accesses of broad bandbroadband or fiber that we provideTelefónica provides to ourits competitors, who then sell services over such accesses to their residential and corporate clients.
"YoY" or "y-o-y" means year-on-year.
In this Annual Report we make certain comparisons in local currency or on a “constant euro basis” or “excluding foreign exchange rate effects” in order to present an analysis of the development of our results of operations from year-to-year without the effects of currency fluctuations. To make comparisons on a local currency basis, we compare financial items in the relevant local currency for the periods indicated as recorded in the relevant local currency for such periods. To make comparisons on a “constant euro basis” or “excluding foreign exchange rate effects,” we convert the relevant financial item into euro using the prior year’s average euro to relevant local currency exchange rate. In addition, we present certain financial information excluding the effects of Venezuela being considered a hyperinflationary economy in 2012, 2013 and 2014 by eliminating all adjustments made as a result of such consideration.
In this Annual Report, references to “U.S. dollars,” “dollars” or “$,” are to United States dollars, references to “pounds sterling,” “sterling” or “£” are to British pounds sterling, references to “reais” refer to Brazilian reais and references to “euro”, “euros” or “€” are to the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Community, as amended from time to time.
Our consolidated financial statements as of December 31, 20132017 and 2014,2016, and for the years ended December 31, 2012, 20132017, 2016 and 20142015 included elsewhere in this Annual Report, including the notes thereto (the “Consolidated“Consolidated Financial Statements”Statements”), are prepared in conformity with International Financial Reporting Standards (“IFRS”IFRS”) as issued by the International Accounting Standards Board (“IASB”IASB”).
| Item 1. Identity of Directors, Senior Management and Advisors |
Not applicable.
Not applicable.
Not applicable.
| Offer Statistics and Expected Timetable |
Not applicable.
The following table presents certain selected consolidated financial data. It is to be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, “Item 4. Information on the Company—Business Overview” and the Consolidated Financial Statements. The consolidated income statement and cash flow data for the years ended December 31, 2012, 20132015, 2016 and 20142017 and the consolidated statement of financial position data as of December 31, 20132016 and 20142017 set forth below are derived from, and are qualified in their entirety by reference to the Consolidated Financial Statements.
The consolidated income statement and cash flow data for the yearsyear ended December 31, 20102015 set forth below was retrospectively amended in 2016 to show the reclassification of the results attributable to our operations in the United Kingdom as continuing operations. As such, the information set forth below is not derived from Telefónica, S.A.’s consolidated financial statements presented for the year ended December 31, 2015, which are not included nor incorporated by reference in this Annual Report.
The consolidated income statement and 2011 andcash flow data for the year ended December 31, 2014 set forth below is derived from Telefónica, S.A.’s consolidated financial statements for that year. The consolidated statement of financial position data as of December 31, 2010, 20112014 set forth below was retrospectively amended in 2016 to show the finalization of the purchase price allocation for the acquisition of E-Plus and 2012as such, is not derived from Telefónica, S.A.’s consolidated financial statements presented for the year ended December 31, 2014, which are not included nor incorporated by reference in this Annual Report.
The consolidated statement of financial position as of December 31, 2013 and the consolidated income statement and cash flow data for the year ended December 31, 2013 set forth below are derived from Telefónica, S.A.’s consolidated financial statements presented for such years,the year ended December 31, 2013, which are not included herein.
nor incorporated by reference in this Annual Report.
Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
The basis of presentation is described in detail in Note 2 to our Consolidated Financial Statements.
11 |
| | | | | | | | | | |
| Millions of euros | 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
|
| Revenues | 57,061 |
| 50,377 |
| 54,916 |
| 52,036 |
| 52,008 |
|
| Other income | 1,693 |
| 1,707 |
| 2,011 |
| 1,763 |
| 1,489 |
|
| Supplies | (17,041 | ) | (15,182 | ) | (16,547 | ) | (15,242 | ) | (15,022 | ) |
| Personnel expenses | (7,208 | ) | (7,098 | ) | (10,349 | ) | (8,098 | ) | (6,862 | ) |
| Other expenses | (15,428 | ) | (14,289 | ) | (16,802 | ) | (15,341 | ) | (15,426 | ) |
| Depreciation and amortization | (9,627 | ) | (8,548 | ) | (9,704 | ) | (9,649 | ) | (9,396 | ) |
| OPERATING INCOME | 9,450 |
| 6,967 |
| 3,525 |
| 5,469 |
| 6,791 |
|
| Share of (loss) profit of investments accounted for by the equity method | (304 | ) | (510 | ) | (10 | ) | (5 | ) | 5 |
|
| Net finance expense | (2,696 | ) | (2,519 | ) | (2,341 | ) | (2,706 | ) | (2,290 | ) |
| Net exchange differences | (170 | ) | (303 | ) | (268 | ) | 487 |
| 91 |
|
| Net financial expense | (2,866 | ) | (2,822 | ) | (2,609 | ) | (2,219 | ) | (2,199 | ) |
| PROFIT BEFORE TAX | 6,280 |
| 3,635 |
| 906 |
| 3,245 |
| 4,597 |
|
| Corporate income tax | (1,311 | ) | (383 | ) | (155 | ) | (846 | ) | (1,219 | ) |
| PROFIT FOR THE YEAR | 4,969 |
| 3,252 |
| 751 |
| 2,399 |
| 3,378 |
|
| Attributable to equity holders of the Parent | 4,593 |
| 3,001 |
| 616 |
| 2,369 |
| 3,132 |
|
| Attributable to non-controlling interests | (376 | ) | 251 |
| 135 |
| 30 |
| 246 |
|
| Weighted average number of shares-Basic (thousands)(1) | 4,872,974 |
| 4,850,311 |
| 5,070,588 |
| 5,060,519 |
| 5,110,188 |
|
| Basic and diluted earnings per share attributable to equity holders of the parent (euro)(1) | 0.94 |
| 0.58 |
| 0.07 |
| 0.42 |
| 0.56 |
|
| Basic and diluted earnings per ADS (euro)(1) | 0.94 |
| 0.58 |
| 0.07 |
| 0.42 |
| 0.56 |
|
| Weighted average number of ADS-Basic (thousands)(1) | 4,872,974 |
| 4,850,311 |
| 5,070,588 |
| 5,060,519 |
| 5,110,188 |
|
| Dividends per ordinary share (cash and scrip) (euro) | 0.35 |
| 0.75 |
| 0.75 |
| 0.75 |
| 0.40 |
|
| Dividends per ordinary share (cash and scrip) ($) (2) | 0.47 |
| 0.98 |
| 0.83 |
| 0.82 |
| 0.46 |
|
| Consolidated Statement of Financial Position Data |
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents | 9,977 |
| 6,529 |
| 2,615 |
| 3,736 |
| 5,192 |
|
| Property, plant and equipment | 31,040 |
| 33,156 |
| 33,910 |
| 36,393 |
| 34,225 |
|
| Total assets | 118,862 |
| 122,348 |
| 120,329 |
| 123,641 |
| 115,066 |
|
| Non-current liabilities | 62,236 |
| 62,318 |
| 60,509 |
| 59,805 |
| 59,382 |
|
| Equity | 27,482 |
| 30,321 |
| 25,436 |
| 28,385 |
| 26,618 |
|
| Capital stock | 4,551 |
| 4,657 |
| 4,975 |
| 5,038 |
| 5,192 |
|
| Consolidated Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities | 14,344 |
| 12,193 |
| 13,615 |
| 13,338 |
| 13,796 |
|
| Net cash used in investing activities | (9,900 | ) | (9,968 | ) | (12,917 | ) | (8,208 | ) | (10,245 | ) |
| Net cash used in financing activities | (2,685 | ) | (4,041 | ) | (3,612 | ) | (4,220 | ) | (1,752 | ) |
| Millions of euros | 2010 | 2011 | 2012 | 2013 | 2014 |
| Revenues | 60,737 | 62,837 | 62,356 | 57,061 | 50,377 |
| Other income | 5,869 | 2,107 | 2,323 | 1,693 | 1,707 |
| Supplies | (17,606) | (18,256) | (18,074) | (17,041) | (15,182) |
| Personnel expenses | (8,409) | (11,080) | (8,569) | (7,208) | (7,098) |
| Other expenses | (14,814) | (15,398) | (16,805) | (15,428) | (14,289) |
| Depreciation and amortization | (9,303) | (10,146) | (10,433) | (9,627) | (8,548) |
| OPERATING INCOME | 16,474 | 10,064 | 10,798 | 9,450 | 6,967 |
| Share of (loss) profit of associates | 76 | (635) | (1,275) | (304) | (510) |
| Net finance expense | (2,537) | (2,782) | (3,062) | (2,696) | (2,519) |
| Net exchange differences | (112) | (159) | (597) | (170) | (303) |
| Net financial expense | (2,649) | (2,941) | (3,659) | (2,866) | (2,822) |
| PROFIT BEFORE TAX FROM CONTINUING OPERATIONS | 13,901 | 6,488 | 5,864 | 6,280 | 3,635 |
| Corporate income tax | (3,829) | (301) | (1,461) | (1,311) | (383) |
| PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS | 10,072 | 6,187 | 4,403 | 4,969 | 3,252 |
| Profit after taxes from discontinued operations | − | − | − | − | − |
| PROFIT FOR THE YEAR | 10,072 | 6,187 | 4,403 | 4,969 | 3,252 |
| Non-controlling interests | 95 | (784) | (475) | (376) | (251) |
| PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT | 10,167 | 5,403 | 3,928 | 4,593 | 3,001 |
| Weighted average number of shares (thousands)(1) | 4,705,217 | 4,693,707 | 4,603,539 | 4,627,912 | 4,606,389 |
| Basic and diluted earnings per share from continuing operations attributable to equity holders of the parent (euro)(1) | 2.16 | 1.15 | 0.85 | 0.99 | 0.61 |
| Basic and diluted earnings per share attributable to equity holders of the parent (euro)(1) | 2.16 | 1.15 | 0.85 | 0.99 | 0.61 |
| Earnings per ADS (euro)(1)(2) | 2.16 | 1.15 | 0.85 | 0.99 | 0.61 |
| Weighted average number of ADS (thousands)(1)(2) | 4,705,217 | 4,693,707 | 4,603,539 | 4,627,912 | 4,606,389 |
| Cash dividends per ordinary share (euro) | 1.30 | 1.52 | 0.82 | 0.35 | 0.75 |
| Consolidated Statement of Financial Position Data | | | | | |
| Cash and cash equivalents | 4,220 | 4,135 | 9,847 | 9,977 | 6,529 |
| Property, plant and equipment | 35,802 | 35,469 | 35,021 | 31,040 | 33,343 |
| Total assets | 129,775 | 129,623 | 129,773 | 118,862 | 122,299 |
| Non-current liabilities | 64,599 | 69,662 | 70,601 | 62,236 | 62,311 |
| Equity (net) | 31,684 | 27,383 | 27,661 | 27,482 | 30,289 |
| Capital stock | 4,564 | 4,564 | 4,551 | 4,551 | 4,657 |
| Consolidated Cash Flow Data | | | | | |
| Net cash from operating activities | 16,672 | 17,483 | 15,213 | 14,344 | 12,193 |
| Net cash used in investing activities | (15,861) | (12,497) | (7,877) | (9,900) | (9,968) |
| Net cash used in financing activities | (5,248) | (4,912) | (1,243) | (2,685) | (4,041) |
| |
| (1) | The per share and per ADS computations for all periods presented have been presentedreported using the weighted average number of shares and ADSs, respectively, outstanding for each period, and have been adjusted to reflect the stock dividends which occurred during the periods presented, as if these had occurred at the beginning of the earliest period presented and have also been adjusted for mandatorily convertible notes issued in 2014. In accordance with IAS 33 (“Earnings per share”), the weighted average number of ordinary shares and ADSs outstanding for each of the periods covered has been restated to reflect the issuance of shares pursuant to Telefónica’s scrip dividend in June 2012December 2014, December 2015 and December 2014.2016. As a consequence, basic and diluted earnings per share have also been restated from 20102013 to 2013.2015. |
| |
| (2) | Until January 20, 2011,Quantities in U.S. dollars are calculated in accordance with the conversion rate published by the Depositary (Citibank, N.A.) in connection with each ADS represented the right to receive three ordinary shares. Since January 21, 2011, each ADS represents the right to receive one ordinary share. The above figures have been restated accordingly. Figures do not include any charges of the ADS Depositary.dividend payment. |
Exchange Rate Information
As used in this Annual Report, the term “Noon Buying Rate” refers to the rate of exchange for euro, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes. The Noon Buying Rate certified by the New York Federal Reserve Bank for the euro on February 20, 20159, 2018 was $1.1372=$1.2226= 1.00 euro. The following tables describe, for the periods and dates indicated, information concerning the Noon Buying Rate for the euro. Amounts are expressed in U.S. dollars per 1.00 euro.
Noon Buying Rate
| Noon Buying Rate | | | | |
| Year ended December 31, | Period end | Average (1) | High | Low |
| 2010 | 1.3269 | 1.3218 | 1.4536 | 1.1959 |
| 2011 | 1.2973 | 1.4002 | 1.4875 | 1.2926 |
| 2012 | 1.3186 | 1.2909 | 1.3463 | 1.2062 |
| 2013 | 1.3779 | 1.3303 | 1.3816 | 1.2774 |
| 2014 | 1.2101 | 1.3155 | 1.3816 | 1.2447 |
| 2015 (through February 20, 2015) | 1.1372 | 1.1516 | 1.2015 | 1.1279 |
|
| | | | | | | | |
| Year ended December 31, | Period end |
| Average (1) |
| High |
| Low |
|
| 2013 | 1.3779 |
| 1.3303 |
| 1.3816 |
| 1.2774 |
|
| 2014 | 1.2101 |
| 1.3155 |
| 1.3816 |
| 1.2447 |
|
| 2015 | 1.0859 |
| 1.1032 |
| 1.2015 |
| 1.0524 |
|
| 2016 | 1.0552 |
| 1.1075 |
| 1.1516 |
| 1.0375 |
|
| 2017 | 1.2022 |
| 1.1387 |
| 1.2041 |
| 1.0416 |
|
| 2018 (through February 9, 2018) | 1.2226 |
| 1.2308 |
| 1.2488 |
| 1.1922 |
|
Source: Federal Reserve Bank of New York.
(1) | (1) The average of the Noon Buying Rates for the euro on the last day reported of each month during the relevant period. |
Noon Buying Rate
| Noon Buying Rate | | |
| Month ended | High | Low |
| August 31, 2014 | 1.3436 | 1.3150 |
| September 30, 2014 | 1.3136 | 1.2628 |
| October 31, 2014 | 1.2812 | 1.2517 |
| November 30, 2014 | 1.2554 | 1.2394 |
| December 31, 2014 | 1.2504 | 1.2101 |
| January 31, 2015 | 1.2015 | 1.1279 |
| February 28, 2015 (through February 20, 2015) | 1.1462 | 1.1300 |
|
| | | | |
| Month ended | High |
| Low |
|
| 31 August 2017 | 1.2025 |
| 1.1703 |
|
| 30 September 2017 | 1.2041 |
| 1.1747 |
|
| 31 October 2017 | 1.1847 |
| 1.1580 |
|
| 30 November 2017 | 1.1936 |
| 1.1577 |
|
| 31 December 2017 | 1.2022 |
| 1.1725 |
|
| 31 January 2018 | 1.2488 |
| 1.1922 |
|
| February 9, 2018 (through February 9, 2018) | 1.0802 |
| 1.0551 |
|
Source: Federal Reserve Bank of New York.
Monetary policy within the member states of the euro zone is set by the European Central Bank.
Our ordinary shares are quoted on the Spanish Stock Exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our shares listed on the Spanish Stock Exchanges and, as a result, the market price of our ADSs, which are listed on the New York Stock Exchange. Currency fluctuations may also affect the dollar amounts received by holders of ADSs on conversion by the depositary of any cash dividends paid in euro on the underlying shares.
Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of some of our consolidated subsidiaries are denominated and recorded (principally the Brazilian real, the pound sterling, the Argentine peso, the Peruvian nuevo sol, the Chilean peso, the Colombian peso, the Mexican peso and the Venezuelan bolívar fuerte)bolivar). See Note 3 (a) and (b) to our Consolidated Financial Statements for information on the exchange rate translation methodology we used in preparing our consolidated financial information.
Not applicable.
Not applicable.
D. Risk Factors
The Telefónica Group'sGroup’s business is conditionedaffected by a series of intrinsic risk factors that affect exclusively the Group, as well as a series of external factors that are common to businesses of the same sector. The main risks and uncertainties facing the Company which could affect its business, financial position, reputation, corporate image and brand and its results of operations, must be considered jointly with the information in the Consolidated Financial Statements, and are as follows:
Group-related risks
Group-Related Risks
Worsening of the economic and political environment could negatively affect Telefónica’s business.
Telefónica’snica's international presence enables the diversification of its activities across countries and regions, but it is affected by various legislations,exposes Telefónica to diverse legislation, as well as to the political and economic environments of the countries in which it operates. Any adverse developments or even uncertainties in this regard, including exchange-rate or sovereign-risk fluctuations, may adversely affect the Company's business, financial position, cash flows and results of operations and/or the performance of some or all of the Group’sGroup's financial indicators.
With respect to the economic environment, the Telefónica Group’s business is impacted by overall economic conditions in each of the countries in which it operates. Economic conditions may adversely affect the level of demand of existing and prospective customers, as they may no longer deem critical the services offered by the Group. Factors such
Macroeconomic perspectives in Europe have improved as high debt levels, ongoing restructuringtwo major risks have diminished during 2017. First, political uncertainty has decreased after the results of the general elections in some European countries and, second, the agreement reached in relation to the Greek bailout program and better macroeconomic data in the country have opened the door to a potential solution to the Greek debt crisis in the near term. While such risks have diminished, economic activity and financial stability in Europe could be affected by the monetary normalization that the European Central Bank is expected to continue implementing in the near future, with a negative impact on the balance between the private and public sectors, and by the restructuring processes which the European banking sector is still immersed in. Furthermore, the implementationplanned exit of pending structural reformsthe United Kingdom from the European Union following the outcome of the referendum held in 2016, will result in economic adjustments regardless of the nature of the new trade and continued fiscal austerity measures could hinder more dynamic growth in Europe and, in turn,investment relationships between the consumption and volume of demand for the Group's services, which could materially adversely affect the Group’s business, financial condition, results of operations and cash flows.
The soft economic recovery in Europe together with low inflation rates,United Kingdom and the riskrest of deflation, has ledEurope in the future. In the meantime, there is uncertainty regarding investment, economic activity, employment and may still leadfinancial market volatility. Finally, another possible source of uncertainty given Telefónica's exposure, could come from Catalonia's political situation and its impact on the Spanish economy. Although recent events point to monetarya lower degree of uncertainty, if political tensions re-emerge or intensify, there could be a negative impact both on financing conditions and fiscal easing from key players, with a view to creating a relatively benign scenario for Europe.on the current positive Spanish macroeconomic scenario. In this region,2017, the Telefónica Group generated 23.9%obtained 24.3% of its total revenues in Spain (24.6% in 2016), 14.0% in Germany (14.4% in 2016) and 12.6% in the United Kingdom and 11.0%(13.2% in Germany in 2014.
In addition, the Group’s business may be affected by other possible effects from the economic crisis, including possible insolvency of key customers and suppliers.
2016).
In Latin America, there is an increasing exchange rate risk created by external factors such as the most important challengeuncertainty derived from the monetary normalization process in the United States, the continuing low commodity prices in certain cases despite recent improvement, and doubts about growth and imbalances in China. Certain internal factors such as high fiscal and external deficits in major Latin American countries and the low liquidity in certain exchange markets, together with a low productivity growth, hinder a more accelerated progress in economic development and the rebalancing of still existent mismatches.
In Brazil, although the political scenario continues to be unstable, the government has approved relevant legislative reforms and promoted the approval of other key legislative items, such as the social security reform, which could be approved before the end of the term, which has improved the confidence levels in the government. While signs of stabilization have emerged and the economy has started to show positive growth figures, the pace of the recovery is still weak and the exchange-rate risk in Venezuela and Argentina, given the negative impact that a depreciation in their currencies could have on cash flows from both countries. International financial conditions may be unfavorable and may leadunemployment rate remains at 12%. Moreover, despite decreasing external financing needs, internal financing needs remain high. The combination of such elements has led to potential periodsrisks of volatility linkedfurther downgrades to the evolutioncountry's credit rating, which is already below investment grade, possibly leading to further currency depreciation.
Mexico has a high commercial and financial exposure to the United States, which could generate uncertainty despite having a relatively stable internal outlook, subject to the outcome of the developed financial markets (especially long-termcoming general elections and of the renegotiation of the North American Free Trade Agreement (NAFTA), which is now underway. Any increase in interest rates in the United States and/or a possible renegotiation of trade agreements between both countries could result in higher restrictions on imports into the United States which together with political uncertainty surrounding such matters,
could negatively impact economic activity and exchange rates in Mexico. The relative weight of Mexico in the consolidated revenues of the Telefónica Group was 2.6% for 2017.
In countries such as Chile, Colombia and Peru, increases in commodity prices are having a positive impact on their respective fiscal and external accounts, but growth continues to be affected by the U.S. Federal Reserve’s intervention that are not discountedlower external inflows, which have affected investment and, to a lesser extent, private consumption.
In Argentina, the government is focused on resolving the country's macroeconomic and financial imbalances and on recovering international confidence. The October legislative elections confirmed the good results of the government coalition. However, even though the economy has returned to positive growth rates and the measures taken by the government might continue having positive effects in the market), an economic slowdown in Asia (a key region for Latin America) and slow progress with structural reforms projects in the majority of these countries limiting potential for higher growth rates. Among the most significant macroeconomicmedium term, short term risks persist, including exchange rate risk, factors in the region areespecially due to the high inflation rates, negative economic growth and high internal and external funding needs in Venezuela. These funding needs are significant and are affected byrate.
In Ecuador, despite the recent fallrecovery in oil prices and the recent U.S. dollar depreciation, which ishave allowed for an improvement in economic activity through exports, risks persist, mainly on the main and almost sole source of foreign currency infiscal front. The country's financing needs are still high, which, together with low international reserves, keep the country. These factors are affecting Venezuela’s competitiveness and may resultcountry in a currencymore vulnerable position against volatility shocks.
devaluation. Other risks in the region are Argentina’s high level of inflation coupled with a phase of economic slowdown and weak public finances. Moreover, the recent decline in the prices of oil and other commodities could have a negative impact on the external accounts of countries such as Brazil, Chile, Peru and Colombia.
In relation to the political environment, the Group’s investments and operations in Latin America could be affected by a series of risks related to economic, political and social factors in these countries, collectively denominated “country risk”. For the year ended December 31, 2014,During 2017, Telefónica Hispanoamérica represented 24.1% of the Telefónica Group's revenues (24.2% in 2016), of which 27.8% proceeded from revenues in Argentina, 18.5% in Peru and 17.4% in Chile. During 2017, Telefónica Brazil represented 26.1% and 22.3%23.1% of the Telefónica Group’sGroup's revenues respectively. Moreover, approximately 9.6%(21.3% in 2016). In this respect, 32.4% of the Group’sGroup's revenues in the telephony business arewere generated in countries that do not have investment grade status (in order of importance, Brazil, Argentina, Venezuela, Ecuador, Nicaragua, Guatemala, El Salvador, Nicaragua and Costa Rica), and other countries are only one notch away from losing this threshold. It is also significant that, despite clear improvements in Brazil, the uncertainty surrounding the political situation, fiscal policy stimuli and a relatively high inflation rate could result in a rating downgrade that, depending on the extent of such downgrade, could result in strong exchange-rate volatility due to an outflow of investments, especially in relation to fixed-income.status.
“"Country risk”risk" factors include, among others, the following:
unexpected adverse changes in regulation or administrative policies, including changes that modify the terms and conditions of licenses and concessions and their renewal (or delay their approval);
| · | government regulation or administrative policies may change unexpectedly, including changes that modify the terms and conditions of licenses and concessions and their renewal (or delay their approvals), which could negatively affect the Group’s business in such countries; |
abrupt exchange-rate movements;high inflation rates;
| · | abrupt exchange-rate fluctuations may occur mainly due to high levels of inflation and both fiscal and external deficits with the resulting exchange-rate overvaluation. This movement could lead to strong exchange-rate depreciation in the context of a floating exchange rate regime, a significant devaluation off the back of abandoning fixed exchange rates regimes or the introduction of varying degrees of restrictions on capital movement. For example, in Venezuela, the official U.S. dollar to bolívar fuerte exchange rate is established by the Central Bank of Venezuela and the Minister of Finance, with an alternative market for attracting foreign currency through the Complementary System for Administration of Foreign Currency (Sistema Complementario de Administración de Divisas or “SICAD”) regular and selective auctions. In February 2015, a new Exchange Rate Agreement was established, including the regulations for the Foreign Exchange Marginal System (SIMADI), and the Central Bank of Venezuela published on February 18, 2015 a weighted average exchange rate equal to 172.1 bolívares to the U.S. dollar for the markets referred to in chapters II and IV of such Exchange Rate Agreement. Additionally, the acquisition or use of foreign currencies by Venezuelan or Argentinean companies (in some cases) to pay foreign debt or dividends is subject to the pre-authorization of the relevant authorities. Also, the Argentinean peso, despite its recent stability, continues to be under the threat of a sustained accelerated depreciation against the U.S. dollar;
|
expropriation or nationalization of assets, adverse tax decisions, or other forms of state intervention;economic-financial downturns, political instability and civil disturbances; and
| · | governments may expropriate or nationalize assets, make adverse tax decisions or increase their participation in the economy and in companies; |
| · | economic-financial downturns, political instability and civil disturbances may negatively affect the Telefónica Group’s operations in such countries; and |
| · | maximum limits on profit margins may be imposed in order to limit the prices of goods and services through the analysis of cost structures. For example, in Venezuela, a maximum profit margin has been introduced that will be set annually by the Superintendence for Defense of Socioeconomic Rights. |
maximum limits on profit margins imposed in order to limit the prices of goods and services through the analysis of cost structures (for example, in Venezuela, a maximum profit margin has been introduced that is set annually by the Superintendence for Defense of Socioeconomic Rights).
Any of the foregoing may adversely affect the business, financial position, results of operations andand/or cash flows of the Group.
The Group's financial condition and results of operations may be adversely affected if it does not effectively manage its exposure to foreign currency exchange rates or interest rates or financial investment risks.rates.
AtIn nominal terms, as of December 31, 2014, 70%2017, 71.0% of the Group’sGroup's net financial debt (in nominal terms)plus commitments was pegged to fixed interest rates for a period greater than one year, while 27%year. As of the same date, 17.2% of the Group's net financial debt plus commitments was denominated in a currency other than the euro.
To illustrate the sensitivity of financial expenses to a changevariations in short-term interest rates atas of December 31, 2014:2017: (i) a 100 basis points increase in interest rates in all currencies in which Telefónica hashad a financial position at that date would lead
have led to an increase in financial expenses of 11191 million euros, (ii) whereas a 100 basis points decrease in interest rates in all currencies except the euro, the U.S. dollar and the pound sterling (these to zero(even if negative rates in order to avoid negative rates)are reached), would leadhave led to a reduction in financial expenses of 6874 million euros.euros, in each case for the year ended December 31, 2017. These calculations were made using the same balance position in eachassuming a constant currency and same balance position equivalent to the position at suchthat date and bearing in mindtaking into account the derivative financial instruments arranged.
arranged by the Group.
According to the Group's calculations, the impact on results and specifically changes in the value ofon net exchange differences due to a 10% depreciation of Latin American currencies against the U.S. dollar and a 10% depreciation of the rest of the currencies against the euro would result in exchange losses of 7617 million euros for the year ended December 31, 2017,
primarily due to the weakening of the Venezuelan bolivar and the Argentinean peso.bolivar. These calculations werehave been made using the same balanceassuming a constant currency position in each currency with an impact on profit or loss at such date, includingas of December 31, 2017, taking into account derivative instruments in place. For the year ended December 31, 2014, 22.8%
During 2017, Telefónica Brazil represented 25.9% (24.5% in 2016), Telefónica Hispanoamérica represented 21.9% (23.0% in 2016) and Telefónica United Kingdom represented 10.1% (11.3% in 2016) of the Telefónica Group's operating income before depreciation and amortization (OIBDA) was concentrated in Telefónica Brazil, 26.2% in Telefónica Hispanoamérica and 11.2% in("OIBDA") of the Telefónica United Kingdom.Group.
The Telefónica Group uses a variety of strategies to manage these risks, mainly throughthis risk, among others the use of financial derivatives, which themselves are also expose usexposed to risk, including counterparty risk. Furthermore,However, the Group’sGroup's risk management strategies may not achieve the desired effect, which could adversely affect the Group’sGroup's business, financial condition, results of operations andand/or cash flows.
In 2017, the evolution of exchange rates had a negative impact on results, decreasing the Group's consolidated revenues and OIBDA by an estimated 3.2 p.p. and 4.7 p.p., respectively, mainly due to the depreciation of the Argentine peso, the Venezuelan bolivar and the pound sterling. Furthermore, translation differences had a positive impact on the Group's equity of 2,049 million euros as of December 31, 2016 and a negative impact of 4,607 million euros as of December 31, 2017.
If the Group does not effectively manage its exposure to foreign currency exchange rates or interest rates, it may adversely affect its business, financial position, results of operations and/or cash flows.
Existing or worsening conditions in the financial markets may limit the Group'sGroup’s ability to finance, and consequently, the ability to carry out its business plan.
The performance,operation, expansion and improvement of the Telefónica Group's networks, the development and distribution of the Telefónica Group's services and products, the development and implementation of the Company'sTelefónica's strategic plan the development and implementation of new technologies, or the renewal of licenses as well asor the expansion of ourthe Telefónica Group's business in countries where we operateit operates, may require a substantial amount of financing.
The performanceA decrease in the liquidity of financial marketsTelefónica, or a difficulty in terms of liquidity, cost of credit, access and volatility, continues to be overshadowed by persisting uncertainty regarding certain factors such as the pace of economic recovery, the health of the international banking system and concerns regarding the burgeoning deficits of some European countries. The worsening international financial market credit conditions caused by some of these factors could make it more difficult and more expensive to refinance existing financialrefinancing maturing debt or arrangeraising new funds as debt if necessary, and more difficult to raise funds from the Group's shareholders, and may negatively affect the Group's liquidity. At December 31, 2014, gross financial debt scheduled to mature in 2015 amounted to 8,491 million euros (which includes the net position of derivative financial instruments and certain current payables), and gross financial debt scheduled to mature in 2016 amounted to 8,407 million euros. Despite having covered gross debt maturities of 2015, 2016 and part of 2017 by available cash and lines of credit at December 31, 2014, possible difficulties in maintaining the current safety margin, or the risk that this could be significantly and unexpectedly exhausted,equity could force Telefónica to use resources allocated for otherto investments or other commitments for payment ofto pay its financial debt, which could have a negative effect on the Group's businesses,business, financial position,condition, results of operations and/or cash flows.
Funding could be more difficult and costly in the event of a significant deterioration of conditions in the international or local financial markets due to monetary policies set by central banks, including increases in interest rates and/or balance sheet reductions, and oil price instability, or if there is an eventual deterioration in the solvency or operating performance of Telefónica.
As of December 31, 2017, the Group's net financial debt amounted to 44,230 million euros (48,595 million euros as of December 31, 2016) and, as of December 31, 2017, the Group's gross financial debt amounted to 55,746 million euros (60,361 million euros as of December 31, 2016). At such date, the average maturity of the debt was 8.08 years (6.35 years as of December 31, 2016).
As of December 31, 2017, the Group's gross financial debt scheduled to mature in 2018 amounted to 9,414 million euros, and gross financial debt scheduled to mature in 2019 amounted to 6,063 million euros.
In 2013 theaccordance with its liquidity policy, Telefónica Group issued bonds mainly (i) in euro totaling 3,250 million euros with an average coupon of 3.690%; (ii) in dollars totaling 2,000 million U.S. dollars with an average coupon of 3.709%; and (iii) in Swiss Francs totaling 225 million Swiss francs with an annual coupon of 2.595%. The Telefónica Group also issued undated deeply subordinated securities in euros totaling 1,750 million euros with an average coupon of 6.902%; and in sterling pounds totaling 600 million sterling pounds with a coupon of 6.750%. In 2014 the Telefónica Group issued bonds mainly in the European market with a maturity of eight years totaling 1,250 million euros with an annual coupon of 2.242%, and bonds with a fifteen-year maturity totaling 800 million euros with an annual coupon of 2.932%. In addition, the Telefónica Group issued undated deeply subordinated securities in 2014 totaling 2,600 million euros with an average coupon of 5.075%.
Despite havinghas covered its gross debt maturities profile covered for the next twelve months with cash and credit lines available at December 31, 2017. As of December 31, 2017, the Telefónica Group had undrawn committed credit facilities arranged with banks for an amount of 13,531 million euros (12,541 million euros of which will expire in more than two years, obtaining financing ontwelve months). Telefónica's liquidity could be affected if market conditions make it difficult to renew existing undrawn credit lines. As of December 31, 2017, 7.3% of the international capital marketsaggregate undrawn amount under credit lines was scheduled to expire prior to December 31, 2018.
In addition, given the interrelation between economic growth and financial stability, the materialization of any of the economic, political and exchange rate risks referred to above could also be restricted, in terms of access and cost, if Telefónica's credit ratings are revised downwards, either duelead to lower solvency or operating performance, or as a result of a downgrade in the rating for Spanish sovereign risk by rating agencies. Any of these situations could have a negative impact on the availability and cost of Telefónica's financing and its liquidity strategy. This in turn could have a negative effect on the Group's abilitybusiness, financial condition, results of operations and/or cash flows.
Adoption of new accounting standards could affect the Group's reported results and financial position.
Accounting standard-setting bodies and other authorities may periodically change accounting regulations that govern the preparation of the Group's consolidated financial statements. Those changes could have a significant impact on the way the Group accounts for certain matters and presents its financial position and its results of operations. In some instances, a modified standard or a new requirement with retroactive effect must be implemented, which requires the Group to meet its debt maturities.
Moreover, market conditions could make it harder to renew existing undrawn credit lines, 8% of which, at December 31, 2014, were scheduled to mature prior to December 31, 2015.
restate previous financial statements.
In addition,particular, Telefónica is required to adopt the impactnew accounting standards IFRS 15 "Revenue from Contracts with Customers" and IFRS 9 "Financial instruments", effective from January 1, 2018, and IFRS 16 "Leases", effective from January 1, 2019.
These standards present significant changes that will affect the amount and timing of recognition of revenues and expenses related to certain sales transactions (IFRS 15), the sovereign debt crisisestimation processes for the expected impairment losses on financial assets, the recognition period and the rating downgrades in certain Eurozone countries should be taken into account. Any deterioration in the sovereign debt markets, doubts about developments in European projects (such as implementationdocumentation of the banking union project, the results of the elections in Europe, including Spain among others, or progress towards fiscal integration)hedging policies and strategies (IFRS 9), as well as further credit restrictions by the banking sector could have an adverse effect onaccounting treatment for all lease contracts, other than certain short-term leases and leases of low-value assets (IFRS 16). The Group estimates that the Telefónica Group's ability to access funding and/or liquidity, which couldfirst-time adoption of these changes will have a significant adverse effectmaterial impact on the Group's businesses, financial position, resultsstatements and may make comparisons between periods difficult and less meaningful.
Note 3 to the Consolidated Financial Statements includes information on the main impacts expected from the first-time adoption of operations and cash flows.
the new requirements.
Risks Relating to the Group’s Industry
The Group operates in a highly regulated industry which requires government concessions for the provision of a large part of its services and the use of spectrum, which is a scarce and costly resource.
The telecommunications sector is subject to laws and sector-specific regulations in differentthe majority of the countries and additionally,where the Group operates. Additionally, many of the services the Group provides require the granting of a license, concession or official approval, which usually requires certain obligations and investments to be made, such as those relating to the acquisition of spectrum availability.capacity. Among the main risks of this nature are those related to spectrum regulation and licenses/concessions, rates, universal service regulation, regulated wholesale services over fiber networks, privacy, functional separation of businesses and network neutrality. The fact that the Group's business is highly regulated both affects its revenues and imposes costs on its operations.
Thus, asAs the Group provides most of its services under licenses, authorizations or concessions, it is vulnerable to administrative bodies’bodies' decisions, such as economic fines for serious breaches in the provision of services and, potentially, revocation or failure to renew these licenses, authorizations or concessions, or the granting of new licenses to competitors for the provisions of services in a specific market. The spectrum to which each of the licenses and administrative concessions refers is used for the provision of mobile services on 2G, 3G and 4G technologies. The complementarity between the different frequency bands successively assigned to an operator in a geographic market enables greater flexibility and efficiency in both the deployment of the network and the provision of services to final customers over the capacities resulting from such network.
In this regards,Any challenges or amendments to the Telefónicaterms of licenses, authorizations or concessions granted to the Group pursuesand necessary for the provision of its license renewalsservices or the Group's failure to obtain sufficient or appropriate spectrum capacity in the terms referredjurisdictions discussed below or any others in their respective contractual conditions, thoughwhich it cannot guarantee that it will always complete this process successfullyoperates, or underits inability to assume the most beneficial terms forrelated costs, could have an adverse impact on its ability to launch and provide new services and on its ability to maintain the Group. In many cases complying with certain obligations is required, including, among others, minimum specified quality serviceof existing services, which may adversely affect the Group's business, financial condition, results of operations and/or cash flows.
More detailed information can be found in Annex VI to the Consolidated Financial Statements “Key regulatory issues and coverage standardsconcessions and capital investment. Failure to comply with these obligations could result inlicenses held by the imposition of fines, revision of the contractual terms, or even the revocation of the license, authorization or concession. Telefonica Group”.
Additionally, the Telefónica Group could be affected by regulatory actions carried out byof the antitrust authorities. These authorities could prohibit certain actions, such as new acquisitions or specific practices, create obligations or lead to heavy fines. Any such measures implemented by the competition authorities could result in economic and/or reputational loss for the Group, in addition to a loss of market share and/or harm to the future growth of certain businesses.
Regulation of spectrum and access to new government licenses/concessions of spectrum
In Europe, the amendments by the EU Parliament to the Commission’s proposal on the “Digital Single Market” (the “DSM”) package of measures are currently being discussed byOn September 14, 2016, the European Council. The “DSM” measures include important measures affecting, inter alia, spectrum regulation. Although these measures are not yet final, theyCommission (EC) adopted, among others, a proposed Directive for the establishment of a European Electronic Communication Code (EECC), which could have significant implications, as they include new provisions on secondary markets, criteriainter alia, for access to apply at auctions, renewalsnetworks, spectrum use, auction conditions, duration and termsrenewal of licenses, etc.universal service and consumer protection. The proposed Directive is currently going through the legislative process and its approval is expected in the second quarter of 2018.
In addition,On May 17, 2017, the main allocation criteria forEuropean Parliament and Council approved a decision regarding the use and availability of the 700 MHz band of “Digital Dividend II” (the second spectrum allocation process from television operators to electronic communications services) will be defined in the coming years.band. This could require new cash outflows aheadfrom Telefónica between 2018 and 2022 in the United Kingdom and Spain. The 700 MHz band will initially allow the expansion of the Group’s previously anticipated schedule (itcapacity of 4G networks and, in the near future, the introduction of 5G services with new functionalities. In Spain, it is expected that the spectrum will be available between 2018Ministry of Energy, Tourism and 2021).
Nevertheless, Germany will be the first country in EuropeDigital Agenda publishes its plan to award spectrum inrelease the 700 MHz band. On January 29, 2015,band before June 30, 2018, in line with the German regulator (“BNetzA”calendar approved by the EC and with the 5G National Plan adopted in December 2017. The 5G National Plan also contemplates, among other matters, an urgent auction for the 3.6 GHz band at the beginning of 2018 and, possibly, also in the L band (1452- 1492 MHz).
In connection with the spectrum auction for the 2.3 and 3.4 GHz bands in the United Kingdom, on July 11, 2017 the Office of Communications ("Ofcom") released rules for the upcoming mobile spectrum auction in both the 2.3 GHz (available for "immediate use") and 3.4 GHz bands (which may be used for 5G services). They set forth two separate spectrum caps: a spectrum cap of 255 MHz of immediately usable spectrum and an overall cap of 340 MHz. Hutchison 3G UK Ltd ("H3G") and BT filed a motion to review Ofcom's decision regarding the 3.4 GHz band based on the constraints imposed by the spectrum limits set forth in this band for which they can bid. The judgment was released in December 2017 and both appeals were dismissed. H3G tried to appeal the decision to the Court of Appeal and a hearing took place on February 13, 2018. The appeal was refused and the litigation ended. Therefore, the auction can now proceed without delay. Telefónica UK expects the bidding to start in March 2018.
In Germany, regarding its process to provide new frequencies for the further development of digital infrastructures, the regulatory agency for electricity, gas, telecommunications, post and railway ("BNetzA") published respective final decisionsits position on the spectrum allocation proceedingskey elements on June 27, 2017 and, onat the auction conditionssame time, initiated a procedure for determining the frequency demand for nationwide assignments in the 2 GHz and the 3.6 GHz bands (3.6 GHz is the official wording of BNetza when referring to 3.4-3.8 GHz). Among other things, for the 2 GHz band, BNetzA proposed the joint award of the 700 MHz and 1500 MHz bands. The auction will also include the spectrum corresponding to GSM licenses – the entire 900 MHz band and most of the 1800 MHz band (which will expirefrequencies expiring at the end of 2016) –. Interested bidders may submit applications by March 6, 2015. The auction (Simultaneous Multi-Round Auction) will take place in the second quarter of 2015.
On July 4, 2014, BNetzA adopted a decision concerning the frequency aspects of the Telefónica Deutschland Holding AG merger with E-Plus Mobilfunk GmbH & Co KG (“E-Plus”). BNetzA has instructed Telefónica Deutschland (the surviving entity after2020 and 2025 and indicated that, following the merger takes place) to anticipate the termination of its rights of use in the 900 / 1800 MHz bands by December 31, 2015, (instead of December 31, 2016), if Telefónica Deutschland does not reacquire these frequencies at the above-mentioned auction proceeding. Both Telefónica Deutschland and E-Plus, have legally challenged this BNetzA decisionon August 4, 2014. The German regulator also announced that, onceit does not intend to withdraw any rights of use allocated to Telefónica Deutschland before their expiration (2020 and 2025, respectively). For the auction3.6 GHz band, regional assignments for a part of spectrum mentioned above is over, it will perform a frequency distribution analysis, and determine whether any additional action is needed, particularlythe frequencies are provided for in the area of the 2GHz spectrum band granted to Telefonica Deutschland.
In addition, and within the framework of the conditions imposed by the European Commission in connection with the merger, the surviving entity of the merger is obliged to offer up to 2x10 MHz in the 2600 MHzpaper, as well as upmutual co-usage rights between national and regional assignments. Additionally, it also foresees a demand-based supply with 5G. The procedures to 2x10 MHzauction both bands could begin in 2018 or 2019. The Telefónica Deutschland Group reported its request for frequency by the deadline of September 30, 2017 and commented on the key elements of the proposal. The final determination of the frequency demand and the first draft decisions in this regard are expected in the 2100 MHz spectrum bandfirst quarter of 2018. For frequencies above 24 GHz, BNetzA intends to one potential new mobile network operator. This offer is open to any potential new mobile network operator that had declared a respective interest by December 31, 2014 and to the operator with whom Telefónica Deutschland has signed the network access agreement (Drillisch Group).
On December 26, 2014, the Spanish Government adopted a law in which it delayed, to a maximum period ended on April 1, 2015, the effective delivery of the frequenciesinitially develop an application process in the 800 MHz spectrum which are part of the "Digital Dividend" (the spectrum allocation process from television operators to electronic communications services), and which were expected to be delivered on January 1, 2015 to the already awarded mobile operators. The license term has been extended accordingly to April 24, 2031.
In the United Kingdom a significant increase in the annual license fees charged for the use of the spectrum in 900 MHz and 1800 MHz bands has been proposed by the regulator (the Office of Communications (“Ofcom”)). The outcome of it remains uncertain. Separately, the United Kingdom Government announced recently an agreement with the United Kingdom mobile operators, including Telefonica United Kingdom, under which the mobile operators would accept a 90% geographic coverage obligation for voice and text services. Given the agreement, Ofcom has agreed to consider the impact of the geographic coverage obligation on its valuation of annual fees for 900 MHz and 1800 MHz spectrum. This is expected to delay Ofcom’s decision.In addition, on November 7, 2014, Ofcom released a public consultation on the award of 2.326 GHz and 3.4 GHz bands that is expected to take place in late 2015 or early 2016.frequency band.
In Latin America, spectrum auctions are expected to take place implyingin the coming years, requiring potential cash outflows to obtain additional spectrum or to meet the coverage requirements associated with these licenses. Specifically, the procedures expected to take place in 20152018 in jurisdictions that are relevant for the Group are:
Mexico: An auction of spectrum in the 2500 MHz band is expected to take place in 2018.
| · | Peru:The government announced plans to auction the 700 MHz spectrum band in the first half of 2015 (three blocks of 2x15 MHz have been defined).Colombia: In February 2017, the Ministry of Information Technologies and Communications ("ITC") published the conditions for the auction of 70 MHz of spectrum in the 700 MHz band and of 5 MHz of spectrum in the 1900 MHz band. The ITC modified through Decree 2194 of December 27, 2017 the spectrum caps, increasing them by 5MHz for high bands, reaching a total of 90 MHz, and by 15MHz for low bands, reaching a total of 45 MHz. On January 23, 2018, the ITC published a second project on the conditions of the 700 MHz auction, which included certain modifications, such as: the auction mechanism would be based on a multiple-round ascending clock auction, and the obligation to provide free wifi zones would be removed. This second project was subject to comments until February 20, 2018. The schedule for the auction has not yet been set but the ITC has announced that it should take place in 2018. |
Argentina: The government instructed the regulatory authority to issue new regulations during 2017 (i) to ensure the reassignment of frequencies of the radio spectrum for the provision of wireless or fixed wireless services (known as the "refarming process"), which Telefónica has challenged in court, and (ii) to enable the reassignment of frequencies previously granted to other providers (known as the "spectrum on demand process"). In connection
| · | Costa Rica: Costa Rica’s government has communicated its intention to auction spectrum in the 1800 MHz and AWS bands during 2015. |
with the latter, in May 2017 such "spectrum on demand process" was launched and, in June 2017, certain 2.6 GHz spectrum was granted to Telefónica and other licensed mobile operators, but the effective distribution of the spectrum is still pending.
| · | Mexico: The Federal Institute of Telecommunications (Instituto Federal de Telecomunicaciones) (“IFT”) published its Annual Program for Frequency Use and Development 2015. The program specifies IFT’s intention to award Advanced Wireless Services “AWS” concessions during the course of 2015.
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FurtherIt is possible that some of the above-mentioned spectrum tender procedures will not be completed, or even initiated within the proposed time frames. In addition to the above, it may be the case that certain administrations maywhich have not haveyet announced their intention to release new spectrum, and may do so during the year.2018 or thereafter. The above does not include processes announced viathrough general statements by administrations, which involve bands not key to Telefónica’snica's needs. Furthermore, Telefónica may also seek to acquire spectrum on the secondary market shouldwhere opportunities might arise.
Risks relating to concessions and licenses previously granted
In Argentina,the United Kingdom, Telefónica has an obligation under the terms of its 800 MHz spectrum license to provide indoor coverage to 98% of the United Kingdom population (and 95% of the population of each of England, Wales, Scotland and Northern Ireland). It also has an obligation under the terms of its 900/1800 MHz spectrum license to provide voice and text services to 90% of the United Kingdom landmass. Both requirements had to be met by the end of 2017 and must be maintained thereafter. Telefónica United Kingdom continues to invest in its infrastructure improvement program, upgrading its 2G and 3G networks and working on December 1, 2014, the Secretaryroll-out of Communication through Resolution 85/2014 officially awardedits 4G network. Telefónica ArgentinaUnited Kingdom is in the block 1710-1720/2110-2120process of providing information to the UK's regulatory authority, Ofcom, to demonstrate its compliance with the obligations mentioned above.
In Spain, also related to the licenses of the 800 MHz spectrum band, the assignee operators of 2x10MHz spectrum (Telefónica, Vodafone and Orange) must jointly complete before January 1, 2020 the offering of services provided with other technologies or in other bands of frequency, with the purpose of reaching coverage that allows access, with a speed of 30 megabits per second or faster, to at least 90% of the inhabitants in population units of less than 5,000 inhabitants. In this regard, there was a public consultation process open until January 22, 2018 regarding the way to implement this obligation. In any event, Telefónica is undergoing a constant process of deployment and densification of Long-Term Evolution (“LTE”) solutions over the 800 MHz band that will be the base for a periodcompliance with such obligations.
In Germany, in connection with the merger of 15 years,Telefónica Deutschland Holding AG and E-Plus, three legal proceedings remain open before the European General Court against the decision of the EC authorizing such merger. Oral hearings were held in December 2017 and the 700 MHz block (703-713/758-768 MHz) isdecisions are expected to be officially transferred to Telefónica Argentina during 2015.
in the first quarter of 2018.
In the state of São Paulo, TelefóTelefônica BrasilBrazil provides local and national long-distance Commuted Fixed Switched Telephony Service (CFTS)Services ("STFC") under the so-called public regime, through a concession agreement, which will beis expected to remain in force until 2025. In this regard, in June 27, 2014, as established inaccordance with current regulations, Telefônica Brazil informed the concession agreement, the National Telecommunications AgencyBrazilian regulatory authority (AgênciaAgencia Nacional de Telecomunicações or "ANATEL") (“ANATEL”) issued a public consultation forthat the revisionnet value of assets assigned to the provision of STFC was estimated to total 8,763 million Brazilian reals as of December 31, 2017 (approximately 2,209 million euros under the exchange rate applicable on such date). Under current regulations, Telefónica must update this information by April 30, 2018 by sending the updated list and value of the assets assigned to the provision of STFC as of December 31, 2017. In principle, such assets were considered to be reversible assets, and were thus supposed to be reverted to the Federal Government at the end of the concession agreement. A bill amending the regulatory framework in Brazil is in process, establishing, among other things, that such assets would no longer be reversible under a new license regime in exchange for significant broadband investment commitments. The bill has been approved at both legislative houses but has been challenged before the Federal Supreme Court due to an alleged procedural defect. The outcome of this lawsuit is uncertain, although the Senate's governing board may overcome it by sending the bill for voting in the Plenary (such action depends on the political environment, which is also uncertain). Such publicCourt and, consequently, the Senate's governing board, has each decided to send the bill for voting in the Plenary. In the event that the bill is finally approved, ANATEL would be entitled to adopt the relevant administrative decisions for the amendment of the respective licenses with the consequent amendment of the future obligations imposed on STFC providers.
consultation revising the concession agreement ended on December 26, 2014 and allowed contributions on certain topics such as service universalization, rates and fees and quality of services, among others. Definitive conditions will be published in 2015.
Additionally, inIn Colombia, the Information and Communication Technologies (“ITC”) MinistryITC issued a Resolutionresolution 597 on March 27, 2014 to renew 850 MHz/1900 MHz band licenses for 10ten additional years. Under the scope of such resolution, Colombia Telecomunicaciones, S.A., ESP ("ColTel") (67.5% of which is owned, directly and indirectly, by Telefónica and 32.5% of which is owned by the government of Colombia), renewed its license to exploit such radioelectric spectrum to provide telecommunication services.
The concession agreements from 1994, which were renewed in 2004 and under which the mobile telephone services were provided until 28 November 2013, contained a reversion clause for the underlying assets. However, Law 422 of assets1998 and Law 1341 of 2009 provided that upon expiration of a concession agreement for telecommunication
services, only the liquidationspectrum reverts to the State. That was the understanding under which all the operators, including the authorities, were operating between 1998 and 2013. In 2013, however, when analyzing an appeal on the constitutionality of said laws, the Constitutional Court confirmed the constitutionality of the laws but ruled that it could not be concluded that those laws modified with retroactive effect the reversion clause of the concession contract will be discussed until May 2015, taking into considerationagreements of 1994. On February 16, 2016, the ITC started an arbitration proceeding against ColTel and other defendants in accordance with the terms of the contract,relevant concession agreement of 1994, in order to clarify the validity and scope of such reversion clause. The arbitration award was rendered on July 25, 2017 and was not favorable to ColTel and its co-defendants.
The arbitration tribunal ordered ColTel to pay 1,651,012 million Colombian pesos, after finding on August 4, 2017 that an arithmetic error required that the amount contained in the original award from July 25, 2017 be revised slightly downwards. On August 29, 2017, the shareholders' meeting of ColTel approved a capital increase in a total amount of 1,651,012 million Colombian pesos, 470 million euros at the exchange rate as of such date, to pay the amount imposed by the arbitration award. The Telefónica Group and the Constitutional Court’s reviewColombian government subscribed the capital increase pro rata to their respective shareholding in ColTel. Telefónica's decision to participate in the capital increase does not constitute, and should not be understood as, an acceptance of Law 422the arbitration award. Telefónica reserves all of 1998, which establishedits legal rights and the reversionexercise by Telefónica or ColTel of onlyany applicable legal action, national or international. Both ColTel and Telefónica have started legal actions. On August 18, 2017, ColTel filed an appeal to challenge the radio-electric frequencies.arbitration award at Colombia's highest court of administrative litigation (Consejo de Estado). In addition, on December 18, 2017, ColTel also filed a constitutional action “acción de tutela” seeking to protect its constitutional rights jeopardized by the arbitration award. On the other hand, pursuant to the relevant bilateral treaty, Telefónica notified Colombia of its intention to file a claim in the International Centre for Settlement of Investment Disputes ("ICSID") after the expiration of the 90-day notice period. After the expiration of such deadline, on February 1, 2018, Telefónica submitted the arbitration request to the ICSID.
In Peru, an application for partial renewal of theTelefónica has concessions for the provision of fixed-line services until November 2027. In December 2013, Telefónica filed a partial renewal request for these concessions for five more years. In December 2014 and June 2016, Telefónica filed renewal requests for an additional twenty years in relation to a concession for the fixed-line service for another five years has been issued, although assurance has been given byprovision of local carrier services and to one of the “Ministryconcessions to provide mobile line services in certain provinces, respectively. As of the date of this Annual Report, the decision of the Ministry of Transport and Communications” (MinisterioCommunications (Ministerio de Transportes y Comunicaciones)Comunicaciones) in previous renewals, thatthese proceedings is still pending and, according to the concession willlegislation, the underlying concessions remain in force until November 2027. Also, a new law has been enacted establishing mobile virtual network operator (MVNOs) and Rural Mobile Infrastructure Operators (RMIOs) inas long as the Peruvian market.
In Mexico, in light of the constitutional reform resulting from the “Pact for Mexico” political initiative, it is expected that a publicly-owned wholesale network, which will offer wholesale services in the 700 MHz band, will be created. As of today, the funding and the marketing model of this project have not yet been determined.
proceedings are pending.
Telefónica Móviles Chile, S.A. was awarded 2x10 MHz spectrum on the 700 MHz (2x10 MHz) band in March 2014. A third party provider opposed thisWhile services are being provided on such spectrum, a consumer organization filed a claim against the allocation of spectrum on the basis700 MHz band that it would exceedis still pending.
During 2017, the limit spectrum of 60 MHz established by a judgment of the Supreme Court of January 27, 2009. This cap was established for the AWS auction held in 2009, but not for subsequent auctions (2600 MHz and 700 MHz). In a judgment on December 31, 2014, the court of appeals rejected the third party claim. Consequently, the regulator is in a position to adopt a Decree awarding the concession to Telefónica.
TheGroup's consolidated investment in spectrum acquisitions and renewals in 2014 amounted to 1,294.2538 million euros.
The Company’s failure to obtain sufficient or appropriate spectrum capacity in the jurisdictions discussed above or any others in which it operates or its inability to assume the related costs, could have an adverse impact on its ability to launch and provide new services and on the Company’s ability to maintain the quality of existing services, which may adversely affect the Group’s business, financial condition, results of operations and cash flows.
Regulation of wholesale services
The EC's proposal in respect of the regulatory framework intends, among other measures, to incorporate a methodology and retail charges
In terms of roaming,a European upper limit for the regulated “Eurotariffs” were reduced on July 1, 2014 (in the wholesale market, the price of data was reduced by 67%, the price of call by 50%; andcall-termination prices for landline phones/mobile phones (FTRs/MTRs) applicable in the retail market, the price of data was reduced by 55%, the price of outgoing voice call by 21%, the price of incoming voice call by 28% and the price of outgoing texts by 25%), as per the regulation approved in 2012. The structural roaming solutions which could lead to a price decrease in the intra-European Union roaming services also took effect in July 2014. Furthermore, the package of DSM measures mentioned above, which is under discussion, also includes a proposal to eliminate European Union roaming charges as of a yet to be determined date. However, the European Parliament proposed the “end of roaming” by December 15, 2015 in a proposal known as “Roaming Like at Home”.
EU. The decreases in wholesale mobile network termination rates (“MTR”("MTRs") in Europe are also noteworthy. Since termination fees in mobile and fixed communications have decreased substantially in recent years, future decreases are expected to become smaller so that the negative impact on turnover is expected to be less significant than in the past.
In the United Kingdom, wholesale MTRs have been reduced to 0.845 ppm (pence/minute)the current rate is 0.495 pence per minute. On June 27, 2017, Ofcom made a consultation on a proposal for a progressive reduction over a three-year period from April 1, 2014 (representing a 0.3% reduction compared to the previous rates). In a consultation document published in June 2014, Ofcom has proposed a further reduction to 0.545 ppm, from April 1, 2015.
In Germany, on September 3, 2014, the BNetzA adopted a proposal to reduce MTRs. The new prices will gradually decrease to 0.0172 euro/minute from December 1, 2014, and2018, which would result in a second stage, from 0.0172 euro/minute to 0.0166 euro/minute from December 1, 2015 until the end of November 2016. The European Commission has requested10% reduction in real terms in MTRs during that the German regulator withdraw or amend its latest decision on mobile termination rates, in force as at the date of this Annual Report. There is a risk that the European Commission will initiate infringement proceedings against Germany, and rates may be further reduced.
period.
In Spain, the National Regulatory & Competition Authority (Comisión Nacional de los Mercados y la Competencia) has adopted a final decision on the third round analysis of the wholesale market for fixed call termination. Fromin November 1,
2014, a symmetric fixed termination rate (“FTR”) of 0.0817 euro cents/minute applies, based on pure bottom-up long run incremental costs (“BU-LRIC”) meaning that billing must be entirely conducted on a “per second” basis, without a peak/off-peak differentiation. The decision therefore eliminates the asymmetry in FTRs that existed since 2006 when alternative network operators were allowed to charge up to 30% above Telefónica’s per minute local FTR. It also brings forth an important reduction in average termination prices for Telefónica (by 80%) in comparison to the former applicable tariffs.
In Latin America, there are also moves to review MTRs leading to these being reduced. Thus, for example, developments in Mexico are among the most relevant, where the IFT has declared the América Móvil Group a preponderant operator in the telecommunications market. As a result, on March 26, 2014, it introduced, among others, special regulations on asymmetric interconnection rates. In that sense, the Federal Telecommunications and Broadcasting law, effective as of August 13, 2014, imposed several obligations on the preponderant operator, which are quite extensive and, in principle, potentially significantly beneficial to Telefónica’s competitive position, particularly with regards to the measures imposed on preponderant operators (to the extent they nominally retain such qualification). With regards to MTR, Telefónica México filed an administrative appeal against the 2011 resolutions of the Federal Telecommunications Commission of México (Cofetel) regarding mobile network termination rates (representing a 61% reduction compared to the previous rates). As of the date of this Annual Report, no ruling has been made on this appeal. Recently, IFT determined the mobile termination rates for 2012, and Telefónica México filed an injunction against this rate. Once these appeals have been concluded, the rates applied may be further reduced retroactively. As of the date of this Annual Report, IFT has not approved the termination rates for 2013, 2014 or 2015 for Telefónica México.
In Brazil, at the end of 2012, ANATEL launched the “Plano Geral de Metas de Competição” (“PGMC”) regarding fixed-mobile rate adjustment reductions until February 2016 and amending the previous reduction conditions (75% of the 2013 rate in 2014 and 50% of the 2013 rate in 2015). In order to complement reductions and approach the cost of the services according to a financial cost model, on July 7, 2014, ANATEL published reference values for MTR taking effect from 2016 to 2019. Such reductions are approximately 44% per year. Furthermore, there are several legislative initiatives that aim to abolish the basic fee of fixed-telephony service. “Price protection” practices (reimbursement of differences in prices of a product to customers if this falls within a relative short period of time) may also have a negative impact in Telefónica Brasil, in both economic and image terms.
In Chile, a tariff decree was issued to set fixed-line termination charges for the 2014-2019 periods. The new tariff entered into effect on May 8, 2014 and applies a reduction of 37% in prices against those charged for the period prior to such tariff. A tariff decree has been issued for mobile networks covering the 2014-2019 five-year period. Such tariff decree entered into effect on January 25, 2014 and implies a reduction of 74.7% with respect to the previous rates. After a review by the general comptroller (Contraloría General) an additional 1.7% reduction was approved on May 27, 2014.
In Ecuador the rate-related risks relate to a reduction in rural and urban telephony charges, a reimbursement of top-up balances, as well as rounding to the nearest minute.
The implementation of the Enabling Act (Ley Habilitante) in Venezuela also confers full powers to the President to implement price control measures. Under this Act, in January 2014, an organic fair price law was issued, which caps the revenue of related enterprises at 30% of their operating costs. In relation to MTRs with the national operator of reference (Compañía Anónima Nacional Teléfonos de Venezuela) (“CANTV”), these have been reduced by 6% compared to the previous rates. In November 2014, near the end of the term allowing the enactment of laws autonomously granted to the President of the Republic, new important decree-laws were enacted, in particular, the Reform of the Law on Foreign Investment, in which, among other things, new requirements for the return of foreign investment were established; the Reform of the Antitrust Law, which was predominantly aimed at enhancing monopoly control regulation and increasing penalties for infringement; and the Reform of the Exchange Crimes Law, which increased economic sanctions.
In Colombia, on December 30, 2014, the Colombian regulator (“CRC”) enacted Resolution 4660 establishing a gradual reduction for MTRs. The glide path initiates in 2015 in 32.88 Colombian pesos per minute representing a decrease of 41.7% and then descends approximately 42.2% in 2016 and 42.2% in 2017, (each such reduction being as compared to the previous year). This regulatory measure also imposes asymmetric MTRs to the dominant provider (the América Móvil Group), imposing the final rate established in the glide path from 2015 to 2017. The CRC also regulated the charges for national roaming and the SMS termination rates, setting a reduction of 41.5% in 2015, 39.6% in 2016 and 43.3% in 2017 (each such reduction being as compared to the previous year).
Regulation of universal services
Further to its formal obligation to review the scope of the Universal Service Directive (the set of basic electronic communication services whose provision is guaranteed to any user requesting it, regardless of its location, with a specified quality at an affordable price), the European Commission is expected to undertake a public consultation in the months following the date of this Annual Report, which may include both the potential inclusion of broadband in its scope and a possible reduction of some of the current universal service obligations. Depending on the terms that will be set forth in the new regulation, implementation at a local level could lead to higher costs for both the universal service provider and the operators forced to finance the universal service.
The last Plano Geral de Metas de Universalização (“PGMU”) was published in Brazil on June 30, 2011 and applies to the 2011-2015 period. This sets goals for public phones, low cost fixed-lines and coverage density in rural and poor areas with 2.5GHz/450 MHz. Also according to such PGMU, the assets assigned to the provision of the services described in the public concession agreement are considered reversible assets. In 2014, ANATEL issued a public consultation with its proposals for the 2015-2020 period universalization targets. The agency’s proposal focuses on reducing the distance between public telephones and backhaul’s expansion.
Regulation of fiber networks
In December 2014, the Spanish National Regulatory &and Competition Authority (Comisión Nacional de los Mercados y la Competencia or "CNMC") submitted to the EC the draft measures to set the new MTRs for all the mobile operators, which would imply a progressive reduction of 40% from current levels. The proposed dates and MTRs would be as follows: since the decision becomes effective until December 31, 2018 at 0.0070 €/min; from January 1, 2019 until December 31, 2019 at 0.0066 €/min; and as from January 1, 2020 at 0.0064 €/min. A final decision was adopted in 2018 setting the rate at 0.0067 €/min during the year 2019.
In Latin America, the Group believes it is likely that MTRs will also be reduced in the short to medium term.
In Brazil, the Plano Geral de Metas de Competição ("PGMC"), amended by Resolution 649/2015, established that mobile termination fees are subject to successive yearly reductions from 2016 until 2019, when the definitive cost-oriented-model fees are expected to be in force (such Resolution has conductedbeen challenged in courts and the proceedings are ongoing). On December 5, 2016, ANATEL issued a public consultation for the revision of the PGMC, which addresses changes in the relevant wholesale markets regulated by the PGMC and also in the cost-oriented model. ANATEL is expected to deliberate on the new regulations during 2018.
In Mexico, on November 9, 2017, the Instituto Federal de Telecomunicaciones ("IFT") announced that the MTRs applicable to the so-called Prevailing Economic Agent ("PEA") for 2018 shall be 0. 028562 pesos per minute while the MTRs applicable to the operators other than the PEA shall be 0.112799. The IFT fixed the MTRs on the PEA’s network as a result of a prior ruling of the Supreme Court of Justice in favor of the PEA and against its obligation to refrain from charging fees for the termination of mobile, fixed and SMS traffic on its network.
In Peru, the Organismo Supervisor de las Telecomunicaciones ("OSIPTEL") started in November 2016 the process to amend the maximum MTRs. On January 28, 2018, OSIPTEL published the caps on interconnection rates for MTRs. The approved rate is the same for all networks and entails a decrease of 63% (USD 0.00661 per minute rated at the second). The new fees established by OSIPTEL will apply as of the adoption of the regulation.
As a result of the foregoing regulatory actions, Telefónica may receive lower prices for certain of its services, which may materially adversely affect its business, financial condition, results of operations and/or cash flows. During the year ended December 31, 2017 the negative impact of these regulations is estimated to have resulted in the deduction of approximately 1 percentage point from the organic growth of the Group's revenues (see "Item 5. Operating and Financial Review and Prospects" for an explanation on how organic growth is calculated).
Regulation of universal service obligations
Universal service obligations ("USO") refers to the obligations imposed on telecommunication operators which are aimed at granting access to all the consumers in a country to a minimum set of services offered at reasonable and fair prices in order to avoid social exclusion. On its proposal for the reform of the regulatory framework issued on September 14, 2016, the EC sought to modernize USO in Europe, removing the mandatory inclusion of the legacy outdated services (telephone boxes, directories and information services) and focusing on the provision of affordable broadband services. The EC also proposed that USO should be funded out of general budgets and not from the sectoral budget. However, if this funding method does not thrive, the inclusion of affordable broadband services could end up being more expensive for the sector. In any case, the new regulation is not expected to be applicable before 2020.
In Spain, the USO for 2017 were extended for 2018, with Telefónica being responsible for the provision of the elements of Universal Service to fixed-broadband access, pay phones and directories.
In Brazil, a proposal of the General Plan for Universalization of Fixed Switched Telephony Services was approved by ANATEL in 2016. The final version, however, has not been published because the amendment to the underlying concession agreement has not been yet finalized.
The imposition on the Telefónica Group of additional or more onerous USO in the jurisdictions where it operates could have a material adverse effect on its business, financial condition, results of operations and/or cash flows.
Regulation of fiber networks
On December 29, 2017, a draft measure on the economic replicability methodology to be used to assess the maximum wholesale access price which Telefónica could charge to other operators for accessing the optical fiber network in regulated areas (NEBA Local and NEBA services), was notified to the EC establishing a maximum wholesale access price of 16.38 €/month. The final decision is expected within the current first quarter of 2018. In June 2017, CNMC launched a public consultation on the regulatorymethodology to analyze if Telefónica´s business offers can be replicated by other operators. The final decision is not expected before mid-2018.
Any of such obligations for broadband market regulation in Spain. As a resultand restrictions could raise costs and limit Telefónica's freedom to provide the aforementioned services, which could materially adversely affect Telefónica's business, financial condition, results of this consultation,the new regulation that will apply to NGN (Next Generation Networks) could be approved in the fourth quarter of 2015 and will last for at least three years. This could increase Telefónica's regulatory obligations in Spain and the ability of other operators to compete in such market.
In Colombia, the regulatory authority CRC published a regulatory project for transmission capacity between municipalities through fiber networks operations and/or connectivity to impose open network and elements access through a mandatory offer for those enterprises that have overcapacity and have some unused installed network elements. This project will be discussed in the first half of 2015.
cash flows.
Regulations on privacy
In Europe, a newthe General Data Protection Regulation ("GDPR") of April 27, 2016, will be directly applicable in all Member States from May 25, 2018. In addition, on January 10, 2017, the EC presented its proposal for a Regulation
on privacy and electronic communications ("ePrivacy"), which will replace the current Directive 2002/58/EC. The proposal implies an extra layer of regulation on top of the GDPR and also introduces administrative fines of up to 4% of an undertaking's annual global turnover for breaching new regulations. In this area, a strict data protection and privacy regulation may result in limitations on the ability to offer innovative digital services such as big data services. The future ePrivacy Regulation is undergoingnot expected to be adopted before the European legislative process which,end of 2018.
The Privacy Shield, approved by the EC on July 12, 2016 to lay out the framework for the international transfer of personal data from the EU to the US, has been challenged before the EU's General Court by civil-society groups, but the admission of their appeals is still pending as at the date of this Annual Report,Report. Nevertheless, the EC completed on October 18, 2017 its first annual review on the performance of the Privacy Shield and concluded that the Privacy Shield continues to ensure an adequate level of data protection for personal data of European citizens.
In Brazil, the adoption of a Personal Data Protection Act is not expected to end before mid-2015.still pending. This act could lead to certain critical provisions laid down in the current draft of the regulation (presently under debate) being worded in such a way that stops or hinders Telefónica from launching some services, that focus on the processing of personal data.
In Brazil, triggered by the approval of Civil Rights Framework for Internet Governance, which provides certain generic rules about data protection, the Ministry of Justice could in the near future, adopt the final version of the Draft Personal Data Protection Act. This could lead to a greater number offurther obligations and restrictions for operators in relation to the collection of personal data and its treatment.
Any obligations and restrictions arising from privacy regulations could raise costs and limit Telefónica's ability to provide certain services, which could materially adversely affect Telefónica's business, financial condition, results of telecom services users and further restrictions on the treatment of such data.
Regulation of functional separation
The principles established in Europe’s common regulatory framework, adopted in 2009 and transposed in the national legislation of each Member State in which Telefónica operates could result in greater regulatory pressure on the local competitive environment. Specifically, this framework supports the possibility of national regulators (in specific cases and under exceptional conditions) forcing operators with significant market power and vertically-integrated operators to separate their wholesale and retail businesses at a functional level. They would therefore be required to offer equal wholesale terms to third-party operators that acquire these products.
operations and/or cash flows.
Regulation of network neutrality
In Europe, national regulators are seeking to strengthen their supervision of operators with regard to the blocking of access, discrimination of applications or Internet service quality. The European Parliament and the Council are simultaneously debating the draft of the European DSM Regulation proposed by the European Commission that, among other things, deals withUnder the principle of network neutrality. The regulationneutrality applicable to the Internet access services realm, network operators are not permitted to establish technical or commercial restrictions regarding the terminals that can be connected or the services, or applications and contents that can be accessed or distributed through the Internet by the end user. It also refers to the non-discriminatory behavior (e.g. non-anticompetitive) to be adopted by operators regarding the different types of Internet traffic circulating through their networks.
In Europe, network neutrality could directly affect
possible future business models of Telefónica and may affect the network management or differentiation of characteristics and quality of Internet access service.
November 25, 2015.
Telefónica is presentoperates in Latin American countries where net neutrality has already been ruled,is being implemented, such as Chile, Colombia, Mexico, Peru and more recently Brazil, but this remains a live issue and with varying degrees of development in other countries where it operates. In Germany, the Economy Minister withdrew a draft law that it published on June 20, 2013, to regulate net neutrality, especially with regard to the blocking and discrimination of content and Internet services. It plans to submit a new draft after the EU has settled on a position(where OSIPTEL implemented regulations on net neutrality withinon January 1, 2017) and in Brazil. In Mexico, it is expected that IFT will issue guidelines during 2018. In Chile, on November 22, 2016, the DSM approach, which might occur in early 2015. In addition, one German region (BundeslandCommission of Thuringia) has passedTelecommunications submitted a new law (which applies only in such region) withbill for amending the aim that broadcastingNetwork Neutrality Act. The main changes proposed concern the establishment of rules applying measures for traffic management and tele-media may not be blocked, limited or treated differently from other data traffic.
restrictive rules for "Zero Rating".
If changes to regulation such as those described above, or otherwise, occur in the various jurisdictions where the Telefónica Group operates, it could have a material adverse effect on its business, financial condition, results of operations andand/or cash flows.
For a detailed description of these regulations see Appendix VII of the Consolidated Financial Statements “Key Regulatory Issues and Concessions and Licenses Held by the Telefónica Group”.
The Telefónica Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.
The Telefónica Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, the Group’sGroup's international operations are subject to various anti-corruption laws, including the U.S.US Foreign Corrupt Practices Act of 1977 (“FCPA”) and the United Kingdom Bribery Act of 2010, (the “Bribery Act”), and economic sanctionsanctions programs, including those administered by the United Nations, the European Union and the United States, including the U.S.US Treasury Department’sDepartment's Office of Foreign Assets Control (“OFAC”).Control. The FCPA prohibitsanti-corruption laws generally prohibit providing anything of value to foreigngovernment officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Telefónica Group’sGroup's business, it may deal with entities, the employees of which are considered foreign officials for purposes of the FCPA.government officials. In addition, economic sanctions programs restrict the Group’sGroup's business dealings with certain sanctioned countries, individuals and entities.
Although the Group has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that the Group’sGroup's employees, directors, officers, partners, agents and service providers will not take actions in violation of the Group’sGroup's policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which the Group or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties, exclusion from government contracts, damage to the Group's reputation and other consequences, that could have a material adverse effect on the Group’sGroup's business, reputation, results of operations and financial condition.
As of the date of this Annual Report, Telefónica is conducting internal investigations covering various countries regarding possible violations of applicable anti-corruption laws. Telefónica has been in contact with and cooperating with governmental authorities about these matters and intends to continue to cooperate with those authorities as the investigations continue. It is not possible at this time to predict the scope or duration of these matters or their likely outcome.
Customers' perceptions of services offered by the Company may put it at a disadvantage compared to competitors' offerings.
Customers' perceptions of the assistance and services offered are critical to operating in highly-competitive markets. The ability to predict and respond to the changing needs and demands of customers affects the Company'sTelefónica's competitive position relative to other technology sector companies, and its ability to extract the value generated during thisthe process of transformation.digital transformation we are immersed in. Failure to do so adequately could have an adverse impact on the Group's business, financial condition, results of operations andand/or cash flows.
CompanyTelefónica may not be able to adequately foresee and respond to technological changes and sector trends.
In a sector characterized by rapid technological change, it is essential to be able to offer the products and services demanded by the market and consider the impacts of changes in the life cycle of technical assets, secure margins and select the right investments to make.
The Telefónica Group operates in markets that are highly competitive and subject to constant technological development. Therefore, as a consequence of both of these characteristics, it is subject to the effects of actions by competitors in these markets and to its ability to anticipate and adapt, in a timely manner, to constant technological changes, changes in customer preferences that are taking place in the industry, as well as economic, political and social circumstances.
new competitors in the markets where the Group is the leader, such as Chile and Peru, has resulted in the Group losing market share in the mobile phone market during the period between 2014 and the end of 2017. In this competitive environment, the Group has focused on its high-value customers and estimates that the loss of revenues has been lower than the loss of accesses. Failure to do so adequately anticipate and adapt to constant technological changes, changes in customer preferences that are taking place in the industry, as well as economic, political and social circumstances could have an adverse impacteffect on the Group's business, financial condition, results of operations andand/or cash flows.
New products and technologies arise constantly and their development can render obsolete the products and services the Telefónica Group offers and the technology it uses. This means that Telefónica must invest in the development of new products, technology and services so it can continue to compete effectively with current or future competitors, and which may result in the decrease of the Group's profits and revenue margins. In this respect, margins from traditional voice and data business are shrinking, while new sources of revenues are deriving from mobile Internet and connectivity services that are being launched. Research and development costs amounted to 1,111 million euros and 1,046862 million euros in 2014 and 2013, respectively;2017, representing an increasea decrease of 6.2%4.8% from 1,046906 million euros in 2013.2016 (1,055 million euros in 2015). These expenses represented 2.2%1.7%, 1.7% and 1.8%1.9% of the Group's consolidated revenue,revenues in 2017, 2016 and 2015, respectively. These figures have been calculated using the guidelines established in the Organization for Economic Cooperation and Development (OECD)("OECD") manual. One technology that telecommunications operators, including Telefónica (in Spain and Latin America), are focused on is the new FTTx-type network, which offers broadband access using optical fiber with superior services, such as Internet speed of up to 100MB300MB or HD television services. However, substantial investment is required to deploy these networks, which entails fully or partially substituting copper loop access with optic fiber. In Spain, as of December 2017 Telefónica has already 19.2 million premises passed with fibre (representing 66% of the households), which shows the level of investment required. While an increasing demand for the capabilities offered by these new networks to end users exists, the high level of the investments requires a continuous analysis of the return on investment.
The explosion of the digital market and entry of new players in the communications market, such as MVNOs, Internet companies or device manufacturers, may cause the loss of value of certain assets, and affect the Group’sGroup's ability to generate income. Therefore, it is necessary to update the business model, encouraging the pursuit of incomesincome and additional efficiencies to those followed traditionally.traditionally sought. Failure to do so adequately could have an adverse impacteffect on the Group's business, financial condition, results of operations andand/or cash flows.
In addition, the ability of the Telefónica Group's IT systems (operational and backup) to respond the Company'sto Telefónica's operating requirements is a key factor to be taken into account with respect to the commercial development, customer satisfaction and business efficiency. Any failure by Telefónica Group's IT systems to adequately respond to the Group's
The Companyevolving operating requirements could have an adverse effect on the Group's business, financial condition and/or results of operations.
Telefónica depends on its suppliers.
The existence of critical suppliers in the supply chain, especially in areas such as network infrastructure, information systems or handsets, with a high concentration in a small number of suppliers, poses risks that may affect the Company’sTelefónica's operations, and may cause legal contingencies or damages to the Company'sits image in the event that inappropriate practices are produced by a participant in the supply chain.
As of 31 December 31, 2014,2017, the Telefónica Group depended on sixthree handset suppliers and 1110 network infrastructure suppliers, which, together, accounted for 80% of79% and 78%, respectively, for the awarded contracts foras of such date (for their products groups). One of the year then ended.handset suppliers represented two-fifths of all handset allocations as of such date. These suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own stock shortfalls and business requirements.
If these suppliers fail to deliver products and services to the Telefónica Group on a timely basis, it could jeopardize network deployment and expansion plans, which in some cases could adversely affect the Telefónica Group's ability to satisfy its license terms and requirements, or otherwise have an adverse impacteffect on the Group's business, financial condition, results of operations andand/or cash flows.
Unanticipated network interruptions can lead to quality loss or the interruption of the service.
Unanticipated network interruptions as a result of system failures, including those due to natural disasters caused by natural or meteorological events (due, in turn, to extreme weather conditions, especially in the geographies with greater exposure to them), network, hardware or software failures, stealing of infrastructure elements or cyber-attacks, which affect the quality of or cause an interruption in the Telefónica Group's service, could lead to customer dissatisfaction, reduced revenues and traffic, costly repairs, penalties or other measures imposed by regulatory authorities and could harm the Telefónica Group's image and reputation.
Telecommunications companies worldwide face increasing cybersecurity threats as businesses have become increasingly dependent on telecommunications and computer networks and adopt cloud computing technologies. Cybersecurity threats may include gaining unauthorized access to Telefónica's systems or inserting computer viruses or malicious software in its systems to misappropriate consumer data and other sensitive information, corrupt Telefónica's data or disrupt its operations. Unauthorized access may also be gained through traditional means such as the theft of laptop computers, data devices and mobile phones and intelligence gathering on employees with access. Further, our employees or other persons may have unauthorized or authorized access to our systems and/or take actions that affect our networks in an inconsistent manner with the Group’s policies or otherwise adversely affect the Group or its ability to adequately process internal information.
Telefónica attempts to mitigate these risks through a number of measures, including backup, systemslog review, vulnerabilities checks, network segregation measures and protective systems such as firewalls, intrusion detection or prevention systems, virus scanners and other physical and logical security.security measures. However, the application of these measures aremay not always be effective. Although the Telefónica Group has insurance policies to cover these types of incidents, and the claims and loss in revenue caused by service interruptions to date have been covered by these policies, these policies may not be sufficient to cover all possible monetary losses.
The telecommunications industry may be affected by the possible effects ofthat electromagnetic fields, emitted by mobile devices and base stations, may have on human health.
In some countries, there is a concern regarding potential effects of electromagnetic fields, emitted by mobile devices and base stations, on human health. This public concern has caused certain governments and administrations to take measures that have hindered the deployment of the infrastructures necessary to ensure quality of service, and affected the deployment criteria of new networks and digital services such as smart meters development.
There is a consensus between certain expert groups and public health agencies, including the World Health Organization, (WHO), that states that currently there are no established risks associated with exposure to low frequency signals in mobile communications. However, the scientific community is still investigating this issue especially with respect to mobile devices. Exposure limits for radio frequency suggested in the guidelines of the Protection of Non-Ionizing Radiation Protection Committee (ICNIRP) have been internationally recognized. The mobile industry has adopted these exposure limits and works to request authorities worldwide to adopt these standards.
Worries about radio frequency emissions may discourage the use of mobile devices and new digital services, which could cause the public authorities to implement measures restricting where transmitters and cell sites can be located, how they operate, the use of mobile telephones and the massive deployment of smart meters and other products using mobile technology. This could lead to the CompanyTelefónica being unable to expand or improve its mobile network.
The adoption of new measures by governments or administrations or other regulatory interventions in this respect, and any future assessment on the adverse impact of electromagnetic fields on health, may negativelyadversely affect the business, financial conditions, results of operations andand/or cash flows of the Telefónica Group.
Possible regulatory, business, economic or political changes could lead to asset impairment.
The Telefónica Group reviews on an annual basis, or more frequently when the circumstances require it, the value of assets and cash-generating units, to assess whether their carrying values can be supported by the future expected cash flows, including, in some cases synergies allowed for in acquisition costs. Potential changes in the regulatory, business, economic or political environment may result in the need to introduce changes to estimates made and to recognize impairments in goodwill, intangible assets, property, plant and equipment or fixedfinancial assets. Although the recognition of impairments of property, plant and equipment, intangible assets and financialthese assets results in a non-cash charge on the income statement, it could adversely affect the results of the Telefónica Group’sGroup's operations. In this respect, the Telefónica Group has experienced impairments on certain of its investments, affecting its results of operations in the year in which they were experienced. For example, with respectNo impairments were recognized in 2017. In 2016, impairment losses in goodwill were recognized amounting to the investment in Telco, S.p.A. (“Telco”), value adjustments were made in fiscal years 2013 and 2014 with a negative impactan aggregate amount of 267215 million euros, relating to Telefónica´s operations in Venezuela (124 million euros) and 464in Mexico (91 million euros, respectively.
euros).
The Telefónica Group'sGroup’s networks carry and store large volumes of confidential, personal and corporate data, and its Internet access and hosting services may lead to claims for illegal or illicit use of the Internet.
The Telefónica Group's networks carry and store large volumes of confidential, personal and business data, through both voice and data traffic. The Telefónica Group stores increasing quantities and types of customer data in both business and consumer segments. Despite its best efforts to prevent it, the Telefónica Group may be found liable for any loss, transfer, or inappropriate modification of the customer data or general public data stored on its servers or transmitted through its networks, any of which could involve many people and have an impact on the Group's reputation, or lead to legal claims and liabilities that are difficult to measure in advance.
In addition, the Telefónica Group’sGroup's Internet access and hosting servers could lead to claims for illegal or unlawful use of the Internet. Telefónica, like other telecommunications providers, may be held liable for any loss, transfer or inappropriate modification of the customer data stored on its servers or carried by its networks.
In most countries in which the Telefónica Group operates, the provision of its Internet access and hosting services (including the operation of websites with shelf-generated content) are regulated under a limited liability regime applicable to the content that it makes available to the public as a technical service provider, particularly content protected by copyright or similar laws. However, regulatory changes have been introduced imposing additional obligations on access providers (such as blocking access to a website) as part of the struggle against some illegal or illicit uses of the Internet, notably in Europe.
Any of the foregoing could have an adverse impacteffect on the business, financial position, results of operations andand/or cash flows of the Group.
Telefónica and Telefónica Group companies are party to lawsuits, tax claims, antitrust and other legal proceedings.
Telefónica and Telefónica Group companies are party to lawsuits, tax claims, antitrust and other legal proceedings in the ordinary course of their businesses, the financial outcome of which is unpredictable. An adverse outcome or settlement in these or other proceedings could result in significant costs and may have a material adverse effect on the Group's business, financial condition, results of operations, reputation andand/or cash flows. In particular, regarding tax and antitrust claims, the Telefónica Group has openis party to certain judicial procedurestax proceedings in Peru concerning the clearance of certain previous years' income tax, forin respect of which a contentious-administrative appeal is currently pending as well asand to certain tax and regulatory proceedings in Brazil, with CADE’s (Conselho Administrativo de Defesa Ecônomica) resolution with regard to the acquisition of a 50% stake in Vivo and with certain open tax procedures, primarily relating to the CIMSICMS (a Brazilian tax on telecommunication services). and the corporate tax. Further details on these matters are provided in Notes 15, 17 and 21 and 17 ofto the Consolidated Financial Statements.
| Information on the Company |
Item 4. Information on the Company
A. History and Development of the Company
Overview
Telefónica, S.A., is a corporation duly organized and existing under the laws of the Kingdom of Spain, incorporated on April 19, 1924. We are:We:
are a diversified telecommunications group which provides a comprehensive range of services through one of the world’s largest and most modern telecommunications networks;
•are focused on providing telecommunications services; and | · | a diversified telecommunications group which provides a comprehensive range of services through one of the world’s largest and most modern telecommunications networks; |
| · | focused on providing telecommunications services; and |
| · | present principally in Europe and Latin America. |
•operate principally in Europe and Latin America.
The following significant events occurred in 2014:2017:
•On January 17, 2017, Telefónica Emisiones, S.A.U., a wholly-owned subsidiary of Telefónica, issued notes guaranteed by Telefónica under its 40,000,000,000 euros program for the issuance of debt instruments (as amended and renewed from time to time, the "EMTN Programme") in an aggregate principal amount of 1,750 million euros. This issue was split into two tranches. The first tranche, in an aggregate principal amount of 1,250 million euros, due on January 17, 2025, pays an annual coupon of 1.528%, and was issued at par. The second tranche, in an aggregate principal amount of 500 million euros, due on October 17, 2028, pays an annual coupon of 2.318%, and was issued at par.
•On February 20, 2017, Telefónica reached an agreement for the sale of up to 40% of the total share capital of Telxius Telecom, S.A.U. ("Telxius") to Taurus Bidco S.à.r.l. ("KKR", an entity managed by Kohlberg Kravis Roberts & Co. L.P.), for a total amount of 1,275 million euros (12.75 euros per share). The aforementioned agreement included a purchase agreement for the sale of 62 million shares (representing 24.8% of the share capital) of Telxius for a price of 790.5 million euros, as well as options over 38 million shares (representing 15.2% of the share capital) for a price of at least 484.5 million euros. These options corresponded to a call option exercisable by KKR and to a put option exercisable by Telefónica upon maturity of the call option, if such call option was not exercised. | · | On February 8, 2013, the Venezuelan bolívar was devalued from 4.3 bolívares per U.S. dollar to 6.3 bolívares per U.S. dollar. |
On October 24, 2017, after obtaining all the relevant regulatory approvals, Telefónica transferred 62 million shares of Telxius (representing 24.8% of its share capital) to KKR in exchange for 790.5 million euros (12.75 euros per share). Following the execution of the sale, a shareholders' agreement among Telefónica, KKR and Telxius became effective on the same date, which regulates the relationships between Telefónica and KKR as shareholders of Telxius.The exchange rateOn November 13, 2017, KKR exercised the call option over 38 million shares (representing 15.2% of 6.3 bolívares per U.S. dollar was usedTelxius’ share capital) foreseen in the translationagreement, and on December 7, 2017, Telefónica, transferred to KKR such 38 million shares of Telxius (representing 15.2% of its share capital) in exchange for 484.5 million euros (12.75 euros per share).
Pursuant to these transactions, KKR acquired 40% of the financial informationshare capital of Venezuelan subsidiariesTelxius in exchange for the entiretyan aggregate amount of 2013.1,275 million euros (12.75 euros per share) and Telefónica retained control over Telxius.
•On March 8, 2017, Telefónica Emisiones, S.A.U. issued senior notes guaranteed by Telefónica in an aggregate principal amount of 3,500 million dollars. This issue was split into two tranches. The first tranche, in an aggregate principal amount of 1,500 million dollars, due on March 8, 2027, with a coupon of 4.103% payable semi-annually, was issued at par. The second tranche, in an aggregate principal amount of 2,000 million dollars, due on March 8, 2047, with a coupon of 5.213%, payable semi-annually, was issued at par.
During 2014, by virtue of certain Exchange Agreements the allocations conducted through the Complementary System for Administration of Foreign Currency (SICAD I),•On March 13, 2017, Telefónica entered into a swap agreement with Koninklijke KPN NV ("KPN") pursuant to which Telefónica Venezuela had accessagreed to deliver 72.0 million of its treasury shares (representing 1.43% of its share capital), in exchange for imports, were expanded and,178.5 million shares in addition, a new exchange mechanism with a more widespread use was put in place, called SICAD II.
Telefónica's subsidiary Telefónica Deutschland Holding AG ("Telefónica Deutschland") owned by KPN, representing 6.0% of the share capital of Telefónica Deutschland. The exchange rates resultingratio was determined based on the volume-weighted average price of the respective shares during the then last five trading sessions. As a result of this agreement, Telefónica increased its shareholding in Telefónica Deutschland from 63.2% to 69.2%, one of the Group's main cash flow growth contributors, increasing, as a result, its share in dividends distributed by Telefónica Deutschland. Under this agreement, KPN undertook, among other obligations, to comply with certain restrictions which, in case of sale of the aforementioned shares of Telefónica, would ensure an orderly sale of such shares.
•On March 29, 2017, the board of directors of Telefónica established the dividend payment periods for 2017. The payment of dividends in the last allocations of SICAD I and SICAD II before December 31, 2014 were 12.0 and 49.988 bolívares per U.S. dollar, respectively.
In the absence of SICAD I auctions since mid-October 2014,second quarter would take place in June 2017, and the lackpayment of expectations of new auctions close to 2014 year-end,dividends in a macroeconomic context aggravated by the fallfourth quarter would take place in December 2017, in both cases on or before the third Friday of the oil price,corresponding month. In 2017, dividend payments amounted to 0.40 euros per share in cash and were paid in two tranches: (i) 0.20 euros per share was paid in cash on or before Friday, June 16, 2017 (meeting the Company has decided to take ascommitment of paying 0.55 euros per share for 2016), and (ii) 0.20 euros per share was paid in cash on or before Friday, December 15, 2017.
•On April 28, 2017, Telefónica Emisiones, S.A.U., issued notes guaranteed by Telefónica in an additional aggregate principal amount of 500 million dollars, which are fully fungible with its existing 5.213% senior notes due March 8, 2047. This issuance constituted a reference the rate resulting in the allocations conducted through SICAD II for translating the financial statementsreopening of the Venezuelan subsidiaries. The Company considers that it is30 year notes issued on March 8, 2017 in an amount of 2,000 million dollars.
•On May 4, 2017, the most representative amongBoard of Directors of Telefónica adopted the available official exchange rates at 2014 year-end for the monetary translation of the accounting figures of transactions, cash flows and balances.
The main impacts of using this new exchange rate in the Telefónica Group’s consolidated financial statements as of December 31, 2014 were as follows:
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| – | A decrease in equity, withinTo reduce the caption “Translation differences”,number of approximately 2,950 million euros (see Note 12.fmembers of the Consolidated Financial Statements)Board of Directors. |
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| – | To take formal notice and record the voluntary resignations as a combined resultmembers of the translation to euros at the new exchange rate partially offset by the impact in equity of the inflation adjustment for the period. |
| - | As part of the decrease mentioned in the preceding paragraph, the value in euros of the net financial assets denominated in bolívares decreased by approximately 2,700 million euros, as per the balance as of December 31, 2014. |
| - | The results from the Telefónica’s subsidiaries in Venezuela have been translated at the new exchange rate. This implied a reduction in operating income before depreciation and amortization (OIBDA) and profit of the year of, approximately, 1,730 and 660 million euros, respectively. |
| · | On January 28, 2014, after obtaining the relevant regulatory approval, the sale of Telefónica Czech Republic, a.s. ("Telefónica Czech Republic") was completed. As a result of the sale, Telefónica held a 4.9% stake in Telefónica Czech Republic, which it subsequently sold in October 2014 for 160 million euros.
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| · | On February 26, 2014, the Board of Directors of Telefónica approvedof Mr. César Alierta Izuel, Mr. Gonzalo Hinojosa Fernández de Angulo and Mr. Pablo Isla Álvarez de Tejera. |
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| – | To appoint, by co-optation, Ms. Carmen García de Andrés and Mr. Francisco José Riberas Mera as independent directors, upon the implementation of a new organizational structure focused on clients and that incorporates its digital offering as the main focus for commercial policies. The structure aims to give greater visibility to local operations, bringing them closer to the corporate decision-making center, simplifying the global structure and strengthening the cross-cutting areas to make the decision-making process more efficient. |
Within this framework, Telefónica created the role of the Chief Commercial Digital Officer, who is responsible for fostering revenue growth. On the cost side, the Company strengthened the role of the Chief Global Resources Officer. Both Officers report directly to the Chief Operating Officer (COO), as do the local business CEOs for Spain, Brazil, Germany and the United Kingdom, in addition to the Latin American Unit, which now excludes Brazil.
| · | On February 27, 2014, the Board of Directors of Telefónica agreed to determine the amount of the 2014 dividend at 0.75 euro per share, payable in two tranches: |
- 0.40 euro per share in cash in the second quarter of 2015.
-0.35 euro per share by means of a "scrip dividend" in the fourth quarter of 2014.
| · | On May 6, 2014, Telefónica submitted a binding offer for the acquisition of 56% of the share capital of Distribuidora de Televisión Digital, S.A. ("DTS"), directly or indirectly owned by Promotora de Informaciones, S.A. (PRISA).
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| · | On May 7, 2014, Telefónica paid a dividend of 0.40 euro per share in cash (dividend distribution charged against 2014 net income) corresponding to the second tranche of the 2013 dividend which in total amounted to 0.75 euro per share. |
| · | On May 30, 2014, Telefónica's Annual General Shareholders' Meeting took place on second call with the attendance, present or represented, of 54.81% of the share capital. In this meeting, all the resolutions submitted by the Board of Directors for deliberation and approval were approved by majority of votes. |
| · | On June 2, 2014, Telefónica's subsidiary Telefónica de Contenidos, S.A.U. ("Telefónica Contenidos") executed a share purchase agreement with PRISA in connection with PRISA’s stake in DTS. The price agreed amounts to 750 million euros, subject to customary adjustments at closing. The closing of this purchase agreement is subject to obtaining the relevant authorization of the competition authorities and to the approval of a representative panel of the banks financing PRISA.
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| · | On July 2, 2014, Telefónica Deutschland received the EU Commission's conditional clearance to acquire the E-Plus Group from the Dutch telecommunication corporation Koninklijke KPN N.V. In connection with such |
conditional clearance, on June 25, 2014, Telefónica Deutschland signed an agreement with the Drillisch Group according to which the latter agreed to acquire, in addition to the agreed capacity to provide services to its existing customers through Telefónica Deutschland's or the E-Plus Group’s networks, 20% of the capacity of all mobile networks that belong to Telefónica Deutschland after the acquisition of the E-Plus Group. The 20% capacity will be reached gradually over a 5-year period. In addition, the Drillisch Group will have the right to acquire up to an additional 10% of capacity of the aforementioned mobile networks.
Telefónica Deutschland will grant the Drillisch Group, through a Mobile Bitstream Access model, access to the future joint network of Telefónica Deutschland and the E-Plus Group, as well as to the existing and future technology developments on that network, which the Drillisch Group will be able to offer to its customers. Final clearance for the acquisition was given on August 29, 2014. On October 1, 2014, Telefónica Deutschland completed the acquisition of E-Plus, following its execution of a capital increase intended to fund such acquisition. Telefónica maintains a stake of 62.1% in Telefónica Deutschland, which now includes 100% of the E-Plus Group, while the Dutch company Koninklijke KPN N.V. holds a 20.5% stake, and the rest is free float.
| · | On July 4, 2014, Telefónica de Contenidos acquired 22% of the share capital of DTS owned by Mediaset España Comunicación, S.A. ("Mediaset") for consideration of 295 million euros.
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A payment of 30 million euros has been agreed as consideration for the waiver of Mediaset's pre-emptive rights relating the stake held by PRISA in DTS. Pursuant to the agreement, Mediaset will receive (i) 10 million euros in the event that Telefónica de Contenidos closes the acquisition of the 56% stake of DTS held by PRISA and, in that case, (ii) up to 30 million euros depending on the evolution of the Pay-TV customers in Spain of the Telefónica Group during the four years following the closing of such acquisition.
| · | On July 7, 2014, Telefónica reached an agreement with Reti Televisive Italiane S.p.A. ("RTI") for the acquisition by Telefónica of an 11.11% stake of the capital of a newly created company, which will consolidate the Pay-TV business of the Mediaset Group in Italy, currently commercialized under the name of "Mediaset Premium". The purchase price is 100 million euros.
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| · | On July 15, 2014, after obtaining the corresponding regulatory authorizations, Telefónica concluded the 100% sale of its stake in Telefónica Ireland, Ltd. to the Hutchison Whampoa Group. The value of the sale amounted to 850 million euros, including an initial cash consideration of 780 million euros received at the closing of the transaction, and an additional deferred payment of 70 million euros, based on the completion of agreed financial objectives. |
| · | On September 19, 2014, Telefónica, S.A. signed an agreement with Vivendi S.A. for the acquisition by Telefónica Brasil, S.A. of Global Village Telecom, S.A. and its holding company GVT Participações, S.A. (jointly “GVT”) for a cash consideration of 4,663 million euros, and a payment in shares representing 12.00% of the share capital of Telefónica Brasil, S.A., after its combination with GVT. |
As part of the agreement, Vivendi S.A. will acquire from Telefónica 1,110 million ordinary shares in Telecom Italia currently representing 8.3% of Telecom Italia’s voting share capital (equivalent to 5.7% of its total share capital), in exchange for 4.5% of Vivendi, S.A.'s capital in Telefónica Brasil, S.A., after its combination with GVT (which represents all of the voting shares and 0.7% of the preferred shares to be received by Vivendi S.A. under the agreement referred to above).
The cash payment for this transaction is expected to be financed via a capital increase by Telefónica Brasil S.A., which Telefónica S.A. intends to subscribe in proportion to its current stake in Telefónica Brasil, S.A. and intends to fund, in turn, via a capital increase.
The final closing of the operation is subject to obtaining the relevant regulatory authorizations (including telecommunication and anti-trust approval). On December 22, 2014, ANATEL approved the acquisition of GVT, although the resolution about the acquisition by Vivendi, S.A. of the 1,110 million of ordinary shares of Telecom Italia is still pending. As of the date of this Annual Report, CADE continues to analyze the process.
| · | On September 30, 2014, Telefónica Brasil, S.A. was granted a national block of 2x10 MHz, in the 700 MHz band spectrum auction, called by ANATEL, for the minimum amount reserved to that block, equivalent to 1,927,964,770 reais (approximately 619 million euros). |
With this acquisition, Telefónica Brasil, S.A. has reached its goal of ensuring the necessary spectrum for its medium- and long-term expansion of the 4G service in order to meet the growing demand for mobile access to high-speed Internet.
| · | On October 10, 2014, the Executive Commission of Telefónica's Board of Directors agreed that, at the Executive Commission scheduled for November 14, 2014, the appropriate corporate resolutions to carry out the execution of a free-of-charge capital increase related to shareholder compensation by means of a scrip dividend ("Telefónica's Flexible Dividend"), approved by the Annual General Shareholder's Meeting held on May 30, 2014, should be adopted. On November 14, 2014, the Executive Commission adopted the implementation of such capital increase. As a result, the last five trading sessions prior to November 14, 2014 were considered to determine the market price applicable to the free-of-charge allotment rights purchase price setting formula and to the provisional number of shares to issue formula.
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| · | The free-of-charge allotment rights derived from the capital increase were allotted to Telefónica shareholders appearing as such in the book-entry records of Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (Iberclear), at 11:59 p.m. Madrid time, on November 18, 2014 (the day of publication of the capital increase notice in the Official Commercial Registry Gazette (Boletín Oficial del Registro Mercantil)).
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| · | On October 27, 2014, following a reportproposal of the Nominating, Compensation and Corporate Governance Committee,Committee. |
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| – | To submit for approval of the shareholders at the Annual General Shareholders' Meeting: (i) the re-election of Mr. José María Álvarez-Pallete López and Mr. Ignacio Moreno Martínez as Directors of the Company, (ii) the ratification and appointment of the new independent directors, Ms. Carmen García de Andrés and Mr. Francisco José Riberas Mera, and also (iii) the reduction in the number of members of the Board of Directors of Telefónica approved, with regard to the first cycle (2014-2017)seventeen. |
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| – | To appoint: (i) Ms. Carmen García de Andrés as member of the long-term incentive plan (which consists inAudit and Control Committee and (ii) Mr. Jose Javier Echenique Landiríbar and Mr. Luiz Fernando Furlán, all of whom are independent directors, as members of the granting of shares of Telefónica to Telefónica Group executives (including executive directors of Telefónica) as approved byNominating, Compensation and Corporate Governance Committee. |
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| – | To call the Annual General ShareholdersShareholders' Meeting which was held on May 30, 2014, (which determined the maximum possible number of shares to be received by the executive directors of Telefónicain Madrid, at the endRecintos Feriales of the first cycle of the plan)IFEMA (Feria de Madrid), Campo de las Naciones, Parque Ferial Juan Carlos I, Pabellón 3, at 12:00 p.m. on June 9, 2017 on second call. |
•On June 9, 2017, Telefónica announced the holding of its Annual General Shareholders' Meeting at second call with the attendance, present or represented, of shareholders holding shares representing 56.51% of its share capital. All of the resolutions submitted by the Board of Directors for deliberation and vote at such meeting were approved by a majority of votes.
Furthermore, Telefónica announced that, according to the shareholder remuneration policy, a dividend distribution of an aggregate fixed gross amount of 0.40 euros had been agreed and would be charged to unrestricted reserves during 2017, to be paid in the two tranches referred to above, in respect of each issued share of Telefónica in circulation and carrying entitlement to such distribution. The first payment, of a gross amount of 0.20 euros in cash per share, was made on June 16, 2017; and the second payment, of a gross amount of 0.20 euros in cash per share, was made on December 14, 2017.
•On July 27, 2017, Telefónica announced the following resolutions in connection with the composition of its Board of Directors and its committees: (i) the taking of formal notice and record of the voluntary resignation from the Board of Directors of Telefónica presented by Julio Linares López; (ii) the appointment by co-optation of Mr. Ángel Vilá Boix as a member of the Board of Directors of Telefónica as an Executive Director in replacement of Mr. Julio Linares López; and (iii) the appointment of Mr. Ángel Vilá Boix Chief as Chief Operating Officer (COO) of Telefónica and member of the Executive Commission. Additionally, the Board of Directors, approved a new organizational structure for Telefónica.
•On July 27, 2017, Telefónica announced that on July 25, 2017, ColTel (67.5% of which is owned, directly and indirectly, by Telefónica and 32.5% of which is owned by the Colombian Government) and other telecom operators were notified of the arbitration award issued in the arbitration proceedings initiated by the Colombian Ministry of Information Technologies and Communications ("ITC") in connection with its intention to achieve the reversion of certain assets owned by such operators and earmarked for the provision of mobile voice services under former concessions.
The arbitration award was not favorable to ColTel and its co-defendants. The amount of the award, following the correction of an arithmetical error by the court, was set for ColTel in the amount of 1,651,012 million Colombian pesos (470 million euros at the exchange rate of the date of the issuance of the award).
•On August 29, 2017, the shareholders' meeting of ColTel approved:
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| – | A capital increase in an aggregate amount of theoretical shares to be assigned to1,651,012 million Colombian pesos (capital and premium), 470 million euros at the other executives,exchange rate of such date (the "Arbitration Award-Capital Increase"). |
The proceeds from the Arbitration Award-Capital Increase were used to pay the entire amount set forth in the arbitration award issued in the arbitration proceedings initiated by the ITC referred to above.
The Telefónica Group and the Colombian Government subscribed the Arbitration Award-Capital Increase pro rata to their respective shareholding in ColTel. The Telefónica Group disbursed 1,114,433 million Colombian pesos, 317 million euros at the exchange rate of the relevant transaction date. The Colombian Government assumed, and consequently offset, a portion of ColTel's indebtedness.
Telefónica's decision to participate in the Arbitration Award-Capital Increase does not constitute, and should not be understood as, an acceptance of the validity of the arbitration award.
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| – | A further capital increase in an aggregate amount of 4,800,966 million Colombian pesos (capital and premium), 1,384 million euros at the maximum possible number of shares to be received by them, in the event of fulfilmentexchange rate of the relevant co-investment requirement, andtransaction date (the "PARAPAT Capital Increase"), so that ColTel would voluntarily pre-pay the entire amount of ColTel's debt derived from the achievement ofoperating agreement dated August 13, 2003 (as amended, the maximum total shareholder return (TSR) established in"Operating Agreement") with Patrimonio Autónomo Receptor de Activos de la Empresa Nacional de Telecomunicaciones (the "PARAPAT") with the plan.proceeds from the PARAPAT Capital Increase. |
| · | On November 10, 2014, Telefónica, through its 100% subsidiary, Telefónica Internacional, S.A.U., sold 597,844,100 shares of China Unicom (Hong Kong) Limited ("China Unicom") as further described under "—Strategic Partnerships—China United Network Communications Group Co., Ltd. (China Unicom)", below. |
| · | On December 9, 2014, the Company announced that, on December 3, 2014, the free-of-charge allotment rights trading period for the free-of-charge capital increase related to Telefónica’s Flexible Dividend had ended. The holders of 15.8% of the free-of-charge allotment rights accepted the purchase commitment assumed by Telefónica, S.A. The gross amount paid by Telefónica, S.A. for these rights amounted to 241,542,822.19 euros. The company waived the rights thus acquired, which were amortized. |
The Telefónica Group and the Colombian Government subscribed the PARAPAT Capital Increase pro rata to their respective shareholding in ColTel. The Telefónica Group disbursed 3,240,652 million Colombian pesos, 934 million euros at the exchange rate of the relevant transaction date. The Colombian Government assumed 32.5% of ColTel's payment obligations with the PARAPAT.
The holdersPARAPAT Capital Increase was subscribed on September 26, 2017 and, on September 27, 2017, ColTel pre-paid all of 84.2%its debt with the PARAPAT after terminating the Operating Agreement with the PARAPAT. As part of the free-of-charge allotment rightsearly termination of the Operating Agreement with the PARAPAT, ColTel acquired control of the companies Empresa de Telecomunicaciones de Telebucaramanga S.A. ESP, Metropolitana de Telecomunicaciones S.A. ESP and Operaciones Tecnológicas y Comerciales S.A.S., for an aggregate amount of 509,975 million Colombian pesos (approximately 147 million euros at the date of the transaction). See Note 5 to the Consolidated Financial Statements.
As a result of the investments from recent years and the strengthening of its financial condition derived from the capital increases, ColTel has been able to reduce its indebtedness and obligations to make future financial payments, and we expect it will face a new phase of growth and consolidation.
The execution of these transactions had no material impact on the Telefónica Group's net financial debt, which just experienced an increase of 32 million euros, since all of ColTel's payment obligations with the PARAPAT were entitled, therefore,already consolidated in the financial statements of the Telefónica Group.
•On September 12, 2017, Telefónica Emisiones, S.A.U. issued debt instruments guaranteed by Telefónica under the EMTN Programme in an aggregate principal amount of 1,250 million euros. These notes are due on January 12, 2028, pay an annual coupon of 1.715%, and were issued at par.
•On September 20, 2017, in relation to receive newthe bonds mandatorily convertible into shares of Telefónica S.A. Nevertheless,that were issued by its wholly-owned subsidiary Telefónica Participaciones, S.A.U. on September 24, 2014 and were guaranteed by Telefónica (the "Convertible Bonds"), Telefónica announced that, in order to satisfy the Company waivedmandatory conversion of the free-of-charge allotment rights that corresponded tototality of the Convertible Bonds on their maturity date on September 25, 2017, and given the resulting conversion price of 9.7174 euros per share:
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| – | it had issued 154,326,696 new shares (the "New Shares"), representing 2.9723% of its share capital following the capital increase, and |
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| – | it would deliver 14,973 existing shares held as treasury stock. |
As a result of the conversion and the aforementioned capital increase, Telefónica's share capital was set at 5,192,131,686 euros, divided into 5,192,131,686 ordinary shares atof the record date (November 18, 2014). Therefore, the final number of ordinary sharessame class and series, with a nominal value of one (1)1 euro, issued inand the Convertible Bonds were canceled. The public deed relating to the conversion of obligations, capital increase and amortization of obligations was 106,179,744 (2.3% of the Company’s share capital as of that date), totaling 106,179,744 euros. As a result, the share capital of Telefónica, S.A. after the capital increase, as registered on December 9, 2014 with the CommercialMercantile Registry of Madrid was 4,657,204,330 euros (4,657,204,330 shares).
on such date. The new sharesNew Shares were admitted to listingtrading on the four Spanish Stock Exchanges in December 2014 and trading onare tradable through the Spanish Automated Quotation System began on Friday, December 12, 2014.(Sistema de Interconexión Bursátil Español) since September 25, 2017. The new shares were thereafter admittedadmission to listing ontrading of the New Shares in the foreign stock exchanges of London, Buenos Aireswhere Telefónica is listed was also requested and Lima.
granted.
Table•On December 7, 2017, Telefónica Europe B.V., a Dutch subsidiary of ContentsTelefónica, issued undated 5.5-year non-call deeply subordinated guaranteed fixed rate reset securities, with the subordinated guarantee of Telefónica, in a nominal amount of 1,000 million euros (the "Securities"). The Securities were issued at par and accrue interest at a rate of 2.625% annually as from (and including) the issue date up to (but excluding) June 7, 2023. From (and including) June 7, 2023, the Securities will accrue a fixed rate interest equal to the applicable 5-year Swap Rate (as defined in the terms of the Securities) plus a margin of (i) 2.327% per year as from June 7, 2023 up to (but excluding) June 7, 2028; (ii) 2.577% per year as from June 7, 2028 up to (but excluding) June 7, 2043; and (iii) 3.327% per year as from (and including) June 7, 2043. The Securities are perpetual although they are subject to a call option exercisable by the issuer upon certain conditions.
•On December 21, 2017, Mr. Antonio Massanell Lavilla announced his voluntary resignation from the Board of Directors of Telefónica and, consequently, from his positions as Chairman of the Service Quality and Customer Service Committee, and as member of the Audit and Control Committee, of the Regulation and Institutional Affairs Committee, and of the Strategy and Innovation Committee.
Business areas
On February 26, 2014,The organizational structure approved by the Board of Directors of Telefónica, S.A. approvedon February 26, 2014 is made up of the implementation of a new organizational structure focused on clients and which incorporates the digital offering as the main focus of commercial policies. The structure gives greater visibility to local operators, bringing them closer to the corporate decision-making center, simplifying the Group’s global structure and strengthening the cross-cutting areas to improve flexibility and agility in decision making.
Due to the implementation of this new organizational structure, from the beginning of 2014, the new organizational structure has been composed offollowing segments: Telefónica Spain, Telefónica Brazil,United Kingdom, Telefónica Germany, Telefónica United KingdomBrazil and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries(formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, & Central America, Ecuador and Uruguay). All business that is
These segments include the information related to wireline, wireless, cable, data, internet and television businesses and other digital services provided in each country or countries. Any services not specifically included in these new segments isare part of “Other companies and eliminations”, which includes, in particular, Telxius (as further explained below), the companies belonging to the cross-sectional areas, other Group companies as well as eliminations in the consolidation process. Inter-segment transactions are carried out at market prices.
Telxius' results are fully reported under "Other companies and eliminations" since January 1, 2017, reflecting the integration within Telxius of the mobile telecommunications towers transferred from the Telefónica Spain, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica segments and the international submarine fiber optic cable (which had already been previously reported under "Other companies and eliminations"). As a result, the Group’sThe 2016 comparative segment results have been revised, foraccordingly. Based on the 2013different dates on which assets were contributed to Telxius by each operating segment, this has affected the results of Telefónica Spain (since January 1, 2016), Telefónica Germany (since May 1, 2016), Telefónica Brazil (since April 1, 2016) and 2012 fiscal yearsTelefónica Hispanoamérica (Telefónica Perú since April 1, 2016 and Telefónica Chile since May 1, 2016). The results of the segments do not include the intra-group capital gains resulting from the transfer of towers to reflect this new organization. Because this is an intragroup change,Telxius.
In addition, in 2017 Telefónica’snica Spain includes the companies Telefónica Studios and Telefónica Servicios Audiovisuales (which had been previously reported under “Other companies and eliminations”), and Telefónica Spain and Telefónica Hispanoamérica include the results of the data center business in Spain and Chile, respectively (which had been previously reported under “Other companies and eliminations”). As a consequence, the 2016 comparative segment results have also been revised accordingly.
These changes in the segments have had no impact on the consolidated results of the Group.
The Telxius subsidiaries currently holding the telecommunications towers did not exist in 2015 as such towers were part of the operating companies of the relevant countries. Thus, segment information could not be retrospectively revised for 2013 and 2012 are not affected.
Additionally, as a result2015. The segment reporting for 2016 is being presented under two different bases: (i) for purposes of management integrations undertaken in Peru, Argentina and Chile, the revenue breakdowncomparison against 2017, 2016 segment information has been reclassified, allocating “inter-company” eliminations within fixedrevised so that the telecommunications towers are part of Telxius (since the dates on which the relevant assets were transferred to Telxius); and mobile businesses.
Segment reporting takes into account the impact(ii) for purposes of the purchase price allocation to assets acquired andcomparison against 2015, the liabilities assumed from the companies includedtelecommunications towers are integrated in each relevant segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.
The Group manages borrowing activities and taxes centrally. Also, Telefónica, S.A. is the head of the Telefónica tax group in Spain. Therefore, it does not disclosea significant part of the related assets and liabilities revenueare included under “Other companies and expenses by reportable segments. In addition, revenueeliminations” and the results of the segments are disclosed up to operating income. Revenue and expenses arising from intra-group invoicing for the use of the trademark and management services have been eliminated from the operating results of each Group segment. These adjustments have no impact on the Group’s consolidated results.
Segment reporting takes into account the impact of the purchase price allocation to the assets acquired and the liabilities assumed for the companies included in each segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.
The following chart shows the organizational structure of the principal subsidiaries of the Telefónica Group at December 31, 2014,2017, including their jurisdictions of incorporation and our ownership interest. For further detail, see Exhibit 8.1 to this Annual Report.
(1) | Ownership in Telefónica Móviles España, S.A.U. is held directly by Telefónica, S.A. |
(2) | Representing a 91.76% voting interest. |
(3) | Ownership in Telefónica International Wholesale Services, S.L. is held 92.51% by Telefónica, S.A. and 7.49% by Telefónica Datacorp, S.A.U. |
(4) | Companies held indirectly. |
(5) | Ownership in TIWS II is held directly by Telefónica, S.A. |
Telefónica, S.A., the parent company of the Telefónica Group, also operates as a holding company with the following objectives:
coordinate the Group’s activities;
| · | coordinate the Group’s activities; |
allocate resources efficiently among the Group;provide managerial guidelines for the Group;
| · | allocate resources efficiently among the Group; |
manage the Group’s portfolio of businesses;foster cohesion within the Group; and
| · | provide managerial guidelines for the Group; |
| · | manage the Group’s portfolio of businesses; |
| · | foster cohesion within the Group; and |
| · | foster synergies among the Group’s subsidiaries. |
Our principal executive offices are located at Distrito Telefónica, Ronda de la Comunicación, s/n, 28050 Madrid, Spain, and our registered offices are located at Gran Vía, 28, 28013 Madrid, Spain. Our telephone number is +34 900 111 004.
Capital Expenditures and Divestitures
Our principal capital expenditures during the three years ended December 31, 2014,2017, consisted of additions to property, plant and equipment and additions to intangible assets, including spectrum. In 2014, 20132017, 2016 and 2012,2015, we made capital expenditures of 9,4488,697 million euros, 9,3958,928 million euros and 9,45810,461 million euros, respectively.
Year ended December 31, 2014
2017
Capital expenditures in 2014 increased 0.6%2017 decreased 2.6% compared to 2013.2016. Capital expenditures in 20142017 included the cost of spectrum mainly in Brazil, Argentina, Venezuela, Colombia, Uruguay and Panama,Costa Rica, amounting to 1,294538 million euros.
Investment by Telefónica Spain amounted to 1,683 million euros and was primarily focused on rapid fiber optic roll out, exceeding 19 million premises passed by year-end 2017, together with investments in the LTE network, with a 97% population coverage, and transport network modernization. Investment by Telefónica United Kingdom in 2017 amounted to 827 million euros and was mainly focused on increasing LTE coverage, achieving 99% population coverage by year-end 2017, and also pursuing the improvement of network capacity and quality of customer experience. Investment by Telefónica Germany in 2017 amounted to 951 million euros and was focused on network integration in order to enhance customer experience and to capture integration synergies and further LTE network rollout achieving a population coverage of 82% by year-end 2017. Investment by Telefónica Brazil in 2017 amounted to 2,225 million euros and was mainly dedicated to extend the coverage and capacity of 4G and 3G mobile networks, the deployment and connection of fiber network in the fixed business as well as network integration and simplification of processes and systems. Investment by Telefónica Hispanoamérica in 2017 amounted to 2,678 million euros and was mainly focused on improving the coverage and capacity of 4G and 3G networks, the roll out of ultra-broadband fixed capabilities (fiber / HFC) and the simplification and digitalization of processes and systems.
Year ended December 31, 2016
Capital expenditures in 2016 decreased 14.7% compared to 2015. Capital expenditures in 2016 included the cost of spectrum mainly in Peru and Brazil, amounting to 345 million euros.
Investment by Telefónica Spain amounted to 1,852 million euros and was primarily focused on rapid fiber optic roll out, together with investments in the LTE network, reaching a 96% population coverage, and transport network modernization. Investment by Telefónica United Kingdom in 2016 amounted to 931 million euros and was mainly focused on increasing LTE coverage, achieving 95% population coverage by year-end 2016 and also, pursuing the improvement of network capacity. Investment by Telefónica Germany in 2016 amounted to 1,107 million euros, with LTE roll out the company's main focus, achieving a coverage of 79% by year-end 2016, and network consolidation activities, which are allowing to enhance customer experience and to capture integration synergies. Investment by Telefónica Brazil in 2016 amounted to 2,137 million euros and was mainly dedicated to extend the coverage and capacity of 4G and 3G mobile networks, as well as improving network quality, and the deployment and connection of fiber network in the fixed business. Investment by Telefónica Hispanoamérica in 2016 amounted to 2,615 million euros and was mainly focused on improving the coverage and capacity of 3G and 4G networks, the roll out of ultra-broadband fixed capabilities (fiber / HFC) and the quality enhancement in broadband and TV services. For purposes of the comparison against 2017, investments by segment in 2016 have been revised. Please see “Business areas” above.
Year ended December 31, 2015
Capital expenditures in 2015 increased 10.7% compared to 2014. Capital expenditures in 2015 included the cost of spectrum mainly in Germany, Argentina, Ecuador and Spain, amounting to 1,585 million euros.
Investment by Telefónica Spain in 20142015 amounted to 1,7321,827 million euros. Fiber opticeuros and was rolled out rapidly,primarily focused on fiber networks, 3G, 4G and by year-end 2014 Telefónica Spain had created more than 10 million “fiber-to-the-house” (“FTTH”) facilities in Spain, increasing its investments in LTE networks. Investmentfiber as well as improvement of the quality of broad-band services and Pay TV. Investments by Telefónica United Kingdom in 20142015 amounted to 755883 million euros and was mainly due to greaterfocused on increasing LTE coverage, – an estimated 58%achieving 79.6% population coverage by year-end 2015, seeking to achieve improvements of the outdoor population - and a network capacity ramped up to copeand quality in line with denser 3G and 4G traffic.the operator’s objectives. Investment atby Telefónica Germany in 20142015 amounted to 8492,230 million euros, focusing on its LTE roll-out strategy, securing 61% coverage in 2014.strategy. Investment atby Telefónica Brazil in 20142015 amounted to 2,9332,105 million euros, and related mainly due to the fact that the mobile segment featured a continuation of the 3G and LTE roll-outs in 2014, improving network capacity, systems and applications. Investment in the fixed-line network was used to expandexpansion of the roll-out of fiber optic, larger volumes of IPTV customers and corporate projects.optic. Investment by Telefónica Hispanoamérica in 20142015 amounted to 2,8423,060 million euros and was mainly focused on LTE roll-outs, in practically all operations in the region. Investment was also allocated to the densification of the 3G network, optimization of fixed-mobile convergence systems, the continuation of ultra broad bandultra-broadband (UBB) roll-out for fixed broadband by speed upgrades and network digitalization television and digital initiatives.
Year ended December 31, 2013
Capital expenditures in 2013 were in line with 2012. Capital expenditures in 2013 included the cost of spectrum mainly in United Kingdom, Brazil, Peru, Colombia and Spain, amounting to 1,224 million euros.
Investment by Telefónica Spain in 2013 amounted to 1,529 million euros, reflecting a high level of investment efficiency, as a result of the improvements in quality indexes, the reduction of complaints and enhanced efficiency in IT. At the end of the year, there was an acceleration in the rollout of fiber optic, and a boost of LTE deployment. Investment by Telefónica United Kingdom amounted to 1,385 million euros mainly due to spectrum investment (719 million euros). Investment by Telefónica Germany amounted to 666 million euros, focusing its efforts on network quality while accelerating investment in LTE network deployment. Investment by Telefónica Brazil amounted to 2,127 million euros mainly due to the expansion and improvement of the mobile networks, both 3G and 4G, as well as improving the rollout of its fiberPay TV network. Investment by Telefónica Hispanoamérica in 2013 amounted to 3,118 million euros, mainly in the mobile
business and centered primarily on overlay projects and expansion of the coverage, quality and density of 3G networks, as well as the minimum roll-out of LTE (Colombia and Chile), the development of platforms to underpin new VASs, and the optimization of infrastructure and systems developments focusing on self-management. In the fixed line business, funds continued to be earmarked for rolling out UBB through speed upgrades in ADSL, fiber (FTTx) and VDSL in Argentina and Chile, as well as the installation of fixed-mobile convergence systems (Colombia, Chile and Peru).
Year ended December 31, 2012
Capital expenditures in 2012 declined 7.5% compared to 2011. Capital expenditures in 2012 included the cost of spectrum in Brazil, Nicaragua, Chile, Venezuela and Ireland, amounting to 586 million euros. In Telefónica Spain, investments amounted to 1,692 million euros, mainly focused on improvements in quality levels and reduction in the level of complaints. Investment by Telefónica United Kingdom amounted to 748 million euros focusing on increasing its 3G coverage and capacity. Investment by Telefónica Germany amounted to 609 million euros focusing on the development of the LTE network and the increase of capacity in the 3G network. Investment by Telefónica Brazil amounted to 2,444 million euros mainly driven by mobile network expansion. Investments in Telefónica Hispanoamérica amounted to 2,988 million euros focusing on mobile business (mainly with overlay projects, and coverage expansion and enhancing the quality of its 3G networks), as well as on development of new platforms and evolving the existing ones to support new value-added services. In the fixed line business significant investments were made in ultra broad band and speed upgrades in DSL, FTTx and VDSL in Argentina and Chile. In addition, Telefónica Digital made investments throughout 2012 in TV business including new HD channels introduction and commercial launches of OTT services and content delivery network in line with Telefónica Digital initiatives.
Financial Investments and Divestitures
Our principal financial investmentinvestments in 2014 was2017 were: (i) the acquisition of E-Plus,swap agreement with KPN pursuant to which was completed on October 1, 2014, throughwe agreed to deliver 72.0 million Telefónica shares held in treasury in exchange for 178.5 million shares in our subsidiary Telefónica Deutschland for a total purchase priceheld by KPN, representing 6.0% of 7,463 million euros.the share capital Telefónica Deutschland, and (ii) our pro-rata participation in in ColTel’s Arbitration Award-Capital Increase and PARAPAT Capital Increase, referred to above. Our principal divesturesfinancial divesture in 2014 were the completion of the sales of Telefónica Czech Republic, a.s. on January 28, 2014, Telefónica Ireland, Ltd on July 2, 2014, and2017 was the sale of shares representing approximately 2.5%40% of the share capital of China UnicomTelxius for approximately 6871,275 million euros.
euros to KKR. Telefónica retained control over Telxius. We also divested in Telefónica treasury shares as a result of the swap agreement referred to above.
There were no significant financial investments in 2013.2016. Our principal divesturesfinancial divesture in 2013 were2016 was the sale of 40.00% of our investment, through Telefónica Centroamérica de Inversiones, S.L.Telefé, in Guatemala, Salvador, Nicaragua and Panamawhich was completed on November 11, 2016, for 500345 million U.S. dollars (equivalent to 377(approximately 322 million euros) and the sale on July 10, 2016 of 361,794,559 shares of China Unicom (Hong Kong) Limited (“China Unicom”), representing 1.51% of the share capital of the company, at a price of 7.80 Hong Kong dollars per share for a total amount of 2,822 million Hong Kong dollars, approximately 322 million euros.
Our principal financial investment in 2015 was the acquisition of GVT, which was completed on May 28, 2015, through our subsidiary Telefônica Brasil for a total purchase price of 4,663 million euros on(through payment in cash and debt assumption) as well as the datedelivery of executionshares representing 12% of the sale)share capital of Telefônica Brasil (following its integration with no impact inGVT) and the resultsacquisition on April 30, 2015 of 56% of DTS for an initial consideration of 707 million euros, subject to the finalization of the Group given our continued control overworking capital and net debt adjustments. Our principal divesture in 2015 was the company after the transaction; the agreement to sell 65.9%sale of our investment in Telefónica Czech Republic, a.s. for 306 Czech crown per share (approximately 2,467 million euros at the date of the agreement), resulting in a capital loss of 176 million euros and the agreement to sell our stake in Telefónica Ireland, LtdItalia (we disposed of 872 million ordinary shares in Telecom Italia in exchange for 850approximately 1,025 million euros.
There were no significant financial investmentseuros and 1,110 million ordinary shares in 2012. Our principal divesturesTelecom Italia in 2012 were the sale in July 2012 of shares representing 4.56%exchange for 4.5% of the share capital of China Unicom for 10,748in Telefônica Brasil). In addition, we also exchanged 46 million Hong Kong dollars (approximately 1,142 million euros at that date), resulting in a loss of 97 million euros; the sale of 23.17%treasury shares of Telefónica Germany Holding, A.G. for 1,499 million euros, with no impactapproximately 3.5% of the Share Capital of Telefónica Brasil.
Active portfolio management is part of Telefónica’s strategy and therefore it may undertake transactions involving its or its subsidiaries' shares, including transactions similar to those undertaken in the results of the Group given we maintain the control over the company after this transaction, and the sale of Atento for 1,051 million euros, including a vendor loan of 110 million euros as well as certain deferred payments for 110 million euros, resulting in a capital gain of 61 million euros.
2015-2017 period or otherwise, at any time.
Public Takeover Offers
Not applicable
applicable.
Recent Developments
The principal events that have occurred since December 31, 2014,2017, are set forth below:
On January 22, 2018, Telefónica's wholly-owned subsidiary Telefónica Emisiones, S.A.U. issued notes guaranteed by Telefónica, S.A. amounting to 1,000 million euros. The notes are due on January 22, 2027, pay an annual coupon of 1.447% and were issued at par (100%).
| · | On January 23, 2015 Telefónica and Hutchison Whampoa Group agreed to enter into exclusive negotiations for the potential acquisition by the latter of Telefonica UK limited (Telefónica’s business in the UK (“O2 UK”)) for an indicative price in cash (firm value) of 10.25 billion pounds (approximately 13.5 billion euros); composed of (i) an initial amount of 9.25 billion pounds (approximately 12.2 billion euros) which would be paid at closing and (ii) an additional deferred payment of 1.0 billion pounds (approximately 1.3 billion euros) to be paid once the cumulative cash flow of the combined company in the United Kingdom has reached an agreed threshold.
|
On January 31, 2018, the Board of Directors of Telefónica appointed Mr. Jordi Gual Solé as a member of the Board of Directors, as a Proprietary Director, replacing Mr. Antonio Massanell Lavilla who had voluntarily resigned from the Board on December 21, 2017. Mr. Gual was also appointed as a member of the Regulation and Institutional Affairs Committee, and of the Strategy and Innovation Committee.
On January 31, 2018, the Board of Directors of Telefónica also resolved to adopt a new organizational structure in order to make the Company more agile, simple and focused on management, customer service, growth, efficiency and profitability. The main changes were:
The exclusivity period will last a specified period, allowingareas of General Counsel, and Public Affairs and Regulation were unified.
A new Executive Chairman was appointed for Telefónica España, who was also appointed as a member of the Executive Committee of Telefónica, S.A.
Telefónica Hispanoamérica was split into two new units: (i) Telefónica Hispam Sur (encompassing operations in Argentina, Chile, Peru and Hutchison Whampoa GroupUruguay); and (ii) Telefónica Hispam Norte (encompassing the operations in Colombia, México, Central America, Ecuador and Venezuela). This change had no impact on our operating segments as of and for the year ended December 31, 2017.
The area of People (Human Resources) was enhanced and now reports directly to negotiate definitive agreements, while Hutchison Whampoa Group completes its due diligence.
the Executive Chairman.For more information related to our significant financing transactions completed in 2014 and through the date of this Annual Report,2018, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Anticipated Sources of Liquidity”.
The Telefónica Group is one of the world´sworld’s leading mobile and fixed communications services providers. Its strategyOur objective is to become a leadercreate, protect and promote fixed and mobile connections for our customers helping them to take control over their digital lifestyle. Therefore, we primarily offer our customers the connectivity they need to interact and live in the new digital worldmarkets where we operate through simple products and transform the possibilitiesservices while protecting their data and managing it brings into reality.in a responsible way.
Telefonica’s aim is to reinforce its position as an active player in the digital world capable of seizing all the opportunities affordedThe organizational structure approved by its global scale and its industrial and strategic alliances.
On February 26, 2014, the Board of Directors of Telefónica, S.A. approvedon February 26, 2014 is made up of the implementation of a new organizational structure focused on clients and which incorporates the digital offering as the main focus of commercial policies. The structure gives greater visibility to local operators, bringing them closer to the corporate decision-making center, simplifying the Group’s global structure and strengthening cross-cutting areas to improve flexibility and agility in decision making.
From January 1, 2014 on, and due to the implementation of this new organizational structure, the Group´s structure is composed offollowing segments: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (comprised of our consolidated subsidiaries(formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, & Central America, Ecuador and Uruguay). These segments include the information related to wireline, wireless, DSL, TV,cable, data, internet and television businesses and other digital services provided in each country or countries. Any services not specifically included in these new segments are part of “Other companies and eliminations”.
The Telxius' financial figures are fully reported under "Other companies and eliminations" since January 1, 2017, reflecting the integration within Telxius of the mobile telecommunications towers transferred from Telefónica Group's strategy aims to:
| · | Improve the customer experience in order to continue increasing accesses. |
| o | Drive forward the penetration of smart phones in all markets in order to raise the growth rate of mobile data by monetizing their increasingly widespread use. |
| o | Defend our competitive positioning, and leverage our customer knowledge. |
| o | Develop the growth opportunities that have arisen in an increasingly digital context, such as media, financial services, cloud, security, advertising, M2M, e-Health, etc. |
| o | Capture the opportunity in the business segment. |
| · | Continue working on the transformation of the Group’s operating model: |
| o | Increase the modernization of networks in markets where we operate through technological advances and the acquisition of spectrum. |
| o | Maximize the benefits of economies of scale to increase efficiency. |
| o | Simplify the operative model. |
| o | Reduce legacy cost, especially legacy network costs. |
In addition,Spain, Telefónica maintains an industrial alliance with China Unicom. Furthermore, in order to potentially unlock the value of Telefónica's scale, the "Partners" program was created in 2011, and now includes five operators (Bouygues, Etisalat, Sunrise, Megafon and O2 CZ). The Telefónica Partners Program is an initiative that makes available to selected operators and under commercial terms a host of services that allows partners to leverage on Telefónica’s scale and to cooperate on key business topics (digital services, roaming, services to multinationals, procurement, devices, etc.).
Moreover Telefónica’s portfolio was restructured in 2014 through the acquisition of E-Plus by Telefónica Deutschland to form the leading operator in Germany, in terms of number of wireless customers. Telefónica is also in the process of acquiring GVT through Telefónica Brazil subject to regulatory approval, and negotiating the sale of its business in the United Kingdom.
Other information
Non-controlling interests can be divided into two groups. Firstly, subsidiaries listed in a regulated market, such as Telefónica Brasil orHispanoamérica (Telefónica Peru and Telefónica Deutschland, where minority shareholdings are widely dispersedChile) segments and in respect of which Telefónica protects minority interests by complying with the regulations of the related market. Secondly, subsidiaries with a main minority shareholder, with whom agreements are entered into in order to guarantee the protection of such shareholder’s rightsinternational submarine fiber optic cable (which had been previously reported under "Other companies and in certain cases (such as Colombia Telecomunicaciones) where there are also specific commitments resulting from corporate transactions (see Note 21.b of the Consolidated Financial Statements)eliminations").
The Telefónica Group’s Spanish companies have adapted their internalstrategy aims to:
Enhance value through:
Offering good connectivity, for which our infrastructure management and our continuous investment in network are key. We aim to return control over the data to our customers.
Providing a bundled offer with video and digital services. We offer our customers additional data in order to amplify services, such as video or digital services, through unique, simple and clear offers.
Providing increased customer value and customer experience with improved digital access, aiming to offer the best products, solutions and contents.
With the following enablers:
End-to-end digitalization: seeking the reduction of our legacy investments to increase virtualization, the reduction of physical servers, data centers and applications, the digitalization of IT systems and processes and payment schedulesthe digitalization of front and back office, in order to the provisions of Law 15/2010 (amended by Law 31/2014) and Royal Decree-Law 4/2013, amending Law 3/2004, which establishes measures against late payment in commercial transactions. Engagement conditions with commercial suppliers in 2014 included payment periods of upbe able to 60 days, according to the terms agreed between the parties. For efficiency purposes, the Telefónica Group’s companies in Spain have agreed payment schedules with suppliers, whereby payments are made on set days of each month. Payments to Spanish suppliers in 2014 and 2013 surpassing the established legal limit were the result of circumstances or incidents beyond the payment policies, mainly the delay in issuing invoices (legal obligation of the supplier), the closing of agreements with suppliers over the delivery of goods or the rendering of services, or occasional processing issues. According to such criteria, the average payment period to suppliers of the Telefónica Group’s companies in Spain in 2014, accordingoffer a true digital experience to our best estimates, amountedcustomers.
Big data and innovation to 51 days.add value to our customers and return the control over data to our customers.
Continued focus on capital allocation in our legacy investments and the simplification of processes in order to continue investing.
2017 highlights
2017 was characterized by positive growth in OIBDA and operating cash flow (OIBDA-CapEx), up by 7.1% and by 21.0% respectively y-o-y in reported terms. Furthermore, the Company continued its transformation process with 44.4 million premises passed ready to use FTTx, additionally, the LTE coverage reached 72% as of December 31, 2017 (+11 p.p. y-o-y), resulting in more capex to 16.7% ratio of capex over revenues. The Company hasclosed the year with a governance system, which appliestotal of 343 million accesses, (down 1.9% y-o-y), explained by the decrease in prepay and fixed voice. In line with our strategic focus to Telefónica’s entire structure. Pursuant to the Company’s commitment to its shareholders, the Board of Directors, supportedgrow in high value customers, post-pay customers grew by its Committees, manages the Company’s business in accordance with the corporate governance rules laid down primarily in the Corporate By-laws, in the Regulation of the General Shareholders' Meeting, and in the Regulation of the Board of Directors. See “Item 16G. Corporate Governance – Significant Differences in Corporate Governance Practices – Corporate governance guidelines.”
Telefónica’s Board of Directors consists of 18 directors and is responsible for overseeing and controlling the Company’s activity. It has sole powers regarding general strategy and policies on corporate governance, corporate social responsibility, remuneration of the Board and senior management, shareholder remuneration, and strategic investments.
In order to strengthen the corporate governance of the Company, the Board of Directors of Telefónica, S.A. has eight committees (including the Executive Commission) which are charged with examining and overseeing areas of particular relevance. Pursuant to its regulation, the Board also confers responsibility for day-to-day management of the businesses to Telefónica’s executive bodies (primarily through the Executive Committee) and management team.
Financial Results
2014 highlights
The Group's total accesses rose 5.5% during 2014 to 3414.6% year-on-year, reaching 116 million customers, while UBB customers reached 11 million customers at December 31, 2014, including2017, representing a 20% increase year-on-year.
In 2017, revenues totalled 52,008 million euros, down 0.1% compared to 2016 in reported terms (+3.4% in organic terms). OIBDA totalled 16,187 million euros in 2017, up 7.1% in reported terms. In organic terms, OIBDA was up 5.3%, mainly due to the additionalpositive evolution of all regions and offsetting the lower service revenues in Spain. In 2017, operating income, was 6,791 million euros, up by 24.2% as compared to 2016 in reported terms (+14.1% in organic terms), which included depreciation and amortization of 9,396 million euros, down by 2.6% as compared to 2016 in reported terms.
Telefónica’s total accesses it gained following the purchase totaled 343.5 million as of December 31, 2017, decreasing by 1.9% year-on-year, as a result mainly of the E-Plus Groupreduction of the prepaid base in Germany. Excluding the E-Plus Group accesses from 2014 results and accesses from Telefónica Czech RepublicHispanoamérica and Telefónica Ireland from 2013 results, the increase would have been 2.0%. ThereGermany. By service, there was highincreased commercial activity focus onrelated to high value customers, which resultedresulting in thea growth of the contract mobile segment (“smartphones”(smartphones and LTE), fiber and Pay-TV. The volume of fiber accesses also grew, reaching 1.8 million at December 31, 2014. Notably, accessesAccesses in Telefónica Hispanoamérica (39%decreased by 3.6% year-on-year (representing 38% of the Group's total), increased by 2.5%,Group’s total accesses as of December 31, 2017) and accesses in Telefónica Brazil (28%Germany decreased by 3.5% (representing 14% of the Group'sGroup’s total) increased by 3.0% in 2014.
The evolution of foreign exchange rates impacted negatively our 2014 consolidated financial results, in particular the depreciation of the Argentine peso, Brazilian real and the implicit depreciation of the Venezuelan bolivar.
In its 2014 consolidated financial statements, Telefónica used the exchange rate of the Venezuelan bolívar set at the previously denominated SICAD II, (set at 49.988 Venezuelan bolívar fuerte per U.S. dollar in the last auction), for the purpose of translating the transactions, cash flows and balances related to the investments in Venezuela. The Company has decided to take such exchange rate as a reference, as it considers it to be the most representative among the available exchange rates as of such date, for the monetary translation of the accounting figures of cash flows and balances.
Accordingly, we estimate that the foreign exchange rate effect and the hyperinflations in Venezuela reduce our revenues and OIBDA in 2014 by 12.1 percentage points and 13.1 percentage points, respectively.
Revenues totaled 50,377 million euros in 2014, down 11.7% compared to 2013, mainly affected by exchange rate differences and the effect of hyperinflation in Venezuela, which reduced year-on-year growth by 12.1 percentage points. Additionally, this decrease was also affected by changes in the composition of the Group (-2.1 p.p.), in particular the sales of Telefónica Czech Republic and Telefónica Ireland and by the acquisition of the E-Plus Group. Excluding these impacts, revenues would have increased by 2.6% year-on-year mainly due to the performance of Telefónica Hispanoamérica, where revenues from mobile data and digital services increased. In order to make comparisons excluding the impact of changes to the scope of consolidation caused by the sales of Telefónica Czech Republic and Telefónica Ireland and the acquisition of the E-Plus Group in 2014, we have excluded the contribution of such entities to revenues in both 2013 and 2014.
The structure of revenues reflects the Company's business diversification. Despite the impact of exchange rates mentioned above, the segments that were the largest contributors to our revenues in 2014 were Telefónica Hispanoamérica, representing 26.1% (-3.4 p.p. compared to 2013), Telefónica Spain, representing 23.9% (+1.2 p.p. compared to 2013), Telefónica Brazil, representing 22.3% (+0.9 p.p. compared to 2013), Telefónica United Kingdom, representing 14.0% (+2.3 p.p. compared to 2013) and Telefónica Germany, representing 11.0% (+2.3 p.p. compared to 2013).
OIBDA reached 15,515 million euros for the year ended December 31, 2014, a fall of 18.7%, mainly due to:
| · | the effect of exchange rates and hyperinflation in Venezuela (-13.1 p.p.); |
| · | changes to the scope of consolidation (-3.5 p.p.) as a result of the exclusion of Telefónica Czech Republic and Telefónica Ireland, and the inclusion of the E-Plus Group; |
| · | recognition in 2014 of expenditure mainly on the global restructuring program, in accordance with the simplification initiatives that the Group is implementing to meet its targets, totaling 652 million euros (670 million euros excluding exchange rate effects), accounting for a reduction of 3.5 percentage points; |
| · | a higher sale value of non-strategic towers in 2014 compared to 2013 (196 million euros in 2014, mainly in Telefónica Spain, in the amount of 191 million euros, compared to 111 million euros in 2013 accounted for mainly by Telefónica Spain (70 million euros), Telefónica Brazil (29 million euros) and Telefónica Hispanoamérica (11 million euros, in Mexico, Chile and Colombia). This effect accounts for an addition of 0.5 percentage points of OIBDA growth; and
|
| · | the impact of the sale of companies in 2013, chiefly the sale agreements for Telefónica Ireland (16 million euros) and Telefónica Czech Republic (176 million euros) (+1 p.p.), and the sale of Hispasat (21 million euros; -0.1 p.p). |
Excluding these effects, OIBDA would have increased by 0.2% in 2014 compared to 2013. The OIBDA margin was 30.8% for 2014, down 2.6 percentage points compared to 2013 in reported terms.
The below table shows the evolution of accesses over the past threetwo years as of December 31 of such years:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2016 |
| 2017 |
| %Reported
YoY |
|
| Fixed telephony accesses (1) | 38,280.1 |
| 36,898.6 |
| (3.6 | %) |
| Internet and data accesses (2) | 21,652.1 |
| 21,864.6 |
| 1.0 | % |
| Broadband (3) | 21,194.9 |
| 21,417.5 |
| 1.1 | % |
FTTx/Cable
| 9,137.6 |
| 10,961.6 |
| 20.0 | % |
| Mobile accesses | 276,450.0 |
| 271,766.9 |
| (1.7 | %) |
| Prepay | 165,663.2 |
| 155,868.5 |
| (5.9 | %) |
| Contract | 110,786.8 |
| 115,898.4 |
| 4.6 | % |
| M2M | 14,002.0 |
| 16,137.2 |
| 15.2 | % |
| Pay TV | 8,289.0 |
| 8,467.7 |
| 2.2 | % |
| Final Clients Accesses | 344,671.1 |
| 338,997.9 |
| (1.6 | %) |
| Wholesale Accesses | 5,300.9 |
| 4,460.2 |
| (15.9 | %) |
| Total Accesses | 349,972.1 |
| 343,458.1 |
| (1.9 | %) |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Also referred to as fixed broadband accesses.
(3) Includes DSL, satellite, optic fiber, cable modem and broadband circuits.
The below table shows the evolution of accesses by segment:
|
| | | |
| | YoY variation | % Over Total Accesses |
| Accesses 2017 | 2016 | 2017 |
| Spain | (0.6%) | 11.8% | 11.9% |
| United Kingdom | (1.7%) | 7.4% | 7.4% |
| Germany | (3.5%) | 14.1% | 13.9% |
| Brazil | 0.7% | 27.8% | 28.5% |
| Hispanoamérica | (3.6%) | 38.8% | 38.1% |
| Others | 28.9% | 0.1% | 0.2% |
Mobile accesses totaled 271.8 million at December 31, 2017, down 1.7% compared to December 31, 2016. The decrease in prepaid accesses (-5.9% year-on-year) more than offset the increase in accesses in mobile contract (+4.6% year-on-year), which continued to increase their weight over total mobile accesses reaching 42.6% (+2.6 p.p. year-on-year).
Smartphoneaccesses grew (up 7.9% year-on-year), totaling 158.7 million accesses and reaching a penetration rate over total accesses of 63.0% (+5.9 p.p. year-on-year), reflecting the Company’s strategic focus on the growth of its data services.
Fixed broadband accesses stood at 21.4 million at December 31, 2017, up 1.1% year-on-year. Fiber accesses stood at 11.0 million at December 31, 2017 compared to 9.1 million in 2016.
Pay TV accesses totaled 8.5 million at December 31, 2017, growing 2.2% year-on-year, due to the growth in Telefónica Spain (5.2% year-on-year), that expanded its TV offer to the whole Fusión base and in Telefónica Hispanoamérica (3.9% year-on-year) where all countries offering this service grew.
The table below shows the evolution of our estimated access market share for mobile and fixed broadband for the past two years.
| ACCESSES | |
| Thousands of accesses | 2012 | 2013 | 2014 | %Var 12/13 | %Var 13/14 |
| Fixed telephony accesses (1) (2) (3) | 40,002.6 | 39,338.5 | 36,830.0 | (1.7%) | (6.4%) |
| Internet and data accesses | 19,402.6 | 19,102.0 | 18,151.7 | (1.5%) | (5.0%) |
| Narrowband | 653.2 | 510.8 | 373.1 | (21.8%) | (27.0%) |
| Broadband (4) | 18,596.2 | 18,447.8 | 17,668.5 | (0.8%) | (4.2%) |
| Other (5) | 153.1 | 143.4 | 110.1 | (6.3%) | (23.3%) |
| Mobile accesses | 247,346.9 | 254,717.2 | 274,458.0 | 3.0% | 7.8% |
| Prepay (6) (7) | 165,821.9 | 165,557.0 | 175,720.4 | (0.2%) | 6.1% |
| Contract | 81,525.0 | 89,160.3 | 98,737.6 | 9.4% | 10.7% |
| Pay-TV (8) | 3,336.2 | 3,602.2 | 5,087.2 | 8.0% | 41.2% |
| Unbundled loops | 3,308.8 | 3,833.4 | 4,087.3 | 15.9% | 6.6% |
| Shared ULL | 183.5 | 130.6 | 94.1 | (28.9%) | (27.9%) |
| Full ULL | 3,125.3 | 3,702.9 | 3,993.3 | 18.5% | 7.8% |
| Wholesale ADSL | 845.4 | 866.9 | 750.1 | 2.5% | (13.5%) |
| Other | 1,577.1 | 1,658.2 | 1,684.1 | 5.1% | 1.6% |
| Final Clients Accesses | 310,088.3 | 316,759.9 | 334,526.9 | 2.2% | 5.6% |
| Wholesale Accesses | 5,731.3 | 6,358.5 | 6,521.6 | 10.9% | 2.6% |
| Total Accesses | 315,819.6 | 323,118.4 | 341,048.5 | 2.3% | 5.5% |
| | | |
Notes: - Telefónica Czech Republic accesses are de-consolidated from the first quarter of 2014, Telefónica Ireland accesses are de-consolidated from the third quarter of 2014 and E-Plus accesses are consolidated from the fourth quarter of 2014. |
| - Telefónica Spain mobile accesses include since 2013 the accesses of Tuenti; in 2012 they have been restated with the same criteria. |
| (1) RTB (includes public use telephony) x1; Basic Access RDSI x1; Primarily Access RDSI; Digital Access 2/6 x30. Includes internal use. Includes "fixed wireless" voice accesses. Includes Voice over IP and Naked DSL. |
| (2) In the first quarter of 2014, 45 thousands inactive "fixed wireless" accesses were disconnected in Mexico. |
| (3) In the second quarter of 2014, fixed clients includes 50 thousands additional fixed wireless clients in Peru. |
| (4) Includes DSL, satellite, optic fiber, cable modem and broadband circuits. |
| (5) Rest of retail non broadband circuits. |
| (6) In the first quarter of 2014, 1.9 million inactive accesses were disconnected in Mexico. |
| (7) In the fourth quarter 2014, 1.8 million inactive accesses were disconnected in Central America. |
| (8) In the second quarter of 2014, Pay-TV accesses includes 131 thousand "TV Mini" clients in Spain. |
|
| | |
| Competitive Position Evolution | | |
| | Mobile Market Share (1) |
| Telefónica | 2016 | 2017 |
| Spain | 29.7% | 29.3% |
| United Kingdom | 26.9% | 26.3% |
| Germany | 37.9% | 36.9% |
| Brazil | 30.2% | 31.7% |
| Argentina | 33.3% | 32.8% |
| Chile | 32.6% | 32.2% |
| Peru | 44.0% | 36.8% |
| Colombia | 23.4% | 24.4% |
| Venezuela | 37.8% | 39.1% |
| Mexico | 24.2% | 22.0% |
| Central America | 29.9% | 28.4% |
| Ecuador | 30.7% | 30.0% |
| Uruguay | 33.0% | 34.2% |
(1) Internal estimation in both years.
|
| | |
| | FBB Market Share (1) |
| Telefónica | 2016 | 2017 |
| Spain | 42.5% | 40.6% |
| Brazil | 27.9% | 26.5% |
| Argentina | 28.4% | 24.1% |
| Chile | 36.5% | 34.6% |
| Peru | 78.7% | 73.9% |
| Colombia | 16.3% | 15.3% |
(1) Internal estimation in both years.
2017/2016 Consolidated results
In this section, we discuss changes in the Group’s consolidated income statements for 2017 and 2016. Changes in the Group’s consolidated income statements for 2016 and 2015 are discussed in a separate section further below.
|
| | | | | | | | | | | | |
| | Year ended December 31 | Variation |
| Consolidated Results | 2016 | 2017 | 2017 vs 2016 |
| Millions of euros | Total | % of revenues | Total | % of revenues | Total | % |
| Revenues | 52,036 |
| 100.0 | % | 52,008 |
| 100.0 | % | (28 | ) | (0.1 | %) |
| Other income | 1,763 |
| 3.4 | % | 1,489 |
| 2.9 | % | (274 | ) | (15.5 | %) |
| Supplies | (15,242 | ) | (29.3 | %) | (15,022 | ) | (28.9 | %) | 220 |
| (1.4 | %) |
| Personnel expenses | (8,098 | ) | (15.6 | %) | (6,862 | ) | (13.2 | %) | 1,236 |
| (15.3 | %) |
| Other expenses | (15,341 | ) | (29.5 | %) | (15,426 | ) | (29.7 | %) | (85 | ) | 0.5 | % |
| OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA) | 15,118 |
| 29.1 | % | 16,187 |
| 31.1 | % | 1,069 |
| 7.1 | % |
| OIBDA Margin | 29.1 | % | | 31.1 | % | | | 2.1 p.p. |
|
| Depreciation and amortization | (9,649 | ) | (18.5 | %) | (9,396 | ) | (18.1 | %) | 253 |
| (2.6 | %) |
| OPERATING INCOME | 5,469 |
| 10.5 | % | 6,791 |
| 13.1 | % | 1,322 |
| 24.2 | % |
| Share of (loss) income of investments accounted for by the equity method | (5 | ) | 0.0 | % | 5 |
| 0.0 | % | 10 |
| c.s. |
|
| Net financial expense | (2,219 | ) | (4.3 | %) | (2,199 | ) | (4.2 | %) | 20 |
| (0.9 | %) |
| PROFIT BEFORE TAX | 3,245 |
| 6.2 | % | 4,597 |
| 8.8 | % | 1,352 |
| 41.6 | % |
| Corporate income tax | (846 | ) | (1.6 | %) | (1,219 | ) | (2.3 | %) | (373 | ) | 44.1 | % |
| PROFIT FOR THE YEAR | 2,399 |
| 4.6 | % | 3,378 |
| 6.5 | % | 979 |
| 40.8 | % |
| Attributable to equity holders of the Parent | 2,369 |
| 4.6 | % | 3,132 |
| 6.0 | % | 763 |
| 32.2 | % |
| Attributable to non-controlling interests | 30 |
| 0.1 | % | 246 |
| 0.5 | % | 216 |
| n.m. |
|
Note:
c.s: change of sign
n.m: non meaningful
Adjustments made to calculate organic variations
Year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis, by considering a constant perimeter of consolidation and constant average foreign exchange rates and by making certain other adjustments which are described herein. “Organic" variations should not be viewed in isolation or as an alternative to reported variations.
For purposes of this report, 2017/2016 “organic” variation is defined as the reported variation as adjusted to exclude the impacts detailed below:
Foreign exchange effects and hyperinflationary adjustments in Venezuela: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2016 for both years.
Foreign exchange rates had a negative impact on our reported 2017 results, mainly due to the depreciation versus the euro of various Latin American currencies (in particular the Venezuela bolivar and the Argentine peso) and the pound sterling.
The impact of hyperinflationary adjustments in Venezuela has been excluded by reversing such adjustments.
Foreign exchange effects and hyperinflation in Venezuela decreased revenue growth by 3.2 percentage points and OIBDA growth by 4.7 percentage points.
Changes in the scope of consolidation: we have excluded the impact of changes in our consolidation perimeter in 2017 and 2016. The main changes in our consolidation perimeter in such years related to the sale of Telefé and the sale of Telecomunicaciones Personalizadas in the last quarter of 2016, and the inclusion of the Colombian companies Telebucaramanga, Metrotel and Optecom in our consolidation perimeter since October 2017.
To exclude the impact of the mentioned perimeter changes in the calculation of organic variations, the 2016 comparative figures exclude the consolidated results of Telefé and Telecomunicaciones Personalizadas, and in 2017 we exclude the results of Telebucaramanga, Metrotel and Optecom.
Restructuring costs: we have excluded the impact in 2017 and 2016 of restructuring costs, mainly those related to the first Collective Agreement of Related Companies in Spain, restructuring processes relating to Telefónica Germany and Telefónica Hispanoamérica, and the Group’s simplification program in global areas.
The distribution by segment of the restructuring costs is as follows (impacts on OIBDA):
|
| | | | |
| Millions of euros | 2016 |
| 2017 |
|
| Telefónica Spain | 837 |
| 165 |
|
| Telefónica Brazil | 40 |
| — |
|
| Telefónica Germany | 89 |
| 82 |
|
| Telefónica United Kingdom | 37 |
| — |
|
| Telefónica Hispanoamérica | 84 |
| 103 |
|
| Other companies | 293 |
| (10 | ) |
| Total restructuring costs | 1,380 |
| 340 |
|
Results of tower sales: the results attributable to the sale of towers in 2017 and 2016 have been excluded.
In 2017, the results from the sale of towers totaled 7 million euros, mainly in Telefónica Hispanoamérica.
In 2016, the results from the sale of towers totaled 1 million euros, also in Telefónica Hispanoamérica.
Spectrum acquisition: we have excluded the impact of spectrum acquisitions in 2017 and 2016.
In 2017, these acquisitions totaled 538 million euros, 470 million euros corresponding to Telefónica Colombia, 4 million euros corresponding to Telefónica México, 36 million euros corresponding to Telefónica Centroamérica (21 million euros in Costa Rica and 15 million euros in El Salvador), 27 million euros corresponding to Telefónica Uruguay and 1 million euros corresponding to Telefónica Germany.
In 2016, these acquisitions totaled 345 million euros, 284 million euros corresponding to Telefónica Peru, 48 million euros corresponding to Telefónica Brazil, 7 million euros corresponding to Telefónica Spain and 6 million euros corresponding to Telefónica Germany.
Gains or losses on the sale of companies: the gains obtained or losses incurred from the sale of companies have not been included in organic variations.
In 2017 no results have been recorded related to sales of companies. In 2016 the 199 million euros in profit obtained from the sale of Telefé and the 29 million euros obtained from the sale of Telecomunicaciones Personalizadas were excluded. Similarly, the loss of 16 million euros incurred in the sale of Vocem was also excluded.
Impairment of goodwill: the impairment losses on goodwill are not included in organic variations.
In 2017, no goodwill impairments were recorded. The comparative base for 2016 excludes the impairment of the goodwill allocated to Telefónica Venezolana and Telefónica Móviles México, amounting to 124 and 91 million euros, respectively.
Other adjustments:the impact of the provision of certain regulatory contingencies is excluded in 2017, amounting to 50 million euros in Telefónica Brazil and 57 million euros in other companies, as well as the provisions recorded in Telefónica Spain to optimize the distribution network in the amount of 13 million euros in 2017 and 18 million euros in 2016. Also the positive result of Telefónica Venezuela tariff increases in the last quarter of 2017 is excluded (6 million euros in revenues and 2 million euros in OIBDA).
The table below shows 2017/2016 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain line items of the consolidated income statement and CapEx and OIBDA-CapEx:
|
| | | | |
| | YoY variation |
| TELEFÓNICA 2017 | % Reported YoY |
| % Organic YoY |
|
| Revenues | (0.1 | %) | 3.4 | % |
| Other income | (15.5 | %) | (3.6 | %) |
| Supplies | (1.4 | %) | 0.6 | % |
| Personnel expenses | (15.3 | %) | 3.0 | % |
| Other expenses | 0.5 | % | 3.7 | % |
| OIBDA | 7.1 | % | 5.3 | % |
| Operating income | 24.2 | % | 14.1 | % |
| CapEx | (2.6 | %) | (1.2 | %) |
| OpCF (OIBDA-CapEx) | 21.0 | % | 12.2 | % |
The table below shows the contribution to reported growth of each item considered to calculate the organic variations, as explained above. For each line item, the contribution to reported growth, expressed in p.p., is the result of dividing the amount of each impact (on a net basis when the impact affects both years) by the consolidated reported figure for the previous year.
|
| | | | | | | | | | | | | | | | |
| | Contribution to reported growth (percentage points) |
| TELEFÓNICA 2017 | Exchange rate effect and hyperinflation |
| Perimeter change |
| Restructuring costs |
| Towers sales |
| Spectrum acquisition |
| Capital gains/losses on sale of companies |
| Impairments |
| Other adjustments |
|
| Revenues | (3.2 | ) | (0.3 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| Other income | 0.1 |
| — |
| — |
| 0.4 |
| — |
| (12.9 | ) | — |
| — |
|
| Supplies | (1.8 | ) | (0.2 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| Personnel expenses | (4.3 | ) | (0.8 | ) | (12.7 | ) | — |
| — |
| — |
| — |
| — |
|
| Other expenses | (4.5 | ) | (0.1 | ) | — |
| — |
| — |
| (0.1 | ) | (1.4 | ) | 3.2 |
|
| OIBDA | (4.7 | ) | (0.2 | ) | 6.8 |
| — |
| — |
| (1.4 | ) | 1.4 |
| (0.6 | ) |
| Operating income | (10.7 | ) | (0.5 | ) | 18.9 |
| 0.1 |
| — |
| (3.9 | ) | 3.9 |
| (1.8 | ) |
| CapEx | (3.6 | ) | — |
| — |
| — |
| 2.2 |
| — |
| — |
| — |
|
| OpCF (OIBDA-CapEx) | (6.4 | ) | (0.4 | ) | 16.7 |
| 0.1 |
| (3.1 | ) | (3.4 | ) | 3.5 |
| (1.6 | ) |
Results discussion
Revenues totaled 52,008 million euros in 2017, decreasing 0.1% compared to 2016 in reported terms, impacted by the negative evolution in foreign exchange rates and hyperinflation in Venezuela (-3.2 p.p.) and the changes in the consolidating perimeter (-0.3 p.p.), which offset the higher revenues of Telefónica Hispanoamérica, Telefónica Brazil and Telefónica United Kingdom. In organic terms (for additional information on organic variations, see "Adjustments made to calculate organic variations"), revenues increased by 3.4%. The structure of revenues reflects Telefónica’s business diversification. The segment with the largest contribution to our revenues is Telefónica Spain, representing 24.3% (-0.3 p.p. compared to 2016), followed by Telefónica Hispanoamérica, representing 24.1%, in line with 2016, and Telefónica Brazil, representing 23.1% (+1.8 p.p. compared to 2016).
Since January 1, 2017 Mobile Service Revenues (mainly data revenue) and Fixed revenues have been revised due to different allocation criteria. For comparative purposes, these numbers for 2016 are reported using the same criteria. This change does not affect the total Mobile Business Revenues figures reported for 2016.
Mobile business revenues totaled 32,827 million euros in 2017 (of which 28,677 million euros corresponded to service revenues and 4,150 million euros corresponded to handset revenues), up 1.2% year-on-year in reported terms as a result of the higher revenues of Telefónica Hispanoamérica, Telefónica Brazil and Telefónica United Kingdom, which were partially offset by the negative impact of the evolution in foreign exchange rates and hyperinflation in Venezuela (-4.1 p.p.). In organic terms, mobile business revenues grew by 5.3% despite the regulatory impacts affecting interconnection revenues in some operators of the Group.
Mobile service revenues, which include mobile data revenues, totaled 28,677 million euros in 2017, up 0.9% year-on-year in reported terms mainly explained by higher data consumption. Excluding the impact of changes in foreign exchange rates and hyperinflation in Venezuela the growth was 5.1%.
Mobile data revenues totaled 16,942 million euros in 2017, up 11.5% in reported terms mainly due to higher consumption of data by our customers. Excluding the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-5.4 p.p.), the growth of mobile data revenues was 16.8% as a result of the popularization of the use of data with the growth of commercial plans including data-inclusive prepaid plans. Mobile data revenues accounted for 59% of mobile service revenues in 2017, up 5.6 percentage points compared to 2016 in reported terms.
Fixed revenues totaled18,331 million euros in 2017, up 1.8% year-on-year in reported terms, despite the negative impact of changes in foreign exchange rates and hyperinflation in Venezuela (-0.1 p.p.). Excluding such impact, fixed revenues increased by 1.9% as a result mainly of higher broadband connection revenues and Pay-TV revenues due to the commercial actions carried out by the Company in order to increase our value proposition by giving even more speed to our customers.
Other income totaled 1,489 million euros in 2017, which mainly included own work capitalized in our fixed assets and the profit from the sale of other assets.
In 2016, other income also included the profit obtained from the sale of Telefé (199 million euros) and Telecomunicaciones Personalizadas (29 million euros).
Total expenses, which include supply costs, personnel costs and other expenses (principally external services and taxes) but do not include amortization and depreciation expenses, amounted to 37,310 million euros in 2017, down 3.5% year-on-year in reported terms. This decrease was mainly attributable to the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-3.4 p.p.) and to lower restructuring costs in 2017(-2.7 p.p.). These costs are explained in detail below:
Supplies amounted to 15,022 million euros in 2017, down 1.4% year-on-year in reported terms mainly as a result of the impact of foreign exchange rates and hyperinflation in Venezuela (-1.8 p.p.). In organic terms, supplies expenses increased by 0.6% year-on-year, mainly due to higher handset costs.
36Personnel expenses amounted to 6,862 million euros in 2017, down 15.3% year-on-year in reported terms. This decrease was mainly attributable to lower restructuring costs in 2017 (303 million euros in 2017 versus 1,336 million euros in 2016). In organic terms, personnel costs increased 3.0% year-on-year mainly due to inflationary pressure in some Latin American countries.
The average headcount was 125,371 employees in 2017, down 5.1% compared to 2016.Other expenses amounted to 15,426 million euros in 2017, up 0.5% year-on-year in reported terms, as a result mainly of inflationary pressure in some Latin American countries and the depreciation of certain Latin American currencies against the U.S. dollar, which offset the impact of foreign exchange rates and hyperinflation in Venezuela (-4.5 p.p.). There were also increases in network costs, as a result of the growth in data traffic, and higher systems costs, due to the transformation process of our systems which force us to have both systems cohabitating, as we are still decommissioning some IT systems. In organic terms, other expenses increased by 3.7% year-on-year.
OIBDA was 16,187 million euros in 2017, up 7.1% in reported terms, mainly due to the lower restructuring costs in 2017 compared to 2016 (+6.8 p.p.), partially offset by the impact of foreign exchange rates and hyperinflation
in Venezuela (-4.7 p.p.). In organic terms, OIBDA grew by 5.3% mainly due to the positive evolution of service revenues and the continuous effort to contain costs.
OIBDA margin stood at 31.1% in 2017, up 2.1 percentage points compared to 2016 in reported terms.
By segments, the main contributors to Group OIBDA were: Telefónica Spain with 30.6% (+1.5 p.p. compared to 2016), Telefónica Brazil with 25.9% (+1.4 p.p. compared to 2016) and Telefónica Hispanoamérica with 21.9% (reducing its contribution by 1.1 p.p. compared to 2016 due to the lower contribution of Peru and Chile).
Depreciation and amortization amounted to 9,396 million euros in 2017, down 2.6% year-on-year in reported terms, mainly due to the impact of foreign exchange rates and hyperinflation in Venezuela (-1.3 p.p.) and lower amortization in Telefónica Spain and Telefónica Germany.
Operating income (OI) in 2017 totaled 6,791 million euros, up 24.2% in reported terms (14.1% in organic terms).
The share of income (loss) of investments accounted for by the equity method for 2017 was a gain of 5 million euros (compared to a loss of 5 million euros in 2016).
Net financial results amounted to a loss of 2,199 million euros in 2017, 0.9% lower than the previous year, due to a lower cost of debt in European and Latin American currencies, which was partially offset by a lower impact associated to Venezuela and by not generating this year the savings from 2016 in FX hedging linked to Telefónica United Kingdom.
Corporate income tax amounts to 1,219 million euros in 2017. Considering a profit before taxes of 4,597 million euros, the effective tax rate stood at 26.5%, in line with the previous year (26.1%).
As a result , profit for the year attributable to equity holders of the parent for 2017 was 3,132 million euros (2,369 million euros in 2016).
Profit attributable to non-controlling interest was 246 million euros, 216 million euros higher than in 2016, mainly due to the increase in the profit attributable to minority interests at Telefónica Brazil and Telefónica Colombia and lower loss attributable to Telefónica Germany.
2017/2016 Segment results
TELEFÓNICA SPAIN
The below table shows the evolution of accesses in Telefónica Spain over the past two years as of December 31 of such years:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2016 |
| 2017 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 9,720.2 |
| 9,304.7 |
| (4.3 | %) |
| Internet and data accesses (2) | 6,094.5 |
| 6,039.6 |
| (0.9 | %) |
| Broadband | 6,067.3 |
| 6,020.3 |
| (0.8 | %) |
| FTTH | 2,998.3 |
| 3,423.7 |
| 14.2 | % |
| Mobile accesses | 17,237.7 |
| 17,576.5 |
| 2.0 | % |
| Prepay | 2,329.3 |
| 1,793.4 |
| (23.0 | %) |
| Contract | 14,908.4 |
| 15,783.1 |
| 5.9 | % |
| M2M | 2,006.3 |
| 2,015.6 |
| 0.5 | % |
| Pay TV | 3,657.0 |
| 3,847.6 |
| 5.2 | % |
| Final Clients Accesses | 36,709.4 |
| 36,768.5 |
| 0.2 | % |
| Wholesale Accesses | 4,525.5 |
| 4,221.1 |
| (6.7 | %) |
| Total Accesses | 41,234.9 |
| 40,989.6 |
| (0.6 | %) |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Also referred to as fixed broadband accesses.
In 2017 the commercial activity continued to leverage the differentiated assets of the Company, mainly through the convergent offer (which means the offer of more than a single service for a single price) “Movistar Fusión+” and the "Más por Más” strategy. The Company continued to evolve the above mentioned offer and to adapt it to incremental customer demand mainly through the rise of data in all mobile lines included in the Fusión portfolio. In addition, in July 2017 the portfolio was increased with the launching of two new options for “Fusión +” (“Fusión Series” and “Fusión #0”) which include TV services and its functionalities in all the convergent portfolio.
In 2017 Consumer “Fusión” churn rose up to 1.5% (+0.2 p.p. year-on-year), reflecting increased commercial competition in the market during the year. Broadband accesses decreased by 47 thousand year-on-year and fixed telephony accesses net loss, reached 416 thousand customers. On the other hand, high value accesses such as fiber accesses, increased by 425 thousand and mobile contract accesses increased by 875 thousand, showing the success of the convergent strategy (which means the offer of more than a single service for a single price) that from 2017 includes a second mobile line in all “Fusión” tariffs additional to the main line already included in the package.
Telefónica Spain had 41.0 million accesses at the end of December 2017, down 0.6% year-on-year, explained by the decrease in prepay mobile accesses, fixed telephony accesses as well as copper wholesale accesses. Retail accesses increased by 0.2% year-on-year.
Consumer “Movistar Fusión”, with a customer base of 4.4 million with 3.7 million additional mobile add-ons to the original offer as of December 31, 2017, maintained a solid year-on-year growth (+2% and +45% respectively compared to December 2016) and contributed 85% of the fixed retail broadband customer base (+2 p.p. year-on-year) and 79% of the wireless contract customer base (+6 p.p. year-on-year). There was significant growth in the penetration of the high value services of “Movistar Fusión”, with 38% of the customer base already using 300 Mb ultra-fast broadband (+2 p.p. year-on-year) and 76% of the customer base having Pay-TV as of December 31, 2017 (+8 p.p. year-on-year), as well as growth in mobile lines (each main Fusión package had 1.8 mobile lines in average compared to 1.6 in 2016).
Retail broadband accesses decreased 47 thousand accesses in 2017, totaling 6 million accesses (-0.8% year-on-year).
Fiber accesses showed a good evolution in terms of net adds, reaching 3.4 million customers at December 31, 2017 (up 14.2% compared to December 31, 2016), representing 57% of broad band accesses (+7 p.p. year-on-year), with 425 thousand new accesses in 2017. Ultra-speed fiber accesses with 300 Mb (with additional ARPU of 10-12 euros,
including VAT) reached 2.2 million accesses (64% of total fiber accesses). At December 31, 2017 the fiber deployment reached 19.2 million premises, 2.1 million more than at December 31, 2016, and continues to be the largest in Europe.
Total mobile accesses stood at 17.6 million, up 2.0% compared with year-end 2016 as a result of the increase in contract accesses and despite the decrease in prepay accesses, reflecting the success of the convergent strategy and the good evolution of the mobile number portability in the last quarter of the year, boosted by the improvement of the portability offer. The contract access base accelerated its growth during 2017, growing by 5.9% year-on-year. Smartphone penetration stood at 76.4% of the mobile voice base (+5.6 p.p. compared to year-end 2016) and significantly boosted data traffic which grew by 111% year-on-year in 2017 due to the higher number of customers with the renewed portfolio containing superior data packages.
LTE network rollout continued to progress and coverage reached approximately 97% (criteria base on competitors' calculation) (by summing up all inhabitants of the cities with some LTE coverage)) of the population at December 31, 2017, up 1 p.p. compared to December 31, 2016. As a result, the LTE customer base was over 7.6 million customers at December 31, 2017, while penetration reached 49.4% (+9.5 p.p. year-on-year).
Pay-TV accesses reached 3.8 million at the end of 2017, growing by 5.2% compared to December 31, 2016 driven by the inclusion of TV services in all “Fusión” portfolio convergent packages since July 2017.
Wholesale accesses stood at 4.2 millionat the end of 2017, decreasing by 6.7% year-on-year, however NEBA (New Ethernet Broad Band Service for Wholesale) Fiber accesses net adds increased to 850 thousand accesses, representing 20% of total wholesale accesses (+13 p.p. year-on-year) and reflecting the positive evolution of the network due to the use of superior technologies.
The table below shows the Telefónica Spain’s results over the past two years:
|
| | | | | | | | |
| Millions of euros | | | | |
| TELEFÓNICA SPAIN | 2016 (*) |
| 2017 |
| % Reported YoY |
| % Organic YoY (3) |
|
| Revenues | 12,815 |
| 12,653 |
| (1.3 | %) | (1.2 | %) |
| Consumer (1) | 6,536 |
| 6,602 |
| 1.0 | % | 1.0 | % |
| Fusion | 4,096 |
| 4,470 |
| 9.1 | % | 9.1 | % |
| Out of Fusion | 2,440 |
| 2,132 |
| (12.6 | %) | (12.6 | %) |
| Corporate | 3,445 |
| 3,401 |
| (1.3 | %) | (1.3 | %) |
| Comunications | 2,721 |
| 2,631 |
| (3.3 | %) | (3.3 | %) |
| IT | 724 |
| 770 |
| 6.4 | % | 6.4 | % |
| Others (2) | 2,337 |
| 2,271 |
| (2.8 | %) | (2.5 | %) |
| Other income | 474 |
| 410 |
| (13.5 | %) | (8.0 | %) |
| Supplies | (3,406 | ) | (3,481 | ) | 2.2 | % | 2.2 | % |
| Personnel expenses | (3,022 | ) | (2,212 | ) | (26.8 | %) | (6.3 | %) |
| Other expenses | (2,458 | ) | (2,418 | ) | (1.6 | %) | (1.4 | %) |
| OIBDA | 4,403 |
| 4,952 |
| 12.5 | % | (1.8 | %) |
| OIBDA margin | 34.4 | % | 39.1 | % | 4.8 p.p. |
| (0.2 p.p.) |
|
| Depreciation and amortization | (1,827 | ) | (1,688 | ) | (7.6 | %) | (7.6 | %) |
| Operating income (OI) | 2,576 |
| 3,264 |
| 26.7 | % | 1.3 | % |
| CapEx | 1,852 |
| 1,683 |
| (9.1 | %) | (8.8 | %) |
| OpCF (OIBDA-CapEx) | 2,551 |
| 3,269 |
| 28.2 | % | 2.0 | % |
Notes:
(*) Revised data.
(1) Consumer revenues also include freelance revenues.
(2) Other includes wholesale, subsidiaries and other revenues.
(3) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Spain, we have made the following adjustments in order to calculate 2017/2016 variations in organic terms:
Changes in the scope of consolidation: the main change in 2017 compare with the previous year relates to the sale of Telecomunicaciones Personalizadas, in the last quarter of 2016.
Restructuring costs:the impact of certain restructuring costs related to the Voluntary Suspension Plan and other plans in Spain amounting to 165 million and 837 million euros in 2017 and 2016, respectively have been excluded.
TableSpectrum acquisition: we have excluded the impact of Contentsspectrum acquisitions in 2016, which totaled 7 million euros. During 2017 no acquisitions have been made.Gains or losses on the sale of companies: in the comparative base of 2016, the gain obtained from the sale of Telecomunicaciones Personalizadas for 29 million euros was excluded.
Optimization of the distribution network: the impact of the provisions recorded totaling 13 and 18 million euros in 2017 and 2016, respectively, were excluded.
The charttable below shows 2017/2016 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain line items of the income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
TELEFÓNICA SPAIN
2017 | % Reported YoY |
| % Organic YoY |
| Perimeter change |
| Restructuring costs |
| Spectrum acquisition |
| Capital Gains/losses on sale of companies |
| Spain distribution network |
|
| Revenues | (1.3 | %) | (1.2 | %) | (0.1 | ) | — |
| — |
| — |
| — |
|
| Other income | (13.5 | %) | (8.0 | %) | — |
| — |
| — |
| (6.0 | ) | — |
|
| Supplies | 2.2 | % | 2.2 | % | — |
| — |
| — |
| — |
| — |
|
| Personnel expenses | (26.8 | %) | (6.3 | %) | — |
| (22.3 | ) | — |
| — |
| — |
|
| Other expenses | (1.6 | %) | (1.4 | %) | — |
| — |
| — |
| — |
| (0.2 | ) |
| OIBDA | 12.5 | % | (1.8 | %) | (0.1 | ) | 15.3 |
| — |
| (0.7 | ) | 0.1 |
|
| CapEx | (9.1 | %) | (8.8 | %) | — |
| — |
| (0.4 | ) | — |
| — |
|
| OpCF (OIBDA-CapEx) | 28.2 | % | 2.0 | % | (0.2 | ) | 26.4 |
| 0.3 |
| (1.1 | ) | 0.2 |
|
Results discussion
Revenues in Telefónica Spain in 2017 were 12,653 million euros, down 1.3% year-on-year in reported terms mainly as a result of the decrease in handset revenues. In organic terms (excluding Telecomunicaciones Personalizadas from the consolidation perimeter), revenues were down 1.2% year-on-year.
Given the high penetration level of convergent offers (which means the offer of more than a single service for a single price), the revenue breakdown by service is considered to be increasingly less relevant. For this reason, Telefónica Spain has established a revenue breakdown that management believes is more meaningful.
Consumer revenues (6,602 million euros in 2017) grew by 1.0% year-on-year in reported terms mainly driven by the growth in ARPU and in the number of customers as well as a significant improvement in the customers' mix. It is worth highlighting the strong growth in "Fusión" revenues during 2017 (4,470 million euros, +9.1% year-on-year in reported terms) which more than offset the drop in "non-Fusión" revenues.
Business revenues (3,401 million euros in 2017) decreased by 1.3% year-on-year in reported terms, mainly due to a better evolution in the communications revenues trend and higher IT revenues.
Other revenues, which include wholesale, subsidiaries and other revenues (2,271 million euros in 2017) decreased by 2.8% year-on-year in reported terms, due mainly to lower wholesale revenues from TV and MVNOs and, to a lesser extent, to the effect of price regulatory changes applicable throughout 2017 (affecting NEBA (New Ethernet Broad Band Service for Wholesale), ORLA (leased lines reference offer including Ethernet interfaces), etc.).
Fusión ARPU rose to 85.1 euros in 2017, up 5.8% year-on-year in reported terms, boosted by the demand of higher value packages and the tariff revisions, as well as the improvement in the customers' mix stimulated by the renovation of our portfolio including additional mobile lines, additional contents as well as an improvement in functionalities in the convergent offers.
OIBDA amounted to 4,952 million euros in 2017, up 12.5% year-on-year in reported terms. In 2016, OIBDA was adversely affected by the provisions recorded in connection with the restructuring costs resulting from the extension to 2018 of the ‘Employment Suspension Plan’ and other restructuring plans (837 million euros) and the restructuring of the distribution channel (18 million euros). In 2017, OIBDA included lower provisions related mainly to the ‘Employment Suspension Plan’ as a result of its increased acceptance (165 million euros), which we expect will result in further cost savings, and the restructuring of the distribution channel (13 million euros).
In organic terms, OIBDA decreased 1.8% year-on-year, mainly due to the lower wholesale revenues and higher content costs, partially offset by the decrease in personnel expenses. Personnel expenses decreased 6.3% year-on-year in organic terms driven by the savings generated by the ‘Employment Suspension Plan’ (158 million euros). On the other hand, the increase in supplies (+2.2% in reported terms) which were impacted by higher content costs and IT equipment purchases, were partially offset by the other expenses, which dropped 1.6% in reported terms principally due to lower commercial costs.
OIBDA margin was 39.1% in 2017 in reported terms, down 4.8 percentage points year-on-year in reported terms.
TELEFÓNICA UNITED KINGDOM
The table below shows the evolution of accesses by regionin Telefónica United Kingdom over the past two years as of December 31 of such years:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2016 |
| 2017 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 272.6 |
| 283.9 |
| 4.1 | % |
| Internet and data accesses (2) | 23.7 |
| 25.3 |
| 6.6 | % |
| Broadband | 23.7 |
| 25.3 |
| 6.6 | % |
| Mobile accesses | 25,462.7 |
| 25,003.9 |
| (1.8 | %) |
| Prepay | 9,701.4 |
| 9,203.7 |
| (5.1 | %) |
| Contract | 15,761.3 |
| 15,800.2 |
| 0.2 | % |
| M2M | 3,266.9 |
| 3,358.9 |
| 2.8 | % |
| Final Clients Accesses | 25,759.0 |
| 25,313.1 |
| (1.7 | %) |
| Total Accesses | 25,759.0 |
| 25,313.1 |
| (1.7 | %) |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Also referred to as fixed broadband accesses.
In 2017, Telefónica United Kingdom maintained a competitive position which has been underpinned by the strength of the O2 brand, new and innovative commercial propositions and customer experience. These factors have allowed the Company to maintain customer loyalty and continue to keep growing in high value customers in a competitive market.
The total access base went down by 1.7% year-on-year and stood at 25.3 million at December 31, 2017, mainly driven by a 1.8% decline in the mobile customer base.
The contract mobilecustomer base grew 0.2% year-on-year and stood at 15.8 million accesses, with a broadly stable 63.2% share over the total mobile base. Mobile accesses decreased by 459 thousand customers, driven by higher volatility in the prepay customer base (which decreased 5.1% year-on-year to 9.2 million at December 31, 2017) and 228 thousand inactive disconnections in postpay. Smartphone penetration reached 76.5% of the total mobile accesses base, up 8.1 percentage points year-on-year. LTE customers, increased by 6.6% year-on-year reaching 12.9 million at December 31, 2017. LTE penetration reached 59.6% of the total mobile access base.
The table below shows the evolution of Telefónica United Kingdom´s results over the past two years:
|
| | | | | | | | |
| Millions of euros | | | | |
| TELEFÓNICA UNITED KINGDOM | 2016 |
| 2017 |
| % Reported YoY |
| % Organic YoY (1) |
|
| |
| Revenues | 6,861 |
| 6,540 |
| (4.7 | %) | 2.2 | % |
| Mobile service revenues (2) | 5,363 |
| 5,050 |
| (5.8 | %) | 1.0 | % |
| Other income | 148 |
| 135 |
| (9.0 | %) | (2.4 | %) |
| Supplies | (3,226 | ) | (3,125 | ) | (3.1 | %) | 3.9 | % |
| Personnel expenses | (528 | ) | (442 | ) | (16.2 | %) | (3.4 | %) |
| Other expenses | (1,546 | ) | (1,469 | ) | (5.0 | %) | 1.9 | % |
| OIBDA | 1,709 |
| 1,639 |
| (4.1 | %) | 0.7 | % |
| OIBDA margin | 24.9 | % | 25.1 | % | 0.1 p.p. |
| (0.4 p.p.) |
|
| Depreciation and amortization | (1,090 | ) | (1,047 | ) | (4.0 | %) | 3.0 | % |
| Operating income (OI) | 619 |
| 592 |
| (4.3 | %) | (3.1 | %) |
| CapEx | 931 |
| 827 |
| (11.2 | %) | (4.8 | %) |
| OpCF (OIBDA-CapEx) | 778 |
| 812 |
| 4.4 | % | 6.9 | % |
(1) See adjustments made to calculate organic variation below.
(2) Mobile service revenues include revenues from MVNOs since 1 January 2017, which were previously accounted as "Handset revenues and others"; these criteria are applied across Telefónica Group. For comparative purposes, mobile services and handset revenues for 2016 are reported using the same criteria.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica United Kingdom, we have made the following adjustments in order to calculate 2017/2016 variations in organic terms:
Exchange rate effect: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2016 for both years.
Restructuring costs: we have excluded the impact in 2017 and 2016 of restructuring costs, amounting to 314 thousand euros and 37 million euros, respectively.
The table below shows 2017/2016 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain line items of the income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
TELEFÓNICA UNITED KINGDOM
2017 | % Reported YoY |
| % Organic YoY |
| Exchange rate effect |
| Restructuring costs |
|
| |
| Revenues | (4.7 | %) | 2.2 | % | (6.9 | ) | — |
|
| Other income | (9.0 | %) | (2.4 | %) | (6.6 | ) | — |
|
| Supplies | (3.1 | %) | 3.9 | % | (7.0 | ) | — |
|
| Personnel expenses | (16.2 | %) | (3.4 | %) | (6.1 | ) | (7.0 | ) |
| Other expenses | (5.0 | %) | 1.9 | % | (6.9 | ) | — |
|
| OIBDA | (4.1 | %) | 0.7 | % | (7.0 | ) | 2.2 |
|
| CapEx | (11.2 | %) | (4.8 | %) | (6.4 | ) | — |
|
| OpCF (OIBDA-CapEx) | 4.4 | % | 6.9 | % | (7.6 | ) | 4.8 |
|
Results discussion
Total revenues were 6,540 million euros in 2017, down by 4.7% year-on-year in reported terms mainly due to the depreciation of the pound sterling (which accounted for 6.9 p.p. of the year-on-year decrease). In organic terms, revenues increased by 2.2% year-on-year due mainly to higher mobile service revenues and the handset revenues growth as well as revenues linked to M2M programs.
Mobile service revenues totaled 5,050 million euros in 2017, down by 5.8% year-on-year in reported terms due mainly to the depreciation of the pound sterling (which accounted for 6.8 p.p. of the year-on-year decrease). Excluding this impact, mobile service revenues grew by 1.0% due to the increase in "In-Bundle" tariffs (which are linked to the RPI (Retail Price Index)) and the higher data consumption that offset the significant negative impact from changes in the European roaming regulation that became effective on June 15, 2017.
Mobile ARPU decreased by 6.5% year-on-year in reported terms due mainly to the depreciation of the pound sterling. In organic terms, ARPU increased by 0.3% with a data ARPU growth of 1.1% y-o-y, despite the significant negative impact from changes in the European roaming regulation, due to the growth of high-speed network penetration that led to the increased adoption of high end tariffs by our customers.
|
| | | | | | | | |
| TELEFÓNICA UNITED KINGDOM | 2016 |
| 2017 |
| %YoY |
| %Organic YoY |
|
| Voice Traffic (millions of minutes) | 93,306 |
| 94,723 |
| 1.5 | % | 1.5 | % |
| ARPU (EUR) | 17.0 |
| 15.9 |
| (6.5 | %) | 0.3 | % |
| Prepay | 7.5 |
| 6.9 |
| (7.0 | %) | 0.3 | % |
| Contract (1) | 28.8 |
| 26.8 |
| (6.8 | %) | 0.2 | % |
| Data ARPU (EUR) | 10.3 |
| 9.7 |
| (5.8 | %) | 1.1 | % |
| % non-SMS over data revenues (2) | 64.2 | % | 65.5 | % | 1.3 p.p. |
| 1.3 p.p. |
|
Notes:
(1) Excludes M2M.
(2) Mobile data revenues have been revised, for comparative purposes mobile data revenues for 2016 are reported using the same criteria.
OIBDA totaled 1,639 million euros in 2017, down by 4.1% year-on-year in reported terms, as a result mainly of the depreciation of the pound sterling. In organic terms, OIBDA increased by 0.7% year-on-year as a result mainly of higher mobile service revenues (+1.0% y-o-y in organic terms) despite the significant negative impact from the new European roaming regulation (RLAH "Roaming Like at Home") and the costs growth, associated with 4G network deployment needed to support the higher data traffic demand.
The OIBDAmargin stood at 25.1% in 2017, with an increase of 0.1 percentage points in reported terms compared to 2016.
TELEFÓNICA GERMANY
The below table shows the evolution of accesses in Telefónica Germany over the past two years as of December 31 of such years:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2016 |
| 2017 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 2,010.3 |
| 1,979.6 |
| (1.5 | %) |
| Internet and data accesses (2) | 2,324.5 |
| 2,281.5 |
| (1.9 | %) |
| Broadband | 2,104.0 |
| 2,072.2 |
| (1.5 | %) |
| FTTx | 805.5 |
| 1,151.6 |
| 43.0 | % |
| Mobile accesses | 44,320.7 |
| 43,154.7 |
| (2.6 | %) |
| Prepay | 23,784.0 |
| 21,880.9 |
| (8.0 | %) |
| Contract | 20,536.6 |
| 21,273.8 |
| 3.6 | % |
| M2M | 787.8 |
| 1,027.0 |
| 30.4 | % |
| Final Clients Accesses | 48,655.5 |
| 47,415.8 |
| (2.5 | %) |
| Wholesale Accesses | 691.0 |
| 188.1 |
| (72.8 | %) |
| Total Accesses | 49,346.4 |
| 47,603.9 |
| (3.5 | %) |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Also referred to as fixed broadband accesses.
During 2017 Telefónica Germany maintained solid operational momentum in a dynamic competitive environment increasingly focused on the monetization opportunity driven by large data packages. Data usage showed significant y-o-y growth, supported by the good reception from new and existing customers of the O2 Free 15th anniversary promotions and the new O2 Free portfolio.
The total access base decreased 3.5% year-on-year and stood at 47.6 million at December 31, 2017, mainly driven by a 2.6% decrease in the mobile base (which fell to 43.2 million).
The contract mobile customer base grew 3.6% year-on-year and reached 21.3 million accesses, with a broadly stable 49.3% share over the total mobile base. Net adds reached 0.7 million contract accesses due to the solid contribution of partners (second brands) and increasing demand for tariffs with large data volumes. Smartphone penetration reached 60.9% of the total mobile access base, up 1.4 percentage points year-on-year driven by the continued growth of LTE customers (+31% year-on-year reaching 15.8 million at December 31, 2017) which reflects the continuous demand by customers for high speed mobile data access. LTE penetration reached 37.4% of the total mobile access base.
The prepay mobile access base decreased 8.0% year-on-year to 21.9 million. The prepay segment lost 1.9 million accesses in 2017 mainly due to a technical base adjustment of 1.2 million inactive users driven by IT-harmonization after systems integration and the implementation of regulatory changes (mainly, the need for a legitimation check for prepay SIM-cards as well as requirements applicable to European travelers).
The retail broadband net additions were negative in 2017 with 31.8 thousand accesses. VDSL accesses grew driven by strong demand with 346 thousand net additions in 2017 (+19.9% year-on-year), while the wholesale DSL customer base continued to fall according to the planned dismantling of the old legacy infrastructure.
The table below shows the evolution of Telefónica Germany’s results over the past two years:
|
| | | | | | | | | |
| | Millions of euros | | | | |
| | TELEFÓNICA GERMANY | 2016 (*) |
| 2017 |
| % Reported YoY |
| % Organic YoY (1) |
|
| |
| | Revenues | 7,503 |
| 7,296 |
| (2.8 | %) | (2.8 | %) |
| | Mobile Business | 6,498 |
| 6,415 |
| (1.3 | %) | (1.3 | %) |
| | Mobile service revenues | 5,437 |
| 5,287 |
| (2.8 | %) | (2.8 | %) |
| | Fixed Business | 981 |
| 862 |
| (12.2 | %) | (12.2 | %) |
| | Other income | 146 |
| 159 |
| 9.2 | % | 9.2 | % |
| | Supplies | (2,452 | ) | (2,396 | ) | (2.3 | %) | (2.6 | %) |
| | Personnel expenses | (646 | ) | (642 | ) | (0.6 | %) | (0.3 | %) |
| | Other expenses | (2,780 | ) | (2,596 | ) | (6.6 | %) | (6.6 | %) |
| | OIBDA | 1,771 |
| 1,821 |
| 2.8 | % | 2.9 | % |
| | OIBDA margin | 23.6 | % | 25.0 | % | 1.4 p.p. |
| 1.4 p.p. |
|
| | Depreciation and amortization | (2,200 | ) | (1,954 | ) | (11.2 | %) | (10.9 | %) |
| | Operating income (OI) | (429 | ) | (133 | ) | (69.1 | %) | (85.3 | %) |
| | CapEx | 1,107 |
| 951 |
| (14.2 | %) | (13.7 | %) |
| | OpCF (OIBDA-CapEx) | 664 |
| 870 |
| 31.1 | % | 27.4 | % |
(*) Revised data.
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Germany, we have made the following adjustments in order to calculate 2017/2016 variations in organic terms:
Restructuring costs: we have excluded the impact of restructuring costs associated with simplification processes implemented in Germany. In 2017, restructuring costs had an 82 million euros impact on OIBDA. In 2016, restructuring costs had a 89 million euros impact on OIBDA.
Spectrum acquisition: the CapEx organic variation exclude spectrum acquisition, which in 2017 amounted to 1 million euros (6 million euros in 2016).
Changes in the scope of consolidation: in 2016, we have excluded the results of four months of the tower business transferred to Telxius on May 1, 2016, which had a 12 million euros impact on OIBDA (11 million euros on OpCF).
The table below shows 2017/2016 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain line items of the income statement measures and CapEX and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
TELEFÓNICA GERMANY
2017 | %ReportedYoY |
| %Organic YoY |
| Restructuring costs |
| Spectrum acquisition |
| Perimeter change |
|
| Revenues | (2.8 | %) | (2.8 | %) | — |
| — |
| — |
|
| Other income | 9.2 | % | 9.2 | % | — |
| | — |
|
| Supplies | (2.3 | %) | (2.6 | %) | — |
| — |
| 0.3 |
|
| Personnel expenses | (0.6 | %) | (0.3 | %) | (0.3 | ) | — |
| — |
|
| Other expenses | (6.6 | %) | (6.6 | %) | (0.2 | ) | — |
| 0.1 |
|
| OIBDA | 2.8 | % | 2.9 | % | 0.4 |
| — |
| (0.7 | ) |
| CapEx | (14.2 | %) | (13.7 | %) | — |
| (0.5 | ) | (0.1 | ) |
| OpCF (OIBDA-CapEx) | 31.1 | % | 27.4 | % | 1.1 |
| 0.8 |
| (1.7 | ) |
Results discussion
Total revenues were 7,296 million euros in 2017 down 2.8% year-on-year in reported terms due mainly to the lower service revenues.
Mobileservice revenues totaled 5,287 million euros in 2017, decreasing 2.8% year-on-year in reported terms due to the negative impact of regulatory developments (termination rate cuts and European roaming regulation), OTT trends, the higher share of wholesale revenues and the ongoing legacy base rotation. Telefónica Germany continued to focus on data revenues, which decreased by 0.2% and accounted for 56% of mobile service revenues in 2017. Non-P2P SMS data revenues amounted to 2,398 million euros (increasing +5.0% year-on-year) and accounted for 80.3% of the total data revenues (+4 p.p. year-on-year).
Fixed revenues were 862 million euros in 2017 (down 12.2% year-on-year), as a result of the lower year-on-year customer base in retail DSL and the planned phasing-out of the wholesale DSL business.
Mobile ARPU was 9.7 euros in 2017 (down 5.7% year-on-year), while contract ARPU stood at 15.5 euros (down 6.0% year-on-year), as a result of the regulatory developments, high pricing pressure in a competitive market, a higher share of wholesale customers in the customer base and the consequent change in the weight of retail to wholesale. Data ARPU was 5.6 euros (down 2.8% year-on-year).
|
| | | | | | |
| TELEFÓNICA GERMANY | 2016 |
| 2017 |
| %YoY |
|
| Voice Traffic (millions of minutes) | 113,896 |
| 98,084 |
| (13.9 | %) |
| ARPU (EUR) | 10.3 |
| 9.7 |
| (5.7 | %) |
| Prepay | 5.7 |
| 5.2 |
| (8.5 | %) |
| Contract (1) | 16.5 |
| 15.5 |
| (6.0 | %) |
| Data ARPU (EUR) | 5.7 |
| 5.6 |
| (2.8 | %) |
| % non-SMS over data revenues (2) | 76.3 | % | 80.3 | % | 4.0 p.p. |
|
Notes:
(1) Excludes M2M.
(2) Mobile data revenues have been revised, for comparative purposes mobile data revenues for 2016 are reported using the same criteria.
OIBDA totaled 1,821 million euros in 2017, increasing 2.8% year-on-year in reported terms. In organic terms, OIBDA grew by 2.9% year-on-year, driven by the integration synergies captured (as a consequence of the integration of activities after the E-Plus acquisition in 2014) and the capital gains on the sale of assets, which offset the decrease in service revenues as a result of the impact of regulation and the continued commercial investments to drive O2 brand positioning.
The OIBDA margin stood at 25.0% in reported terms for 2017, up 1.4 percentage points compared to 2016.
TELEFÓNICA BRAZIL
The below table shows the evolution of accesses in Telefónica Brazil over the past two years as of December 31 of such years:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2016 |
| 2017 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 14,338.4 |
| 13,837.3 |
| (3.5 | %) |
| Internet and data accesses (2) | 7,383.2 |
| 7,534.5 |
| 2.0 | % |
| Broadband | 7,311.0 |
| 7,466.1 |
| 2.1 | % |
| FTTx/Cable | 4,145.8 |
| 4,541.0 |
| 9.5 | % |
| Mobile accesses | 73,769.8 |
| 74,931.3 |
| 1.6 | % |
| Prepay | 40,387.2 |
| 38,168.1 |
| (5.5 | %) |
| Contract | 33,382.6 |
| 36,763.2 |
| 10.1 | % |
| M2M | 5,005.1 |
| 6,312.5 |
| 26.1 | % |
| Pay TV | 1,712.7 |
| 1,587.7 |
| (7.3 | %) |
| Final Clients Accesses | 97,204.2 |
| 97,890.8 |
| 0.7 | % |
| Wholesale Accesses | 17.9 |
| 14.3 |
| (20.4 | %) |
| Total Accesses | 97,222.2 |
| 97,905.1 |
| 0.7 | % |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Also referred to as fixed broadband accesses.
Telefónica Brazil closed the year 2017 improving its competitive position in the mobile market. In the mobile business, leadership has been maintained in the higher value segments, which permitted the operator to capture mobile market revenue growth in 2017. In the fixed business, the transformation towards value-added clients resulted in the increase in fiber in broadband and in IPTV in the Pay-TV business.
Revenues and OIBDA evolution was positively supported by the acceleration of mobile adoption and the good evolution of fiber and IPTV. Additionally, Telefónica Brazil carried out cost control measures and generated benefits from the synergies with GVT that offset the negative impacts of adverse political conditions in Brazil, the aggressiveness of competitors and the worsening of the traditional fixed business.
However, results in 2017 were adversely affected by the interconnection tariff reduction in the mobile business (-45.6%), in the retail fixed-mobile tariff (-17.7%), in the fixed-local tariff (-35.3%) and in the fixed-interurban tariff (-50.9%) since February 25, 2017.
Telefónica Brazil reached 97.9 million accesses at December 31, 2017, up 0.7% compared with December 2016.
In the mobile business, the strategic focus remained on gaining and retaining high value customers, reaching a market share of 41.8% in the contract segment as of December 31, 2017 (Source: Anatel), preserving the leadership. Telefónica Brazil maintained its market leadership in terms of total accesses with a market share of 31.7% as of December 2017 (source: Anatel), driven in part by the contract clients growth (10.1% year-on-year), which offset the fall in prepaid clients (-5.5% year-on-year). The improvement in contract accesses is the consequence of the offering of more attractive plans, the applications and certain special roaming plans for pure contract clients.
In its fixed business, Telefónica Brazil maintained its strategic focus on fiber deployment, with 18.4 million premises passed with fiber at December 31, 2017 and 4.5 million homes connected. Traditional accesses decreased 3.5% due to the fixed-mobile substitution. Retail broadband accesses totaled 7.5 million accesses at the end of 2017, increasing 2.1% year-on-year. Among them, 61% accesses were connected with FTTx. Pay TV customers reached 1.6 million as of December 31, 2017, down 7.3% year-on-year due to the discontinuation of the DTH business and a commercial strategy based on value clients of IPTV. IPTV accesses increased in relevance representing 24% of total Pay TV accesses.
The table below shows the evolution of Telefónica Brazil’s results over the past two years:
|
| | | | | | | | | |
| | Millions of euros | | | |
| |
|
| | TELEFÓNICA BRAZIL | 2016(*) |
| 2017 |
| % Reported YoY |
| % Organic YoY (1) |
|
| |
| | Revenues | 11,090 |
| 12,019 |
| 8.4 | % | 1.4 | % |
| | Mobile Business | 6,663 |
| 7,360 |
| 10.5 | % | 3.7 | % |
| | Mobile service revenues | 6,351 |
| 7,062 |
| 11.2 | % | 4.4 | % |
| | Fixed Business | 4,427 |
| 4,659 |
| 5.2 | % | (2.1 | %) |
| | Other income | 348 |
| 358 |
| 2.9 | % | (3.6 | %) |
| | Supplies | (2,260 | ) | (2,268 | ) | 0.4 | % | (6.2 | %) |
| | Personnel expenses | (1,165 | ) | (1,196 | ) | 2.6 | % | (1.2 | %) |
| | Other expenses | (4,311 | ) | (4,722 | ) | 9.5 | % | 1.7 | % |
| | OIBDA | 3,702 |
| 4,191 |
| 13.2 | % | 6.0 | % |
| | OIBDA margin | 33.4 | % | 34.9 | % | 1.5 p.p. |
| 1.5 p.p. |
|
| | Depreciation and amortization | (2,036 | ) | (2,228 | ) | 9.4 | % | 2.6 | % |
| | Operating income (OI) | 1,666 |
| 1,963 |
| 17.9 | % | 10.0 | % |
| | CapEx | 2,137 |
| 2,225 |
| 4.1 | % | (0.1 | %) |
| | OpCF (OIBDA-CapEx) | 1,566 |
| 1,966 |
| 25.5 | % | 13.6 | % |
(*) Revised data
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Brazil, we have made the following adjustments in order to calculate 2017/2016 variations in organic terms:
Exchange rate effect: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2016 for both years.
Changes in the scope of consolidation: the 2016 comparative figures for organic changes included the six months impact of the consolidation of Terra Networks Brazil in this segment which had an impact of 14 million euros on OIBDA and 13 million euros on OpCF for 2016, and excluded the results of three years.months of the tower business transferred to Telxius on April 1, 2016, which had an impact of 4 million euros on OIBDA and OpCF.
Restructuring costs: we have excluded the impact of restructuring costs associated with the simplification processes implemented in Telefónica Brazil. In 2016, these restructuring costs totaled 40 million euros. There were no such restructuring costs during 2017.
Results of tower sales: the results attributable to the sale of towers have been excluded (107 thousand euros in 2017 and 100 thousand euros in 2016).
Spectrum acquisition: the impact of spectrum acquisitions has been excluded (48 million euros in 2016).
Contingencies: the impact of the provision of certain regulatory contingencies in 2017 is excluded in Telefónica Brasil (50 million euros).
The table below shows 2017/2016 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain line items of the income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
| TELEFÓNICA BRAZIL 2017 | % Reported YoY |
| % Organic YoY |
| Exchange rate effect |
| Perimeter change |
| Restructuring costs |
| Towers sales |
| Spectrum acquisition |
| Contingencies |
|
| Revenues | 8.4 | % | 1.4 | % | 6.7 |
| 0.3 |
| — |
| — |
| — |
| — |
|
| Other income | 2.9 | % | (3.6 | %) | (6.4 | ) | (0.1 | ) | — |
| — |
| — |
| — |
|
| Supplies | 0.4 | % | (6.2 | %) | 6.2 |
| 0.4 |
| — |
| — |
| — |
| — |
|
| Personnel expenses | 2.6 | % | (1.2 | %) | 6.4 |
| 0.8 |
| (3.5 | ) | — |
| — |
| — |
|
| Other expenses | 9.5 | % | 1.7 | % | 6.8 |
| — |
| — |
| — |
| — |
| 1.1 |
|
| OIBDA | 13.2 | % | 6.0 | % | 7.0 |
| 0.3 |
| 1.1 |
| — |
| — |
| (1.3 | ) |
| CapEx | 4.1 | % | (0.1 | %) | 6.5 |
| 0.1 |
| — |
| — |
| (2.3 | ) | — |
|
| OpCF (OIBDA-CapEx) | 25.5 | % | 13.6 | % | 7.8 |
| 0.6 |
| 2.6 |
| — |
| 3.1 |
| (3.0 | ) |
Results discussion
Revenues totaled 12,019 million euros in 2017, up 8.4% in reported terms, due mainly to the appreciation of the Brazilian real (which accounted for +6.7 p.p. of the evolution) and the changes in the consolidation perimeter (+0.3 p.p.). In organic terms, the year-on-year increase was 1.4%, principally due to the good evolution in the mobile business (+3.7% year-on-year) despite the negative impact from the decrease of the regulated tariffs.
Revenues from the mobile business totaled 7,360 million euros in 2017, up 10.5% in reported terms due mainly to the appreciation of the Brazilian real (which accounted for 6.9 p.p. of the evolution). In organic terms, revenues from the mobile business increased by 3.7% due to the positive evolution of service revenues (+4.4% year-on-year) as a result of the higher weight of the contract clients, who generally use more data and other services over connectivity, that offset the decrease in interconnection tariffs and the decline in prepaid revenues associated with a smaller customer base. Additionally, handset revenues slowed down by 4.5% in reported terms due to a lower commercial activity, which was focused on higher value clients.
Fixed telephony revenues totaled 4,659 million euros, up 5.2% in reported terms due mainly to the appreciation of the Brazilian real (which accounted for 6.5 p.p. of the evolution) and the impact of the consolidation of Terra Networks Brasil (0.8 p.p.), which offset the regulatory impact of the decrease in the fixed-mobile and fixed-fixed tariffs and the decrease in voice traffic. In organic terms, revenues were down by 2.1%, mainly due to the regulatory impact of such tariff decreases and the decrease in voice traffic, which more than offset the increase in broadband and new services revenues, which were up by 8.3% year-on-year in organic terms supported by the increase in fiber revenues, from high-value customers.
The mobile ARPU increased 7.8% year-on-year in reported terms due mainly to the better quality of the customer base and the expansion of data revenues as well as the appreciation of the Brazilian real. In organic terms, it increased 2.6% year-on-year as a consequence of the higher data ARPU which more than offset the negative impact of the reduction in the mobile termination rates.
|
| | | | | | | | |
| TELEFÓNICA BRAZIL | 2016 |
| 2017 |
| %YoY |
| %Local Currency YoY |
|
| Voice Traffic (millions of minutes) | 373,074 |
| 333,752 |
| (10.5 | %) | (10.5 | %) |
| ARPU (EUR) | 7.1 |
| 7.7 |
| 7.8 | % | 2.6 | % |
| Prepay | 3.4 |
| 3.7 |
| 11.1 | % | (3.4 | %) |
| Contract (1) | 12.9 |
| 14.4 |
| 11.2 | % | 1.5 | % |
| Data ARPU (EUR) | 3.5 |
| 5.4 |
| 55.0 | % | 32.4 | % |
| % non-SMS over data revenues (2) | 89.3 | % | 92.2 | % | 2.9 p.p. |
| 3.0 p.p. |
|
Notes:
(1) Excludes M2M.
(2) Mobile data revenues have been revised, for comparative purposes mobile data revenues for 2016 are reported using the same criteria.
OIBDA stood at 4,191 million euros in 2017, up 13.2% in reported terms. This evolution was affected by the appreciation of the Brazilian real (+7.0 p.p.) and the changes in the consolidation perimeter (+0.3 p.p.). In organic terms, the year-on-year increase was 6.0% due to the contract and fiber revenues improvement, as well as cost efficiencies and higher synergies from the consolidation of GVT in 2015. Personnel expenses totaled 1,196 million euros in 2017, up 2.6% in reported terms mainly as the result of the appreciation of the Brazilian real. In organic terms, personnel expenses decreased by 1.2% year-on-year as a result of the restructuring plans implemented in 2016. In addition, supplies costs fell (-6.2% in organic terms) thanks to the positive impact of the interconnection tariff reduction and synergies from the consolidation of GVT achieved mainly in content costs.
The OIBDA margin stood at 34.9% in reported terms for 2017, up 1.5 percentage points in reported and organic terms compared to 2016.
TELEFÓNICA HISPANOAMÉRICA
The below table shows the evolution of accesses in Telefónica Hispanoamérica over the past two years as of December 31 of such years:
|
| | | | | | |
| ACCESSES | | | |
| Thousands of accesses | 2016 |
| 2017 |
| %Reported YoY |
|
| Fixed telephony accesses (1) (2) | 11,938.6 |
| 11,493.1 |
| (3.7 | %) |
| Internet and data accesses (2) (3) | 5,707.9 |
| 5,885.3 |
| 3.1 | % |
| Broadband | 5,570.7 |
| 5,735.2 |
| 3.0 | % |
| Mobile accesses | 115,284.5 |
| 110,563.7 |
| (4.1 | %) |
| Prepay | 89,461.2 |
| 84,822.4 |
| (5.2 | %) |
| Contract | 25,823.3 |
| 25,741.3 |
| (0.3 | %) |
| M2M | 2,561.3 |
| 2,886.5 |
| 12.7 | % |
| Pay TV | 2,919.2 |
| 3,032.4 |
| 3.9 | % |
| Final Clients Accesses | 135,850.3 |
| 130,974.6 |
| (3.6 | %) |
| Wholesale Accesses | 66.5 |
| 36.7 |
| (44.8 | %) |
| Total Accesses Hispanoamérica | 135,916.8 |
| 131,011.3 |
| (3.6 | %) |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Following the pre-payment of the debt derived from the operating agreement with PARAPAT in Colombia and after taking over its subsidiaries Telebucaramanga, Metrotel and Optecom, the consolidated results are included in the fixed business from October 1, 2017.
(3) Also referred to as fixed broadband accesses.
Total accesses reached 131.0 million at December 2017 (-3.6% year-on-year).
Mobile accesses fell by 4.1% year-on-year to 110.6 million customers, mainly due to a lower prepaid customer base.
Contract accesses remained broadly unchanged from the previous year, with a good performance in Argentina (+4.9%), Mexico (+13.0%) and Colombia (+4.0%), compensating the negative evolution in Peru (-17.5%) which faced a complicated competitive environment.
Prepaid accesses decreased 5.2% y-o-y, with negative net adds of 4.6 million accesses at December 31, 2017, mainly as a result of the evolution in Argentina (-1.9 million accesses), Mexico (-1.7 million accesses) and Peru (-758 thousand accesses), which was partially offset by Colombia (+721 thousand accesses) where we were the only operator with positive results in the prepay segment. Lower accesses were mainly the result of intense market competition and our continued focus on attracting high-value customers.
The smartphone customer base increased 11.3% year-on-year at December 31, 2017, reaching 51.3 million accesses (+5.2 million compared to December 2016) with a mobile access penetration of 48% (+6.8 p.p. y-o-y), growing in all countries of the region except Mexico (-3.2%) and Venezuela (-3.0%). In addition, accesses with 4G terminals increased 77%, reaching 27.4 million accesses by year-end.
Fixed accesses stood at 11.5 million at December 31, 2017 (-3.7% y-o-y) with negative net adds of 445 thousand customers, due to the erosion of the traditional fixed business, which more than offset the inclusion of 315 thousand accesses in Colombia of Tele-Bucaramanga and MetroTel in 2017.
Fixed broad band accesses reached 5.7 million at December 31, 2017 (+3.0% y-o-y), mainly due to the inclusion of 236 thousand accesses in Colombia of Tele-Bucaramanga and MetroTel and, to a lesser extent, due to the good results in Peru (+6.2%) and Chile (+1.7%) which offset the decrease in accesses in Argentina (-10.1%), as the operator focused on fiber (high-value customers), which affected the growth in the copper business. The penetration of FBB accesses over fixed accesses stood at 50% (+3.2 p.p. y-o-y), focusing on UBB deployment in the region, reaching 6.8 million real estate units and 1.8 million connected accesses (+61% y-o-y). The penetration of UBB accesses over fixed broadband accesses stood at 31% (+11 p.p. y-o-y).
Pay TV accesses stood at 3 million (+3.9% y-o-y) registering net adds of 113 thousand accesses with positive results in all countries of the region that offer the service, and mainly Peru (+7.2%), Chile (+3.6%) and Colombia (+2.4%).
The table below shows the evolution of Telefónica Hispanoamérica’s results over the past two years:
|
| | | | | | | | | |
| | Millions of euros | | | |
| |
|
| | TELEFÓNICA HISPANOAMÉRICA | 2016 (*) |
| 2017 |
| % Reported YoY |
| % Organic YoY (1) |
|
| |
| | Revenues | 12,579 |
| 12,552 |
| (0.2 | %) | 15.3 | % |
| | Mobile Business | 8,580 |
| 8,588 |
| 0.1 | % | 19.0 | % |
| | Mobile service revenues | 7,627 |
| 7,408 |
| (2.9 | %) | 17.4 | % |
| | Fixed Business | 3,999 |
| 3,964 |
| (0.9 | %) | 7.5 | % |
| | Other income | 274 |
| 274 |
| 0.0 | % | 5.8 | % |
| | Supplies | (3,718 | ) | (3,664 | ) | (1.5 | %) | 4.3 | % |
| | Personnel expenses | (1,587 | ) | (1,647 | ) | 3.7 | % | 28.1 | % |
| | Other expenses | (4,074 | ) | (3,977 | ) | (2.4 | %) | 15.8 | % |
| | OIBDA | 3,474 |
| 3,538 |
| 1.8 | % | 19.9 | % |
| | OIBDA margin | 27.6 | % | 28.2 | % | 0.6 p.p |
| 1.2 p.p |
|
| | Depreciation and amortization | (2,189 | ) | (2,191 | ) | 0.1 | % | 9.6 | % |
| | Operating income (OI) | 1,285 |
| 1,347 |
| 4.8 | % | 31.3 | % |
| | CapEx | 2,615 |
| 2,678 |
| 2.4 | % | 8.6 | % |
| | OpCF (OIBDA-CapEx) | 859 |
| 860 |
| 0.1 | % | 38.3 | % |
(*) Revised data.
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Hispanoamérica, we have made the following adjustments in order to calculate 2017/2016 variations in organic terms:
Exchange rate effects and hyperinflationary adjustments in Venezuela: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2016 for both years. We have also excluded the impact of hyperinflationary adjustments in Venezuela, by reversing such adjustments.
Changes in the scope of consolidation: the results of the Colombian companies Telebucaramanga, Metrotel and Optecom (which were acquired in October 2017 and had a 4 million euros impact on OIBDA before restructuring costs) have been excluded, as well as the results in 2016 of the towers business transferred to Telxius (on April 1, 2016 by Telefónica Peru and on May 1, 2016 by Telefónica Chile) which had a 3 million euros impact on OIBDA and a 2 million euros impact on OpCF.
Restructuring costs: we have excluded the impact of restructuring costs in 2017 and 2016, amounting to 103 and 84 million euros impact in OIBDA, respectively.
Results of tower sales: the results attributable to the sale of towers have been excluded (7 million euros in 2017 and 1 million euros in 2016).
Spectrum acquisition: the impact of spectrum acquisitions amounting to 537 million euros has been excluded in 2017 (470 million euros in Colombia) and 2016 (284 million euros, corresponding to Peru).
Capital gains and losses on sales of companies: gains and losses obtained from the sale of companies are excluded to calculate organic variations. In 2016, the profit from the sale of Telefé for 15 million euros was excluded.
Goodwill impairments: impairment losses from goodwill in consolidation are excluded to calculate organic variations. In 2016, the impairment loss on the goodwill assigned to Telefónica Venezolana and Telefónica Móviles Mexico amounting to 124 and 91 million euros, respectively, was excluded.
Other adjustments: the positive result of Telefónica Venezuela tariff increases in the last quarter of 2017 is excluded (6 million euros in revenues and 2 million euros in OIBDA).
The table below shows 2017/2016 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain line items of the income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | | | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
| TELEFÓNICA HISPANOAMÉRICA 2017 | % Reported YoY |
| % Organic YoY |
| Exchange rate effect and hyperinflation |
| Restructuring costs |
| Towers sales |
| Spectrum acquisition |
| Capital Gains/losses on sale of companies |
| Impairments |
| Perimeter change |
| Other adjustments |
|
| Revenues | (0.2 | %) | 15.3 | % | (15.6 | ) | — |
| — |
| — |
| — |
| — |
| 0.2 |
| — |
|
| Other income | 0.0 | % | 5.8 | % | (2.9 | ) | — |
| 2.4 |
| — |
| (5.3 | ) | — |
| — |
| — |
|
| Supplies | (1.5 | %) | 4.3 | % | (6.0 | ) | — |
| — |
| — |
| — |
| — |
| 0.3 |
| — |
|
| Personnel expenses | 3.7 | % | 28.1 | % | (24.5 | ) | 1.7 |
| — |
| — |
| — |
| — |
| 0.2 |
| — |
|
| Other expenses | (2.4 | %) | 15.8 | % | (21.5 | ) | — |
| — |
| — |
| — |
| (5.3 | ) | 0.2 |
| 9.5 |
|
| OIBDA | 1.8 | % | 19.9 | % | (24.8 | ) | (0.7 | ) | 0.2 |
| — |
| (0.4 | ) | 6.2 |
| — |
| 0.1 |
|
| CapEx | 2.4 | % | 8.6 | % | (15.2 | ) | — |
| — |
| 9.7 |
| — |
| — |
| 0.3 |
| — |
|
| OpCF (OIBDA-CapEx) | 0.1 | % | 38.3 | % | (54.0 | ) | (3.0 | ) | 0.7 |
| (29.6 | ) | (1.7 | ) | 25.0 |
| (0.7 | ) | 0.2 |
|
Results discussion
Revenuesamounted to 12,552 million euros in 2017, decreasing 0.2% year-on-year in reported terms. This decrease was mainly driven by the foreign exchange effects and the hyperinflation in Venezuela which decreased growth by 15.6 p.p. In organic terms, revenues would have grown by 15.3% year-on-year, driven by the good performance of data revenues, both mobile and fixed revenues, and the increase in TV revenues and handset sales revenues, in spite of interconnection tariff reductions.
Mobile service revenues reached 7,408 million euros in 2017, decreasing 2.9% year-on-year in reported terms. This decrease was mainly driven by the foreign exchange effects and the hyperinflation in Venezuela which decreased growth by 20.3 p.p. Excluding this effect, these revenues would have grown by 17.4%. Mobile service revenues performance by country was as follows:
In Argentina, mobile service revenues reached 1,966 million euros in 2017, increasing by 20.8% year-on-year in reported terms. This increase was due mainly to upward adjustment in tariffs, higher consumption in postpaid, a bigger customer base with top-ups and a higher top-up volume in prepaid, which more than offset the foreign exchange effect (which decreased growth by 16.6 p.p.). Excluding this effect, these revenues would have grown by 37.4%.
In Mexico, mobile service revenues reached 1,102 million euros in 2017, decreasing by 11.6% year-on-year in reported terms. This decrease was attributable in part to the foreign exchange effect, which decreased growth by 2.8 p.p. Excluding this effect, these revenues decreased by 8.8%, principally as a result of the performance of the prepay revenues which were affected by the 7.1% decrease in the customer base, which more than offset the positive impact of the interconnection agreements entered into during the first half of 2016 (37 million euros).
In Chile, mobile service revenues reached 1,069 million euros in 2017, decreasing by 3.0% year-on-year in reported terms, due mainly to the lower outgoing mobile revenues, which were affected by extremely aggressive competition, and lower FBB revenues, also as a result of increased competition that affected ARPU growth and our customer base (which was negatively impacted by churn level). These factors more than offset the positive impact of the foreign exchange effect. In local currency, these revenues decreased by 5.1%.
In Peru, mobile service revenues reached 1,072 million euros in 2017, decreasing by 11.1% year-on-year in reported terms. The decrease in revenues was mainly due to lower prepay and postpaid revenues as a consequence of higher competitiveness in the market with the launching of voice and data unlimited plans, the offering of high subsidies and portability with discounts of 50%. These actions resulted in net losses of customers and lower ARPU levels. These factors more than offset the positive impact of the foreign exchange effect. In local currency, these revenues decreased by 12.5%.
In Colombia, mobile service revenues reached 768 million euros in 2017, increasing by 3.4% year-on-year in reported terms, affected by the foreign exchange effect which accounted for 1.4 percentage points of the increase. In local currency, these revenues increased by 2.0% due to higher interconnection tariffs and improvements in our offers, directed to high-value customers.
Data revenues in the segment reached 4,119 million euros in 2017, increasing by 10.7% year-on-year in reported terms, due to the higher data revenues in all countries of the region except Chile and Peru. This increase was significantly offset by the foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela (which detracted 24.3 p.p. of the increase). Excluding this effect, the data revenues would have been up by 35.0 % year-on-year.
Fixed business revenues reached 3,964 million euros in 2017, decreasing by 0.9% year-on-year in reported terms. Excluding foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela (-8.9 p.p.) and the changes in the scope of consolidation of the Colombian companies of Telebucaramanga, Metrotel and Optecom (-0.6 p.p.), these revenues would have grown by 7.5% year-on-year due to higher TV revenues and fixed broadband, offsetting the decline in accesses and voice revenues. Argentina in particular, experienced acceleration in the fixed business with strong growth of broadband revenues due to adjustment of tariffs, improving speed and a better quality of the access base.
OIBDA reached 3,538 million euros in 2017, increasing 1.8% year-on-year in reported terms, as a result mainly of the increase in revenues and, to a lesser extent the impairment losses from goodwill in 2016 (which accounted for 6.2 p.p.), which more than offset the impact of foreign exchange effects and hyperinflationary adjustments in Venezuela (which decreased growth by 24.8 p.p.) and restructuring costs made by the company (which decreased growth by 0.7 p.p.). In organic terms, OIBDA would have increased 19.9%, due to higher revenues in spite of higher interconnection, network and IT expenses. The higher expenses are explained by:
higher supply costs due to higher content costs, purchase of fixed equipment and recharge of prepaid cards that offset the lower interconnection costs resulting from lower costs in Mexico, Chile, Ecuador and Colombia;
higher personnel expenses driven by the increase of inflation in some countries of the region, which could not be offset by the savings resulting from the restructuring plans carried out during the previous year. Restructuring plans carried out in 2017, amounting to 103 million euros, affected mainly Mexico, Central America, Argentina, Peru, Colombia and Chile, and
higher network expenses, mainly in Venezuela, Argentina and Mexico due to the expansion of the fixed and mobile networks, as well as the impact of inflation and depreciation of Latin American currencies against the U.S. dollar.
Below, is additional information by country:
Argentina: OIBDA amounted to 971 million euros in 2017, increasing 21.8% in reported terms. The exchange rate effect reduced growth by 16.7 percentage points. In local currency, the year-on-year variation was 38.5%, due to the good performance of revenues, which more than offset the effect of higher expenses as a result of inflation. Personnel expenses also increased as a result of the ongoing restructuring plans of the company and interconnection expenses increased due to tariff increases.
Mexico: OIBDA amounted to 302 million euros in 2017; decreasing 2.2% in reported terms affected by the exchange rate effect which reduced growth in 3.1 percentage points. In local currency, OIBDA increased by 0.9% reflecting the positive evolution of prepaid revenues as well as the positive impact of interconnection agreements entered into in the first quarter of 2016 and the cost efficiencies achieved. Moreover, personnel expenses increased in 2017 as a result of the restructuring plans of the company.
Chile: OIBDA amounted to 630 million euros in 2017, decreasing 10.5% in reported terms due to a limited extent to the exchange rate evolution that reduced variation in 2.0 percentage points. Excluding this effect, OIBDA would have decreased by 12.4%, as a result of the reduction in revenues mentioned above. In addition, there were higher personnel expenses in 2017 as a result of the restructuring plans of the company.
Peru: OIBDA amounted to 588 million euros in 2017, decreasing 24.5% in reported terms (with the exchange rate evolution having a positive impact of 1.2 percentage points). In local currency, OIBDA decreased by 25.7%, affected by the service revenue reduction. In addition, there were higher personnel expenses in 2017 as a result of the restructuring plans of the company.
Colombia: OIBDA amounted to 482 million euros in 2017, increasing 3.7% in reported terms, due in part to the exchange rate evolution that accounted for 1.4 percentage points of the increase. In local currency, OIBDA increased by 2.3% due to the good performance of revenues as well as lower supplies associated with lower interconnection tariffs and efficiencies in other expenses. Personnel expenses in 2017 increased as a result of the restructuring plans of the company.
OIBDA margin reached 28.2% in 2017, and increased by 0.6 percentage points year-on-year in reported terms. Excluding the foreign exchange effects and the impact of hyperinflationary adjustments in Venezuela, OIBDA margin would have increased by 2.8 percentage points, due principally to the higher margin in Argentina (+1.2 p.p.) and Mexico (+0.7 p.p.). Peru (-5.8 p.p.) and Chile (-3.7 p.p.) showed a reduction in OIBDA margin.
2016highlights
In 2016 Telefónica took further steps aimed at achieving profitable and sustainable long-term growth, and improving in efficiencies and synergies, which resulted in a higher OIBDA (+14.3% year-on-year in reported terms). Additionally, the investment levels over total revenues continued above 17% with a total amount of 8,928 million euros, with more than 2,000 million euros dedicated to LTE and ultra-broad band (“UBB”). The Company closed the year with a total of 350 million accesses, representing a stable growth level (0.7% versus 2015), where the downward growth trend in prepay and fixed voice was more than compensated by the growth in value customers. Post-pay customers, which grew by 6.3% year-on-year, reaching 111 million customers, while fiber customers amounted to 7.3 million customers at December 2016, representing a 18.9% increase year-on-year.
In 2016, revenues totaled 52,036 million euros, down 5.2% compared to 2015 in reported terms. OIBDA totaled 15,118 million euros in 2016, up 14.3% in reported terms. In organic terms (which term and calculation is explained further below), OIBDA was up 4.7%, due mainly to the positive evolution of all the regions mainly as a consequence of the integration synergies in Telefónica Brazil and Telefónica Germany, the positive evolution of service revenues and the continuous effort in efficiency and simplification.
Telefónica’s total accesses totaled 350.0 million as of December 31, 2016. Group accesses increased by 0.7% year-on-year, mainly as a result of the solid growth in Telefónica Germany, Telefónica United Kingdom and Telefónica Hispanoamérica. By service, it is worth highlighting the higher commercial activity based on high value customers, resulting in a sustained growth of the contract mobile segment (smartphones and LTE) and fiber. It is worth mentioning, the growth in accesses in Telefónica Hispanoamérica (representing 39% of the Group’s total accesses as of December 31, 2016) up by 0.9% year-on-year, the growth in accesses in Telefónica Germany (representing 14% of the Group’s total) up by 2.0% year-on-year and the growth in accesses in Telefónica United Kingdom (representing 7% of the Group’s total) up by 1.9% year-on-year.
The below table shows the evolution of accesses as of December 31, 2015 and 2016 respectively:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2015(*) |
| 2016 |
| %Reported
YoY |
|
| Fixed telephony accesses (1) | 39,734.9 |
| 38,280.1 |
| (3.7 | %) |
| Internet and data accesses | 21,365.3 |
| 21,652.1 |
| 1.3 | % |
| Broadband (2) | 20,971.3 |
| 21,194.9 |
| 1.1 | % |
Fiber
| 7,393.1 |
| 9,162.9 |
| 23.9 | % |
| Mobile accesses | 272,103.9 |
| 276,450.0 |
| 1.6 | % |
| Prepay | 167,845.1 |
| 165,663.2 |
| (1.3 | %) |
| Contract | 104,258.8 |
| 110,786.8 |
| 6.3 | % |
| M2M | 11,526.3 |
| 14,002.0 |
| 21.5 | % |
| Pay TV | 8,271.6 |
| 8,289.0 |
| 0.2 | % |
| Final Clients Accesses | 341,475.6 |
| 344,671.1 |
| 0.9 | % |
| Wholesale Accesses | 6,062.8 |
| 5,300.9 |
| (12.6 | %) |
| Total Accesses | 347,538.4 |
| 349,972.1 |
| 0.7 | % |
Notes:
(*) Accesses include GVT and DTS customers since May 1, 2015. There were no variations in organic terms during the period.
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Includes DSL, satellite, optic fiber, cable modem and broadband circuits.
The below table shows the evolution of accesses by region (millions) segment:
|
| | | | | | |
| | YoY variation | % Over Total Accesses |
| Accesses 2016 | 2015 | 2016 |
| Spain | (1.8 | %) | 12.1 | % | 11.8 | % |
| United Kingdom | 1.9 | % | 7.3 | % | 7.4 | % |
| Germany | 2.0 | % | 13.9 | % | 14.1 | % |
| Brazil | 0.3 | % | 27.9 | % | 27.8 | % |
| Hispanoamérica | 0.9 | % | 38.7 | % | 38.8 | % |
| Others | 40.7 | % | 0.1 | % | 0.1 | % |
The Group’s strategy is based on capturing growth in its markets, especially on attracting high-value customers.
Mobile accesses totaled 274.5276.5 million in 2014, increasing 7.8%at December 31, 2016, up 1.6% compared to 2013 (a 2.2% increase excluding accesses from the E-Plus Group in 2014 and from Telefónica Czech Republic and in Telefónica Ireland in 2013), drivenDecember 31, 2015, affected mainly by the E-Plus Group acquisition and strong growthincrease in the number of contract segment (+10.7%)accesses , which represented 36% ofup 6.3% year-on-year, continuing to increase their weight over total mobile accesses in 2014reaching 40.1% (+11.8 p.p. year-on-year). Notably, Telefónica Spain has increased its contract segment in 2014 in 77 thousand new accesses (excluding the impact of the disconnection of 569 thousand inactive M2M accesses in the first three months of 2014), a positive number for the first time since 2011.
Smartphone accessesaccesses maintained a strong growth rate (up 39.0% at December 31, 2014 compared to December 31, 2013)16.6% year-on-year), totaling 90.4147 million accesses and reaching a penetration rate over total accesses of 35%57.1% (+87.6 p.p. year-on-year), reflecting the Company’s strategic focus on the growth of its data services.
Fixed broadband accesses accesses stood at 17.721.2 million at December 31, 2014, a decrease of 4.2% year-on-year (+0.8% excluding accesses from Telefónica Czech Republic in 2013). Fiber2016, up 1.1% year-on-year. UBB accesses stood at 1.89.2 million at December 31, 2014 (a 111.8% increase compared to December 31, 2013).2016.
TV accesses totaled 5.18.3 million at December 31, 2014, up 41.2%2016, remaining stable year-on-year (47.6% excluding accesses(+0.2%) due to the effort in capturing high value customers in Telefónica Brazil and Telefónica Hispanoamérica.
The table below shows the evolution of our estimated access market share for mobile and DSL in 2015 and 2016.
|
| | |
| Competitive Position Evolution | | |
| | Mobile Market Share (1) |
| Telefónica | 2015 | 2016 |
| Spain | 30.8% | 30.5% |
| United Kingdom | 27.2% | 26.8% |
| Germany | 38.1% | 37.9% |
| Brazil | 28.4% | 30.2% |
| Argentina | 32.3% | 33.3% |
| Chile | 36.7% | 33.4% |
| Peru | 49.7% | 44.0% |
| Colombia | 22.4% | 23.2% |
| Venezuela | 34.2% | 37.8% |
| Mexico | 22.7% | 24.2% |
| Central America | 33.2% | 34.1% |
| Ecuador | 29.7% | 31.0% |
| Uruguay | 34.9% | 33.1% |
(1) Internal estimation in both years
|
| | |
| | DSL Market Share (1) |
| Telefónica | 2015 | 2016 |
| Spain | 43.5% | 42.5% |
| Brazil | 28.1% | 28.0% |
| Argentina | 29.4% | 28.6% |
| Chile | 39.4% | 36.4% |
| Peru | 80.5% | 78.7% |
| Colombia | 18.1% | 16.6% |
(1) Internal estimation in both years
2016/2015 Consolidated results
In this section, we discuss changes in the Group’s consolidated income statements for 2016 and 2015.
|
| | | | | | | | | | | | |
| | Year ended December, 31 | |
| Variation |
| Consolidated Results | 2015 | 2016 | 2016 vs 2015 |
| Millions of euros | Total |
| % of revenues |
| Total |
| % of revenues |
| Total |
| % |
|
| Revenues | 54,916 |
| 100.0 | % | 52,036 |
| 100.0 | % | (2,880 | ) | (5.2 | %) |
| Other income | 2,011 |
| 3.7 | % | 1,763 |
| 3.4 | % | (248 | ) | (12.3 | %) |
| Supplies | (16,547 | ) | (30.1 | %) | (15,242 | ) | (29.3 | %) | 1,305 |
| (7.9 | %) |
| Personnel expenses | (10,349 | ) | (18.8 | %) | (8,098 | ) | (15.6 | %) | 2,251 |
| (21.8 | %) |
| Other expenses | (16,802 | ) | (30.6 | %) | (15,341 | ) | (29.5 | %) | 1,461 |
| (8.7 | %) |
| OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION (OIBDA) | 13,229 |
| 24.1 | % | 15,118 |
| 29.1 | % | 1,889 |
| 14.3 | % |
| Depreciation and amortization | (9,704 | ) | (17.7 | %) | (9,649 | ) | (18.5 | %) | 55 |
| (0.6 | %) |
| OPERATING INCOME | 3,525 |
| 6.4 | % | 5,469 |
| 10.5 | % | 1,944 |
| 55.2 | % |
| Share of loss of investments accounted for by the equity method | (10 | ) | 0.0 | % | (5 | ) | 0.0 | % | 5 |
| (54.3 | %) |
| Net financial expense | (2,609 | ) | (4.8 | %) | (2,219 | ) | (4.3 | %) | 390 |
| (14.9 | %) |
| PROFIT BEFORE TAX | 906 |
| 1.6 | % | 3,245 |
| 6.2 | % | 2,339 |
| n.m. |
|
| Corporate income tax | (155 | ) | (0.3 | %) | (846 | ) | (1.6 | %) | (691 | ) | n.m. |
|
| PROFIT FOR THE YEAR | 751 |
| 1.4 | % | 2,399 |
| 4.6 | % | 1,648 |
| n.m. |
|
| Attributable to equity holders of the Parent | 616 |
| 1.1 | % | 2,369 |
| 4.6 | % | 1,753 |
| n.m. |
|
| Attributable to non-controlling interests | 135 |
| 0.2 | % | 30 |
| 0.1 | % | (105 | ) | (77.9 | %) |
Adjustments made to calculate organic variations
Year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis, by considering a constant perimeter of consolidation and constant average foreign exchange rates and by making certain other adjustments which are described herein. “Organic variations” should not be viewed in isolation or as an alternative to reported variations.
For purposes of this report, 2016/2015 “organic” variation is defined as the reported variation as adjusted to exclude the impacts detailed below:
Foreign exchange effects and hyperinflationary adjustments in Venezuela: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2015 for both years.
Foreign exchange rates had a negative impact on our reported 2016 results, mainly due to the depreciation versus the euro of various Latin American currencies (in particular the Argentine peso, the Brazilian real and, to a lesser extent, the Venezuelan bolivar), and the pound sterling.
We have also excluded the impact of hyperinflationary adjustments in Venezuela by reversing such adjustments.
Changes in the scope of consolidation: we have excluded the impact of changes in our consolidation perimeter in 2016 and 2015. The main changes in our consolidation perimeter in such years related to the consolidation of GVT in Telefónica Brazil since May 2015 and the consolidation of DTS in Telefónica Spain since May 2015. In addition, Telefé was sold in November 2016.
In order to exclude the impact of these changes in our perimeter for the calculation of organic variations, the 2015 comparative figures:
| |
| ◦ | include GVT’s results from January 1 to April 30, 2015; |
| |
| ◦ | include DTS’s results from January 1 to April 30, 2015; |
| |
| ◦ | exclude Telefé’s results from November 1 to December 31, 2015. |
Restructuring costs: we have excluded the impact in 2016 and 2015 of certain restructuring costs, mainly those related to the first Collective Agreement of Related Companies in Spain, restructuring processes relating to Germany and Brazil and the Group’s simplification program in global areas.
The distribution by segment of the restructuring costs is as follows (impacts on OIBDA):
|
| | | | |
| Millions of euros | 2015 |
| 2016 |
|
| Telefónica Spain (Individual Suspension Plan) | 2,896 |
| 789 |
|
| Telefónica Spain (other restructuring plans) | — |
| 48 |
|
| Telefónica Brazil | 7 |
| 40 |
|
| Telefónica Germany | 74 |
| 89 |
|
| Telefónica United Kingdom | 4 |
| 37 |
|
| Telefónica Hispanoamérica | 38 |
| 84 |
|
| Other companies | 198 |
| 293 |
|
| Total restructuring costs | 3,217 |
| 1,380 |
|
Results of tower sales: the results attributable to the sale of towers in 2016 and 2015 have been excluded.
In 2016, the results from the sale of towers totaled 1 million euros, mainly in Telefónica Hispanoamérica. In 2015, the results from the sale of towers totaled 65 million euros, distributed as follows: Telefónica Spain (38 million euros), Telefónica Brazil (10 million euros) and Telefónica Hispanoamérica (18 million euros, mainly in Chile).
Irrevocable commitment with Fundación Telefónica: in 2015 we have excluded the expense (325 million euros) resulting from Telefónica, Czech RepublicS.A.’s irrevocable commitment to make a donation to Fundación Telefónica in 2013). Net adds (new additionsorder to provide this entity with the financing required so that it can carry out its existing or new social programs and non-profit activities in the short and medium term.
Adjustment to the customer base), excluding accessesfinal purchase price of E-Plus: in 2015 we have excluded the result from Telefónica Czech Republic, reached 1.6 million in the year.
Telefónica’s customer base includesdifference between the consumer and business segments, and therefore is not affected by customer concentration risk.
2014 Consolidated results
The below table shows our consolidated results of operations forE-Plus (as estimated at the past three years.
| | Year ended December 31 | | Percent Change |
| | | | | | | | | | | | | | | |
| | 2012 | | 2013 | | 2014 | | 2013 vs 2012 | | 2014 vs 2013 |
| Millions of Euros | Total | % of revenues | | Total | % of revenues | | Total | % of revenues | | Total | % | | Total | % |
| Revenues | 62,356 | 100.0% | | 57,061 | 100.0% | | 50,377 | 100.0% | | (5,295) | (8.5%) | | (6,684) | (11.7%) |
| Other income | 2,323 | 3.7% | | 1,693 | 3.0% | | 1,707 | (3.4%) | | (630) | (27.1%) | | 14 | 0.9% |
| Supplies | (18,074) | (29.0%) | | (17,041) | (29.9%) | | (15,182) | (30.1%) | | 1,033 | (5.7%) | | 1,859 | (10.9%) |
| Personnel expenses | (8,569) | (13.7%) | | (7,208) | (12.6%) | | (7,098) | (14.1%) | | 1,361 | (15.9%) | | 110 | (1.5%) |
| Other expenses | (16,805) | (27.0%) | | (15,428) | (27.0%) | | (14,289) | (28.4%) | | 1,377 | (8.2%) | | 1,139 | (7.4%) |
| Operating income before depreciation and amortization (OIBDA) | 21,231 | 34.0% | | 19,077 | 33.4% | | 15,515 | 30.8% | | (2,154) | (10.1%) | | (3,562) | (18.7%) |
| Depreciation and amortization | (10,433) | (16.7%) | | (9,627) | (16.9%) | | (8,548) | (17.0%) | | 806 | (7.7%) | | 1,079 | (11.2%) |
| Operating income | 10,798 | 17.3% | | 9,450 | 16.6% | | 6,967 | 13.8% | | (1,348) | (12.5%) | | (2,483) | (26.3%) |
| Share of loss of investments accounted for by the equity method | (1,275) | (2.0%) | | (304) | (0.5%) | | (510) | (1.0%) | | 971 | (76.2%) | | (206) | 68.2% |
| Net financial expense | (3,659) | (5.9%) | | (2,866) | (5.0%) | | (2,822) | (5.6%) | | 793 | (21.7%) | | 44 | (1.6%) |
| Corporate income tax | (1,461) | (2.3%) | | (1,311) | (2.3%) | | (383) | (0.8%) | | 150 | (10.3%) | | 928 | (70.8%) |
| Profit for the year | 4,403 | 7.1% | | 4,969 | 8.7% | | 3,252 | 6.5% | | 566 | 12.9% | | (1,717) | (34.6%) |
| Non-controlling interests | (475) | (0.8%) | | (376) | (0.7%) | | (251) | (0.5%) | | 99 | (20.8%) | | 125 | (33.2%) |
| Profit for the year attributable to equity holders of the parent | 3,928 | 6.3% | | 4,593 | 8.0% | | 3,001 | 6.0% | | 665 | 16.9% | | (1,592) | (34.7%) |
Year ended December 31, 2014 compared with year ended December 31, 2013
The evolution of foreign exchange rates impacted negatively in 2014 financial results, in particular the depreciationend of the Argentine peso, Brazilian realvaluation period) and the implicit depreciationfinal purchase price agreed with KPN, totaling 104 million euros (which had a 102 million euros positive impact on OIBDA, net of the Venezuelan bolívar.
In the 2014 consolidated financial statements, Telefónica will use the exchange rate of the Venezuelan bolívar set at the previously denominated SICAD II (set at 49.988 Venezuelan bolívar fuerte per dollar in the last auction), for the purpose of translating the transactions, cash flows and balancescosts related to the investmentsacquisition).
Spectrum acquisition: we have excluded the impact of spectrum acquisitions in Venezuela. 2016 and 2015.
In 2016, these acquisitions totaled 345 million euros, 284 million euros corresponding to Telefónica Perú, 48 million euros corresponding to Telefónica Brasil, 7 million euros corresponding to Telefónica Spain and 6 million euros corresponding to Telefónica Germany.
In 2015 these acquisitions totaled 1,585 million euros, 1,198 million euros corresponding to Telefónica Germany, 49 million euros corresponding to Telefónica Spain and 338 million euros corresponding to Telefónica Hispanoamérica (mainly Argentina and Ecuador).
Gains or losses on the sale of companies: the gains obtained or losses incurred from the sale of companies have not been included in organic variations.
In 2016 the 199 million euros in profit obtained from the sale of Telefé and the 29 million euros obtained from the sale of Telecomunicaciones Personalizadas were not included. Similarly, the loss of 16 million euros incurred in the sale of Vocem was also not included.
Impairment of goodwill: the impairment losses on goodwill have not been included in organic variations.
In 2016, the impairment loss on the goodwill assigned to Telefónica Venezolana and Telefónica Móviles Mexico amounting to 124 and 91 million euros, respectively, has been excluded.
In 2015, the impairment loss on the goodwill generated by the acquisition of Telefónica Digital Inc. amounting to 104 million euros was excluded.
Other adjustments: we have excluded the impact of the impairment resulting from the deterioration in certain minority participations, totaling 23 million euros in 2015. We have also excluded the impact of the provisions recorded in Telefónica Spain to optimize the distribution network (18 and 30 million euros in 2016 and 2015, respectively).
The Company has decidedtable below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to take such exchange rateabove) of certain income statement and other measures:
|
| | | | |
| | YoY variation |
TELEFÓNICA
2016 | % Reported YoY |
| % Organic
YoY |
|
| Revenues | (5.2 | %) | 1.3 | % |
| Other income | (12.3 | %) | (13.9 | %) |
| Supplies | (7.9 | %) | (3.1 | %) |
| Personnel expenses | (21.8 | %) | 1.9 | % |
| Other expenses | (8.7 | %) | 0.2 | % |
| OIBDA | 14.3 | % | 4.7 | % |
| Operating income (OI) | 55.2 | % | 8.3 | % |
| CapEx | (14.7 | %) | 3.9 | % |
| OpCF (OIBDA-CapEx) | n.m. |
| 5.6 | % |
The table below shows the contribution to reported growth of each item considered to calculate the organic variations, as explained above. For each line item, the contribution to reported growth, expressed in p.p., is the result of dividing the amount of each impact (on a reference, as it considers it to benet basis when the most representative amongimpact affects both years) by the available exchange rates as of such date,consolidated reported figure for the monetary translation of the accounting figures of cash flows and balances.previous year.
Accordingly, we estimate that
|
| | | | | | | | | | | | | | | | | | | | |
| | Contribution to reported growth (percentage points) |
TELEFÓNICA
2016 | Exchange rate effect and hyperinflation |
| Perimeter change |
| Restructuring costs |
| Towers sales |
| Commitment with Fundación |
| Adjustments to the final purchase price of E-Plus |
| Spectrum acquisition |
| Capital gains/losses on sale of companies |
| Impairments |
| Other adjustments |
|
| Revenues | (8.0 | ) | 1.4 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Other income | (3.9 | ) | 1.7 |
| — |
| (3.2 | ) | — |
| (5.2 | ) | — |
| 11.3 |
| — |
| — |
|
| Supplies | (6.7 | ) | 1.9 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Personnel expenses | (7.0 | ) | 1.1 |
| (17.2 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Other expenses | (8.7 | ) | 1.3 |
| (0.1 | ) | 0.0 |
| (1.9 | ) | 0.0 |
| — |
| 0.1 |
| 0.7 |
| (0.2 | ) |
| OIBDA | (8.8 | ) | 1.3 |
| 13.6 |
| (0.5 | ) | 2.5 |
| (0.8 | ) | — |
| 1.6 |
| (0.8 | ) | 0.3 |
|
| Operating Income (OI) | (20.2 | ) | (0.9 | ) | 51.1 |
| (1.8 | ) | 9.2 |
| (2.9 | ) | — |
| 6.0 |
| (3.1 | ) | 1.0 |
|
| CapEx | (7.9 | ) | 1.5 |
| — |
| — |
| — |
| — |
| (11.7 | ) | — |
| — |
| — |
|
| OpCF (OIBDA-CapEx) | (12.4 | ) | 0.2 |
| 65.1 |
| (2.3 | ) | 11.7 |
| (3.7 | ) | 44.1 |
| 7.6 |
| (4.0 | ) | 1.3 |
|
Results discussion
Revenues totaled 52,036 million euros in 2016, decreasing 5.2% compared to 2015 in reported terms. This decrease was mainly attributable to the impact of changes in foreign exchange rate affectrates and hyperinflation in Venezuela reduce revenue and OIBDA(-8.0 p.p.), which was partially offset by the changes in 2014the consolidation perimeter, which contributed with 1.4 p.p. to the year-on-year growth. In organic terms, revenues increased 1.3% due to the increase in service revenues offset by 12.1 percentage points and 13.1 percentage points, respectively.
Year-on-year comparisons of the Group’s earnings have also beendecrease in handset revenues affected by the acquisition and consolidationextension of the results of the E-Plus Group since October 1, 2014 and the sale and deconsolidation of the results of Telefónica Czech Republic (deconsolidated as of January, 2014) and Telefónica Ireland (deconsolidated as of July, 2014). Overall, these changes to the scope of consolidation explain 2.1 percentage points of the year-on-year decrease in revenues and 3.5 percentage points of the year-on-year decrease in OIBDA.
Revenues totaled 50,377 million euros in 2014, decreasing 11.7% compared to 2013, mainly affected by exchange rate differences and the effect of hyperinflation in Venezuela, which caused a 12.1 percentage points reduction in year-on-year growth. Additionally, revenues were also affected by changes to the scope of consolidation (-2.1 p.p.), chiefly the sales of Telefónica Czech Republic and Telefónica Ireland and the acquisition of E-Plus. Excluding these impacts, revenues would have increased by 2.6% year-on-year mainly due to the performance of Telefónica Hispanoamérica, where revenues from mobile data and digital services increased. In order to make comparisons excluding the impact of changes to the scope of consolidation caused by the sales of Telefónica Czech Republic and Telefónica Ireland and the acquisition of the E-Plus Group, we have excluded the contribution of such entities to revenues in both 2013 and 2014.
The structure of revenues reflects Telefónica’s business diversification. Despitediversification, the segment with the largest contribution to our revenues in 2016 was Telefónica Spain, representing 24.4% (+1.8 p.p. compared to 2015), followed by Telefónica Hispanoamérica, representing 24.2% despite the adverse impact of exchange rates as mentioned above, Telefónica Hispanoamércia was the largest contributor to our revenuesand hyperinflation in 2014, representing 26.1% (-3.4Venezuela, (-2.0 p.p. compared to 2013). The other segments showed a positive evolution compared to 2013:2015), and Telefónica Spain,Brazil, representing 23.9%21.3% (+1.2 p.p. compared to 2013)2015).
Mobile business revenues totaled 32,401 million euros in 2016 (of which 28,030 million euros corresponded to service revenues and 4,032 million euros corresponded to handset revenues) down 8.8% year-on-year in reported terms. This decrease was mainly attributable to the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-8.7 p.p.). Excluding this impact, the year-on-year decrease was 0.1%, mainly due to the decrease of mobile revenues in Europe due to less handsets revenues that offset the increase of mobile revenues in Telefónica Hispanoamérica and in Telefónica Brazil representing 22.3% (+0.9 p.p. compared to 2013)as a result mainly of the increase in the customer base and data usage.
Mobile service revenues, Telefónica United Kingdom, representing 14.0% (+2.3 p.p. compared to 2013) and Telefónica Germany, representing 11.0% (+2.3 p.p. compared to 2013).
Mobile datawhich is included in mobile business revenues, fell by 5.2%totaled 28,030 million euros in 2016, down 7.5% year-on-year in reported terms affected mainlyexplained by the impact of changes in foreign exchange rate differencesrates and the effect of hyperinflation in Venezuela. Excluding exchange rate differences and the effect of hyperinflation in Venezuela (which accounted for 14.3(-8.9 p.p. of the). Excluding this impact, mobile service revenues increased year-on-year fall) and changesby 1.5% due mainly to the scopehigher customer base and higher data consumption.
Mobile data revenues, which is included in mobile service revenues, totaled 14,663 million euros in 2016, up 2.1% in reported terms. This increase was mainly attributable to higher consumption of consolidation (which accounted for 0.5data by our customers, which was partially offset by the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-10.2 p.p. of the year-on-year fall), revenues from). Excluding this impact, mobile data would haverevenues increased by 9.9%.12.3% due mainly to the increase of non-SMS data revenues (up 19.7%) and higher use of data per customer. Mobile data revenues accounted for 41%52% of mobile service revenues in such year,2016, up 3.1 percentage points4.9 p.p. compared to 2013. Revenue from non-SMS data showed a solid growth of 6.7%2015 in reported terms (+23.9% excludingterms.
Fixed revenues totaled 18,187 million euros in 2016, up 1.9% year-on-year in reported terms. This increase was mainly attributable to the full year of consolidation of GVT and DTS in 2015 (which accounted for +4.7 p.p. of the year-on-year increase), which was partially offset by the impact of changes in foreign exchange rate differencesrates and the effect of hyperinflation in Venezuela (+16.8(-6.9 p.p.). Excluding these impacts, fixed revenues increased 3.9%. This increase was mainly due to higher broad band connection revenues and changesPay-TV revenues as a result of the commercial actions carried out by the Company in order to increase our value proposition and the scope of consolidation (-0.1 p.p.)), and accounted for 73% of total data revenue during the yearhigher customer base in reported terms (+8.1 p.p. year-on-year).Pay-TV.
Other income totaled 1,763 million euros in 2014 mainly included own work capitalized in our fixed assets,2016, including the profit obtained from the sale of Telefé (199 million euros) and Telecomunicaciones Personalizadas (29 million euros). It also included income derived from the sale of towers totaling 1 million euros.
In 2015, other assets,income included the positive result from the E-Plus price adjustment (104 million euros), the positive impact from the expired payment obligation (98 million euros) in Telefónica Brazil and the spectrum swap with AT&T in Telefónica Mexico (79 million euros). Other income also included in 2015, income derived from the sale of real estate (78 million euros) and the sale of non-strategic towers of Telefónica Spain, Telefónica Brazil and Telefónica Hispanoamérica.
In 2014, other income increased mainly due to the sale of non-strategic towers (with an impact on OIBDA of 196totaling 65 million euros), primarilyeuros in Telefónica Spain (191 million euros), extraordinary sales of real estate in Telefónica Spain (41 million euros) and recognition of capital gains on the sale of assets belonging to the fixed business in Telefónica United Kingdom once the conditions stipulated in the relevant sales agreement had been met (49 million euros).
Other income in 2013 consisted mainly of the sale of non-strategic towers of Telefónica Brazil, Telefónica Hispanoamérica and Telefónica Spain (113 million euros in other income and 111 million euros in OIBDA), capital gains on the sale of assets belonging to the fixed business of Telefónica United Kingdom (83 million euros) and capital gains on the assets sale of Telefónica Germany (76 million euros), capital gains on the sale of Hispasat (21 million euros).
Spain.
Total expenses: expensesin 2014 (which, which include supply costs, personnel costs and other expenses (principally external services and taxes), amounting to 36,569 but do not include amortization and depreciation expenses, were 38,681 million euros in 2016, down by 7.8% comparedyear-on-year 11.5% in reported terms. This decrease was mainly attributable to 2013, mainly due to:the impact of changes in foreign exchange rates and hyperinflation in Venezuela (-7.5 p.p.). The costs are explained in detail below:
| · | exchange rate differences and the effect of hyperinflation in Venezuela (-11.3 p.p.); |
| · | changes to the scope of consolidation (-1.4 p.p.) caused by the sales of Telefónica Czech Republic and Telefónica Ireland and the acquisition of the E-Plus Group; |
| · | impact of the sale agreements of Telefónica Ireland and Telefónica Czech Republic (-0.5 p.p.) in 2013; and
|
| · | the recognition in 2014 of expenditures mainly on the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its targets, totaling 652 million euros (670 million euros excluding exchange rate effects), accounting for 1.7 percentage points.
|
Excluding these impacts, totalSupplies amounted to 15,242 million euros in 2016, down 7.9% year-on-year in reported terms mainly as a result of the impact of foreign exchange rates and hyperinflation in Venezuela (-6.7 p.p.). In organic terms, supplies expenses would have increaseddecreased by 3.9% in 2014 compared to 2013,3.1% year-on-year, mainly due to higher commercial expenditureslower handset consumption associated with a longer handset lifecycle, and outlays on networks and systems.lower interconnection costs.
| · | Supplies amounted to 15,182 million euros in 2014, down 10.9% against 2013, mainly due to exchange rate differences and the effect of hyperinflation in Venezuela, which decreased supplies expenses by 8.6 percentage points. The year-on-year change was also affected by changes to the scope of consolidation (due to the sales of Telefónica Czech Republic and Telefónica Ireland and from the acquisition of the E-Plus Group, resulting in
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39
Personnel expenses amounted to 8,098 million euros in 2016, down 21.8% in reported terms year-on-year compared to 2015. This decrease was mainly attributable to the restructuring provision of 1,336 million euros, principally in Telefónica Spain, accounting for 17.2 p.p. of the year-on-year decrease. In organic terms, personnel costs increased 1.9% year-on-year due to inflationary pressure in some Latin American countries and the internalization of services in Telefónica Brazil, which was partially offset by the savings generated from restructuring plans in recent years.The average headcount was 132,120 employees in 2016, down 1.1% compared to 2015.
Other expenses amounted to 15,341 million euros in 2016, down 8.7% in reported terms. This decrease was mainly attributable to the impact of foreign exchange rates and hyperinflation in Venezuela (-8.7 p.p.) In organic terms, other expenses remained flat year-on-year (+0.2%), principally due to savings in commercial costs, benefitting from higher synergies in Telefónica Spain, Telefónica Brazil and Telefónica Germany, which offset in part the negative impact of the inflation rates in some Latin American countries resulting in higher network costs.
a 1.9 percentage points decrease. Excluding these effects, supplies expenses would have fallen by 0.5% was 15,118 million euros in 2016, up 14.3% in reported terms as thea result of various factors that affect comparability, mainly the lower mobile interconnectionrestructuring costs in 2016 (1,380 million euros) compared to 2015 (3,217 million euros), which accounted for 13.6 p.p. of the year-on-year increase, the provision related to the agreement between Telefónica, S.A. and Fundación Telefónica registered in 2015 (+2.5 p.p.), the impact of the consolidation of GVT, DTS and Telefé (+1.3 p.p.) and the capital gain from the sale of Telefé, Telecomunicaciones Personalizadas and Vocem (+1.6 p.p.). These factors more than offset the higher equipment costsimpact of handsetschanges in foreign exchange rates and TV content.
| · | Personnel expenses totaled 7,098 million euros in 2014, down 1.5% compared to 2013, mainly affected by exchange rate differences and the effect of hyperinflation in Venezuela, (-12.1 p.p.) and changes to the scope of consolidation (-2.4 p.p.) which were mostly offset by the expenditures on the global restructuring program, in accordance with the the simplification initiatives the Group is implementing to meet its targets (+8.1 p.p.). Excluding these impacts, personnel costs rose by 5.2% in 2014 compared to 2013 due to higher prices in some countries.
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The average headcount in 2014 was 120,497 employees, down 7.2% comparedVenezuela (-8.8 p.p.), the adjustments made to 2013the final acquisition price of E-Plus in 2015 (-0.8 p.p.), the impairment loss on goodwill (-0,8 p.p.) and finally the lower sale of towers (-0.5 p.p.). In organic terms, OIBDA grew 4.7% due mainly to the changespositive evolution of all the regions as consequence of the positive evolution of service revenues, integration synergies captured in Telefónica Brazil and Telefónica Germany and the scope of consolidation (-2.2% excluding changescontinuous effort to the scope of consolidation).
| · | Other expensescontain costs. amounted to 14,289 million euros in 2014, down 7.4% as compared to 2013 mainly caused by exchange rate differences and the effect of hyperinflation in Venezuela (-13.9 p.p.). The year-on-year variation was also affected by the impact of value adjustments in the sales of Telefónica Ireland and Telefónica Czech Republic (-1.2 p.p.), changes to the scope of consolidation by the sales of Telefónica Czech Republic and Telefónica Ireland and the acquisition of the E-Plus Group (-0.5 p.p.) and the recognition of integration costs in Telefónica Germany (+0.6 p.p.). Excluding these impacts, other expenses would have increased by 8.1% due to higher commercial costs, higher network costs produced by larger volumes of data traffic and greater outlays on modernization of the network.
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OIBDA reached 15,515 million euros for the year ended December 31, 2014, a fall of 18.7%, mainly due to:
| · | the effect of exchange rates and hyperinflation in Venezuela (-13.1 p.p.); |
| · | changes to the scope of consolidation (-3.5 p.p.) following the exclusion of Telefónica Czech Republic and Telefónica Ireland and the inclusion of the E-Plus Group; |
| · | recognition in 2014 of expenditure mainly on the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its targets, totaling 652 million euros (670 million euros at the exchange rate used to calculate 2013 results), accounting a decrease of 3.5 percentage points;
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| · | the impact of the sale of companies in 2013, chiefly the sale agreements for Telefónica Ireland (16 million euros) and Telefónica Czech Republic (176 million euros) (+1 p.p.), and the sale of Hispasat (21 million euros; -0.1 p.p); and |
| · | a higher sale value of non-strategic towers in 2014 compared to 2013 (196 million euros in 2014, mainly in Telefónica Spain (191 million euros), and 111 million euros in 2013, mainly in Telefónica Spain (70 million euros), Telefónica Brazil (29 million euros) and Telefónica Hispanoamérica (11 million euros, in Mexico, Chile and Colombia)). This effect accounts for 0.5 percentage points of OIBDA growth. |
Excluding these effects, OIBDA in 2014 would have increased by 0.2% compared to 2013. TheOIBDA margin was 30.8% for 2014, down 2.6 percentage points year-on-yearstood at 29.1% in 2016, up 5 p.p. compared to 2015 in reported terms. In organic terms OIBDA margin was 31.5% and increased 1 p.p. compared to 2015 thanks to the increase in service revenues and higher content costs.
By region,segments, the main contributors to Group OIBDA were Telefónica Spain contributed most to the Group's consolidated OIBDA, accounting for 36.6% of the totalwith 29.6% (+3.311.9 p.p. compared to 2013), Telefónica Hispanoamérica accounted for 26.2% (-2.8 p.p. compared2015 due to 2013)lower restructuring cost provision in 2016), Telefónica Brazil accounted for 22.8% (+2.2with 24.6% (-2.4 p.p. compared to 2013),2015) and Telefónica United Kingdom accounted for 11.2% (+2.7Hispanoamérica with 23% (reducing its contribution by 9.9 p.p. compared to 2013)2015 due to the lower contribution of Argentina, Peru and Telefónica Germany accounted for 4.7% (-2.1 p.p. compared to 2013)Mexico).
Depreciation and amortization amounted to 8,5489,649 million euros in 2014, a decline of 11.2% compared to 2013,2016, down 0.6% year-on-year in reported terms, mainly due to lower depreciationthe impact of fixed assets, mainlyforeign exchange rates and hyperinflation in Brazil.Venezuela partially offset by the consolidation of GVT and DTS. The total depreciation and amortization charges arising from purchase price allocation processes amounted to 708801 million euros for the year (-17.3% year-on-year).in 2016, down 10% year-on-year.
Operating income (OI) in 20142016 totaled 6,9675,469 million euros, down 26.3%up 55.2% in reported terms compared to 2013, mainly affected by exchange rate differences and2015 for the effect of hyperinflation (-18.8 p.p.), recognition in 2014 of expenditure mainly on
the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its targets (-7.1 p.p.), changes to the scope of consolidation (-4.9 p.p.), consisting of the sale of Telefónica Czech Republic and Telefónica Ireland and the acquisition of the E-Plus Group, and additionally affected by the value adjustment of companies in 2013 (+1.7 p.p.). Additionally, the year-on-year variation was affected by higher sales of non-strategic towers in 2014 as compared to 2013 (+0.9 p.p.). Excluding these effects,reasons set forth above. In organic terms, operating income would have increased by 1.9% year-on-year.
The share of profit (loss) of investments accounted for by the equity method for the year was a loss of 510 million euros (a loss of 304 million euros in 2013), mainly due to valuation adjustments of Telco, S.p.A. at Telecom Italia, S.p.A. This, along with the contribution to the year's results, had a negative impact of 464 million euros (a loss of 267 million euros in 2013).
Net financial expense amounted to 2,822 million euros in 2014 (-1.6% year-on-year), and includes 293 million euros due to net negative foreign exchange differences primarilygrew 8.3% year-on-year mostly as a result of the Company’s decision to adopt the SICAD II exchange rate of the Venezuelan bolivar. Excluding this effect, net financial expenses would have fallen 8.2% year-on-year, mainly due to a 9.1% reduction in the average debt, placing the effective cost of debt in 2014 was 5.40%, 6 basis points higher than in 2013. The greater weight of debt in Latin America currencies and repayment and maturity of cheap debt in euros increases the average cost in 47 basis points, while lower rates in Latin America and Europe reduce it in 41 basis points.savings.
Corporate income taxThe totaled 383 million euros in 2014 on a pre-tax income of 3,635 million euros, implying an effective tax rate of 10.5%, 10.3 percentage points lower year-on-year. This was mainly due to the effect of a review of deferred taxes in Brazil following a change to legislation during the second quarter of 2014, and to a larger recognition of tax credits in Colombia.
Profit attributable to non-controlling interests reduced net profit by 251 million euros in 2014, 33.2% less than in 2013, mainly due to the effect of a review of deferred taxes in Brazil following a change to legislation in 2014, and to a larger recognition of tax credits.
As a result of the foregoing, consolidated net profit for 2014 was 3,001 million euros (down by 34.7% year-on-year).
Year ended December 31, 2013 compared with year ended December 31, 2012
The main metrics in the income statement were negatively affected in 2013 by exchange rate fluctuations, mainly due to the devaluation of the Venezuelan bolivar and the depreciations of the Brazilian reais and the Argentine peso against the euro. Exchange rates reduced year-on-year revenue and OIBDA growth in 2013 by 7.5 percentage points.
In addition, the Telefónica Group deconsolidated the results from the Atento Group as of the end of November 2012 (following the disposal of the Atento Group during the fourth quarter of 2012), therefore affecting year-on-year comparisons of Telefónica’s reported financial results.
Revenues in 2013 totaled 57,061 million euros, decreasing 8.5% in reported terms, mainly affected by the exchange rate differences and the effect of hyperinflation in Venezuela which reduced year-on-year growth by 7.5 percentage points. Additionally, revenues were affected by changes in the consolidation perimeter especially the deconsolidation of the Atento group (-1.7 p.p.). Excluding these impacts, revenue in 2013 would have increased by 0.7% year-on-year.
The structure of revenues reflects the Company’s diversification and despite the above-mentioned exchange rate impact, Telefónica Hispanoamérica accounted for 29.5% of total revenues in 2013 (+2.7 p.p. compared with 2012). Telefónica United Kingdom accounted for 11.7% (+0.4 p.p. compared with 2012), Telefónica Brazil accounted for 21.4% of the total (-0.4 p.p. compared with 2012) and Telefónica Spain accounted for 22.7% (-1.3 p.p. compared with 2012).
Mobile data revenues decreased 0.7% in reported terms. Excluding the impact of exchange rate differences and the effect of the hyperinflation in Venezuela, mobile data revenues would have increased 9.3%. These revenues accounted for 37% of mobile service revenues in 2013, a 3 percentage points growth compared with 2012. Especially noteworthy is the growth in non-SMS data revenues (+11.2% in reported terms and +22.2% excluding the impact of exchange rate
differences and the effect of hyperinflation in Venezuela), which accounted for 64% of total data revenues in the year in reported terms (+7 p.p. year-on-year).
Other income: mainly includes own work capitalized in our fixed assets, the profit from the sale of other assets, and the disposal of non-strategic towers of Telefónica Brazil, Telefónica Hispanoamérica and Telefónica Spain. The lower level of sales of non-strategic towers compared to 2012 is the main driver for the decrease in other income, decreasing to 1,693 million euros in 2013 from 2,323 million euros in 2012.
Other income in 2013 consisted mainly of the sale of non-strategic towers in Telefónica Brazil, Telefónica Hispanoamérica and Telefónica Spain (113 million euros in other income and 111 million euros in OIBDA), the capital gain from the disposal of the assets of the fixed business of Telefónica United Kingdom (83 million euros), the capital gain from the sale of assets in Telefónica Germany (76 million euros) and the capital gain from the sale of the stake in Hispasat (21 million euros).
In 2012 other income was mainly comprised of income from the sale of non-strategic towers in Telefónica Brazil, Telefónica Hispanoamérica and Telefónica Spain (659 million euros in other income and 643 million euros in OIBDA), the gain from the sale of applications (39 million euros), and the capital gains from the sale of the Atento group (61 million euros), of Rumbo (27 million euros) and the partial sale of Hispasat (26 million euros).
Total expenses, which include supplies, personnel expenses and other expenses (primarily external services and taxes) amounted to 39,678 million euros in 2013. This represented an 8.7% decrease year-on-year in reported terms, which was primarily due to:
| · | exchange rate differences and the effect of hyperinflation in Venezuela (-7.3 p.p.); |
| · | changes in the consolidation perimeter caused by the disposal of Atento and Rumbo (-1.9 p.p.); |
| · | value adjustments and loss on sale of companies in 2013 and 2012: |
| · | the impact of losses on the sale of companies in 2013, (totaling 192 million euros), primarily from the sale agreements to Telefónica Ireland and Telefónica Czech Republic (+0.4 p.p.); |
| · | the impact of value adjustments and loss on sale of companies in 2012, which totaled an amount of 624 million euros, primarily from the sale of part of our stake in China Unicom and a value adjustment of Telefónica Ireland (-1.4 p.p.); and |
| · | a contractual change in the commercial model for selling handsets in Chile as a result of which we began from September 2012, to record all of the costs of handsets sold immediately rather than capitalizing such costs and depreciating them over the life of the contract (+0.4 p.p.). |
Excluding the aforementioned items, total expenses grew 1.2% in 2013 compared with 2012, mainly as a result of the greater commercial activity in Telefónica Brazil and Telefónica Hispanoamérica, focused on capturing high-value customers.
| · | Supplies stood at 17,041 million euros in 2013, falling 5.7% with respect to 2012, affected to a large degree by exchange rate differences and the effect of hyperinflation in Venezuela, which reduced this item by 7.3 percentage points. Additionally, the year-on-year change is affected by changes in the consolidation perimeter (-1.4 p.p.) and by the contractual change in the commercial model for selling handsets in Chile discussed above (+0.9 p.p.). Excluding both effects, expenses grew 2%, as a result of the greater commercial activity in Telefónica Brazil and Telefónica Hispanoamérica, both in the mobile segment, due to an increase in the weighting of smartphone sales, and in the fixed business, mainly Pay-TV, which offset the decline in equipment costs of operators in Europe and the lower termination costs at the group level.
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| · | Personnel expenses totaled 7,208 million euros and fell by 15.9% with respect to 2012, mainly affected by the exchange rate differences and the effect of hyperinflation in Venezuela (-6.2 p.p.) and changes in the consolidation perimeter (-13.6 p.p.). Excluding both effects personnel expenses increased by 4% due to the negative impact of inflation in certain Latin American countries, which more than offset declines reported by Telefónica Spain, Telefónica Czech Republic and Telefónica United Kingdom due to savings from workforce restructuring
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programs. This item also reflects restructuring expenses amounting to 156 million euros in 2013 compared to 67 million euros in 2012.
The average headcount in 2013 was 129,893 employees, 3.9% lower than the average in 2012, excluding the impact of the deconsolidation of Atento.
| · | Other expenses amounted to 15,428 million euros, falling 8.2%, mainly affected by the impact of exchange rate differences and the effect of hyperinflation in Venezuela (-8 p.p.). In addition, it was also affected by the above-mentioned value adjustment in companies in 2012 and 2013 (-2.6 p.p.), expenses associated with the sale of non-strategic towers (-0.1 p.p.) and changes in the consolidation perimeter (+3.5 p.p.). Excluding these effects this item fell 1.1%, explained by the lower costs of operators in Europe, mainly in commercial expenses, systems and networks, due to the efficiency measures carried out especially in Telefónica Spain, which involved simplification of processes, distribution channels and call centers redefinition, internalization of activities, savings from the restructuring plan and temporary cancelation of the corporate contribution to pension plans.
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OIBDA reached 19,077 million euros, showing a decline of 10.1%, mainly affected by:
| · | exchange rate differences and the effect of hyperinflation in Venezuela (-7.5 p.p.); |
| · | the lower amount of non-strategic towers sold in 2013 compared to 2012 (-2.5 p.p.); |
| · | changes in the consolidation perimeter mainly caused by the disposal of Atento (-1.0 p.p.); |
| · | the contractual change in the commercial model for selling handsets in Chile (-0.8 p.p.); |
| · | value adjustments and loss on sale of companies in 2013 and 2012: |
| · | the impact of the sale of companies mainly the disposal of Telefónica Ireland and Telefónica Czech Republic in 2013 (-1.3 p.p.); and |
| · | the impact of value adjustments and loss on sale of companies in 2012 totaled 624 million euros, primarily from the sale of part of our stake in China Unicom and a value adjustment of Telefónica Ireland (+2.9 p.p.). |
Excluding the aforementioned items, OIBDA for 2013 would have been stable versus the prior year. OIBDA margin was 33.4% in 2013, down 0.6 percentage points year-on-year in reported terms.
By region, Telefónica Spain, accounted for 33.2% of consolidated OIBDA in 2013 (+1 p.p. compared to 2012), while Telefónica Hispanoamérica accounted for 29.0% (+0.8 p.p. compared to 2012) and Telefónica Brazil accounted for 20.7% (-3.7 p.p. compared to 2012).
Depreciation and amortization in 2013 (9,627 million euros) registered a year-on-year drop of 7.7%, mainly due to the exchange rate effects and the sale of the Atento Group, Telefónica Ireland and Telefónica Czech Republic. The depreciation and amortization charges arising from purchase price allocation processes amounted to 856 million euros during 2013 (-11.1% year-on-year).
Operating income in 2013 totaled 9,450 million euros, decreasing 12.5% year-on-year, mainly affected by exchange rate differences and the effect of hyperinflation in Venezuela (-9.6 p.p.). Additionally the year-on-year change was due to the lower amount of non-strategic towers sold in 2013 as compared to 2012 (-4.9 p.p.), changes in the consolidation perimeter (-1.5 p.p.), the contractual change in the commercial model for selling handsets in Chile in 2012 (-0.9 p.p.), sales of companies (-0.1 p.p.) and the value adjustment of companies in 2013 and 2012 (+4.9 p.p.). Excluding these impacts operating income would have fallen 0.5% year-on-year.
Share of profit (loss) of investments accounted for by the equity method was a loss of 304 million euros in 2013 compared with a loss of 1,275 million euros in 2012 and was affected by adjustments to the value of the stake of Telco, S.p.A. in Telecom Italia, S.p.A and the contribution to results in the year, resulting in a negative impact on “Shareshare of loss of investments accounted for by the equity method”method for 2016 was a loss of 2675 million euros and 1,277(compared to a loss of 10 million euros respectively.in 2015).
Net financial expense amounted to 2,8662,219 million euros in 2013, 21.7%2016, 14.9% lower than in 2012, of which 111 million euros werethe previous year, due to net negative foreign exchange differences. Excluding this effect, net financial expenses fell 11.8% year-on-year, mainly duesavings from the management of debt (pound sterling hedges linked to an 11.4% reduction inTelefónica United Kingdom and the average debt. The effectivelower cost of debt in 2013 excluding exchange rate differences was 5.34%, 3 basis points below 2012, with savings from management improvements overEuropean currencies). On the gross cost of debt in euros offsettingother hand, the impact on the effective costhigher finance income resulting from the fact that mostinflation in Venezuela was mainly offset by the income from the sale of equity investments, with the capital loss from the sale of the reduction has been1.5% stake in euros (with below average costs).China Unicom (155 million euros) in 2016, and the positive impact from the divestment of the holding in Telecom Italia, S.p.A. (380 million euros) in 2015.
Corporate income tax in 2013 stood at 1,311 amounted to 846 million euros onin 2016. Considering a pre-tax incomeprofit of 6,2803,245 million euros, implying anthe effective tax rate of 20.9%stood at 26.1%, 4.0 percentage points lower year-on-year. This is mainly9.0 p.p. higher than the 2015 effective tax rate, due to thelower tax credits recognition in 2012 of the tax assessments in Spain.2016.
Profit attributable to non-controlling interests reduced 2013 net profit by 376 million euros and was down 20.7% year-on-year, mainly as a result of the lower profit attributed to minority interests in Telefónica Brazil, affected by the exchange rate.
As a result of the performance of the above items,foregoing, profit for the period year attributable to equity holders of the parentin 2013 for 2016 was 4,5932,369 million euros (16.9% higher year-on-year)(616 million euros in 2015).
Segment results
Some of the figuresProfit attributable to non-controlling interest reached 30 million euros, 105 million euros less than in the table below are compared at a constant exchange rate in order to analyze yearly performance excluding the effect of exchange rate variation. For certain of the financial results discussed below, comparison has been made using the previous year’s average exchange rate to convert the figure and by excluding the consideration of Venezuela as a hyperinflationary economy. In these cases a comment of “excluding foreign exchange rate effect” or “excluding foreign exchange rate effect and the consideration of Venezuela as a hyperinflationary economy” (or similar wording) has been indicated.
Some figures discussed further below have been compared in local currency (LC), taking the financial magnitudes in the relevant local currency as they were registered in the corresponding periods.
| | | | | | | | | % YoY 12/13 | | % YoY 13/14 |
| Millions of euros | 2012 | % Total | 2013 | % Total | 2014 | % Total | | Reported | Ex fx (*) | | Reported | Ex fx (*) |
| Revenues | 62,356 | | 57,061 | | 50,377 | | | (8.5%) | (1.0%) | | (11.7%) | 0.4% |
| Telefonica Spain | 14,996 | 24.0% | 12,959 | 22.7% | 12,023 | 23.9% | | (13.6%) | (13.6%) | | (7.2%) | (7.2%) |
| Telefonica United Kingdom | 7,042 | 11.3% | 6,692 | 11.7% | 7,062 | 14.0% | | (5.0%) | (0.5%) | | 5.5% | 0.2% |
| Telefonica Germany | 5,213 | 8.4% | 4,914 | 8.6% | 5,522 | 11.0% | | (5.7%) | (5.7%) | | 12.4% | 12.4% |
| Telefonica Brazil | 13,618 | 21.8% | 12,217 | 21.4% | 11,231 | 22.3% | | (10.3%) | 2.2% | | (8.1%) | 0.5% |
| Telefonica Hispanoamérica | 16,741 | 26.8% | 16,855 | 29.5% | 13,155 | 26.1% | | 0.7% | 16.1% | | (22.0%) | 14.6% |
| OIBDA | 21,231 | | 19,077 | | 15,515 | | | (10.1%) | (2.6%) | | (18.7%) | (5.7%) |
| Telefonica Spain | 6,815 | 32.1% | 6,340 | 33.2% | 5,671 | 36.6% | | (7.0%) | (7.0%) | | (10.6%) | (10.6%) |
| Telefonica United Kingdom | 1,602 | 7.5% | 1,637 | 8.6% | 1,744 | 11.2% | | 2.2% | 7.0% | | 6.5% | 1.1% |
| Telefonica Germany | 1,351 | 6.4% | 1,308 | 6.9% | 733 | 4.7% | | (3.2%) | (3.2%) | | (44.0%) | (44.0%) |
| Telefonica Brazil | 5,161 | 24.3% | 3,940 | 20.7% | 3,543 | 22.8% | | (23.7%) | (13.0%) | | (10.1%) | (1.7%) |
| Telefonica Hispanoamérica | 5,983 | 28.2% | 5,531 | 29.0% | 4,068 | 26.2% | | (7.6%) | 8.6% | | (26.5%) | 14.2% |
| OIBDA Margin | 34.0% | | 33.4% | | 30.8% | | | | | | | |
| Telefonica Spain | 45.4% | | 48.9% | | 47.2% | | | | | | | |
| Telefonica United Kingdom | 22.7% | | 24.5% | | 24.7% | | | | | | | |
| Telefonica Germany | 25.9% | | 26.6% | | 13.3% | | | | | | | |
| Telefonica Brazil | 37.9% | | 32.3% | | 31.5% | | | | | | | |
| Telefonica Hispanoamérica | 35.7% | | 32.8% | | 30.9% | | | | | | | |
| Operating Income (OI) | 10,798 | | 9,450 | | 6,967 | | | (12.5%) | (2.8%) | | (26.3%) | (7.5%) |
| Telefonica Spain | 4,752 | 44.0% | 4,437 | 46.9% | 3,866 | 55.5% | | (6.6%) | (6.6%) | | (12.9%) | (12.9%) |
| Telefonica United Kingdom | 607 | 5.6% | 621 | 6.6% | 623 | 8.9% | | 2.3% | 7.2% | | 0.3% | (4.7%) |
| Telefonica Germany | 118 | 1.1% | 77 | 0.8% | (693) | (9.9%) | | (35.4%) | (35.4%) | | n.m. | n.m. |
| Telefonica Brazil | 2,843 | 26.3% | 1,831 | 19.4% | 1,781 | 25.6% | | (35.6%) | (26.6%) | | (2.7%) | 6.3% |
| Telefonica Hispanoamérica | 3,221 | 29.8% | 3,007 | 31.8% | 2,034 | 29.2% | | (6.6%) | 16.8% | | (32.4%) | 20.9% |
| Profit for the year attributable to equity holders of the parent | 3,928 | | 4,593 | | 3,001 | | | | | | | |
| (*) Excludes exchange rate effects and hyperinflation in Venezuela. |
Revenues and OIBDA contribution by country
We include below certain charts showing the revenues and OIBDA contribution by main countries, and segments, to total consolidated Group revenues and OIBDA for 2012, 2013 and 2014. By way of explanation, total Group revenues and OIBDA are 100% in each year, and in each country or region the percentage represents its contribution2015, mainly due to the total Group.
increase in losses attributable to minority interests at Telefónica Germany, offset by the lower profit attributable to minority interests in Telefónica Brazil.
As the preceding charts show, the Telefónica Group has high geographic diversification. During the periods covered by such charts, Telefónica Spain and Telefónica Brazil are the largest single contributors to Group revenue and OIBDA, followed by the United Kingdom, Germany, Argentina, Peru, Mexico and Venezuela and Central America.
Together, these countries accounted for 91.1% of OIBDA and 88.3% of Group revenues in 2014 (89.5% of OIBDA and 85.4% of revenues in 2013 and 89.5% of OIBDA and 84.3% of revenues in 2012, respectively).
Beginning in 2013 we present figures of Venezuela and Central America together, and figures for previous years have been revised accordingly.
Contribution to Growth by Country
In the charts included below, we show the contribution to revenue and OIBDA year-on-year growth of our segments and the main countries where we operate for 2013 and 2014, excluding foreign exchange rate effects and the effect of hyperinflation in Venezuela. For example, in the chart relating to our revenues for 2014, the drop of -1.7% of Telefónica Spain means that Telefónica Spain’s drop in revenues caused a 1.7 percentage points year-on-year decrease in total consolidated revenues in 2014, and the addition of all countries’ contributions shown in the chart equals the total Group revenues increase in 2014 (+0.4% in 2014), excluding the impact of exchange rate differences and the effect of hyperinflation in Venezuela.
The below tables show the evolution of Telefónica’s estimated mobile and DSL accesses market share over the past three years:
| Evolution of competitive position | | | |
| | | | Mobile Market Share (1) |
| Telefónica | | | 2012 | 2013 | 2014 |
| Spain | | | 36.2% | 33.9% | 31.2% |
| United Kingdom | | 26.6% | 26.5% | 26.9% |
| Germany (2) | | | 16.7% | 16.9% | 36.9% |
| Brazil | | | 29.1% | 28.6% | 28.4% |
| Argentina | | | 29.7% | 31.4% | 31.3% |
| Chile | | | 38.8% | 38.7% | 39.4% |
| Peru | | | 60.0% | 59.7% | 55.2% |
| Colombia | | | 21.6% | 24.0% | 23.5% |
| Venezuela | | | 32.9% | 32.0% | 33.7% |
| Mexico | | | 19.2% | 18.5% | 20.8% |
| Central America | | 29,7% | 31.8% | 31.5% |
| Ecuador | | | 29.3% | 32.6% | 27.9% |
| Uruguay | | | 37.4% | 35.8% | 34.4% |
| (1) Company estimation. | | | | |
| (2)Germany in 2014 includes E-Plus. | | | |
| Evolution of competitive position | | | |
| | | | DSL Market Share (1) |
| Telefónica | | | 2012 | 2013 | 2014 |
| Spain | | | 48.8% | 47.4% | 45.1% |
| Brazil | | | 18.8% | 16.3% | 16.4% |
| Argentina | | | 30.9% | 30.5% | 30.3% |
| Chile | | | 41.2% | 40.2% | 39.8% |
| Colombia | | | 18.1% | 18.7% | 18.8% |
| (1) Company estimation. | | | | |
Segments Discussion
2016/2015 Segment results
TELEFÓNICA SPAIN
The below table shows the evolution of accesses in Telefónica Spain over 2015 and 2016:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2015 |
| 2016 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 10,005.6 |
| 9,720.2 |
| (2.9 | %) |
| Internet and data accesses | 6,000.0 |
| 6,094.5 |
| 1.6 | % |
| Broadband (2) | 5,962.0 |
| 6,067.3 |
| 1.8 | % |
| Fiber | 2,223.0 |
| 2,998.3 |
| 34.9 | % |
| Mobile accesses | 17,258.5 |
| 17,237.7 |
| (0.1 | %) |
| Prepay | 2,777.1 |
| 2,329.3 |
| (16.1 | %) |
| Contract | 14,481.4 |
| 14,908.4 |
| 2.9 | % |
| M2M | 1,778.8 |
| 2,006.3 |
| 12.8 | % |
| Pay TV | 3,671.5 |
| 3,657.0 |
| (0.4 | %) |
| Final Clients Accesses | 36,935.6 |
| 36,709.4 |
| (0.6 | %) |
| Wholesale Accesses | 5,037.7 |
| 4,525.5 |
| (10.2 | %) |
| Total Accesses | 41,973.3 |
| 41,234.9 |
| (1.8 | %) |
Notes:
There were no variations in organic terms during the past three years.period.
(1) PSTN (including Public Use Telephony) x1; ISDN Basic access x1; ISDN Primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL.
| ACCESSES | |
| Thousands of accesses | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Fixed telephony accesses (1) | 11,723.0 | 11,089.8 | 10,447.8 | (5.4%) | (5.8%) |
| Naked ADSL | 25.0 | 22.8 | 21.3 | (9.1%) | (6.6%) |
| Internet and data accesses | 5,779.3 | 5,899.0 | 5,928.7 | 2.1% | 0.5% |
| Narrowband | 54.0 | 38.5 | 30.9 | (28.7%) | (19.6%) |
| Broadband (2) | 5,709.3 | 5,846.8 | 5,885.9 | 2.4% | 0.7% |
| Other (3) | 16.0 | 13.7 | 11.9 | (14.2%) | (13.7%) |
| Mobile accesses | 20,608.7 | 19,002.1 | 17,575.4 | (7.8%) | (7.5%) |
| Prepay | 5,180.5 | 4,262.7 | 3,328.1 | (17.7%) | (21.9%) |
| Contract (4) | 15,428.2 | 14,739.3 | 14,247.3 | (4.5%) | (3.3%) |
| Pay-TV (5) | 710.7 | 672.7 | 1,884.7 | (5.4%) | 180.2% |
| WLR (6) | 481.2 | 525.8 | 570.6 | 9.3% | 8.5% |
| Unbundled loops | 3,262.0 | 3,787.1 | 4,087.3 | 16.1% | 7.9% |
| Shared ULL | 183.5 | 130.6 | 94.1 | (28.9%) | (27.9%) |
| Full ULL (7) | 3,078.5 | 3,656.5 | 3,993.3 | 18.8% | 9.2% |
| Wholesale ADSL | 652.3 | 676.8 | 707.8 | 3.8% | 4.6% |
| Other (8) | 0.5 | 0.4 | 0.3 | (23.9%) | (28.5%) |
| Final Clients Accesses | 38,821.7 | 36,663.6 | 35,836.7 | (5.6%) | (2.3%) |
| Wholesale Accesses | 4,396.0 | 4,990.1 | 5,366.0 | 13.5% | 7.5% |
| Total Accesses | 43,217.8 | 41,653.6 | 41,202.7 | (3.6%) | (1.1%) |
| | | | | | |
| Notes: |
| (1) PSTN (including public use telephony) x1; ISDN basic access x1; ISDN primary access; 2/6 digital access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL. |
| (2) Includes ADSL, satellite, optical fiber, cable modem and broadband circuits. |
| (3) Leased lines. |
| (4) In the first quarter of 2014, 569 thousand M2M inactive accesses were disconnected. |
| (5) Since the second quarter of 2014, Pay-TV accesses include 131 thousand “TV Mini” customers. |
| (6) Wholesale Line Rental. |
(7) Includes naked shared loops. (8) Wholesale circuits. |
The resultsIn 2016 the commercial activity was leveraged on the differentiated assets of Telefónica Spain in 2014 showed a softer decline in revenues than in 2013 versus 2012, due in part to a more favorable macroeconomic and competitive environment.
By the end of 2014 the Company became a leaderand, in the second half of 2015 was strengthened by the convergent offer “Movistar Fusión+” launched in July 2015. During the first semester of 2016 the tariffs of the Pay-TV marketconsumer segment, fundamentally broadband, postpaid mobile and “Fusión” were revised and, on July 3, 2016 a new "Movistar Fusión+" portfolio was launched, increasing the value offered to customers and tailoring it to their preferences. Basic bundles now include content from the Spanish "La Liga", to which "UEFA Champions and Europe League" are added in ultrafast packages; and the new "Movistar Fusión+" bundles include additional mobile lines and Premium TV content. It is important to highlight the good evolution of the second mobile line included in “Fusión+ Contigo” since its launching on June 1, 2016.
Churn evolution was positive in 2016, especially taking into account the elimination of “Fusión” long-term contracts on August 1, 2015, reflecting the higher loyalty of the customers with 1.9 million customers (almost three times higher thanbundles services. This fact has resulted in 2013),a positive performance of commercial activity in 2016, broadband net adds grew by 39% year-on-year, there were more than 1 million 100 Mb775 thousand new fiber customers (doubling the figure for 2013)accesses, and a mobile contract base showing positive net adds at year-end forcontinued growth (+0.4 million customers). In fixed telephony the first time since 2011 (excluding the disconnectionnet loss of 569 thousand M2M accesses during the first quarter of the year).
Telefónica Spain improved its commercial offer throughout the year, offering extra value to the customer. Notably, it launched “Movistar Fusión TV” in April as part of the convergent “Fusión” portfolio, increased the volume of its mobile data and the flexibility to purchase content bundles during the third quarter and launched “Movistar Series” in December, an “a la carta” and multiscreen TV service offering certain TV series, for 7 euros a month (including VAT), just one day after their premiers in the United States. In addition, it improved its mobile-only contract offeringdecreased by launching the new “VIVE” portfolio in October, which was renewed in February 2015, increasing data volume and introducing new value-added services.
Telefónica Spain had 41.2 million accesses at the end of December 2014,2016, down 1%1.8% year-on-year, mainly due toexplained by the disconnection of 569 thousand inactive M2Mdecrease in prepay mobile contract accesses in the first quarter of the year.and fixed telephony accesses. Retail accesses also declined by 0.6% year-on-year.
“Movistar Fusión”n”, with a customer base of 3.74.3 million and 1.4with 2.5 million additional mobilewireless lines to the base offer as of December 31, 2016, maintained a solid year-on-year growth (+27%5% and +26% respectively compared to 2013)December 2015) and increased its penetration (73%contributed 83% of the fixed retail broadband customer base (3.0% year-on-year) and 57%73% of mobilethe wireless contract customer base (6 p.p. year-on-year). There was significant growth in the consumer segment). Atpenetration of the same time, higherhigh value offers (fiber and TV) continued to attract customers. As a result, 21%services of Movistar“Movistar Fusión customers hadn”, with 37% of the customer base already using 100 Mb fiber speedor 300 Mb ultra-fast broadband (+8 p.p. year-on-year) and 45% have IPTV68% of the customer base with Pay-TV as of December 31, 2016 (+315 p.p. year-on-year).
Fixed accesses decreased 2.9% year-on-year, with a net loss of 285 thousand accesses in the year 2016. This decrease was mainly due to a slower fixed access market evolution.
By year-end,
Retail broadband accesses presented 105 thousand new accesses in 2016, totaling 6.1 million accesses (+1.8% year-on-year) due to a low churn (1.4% in 2016, +0.02 p.p. year-on-year).
Fiber accesses showed a good evolution in terms of net adds (0.8 million new accesses in 2016), reaching 3.0 million customers in 2016 (up 34.9% compared to 2015), 49% of which corresponded to broad band accesses (+12 p.p. year-on-year), and with more than 775 thousand new accesses in 2016. Ultra-speed fiber accesses, totaled 1.3 million (more than doubling the figure for 2013) and accounted for 22% of the broadband customer base, and customers with 100 or 300 Mb fiber speed, who have higher(with additional ARPU (currently aof 10 euros, price premium) and lower churn (0.5 times) compared with DSL customers, exceeded one million.
The intense paceincluding VAT) reached 2.0 million accesses (68% of total fiber accesses). At December 31, 2016 the fiber deployment reached 10.317.1 million premises, passed2.7million more than at December 31, 2015, and continues to be the end of the year.largest in Europe.
Pay-TV accesses reached 1.9 million (almost three times higher than in December 2013), reflecting the strong adoption of “Movistar TV”, a key aspect of the new bundle offer with quality content and innovative functionality, making Telefónica the leading Pay-TV operator.
Total mobile accesses stood at 17.617.2 million, down 8%0.1% compared with year-end 2013, affected by the disconnection of 569 thousand inactive M2M mobile contract accesses in the first quarter2015 as a result of the year.
decrease in prepay accesses. The contract access base added 77 thousand net additions in 2014 (excluding the impact of the disconnection of 569 thousand inactive M2M mobile contract accesses),accelerated its growth during 2016, growing for the first time since 2011 (+0.5% year-on-year), mainly driven by churn reduction (-0.2 p.p. year-on-year), with a lower loss of customers due to portability (-30% year-on-year), and the growth of gross additions (+10% year-on-year).
2.9% year-on-year. Smartphone penetration stood at 61%70.9% of the mobile voice base (+104.6 p.p. compared to year-end 2013)2015) and significantly boosted data traffic growth to 28%62% year-on-year in 2014. 2016 due to the higher number of customers with the renewed portfolio containing superior data packages.
LTE network rollout continued to progress well and coverage reached 58%(based on our estimates) approximately 91% of the population at the end of 2014.
| CONSOLIDATED RESULTS | | | | | |
| Millions of euros | | | | | |
| TELEFÓNICA SPAIN | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Revenues | 14,996 | 12,959 | 12,023 | (13.6%) | (7.2%) |
| Wireless Business | 6,464 | 5,121 | 4,556 | (20.8%) | (11.0%) |
| Mobile service revenues | 5,453 | 4,580 | 3,888 | (16.0%) | (15.1%) |
| Wireline Business | 9,541 | 8,861 | 8,543 | (7.1%) | (3.6%) |
| OIBDA | 6,815 | 6,340 | 5,671 | (7.0%) | (10.6%) |
| OIBDA Margin | 45.4% | 48.9% | 47.2% | 3.5 p.p. | (1.8 p.p.) |
| Depreciation and amortization | (2,063) | (1,903) | (1,805) | (7.7%) | (5.1%) |
| Operating Income (OI) | 4,752 | 4,437 | 3,866 | (6.6%) | (12.9%) |
| CapEx | 1,692 | 1,529 | 1,732 | (9.6%) | 13.3% |
| OpCF (OIBDA-CapEx) | 5,123 | 4,811 | 3,939 | (6.1%) | (18.1%) |
2014 Results
2016, up 16 p.p. compared to 2015, due to the deployment of the 800 MHz. As a result, the LTE customer base reached 6.0 million customers in 2016, almost doubling the customer base in 2015, while penetration reached 40% (+19 p.p. year-on-year).
Pay-TV accessesRevenues totaled 12,023 reached 3.7 million, euros in 2014 (-7.2% year-on-year).We considerline with the previous year, including 613 thousand satellite TV accesses from DTS.
Given the high penetration level of the convergent offer “Fusión”, the revenue breakdown by service is considered to be increasingly less relevant givenin 2016. For this reason, Telefónica Spain has disclosed a new revenue breakdown that management believes is more meaningful.
The table below shows the high penetration levelevolution of our convergent offer. However,Telefónica Spain’s results over 2015 and 2016:
|
| | | | | | | | |
| Millions of euros | |
| |
| |
| |
|
| TELEFÓNICA SPAIN | 2015 |
| 2016 |
| %Reported YoY |
| %Organic YoY (3) |
|
| Revenues | 12,402 |
| 12,713 |
| 2.5 | % | (0.1 | %) |
| Consumer (1) | 6,129 |
| 6,536 |
| 6.6 | % | 1.8 | % |
| Fusión | 3,368 |
| 4,095 |
| 21.6 | % | 21.6 | % |
| Out of Fusión | 2,761 |
| 2,441 |
| (11.6 | %) | (20 | %) |
| Corporate | 3,473 |
| 3,423 |
| (1.4 | %) | (1.4 | %) |
| Communications | 2,799 |
| 2,708 |
| (3.3 | %) | (3.3 | %) |
| TI | 674 |
| 716 |
| 6.2 | % | 6.2 | % |
| Others (2) | 2,152 |
| 2,257 |
| 4.8 | % | 3.2 | % |
| Other income | 516 |
| 476 |
| (7.6 | %) | (6.4 | %) |
| Supplies | (2,996 | ) | (3,375 | ) | 12.7 | % | 4.4 | % |
| Personnel expenses | (5,173 | ) | (2,997 | ) | (42.1 | %) | (6.2 | %) |
| Other expenses | (2,413 | ) | (2,350 | ) | (2.6 | %) | (4.8 | %) |
| OIBDA | 2,336 |
| 4,467 |
| 91.2 | % | 1.4 | % |
| OIBDA Margin | 18.8 | % | 35.1 | % | 16.3 p.p. |
| 0.6 p.p. |
|
| Depreciation and amortization | (1,898 | ) | (1,830 | ) | (3.6 | %) | (4.8 | %) |
| Operating income (OI) | 438 |
| 2,637 |
| n.m. |
| 5.1 | % |
| CapEx | 1,827 |
| 1,847 |
| 1.1 | % | 3.0 | % |
| OpCF (OIBDA-CapEx) | 509 |
| 2,621 |
| n.m. |
| 0.6 | % |
Notes:
(1) Consumer revenues also include freelance revenues.
(2) Other revenues include wholesale, subsidiaries and other revenues.
(3) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Spain, we continuehave made the following adjustments in order to report revenue separatelycalculate 2016/2015 variations in organic terms:
Changes in the scope of consolidation: DTS was included in Telefónica’s consolidation perimeter on May 1, 2015. In order to exclude the impact of this change in the perimeter for information purposes. Fixed business revenues fell 3.6% year-on-year in 2014, duethe calculation or organic variations, the 2015 comparative figures include DTS’s results from January 1 to lower access and voice revenues, partially offset by higher broadband and new services revenues, mainly TV and IT. Mobile business revenues fell 11.0% year-on-year in 2014 dueApril 30, 2015.
Restructuring costs: the impact of certain restructuring costs related to the declineVoluntary Suspension Plan in mobile accessesSpain and the 10.1% drop in ARPU, impacted by lower prices in the new tariff portfolio.
Mobile ARPU is becoming less representative of the Group’s business performance, owingamounting to its significant dependence on the allocation of revenue in convergent offers. In 2014 mobile ARPU declined by 10.1% year-on-year, impacted by lower prices in the new tariff portfolio.
| TELEFÓNICA SPAIN | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Voice Traffic (Million minutes) | 36,382 | 34,428 | 35,600 | (5.4%) | 3.4% |
| ARPU (EUR) (1) | 20.6 | 17.7 | 15.9 | (14.3%) | (10.1%) |
| Prepay | 8.8 | 7.3 | 6.2 | (17.8%) | (14.5%) |
| Contract (2) | 28.6 | 24.0 | 20.6 | (16.2%) | (14.2%) |
| Data ARPU (EUR) (1) | 6.5 | 6.8 | 7.0 | 4.4% | 3.6% |
| % non-SMS over data revenues | 85.2% | 92.1% | 95.0% | 7.0 p.p. | 2.8 p.p. |
| | | | | | |
| Notes: |
| (1) Impacted by the disconnection of 569 thousand inactive M2M accesses in the first quarter of 2014. |
| (2) Excludes M2M. |
Total expenses, which include supplies, personnel expenses837 million and other expenses (mainly subcontract expenses and others) but do not include depreciation and amortization expenses, amounted to 6,9872,896 million euros in 2016 and 2015, respectively, has been excluded.
2014, down 1.1% year-on-year, reflectingResults of tower sales: the control of costs and the transformation efficiency initiatives implemented several years ago. The breakdown by components is as follows:
| · | Supplies (2,592 million euros) increased 4.2% year-on-year in 2014, mainly reflecting higher spending on handsets and TV content.
|
| · | Personnel expenses(2,139 million euros) increased 1.2% year-on-year in 2014, primarily due to the end of the redundancy program in 2013 and the Company’s contribution to its pension plan in July 2014, following its temporary freeze from April 2013 to July 2014. At December 31, 2014, Telefónica Spain’s headcount totaled 30,020 employees compared to 29,764 at December 31, 2013.
|
| · | Other expenses (2,256 million euros) fell by 8.5% year-on-year in 2014, reflecting the savings resulting from the simplification processes, redefinition of distribution channels and in-sourcing of activities, which more than offset the expenses related to the increased commercial effort in advertising and handset sales.
|
OIBDA amounted to 5,671 million euros in 2014 (-10.6% year-on-year), affected by the drop in revenues despite the higher commercial effortresult obtained by Telefónica Spain to capture the growth and value opportunity in the market. Excludingfrom the sale of non-strategic towers in 2015 totaling 38 million euros, has been excluded. Telefónica Spain recognized no result from the sale of towers in 2016.
Spectrum acquisition: we have excluded the impact of spectrum acquisitions in 2016 and 2015, which totaled 7 and 49 million euros, respectively.
Gains or losses on the sale of companies: in 2016, the gain obtained from the sale of Telecomunicaciones Personalizadas for 7029 million euros was excluded.
Optimization of the distribution network:the impact of the provisions recorded for 18 million and 30 million euros in 20132016 and 1912015, respectively, have been excluded.
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
TELEFÓNICA SPAIN
2016 | %Reported YoY |
| %Organic YoY |
| Perimeter change |
| Restructuring costs |
| Towers sales |
| Spectrum acquisition |
| Capital Gains/losses on sale of companies |
| Spain distribution channel |
|
| Revenues | 2.5 | % | (0.1 | %) | 2.6 |
| — |
| — |
| — |
| — |
| — |
|
| Other income | (7.6 | %) | (6.4 | %) | 0.1 |
| — |
| (7.4 | ) | — |
| 5.6 |
| — |
|
| Supplies | 12.7 | % | 4.4 | % | 7.9 |
| — |
| — |
| — |
| — |
| — |
|
| Personnel expenses | (42.1 | %) | (6.2 | %) | 0.5 |
| (39.8 | ) | — |
| — |
| — |
| — |
|
| Other expenses | (2.6 | %) | (4.8 | %) | 2.8 |
| — |
| — |
| — |
| — |
| (0.5) |
|
| OIBDA | 91.2 | % | 1.4 | % | (0.2 | ) | 88.1 |
| (1.6 | ) | — |
| 1.2 |
| 0.5 |
|
| CapEx | 1.1 | % | 3.0 | % | 0.4 |
| — |
| — |
| (2.3 | ) | — |
| — |
|
| OpCF (OIBDA-CapEx) | n.m. |
| 0.6 | % | (2.2 | ) | n.m. |
| (7.5 | ) | 8.2 |
| 5.6 |
| 2.3 |
|
Results discussion
Revenues in Telefónica Spain in 2016 were 12,713 million in 2014, OIBDA fell 12.6%euros, up 2.5% year-on-year in 2014.
2013 Results
In 2013 revenues stood at 12,959 million euros (-13.6% year-on-year), partly affected by the sharp drop in revenues from handset sales (-46.4% year-on-year) due to the removal of subsidies in March 2012.
| · | Excluding handset sales, revenues in 2013 amounted to 12,417 million euros (-11.2% year-on-year). Excluding the impact of regulation (which imposed interconnection and roaming), these revenues would have fallen 9.6% year-on-year. |
| · | Revenues from the fixed business fell 7.1% year-on-year in 2013, due to lower access and voice revenues, primarily driven by the loss of accesses, and lower broadband and new service revenues, reflecting the negative performance of broadband ARPU, and affected by the migration of customers to the new tariffs. |
| · | Mobile revenues fell by 20.8% year-on-year in 2013. Mobile service revenue declined by 16.0% year-on-year in 2013 explained by ARPU decline. |
| · | Telefónica Spain revenue reduction is mainly due to ARPU reductions across services reflecting lower prices of the renewed portfolio and lower customers consumption, and also, as a consequence of declines in accesses (-4% year-on-year), as a consequence of the high competitive pressure in the market. |
ARPU decreased 14.3% year-on-year in 2013, affected by the 60% cut in the mobile termination rate since July 1, in addition to the cuts implemented in April 2013 (-13%) and October 2012 (-8%). The drop in ARPU also reflects lower prices of the new tariff portfolio and lower customer usage. However, it is worth noting that the ARPU of individual services is less representative following the launch of “Movistar Fusión”, as it is affected by the defined allocation of convergent product revenues between the fixed and mobile businesses.
Total expenses, which include supplies, personnel expenses and other expenses (mainly subcontract expenses and others) but do not include depreciation and amortization expenses, amounted to 7,064 million euros in 2013, 18.2% less than in 2012, mainly due to a reduction in commercial costs,reported terms mainly as a result of the eliminationconsolidation of DTS since May 1, 2015 (which accounted for +2.6 p.p. of the year-on-year increase). In organic terms, revenues were flat year-on-year, as lower handset subsidies and other savings arising fromrevenues were offset by higher service revenues.
Given the various efficiency improvement programs. Thehigh penetration level of the convergent offer (which means the offer of more than a single service for a single price), the revenue breakdown by componentsservice is as follows:considered to be increasingly less relevant. For this reason, Telefónica Spain has established a new revenue breakdown that management believes is more meaningful.
| · | Supplies declined 23.9% year-on-year in 2013 to 2,486 million euros, mainly due to lower handset costs as a consequence of the new commercial policy and lower mobile interconnection costs.
|
| · | Personnel expenses amounted to 2,113 million euros in 2013, down 6.1% year-on-year as a result of the savings derived from the redundancy program and from the temporary removal of Telefónica Spain’s contribution to the pension plan beginning in April 2013. At December 31, 2013, Telefónica Spain’s headcount totaled 29,764 employees, compared to 31,434 at December 31, 2012.
|
| · | Other expenses amounted to 2,464 million euros in 2013, down by 20.9% compared to 2012 due to lower commercial expenses and the savings from Telefónica Spain’s simplification process, as well as the redefinition of the distribution channel and call centers and the in-sourcing of activities.
|
Consumer revenuesOIBDA stood at 6,340 (6,536 million euros in 2013, showing2016) grew by 6.6% year-on-year in reported terms, as a result of the consolidation of DTS since May 1, 2015 (+4.8 p.p. of the year-on-year declineincrease). In organic terms, these
revenues increased 1.8% year-on-year, mainly driven by the growth in ARPU and in the number of 7.0%.customers. It is worth highlighting the strong growth in "Fusión" revenues during 2016 (4,095 million euros, +21.6% year-on-year) which more than offset the drop in "non-Fusión" revenues.
Business revenues (3,423 million euros in 2016) decreased by 1.4% year-on-year in reported terms, improving the year-on-year trend, mainly due to a better evolution in communications revenues evolution and higher IT revenues. During 2016, business revenues showed a path of stabilization, supported by the commercial offer renovation, with integrated connectivity solutions, IT and digital services, all of them key for the digitalization of the businesses.
Other revenues, which include wholesale, subsidiaries and other revenues (2,257 million euros in 2016) grew by 4.8% year-on-year in reported terms, due to the growth in wholesale TV revenues and fixed ingoing voice revenues.
Fusión ARPU was 80.4 euros in 2016, up 12.0% year-on-year in reported terms, boosted by the demand of higher value packages and the tariff revisions, as well as the improvement in the customers' mix stimulated by the renovation of the portfolio that took place in August, 2016 including mobile additional lines and additional contents in the convergent offers.
OIBDA amounted to 4,467 million euros in 2016, up 91.2% year-on-year in reported terms, as a consequence of the provisions recorded in 2015 totaling 2,896 million euros relating to restructuring cost by the “Employment Suspension Plan” and 30 million euros relating to restructuring of the distribution channel. The OIBDA decreasereported in 2016 also included 837 million euros of provisions due to the Individual Suspension Plan and other restructuring plans, and 18 million euros of provision due to the restructuring of the distribution channel.
In organic terms OIBDA increased 1.4% year-on-year, mainly due to the higher service revenues, lower personnel costs (down by 6.2% year-on-year in organic terms which is mainly explained by the revenue decrease, partially offsetsavings generated by costs reduction, especially the continued reduction“employment suspension plan” (207 million euros) since April 2016) and lower other expenses, which dropped 2.6% in reported terms and down 4.8% in organic terms excluding changes in the perimeter of consolidation, principally due to lower commercial costs, afterwhich in total offset the handset subsidy removal policy,increase of supplies (+12.7% in reported terms, +4.4% in organic terms) impacted by higher content costs and other savings arising from several IT equipment purchases.
efficiencyOIBDA margin programs (such as simplification of processes, distribution channel was 35.1% in 2016 in reported terms and call centers redefinition, internalization of activities, savings from the restructuring personnel plan and temporary cancelation of the corporate contribution to pension plans).
Excluding the sale of non-strategic towers for 60 million euros41.6% in 2012 and 70 million eurosorganic terms, up 16.3 p.p. year-on-year in 2013, OIBDA decreased by 7.2%.
reported terms.
TELEFÓNICA UNITED KINGDOM
The table below shows the evolution of accesses in Telefónica United Kingdom over 2015 and 2016:
| ACCESSES | | | | | |
| Thousands of accesses | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Fixed telephony accesses (1) | 377.4 | 208.2 | 228.0 | (44.8%) | 9.5% |
| Internet and data accesses | 560.1 | 14.8 | 19.2 | (97.4%) | 29.8% |
| Broadband | 560.1 | 14.8 | 19.2 | (97.4%) | 29.8% |
| Mobile accesses | 22,864.2 | 23,649.0 | 24,479.1 | 3.4% | 3.5% |
| Prepay | 10,962.9 | 10,764.7 | 10,761.2 | (1.8%) | (0.0%) |
| Contract | 11,901.3 | 12,884.3 | 13,717.9 | 8.3% | 6.5% |
| Final Clients Accesses | 23,801.7 | 23,872.0 | 24,726.4 | 0.3% | 3.6% |
| Wholesale Accesses (2) | 40.5 | 31.6 | - | (22.1%) | - |
| Total Accesses | 23,842.2 | 23,903.6 | 24,726.4 | 0.3% | 3.4% |
| | | | | | |
| Notes: | | | | | |
| (1) PSTN (including public use telephony) x1; ISDN basic access x1; ISDN primary access; 2/6 digital access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL. |
| (2) From the first quarter of 2014, the company stopped offering a wholesale service. |
|
| | | | | | |
| ACCESSES | | | |
| Thousands of accesses | 2015 |
| 2016 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 247.1 |
| 272.6 |
| 10.3 | % |
| Internet and data accesses | 21.0 |
| 23.7 |
| 12.8 | % |
| Broadband | 21.0 |
| 23.7 |
| 12.8 | % |
| Mobile accesses | 25,018.8 |
| 25,462.7 |
| 1.8 | % |
| Prepay | 10,561.4 |
| 9,701.4 |
| (8.1 | %) |
| Contract | 14,457.4 |
| 15,761.3 |
| 9.0 | % |
| M2M (2) | 2,383.9 |
| 3,266.9 |
| 37.0 | % |
| Final Clients Accesses | 25,286.9 |
| 25,759.0 |
| 1.9 | % |
| Total Accesses | 25,286.9 |
| 25,759.0 |
| 1.9 | % |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
(2) Includes 720 thousand M2M accesses on the global platform since the first quarter 2016.
In 2016, Telefónica and the Hutchison Whampoa Group agreed to commence exclusive negotiations for a possible Whampoa Group purchase of O2 UK on January 23, 2015.
Total accesses were 24.7 million at year-end 2014 (+3.4% year-on-year). Mobile accesses increased by 3.5% year-on-year to 24.5 million by year-end 2014, boosted by the continued expansion of contract customers and a stable pre-pay segment. In this way, the proportion of contract customers rose 2 percentage points year-on-year to account for 56% of total mobile accesses. Contract net additions totaled 0.8 million customers in 2014United Kingdom maintained market momentum, as a result of good performance, despite fierce competition. Contractthe O2 brand recognition, the commercial proposal success and the customer churn improvedloyalty. These factors have allowed the company to keep growing in a competitive market.
The total access base grew 1.9% year-on-year and stood at 25.8 million at December 31, 2016, mainly driven by 0.1 percentage pointsa 1.8% increase in the mobile customer base.
The contract mobile customer base grew 9.0% year-on-year in 2014and reached 15.8 million accesses, with a broadly stable 61.9% share over the total mobile base driven by the incorporation of 720 thousand M2M accesses on the global platform, not accounted before. Net adds reached 444 thousand accesses due to 1.0%.the solid contribution of postpay accesses. Smartphone penetration (as a percentagereached 68.4% of mobile internet data tariff overthe total mobile customers) roseaccesses base, up 8.0 p.p. year-on-year, driven by 3the continued growth of LTE customers (+36.1% year-on-year reaching 10.4 million at December 31, 2016). LTE penetration reached 47% of the total mobile access base.
The prepay access base decreased 8.1% year-on-year to 9.7 million at December 31, 2016.
The table below shows the evolution of Telefónica United Kingdom's results over 2015 and 2016:
|
| | | | | | | | |
| Millions of euros | |
| |
| |
| |
|
| TELEFÓNICA UNITED KINGDOM | 2015 |
| 2016 |
| %Reported YoY |
| %Organic YoY (1) |
|
| Revenues | 7,837 |
| 6,861 |
| (12.5 | %) | (1.5 | %) |
| Mobile service revenues | 5,778 |
| 5,121 |
| (11.4 | %) | (0.3 | %) |
| Other income | 170 |
| 148 |
| (12.7 | %) | (1.8 | %) |
| Supplies | (3,769 | ) | (3,226 | ) | (14.4 | %) | (3.7 | %) |
| Personnel expenses | (549 | ) | (528 | ) | (3.9 | %) | 1.2 | % |
| Other expenses | (1,760 | ) | (1,546 | ) | (12.1 | %) | (1.1 | %) |
| OIBDA | 1,929 |
| 1,709 |
| (11.4 | %) | 1.7 | % |
| OIBDA Margin | 24.6 | % | 24.9 | % | 0.3 p.p. |
| 0.8 p.p. |
|
| Depreciation and amortization | (1,196 | ) | (1,090 | ) | (8.9 | %) | 2.6 | % |
| Operating Income (OI) | 733 |
| 619 |
| (15.5 | %) | 0.2 | % |
| CapEx | 883 |
| 931 |
| 5.5 | % | 18.7 | % |
| OpCF (OIBDA-CapEx) | 1,046 |
| 778 |
| (25.6 | %) | (12.7 | %) |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage points withchanges referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to year-end, to 52%.
Telefónica United Kingdom, continueswe have made the deploymentfollowing adjustments in order to calculate 2016/2015 variations in organic terms:
Exchange rate effect: we have excluded the impact of its LTE network, reaching 58% outdoor coverage at year end, and keeps focusing on offering a positive network experience to 4G customers.
changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2015 for both years.
53
Restructuring costs: we have excluded the impact in 2016 and 2015 of restructuring costs, amounting to 37 and 4 million euros, respectively.| CONSOLIDATED RESULTS | | | | | | | |
| Millions of euros | | | | %YoY 12/13 | %YoY 13/14 |
| TELEFÓNICA UNITED KINGDOM | 2012 | 2013 | 2014 | € | LC | € | LC |
| Revenues | 7,042 | 6,692 | 7,062 | (5.0%) | (0.5%) | 5.5% | 0.2% |
| Mobile service revenues | 6,060 | 5,461 | 5,397 | (9.9%) | (5.7%) | (1.2%) | (6.2%) |
| OIBDA | 1,602 | 1,637 | 1,744 | 2.2% | 7.0% | 6.5% | 1.1% |
| OIBDA Margin | 22.7% | 24.5% | 24.7% | 1.7 p.p. | 1.7 p.p. | 0.2 p.p. | 0.2 p.p. |
| Depreciation and amortization | (995) | (1,016) | (1,121) | 2.1% | 6.9% | 10.3% | 4.7% |
| Operating Income (OI) | 607 | 621 | 623 | 2.3% | 7.2% | 0.3% | (4.7%) |
| CapEx | 748 | 1,385 | 755 | 85.3% | 94.0% | (45.5%) | (48.3%) |
| OpCF (OIBDA-CapEx) | 854 | 252 | 989 | (70.5%) | (69.1%) | n.m. | n.m. |
|
| | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
| | | |
| |
| |
|
| TELEFÓNICA UNITED KINGDOM | % Reported YoY |
| % Organic YoY |
| Exchange rate effect |
| Restructuring costs |
|
| 2016 |
| Revenues | (12.5 | %) | (1.5 | %) | (11.0 | ) | — |
|
| Other income | (12.7 | %) | (1.8 | %) | (10.9 | ) | — |
|
| Supplies | (14.4 | %) | (3.7 | %) | (10.7 | ) | — |
|
| Personnel expenses | (3.9 | %) | 1.2 | % | (12.0 | ) | 6.9 |
|
| Other expenses | (12.1 | %) | (1.1 | %) | (11.0 | ) | — |
|
| OIBDA | (11.4 | %) | 1.7 | % | (11.1 | ) | (2.0 | ) |
| CapEx | 5.5 | % | 18.7 | % | (13.2 | ) | — |
|
| OpCF (OIBDA-CapEx) | (25.6 | %) | (12.7 | %) | (9.3 | ) | (3.6 | ) |
Results discussion
Total revenuesin 2014 increased 5.5% year-on-year to 7,062 were 6,861 million euros in 2016, down by 12.5% year-on-year in reported terms (+0.2%mainly due to the depreciation of the pound sterling (which accounted for -11.0 p.p. of the year-on-year excluding foreign exchange rate effects)decrease). In organic terms, revenues decreased by 1.5% year-on-year due mainly to lower handset sales, which declined by 8.0% year-on-year.
| · | Mobile service revenues reached 5,397Mobile service revenues totaled 5,121 million euros in 2016, down 1.2% year-on-year in reported terms (-6.2% excluding foreign exchange rate effects) negatively affected by the “Refresh” model, mobile termination rate cuts and roaming regulation. Excluding the impacts of, mobile termination rate cuts, (+0.4 p.p.), roaming regulation (+0.5 p.p.) and the new commercial model “Refresh” (+6.5 p.p.), mobile service revenues would have increased by 1.3% year-on-year as a result of the growth in mobile accesses and price stabilization. The “Refresh” model translates into more revenue from handset sales (even where the number of units sold are not increased), since handset sales are fully recognized upfront. |
| · | Non-SMS data revenues rose 23.9% year-on-year (+17.6% year-on-year excluding foreign exchange rate effects), accounting for 57.9% of data revenues (+8.0 p.p. year-on-year).
|
| · | Data revenue recorded an increase of 1.5% year-on-year in 2014. Data revenue in 2014 accounted for 57% of mobile service revenue, 4 percentage points more than 2013. |
ARPU fell by 3.9%11.4% year-on-year in 2014 (-8.8% excludingreported terms due mainly to the effectdepreciation of foreign exchange rates),the pound sterling (which accounted for -11.1 p.p. of the year-on-year decrease). Excluding this impact, mobile service revenues decreased by 0.3% due to the “Refresh” commercial model as well as the low interconnection fares. Under the Refresh commercial model, certain revenues related to handset are not considered as mobile service revenues, but as handset revenues.
Mobile ARPU decreased by 12.1% year-on-year in reported terms due mainly to the depreciation of the pound sterling. In organic terms, ARPU went down by 1.1% adversely affected by the “Refresh” model. Excluding the effect of regulation andmodel, while data ARPU increased by 2.3%. In the “Refresh” model (+7.2 p.p.),handset revenues are not considered as mobile service revenues, but as handset revenues and ARPU would have decreased by 1.6% year-on-year. Voice ARPU fell 12.5% in reported terms (-16.9% excludingdoes not reflect the effect of foreign exchange rates). Data ARPU increased by 3.6% in reported terms (-1.6% year-on-year excluding the effect of foreign exchange rates).handset revenues.
| TELEFÓNICA UNITED KINGDOM | 2012 | 2013 | 2014 | %YoY LC 12/13 | %YoY LC 13/14 |
| Voice Traffic (Million minutes) | 48,250 | 48,479 | 49,096 | 0.5% | 1.3% |
| ARPU (EUR) | 22.5 | 19.6 | 18.8 | (8.8%) | (8.8%) |
| Prepay | 9.6 | 7.7 | 7.3 | (16.0%) | (9.3%) |
| Contract (1) | 40.3 | 35.0 | 33.1 | (9.1%) | (10.1%) |
| Data ARPU (EUR) | 11.4 | 10.4 | 10.8 | (4.5%) | (1.6%) |
| % non-SMS over data revenues | 46.8% | 50.0% | 57.9% | 3.2 p.p. | 8.0 p.p. |
| | | | | | |
| Notes: |
| (1) Excludes M2M. |
Mobile voice traffic in 2014 remained stable compared to 2013, while data traffic increased by 72%, driven by higher penetration of smartphones and higher usage per customer.
54 |
| | | | | | | | |
| TELEFÓNICA UNITED KINGDOM | 2015 |
| 2016 |
| %YoY |
| %Organic YoY |
|
| Voice Traffic (millions of minutes) | 90,527 |
| 93,306 |
| 3.1 | % | 3.1 | % |
| ARPU (EUR) | 19.4 |
| 17.0 |
| (12.1 | %) | (1.1 | %) |
| Prepay | 7.7 |
| 7.5 |
| (3.1 | %) | 9.7 | % |
| Contract (1) | 33.5 |
| 28.8 |
| (14.1 | %) | (3.5 | %) |
| Data ARPU (EUR) | 11.3 |
| 10.3 |
| (9.0 | %) | (2.3 | %) |
| % non-SMS over data revenues | 59.4 | % | 61.4 | % | 2.0 p.p. |
| 2.0 p.p. |
|
Notes:Total expenses were 5,502 totaled 1,709 million euros in 2014, up by 4.7%2016, down 11.4% year-on-year in reported terms, impactedas a result mainly of the depreciation of the pound sterling. In organic terms, OIBDA increased by 1.7% year-on-year due to the foreign exchange rate in 5.3 percentage points. Excluding this impact, expenses would have decreasedreduction of costs offset by 0.6%. The breakdown by components is as follows:lower service revenues.
| · | Supplies increased by 3.4% year-on-year in 2014 in reported terms to 3,520 million euros, impacted by the foreign exchange rate (+5.2The OIBDA margin stood at 24.9% in 2016, with an increase of 0.3 p.p.). Excluding this impact, supplies would have decreased by 1.8%, mainly due to lower interconnection costs.
|
| · | Personnel expenses were down by 15.3% year-on-year in 2014, amounting to 460 million euros, impacted by the exchange rate (+4.3 p.p.). Excluding this impact, personnel costs would have been down by 19.6%, as a result of the outsourcing of the customer service facility. Personnel expenses were also affected by restructuring costs (5 million euros in 2014 and 48 million euros in 2013).
|
| · | Other expenses were 1,521 million euros in 2014, a 16.1% year-on-year increase in reported terms, with an exchange rate impact of 5.9 percentage points. Excluding this impact, other expenses would have increased by 10.3% as a result of the outsourcing of the customer service facility.
|
OIBDA totaled 1,744 million euros, up by 6.5% in reported terms (+1.1% excludingcompared to 2015. In organic terms, OIBDA margin stood at 25.5%.
TELEFÓNICA GERMANY
The below table shows the foreign exchange rate impact),evolution of accesses in Telefónica Germany over 2015 and 2016:
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2015 |
| 2016 |
| % Reported YoY |
|
| Fixed telephony accesses (1) | 1,997.8 |
| 2,010.3 |
| 0.6 | % |
| Internet and data accesses | 2,330.6 |
| 2,324.5 |
| (0.3 | %) |
| Broadband | 2,098.0 |
| 2,104.0 |
| 0.3 | % |
| VDSL | 516.8 |
| 805.5 |
| 55.9 | % |
| Mobile accesses | 43,062.8 |
| 44,320.7 |
| 2.9 | % |
| Prepay | 23,979.4 |
| 23,784.0 |
| (0.8 | %) |
| Contract | 19,083.4 |
| 20,536.6 |
| 7.6 | % |
| M2M | 632.0 |
| 787.8 |
| 24.6 | % |
| Final Clients Accesses | 47,391.2 |
| 48,655.5 |
| 2.7 | % |
| Wholesale Accesses | 972.0 |
| 691.0 |
| (28.9 | %) |
| Total Accesses | 48,363.2 |
| 49,346.4 |
| 2.0 | % |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
During 2016 Telefónica Germany maintained market momentum with the launch of a new Premium portfolio called “O2 Free” on October 5, 2016, which underpins the company's data monetization strategy, offering more content at a higher price with a clear focus on retaining and developing the premium customer base. Competitive pressure in the non-premium segment is showing some signs of improvement. At the same time, Telefónica Germany delivered on its integration milestones, generating additional savings in line with its synergy targets.
The total access base grew 2.0% year-on-year and stood at 49.3 million at December 31, 2016, mainly driven by a 2.9% increase in the mobile base (which reached 44.3 million).
The contract mobile customer base grew 8% year-on-year and reached 20.5 million accesses, with a broadly stable 46.3% share over the total mobile base. Net adds reached 1.5 million accesses due to higher revenues and cost control partially offsetthe solid contribution of partners (second brands). Smartphone penetration reached 59% of the total mobile access base, up 5.2 p.p. year-on-year driven by the negative contributioncontinued growth of LTE customers (+53% year-on-year reaching 12.1 million at December 31, 2016) which reflects the continuous demand by customers for high speed mobile data access. LTE penetration reached 27% of the “Refresh” model.total mobile access base.
The prepay access base remained broadly stable year-on-year (-0.8%) at 23.8 million. The prepay segment lost 195 thousand accesses in 2016 due to the partner segment.
2013 ResultsThe retail broadband access loss trend continued to improve, with 6 thousand net additions in 2016. VDSL registered 289 thousand net additions (+60% year-on-year) in 2016 and continued to benefit from the continued strong demand, while the wholesale DSL customer base continued to fall due to the planned dismantling of the legacy infrastructure.
The table below shows the evolution of Telefónica Germany’s results over 2015 and 2016:
|
| | | | | | | | |
| Millions of euros | |
| |
| |
| |
|
| TELEFÓNICA GERMANY | 2015 |
| 2016 |
| %Reported YoY |
| %Organic YoY (1) |
|
| Revenues | 7,888 |
| 7,503 |
| (4.9 | %) | (4.9 | %) |
| Mobile Business | 6,832 |
| 6,498 |
| (4.9 | %) | (4.9 | %) |
| Mobile service revenues | 5,532 |
| 5,437 |
| (1.7 | %) | (1.7 | %) |
| Fixed Business | 1,043 |
| 981 |
| (5.9 | %) | (5.9 | %) |
| Other income | 265 |
| 146 |
| (45.0 | %) | (9.3 | %) |
| Supplies | (2,712 | ) | (2,452 | ) | (9.6 | %) | (9.6 | %) |
| Personnel expenses | (655 | ) | (646 | ) | (1.4 | %) | (7.9 | %) |
| Other expenses | (2,928 | ) | (2,757 | ) | (5.8 | %) | (5.0 | %) |
| OIBDA | 1,858 |
| 1,794 |
| (3.4 | %) | 2.9 | % |
| OIBDA Margin | 23.6 | % | 23.9 | % | 0.4 p.p. |
| 1.9 p.p. |
|
| Depreciation and amortization | (2,128 | ) | (2,211 | ) | 3.9 | % | 3.9 | % |
| Operating Income (OI) | (270 | ) | (417 | ) | 54.2 | % | 9.8 | % |
| CapEx | 2,230 |
| 1,108 |
| (50.3 | %) | 6.8 | % |
| OpCF (OIBDA-CapEx) | (372 | ) | 686 |
| c.s. |
| (2.1 | %) |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as ���organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Germany, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
Total Restructuring costs:revenues we have excluded the impact of restructuring costs associated with simplification processes implemented in Germany. In 2016, restructuring costs had an 89 million euros impact on OIBDA. In 2015, restructuring costs had a 74 million euros impact on OIBDA.
Adjustments to the final purchase price of E-Plus: in 2015 we have excluded the result from the difference between the preliminary purchase price of E-Plus (as estimated at the end of the valuation period) and the final purchase price agreed with KPN, totaling 104 million euros (which had 102 million euros positive impact on OIBDA, net of costs related to the acquisition).
Spectrum acquisition: the CapEx organic variation exclude spectrum acquisition, which in 2015 amounted 6,692to 1.198 million euros (6 million euros in 2013,2016).
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement measures and CapEX and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
| TELEFÓNICA GERMANY 2016 | %Reported YoY |
| %Organic YoY |
| Restructuring costs |
| Adjustments to the final purchase price of E-Plus |
| Spectrum acquisition |
|
| Revenues | (4.9 | %) | (4.9 | %) | — |
| — |
| — |
|
| Other income | (45.0 | %) | (9.3 | %) | — |
| (39.4 | ) | — |
|
| Supplies | (9.6 | %) | (9.6 | %) | — |
| — |
| — |
|
| Personnel expenses | (1.4 | %) | (7.9 | %) | 6.4 |
| — |
| — |
|
| Other expenses | (5.8 | %) | (5.0 | %) | (0.9 | ) | (0.1 | ) | — |
|
| OIBDA | (3.4 | %) | 2.9 | % | (0.8 | ) | (5.5 | ) | — |
|
| CapEx | (50.3 | %) | 6.8 | % | — |
| — |
| (53.5 | ) |
| OpCF (OIBDA-CapEx) | c.s. |
| (2.1 | %) | 4.1 |
| 27.4 |
| n.m. |
|
Results discussion
Total revenues were 7,503 million euros in 2016, down 5.0%4.9% year-on-year in reported terms (-0.5% excluding exchange rate differences) reflecting the disposal of the fixed consumer business as well as the “Refresh” model contribution (+5.8 p.p. in 2013). The “Refresh” model translates into more revenue from handset sales (even where the number of units sold do not increase), since handset sales are fully recognized upfront.
| · | Mobile service revenues in 2013 totaled 5,461 million euros, a decrease of 9.9% year-on-year in reported terms (-5.7% excluding the impact of exchange rate differences) negatively affected by the “Refresh” model, mobile termination rate cuts and roaming regulation. Excluding the impact of mobile termination rate cuts (+2.4 p.p.) and roaming regulation (+0.6 p.p.), as well as the impact of the “Refresh” model (+1.3 p.p.), the mobile service revenues would have decreased 1.3% year-on-year due to the pressure on ARPU. |
| · | Non-SMS data revenues grew 0.8% year-on-year (+5.5% year-on-year excluding exchange rate differences) accounting for 50% of data revenues in 2013 (+3 p.p. year-on-year). |
| · | The decline of SMS volumes led data revenue to decline 1.2% year-on-year in 2013. In 2013, data revenues accounted for 53% of mobile service revenues, an increase of 2 percentage points compared to the previous year. |
| · | ARPU fell 12.9% year-on-year (-8.8% year-on-year excluding the impact of the exchange rate differences) negatively impacted by the “Refresh” model, as well as mobile termination rate cuts and roaming regulation. Excluding the impact of regulation, ARPU would have decreased by 5.5% year-on-year. Voice ARPU fell 17.1% in reported terms (-13.2% excluding exchange rate differences and -8.4% excluding additionally the effect of regulations). Data ARPU fell 8.8% in reported terms (-4.5% excluding exchange rate differences). |
Mobile voice traffic remained relatively stable with respectdue mainly to the previous year.
lower service revenues and handset sales.
Mobile service revenuesTotal expenses amounted to 5,256 totaled 5,437 million euros in 2013,2016, decreasing 6.1%1.7% year-on-year in reported terms (affected by the foreign exchange rate difference in -4.4 p.p.). Excluding this effect, total expenses would have decreased 1.7% year-on-year. The breakdown by components is as follows:
| · | Supplies amounteddue mainly to 3,403 million euros, decreasing 5.8% year-on-year affected by foreign exchange rate differences (-4.4 p.p.). Excluding this effect, supplies would have decreased 1.4% mainly due to the reduction of interconnection costs.
|
| · | Personnel expenses amounted to 543 million euros in 2013, a decrease of 1.6% in reported terms, affected by foreign exchange rate differences (-4.6 p.p.). Excluding this effect, personnel expenses would have increased by 3.0%, affected by 48 million euros of restructuring expenses.
|
| · | Other expenses were 1,310 million euros and decreased by 8.7% in reported terms, affected by foreign exchange rate differences (-4.3 p.p.). Excluding this effect these costs would have decreased 4.4%, due to lower commissions and benefits of the “Refresh” model.
|
OIBDA stood at 1,637 million euros in 2013, representing a year-on-year increase of 2.2% in reported terms (+7.0% excluding the impact from exchange rate differences). Year-on-year performance was positively affected byof termination and roaming tariffs, the capital gainincreasing share of 83 million euros frompartner segment (second brands) within the fixed consumer business disposal offset partially bycustomer base and the negative impact of restructuring expenses (48 million euros). In addition, OIBDA performance reflects the acceleration in the recording of hardware sales from the “Refresh” model, partially mitigated by the higher upfront commercial costs resulting from the model.
TELEFÓNICA GERMANY
| ACCESSES | |
| Thousands of accesses | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Fixed telephony accesses (1) | 2,249.0 | 2,124.9 | 2,036.4 | (5.5%) | (4.2%) |
| Internet and data accesses | 2,678.9 | 2,516.1 | 2,387.0 | (6.1%) | (5.1%) |
| Narrowband | 302.6 | 271.7 | 243.2 | (10.2%) | (10.5%) |
| Broadband | 2,376.3 | 2,244.3 | 2,143.8 | (5.6%) | (4.5%) |
| Mobile accesses | 19,299.9 | 19,401.0 | 42,124.9 | 0.5% | 117.1% |
| Prepay | 9,191.3 | 9,114.9 | 23,350.7 | (0.8%) | 156.2% |
| Contract | 10,108.5 | 10,286.1 | 18,774.1 | 1.8% | 82.5% |
| Final Clients Accesses (2) | 24,284.9 | 24,042.0 | 46,548.3 | (1.0%) | 93.6% |
| Wholesale Accesses | 1,087.9 | 1,125.0 | 1,113.3 | 3.4% | (1.0%) |
| Total Accesses | 25,372.8 | 25,166.9 | 47,661.5 | (0.8%) | 89.4% |
| | | | | | |
| Notes: |
| (1) PSTN (including public use telephony) x1; ISDN basic access x1; ISDN primary access; 2/6 digital access x30. Company’s accesses for internal use included. Includes VoIP and Naked ADSL. |
(2) 2012 includes 57.2 thousand of Pay-TV accesses.
The results of the E-Plus Group have been fully consolidated with Telefónica Germany since October 1, 2014 (once the acquisition was completed, following its announcement in 2013). As a result, mobile accesses reached 42.1 million at the end of 2014, up by 117% year-on-year, making us the largest operator on the German market in terms of mobile customers according to the Company’s estimates. At the date of consolidation, the E-Plus Group accounted for 22.6 million accesses.
The German market remained competitive in 2014, with pressure on commercial expenses and focus on bundled voice and data tariffs, oriented to capture higher-value customers and develop the current base of customers by increasing their consumption. Bundle offers were also brought on to the market by our main competitors in the second half of 2014.
As part of its strategy of development and monetization of data traffic,pressure. Telefónica Germany continued to step up its investmentfocus on data revenues, which increased by 5.3% and accounted for 55% of mobile service revenues in LTE. It finished2016. Non-P2P SMS data revenues amounted to 2,300 million euros (increasing +13.1% year-on-year) and non-P2P SMS data revenues accounted for 76.9% of the year with 62% coverage of outdoor population, and increased the volume of handsets and users of this technology.total data revenues (+5.3 p.p. year-on-year).
The main brands operated by Telefónica Germany, via its “O2 Blue All-in” and “Base All-in” portfolios, have maintained prices focused on increasing the value of our customers, with a viewFixed revenues were 981million euros in 2016 (down 5.9% year-on-year), due to increasing the proportion of higher-value customers.
Contract mobile customers grew by 83% year-on-year, impactedlower wholesale revenues driven by the incorporationplanned decommissioning of the E-Plus Group, reaching 18.8 million accesses. The proportion oflegacy ULL platform.
Mobile ARPU was 10.3 euros in 2015 (down 3.7% year-on-year), while contract accesses reached 45%, impacted by the higher proportion of pre-pay customers among the E-Plus Group customer base. Smartphone penetration reached 29% in 2014, with a considerable volume of LTE customers.
Retail broadband accessesARPU stood at 2.1 million in December 2014 (-4.5%16.5 euros (down 4.1% year-on-year).
| CONSOLIDATED RESULTS | | | | | |
| Millions of euros | | | | | |
| TELEFÓNICA GERMANY | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Revenues | 5,213 | 4,914 | 5,522 | (5.7%) | 12.4% |
| Wireless Business | 3,845 | 3,673 | 4,375 | (4.5%) | 19.1% |
| Mobile service revenues | 3,152 | 2,989 | 3,580 | (5.2%) | 19.8% |
| Wireline Business | 1,363 | 1,235 | 1,138 | (9.4%) | (7.8%) |
| OIBDA | 1,351 | 1,308 | 733 | (3.2%) | (44.0%) |
| OIBDA Margin | 25.9% | 26.6% | 13.3% | 0.7 p.p. | (13.4 p.p.) |
| Depreciation and amortization | (1,233) | (1,231) | (1,426) | (0.1%) | 15.7% |
| Operating Income (OI) | 118 | 77 | (693) | (35.4%) | n.m. |
| CapEx | 609 | 666 | 849 | 9.4% | 27.5% |
| OpCF (OIBDA-CapEx) | 743 | 642 | (116) | (13.5%) | n.m. |
2014 Results
Total revenues amounted to 5,522 million euros in 2014, up by 12.4% due mainly to the consolidation of the E-Plus Group since October 1, 2014, and offset in part by the lower service revenues during the rest of the year.
| · | Mobile service revenues totaled 3,580 million euros in 2014, up by 19.8% year-on-year due mainly to the consolidation of the E-Plus Group since October 1, 2014 and offset in part by the lower voice and SMS revenues during the rest of the year. Telefónica Germany continued to focus on data revenues, which increased 24.3% and accounted for 50.1% of mobile service revenues. Non-P2P SMS data revenues accounted for 71% of the total data revenues (+4.7 p.p. year-on-year), increasing 33% year-on-year. |
| · | Fixed telephony revenues fell by 7.8% year-on-year in 2014 to stand at 1,138 million euros. The main reason for this was a decline in fixed broadband customers (partially mitigated by VDSL growth) and transit business revenues, impacting slightly on the margin.
|
ARPU was negatively affected by the consolidation of the E-Plus Group and decreased by 7.1% year-on-year in 2014, reducing its year-on-year decline compared to 2013, due to the smaller proportional impact of migration to new tariffs, and the various actions undertaken with respect to the Telefónica Germany’s customer base in order to boost income and data leverage.
| TELEFÓNICA GERMANY | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Voice Traffic (Million minutes) | 29,519 | 30,152 | 41,186 | 2.1% | 36.6% |
| ARPU (EUR) | 13.8 | 12.7 | 11.8 | (7.9%) | (7.1%) |
| Prepay | 5.5 | 5.1 | 5.4 | (6.8%) | 4.5% |
| Contract (1) | 21.5 | 19.6 | 18.4 | (9.0%) | (5.9%) |
| Data ARPU (EUR) | 6.2 | 6.2 | 5.9 | 0.7% | (3.9%) |
| % non-SMS over data revenues | 56.7% | 66.5% | 71.2% | 9.8 p.p. | 4.7 p.p. |
| | | | | | |
| Notes: |
| (1) Excludes M2M. |
Total expenses were 4,895 million euros in 2014, up by 29.7% year-on-year due mainly to the consolidation of the E-Plus Group since October 1, 2014. Telefónica Germany recorded a 409 million euros provision for the restructuring process resulting from the integration of the E-Plus Group. The breakdown by component is as follows:
| · | Supplies stood at 2,144 million euros, up by 9.5% year-on-year due mainly to the consolidation of the E-Plus Group since October 1, 2014. There were lower interconnection costs arising from a decrease in SMS volumes and lower interconnection rates, partially offset by higher handset purchases (mainly towards the end of the year).
|
| · | Personnel expenses amounted to 828 million euros during the year, up by 97.7% due mainly to the consolidation of the E-Plus Group since October 1, 2014. In addition, personnel expenses were impacted by the recognition of an expenditure of 321 million euros, related to the provision for the restructuring process resulting from the integration of the E-Plus Group.
|
| · | Other expenses amounted to 1,923 million euros during the year, up by 37.5% mainly impacted by the change of perimeter and the recognition of an expenditure of 87 million euros related to the provision for the restructuring process resulting from the integration of the E-Plus Group. Excluding these impacts, other expenses would have been impacted by higher commercial costs.
|
OIBDA fell 44% year-on-year to stand at 733 million euros in 2014. OIBDA was impacted by the recognition of an expenditure of 409 million euros related to the provision for the restructuring process resulting from integration of the E-Plus Group.
2013 Results
Revenues totaled 4,914 million euros in 2013, down 5.7% year-on-year. This decline is partly attributable to the reduction in termination rates. Excluding this impact, revenues would have fallen 3.5% in 2013, with ongoing headwinds coming from customer base repositioning and the acceleration of declines in SMS volumes. Handset revenues decreased by 1.4% year-on-year in 2013 mainly due to the increasing share of attractive affordable handsets in the market, including selective bundle offers of selected smartphones with high value mobile data tariffs.
| · | Mobile service revenues stood at 2,989 million euros in 2013, a year-on-year decrease of 5.2%. Excluding the impact of the reduction in termination rates, mobile service revenues would have fallen by 1.5% year-on-year in 2013, mainly as a result of the increase in tariff renewals in the customer base and the lower volume of SMS traffic, which were not offset by the growth in data revenues. Telefónica Germany continued to monetize its data revenues with an increase in non-P2P SMS data revenue of 21.7% during the year, accounting for 67% of total data revenue (+10 p.p. year-on-year). As a result, mobile data revenues in 2013 increased 3.7% year-on-year to account for 48% of mobile service revenues (+4 p.p. year-on-year). |
| · | Fixed telephony revenues decreased 9.4% year-on-year in 2013, to 1,235 million euros despite the increasing adoption of VDSL. This is mainly the result of the decline in DSL customer base (mitigated by an increasing uptake of VDSL) and a further reduction of revenues from the low margin voice transit business. |
ARPU decreased by 7.9% year-on-year in 2013, mainly as a result of the reductionhigh pricing pressure in mobile termination rates. Excluding this impact, ARPU would have declined by 4.3% in 2013 on the back of tariff migrations, acceleration of the decrease in SMS volumes and an increasinga competitive market, higher share of discounted online channel activities, whichwholesale customers in the customer base and the consequent change in the weight of retail to wholesale. Data ARPU was partly offset by the increasing demand for mobile data services.5.7 euros (+3.4% year-on-year).
Voice ARPU decreased by 14.9% |
| | | | | | |
| TELEFÓNICA GERMANY | 2015 |
| 2016 |
| %YoY |
|
| Voice Traffic (millions of minutes) | 117,877 |
| 113,896 |
| (3.4 | %) |
| ARPU (EUR) | 10.7 |
| 10.3 |
| (3.7 | %) |
| Prepay | 5.8 |
| 5.7 |
| (1.6 | %) |
| Contract (1) | 17.2 |
| 16.5 |
| (4.1 | %) |
| Data ARPU (EUR) | 5.5 |
| 5.7 |
| 3.4 | % |
| % non-SMS over data revenues | 71.6 | % | 76.9 | % | 5.3 p.p. |
|
Notes:
(1) Excludes M2M.
OIBDA totaled 1,794 million euros in 2016, decreasing 3.4% year-on-year in 2013, mainlyreported terms as a result mainly of regulatory changes (lower roaming and interconnection rates)the previously mentioned positive impact of the final purchase price of E-Plus in 2015 (-5.5 p.p.) and the migration of customer to current tariffs. Data ARPUlower restructuring costs recorded in 2016 (-0.8 p.p.). In organic terms, OIBDA grew 0.7%by 2.9% year-on-year, as a result ofdriven by the increased penetration of mobile broadband, despite the negative impact of lower SMS volumes.
Mobile voice traffic showed year-on-year growth of 2.1%, derived from the growthsynergies captured in the contract customer base.
Total expenses amounted to 3,775integration (approximately 150 million euros in 2013, decreasing 3.8% year-on-year. The breakdown2016) mainly by component is as follows:employees restructuring and infrastructure dismantling.
| · | SuppliesThe amounted to 1,958 million euros, decreasing 8.1% year-on-year, mainly driven by a reduction in interconnection expenses.
|
| · | Personnel expenses amounted to 419 million euros, decreasing 9.9% year-on-year as a result of an accumulation of activities at the end of 2012.
|
| · | Other expenses stood at 1,398 million euros in 2013, increasing by 5.4% year-on-year, due mainly to the higher commercial cost incurred in retention and advertising activities.
|
OIBDA margin stood at 1,308 million euros23.9% in 2013, registering a decline of 3.2% duereported terms for 2016, up 0.4 p.p. compared to the pressure2015 (+1.9 p.p. in revenues, the higher commercial costs and certain handset promotions, offset in part by the capital gains obtained from asset sales totaling 76 million euros (46 million euros of fiber assets and 30 million euros of the related hosting business, Telefónica Online Services)organic terms).
TELEFÓNICA BRAZIL
The below table shows the evolution of accesses in Telefónica Brazil over 2015 and 2016:
| ACCESSES | |
| Thousands of accesses | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Fixed telephony accesses (1) | 10,642.7 | 10,747.8 | 10,743.4 | 1.0% | (0.0%) |
| Internet and data accesses | 3,964.3 | 4,102.0 | 4,082.6 | 3.5% | (0.5%) |
| Narrowband | 137.9 | 92.1 | 73.7 | (33.2%) | (19.9%) |
| Broadband (2) | 3,748.4 | 3,936.7 | 3,939.8 | 5.0% | 0.1% |
| Other (3) | 78.1 | 73.2 | 69.0 | (6.2%) | (5.8%) |
| Mobile accesses | 76,137.3 | 77,240.2 | 79,932.1 | 1.4% | 3.5% |
| Prepay | 57,335.1 | 53,551.9 | 51,582.4 | (6.6%) | (3.7%) |
| Contract | 18,802.2 | 23,688.3 | 28,349.7 | 26.0% | 19.7% |
| Pay-TV | 601.2 | 640.1 | 770.6 | 6.5% | 20.4% |
| Final Clients Accesses | 91,345.4 | 92,730.0 | 95,528.6 | 1.5% | 3.0% |
| Wholesale Accesses | 24.4 | 18.8 | 25.9 | (22.8%) | 37.5% |
| Total Accesses | 91,369.8 | 92,748.9 | 95,554.5 | 1.5% | 3.0% |
| | | | | | |
| Notes: |
| (1) PSTN (including public use telephony) x1; ISDN basic access x1; ISDN primary access; 2/6 digital access x30. Company’s accesses for internal use included. Voice fixed wireless accesses included. |
| (2) Includes ADSL, optical fiber, cable modem and broadband circuits. |
| (3) Retail circuits other than broadband. |
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2015 |
| 2016 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 14,654.5 |
| 14,338.4 |
| (2.2 | %) |
| Internet and data accesses | 7,195.5 |
| 7,383.2 |
| 2.6 | % |
| Broadband | 7,129.5 |
| 7,311.0 |
| 2.5 | % |
| Fiber and VDSL | 3,779.9 |
| 4,171.0 |
| 10.3 | % |
| Mobile accesses | 73,261.3 |
| 73,769.8 |
| 0.7 | % |
| Prepay | 42,194.4 |
| 40,387.2 |
| (4.3 | %) |
| Contract | 31,066.9 |
| 33,382.6 |
| 7.5 | % |
| M2M | 4,234.7 |
| 5,005.1 |
| 18.2 | % |
| Pay TV | 1,787.9 |
| 1,712.7 |
| (4.2 | %) |
| Final Clients Accesses | 96,899.3 |
| 97,204.2 |
| 0.3 | % |
| Wholesale Accesses | 22.3 |
| 17.9 |
| (19.5 | %) |
| Total Accesses | 96,921.5 |
| 97,222.2 |
| 0.3 | % |
During 2014, TelefonicaNotes:
There were no variations in organic terms during the period.
(1) Includes "fixed wireless" and Voice over IP accesses.
Telefónica Brazil strengthenedclosed the year 2016 improving its leadershipcompetitive position in the high-value mobile as well as in the fixed market. In the mobile business, leadership has been maintained in the higher value segments, bothwhich permitted the operator to capture mobile market revenue growth in contract and LTE, driven by improvements in its networks and continuous innovation of its commercial offers. With respect to2016. In the fixed business, it made progressthe transformation towards fiber and Pay-TV was strengthened after the integration of GVT in its transformation process, speedingMay 2015.
Revenues and OIBDA evolution was positively supported by the acceleration of mobile data and the good evolution of fiber and Pay-TV. Additionally, Telefónica Brazil carried out costs control measures and generated benefits from the synergies with GVT that offset the adverse macroeconomic situation in Brazil.
However, results in 2016 were adversely affected by the interconnection tariff reduction in the mobile business (-33.8%) and in the retail fixed-mobile tariff (-20.6%), fixed-local (-65.9%) and fixed-interurban (-21.3%) since February 25, 2016.
Telefónica Brazil reached 97.2 million accesses at December 31, 2016, up deployment of the fiber network and increasing the number of TV accesses.0.3% compared with December 2015.
In the mobile segment, Telefonica Brazil captured more than 50% ofbusiness, the new contractstrategic focus remained on gaining and retaining high value customers, on the market according to Anatel and achievedreaching a market share of 38.9%42.1% in the contract segment as of December 2014 according31, 2016 (Source: Anatel), preserving the leadership. Telefónica Brazil maintained its market leadership in terms of total accesses with a market share of 30.2% as of December 2016 (source: Anatel), driven by the contract clients growth (7.5% year-on-year), and offset the fall in prepaid clients (-4.3% year-on-year). An improvement has been experienced on the “familiar plans”, giving the chance to Anatel. Contract plans were simplified throughoutproceed to data sharing among the year offering larger volumessame family, as well as progress in online client assistance through “meu vivo”, acclaiming one of data, minutesVivo’s strengths and SMS in exchange for higher levels of ARPU.
continuing with constant upgrades.
In its fixed business the company has, Telefónica Brazil maintained its strategic focus on fiber deployment, with 4.117 million premises passed with fiber at December 31, 2016 and 375 thousand4.3 million homes connected. Traditional accesses decreased 2.2% due to the fixed-mobile substitution. Retail broadband accesses totaled 7.3 million accesses at the end of 2016, increasing 2.5% year-on-year. Among them, 59% accesses were connected with FTCC. Pay TV customers reached 1.7 million as of December 31, 2016, down 4.2% in reported terms due mainly to the macroeconomic situation and alsoa commercial strategy based in value clients gaining. IPTV accesses increased in relevance representing 13% of total Pay TV accesses.
The table below shows the evolution of Telefónica Brazil’s results over 2015 and 2016:
|
| | | | | | | | |
| Millions of euros | |
| |
| |
| |
|
| TELEFÓNICA BRAZIL | 2015 |
| 2016 |
| %Reported YoY |
| %Organic YoY (1) |
|
| Revenues | 11,060 |
| 11,097 |
| 0.3 | % | 0.9 | % |
| Mobile Business | 6,906 |
| 6,669 |
| (3.4 | %) | 1.7 | % |
| Mobile service revenues | 6,495 |
| 6,357 |
| (2.1 | %) | 3.1 | % |
| Fixed Business | 4,154 |
| 4,428 |
| 6.6 | % | (0.2 | %) |
| Other income | 416 |
| 348 |
| (16.3 | %) | (16.6 | %) |
| Supplies | (2,568 | ) | (2,249 | ) | (12.4 | %) | (10.9 | %) |
| Personnel expenses | (1,042 | ) | (1,167 | ) | 11.9 | % | 3.1 | % |
| Other expenses | (4,293 | ) | (4,315 | ) | 0.5 | % | 2.0 | % |
| OIBDA | 3,573 |
| 3,714 |
| 3.9 | % | 5.3 | % |
| OIBDA Margin | 32.3 | % | 33.5 | % | 1.2 p.p. |
| 1.4 p.p. |
|
| Depreciation and amortization | (1,916 | ) | (2,038 | ) | 6.4 | % | 2.5 | % |
| Operating Income (OI) | 1,657 |
| 1,676 |
| 1.1 | % | 8.8 | % |
| CapEx | 2,105 |
| 2,138 |
| 1.6 | % | (2.9 | %) |
| OpCF (OIBDA-CapEx) | 1,468 |
| 1,576 |
| 7.3 | % | 17.8 | % |
(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
As explained above, year-on-year percentage changes referred to in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on increasing Pay-TV accesses (up 20.4% year-on-year)a comparable basis.
With respect to Telefónica Brazil, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
Exchange rate effect: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2015 for both years.
Changes in the scope of consolidation: GVT was included in Telefónica’s consolidation perimeter in May 2015. In order to exclude the impact of this change in the perimeter for the calculation of organic variations, the 2015 comparative figures include GVT’s results from January 1 to April 30, 2015.
Restructuring costs: we have excluded the impact of restructuring costs associated with the simplification processes implemented in Telefónica Brazil. In 2016, these restructuring costs totaled 40 million euros. In 2015, these restructuring costs totaled 7 million euros.
Results of tower sales: the results attributable to the sale of towers have been excluded (10 million euros in 2015).
CONSOLIDATED RESULTS | | | | | | | |
| Millions of euros | | | | %YoY 12/13 | %YoY 13/14 |
| TELEFÓNICA BRAZIL | 2012 | 2013 | 2014 | € | LC | € | LC |
| Revenues | 13,618 | 12,217 | 11,231 | (10.3%) | 2.2% | (8.1%) | 0.5% |
| Wireless Business | 8,573 | 8,092 | 7,618 | (5.6%) | 7.5% | (5.9%) | 2.9% |
| Mobile service revenues | 8,167 | 7,608 | 7,228 | (6.8%) | 6.1% | (5.0%) | 3.8% |
| Wireline Business | 5,045 | 4,125 | 3,613 | (18.2%) | (6.8%) | (12.4%) | (4.2%) |
| OIBDA | 5,161 | 3,940 | 3,543 | (23.7%) | (13.0%) | (10.1%) | (1.7%) |
| OIBDA Margin | 37.9% | 32.3% | 31.5% | (5.6 p.p.) | (5.6 p.p.) | (0.7 p.p.) | (0.7 p.p.) |
| Depreciation and amortization | (2,318) | (2,109) | (1,762) | (9.0%) | 3.7% | (16.5%) | (8.7%) |
| Operating Income (OI) | 2,843 | 1,831 | 1,781 | (35.6%) | (26.6%) | (2.7%) | 6.3% |
| CapEx | 2,444 | 2,127 | 2,933 | (13.0%) | (0.9%) | 37.9% | 50.7% |
| OpCF (OIBDA-CapEx) | 2,717 | 1,813 | 610 | (33.3%) | (24.0%) | (66.4%) | (63.2%) |
Spectrum acquisition: the impact of spectrum acquisitions has been excluded (48 million euros in 2016).
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
TELEFÓNICA BRAZIL 2016 | %Reported YoY |
| %Organic YoY |
| Exchange rate effect |
| Perimeter change |
| Restructuring costs |
| Towers sales |
| Spectrum acquisition |
|
| Revenues | 0.3 | % | 0.9 | % | (5.2 | ) | 4.6 |
| — |
| — |
| — |
|
| Other income | (16.3 | %) | (16.6 | %) | 4.4 |
| (7.9 | ) | — |
| 2.3 |
| — |
|
| Supplies | (12.4 | %) | (10.9 | %) | (4.6 | ) | 3.4 |
| — |
| — |
| — |
|
| Personnel expenses | 11.9 | % | 3.1 | % | (5.8 | ) | 11.0 |
| 3.3 |
| — |
| — |
|
| Other expenses | 0.5 | % | 2.0 | % | (5.2 | ) | 3.7 |
| — |
| — |
| — |
|
| OIBDA | 3.9 | % | 5.3 | % | (5.4 | ) | 5.1 |
| (1.0 | ) | (0.3 | ) | — |
|
| CapEx | 1.6 | % | (2.9 | %) | (5.3 | ) | 7.6 |
| — |
| — |
| 2.4 |
|
| OpCF (OIBDA-CapEx) | 7.3 | % | 17.8 | % | (5.6 | ) | 1.4 |
| (2.4 | ) | (0.7 | ) | (3.5 | ) |
Results discussion
Revenues totaled 11,097 million euros in 2016, up 0.3% in reported terms and 0.9% year-on-year in organic terms, due mainly to the depreciation of the Brazilian real (which accounted for -5.2 p.p. of the evolution) and the consolidation of GVT (+4.6 p.p.). In organic terms, the year-on-year variation of 0.9% was principally due to the good evolution in the mobile business (+1.7% year-on-year), which was partially offset by the impact of the regulatory interconnection tariff reduction, impacting resulting in a reduction in fixed revenues, that decreased by 0.2%.
Revenues from the mobile business totaled 6,669 million euros in 2016, down 3.4% in reported terms due mainly to the depreciation of the Brazilian real (which accounted for -5.0 p.p. of the evolution). In organic terms, revenues from the mobile business increased by 1.7% due to the positive evolution of service revenues (+3.1% year-on-year) as a result of the good performance of outbound revenues, which in turn increased as a result of an increase in the customer base and the increased proportion of data revenues. This offsets the decrease in inbound revenues because of the fall in interconnection, due to the decrease of tariffs, and prepaid revenues associated with the customer base fall. Additionally, handsets revenues slow down 23.9% in reported terms due to a lower commercial activity.
2014 Results
Revenues in 2014 totaled 11,2314,428 million euros, an 8.1% year-on-year fallup by 6.6% in reported terms. Excludingterms due mainly to the effectimpact of exchange rate differences,the consolidation of GVT (+12.3 p.p.) and partially offset by depreciation of the Brazilian real (which accounted for -5.6 p.p. of the evolution). In organic terms, revenues would have grownwere down by 0.5% year-on-year,0.2%, mainly due to the positive performanceregulatory impact of the mobile business (up 2.9% year-on-year),decrease of the fixed-mobile and fixed-fixed tariffs that compensate the increase in broadband and new services revenues, which offsetwere up by 6.5% year-on-year in organic terms supported by the declineincrease in fixed telephony revenues (down 4.2% year-on-year).fiber and Pay TV revenues.
| · | Revenues from the mobile business totaled 7,618 million euros in 2014, falling by 5.9%. Excluding the effect of exchange rate differences, revenues from the mobile business would have increased by 2.9% due to the positive evolution of service revenues (up 3.8% year-on-year) as a result of the good performance of outbound revenues, which in turn increased as a result of an increase in the customer base and the increased proportion of data revenues. This trend was partially offset by falling handset sales (an 11.9% decline year-on-year) and lower inbound revenues affected by lower interconnection tariffs. |
| · | Fixed telephony revenues totaled 3,613 million euros, down by 12.4%, although excluding the effect of exchange rates the decrease would have been 4.2%. This decrease was mainly due to the reduction of the fixed-mobile retail rate and the fixed by mobile substitution, bringing down our fixed telephony revenues despite a stable fixed customer base and greater minutes packages. This trend was partially offset by the increase of the broadband and new services revenues that grew 4.0% helped by the increase of accesses connected with fiber, with a higher ARPU, and the growth of the Pay-TV accesses.
|
The mobile ARPU decreased 8.8% increased 13.3% year-on-year in reported terms. Excludingterms due mainly to the effectbetter quality of exchange rate differences,the customer base and the expansion of data revenues that compensate the depreciation of the Brazilian real. In organic terms, it would have decreased 0.6%increased 19.3% year-on-year as a consequence of the higher data ARPU which more than offset the negative impact of the reduction in the mobile termination rates. We believe the betterhigh quality of the clients’client base is reflected in an increase ofin the outbound ARPU and a 16.0%the 25.3% growth ofin the data ARPU.
| | | TELEFÓNICA BRAZIL | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 | 2015 |
| 2016 |
| %YoY |
| %Local Currency YoY |
|
| Voice Traffic (Million minutes) | 113,955 | 115,698 | 127,412 | 1.5% | 10.1% | |
| Voice Traffic (millions of minutes) | | 379,430 |
| 373,074 |
| (1.7 | %) | (1.7 | %) |
| ARPU (EUR) | 8.9 | 8.0 | 7.3 | 2.3% | (0.6%) | 6.3 |
| 7.1 |
| 13.3 | % | 19.3 | % |
| Prepay | 5.0 | 4.5 | 3.9 | 1.5% | (4.3%) | 3.2 |
| 3.4 |
| 5.4 | % | 11.2 | % |
| Contract (1) | 23.1 | 18.8 | 15.7 | (7.3%) | (8.7%) | 13.3 |
| 12.9 |
| (2.9 | %) | 2.4 | % |
| Data ARPU (EUR) | 2.4 | 2.5 | 2.6 | 18.9% | 16.0% | 2.9 |
| 3.5 |
| 19.1 | % | 25.3 | % |
| % non-SMS over data revenues | 62.0% | 67.0% | 77.4% | 5.0 p.p. | 10.4 p.p. | 82.9 | % | 88.4 | % | 5.5 p.p. |
| 5.5 p.p. |
|
| | | |
| Notes: | |
| (1) Excludes M2M. | |
Notes:
(1) Excludes M2M.
OIBDATotal expenses totaled 7,949 stood at 3,714 million euros in 2014, falling 7.3% in reported terms, with an impact of 8.6 percentage points due to the exchange rate effect. Excluding this impact, total expenses would have increased by 1.3%. The breakdown by component is as follows:
| · | Supplies (2,680 million euros) were down by 14.3% in 2014, with an impact of 8 percentage points due to the exchange rate effect. Excluding this impact, supply costs would have fallen by 6.3% due to lower interconnection expenditure associated with regulatory changes and lower handset costs.
|
| · | Personnel expenses (976 million euros) were down by 5.8% in 2014, with an impact of 8.8 percentage points due to the exchange rate effect. Excluding this impact and the recognition in 2014 of expenditure on the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its
|
targets (+7.2 p.p.), personnel costs would have been down by 4.2% as a result of the staff restructuring programs and voluntary redundancies in 2013, which had an impact of 51 million euros in 2013.
| · | Other expenses (4,292 million euros) were down by 2.7% in 2014, with an impact of 9.1 percentage points due to the exchange rate effect. Excluding this effect, other operating expenses would have increased by 6.4%, driven by higher commercial and fiber acquisition costs, higher network deployment and fixed/mobile system improvement costs.
|
OIBDA stood at 3,543 million euros in 2014, a fall of 10.1% (down 1.7% excluding exchange rates effects). This decrease was mainly due to exchange rate effects and, to a lesser extent, expenses incurred as a result of the recognition in 2014 of expenditure on the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its targets (totaling 68 million euros and mainly accruing during the fourth quarter of 2014), the lower gains derived from the sale of non-strategic towers in 2014 (1 million euros) compared to 2013 (29 million euros), higher personnel costs, increased networks costs, higher handsets and customer service costs, due in part to the higher business volumes. Excluding the effect of exchange rate differences, the sale of non-strategic towers and the expenses incurred as a result of Telefónica’s global restructuring program, OIBDA would have increased by 0.9%, a 0.1 percentage points improvement on the margin compared to 2013.
The OIBDA margin stood at 31.5% in reported terms for 2014.
2013 Results
Revenues totaled 12,217 million euros, 10.3% less than 2012. Excluding the effect of exchange rate differences, revenues increased 2.2% year-on-year, mainly due to the strong performance of the mobile business (up 7.5% year-on-year), offsetting the decline in fixed revenues (down 6.8% year-on-year).
| · | 2013 wireless business revenues amounted to 8,092 million euros, down 5.6%. Excluding the effect of exchange rate differences, however, they would have grown 7.5%, boosted by handset sales revenues (up 35.4% year-on-year). This increase was due to the higher weight of smartphone sales and the growth of service revenues (up 6.1% year-on-year) as a result of the growth in outgoing service revenues, which was attributable to the growth of the customer base and the greater weighting of data revenues; all of which was partially offset by a reduction in mobile termination rates, which had an adverse impact on incoming revenues. |
| · | Revenues from the fixed business amounted to 4,125 million euros, down 18.2%. Excluding the effect of exchange rate differences, they would have decreased by 6.8%, affected by the reduction in the fixed-mobile retail tariff as well as by intense competition in the fixed broadband and Pay-TV businesses. |
Mobile ARPU decreased 10.5% year-on-year2016, up 3.9% in reported terms. ExcludingThis evolution was affected by the effect of exchange rate differences, it would have increased 2.3% year-on-year as a consequencerecognition of a better quality of40 million euros related to a restructuring personnel plan in 2016 compared with the customer base, partially offset by7 million euros provision registered in 2015, the positive impact from the expired payment obligation (98 million euros) in 2015, the negative impact of the reduction indepreciation of the mobile terminationBrazilian real (-5.4 p.p.) and the consolidation of GVT (+5.1 p.p.). In organic terms, the year-on-year increase was 5.3% due to revenue improvement and cost efficiency compensating a worse macro scenario with higher inflation, more devaluation and greater insolvencies provision rates.
Total Personnel expenses which include supplies, personnel expenses and other expenses (mainly subcontract expenses and others) but do not include depreciation and amortization expenses, amounted to 8,575 totaled 1,167 million euros in 2013, 6.5% less than in 20122016, up 11.9% in reported terms and 6.5% higher than in 2012 in local currency. The breakdownas result mainly of the consolidation of GVT, which was partially offset by components is as follows:
| · | Supplies amounted to 3,128 million euros, increasing 1.6%the depreciation of the Brazilian real. In organic terms, personnel expenses increased by 3.1% year-on-year in reported terms and 15.8% in local currency, mainly due to higher content costs and higher site lease costs for the deployment of towers and due to our sale and leaseback of towers;
|
| · | Personnel expenses amounted to 1,036 million euros in 2013, down 7.2% year-on-year in reported terms and increasing 5.7% in local currency affected by personnel restructuring costs (51 million euros); and
|
| · | Other expenses amounted to 4,411 million euros, a decrease of 11.4% compared to 2012 in reported terms, with an increase of 0.9% in local currency mainly due to expenses related to customer service, associated with higher commercial activity.
|
OIBDA totaled 3,940 million euros in 2013, down 23.7% in reported terms (-13.0% excluding the effect of exchange rate differences). This performance was mainly due to higher social benefits and the lower gains derivedinternalization of network contractors that compensates benefits from restructuring plans and voluntary redundancy programs in 2016. In addition, supplies costs fell (-10.9% in organic terms) thanks to the sale of non-strategic towers in 2013 (29 million euros) compared to 2012 (445 million euros). Excluding thepositive impact of the sale of non-strategic towersinterconnection tariff reduction and the impact of exchange rate differences, OIBDA would have decreased by 5.5%, losing 2.6 percentage points of margin with respect to 2012.lesser devices consumption (commercial activity focused on profitable clients).
The OIBDA margin stood at 32.3%33.5% in reported terms for 2013.2016, up 1.2 p.p. compared to 2015.
TELEFÓNICA HISPANOAMÉRICA
The below table shows the evolution of accesses in Telefónica Hispanoamérica over 2015 and 2016:
| ACCESSES | |
| Thousands of accesses | 2012 | 2013 | 2014 | %YoY 12/13 | %YoY 13/14 |
| Fixed telephony accesses (1) (2) (3) | 13,510.7 | 13,778.5 | 13,374.4 | 2.0% | (2.9%) |
| Internet and data accesses | 4,768.2 | 5,137.7 | 5,433.8 | 7.8% | 5.8% |
| Narrowband | 71.2 | 33.4 | 25.2 | (53.1%) | (24.5%) |
| Broadband (4) | 4,667.0 | 5,074.9 | 5,379.4 | 8.7% | 6.0% |
| Other (5) | 30.0 | 29.4 | 29.2 | (1.9%) | (0.6%) |
| Mobile accesses | 100,458.2 | 107,266.9 | 110,346.5 | 6.8% | 2.9% |
| Prepay (6)(7) | 79,806.4 | 84,524.1 | 86,698.0 | 5.9% | 2.6% |
| Contract | 20,651.8 | 22,742.7 | 23,648.5 | 10.1% | 4.0% |
| Pay-TV | 1,825.7 | 2,133.5 | 2,431.9 | 16.9% | 14.0% |
| Final Clients Accesses | 120,562.6 | 128,316.6 | 131,586.6 | 6.4% | 2.5% |
| Wholesale Accesses | 22.7 | 22.7 | 16.4 | 0.2% | n.m. |
| Total Accesses T. Hispanoamérica | 120,585.3 | 128,339.3 | 131,603.0 | 6.4% | 2.5% |
| | | | | | |
| Notes: |
| (1) PSTN (including public use telephony) x1; ISDN basic access x1; ISDN primary access; 2/6 Digital Access x30. Company’s accesses for internal use included. Voice fixed wireless accesses included. |
| (2) In the first quarter of 2014, 45 thousand fixed wireless inactive accesses were disconnected in Mexico. |
| (3) In 2014, fixed telephony accesses include 50 thousand “fixed wireless” additional customers in Peru. |
| (4) Includes ADSL, optical fiber, cable modem and broadband circuits. |
| (5) Retail circuits other than broadband. |
(6) In the first quarter of 2014, 1.9 million inactive accesses were disconnected in Mexico. (7) In the fourth quarter of 2014, 1.8 million inactive accesses were disconnected in Central America. |
|
| | | | | | |
| ACCESSES | |
| Thousands of accesses | 2015 |
| 2016 |
| %Reported YoY |
|
| Fixed telephony accesses (1) | 12,829.8 |
| 11,938.6 |
| (6.9 | %) |
| Internet and data accesses | 5,667.8 |
| 5,707.9 |
| 0.7 | % |
| Broadband | 5,610.4 |
| 5,570.7 |
| (0.7 | %) |
| Mobile accesses | 113,302.7 |
| 115,284.5 |
| 1.7 | % |
| Prepay | 88,332.8 |
| 89,461.2 |
| 1.3 | % |
| Contract | 24,969.8 |
| 25,823.3 |
| 3.4 | % |
| M2M | 2,296.9 |
| 2,561.3 |
| 11.5 | % |
| Pay TV | 2,812.2 |
| 2,919.2 |
| 3.8 | % |
| Final Clients Accesses | 134,612.4 |
| 135,850.3 |
| 0.9 | % |
| Wholesale Accesses | 30.9 |
| 66.5 |
| 115.6 | % |
| Total Accesses T. Hispanoamérica | 134,643.3 |
| 135,916.8 |
| 0.9 | % |
Notes:
(1) Includes "fixed wireless" and Voice over IP accesses.
Total accesses closed at 131.6 reached 135.9 million at year-endDecember 31, 2016 (+2.5% 0.9% year-on-year).
Regarding commercial operations in mobile business:
Mobile accesses totaled 110.3115.3 million (+2.9% year-on-year) thanks to strongcustomers and grew 1.7% year-on-year, highlighting the higher quality of the customer base.
In the contract segment, growth, which expanded by 4.0%accesses grew 3.4% year-on-year. Growth was particularly strong in EcuadorArgentina (+13.4% year-on-year)3.3%), Peru (+13.6% year-on-year) and Chile (+4.5% year-on-year)7.5%) and Colombia (+6.0%). Annual net adds reached 854 thousand customers, mainly due to the contribution of Argentina (+231 thousand accesses), Chile (+218 thousand accesses) and Colombia (+203 thousand accesses), benefitting from a successful strategy of migrations (from prepay to contract), as well as a higher amount of gross adds.
In the pre-payprepay segment, (+2.6% year-on-year), growthaccesses grew 1.3% year-on-year, with net adds of 1,1 million customers. Growth was driven mainly by Mexico (+1.5 million accesses), Colombia (+8.7% year-on-year), Mexico (+7.1% year-on-year)0.6 million accesses) and Peru (+3.7% year-on-year), despite disconnection of 1.9 million inactive accesses in Mexico and 1.8 million inactive accesses in Central America as well as more restrictive criteria for customer registration(+0.8 million accesses), compensating the negative net adds in certain countriesother markets like Peru (-1.2 million accesses) and Chile (-1.0 million accesses). Such increases were explained by strong price competition in the region.prepay segment, not followed by Movistar to avoid harming the quality levels of the network (avoiding reduced price offers), along with the focus on attracting high value customers that allowed the acceleration of migration processes from prepay to contract.
Total net adds amounted 3.1The smartphones customer base grew 14.7% year-on-year to 46.1 million in 2014,accesses, with a year-on-year increase in customer additions during the year (+4%) and strong commercial activity in Mexico and Chile. Annual churn stood at 3.4% in 2014, affected by the disconnection of inactive accesses and more restrictive criteria for prepay customer registration.
Growth of smartphones (+32% year-on-year) continued to be the main driver of accesses growth, with a penetration over mobile accesses of 26%41.3% (+64.7 p.p. year-on-year), and an increase in pre-pay customers (+2.6%). Penetration of
smartphones was particularly successful in Mexico (+11 p.p.), Venezuela and Central America (+9 p.p.), Colombia (+5 p.p.) and Chile (+5 p.p.).
Total ARPU grew by 10.6% during the year,mainly due to increasesthe growth in voice traffic (+16.0%) as a resultall countries of higher volumesthe region. At the same time, 4G accesses continued growing, reaching 15.5 million accesses at the end of minutes by customer (+5.4%), and increased data traffic (+65.3%), both of which are mainly attributable to the higher penetration of smartphones and larger average consumption per access.
Regarding the fixed business:
year.
Traditional fixed business accesses stood at 13.411.9 million at December 31, 2016 (-6.9% year-on-year) with a decreasenegative net adds of 2.9% year-on-year,0.9 million customers, affected by the erosion of traditional fixed business in the region, including access losses in Venezuela and Central America (-9.7%Argentina (-4.0% year-on-year), Peru (-5.8% year-on-year), Chile (-4.6% year-on-year), Peru (-3.1%(-5.4% year-on-year) and Argentina (-2.2% year-on-year). On the other hand, Colombia did not show signs of such erosion and achieved an increase in customers in 2014 (+1% (-5.4% year-on-year).
Broadband accesses totaled 5.45.6 million at year-end 2014 (+6%December 31, 2016 (-0.7% year-on-year), after reachingdue to negative net adds in Colombia (-3.6%) and Argentina (-1.6%), which were not enough to offset the positive performance of 0.3 million accesses during 2014, in line with the commercial activity and churn in 2013.Peru (+2.4%). The penetration byof fixed broadband accesses over traditional fixed business accesses was 40%46.7% at December 31, 2016 (+32.9 p.p. year-on-year). The mix of accesses focused onThere was progressive migration towards data plans with higher speeds, andwith 62.1% of broadband accesses with speeds in excess of 4 Mb accounted for 49.9%having a speed over 4Mb at December 31, 2016 (+129 p.p. year-on-year).
Pay-TVTV accesses accounted 2.4 totaled 2.9 million (+14%3.8% year-on-year) after, with net adds of 0.3 million accesses, with107 thousand customers as a result of an improvement in all the countries of in the region that offer the service. Growth was particularly positive in Venezuela and Central AmericaPeru (+21% year-on-year)6.2%), Colombia (+19.7% year-on-year)5.9%) and Chile (+19.5% year-on-year)2.5%).
The table below shows the evolution of Telefónica Hispanoamérica’s results over 2015 and 2016:
| CONSOLIDATED RESULTS | | | | | | | |
| Millions of euros | | | | %YoY 12/13 | %YoY 13/14 |
| TELEFÓNICA HISPANOAMÉRICA | 2012 | 2013 | 2014 | € | LC(*) | € | LC(*) |
| Revenues | 16,741 | 16,855 | 13,155 | 0.7% | 16.1% | (22.0%) | 14.6% |
| Wireless Business | 12,724 | 13,020 | 9,578 | 2.3% | 19.1% | (25.7%) | 16.5% |
| Mobile service revenues | 11,470 | 11,510 | 8,454 | 0.4% | 15.9% | (25.7%) | 17.5% |
| Wireline Business | 4,424 | 4,272 | 3,604 | (3.4%) | 7.6% | (10.1%) | 8.4% |
| OIBDA | 5,983 | 5,531 | 4,068 | (7.6%) | 8.6% | (26.5%) | 14.2% |
| OIBDA Margin | 35.7% | 32.8% | 30.9% | (2.9 p.p.) | (2.3 p.p.) | (1.9 p.p.) | (0.1 p.p.) |
| Depreciation and amortization | (2,762) | (2,524) | (2,034) | (8.6%) | (2.0%) | (19.4%) | 5.3% |
| Operating Income (OI) | 3,221 | 3,007 | 2,034 | (6.6%) | 16.8% | (32.4%) | 20.9% |
| CapEx | 2,988 | 3,118 | 2,842 | 4.3% | 21.3% | (8.8%) | 42.5% |
| OpCF (OIBDA-CapEx) | 2,995 | 2,413 | 1,226 | (19.4%) | 4.1% | (49.2%) | (24.1%) |
| Note: | | | | | | | |
| (*) Excludes the effect of hyperinflation in Venezuela. |
|
| | | | | | | | |
| Millions of euros | |
| |
| |
| |
|
| TELEFÓNICA HISPANOAMÉRICA | 2015 |
| 2016 |
| %Reported YoY |
| %Organic YoY (1) |
|
| Revenues | 14,387 |
| 12,579 |
| (12.6 | %) | 7.5 | % |
| Mobile Business | 10,347 |
| 8,882 |
| (14.2 | %) | 6.3 | % |
| Mobile service revenues | 9,160 |
| 7,918 |
| (13.6 | %) | 7.0 | % |
| Fixed Business | 4,070 |
| 3,732 |
| (8.3 | %) | 12.2 | % |
| Other income | 347 |
| 274 |
| (21.3 | %) | (10.4 | %) |
| Supplies | (4,176 | ) | (3,704 | ) | (11.3 | %) | 4.4 | % |
| Personnel expenses | (1,686 | ) | (1,584 | ) | (6.1 | %) | 22.8 | % |
| Other expenses | (4,516 | ) | (4,088 | ) | (9.5 | %) | 7.0 | % |
| OIBDA | 4,356 |
| 3,477 |
| (20.2 | %) | 3.9 | % |
| OIBDA Margin | 30.3 | % | 27.6 | % | (2.6 p.p.) |
| (1.0 p.p.) |
|
| Depreciation and amortization | (2,241 | ) | (2,190 | ) | (2.3 | %) | 7.5 | % |
| Operating Income (OI) | 2,115 |
| 1,287 |
| (39.1 | %) | 0.5 | % |
| CapEx | 3,060 |
| 2,613 |
| (14.6 | %) | 6.5 | % |
| OpCF (OIBDA-CapEx) | 1,296 |
| 864 |
| (33.3 | %) | (0.3 | %) |
2014 Results(1) See adjustments made to calculate organic variation below.
Adjustments made to calculate organic variations
Revenues amountedAs explained above, year-on-year percentage changes referred to 13,155in this document as “organic” or presented in “organic terms” intend to present year-on-year variations on a comparable basis.
With respect to Telefónica Hispanoamérica, we have made the following adjustments in order to calculate 2016/2015 variations in organic terms:
Exchange rate effects and hyperinflationary adjustments in Venezuela: we have excluded the impact of changes in exchange rates by assuming constant average foreign exchange rates year-on-year. In particular, we have used the average foreign exchange rates of 2015 for both years. We have also excluded the impact of hyperinflationary adjustments in Venezuela, by reversing such adjustments.
Restructuring costs: we have excluded the impact of restructuring costs in 2016 and 2015, amounting to 84 and 38 million euros, respectively.
Results of tower sales: the results attributable to the sale of towers have been excluded (1 million euros in 2016 and 18 million euros in 2015).
Spectrum acquisition:the year 2014, falling 22%impact of spectrum acquisitions has been excluded in 2016 (284 million euros, corresponding to Peru) and 2015 (338 million euros, mainly corresponding to Argentina and Ecuador).
Capital gains and losses on sales of companies: gains and losses obtained from the sale of companies are excluded to calculate organic variations. In 2016, the profit from the sale of Telefé for 15 million euros was excluded.
Goodwill impairments: Impairment losses from goodwill in consolidation are excluded to calculate organic variations. In 2016, the impairment loss on the goodwill assigned to Telefónica Venezolana and Telefónica Móviles Mexico amounting to 124 and 91 million euros, respectively.
The table below shows 2016/2015 variations in reported and organic terms (the latter, calculated in accordance with the adjustments referred to above) of certain income statement and other measures, and the contribution of each item for which we have adjusted to our reported growth:
|
| | | | | | | | | | | | | | | | |
| | YoY variation | Contribution to reported growth (percentage points) |
TELEFÓNICA HISPANOAMÉRICA 2016 | %Reported YoY |
| %Organic YoY |
| Exchange rate effect and hyperinflation |
| Restructuring costs |
| Towers sales |
| Spectrum acquisition |
| Capital gains/losses on sale of companies |
| Impairments |
|
| Revenues | (12.6 | %) | 7.5 | % | (20.0 | ) | — |
| — |
| — |
| — |
| — |
|
| Other income | (21.3 | %) | (10.4 | %) | (10.7 | ) | — |
| (5.0 | ) | — |
| 4.2 |
| — |
|
| Supplies | (11.3 | %) | 4.4 | % | (15.6 | ) | — |
| — |
| — |
| — |
| — |
|
| Personnel expenses | (6.1 | %) | 22.8 | % | (32.4 | ) | 4.2 |
| — |
| — |
| — |
| — |
|
| Other expenses | (9.5 | %) | 7.0 | % | (21.2 | ) | — |
| — |
| — |
| — |
| 4.8 |
|
| OIBDA | (20.2 | %) | 3.9 | % | (17.5 | ) | (1.6 | ) | (0.4 | ) | — |
| 0.3 |
| (4.9 | ) |
| CapEx | (14.6 | %) | 6.5 | % | (19.1 | ) | — |
| — |
| (1.2 | ) | — |
| — |
|
| OpCF (OIBDA-CapEx) | (33.3 | %) | (0.3 | %) | (13.6 | ) | (5.5 | ) | (1.3 | ) | 2.9 |
| 1.1 |
| (16.6 | ) |
Results discussion
Revenues amounted to 12,579 million euros in 2016, decreasing 12.6% year-on-year in reported terms due to the foreign exchange effects and the hyperinflation in Venezuela (-20.0 p.p.). Revenues increased 7.5 % year-on-year in organic terms mainly due to the growth in data revenues (mobile and fixed) and the growth of the customer base, higher data usage per customer and higher data penetration.
Mobile service revenues reached 7,918 million euros in 2016 and decreased by 13.6% year-on-year in reported terms. This decrease was mainly driven by the foreign exchange effects and the hyperinflation in Venezuela (which decreased growth by 20.6 p.p. of the year-on-year variation). Excluding these effects, these revenues grew by 7.0% principally as a result of the increase of service revenues in Argentina (18.4%). Mobile service revenues performance by country was as follows:
| |
| ◦ | In Argentina: mobile service revenues amounted to 1,628 million euros in 2016, decreasing 25.8% year-on-year in reported terms. This decrease was mainly due to the exchange rate effect, reducing growth by 44.2 p.p. Excluding this effect, revenues increased by 18.4% due to the data revenues growth leveraged on the higher 4G customer base, permitting data consumption acceleration and commercial offers adapted to the inflationary environment. |
| |
| ◦ | In Mexico: mobile service revenues reached 1,246 million euros in 2016, decreasing 19% year-on-year in reported terms. In local currency, these revenues decreased 4.9%, mainly due to lower prepaid revenues as a result of strong competition and due to the regulatory impact, which was partially offset by a satisfactory performance in wholesale service. |
| |
| ◦ | In Chile: service revenues reached 1,103 million euros in 2016, decreasing 6.3% year-on- year in reported terms mainly due to the foreign exchange effect (-3.1 p.p.). In local currency, these revenues decreased by 3.2% affected by lower prepaid revenues as well as lower interconnection rates. |
| |
| ◦ | In Peru: mobile service revenues reached 1,206 million euros in 2016, decreasing 13.2% year-on-year in reported terms mainly due to the foreign exchange effect (-5 p.p.). In local currency these |
revenues decreased by 8.2%, affected by the reduction of prepaid and contract revenues due to higher aggressiveness in the market, resulting in lower ARPUs.
Data revenues in the segment reached 3,511 million euros in 2016 and decreased 4.8% year-on-year in reported terms mainly due to the effect offoreign exchange rateseffects and the hyperinflation in Venezuela (-36.1 p.p.)(-24.4 p.p). Excluding these effects, these revenues would have increased by 14.6%grew 19.6 % year-on-year thanks to a good performance of the fixed and mobile data revenues, as well as the mobile voice revenues, in both casesmainly due to the increase in our customer base, higher usage per customerdata revenues in most of the countries of the region and by the higher data penetration despitewhich grew from 41.3% in 2015 to 46.1 % during 2016.
Fixed business revenues reached 3,732 million euros in 2016, and decreased 8.3% in reported terms. Excluding the negative impactforeign exchange effects and the hyperinflation in Venezuela (which decreased growth by 20.5p.p.) these revenues grew by 12.2% due to the increase in broadband and new services revenues (+21.6%). Revenues from broadband and new services, accounted for 53.7% of fixed revenues (+3.0 p.p. year-on-year). The growth was particularly notable in Argentina (44.7%), Colombia (17.4%) and Chile (11.7%) with a strong growth in broadband revenues due to the higher quality of the customer base as well as the tariff adjustment.
OIBDA reached 3,477 million euros in 2016, decreasing 20.2% in reported terms, negatively affected by the goodwill impairment in Mexico and Venezuela and restructuring costs in 2016 and 2015, previously mentioned, and offset by the generated capital gain from the Telefé sale. Excluding these adjustments, exchange rate effects and hyperinflation in Venezuela, OIBDA increased 3.9% in organic terms. This growth is mainly due to the good evolution in revenues and higher commercial efficiencies that offset higher interconnection, tariffs (which subtracted 1.6 p.p. from year-on-year growth).content and network costs, up principally due to the devaluation in certain countries in the region. Energy, electricity and call center costs also increased during 2016.
Below additional information by country.
| · |
| ◦ | Mobile service revenues decreasedArgentina: OIBDA reached 797 million euros in December 2016, decreasing 20.7% in reported terms. In local currency, OIBDA increased by 25.7%26.6%, mainly due to the revenue growth as well as to lower commercial costs recorded in 2016, as a result of lower commercial activity and greater commercial efficiency. |
| |
| ◦ | Chile: OIBDA reached 704 million euros in December 2016, decreasing 7.4% in reported terms mainly due to the effect of exchange rates and hyperinflation in Venezuela (-43.2 p.p.) and the negative impact of interconnection tariffs (-2.4rate evolution (-3 p.p.). Excluding these effects, service revenues would have increasedIn local currency, OIBDA decreased by 17.5% year-on-year. Below is additional information4.4%, explained by country: |
| · | In Argentina,the decrease in mobile service revenues were down by 19.8%revenues. |
| |
| ◦ | Peru: OIBDA reached 782 million euros in December 2016, decreasing 17.1% in reported terms. Excluding the effect of exchange rates they would have been up by 19.3% as a result of the good performance of voice and data revenues, despite the negative impact of certain billing changes implemented (which implied the billing by seconds after the first thirty seconds of the call), and the greater use and penetration of data. |
| · | In Peru, mobile service revenues increased by 7.8% in reported terms. Excluding the effect of exchange rates they would have increased by 13.4%. Growth was mainly driven by the higher customer base and the increase of data scale (non-SMS data revenues were up 42.7% in the year), following the launch of LTE, helping to increase average revenue per customer. |
| · | In Mexico, mobile revenues increased by 5.4% in reported terms. Excluding the effect of exchange rates they would have increased by 10%, as a result of to the new interconnection scenario which led to competitive offers that have driven up customers' voice and data consumption. |
| · | In Venezuela and Central America, mobile service revenues were down by 65.1% in reported terms. Excluding the effect of exchange rates and hyperinflation in Venezuela they would have increased by 36.8%, mainly due to 25% price increases for all services as of July in Venezuela, and the expansion of mobile data services leveraged in non-SMS data revenues growth (+68%), which accounted for 76% of data revenues (+12 p.p. year-on-year). |
| · | Data revenues in the segment were down by 24.4%, due to the effect of exchange rates and hyperinflation in Venezuela. Revenues would have been up by 23% excluding these effects,terms mainly due to the growth of non-SMS data revenues (+43.4%), which accounted for 74% of data revenues (+11 p.p. year-on-year). |
| · | Fixed business revenuesexchange rate evolution. In local currency, OIBDA decreased by 10.1%12.3%, as the efforts in costs savings were insufficient to compensate higher interconnection costs associated with higher traffic, and more than offset the revenue increase. |
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| ◦ | Colombia: OIBDA reached 464 million euros in December 2016, decreasing 15% in reported terms in the year,mainly due to the effects of exchange rates (-18.5 p.p.). Excluding this effect, fixed revenues would have increased by 8.4% year-on-year in 2014, driven by broadband and new services revenues (-2.6% year-on-year in reported terms, +16.2% excluding exchange rate effects). The revenues from broadband and new services, accounted for 60% of fixed revenues (+5 p.p. year-on-year). The acceleration of growth in fixed revenues was particularly notable in Argentina, where there was a substantial increase in access and voice revenues (due to higher ARPU). |
Total expenses stood at 9,342 million euros in 2014, down by 19.2% in reported terms, as a result mainly of the exchange rate effect and hyperinflation in Venezuela (-33.8 p.p.), which was partially offset by a provision of 99 million euros relating to the recognition in 2014 of expenditure on the global restructuring program, in accordance with the simplification initiatives the Group is implementing to meet its targets. Excluding these effects, total expenses would have increased by 14.1%. Below is additional information by country:
| · | Argentina: expenses stood at 2,294 million euros, a decrease of 15.9% in reported terms. Excluding the effect of exchange rates, expenses would have grown by 25.1% due to general price increases, although the company continues to make an effort to contain costs and mitigate the effects of high inflation. |
| · | Peru: expenses stood at 1,718 million euros, up by 5.9% in reported terms. Excluding the effect of exchange rates, expenses would have been up by 11.4%evolution. In local currency, OIBDA decreases 5.1% year-on-year due to higher commercialinterconnection costs driven from the pressure of competition on the Peruvian market. |
| · | Venezuela and Central America: expenses stood at 975 million euros, down by 61.3% in reported terms. Excluding the effect of exchange rates and hyperinflation in Venezuela, expenses would have increased by 36.7%, mainly due to higher prices in general, and the effect of greater expenditure in U.S. dollars for provided services and equipment purchases, being affected by the negative impact of the currency depreciation in Venezuela. |
By component, variation is explained by:
| · | Supplies (3,841 million euros) fell by 22.9% in 2014 in reported terms. Excluding the effect of exchange rates and hyperinflation in Venezuela (-27.6 p.p.), expenses would have grown by 4.7%. The increase is due to handsets costs caused by sales of high-end equipment which more than offset lower mobile termination rates in Chile, Colombia, Peru and Mexico.
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| · | Personnel expenses (1,525 million euros) were down by 12.7% in reported terms, but would have been up by 27.6% excluding the negative impact of 39.5 percentage points caused by the effect of exchange rates and hyperinflation in Venezuela. The increase in these costs is due to a general rise of inflation in certain countries in the region. The recognition of expenditures relatingassociated to the global restructuring program, in accordance with the simplification initiatives that the Group is implementing to meet its targets, added 6.3 percentage points to the variation.
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| · | Other expenses (3,976 million euros) fell by 17.7% in reported terms. Excluding the effect of exchange rates and hyperinflation in Venezuela (+38.2 p.p.) and sales of non-strategic towers in 2013 (-0.1 p.p.), these expenses increased by 21.1%, mainly due to higher voice and data traffic and higher sales campaigns costs.
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This broughtOIBDA to 4,068 million euros in 2014, down by 26.5% in reported terms, due to:
| · | Exchange rate differences and hyperinflation in Venezuela (-40.1 p.p.)successful offer “Todo Destino”. |
| · | Recognition of the global restructuring program costs (99 million euros; -2 p.p.), in accordance with the simplification initiatives the Group is implementing to meet its targets.
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| · | The non-strategic towers sales (4 million euros in 2014 and 11 million euros in 2013; -0.1 p.p.). |
Excluding these impacts, OIBDA would have increased by 16.4%.
The OIBDA margin stood at 30.9% for the year, down by 1.9 percentage points year-on-yearwas 27.6% in 2016, decreasing 2.6 p.p. in reported terms, although excludingterms. This decrease is affected by the effect of exchange ratesmargin reduction in Chile (-1.7 p.p.), Peru (-2.8 p.p.), Colombia (-3.3 p.p.) and hyperinflation in Venezuela, the impact of global restructuring programMexico (-5.0 p.p.), in accordance with the simplification initiatives the Group is implementing to meet its targets, and sales of non-strategic towers, it would have been up by 0.5 percentage points. The increase was due toreflecting a higher margin in all countries in the region, with the exception of Venezuela and Uruguay, and particularly good margin performances in Mexico, Colombia and Chile.
2013 Results
Revenues in 2013 amounted to 16,855 million euros in 2013, with a 0.7% year-on-year growth in reported terms, mainly due to exchange rate differences and the effect of hyperinflation in Venezuela. Excluding these factors, which reduced growth by 15.2 percentage points, growth would have been 16.1%. This performance reflects the positive performance of mobile service revenues, which rose by 15.9% in the year excluding the impact of exchange rates differences and the effect of hyperinflation in Venezuela (decrease 0.4% in reported terms), due to the good performance of data revenue and despite the negative impact of changes in regulations. The main countries that explained this deviation were:
| · | InArgentina, mobile service revenues fell by 2.1% in reported terms, although excluding the effect of exchange rates these would have increased by 21.2% year-on-year as a result of growth of the higher customer base as well as the and higher consumption level, principally data. In this way, data revenues were up by 5.7% in reported terms, although stripping out the effect of exchange rates they would have increased by 30.8% year-on-year in 2013. These accounted for 48% of service revenues (+3 p.p. year-on-year). This increase was mainly due to higher non-SMS data revenue (60.8% year-on-year, accounting for 49% of mobile data revenues (+9 p.p. year-on-year).
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| · | In Peru, mobile service revenues were up by 4.8% in reported terms, although excluding the effect of exchange rates they would have increased by 10.8% year-on-year in 2013 despite the negative impact of regulatory changes affecting fixed-mobile calls. Excluding the negative impact of the regulatory changes, the revenues would have grown 13.4% year-on-year in 2013. This increase was principally driven by data revenues, up by 28.4% in reported terms and up 35.8% year-on-year, excluding the effect of exchange rates. Additionally, these revenues continue to represent a growth opportunity as a result of the solid increase in non-SMS data revenues, up by 65% year-on-year and accounting for 81% of mobile data revenues in the year (+14 p.p. year-on-year).
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| · | In Venezuela and Central America, mobile service revenues increased by 4.4% in reported terms, although excluding the effect of exchange rates and hyperinflation in Venezuela, these would have increased by 34.6% year-on-year, due to the boost of mobile data services and the growth of voice traffic. Data revenues accounted for 29.9% of mobile service revenues. This evolution is boosted by the strong increase in non-SMS data revenue (+56.1% year-on-year), accounting for 64% of data revenues (+7 p.p. year-on-year).
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| · | The mobile service revenue growth was driven by the expansion of data in the region, reflected 42.8% in 2013 in non-SMS data revenues, excluding exchange rate differences and the effect of hyperinflation in Venezuela |
(17% in reported terms). Voice revenues dropped 5.2% year-on-year in reported terms but were up 11.6% year-on-year without exchange rate differences and the impact of hyperinflation in Venezuela, due to the sharp increase in traffic.
| · | Revenues from handset sales amounted to 1,510 million euros and fell 20.3% in reported terms, mainly as a result of the impact of exchange rate differences and the effect of hyperinflation in Venezuela. Excluding these effects, growth would have been 47.4%, growing in all countries in the region as result of the growth in smartphones.
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| · | Revenues from the fixed business fell 3.4% in reported terms, affected by exchange rate differences and the effect of hyperinflation in Venezuela. Excluding this effect, revenues from the fixed business increased 7.6% year-on-year.
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Total expenses, which include supplies, personnel expenses and other expenses (mainly subcontract expenses and others) but do not include depreciation and amortization expenses, stood at 11,562 million euros in 2013, growing 3.3% in reported terms, affected by:
| · | Exchange rate differences and the effect of hyperinflation in Venezuela (-14.3 p.p.); |
| · | The sale of non-strategic towers (-0.1 p.p.);and |
| · | Contractual changes in the commercial model for selling handsets in Chile (+1.5 p.p.). |
Excluding these effects, total expenses would have grown 16.2%. The change in total expenses is explained by:
| · | Argentina: expenses stood at 2,728 million euros, up by 2% year-on-year in reported terms. Excluding the effect of exchange rates, costs would have grown by 26.3% due to general price increases, although the company continues to make an effort to contain costs mitigating the effects of the high inflation.
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| · | Peru: expenses stood at 1,621 million euros, up by 3.5% year-on-year in reported terms. Excluding the effect of exchange rates, expenses would have grown by 9.5%. Excluding the effect of exchange rates and the sale of non-strategic towers, expenses would have increased by 10.0% due to higher commercial costs related to high-value customers, higher content costs, increased personnel costs due to profit-sharing (employees receive a percentage of the net profit) and larger tax costs, due to the 1% taxcommercial effort focused on profits from the TV and broad band businesses. |
| · | Venezuela and Central America: expenses stood at 2,520 million euros, up by 4.0% year-on-year in reported terms. Excluding the effect of exchange rates and hyperinflation in Venezuela, expenses would have increased by 33.6%, mainly due to the general price level, as well as due to the effect of the greater expenditure in U.S. dollars for services rendered and handset purchases, impacted by the impact of the depreciation of the Venezuelan bolívar. |
The breakdown by components explaining the 16.2% variation is as follows:
| · | Supplies increased to 4,983 million euros, an increase of 8.3% year-on-year in reported terms affected by the exchange rate differences and the effect of hyperinflation in Venezuela (-14.6 p.p.) and contractual changes in the commercial model for selling handsets in Chile (+3.6 p.p.). Excluding both effects, supply cost would have grown by 19%. The decline of MTR expenses (net of exchange rate differences and the effect of hyperinflation in Venezuela) did not offset the growth in costs, due to the greater commercial activity in the mobile business, with a higher weight of smartphone sales, and at the fixed business, with higher content costs associated with the sharp rise in Pay-TV accesses, and increased expenses associated with the provision of data services.
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| · | Personnel expenses stood at 1,746 million euros (+1.1% year-on-year in reported terms) growing 17.2% excluding the impact of exchange rates differences and the effect of hyperinflation in Venezuela. This year-on-year growth is mainly due to the impact of inflation in some countries in the segment.
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| · | Other expenses were 4,834 million euros, declining 0.7% in reported terms, affected by the exchange rate differences and the effect of hyperinflation in Venezuela (-13.3 p.p.) and the sale of non-strategic towers (-0.2 p.p.).
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Excluding both effects, other expenses grew 13.0%, due to the higher sales commissions and customer service expenses associated with increased commercial activity.value segments.
OIBDA stood at 5,531 million in 2013, showing a reported year-on-year decline of 7.6%, affected by:
| · | Exchange rate differences and the effect of hyperinflation in Venezuela (-16.1 p.p.). |
| · | Contractual changes in the commercial model for selling handsets in Chile (-2.8 p.p.). |
| · | The sale of non-strategic towers (-2.1 p.p.). |
Excluding the aforementioned items, OIBDA growth would have been 14.3%.
The OIBDA margin stood at 32.8% for the full year, down 2.9 percentage points year-on-year in reported terms; primarily due to the negative evolution of the exchange rates and lower sales of non-strategic towers in 2013 (11 million euros compared to 139 million euros in 2012).
Our services and products
New digital technologies are the main driving force of social and economic transformation today. This premise is the basis upon which we build our vision: we want to provide access to digital life, using the best technology and without leaving anyone behind.
Connectivity is our ally in reducing the digital divide and, due to our fixed and mobile network infrastructure and the services we develop around it, we can aid progress in the communities in which we operate.
To move towards this vision, at Telefónica we work on three basic fronts:
1) Providing access to technology through digital inclusion, in other words, by means of network roll-out and an accessible and affordable offer for all sectors of the population.
2) Developing innovative services that add value to our connectivity and which we develop through innovation: Big Data, the Internet of Things (IoT), eHealth, digital education and eFinances.
3) Incorporating sustainability principles across all of our product development processes.
Mobile business
Telefónica offers a wide variety of mobile and related services and products to personal and business customers. Although they vary from country to country, Telefónica’s principal services and products are as follows:
Mobile voice services: Telefónica’s principal service in all of its markets is mobile voice telephony.
· | Mobile voice services: Telefónica's principal service in all of its markets is mobile voice telephony.Value added services: Customers in most of the markets have access to a range of enhanced mobile calling features, including voice mail, call hold, call waiting, call forwarding and three-way calling. |
Mobile data and Internet services: Current data services offered include Short Messaging Services, or SMS, and Multimedia Messaging Services, or MMS, which allow customers to send messages with images, photographs, sound recordings and video recordings. Customers may also receive selected information, such as news, sports scores and stock quotes. Telefónica also provides mobile broadband connectivity and Internet access. Through mobile Internet access, customers are able to send and receive e-mail, browse the Internet, download games, purchase goods and services in m-commerce transactions and use Telefónica’s other data and software services.
· | Value added services: Customers in most of the markets have access to a range of enhanced mobile calling features, including voice mail, call hold, call waiting, call forwarding and three-way calling.Wholesale services: Telefónica has signed network usage agreements with several MVNOs in different countries. |
Corporate services: Telefónica provides business solutions, including mobile infrastructure in offices, private networking and portals for corporate customers that provide flexible online billing.
· | Mobile data and Internet services: Current data services offered include Short Messaging Services, or SMS, and Multimedia Messaging Services, or MMS, which allow customers to send messages with images, photographs, sound recordings and video recordings. Customers may also receive selected information, such as news, sports scores and stock quotes. Telefónica also provides mobile broadband connectivity and Internet access. Through mobile Internet access, customers are able to send and receive e-mail, browse the Internet, download games, purchase goods and services in m-commerce transactions and use Telefónica’s other data and software services.Roaming: Roaming agreements allow Telefónica customers to use their mobile handsets when they are outside their service territories, including on an international basis. |
Fixed wireless: Telefónica provides fixed voice telephony services through mobile networks in Brazil, Venezuela, Argentina, Peru, Mexico, Ecuador, El Salvador, Guatemala and Nicaragua.
· | Wholesale services: Telefónica has signed network usage agreements with several MVNOs in different countries.
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· | Corporate services: Telefónica provides business solutions, including mobile infrastructure in offices, private networking and portals for corporate customers that provide flexible online billing.
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· | Roaming: Roaming agreements allow Telefónica customers to use their mobile handsets when they are outside their service territories, including on an international basis.
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· | Fixed wireless: Telefónica provides fixed voice telephony services through mobile networks in Brazil, Venezuela, Argentina, Peru, Mexico, Ecuador, El Salvador, Guatemala and Nicaragua.
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· | Trunking and paging: Telefónica provides digital mobile services for closed user groups of clients and paging services in Spain and most of its operationsTrunking and paging: Telefónica provides digital mobile services for closed user groups of clients and paging services in Spain and most of the regions in which it operates in Latin America.
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Fixed-line telephony business
The principal services Telefónica offers in its fixed businesses in Europe and Latin America are:
· | Traditional fixed telecommunication services: Telefónica’s principal traditional fixed telecommunication services include PSTN lines; ISDN accesses; public telephone services; local, domestic and international long-distance and fixed-to-mobile communications services; corporate communications services; supplementary value added services (including call waiting, call forwarding, voice and text messaging, advanced voicemail services and conference-call facilities); video telephony; business oriented value-added services; intelligent network services; leasing and sale of handset equipment; and telephony information services. |
· | Internet and broadband multimedia services: The principal Internet and broadband multimedia services include Internet service provider service; portal and network services; retail and wholesale broadband access through ADSL, naked ADSL (broadband connection without the monthly fixed line fee); narrowband switched access to Internet for universal service, and other technologies. Telefónica also offers high-speed Internet services through fiber to the home (FTTH) in certain markets (primarily Spain, Brazil and Chile) and VDSL-based services (primarily Spain and Germany). Telefónica also offers VoIP services in some markets.
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· | Data and business-solutions services: the data and business-solutions services principally include leased lines; virtual private network, or VPN, services; fiber optics services; the provision of hosting and application, or ASP, service, including web hosting, managed hosting, content delivery and application, and security services; outsourcing
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Internet and broadband multimedia services: the principal Internet and broadband multimedia services include Internet provider service; portal and network services; retail and wholesale broadband access through ADSL, narrowband switched access and other technologies. Telefónica also offers high-speed Internet services through fiber to the home (FTTH) in certain markets (primarily Spain, Brazil and Chile) and VDSL-based services (primarily Spain and Germany). Telefónica also offers VoIP services in some markets.hosting and application, including web hosting, managed hosting, content delivery and application, and security services; outsourcing and consultancy services, including network management, or CGP; and desktop services and system integration and professional services.
· | Wholesale services for telecommunication operators: the wholesale services for telecommunication operators principally include domestic interconnection services; international wholesale services; leased lines for other operators' network deployment; and local loop leasing under the unbundled local loop regulation framework).
Wholesale services for telecommunication operators: the wholesale services for telecommunication operators principally include domestic interconnection services; international wholesale services; leased lines for other operators; and local loop leasing under the unbundled local loop regulation framework. It also includes bit stream services, bit stream naked, wholesale line rental accesses and leased ducts for other operators' fiber deployment. |
Digital services
The main highlights in services developed by Telefónica Digital in 2014 are:
Video/TV services: IPTV services (Internet protocol), over-the-top network television services, and cable and satellite TV. In some markets, advanced pay TV services are also offered, such as high-definition TV (HDTV), Multiroom (allowing clients to watch different TV channels in different rooms), Digital Video Recording (DVR), Multiscreen (all contents in everywhere), CatchUp contents, third party contents and Cloud Video Services (such as Last 7 days, RestartTV and Cloud DVR). In addition, Telefónica offers accessible content in Spain with subtitles, audio description and sign language functionalities through the Movistar+ 5s service, the aim of which is to contribute toward the inclusion of disabled people across the country.
· | Video/TV services: IPTV services (Internet protocol), over-the-top network television services, and cable and satellite TV. In certain markets, advanced Pay-TV services are offered, such as high-definition TV (HDTV), Multiroom (allowing clients to watch different TV channels in different rooms) and Digital Video Recording (DVR)IoT (Internet of Things): Telefónica’s Global IoT portfolio includes: Smart Connectivity: connectivity services for machines, mainly handled through two connectivity platforms, managed by the Group, Smart m2m (developed and owned by Telefónica) and "Jasper" (developed by third parties). Smart Services: end-to-end solutions that include "device + connectivity + application". These solutions are mainly aimed at i) the mobility management of vehicles, assets and/or people, ii) the efficient management of energy consumption and iii) support to the retail sector. We provide high technology services to industrial sectors to optimize their operations and/ or enhance their services. Consumer IoT: products focused on the B2C segment, including end-to-end services in mature categories by technology and market (e.g. connected cars, trackers) and connectivity offer for consumer devices. Financial services and other payment services: These services allow customers to make money transfers, payments and mobile recharges, among other transactions, through prepay accounts or bank accounts. Security services: Telefónica Global Security portfolio includes: Electronic Security: services designed to guard the security and integrity of a customer's physical assets, mostly corporate assets (such as nodes and communications networks in malls, corporate and representative buildings, etc.) Information Security: tools protecting information in end-user devices and communications, fixed and mobile, networks, as well as protecting customers' digital identity. These services include the in-house services developed by 11Paths Cloud computing services: Telefónica offers private, public and hybrid cloud services that allow enterprises of all sizes to manage IT infrastructure more effectively, supporting companies at every stage of the IT life cycle. Our approach is based on an end-to-end management, from the devices to the data source, Data Center services and cloud-based applications, through best-in-class technology. All of which is complemented by Telefonica’s best corporate secure communications services. Advertising: A portfolio of marketing channels that third party brands can use to acquire and engage with customers. Traditional channels such as SMS/MMS messaging may be used alongside with new channels like programmatic display and sponsored connectivity. All of which leverage on our customer data in order to send messages to the correct target as well as to generate post-campaign brand analysis. Big Data: Includes the product families designed to help decision making in different industries such as retail, finance, transport, government, etc., based on customer data. There are three subgroups: (i) “business insights”, that provides information for decision making based on advanced analytical products developed from data generated in our network and systems; (ii) “consultancy and analytics”, which includes professional services, expertise on strategy, data science and data engineering; and (iii) “tools and infrastructure”, that provides advanced technology for data management, storage and exploitation.
Digital Telco Experience: Includes “Novum”, the global solution that aims to provide a E2E digital experience to our customers. Its main features include account Management, eCare, Cloudphone and Aura interaction. |
· | M2M: Includes both M2M connectivity services and end-to-end products in different countries including in-house developments, as the "smart" M2M solution, which enables "smart" meter communications services.
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· | e-Health services or telecare: These services allow tele-assistance through connectivity services to chronic patients, and other eHealth services.
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· | Financial services and other payment services: These services allow customers to make transfers, payments and mobile recharges among other transactions through prepay accounts or bank accounts.
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· | Security services: Includes services such as the "Latch" applications, which allow consumers to remotely switch their digital services on and off.
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· | Cloud computing services: These services include the Instant Servers services, Telefónica's new global public cloud service for corporate clients. This entails high-performance virtual servers that are optimized for mobile and corporate applications (both fixed and mobile).
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· | Advertising: Includes advertising products based on SMS and IT Technologies such as SMS campaigns or bulk SMS sales to corporations, mobile portals and any other advertising related activities.
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· | Big Data: Includes the product "Smart Steps" which helps retailers, municipalities and public security bodies to understand the influx of people. Anonymous mobile data network and aggregates are used to calculate the influx of people in an area.
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· | Future Communications: Includes “TU Go”, Movistar´ s exclusive application that lets clients have the same number on all their devices and communicate among such devices via Wi-Fi.
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Sales and Marketing
Our sales and marketing strategy is aimed toward reinforcing our market position, generating brand awareness, promoting customer growth and achieving customer satisfaction. We use a variety of marketing initiatives and programs, including those that focus on customer value, with in-depth market segmentation; programs to promote customer loyalty; pricing initiatives aimed toward stimulating usage, including segmented packages and innovative tariff options; and initiatives that are responsive to the latest market trends, including those aimed toward boosting demand for our mobile Internet and mobile broadband offerings. In connection with these and our other sales and marketing initiatives, we market our products through a broad range of channels, including television, radio, billboards, telemarketing, direct mail and Internet advertising. We also sponsor a variety of local cultural and sporting events in order to enhance our brand recognition.
Competition
The telecommunications industry is competitive and consumers generally have a choice of mobile and fixed line operators from which to select services. We are a global telecommunications services provider and face significant competition in most of the markets in which we operate. In Europe, our largest competitor is Vodafone and in Latin America, our largest competitor is América Móvil. Newer competitors, including handset manufacturers, MVNOs, internet companies and software providers, are also entering the market and offering integrated communications services.
We compete in our markets on the basis of the price of our services; the quality and range of features; the added value we offer with our service; additional services associated with those main services; the reliability of our network infrastructure and its technological attributes; and the desirability of our offerings, including bundled offerings of one type of service with another and, in the case of the mobile industry, in somemost of the markets offerings that include subsidized handsets.
To compete effectively with our competitors, we need to successfully market our products and services and to anticipate and respond to various competitive factors affecting the relevant markets, such as the introduction of new products and services, different pricing strategies and changes in consumer preferences. See “Risk Factors – Risks Relating byto the Group’sGroup’s Industry – The Group operates in a highly regulated industry which requires government concessions for the provision of a large part of its servicesCompany may not be able to adequately foresee and the use of spectrum, which is a scarcerespond to technological changes and costly resource.sector trends.”
Strategic Partnerships
China Unicom
Since 2005 we have had a stake in China Unicom and its predecessor company. On September 6, 2009, we entered into a strategic alliance agreement with China Unicom, which provides,provided, among other areasthings, for cooperation, joint procurement of infrastructure and client equipment, common development of mobile service platforms, joint provisions of service to multinational customers, roaming, research and development, sharing of best practices and technical, operational and management know-how, joint development of strategic initiatives in the area of network evolution, joint participation in international alliances and exchanges of senior management. In furtherance of this strategic alliance, we entered into a subscription agreement with China Unicom, pursuant to which we increased our voting interest in the share capital of China Unicom to 8.06% and China Unicom obtained a 0.87% voting interest in our share capital in October 2009.
PursuantOn January 23, 2011, we entered into an agreement to enhance the strategic alliance agreement mentioned above,with China Unicom, hasunder which we each agreed to use its best endeavorsstrengthen and deepen our strategic alliance in certain business areas, and committed to maintain a listinginvesting the equivalent of all the issued500 million US dollars in ordinary shares of the other party. Such investments took place along 2011. In recognition of China Unicom's stake in our share capital, we committed to propose, in accordance with the prevailing legislation and our by-laws, the appointment of a member of our Board of Directors nominated by China Unicom.
China Unicom oncompleted the Hong Kong Stock Exchange. For so long as the strategic alliance agreement with us is in effect, China Unicom shall not (i) offer, issue or sell any significant number of its ordinary shares (including treasury shares), or any securities convertible into or other rights to subscribe for or purchase a significant number of China Unicom’s ordinary shares (including treasury shares), to any current major competitoracquisition of Telefónica or (ii) make any significant investment, directly or indirectly, in any current major competitor of Telefónica. We made similar undertakings.
The initial term of the strategic alliance agreement between us and China Unicom terminatedshares on September 6, 2012 and it is subject to automatic annual renewals, subject to either party’s right to terminate on six months’ notice. Also, the strategic alliance agreement may be terminated by China Unicom if our shareholding in China Unicom drops below 5% of its issued share capital or if China Unicom’s shareholding in us drops below 0.5% of our issued share capital. In addition, the strategic alliance agreement is subject to termination in the event either party is in default and automatically terminates on a change in control of China Unicom.
On January 28, 2011, giving it ownership of 1.37% of the Company’s capital.
The Telefónica Group purchased China Unicom completed its acquisitionshares during 2011 to the amount of 21,827,499358 million euros. At December 31, 2011, the Telefónica shares.Group held a 9.57% stake in the company.
On June 10, 2012, Telefónica, S.A. through its 100%nica´s wholly-owned subsidiary Telefónica Internacional, S.A.U., and a subsidiary of China United Network Communications Group Company Limited ("Unicom Parent") through a 100% owned subsidiary, signedentered into an agreement for the acquisition by this last companythe latter of 1,073,777,121 shares of China Unicom-Hong Kong-Limited,Unicom owned by Telefónica, equivalent to 4.56% of the issuedits share capital of China Unicom.
capital.
On July 21, 2012, the aforementionedsuch agreement was complemented by a Supplemental Agreement which determinedsupplemental agreement for the acquisition of theadditional shares at a price of HK$10.02 per share, for a total amount of HK$10,759,246,752.42 (approximately 1,142 million euros).by China United Network Communications Group Company Limited. The transaction was completed on July 30, 2012.
On November 10, 2014,In the following years, Telefónica throughhas continued to sell down its 100% subsidiary, Telefónica Internacional, S.A.U., sold 597,844,100 sharesstake in China Unicom.
As of China Unicom, representing 2.5% ofDecember 31, 2017 we held a 0.59% stake in the share capital of the company, by means of a block trade, at a price of HK$11.14 per share, for a total amount of HK$6,660 million, approximately 687 million euros at the exchange rate as at the date of the sale.
Further to the sale, Telefónica maintains its commitment to the strategic alliance with China Unicom.
As of the date of this Annual Report, Telefónica's shareholding in China Unicom amounts 2.51% of its capital stock. Furthermore,and China Unicom held a 1.24% stake in our share capital. Mr. César Alierta, former chairman of Telefónica, S.A. is a member of the Board of Directors of China Unicom while Mr. Chang Xiaobing, chairmanWang Xiaochu, Chairman and Chief Executive Officer of China Unicom, iscontinues to be a member of theour Board of DirectorsDirectors.
Telefónica maintains its commitment to the strategic partnership with China Unicom, strengthened through cooperation in digital areas such as the big data joint venture between both companies, which is now a market leader of Telefónica.
Telecom Italia
Through a series of transactions from 2007 to 2009, Telefónica acquired an indirect holding of 10.49%telco location-based big data services in the voting shares of Telecom Italia (7.21% of the dividend rights) through its holdingsurban planning sector in Telco.
On June 16, 2014, the three Italian shareholders of Telco requested the initiation of the process of "demerger" (spin off) of the company, as provided in their shareholders agreement. Implementation of the demerger, approved by the General Meeting of Shareholders of Telco held on July 9, 2014, remains subject to obtaining the required anti-trust and telecommunications approvals (including those from Brazil and Argentina). Once the aforementioned approvals are obtained, this decision will be implemented by transferring all the current stake of Telco in Telecom Italia to four newly created companies. The share capital of each of these companies will belong in its entirety to each of the shareholders of Telco and each of these companies will receive a number of shares of Telecom Italia proportional to the current economic stake in Telco of each respective shareholder.
The application process of the aforementioned anti-trust and telecommunications approvals (including those in Brazil and Argentina) to proceed to the "demerger" (spin off) of Telco started, once the corresponding corporate documents were entered into in Italy. On December 22, 2014, Anatel gave its approval to the spin off, though CADE and Argentina are still analyzing the process.
Furthermore, on July 24, 2014, Telefónica issued 750 million euros bonds mandatorily exchangeable into ordinary shares of Telecom Italia maturing on July 24, 2017, representing, as of that date, 6.5% of its current voting share capital. The bonds may be exchanged in advance of the transfer of the shares, except under certain circumstances where the company may opt to redeem the bonds in cash. As a result of this transaction, Telefónica, after the Telco demerger and the later transfer of the underlying shares of the bonds, will reduce its stake in Telecom Italia which will be between 8.3% and 9.4% in Telecom Italia current voting share capital.
It is also significant that, within the framework of the GVT transaction (see "Item 4. Information on the Company—History and Development of the Company”) on September 18, 2014, Vivendi, S.A. will acquire from Telefónica 1,110 million ordinary shares in Telecom Italia representing 8.3% of Telecom Italia’s voting share capital (equivalent to 5.7% of its total share capital), in exchange for 4.5% of Vivendi, S.A.'s capital in Telefónica Brasil, S.A., after its combination with GVT (which represents all of the voting shares and 0.7% of the preferred shares to be received by Vivendi S.A. in connection with the GVT transaction). The final closing of the operation is subject to obtaining the relevant regulatory authorizations (including telecommunication and anti-trust approval).
The Telecom Italia group is principally engaged in the communications sector and, particularly, in telephone and data services on fixed lines for final and wholesale customers, in the development of fiber optic networks for wholesale customers in the provision of broadband services and Internet services, in domestic and international mobile telecommunications (especially in Brazil), in the television sector using both analog and digital terrestrial technology and in the office products sector. Telecom Italia operates primarily in Europe, the Mediterranean basin and in South America.
For more information, please see “Item 5. Operating and Financial Review and Prospects —Operating Results—Significant Factors Affecting the Comparability of our Results of Operations in the Period Under Review” and “Item 10. Additional Information—Material Contracts.” Telco, through which we hold our stake in Telecom Italia, is included in our Consolidated Financial Statements using the equity method.
China.
Regulation
Please see Appendix VIIVI to our Consolidated Financial Statements.
Licenses and Concessions
Please see Appendix VIIVI to our Consolidated Financial Statements.
Seasonality
Our main business is not significantly affected by seasonal trends.
Patents
Our business is not materially dependent upon the ownership of patents, commercial or financial contracts or new manufacturing processes.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.
The following information is disclosed pursuant to Section 13(r). None of these activities involved U.S. affiliates of Telefónica.
Roaming Agreements with Iranian Operators
VariousSome of our subsidiaries have entered into roaming agreements with Iranian telecommunication companies, certain of which are or may be owned or controlled by the government of Iran.companies. Pursuant to such roaming agreements our subsidiaries’ customers are able to roam in the particular Iranian network (outbound roaming) and customers of such Iranian operators are able to roam in our relevant subsidiary’s network (inbound roaming). For outbound roaming, our subsidiaries pay the relevant Iranian operator roaming fees for use of its network by our customers, and for inbound roaming the Iranian operator pays the relevant subsidiary roaming fees for use of itsthe respective network by its customers.
Our subsidiaries were party to the following roaming agreements with Iranian telecommunication companies in 2014:2017:
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| (1) | Telefónica Móviles España S.A. (“TME”TME”), our Spanish directly wholly-owned subsidiary, has respective roaming agreements with (i) Mobile Telecommunication Company of Iran (“MTCI”MTCI”), (ii) MTN Irancell (“Irancell”Irancell”), (iii) Taliya (“Taliya”Taliya”), and (iv) TelecomunicationsTelecommunication Kish Co.Co (“TKC”TKC”). During 2017 TME recorded the following |
During 2014, TME recorded the following revenues related to these roaming agreements: (i) 20,337.2740,450.45 euros from MTCI, (ii) 3,290.7413,086.49 euros from Irancell, (iii) noneno revenues from Taliya, and (iv) noneno revenues from TKC.
TME also holds a Roaming Hub agreementroaming hub through its 55% directly-owned subsidiary, Link2One, a.e.i.e. (“L2O”L2O”). Under thisthe related agreement, L2O provides a roaming hub service to Irancell enabling the latter to maintain a relationship with other members of the hub. Some members of the hub are also entities of the Telefónica Group. Under this roaming hub service, for 2014,During 2017 L2O has billed Irancell 114,428.69 euros.recorded revenues of 48,283.42 euros from Irancell.
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| (2) | Telefónica Germany GmbH & Co. OHG (“TG”TG”), our German 62.37%69.22% indirectly-owned subsidiary, has arespective roaming agreementagreements with MTCI.(i) MTCI and (ii) Irancell. During 2017 TG recorded 156,966.00revenues of (i) 100,501.29 euros in roaming revenues under this agreement in 2014.from MTCI and (ii) 997.08 euros from Irancell. |
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| (3) | Telefónica Brasil (“TB”), our Brazilian 73.96% indirectly owned subsidiary, has a roaming agreement with Irancell. TB recorded 0.90 U.S. dollars in roaming revenues under this agreement in 2014. |
| (4) | Telefónica UK Ltd (“TUK”TUK”), our English directly wholly-owned subsidiary, has respective roaming agreements with (i) MTCI and (ii) Irancell. During 2017 TUK recorded (i) no revenues from MTCI and (ii) 2,817.33 euros from Irancell.
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| (4) | Telefónica Argentina, S.A. and Telefónica Móviles Argentina, S.A. (together “TA”), our Argentinean directly and indirectly wholly-owned subsidiaries, have a roaming agreement with Irancell. TUKDuring 2017 TA recorded 1,558.3415.38 euros in roaming revenues under this agreement in 2013.agreement. |
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| (5) | Telefônica Brasil S.A. (“TB”), our Brazilian 73.58% indirectly-owned subsidiary, has a roaming agreement with Irancell. During 2017 TB recorded 43.87 euros in roaming revenues and had 5,445.94 euros of expenses payable to Irancell under this agreement. |
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| (6) | Pegaso Comunicaciones y Sistemas,PCS S.A. de C.V. (“PCS”(“PCS”), our Mexican directly wholly-owned subsidiary, has a roaming agreement with Irancell. During 2017 PCS recorded no revenues under this agreement in 2014. |
| (6) | Telefónica Argentina, S.A. and Telefónica Móviles Argentina, S.A. (together TA), our Argentinean directly wholly-owned subsidiaries, have a roaming agreement with Irancell. TA recorded 43.96 U.S. dollars14.53 euros in roaming revenues under this agreement in 2014.agreement.
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| (7) | Telefónica Celular de Nicaragua, S.A.del Perú, S.A.A. (“TCN”TdP”), our Nicaraguan 60%Peruvian 98.57% indirectly-owned subsidiary, has a roaming agreement with Irancell. TCNIrancell and during 2017 it paid 0.29 euros thereunder due to traffic. TdP recorded no revenues under this agreement in 2014.during 2017. |
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| (8) | Colombia Telecomunicaciones ESP. S.A. E-Plus Mobilfunk GmbH& Co. KG(“ (“E-Plus”ColTel”), our German 100%Colombian 67.50% directly and indirectly-owned subsidiary, has respectiveholds a roaming agreementshub through L2O. L2O, in turn, provides a roaming hub service to Irancell enabling the latter to maintain a relationship with MTCI, Irancell and Taliya.other members of the hub. During 2014, E-Plus2017 ColTel recorded the following11.26 euros in roaming revenues related to theseunder this roaming agreements: 1,415 euros from Irancell and none from Taliya.hub service. |
The net profit recorded by our subsidiaries pursuant to these agreements did not exceed the related revenues recorded thereunder.
The purpose of all of these agreements is to provide our customers with coverage in areas where we do not own networks. For thatthis purpose, we intend to continue maintaining these agreements.
International Carrier Agreement
with Iran
Telefónica de España has an international carrier agreement with Telecommunication Company of Iran (“TCI”).
Iran.
Pursuant to this agreement, both companies interconnect their networks to allow international exchange of telephone traffic. Telefónica de España recorded 10,5947,992.64 euros in revenues under this agreement in 2014.2017. The net profit recorded by Telefónica de España pursuant to this agreement did not exceed such revenues.
The purpose of this agreement is to allow the exchange of international telephone traffic. Consequently, we intend to continue maintaining this agreement.
See “—History and Development of the Company” and “—Business Overview.”Overview”.
Our central headquarters for the Telefónica Group are located in “Distrito Telefónica,” in Madrid, Spain.
Fixed Networks
We own fixed networks in Spain, Latin America and Europe, having an incumbent role in Spain, Argentina (the greater Buenos Aires metropolitan area and the southern portion of the country), Brazil (São Paulo), Chile, Peru and Colombia.
Following market trends, competitive environments, evolution of technologies and new multimedia and broadband services demanded by our customers, we have upgraded our networks in recent years through the following:
progressive introduction of broadband access technologies over copper: ADSL, ADSL2+, VDSL2, etc., increasing the bandwidth capacity provided to our broadband clients several times in the following manners:last ten years;
introduction of fiber access technologies (xPON) across different deployment scenarios: fiber to the home (FTTH), fiber to the building (FTTB), fiber to the curb (FTTC), fiber to the node (FTTN), etc., increasing the access speed up to 300 Mbps;
| · | progressive introduction of broadband access technologies over copper: ADSL, ADSL2+, VDSL2, etc., increasing the bandwidth capacity provided to our broadband clients several times in the last ten years; |
service support based on powerful Internet Protocol/ Multiprotocol Label Switching (IP/MPLS) backbones, providing full connectivity to the rest of the network layers, such as access and control, to support services for business and customer market segments (fixed and mobile);migration of the legacy time division multiplexing (TDM) switching networks (PSTN and ISDN) to new generation network (NGN) over all-IP packet networks;
| · | introduction of fiber access technologies (xPON) across different deployment scenarios: fiber to the home (FTTH), fiber to the building (FTTB), fiber to the curb (FTTC), fiber to the node (FTTN), etc., increasing the access speed up to 100 Mbps; |
migration from legacy transport technologies, such as asynchronous transfer mode (ATM), frame relay (FR), low-rate leased lines, plesiochronous digital hierarchy (PDH) and synchronous digital hierarchy (SDH), to the new generation of optical transport ones, such as dense wavelength division multiplexing (DWDM), coarse wavelength division multiplexing (CWDM) and new generation-synchronous digital hierarchy (NG-SDH);introduction of IMS (Internet Multimedia Subsystem) to simplify the control of the network and ease the deployment of new services over the all-IP converged network;
| · | service support based on powerful Internet Protocol/ Multiprotocol Label Switching (IP/MPLS) backbones, providing full connectivity to the rest of the network layers, such as access and control, to support services for business and customer market segments (fixed and mobile); |
empowerment of the intelligence of the network to better manage its use, to avoid saturations and frauds and to identify new business opportunities;convergence of fixed and mobile networks, services and support systems from both technological and operational points of view; and
| · | migration of the legacy time division multiplexing (TDM) switching networks (PSTN and ISDN) to new generation network (NGN) over all-IP packet networks; |
| · | migration from legacy transport technologies, such as asynchronous transfer mode (ATM), frame relay (FR), low-rate leased lines, plesiochronous digital hierarchy (PDH) and synchronous digital hierarchy (SDH), to the new generation of optical transport ones, such as dense wavelength division multiplexing (DWDM), coarse wavelength division multiplexing (CWDM) and new generation-synchronous digital hierarchy (NG-SDH); |
| · | introduction of IMS (Internet Multimedia Subsystem) in many countries to simplify the control of the network and ease the deployment of new services over the all-IP converged network; |
| · | empowerment of the intelligence of the network to better manage its use, to avoid saturations and frauds and to identify new business opportunities; |
| · | convergence of fixed and mobile networks, services and support systems from both technological and operational points of view; and |
| · | deployment of new services such as Pay-TV,new services such as Pay TV, to customers connected through broadband accesses in Spain, Germany, Chile and Brazil. |
Mobile Networks
We operate mobile networks in Spain, the United Kingdom, Germany, Brazil, Argentina, Venezuela, Chile, Peru, Colombia, Mexico, Guatemala, Panama, El Salvador, Nicaragua, Costa Rica, Ecuador and Uruguay.
We use a number of mobile technologies in the countries in which we operate, namely: GSM, and UMTS in Spain, the United Kingdom, Germany, and Latin America; and LTE, the latter being already deployed in Germany, Spain, the United Kingdom, Brazil, Chile, Colombia, Peru, Mexico and Uruguay.all our operations. We continue the work of upgrading our mobile networks in line with market trends, the demand of new services from customers and the evolution of technologies. The main steps we are currently taking include:
evolution of broadband in mobile access using technologies such as HSUPA/HSPA+, LTE and LTE-A;
deployment of new services such as mobile television and distribution services for next generation music, video and games;
exploration of the adequacy of new technologies such as HSPA and LTE to provide mobile accesses with increased bandwidth, in particular:
| · | evolution of broadband into mobile access using technologies such as UMTS, HSDPA, HSUPA/HSPA+ and LTE; |
| · | deployment of new services such as mobile television and distribution services for next generation music, video and games; |
| · | exploration of the adequacy of new technologies such as HSPA and LTE to provide mobile accesses with increased bandwidth, in particular: |
| −– | HSPA: we have extended our coverage up to the majority of the urban/suburban areas, and we have increased the capacity of the network by upgrading the network technology to the latest available releases of UMTS standards 3GPP REL 6, REL 7 and REL 8; and |
| − |
| – | LTE: together with main vendors and sharing experience with other operators, we have extensively analyzedare exploiting the opportunities that LTE will bring, as 4G mobile technology is usedbrings to complement current network technology by creatingcreate higher capacity at lower relative cost by user/traffic unit. In this regard, during 2014We are now expanding the capacity of LTE networks in all operations, and we have extendedare planning the commercial operations with this technology in Germany, Spain,deployment of LTE-Advanced, the United Kingdom, Brazil and Chile, and started to offer commercial service in Colombia, Peru, Mexico and Uruguay, while we have continued extensive trials inevolved version of LTE, in the rest of Latin America with the objective of launching LTE services during 2015 in more countries.coming years. |
| − | convergence of fixed and mobile networks, services and support systems from both technological and operational points of view. |
Satellite communications
The services provided using satellite platforms include television contribution signal to feed cable and IPTV head ends, DTH television, VSAT mainly for mobile telephony and Internet access in rural areas, emergency solutions, corporate communications and international communications.
Submarine cables
We are one of the world’s largest submarine cable operators. We participate in approximately 25 international underwater cable systems (nine of which are moored in Spain) and own eleven domestic fiber optic cables.
There are submarine cable connections between Spain and Africa, America, Asia and Europe, respectively, which are jointly owned by us with other telecom operators. The SAM-1 cable, which we own, has a length of approximately 22,000 kilometers underwater and 3,000 kilometers terrestrial and links different countries such as the United States, Puerto Rico, Ecuador, Guatemala, Peru, Chile, Brazil, Argentina and Colombia.
the submarine cable network are being deployed to help meet the capacity demand in the future. The BRUSA cable will link Brazil and the United States, while the Marea cable will link the United States and Europe through Spain. Both cables are expected to begin operating in 2018.
The principal services using the capacity of submarine cables are voice circuits, Internet and dedicated circuits for international traffic and for corporations and business customers.
On February 10, 2016, Telefónica announced the creation of Telxius, a company which brings together certain infrastructure assets of the Group, which enables the management of the Telefónica Group’s infrastructure on a global scale with a more specialized and focused approach, with the aim of increasing the services provided to other operators, improving the return on capital invested and allowing Telxius to participate more actively in the growth opportunities that exist in the industry, including the possibility of incorporating third party assets. As of the date of this Annual Report, the Group owns 60% of the share capital of Telxius.
Item 4A. Unresolved Staff Comments
Not applicable.
Presentation of Financial Information
The information in this section should be read in conjunction with our Consolidated Financial Statements and the notes thereto, included elsewhere in this Annual Report. Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB.
On February 26, 2014,The organizational structure approved by the Board of Directors of Telefónica, S.A. approved the implementation of a new organizational structure focused on clients and which incorporates the digital offering as the main focus for commercial policies. The structure gives greater visibility to local operators, bringing them closer to the corporate decision-making center, simplifying the Group’s global structure and strengthening the cross-cutting areas to improve flexibility and agility in decision making.
Within this framework, Telefónica has created the roleFebruary 26, 2014 is made up of the Chief Commercial Digital Officer, who is responsible for fostering revenue growth. On the cost side, the Company has strengthened the role of the Chief Global Resources Officer. Both Officers report directly to the Chief Operating Officer (COO), as well as the local operators in Spain, Brazil, Germany and the United Kingdom, in addition to the Hispanoamérica unit (which now excludes Brazil).
Due to the implementation of this new organizational structure, from the beginning of 2014, the new organizational structure is composed offollowing segments: Telefónica Spain, Telefónica United Kingdom, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica (comprised of(formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, & Central America, Ecuador and Uruguay). All that is
These segments include the information related to wireline, wireless, cable, data, internet and television businesses and other digital services provided in each country or countries. Any services not specifically included in these new segments isare part of “Other companies and eliminations”, which includes, in particular, Telxius (as further explained below), the companies belonging to the cross-sectional areas, other Group companies as well as eliminations in the consolidation process. Inter-segment transactions are carried out at market prices.
Telxius' results are fully reported under "Other companies and eliminations" since January 1, 2017, reflecting the integration within Telxius of the mobile telecommunications towers transferred from the Telefónica Spain, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica segments and the international submarine fiber optic cable (which had already been previously reported under "Other companies and eliminations"). As a result, the Group’sThe 2016 comparative segment results have been revised, foraccordingly. Based on the year 2012different dates on which assets were contributed to Telxius by each operating segment, this has affected the results of Telefónica Spain (since January 1, 2016), Telefónica Germany (since May 1, 2016), Telefónica Brazil (since April 1, 2016) and 2013Telefónica Hispanoamérica (Telefónica Perú since April 1, 2016 and Telefónica Chile since May 1, 2016). The results of the segments do not include the intra-group capital gains resulting from the transfer of towers to reflectTelxius.
In addition, in 2017 Telefónica Spain includes the above-mentioned new organization. Becausecompanies Telefónica Studios and Telefónica Servicios Audiovisuales (which had been previously reported under “Other companies and eliminations”), and Telefónica Spain and Telefónica Hispanoamérica include the results of the data center business in Spain and Chile, respectively (which had been previously reported under “Other companies and eliminations”). As a consequence, the 2016 comparative segment results have also been revised accordingly.
These changes in the segments (identified as "revised data" throughout this is an intragroup change, Telefónica’sAnnual Report) have had no impact on the consolidated results of the Group.
The Telxius subsidiaries currently holding the telecommunications towers did not exist in 2015 as such towers were part of the operating companies of the relevant countries. Thus, segment information could not be retrospectively revised for 2012 and 2013 are not affected.
Additionally, as a result2015. The segment reporting for 2016 is being presented under two different bases: (i) for purposes of management integrations undertaken in Peru, Argentina and Chile, the revenue breakdowncomparison against 2017, 2016 segment information has been reclassified, allocating “inter-company” eliminations within fixedrevised so that the telecommunications towers are part of Telxius (since the dates on which the relevant assets were transferred to Telxius); and mobile businesses.
(ii) for purposes of the comparison against 2015, the telecommunications towers are integrated in each relevant segment.
Non-GAAP financial information
The management of the Group uses a series of measures in its decision-making, in addition to those expressly defined in the IFRS, because they provide additional information useful to assess the Group’s performance, solvency and liquidity. These measures should not be viewed in isolation or as a substitute for the measures presented according to the IFRS.
The non-GAAP financial measures included in this Annual Report are operating income before depreciation and amortization, net financial debt and net financial debt plus commitments and free cash flow.
Operating income before depreciation and amortization
Operating income before depreciation and amortization or OIBDA,(OIBDA) is calculated by excluding solely depreciation and amortization expenses from our operating income in order to eliminate the impact of generally long-term capital investments that cannot be significantly influenced by our management in the short-term. Our management believes thatincome. OIBDA is meaningful for investors because it provides an analysis of our operating results and our segment profitability using the same measure used by our management. OIBDA also allows us to compare our results with those of other companies in the telecommunications sector without considering their asset structure. We use OIBDA to track ourthe performance of the business evolution and to establish operationaloperating and strategic targets.targets of the Telefónica Group companies. OIBDA is also a measure commonly reported measure and
is widely used byamong analysts, investors and other interested parties in the telecommunications industry. OIBDA isindustry, although not an explicita measure of financial performance underexplicitly defined in IFRS, and therefore, may not be comparable to other similarly titled measures forsimilar indicators used by other companies. OIBDA should not be considered an alternative to operating income as an indicator of our operating performance, or an alternative to cash flows from operating activities as a measure of our liquidity.
substitute for operating income.
The following table provides a reconciliation of our OIBDA to operating income for the periods indicated.
| | Year ended December 31, | | Millions of euros | 2012 | 2013 | 2014 | 2015 |
| 2016 |
| 2017 |
|
| Operating income before depreciation and amortization | 21,231 | 19,077 | 15,515 | 13,229 |
| 15,118 |
| 16,187 |
|
| Depreciation and amortization expense | (10,433) | (9,627) | (8,548) | |
| Depreciation and amortization | | (9,704 | ) | (9,649 | ) | (9,396 | ) |
| Operating income | 10,798 | 9,450 | 6,967 | 3,525 |
| 5,469 |
| 6,791 |
|
The following tables provide a reconciliation of OIBDA to operating income for us and each of our business areas for the periods indicated.
| 2014 |
| Millions of euros | Telefónica Spain | Telefónica United Kingdom | Telefónica Germany | Telefónica Brazil | Telefónica Hispano américa | Other companies and eliminations | Total Group |
| Operating income before depreciation and amortization | 5,671 | 1,744 | 733 | 3,543 | 4,068 | (244) | 15,515 |
| Depreciation and amortization expense | (1,805) | (1,121) | (1,426) | (1,762) | (2,034) | (400) | (8,548) |
| Operating income | 3,866 | 623 | (693) | 1,781 | 2,034 | (644) | 6,967 |
| 2013 |
| Millions of euros | Telefónica Spain | Telefónica United Kingdom | Telefónica Germany | Telefónica Brazil | Telefónica Hispano américa | Other companies and eliminations | Total Group |
| Operating income before depreciation and amortization | 6,340 | 1,637 | 1,308 | 3,940 | 5,531 | 321 | 19,077 |
| Depreciation and amortization expense | (1,903) | (1,016) | (1,231) | (2,109) | (2,524) | (844) | (9,627) |
| Operating income | 4,437 | 621 | 77 | 1,831 | 3,007 | (523) | 9,450 |
| |
78 |
| | | | | | | | | | | | | | |
| 2015 |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other and eliminations |
| Total Group |
|
| Operating income before depreciation and amortization | 2,336 |
| 1,929 |
| 1,858 |
| 3,573 |
| 4,356 |
| (823 | ) | 13,229 |
|
| Depreciation and amortization | (1,898 | ) | (1,196 | ) | (2,128 | ) | (1,916 | ) | (2,241 | ) | (325 | ) | (9,704 | ) |
| Operating income | 438 |
| 733 |
| (270 | ) | 1,657 |
| 2,115 |
| (1,148 | ) | 3,525 |
|
|
| | | | | | | | | | | | | | |
| 2016 |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other and eliminations |
| Total Group |
|
| Operating income before depreciation and amortization | 4,467 |
| 1,709 |
| 1,794 |
| 3,714 |
| 3,477 |
| (43 | ) | 15,118 |
|
| Depreciation and amortization | (1,830 | ) | (1,090 | ) | (2,211 | ) | (2,038 | ) | (2,190 | ) | (290 | ) | (9,649 | ) |
| Operating income | 2,637 |
| 619 |
| (417 | ) | 1,676 |
| 1,287 |
| (333 | ) | 5,469 |
|
|
| | | | | | | | | | | | | | |
| 2016 (*) |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other and eliminations |
| Total Group |
|
| Operating income before depreciation and amortization | 4,403 |
| 1,709 |
| 1,771 |
| 3,702 |
| 3,474 |
| 59 |
| 15,118 |
|
| Depreciation and amortization | (1,827 | ) | (1,090 | ) | (2,200 | ) | (2,036 | ) | (2,189 | ) | (307 | ) | (9,649 | ) |
| Operating income | 2,576 |
| 619 |
| (429 | ) | 1,666 |
| 1,285 |
| (248 | ) | 5,469 |
|
|
| | | | | | | | | | | | | | |
| 2017 |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other and eliminations |
| Total Group |
|
| Operating income before depreciation and amortization | 4,952 |
| 1,639 |
| 1,821 |
| 4,191 |
| 3,538 |
| 46 |
| 16,187 |
|
| Depreciation and amortization | (1,688 | ) | (1,047 | ) | (1,954 | ) | (2,228 | ) | (2,191 | ) | (288 | ) | (9,396 | ) |
| Operating income | 3,264 |
| 592 |
| (133 | ) | 1,963 |
| 1,347 |
| (242 | ) | 6,791 |
|
| 2012 |
| Millions of euros | Telefónica Spain | Telefónica United Kingdom | Telefónica Germany | Telefónica Brazil | Telefónica Hispano américa | Other companies and eliminations | Total Group |
| Operating income before depreciation and amortization | 6,815 | 1,602 | 1,351 | 5,161 | 5,983 | 319 | 21,231 |
| Depreciation and amortization expense | (2,063) | (995) | (1,233) | (2,318) | (2,762) | (1,062) | (10,433) |
| Operating income | 4,752 | 607 | 118 | 2,843 | 3,221 | (743) | 10,798 |
| |
Net financial debt and net financial debt plus commitments
We calculateAs calculated by us, net financial debt by deductingincludes: (i) current and non-current financial liabilities in our consolidated statement of financial position (which includes the negative mark-to-market value of derivatives) and (ii) other payables included in “Trade and other payables” (mainly corresponding to payables for deferred payment of radio spectrum that have a financial component). From these liabilities, the following are subtracted: i) cash and cash equivalents, ii) current financial assets (which include short-term derivatives), iii) the positive mark-to-market value of derivatives with a maturity beyond one year, from the relevant balance sheet date and iv) other interest-bearing assets (each(components of which are components of non-current financial assets and trade“Trade and other receivables in our consolidated statement ofreceivables” and “Non-current financial position), current financial assets and cash and cash equivalents from the sum of (i) current and non-current interest-bearing debt (which includes the negative mark-to-market value of derivatives with a maturity beyond one year) and (ii) other payables (a component of current and non-current trade and other payablesassets” in our consolidated statement of financial position). The accounts included in the net financial debt calculation recorded in "Trade and other payables" or "Non-current financial assets" have a maturity beyond one year and a financial component. In "Trade and other receivables" we include the customer financing corresponding to the installments for the next 12 months in connection with terminal sales for a period of more than one year, and "Non-current financial assets" includes derivatives, installments for the long term sales of terminals to customers and other long term financial assets.
We calculate net financial debt plus commitments by adding gross commitments related to employee benefits to net financial debt, and deducting the value of long-term assets associated with those commitments related to employee benefits. and the tax benefits arising from the future payments of those commitments.
We believe that net financial debt and net financial debt plus commitments are meaningful for investors and analysts because they provide an analysis of our solvency using the same measures used by our management. We use net financial debt and net financial debt plus commitments to calculate internally certain solvency and leverage ratios used by management. NeitherNevertheless, neither net financial debt nor net financial debt plus commitments as calculated by us should be considered an alternative toas a substitute for gross financial debt (the sumas presented in the consolidated statement of current and non-current interest-bearing debt) as a measure of our liquidity.
financial position.
The following table providespresents a reconciliation of our net financial debt and net financial debt plus commitments as of December 31, 2017 and 2016 to the Telefónica Group’s gross financial debt atas indicated in the dates indicated:consolidated statement of financial position.
| Millions of euros | 12/31/2014 | 12/31/2013 | 12/31/2012 |
| Non-current interest-bearing debt | 50,688 | 51,172 | 56,608 |
| Current interest-bearing debt | 9,094 | 9,527 | 10,245 |
| Gross financial debt | 59,782 | 60,699 | 66,853 |
| Non-current trade and other payables | 1,276 | 1,145 | 1,639 |
| Current trade and other payables | 210 | 99 | 145 |
| Non-current financial assets | (6,267) | (4,468) | (5,605) |
| Trade and other receivables | (453) | − | − |
| Current financial assets | (2,932) | (2,117) | (1,926) |
| Cash and cash equivalents | (6,529) | (9,977) | (9,847) |
| Net financial debt | 45,087 | 45,381 | 51,259 |
| Net commitments related to employee benefits | 1,976 | 2,270 | 2,036 |
| Net debt | 47,063 | 47,651 | 53,295 |
| | | | |
|
| | | | |
| Millions of euros | 12/31/2016 |
| 12/31/2017 |
|
| Non-current financial liabilities | 45,612 |
| 46,332 |
|
| Current financial liabilities | 14,749 |
| 9,414 |
|
| Gross financial debt | 60,361 |
| 55,746 |
|
| Cash and cash equivalents | (3,736 | ) | (5,192 | ) |
| Current financial assets | (2,954 | ) | (2,154 | ) |
| Positive mark-to-market value of long-term derivative instruments | (5,048 | ) | (2,812 | ) |
| Other non-current liabilities included in “Trade and other payables” | 749 |
| 708 |
|
| Other current liabilities included in “Trade and other payables” | 449 |
| 111 |
|
| Other assets included in “Non-current financial assets” | (524 | ) | (1,516 | ) |
| Other assets included in “Current trade and other receivables” | (702 | ) | (661 | ) |
| Net financial debt | 48,595 |
| 44,230 |
|
| Gross commitments related to employee benefits | 6,839 |
| 6,578 |
|
| Value of associated long-term assets | (749 | ) | (749 | ) |
| Tax benefits | (1,569 | ) | (1,533 | ) |
| Net commitments related to employee benefits | 4,521 |
| 4,296 |
|
| Net financial debt plus commitments | 53,116 |
| 48,526 |
|
Free Cash Flow
The Group’s free cash flow is calculated starting from “Net cash flow provided by operating activities” as indicated in the consolidated statement of cash flows; deducting (Payments on investments)/Proceeds from the sale of investments in property, plant and equipment and intangible assets, net, adding the cash received form government grants and deducting dividends paid to minority interests. The cash used to cancel commitments related to employee benefits (originally included in the Net cash flow provided by operating activities) is added as it represents the payments of principal of the debt incurred with those employees.
The definition of free cash flow has been revised so that the cash received from the sale of real estate (which in recent years amounted to 35 million euros in 2015, 8 million euros in 2016 and 8 million euros in 2017) is no longer excluded from the cash flow proceeding from the operations. Cash received from the sale of real estate is included in the "(Payments on investments)/Proceeds from the sale of investments in property, plant and equipment and intangible assets, net" figure within the free cash flow.
We believe that free cash flow is a meaningful measure for investors and analysts because it provides an analysis of the cash flow available to protect solvency levels and to remunerate the parent company’s shareholders and other equity holders (which is why free cash flows do not consider payments to minority interests). The same measure is used internally by our management. Nevertheless, free cash flow as calculated by us should not be considered as a substitute for the various flows of cash as presented in the consolidated statements of cash flows.
The following table presents the reconciliation between the Telefónica Group’s Net cash flow provided by operating activities as indicated in the consolidated statement of cash flows and the free cash flow for 2017, 2016 and 2015:
|
| | | | | | |
| Millions of euros | 2015 |
| 2016 |
| 2017 |
|
| Net cash flow provided by operating activities | 13,615 |
| 13,338 |
| 13,796 |
|
| (Payments on investments)/Proceeds from the sale of investments in property, plant and equipment and intangible assets, net | (10,256 | ) | (9,187 | ) | (8,992 | ) |
| Government grants received | 7 |
| — |
| 2 |
|
| Dividends paid to minority interests | (538 | ) | (511 | ) | (555 | ) |
| Payments related to cancellation of commitments | 721 |
| 738 |
| 696 |
|
| Free Cash Flow | 3,549 |
| 4,378 |
| 4,947 |
|
Significant Factors Affecting the Comparability of ourOur Results of Operations in the Periods Under Review
under Review
Please see “Comparative information and main changes in the consolidation scope” in Note 2 to our Consolidated Financial Statements.
Significant Changes in Accounting Policies
Please see Note 3(n) to our Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reflected in the Consolidated Financial Statements and accompanying notes. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions.
We consider an accounting estimate to be critical if:
it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and
| · | it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and |
| · | changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition, results of operations or cash flows. |
The various policies that are important to the portrayal of our financial condition, results of operations and cash flows include:
| · | accounting for long-lived assets, including goodwill; |
| · | revenue recognition; and |
| · | exchange rate used to remeasure Venezuelan bolívar fuerte (BsF)-denominated items. |
Accounting for long-lived assets, including goodwillgoodwill;
deferred taxes;
provisions;
revenue recognition; and
exchange rate used to remeasure Venezuelan bolívar (VEF)-denominated items.
Property, plan and equipment, intangible assets and goodwill
Property, plant and equipment and intangible assets, other than goodwill, are recorded at acquisition cost. If such assets are acquired in a business combination, the acquisition cost is the estimated fair value of the acquired property, plant and equipment or intangible assets. Property, plant and equipment and intangible assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives.
Intangible assets with indefinite useful lives are not amortized, but are, instead, subject to an impairment test on a yearly basis and whenever there is an indication that such assets may be impaired.
Accounting for long-lived assets and intangible assets involves the use of estimates for determining: (a) the fair value at the acquisition date in the case of such assets acquired in a business combination, and (b) the useful lives of the assets over which they are to be depreciated or amortized. We believe that the estimates we make to determine an asset’s useful life are “critical accounting estimates” because they require our management to make estimates about technological evolution and competitive uses of assets.
When an impairment in the carrying amount of an asset occurs, non-scheduled write-downs are made. We perform impairment tests of identifiable intangible and long-lived assets whenever there is reason to believe that the carrying value may exceed the recoverable amount, which is the higher of the asset’s fair value less costs to sell and its value in use. Furthermore, previously recognized impairment losses may be reversed when changes in the estimates used to determine the asset’s recoverable amount indicate that an impairment loss recognized in prior periods no longer exists or may have decreased.
The determination of whether the impairment of long-lived and intangible assets is necessary involves the use of significant estimates and judgment that includes, but is not limited to, the analysis of the cause of potential impairment in value, the timing of such potential impairment and an estimate of the amount of the impairment, which requires the estimation of the future expected cash flows, discount rates and the fair value of the assets.
Specifically, management has to make certain assumptions in respect of uncertain matters, such as growth in revenues, changes in market prices, operating margins, and technology developments and obsolescence, discontinuance of services and other changes in circumstances that indicate the need to perform an impairment test. Management’s estimates about technology and its future development require significant judgment because the timing and nature of technological advances are difficult to predict.
Goodwill arises when the cost of a business combination exceeds the acquirer’s interest in the net fair value of the identifiable assets acquired and liabilities assumed at the acquisition date. Goodwill is not amortized, but is, instead, subject to an impairment test on a yearly basis and whenever there is an indication that the goodwill may be impaired.
Non-scheduled write-downs of goodwill are made when an impairment in the carrying amount of goodwill occurs. We review, on a regular basis, the performance of our cash-generating units. We compare the carrying amount of the cash-generating unit to which the goodwill has been allocated with its recoverable amount. The determination of the recoverable amount of the cash-generating unit involves extensive use of estimates and significant management judgment is involved. Methods commonly used by us for valuations include discounted cash flow methods.
A significant change in the facts and circumstances that we relied upon in making our estimates may have a material impact on our operating results and financial condition.
Deferred income taxes
ManagementThe Group assesses the recoverability of deferred tax assets based on the basis of estimates of our future taxable profit. Theearnings, and of all the available options to achieve an outcome, it considers the most efficient one in tax terms within the legal framework the Group is subject to. Such recoverability of deferred tax assets ultimately depends on ourthe Group’s ability to generate sufficient taxable profit duringearnings over the periods inperiod for which the deferred tax assets are utilized. In making this assessment, our management considersremain deductible. This analysis is based on the scheduled reversal ofestimated schedule for reversing deferred tax liabilities, projectedas well as estimates of taxable profit and tax planning strategies.
This assessment is carried out on the basis ofearnings, which are sourced from internal projections whichthat are continuously updated to reflect our most recent operatingthe latest trends. In accordance with applicable accounting standards,
The recognition of tax assets and liabilities depends on a deferred tax asset must be recognized for all deductible temporary differences and for the carry-forwardseries of unused tax credits and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized. Our current and deferred income taxes are impacted by events and transactions arising in the normal course of business as well as in connection with special and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates ofas to the timing and realization of deferred tax assets and the timing ofprojected tax payment schedule. Actual Group company income tax payments. Actual collectionsreceipts and payments may materiallycould differ from thesethe estimates made by the Group as a result of changes in tax laws as well as unanticipated futurelegislation or unforeseen transactions impacting our incomethat could affect tax balances.
Provisions
Provisions are recorded when, at the end of the period, we have a present obligation as a result of past events, whose settlement requires an outflow of resources that is considered probable and can be measured reliably. This obligation may be legal or constructive, arising from, but not limited to, regulation, contracts, common practice or public commitments, which have created a valid expectation for third parties that we will assume certain responsibilities. The amount recorded is the best estimation performed by the management in respect of the expenditure that will be required to settle the obligations, considering all the information available at the closing date, including the advice of external experts, such as legal advisors or consultants.
If we are unable to reliably measure the obligation, no provision is recorded and information is then presented in the notes to the Consolidated Financial Statements.
Because of the inherent uncertainties in this estimation, actual expenditures may be different from the originally estimated amount recognized.
Connection fees
Revenues from connection fees originated when customers connect to our network are deferred over the average expected length of the customer relationship.
The expected customer relationship period is estimated based on recent historical experience of customer churn rates. Significant changes in our estimations may result in differences in the amount and timing of revenues recognized.
Multiple-element arrangements
Bundled offers
Arrangements involving the delivery of bundled products or services are assessed to determine whether it is necessary to separate the arrangement into individual component deliverables, each with its own revenue recognition criteria.
Revenue relating to the bundled contracts is allocated to the different deliverables identified, based on their relative fair values (i.e., the fair value of each individual component deliverables in relation to the total fair value of the bundled deliverables), considering that amounts contingent upon delivery of undelivered items are not allocated to delivered items. Given that the handsets and airtime are price-sensitive and volatile in a competitive marketplace, the determination of fair values in the mobile phone business is quite complex.
Additionally, a significant change in the facts and circumstances upon which we based our fair value estimates may have an impact on the allocation of revenues among the different deliverables identified and, consequently, on future revenues.
Exchange rate and inflation rates used to remeasuretranslate the financial statements of our Venezuelan subsidiaries
As of December 31, 2014,2017, there are multiple exchange mechanisms and three published exchange rates potentiallylegally available to remeasure BsF-denominated items and transactions infor translation of the financial statements of the Group’s Venezuelan subsidiaries.
We review, on a regular basis, the economic conditions in Venezuela and the specific circumstances of our Venezuelan operations. In light of the worsening of the economic and political crisis in Venezuela in 2017 and in the absence of official rates that are representative of conditions in such country at December 31, 2017, the Group believes it is necessary to estimate an exchange rate that considers the progression of inflation in Venezuela and contributes to reflect the economic and financial position of the Group’s Venezuelan operations within its consolidated financial statements in a more accurate way.
Assessment of the exchange rate that better reflects the economics of Telefónica’s business activities in Venezuela relies on several factors and is performed considering all the information available at the closing date, involvingand entails the use of assumptions and estimates whereand significant management judgment is required.judgment.
Because of theDue to inherent uncertainties in the estimationsestimates required to determine the appropriate exchange rate for the conversion of BsF-denominatedVEF-denominated financial statements, actual cash flows denominated in such currency may differ from the amounts originallycurrently recognized on the basis of our estimations,estimates, as a result of changes in currency laws or changes in exchange mechanisms or published exchange rates that may have a materialan impact on the conversion rate to be used for our Venezuelan subsidiaries’ financial statements, affecting the net monetary position of assets (liabilities) denominated in BsF.VEF.
In addition to this, Venezuela is considered as a hyperinflationary economy since 2009. Telefónica recognizes the effects of inflation by restating the financial information of its Venezuelan operation using the “Indice Nacional de Precios al Consumidor de Venezuela” issued by the Central Bank of Venezuela, or the best estimate in case the final index is not available.
Significant management judgment is required to determine the appropriate inflation rate where the official rate is not available. The estimates and underlying assumptions are based on careful consideration of factors that are considered to be relevant and rely on all the information available at the closing date. Actual results may differ from these estimates as a result of changes in circumstances and assumptions about future developments in Venezuela due to evolving market conditions, uncertainty about currency and operating restrictions or other circumstances arising beyond the control of the Company.
For a discussion of the contribution of Telefónica Venezolana to certain items of the consolidated income statement, cash flows statement and statement of financial position of the Telefónica Group for 2017, please see Note 2 to our Consolidated Financial Statements.
Operating Environment
Our results of operations are dependent, to a large extent, on the level of demand for our services in the countries in which we operate. Demand for services in those countries is affected by the performance of their respective economies, particularly household private consumption, but also gross domestic product, or GDP, inflation, or CPI, external accounts and unemployment rates.
During 2014,2017, global activity picked upgrowth was higher than in 2016 and 2015 and recent developments suggest that this process may consolidate along 2015.growth in 2018 is going to be similar to 2017. The European Union is showing signs of turninghas grown for the corner from recession to recoveryfifth year in a row due to the improvement of internal demand, especially in SpainSpain. Macroeconomic perspectives have improved as risks have diminished compared with both 2016 and 2015, especially political uncertainties after the results of the general elections in some European countries. However, the United Kingdom.
British exit process from the European Union could add risks to this outlook depending on its outcome.
In Latin America, economic activity has turned the corner posting positive growth in 20152017, after the adjustments and economic contraction that characterized 2016, while growth rates were close to zero in 2015. An even higher growth is expected to be higher than in 2014,for 2018, although the growth rates are expected to be significantly lower than those achieved before the global recession. Moreover,The recent recovery in commodity prices, especially oil and copper, are expected to pose downward risksprovide
some relief to the external accounts balances and to activity growth in the region. Additionally,However, a faster monetary normalization in the United States, as well as doubts about growth and imbalances in China, could have an impact on inward external flows, making financing conditions in Latin American countries more stringent, which would affect household private consumption negatively.
Operating environment by country
Spain
In 2014,2017, Spanish GDP expanded by 1.2%3.1% (according to Consensus Economics Forecast (“CFe”Funcas consensus forecast), slightly below the 2015 and 2016 growth rates (3.3%), an independent research firm)but still considerably higher than the 2014 rates (1.4%), compared with a positivefollowing the average annual growth ratecontraction of 3.6% in the period 1998 through 2008 and a contraction on average of 1.3%1.8% in 2009-2013.
This performance was explained by a positive evolution of internaldomestic demand, with household consumption increasing 2.0% according to CFe2.5% in 2014 compared2017 (Funcas consensus forecast), in line with the average growth in 2014-2016 and reverting the average negative growth rates of 1.8% per year during 2009-13.
Investment also showed positive growth in 2017 for the fourth consecutive year in a negative annualrow, at a rate of -2.0% during 2009-134.7% (Funcas consensus forecast), compared to an average 5.8% growth in 2014-16 and compared with average growth of 3.6% during the period 1998 through 2008.
Investment grew at an8.5% annual rate of 0.8% (CFe) during 2014, after a 8.2% decline experienced on average in 2009-13,2009-13. Inflation was 1.1% in 2017, compared with an average annual growth of 5.6% during the period 1998 through 2008. Inflation was -1.0%0.2% in 2014, compared with 0.3% and 3.0% in 2013 and 2012, respectively.2014-16.
The current account showed again a surplus for 2014 was 0.4%in 2017 of 1.8% of GDP (CFe)(Funcas Consensus Forecast), compared with 1.5%improving the 2014-16 average of GDP in 2013 and -3.1% on average in 2009 through 2012.1.4% of GDP.
The unemployment rate continued its downward trend in 2017 after the 26.9% peak reached 24.6%in the first quarter of 2013. The unemployment rate was 17.1% at the end of 2014, higher2017 (Funcas consensus forecast), 1.5 pp lower than at the average rateend of 21.2% in 2009-12, but less than the 26.1% reached in 2013.2016.
United Kingdom
In 2014,2017, the British economy, measured in terms of GDP, grew by 3.0%1.8% compared with a growth rate of 1.7%1.9% in 20132016 and 0.7%2.3% in 2012.
Fixed capital investment increased by 8.1% in 2014, compared with an increase of 3.2% in 2013. Private2015. Household consumption grew by 2.4%, compared with a growth rate of 1.6% and 1.1% in 2013 and 2012, respectively.
The CPI increased by 0.5% in 2014, compared with 2.0% in 2013 and 2.7% in 2012. It iswas the lowest CPI figure since August 2000.
The positive performancemain source of economic growth, has had a favorable impact on the unemployment rate, which reached 6.2%increasing by 1.5% (HM Treasury consensus forecast) in 2014 (CFe) on average,2017, compared with an average annualgrowth rate of 7.6%2.4% in 20132014-16, driven by its fundamentals, with the unemployment rate decreasing to 4.3% (HM Treasury consensus forecast), from 4.9% in 2016 and 8.0%5.4% in 2012.2015. On the other hand, fixed capital investment growth was 2.6% in 2017 (HM Treasury consensus forecast), slightly above the 1.7% experienced in 2016, but down the average of 5.0% in 2014-15. This downward trend is due to the increasing political and economic uncertainty that followed the Brexit referendum in June 2016 which is likely weighing on firms’ investment decisions.
Inflation (CPI) increased by 3.0% year-on-year in 2017, accelerating from 1.6% in 2016 and 0.2% in 2015, with upward pressures coming from energy and food prices as well as exchange rate depreciation.
The British pound sterling experienced a depreciation relative to the euro in 2017, falling by 4% year-on-year, from 0.85 GBP per EUR in 2016 (year-end) to 0.89 GBP per EUR in 2017 (year-end). The increase in uncertainty about the future trade and economic relations between the United Kingdom and the European Union after the Brexit referendum result was the main reason behind the currency weakness.
Germany
In 2014,2017, the German economy grew 1.4%,by 2.5% according to the Deutsche Bundesbank macroeconomic projections, the highest rate since 2011 and after growing 0.1%expanding on average 1.8% in 2013 and 0.4% in 2012.2014-16.
The economic growth recovery in 20142017 was mainly due to a positive contribution of the internal demand, which offsetespecially private consumption (which grew by 2.3%, Bundesbank forecast) and investment (which grew by 4.4%, Bundesbank forecast). The performance of both variables has substantially improved this year compared to the negative contribution of the external sector to GDP growth (exports increased just 3.5% while importsprevious ones; in 2015-16 consumption grew 4.5%, CFe)on average 1.7% and investment 1.9%.
In December 20142017 the CPIinflation rate reached 0.2%was 1.7% year-on-year (compared with 1.4%an average of 0.25% in 2013 and 2.0% in 2012)2015-16), and the unemployment rate stood at 6.4%3.6%, compared with 6.9%3.9% in 20132016 and 6.8%4.4% in 2012.2015.
Brazil
Brazilian GDP increased approximately 0.2%1% in 2014 (CFe)2017 (according to Consensus Economic Forecasts (“CFe”)), following increasesdecreases of 2.5%3.5% in 2013each of 2016 and 1.0% in 2012,2015, according to the Brazilian Geography and Statistics Institute. Investments contracted by approximately 6.4%2.1% (CFe) in 2014,2017, after an increasea decrease of 5.2%10.3% in 2013.2016. Household consumption growth decelerated to approximately 1.5%increased by 0.9% in 2014, from 2.6%2017 (CFe), after a 4.3% decrease in 2013.2016.
Inflation, as measured by the CPI, increased by 6.4%IPCA, was 2.9% in 2014 (above2017 (below the inflation target established bylower bound of the Brazilian Central Bank of 4.5%, but within its range of tolerance)central bank’s 3%-6% tolerance range), compared to 5.9%6.3% in 20132016 and 5.8%10.7% in 2012.2015. Due to increasingdecreasing inflation, the basic interest rate, the Special Clearance and Escrow System rate (Selic rate), was raisedlowered from 10%13.75% at the end of 20132016 to 11.75%7.00% at the end of 2014.2017.
The current account deficit reached 90.99.8 billion U.S. dollars in 2014,2017, compared to 81.423.5 billion U.S. dollars in 20132016 and 54.259.4 billion U.S. dollars in 2012. The2015. In 2017, this deficit observed in 2014 was partially financed by capital inflows, such as foreign direct investments, of 62.4which reached 70.3 billion U.S. dollars, andwhile portfolio investments resulted in an outflow of 26.51.1 billion U.S. dollars. International reserves decreasedincreased by 1.79.8 billion U.S. dollars in 2014,2017, to a level of 374.1382 billion U.S. dollars.
WithThe country-risk decreased, helped by the worsening of most domestic economic data, especially those regarding government accounts, the country risk increased.activity recovery as well as a favorable external scenario for emerging economies. The J.P. Morgan Emerging Markets Bond Index Plus (EMBI + Brazil) reached 259240 basis points at the end of 2014,2017, down from 224328 basis points at the end of 20132016 and 142523 basis points at the end of 2012.
The2015. However, the Brazilian real continued to depreciateslightly depreciated in 2014. The Brazilian real2017, given uncertainties regarding the continuity of fiscal reforms, especially the approval of the social security reform. It depreciated against the U.S. dollar by 13.4% in 2014,1.5%, reaching an exchange rate of 2.663.31 reais per 1U.S. dollar on December 28, 2017, compared to 3.26 reais per U.S. dollar on December 30, 2016 and to 3.90 reais per U.S. dollar on December 31, 2014, compared to 2.34 reais per 1 U.S. dollar on December 31, 2013 and to 2.04 reais per 1 U.S. dollar on December 31, 2012.2015.
Mexico
Mexico’s real GDP increased by an estimated 2.3%2.1% in 20142017 (CFe), compared with a 1.7%3.3% and 3.7% growth2.9% increase in 20132015 and 2012,2016, respectively.
Inflation, as measured by the CPI, was 4.1%6.8% year-on-year in December 20142017 compared with 4.0%3.4% in December 2013, above2016, surpassing the Mexican Central Bank’s target of 3% and also outside its tolerance range of 2% to 4%.
During 2014, aggregate demand in Mexico has continued to show the stabilizing trend that began in 2010, following the harsh economic downturn suffered in 2009. Exports2017, exports increased by more than 5.5%9.8%, private consumption increased by almost 2.2%2.8% (CFe) and investment increaseddecreased by 2.0%0.9% (CFe) compared with 2013.2016.
The current account balance posted a deficit of 25.220.2 billion U.S. dollars in 2014 –according2017 - according to CFe-CFe - compared with 26.522.7 billion U.S. dollars in 2013 (1.9% and 2.1% of GDP, respectively).2016.
On December 31, 2014,2017, the exchange rate relative to the U.S. dollar was 14.8319.66 Mexican pesos to the U.S. dollar (13.08(20.62 and 12.8717.18 on December 31, 20132016 and 20122015, respectively).
Venezuela
No official data is available for GDP, balance of payments or inflation since 2015. However, the expectations about the worsening of economic conditions in Venezuela is officiallyhave been confirmed by analysts forecasts. Ecoanalítica (local consulting firm) expects GDP would have contracted 14.7% in an economic crisis, as GDP2017, with a cumulative 34.3% contraction during the first three quarters of 2014 decreased on average by 4%, after a positive growth of 1.3% in 2013period 2014-2017.
Private consumption, investments and 5.6% in 2012. The oil sector expanded slightly by 0.3% and the non-oil sector fell by 3.8%. Nonetheless there were some sectors that showed growth in this period. For instance, banking and insurance (13.2%), communications (4.1%) and government services (1.7%).
Consumption fell 2.5% year-on-year on average in the first three quarters of 2014 (compared to an increase of 4.4% in 2013 and 6.9% in 2012). Despite the higher inflation, public consumption grew onlyare estimated to have fallen 10.3%, 34.7% and 23.3%, respectively, in 2017. Additionally, exports are estimated to have declined by 0.8% (compared10.5% in 2017 and imports are estimated to growth of 3.3% in 2013 and 6.3% in 2012) while the private sectorhave contracted by 3.3% (compared16.4% according to a positive growth of 4.7%Ecoanalítica estimations.
The inflationary spiral in 2013 and 7.0% in 2012) and investments declined by 17.9% (comparedVenezuela continues to a decrease of -9.0% in 2013 and a positive growth of 23.3% in 2012).
Additionally exports declined by 9.5% (comparedaccelerate. According to a decrease of -8.6% in 2013 and positive growth of 4.9% in 2012), and imports contracted by 19.0% (comparedEcoanalítica, prices are estimated to a decrease of 10.6% in 2013 and positive growth of 26.8% in 2012). During 2014, exports were negatively impacted by the downfall of oil prices and oil production, but imports decreased to a larger extent due to the economic crisis that the country is facing. As a result, the current account surplus was higher in 2014 than in 2013, reaching 9.9 billion U.S. dollars in the first nine months of 2014, compared with 4.9 billion U.S. dollars in the first nine months of 2013.
Also, the capital account deficit reached 7.5 billion U.S. dollars in the first nine months of 2014, compared with a deficit of 5.9 billion U.S. dollars in the same period of 2013. This performance diminished the Venezuelan Central Bank’s stock of international reserves to 22.06 billion U.S. dollars at the end of September 2014 compared with 21.48 billion U.S. dollars at the end of December 2013.
In terms of inflation, the national CPI reached 63.6%have increased 2,874% year-on-year in November 2014 (compared to 56.2% year-on-year2017, much higher than the 525% inflation rates reached in December 2013 and 20.1% year-on-year in December 2012). Venezuela still has the highest inflation rate in Latin America.2016.
The unemployment rate reached 5.9% as of November of 2014, comparedwas estimated to 5.6% athave averaged 9.2% in 2017, similar to the end of 2013 and 5.9% at the end of 2012.9.5% unemployment rate estimated for 2016.
Chile
Chilean GDP expanded moderately at an estimated rate of 1.9%1.5% (CFe), slightly below the lowestrate registered in 2016 (1.6%) and at its slowest pace since the recession2009 recession. The strike in “Escondida,” the biggest copper mine of 2009 and 3.4 percent points under the average annual growth rate for the 2010-2013 period (5.3%). Private consumption slowed down and grew by an estimated 1.8% compared with 5.6% in 2013 and 6.0% in 2012. Investment, in turn, is estimated to have contracted for the first time since 2009. As most emerging economies, Chile faced headwinds from the international financial markets tightening, the decreasing commodity prices (especially copper prices)country, and the emerging/advanced capital flows reallocation. Domestically,protracted contraction in real estate investment prevented a persistent slack of confidence and decreasing expectations also weighed negatively on expenditure decisions.better performance.
The labor market was substantially resilient to the economic underperformance anddeteriorated mildly, the unemployment rate increased from an averageto 6.4% at the end of 6.0%2017 compared to 6.1% and 5.8% in 2013 to 6.5% in 2014 -CFe- (among2016 and 2015, respectively, but remained among the lowest unemployment rates in the last decade).current decade. Nominal wages rose at increasing rates during the year; in part, to compensate the loss in purchasing power due to the higher inflation.line with historical averages, and real wages accelerated as inflation decreased.
Inflation, measured by CPI, reached 4.6%2.3% in 2014 compared2017, decreasing with 3.0%respect to previous years (2.7% and 4.4% in 20132016 and 1.5% in 2012. Inflation gained momentum as2015, respectively). This reduction is mostly explained by the local currency depreciated at a faster pace, as supply shocks temporally hit pricesappreciation of certain food items and as additional or higher specific taxes rates were applied to alcoholic beverages, cigarettes, sodas and new cars, among other items. While the fallChilean peso, soft increases in international oil prices decreasedand excess supplies of fresh vegetables and fruits. Core inflation pressures in(excluding food and energy) reached 1.9%. Both CPI and core CPI inflation remained below 3%, the last partinflation target of the year, general and core inflation closed 2014 well aboveChilean Central Bank during the Central Bank’s monetary policy target range (between 2% and 4%).year.
The Chilean Central Bank reducedlowered its policy interest key rate 25 basis points six times duringfrom 3.5% to 2.5% along the yearfirst half of 2017 and kept it unchanged the rest of the year. The monetary policy aimed to support the recovery in response to less dynamic economic activity in a context of diminished inflation pressures. The inflation outlook changed markedly from previous years and falling expectations. The Monetary Policy Rate closed at 3.00% in 2014. The fiscal deficit reached 1.5% of GDP, comparedgave more room to a deficit of 0.6% in 2013 and a surplus of 0.6% in 2012. loose monetary policy.
The trade balance surplus increased from 2.2reached 6.9 billion U.S. dollars in 20132017, compared to 8.65.3 billion U.S. dollars in 2014 due2016 and 3.5 billion U.S. dollars in 2015. Chilean exports evolved in line with an uptrend in copper prices, which soared 30% along the year, as well as a recovery in Chilean non-mining exports. In turn, Chilean imports grew moderately as local activity remained weak. Total Chilean external trade grew for the first time in three years in line with the improvement in global trade.
The fiscal balance accounted for an estimated deficit of 2.8% of GDP, similar to a fallthe deficit reached in imports caused by the economy’s slowdown.2016 (2.7%) but slightly higher than in 2015 (2.1%).
AtThe nominal exchange rate at the end of 2014, the nominal exchange rate2017 was 607.4615 Chilean Pesospesos per U.S. dollar, reflecting a year-over-year Chilean Peso depreciationpeso appreciation of 16.0%8.2%. The exchange rate performance in 20142017 was mainly explained by the opposing policy decisions adopted in the United States and Chile, with the former being expected to raise interest rates in the short term and the latter loosening its monetary policy stance. The decrease in copper prices also contributed to the Chilean Peso depreciation, although the impactcontinuous increase of copper prices was less significant than in other times.along the year, as well as the persistent weakening of the U.S. dollar against its main counterparts.
In 2014 a tax reform which aims to increase annual taxation by 3 percent points of GDP was approved. These additional resources will be used mainly to finance the upcoming educational reform (1.5% of GDP), to improve the scope of current social policies (0.5% of GDP) and to close the structural fiscal gap (1% of GDP). The reform introduces substantial changes to the Chilean tax system, including two alternative methods for computing shareholder-level income taxation, additional corporate tax rate increases, important amendments to the thin capitalization rules, and other substantial modifications.
Argentina
Argentina’s GDP decreasedgrew by an estimated 1.1%2.8% in 20142017 (CFe). This data is much lower than, in contrast to the 2016 decrease of 2.2% and the average annual growth ratesrate of approximately 8.5%7.5% achieved from 20032005 through 2008, and 5.3% from 2009 to 2012.2008.
The Argentine peso depreciated 29.8%by 18.4% relative to the U.S. dollar, closing at 8.4618.77 Argentine pesos per U.S. dollar at the end of 20142017, compared with 6.5115.85 Argentine pesos per U.S. dollar at the end of 20132016 and 4.9112.94 Argentine pesos per U.S. dollar at the end of 2012.2015.
The officialBuenos Aires CPI increased 23.9%by 26.1% in 2014 (compared2017 compared with 11.0%41.0% in 20132016 and 10.8 %26.9% in 2012).2015.
The expectedestimated current account deficit of 5.228.3 billion U.S. dollar in 2017 (CFe) is the highest in Argentinian history, increasing from the deficit of 14.7 billion U.S. dollars reached in 2016 and the 17.2 billion U.S. dollars deficit of 2015. The trade balance deficit amounted to 8.5 billion U.S. dollars in 2014 is the highest deficit2017, with a 19.7% increase in the last decade. The trade balance contributedimports and a 0.9% increase in exports, both contributing significantly to this result, even when exports decreased lessresult.
Colombia
Colombian GDP grew 1.8% in 2017. That growth was lower than imports during the year (7.3 %2.0% and 8.3% respectively).3.1% recorded in 2015 and 2016, respectively. The tax reform impact on private consumption mostly explains this deceleration.
Economic conditions affectedFollowing the deceleration in GDP, the unemployment rate negatively, which increased to 7.7% in 2014 from 7.1% in 2013 and 7.2% in 2012.
Colombia
During 2014, the economy showed strong growth which remained supported by private consumption and good performance of investments (with the recovery of construction and better dynamism of civil construction works). However, exports showed a slight slowdown as a result of lower external demand and some supply shocks, and industrial production remained weak throughout the year. GDP is estimated to havehas grown nearly 4.9% (CFe) in 2014 (compared with 4.7% in 2013).
Employment during 2014 showed a significant recovery.moderately. The annual average unemployment rate averaged 9.0%for 2017 was 9.4% (CFe), slightly above the 9.2% and 8.9% rates showed in 2014 compared with 9.7%, 10.4%2016 and 10.8% in 2013, 2012 and 2011,2015, respectively.
According to CFe, the balance of payments registered a current account deficit of 16.3 billion U.S. dollars, 4.2% of GDP, compared with 3.2% of GDP in 2013, and 3.1% of GDP in 2012.
Amid expectations of withdrawal of monetary stimulus by the Federal Reserve in the United States and a continuous and sharply decrease in oil prices, the Colombian peso depreciated 23.0% during 2014 against the U.S. dollar (closing the year at 2,455.3 Colombian pesos per one U.S. dollar).
The inflation rate was 3.7%4.1% year-on-year at the end of 2013, compared with 1.9%2017, 1.6 percentage points lower than in 2016. This evolution was mainly explained by the recovery of food supply due to the end of the ENSO (El Niño Southern Oscillation), and 2.4%the vanishing effect related to the 2016 tax reform.
The Colombian peso appreciated 3.4% on average against the U.S. dollar in 2017. The exchange rate at the end of 20132017 was 2.984 Colombian pesos per U.S. dollar. This appreciation is explained by the increase in oil prices, due to the cuts in production made by the OPEC members (Vienna’s agreement), and 2012, respectively.the reduction in the country risk, reflected in the credit default swap (CDS) prices.
The Colombian Central Bank lowered interest rates by 275 basis points from 7.50% to 4.75%, in line with the lower inflation and lower economic activity growth during the year.
Current account deficit is estimated to have reached 11.4 billion U.S. dollars (CFe) in 2017, 3.7% in terms of GDP, which is lower than the 4.4% recorded the year before. This reduction is explained by an increase in exports due to a recovery in commodity prices.
Peru
After four yearsPeruvian GDP expanded by 2.5% in 2017, in contrast to the 4.0% expansion of strong GDP2016. This was mainly explained by a slowdown in growth (5.8% in 2013, 6.0% in 2012, 6.5% in 2011 and 8.5% in 2010), the Peruvian economy posted a sharp slowdown to a growth of 2.9% in 2014 (CFe). The main driversfirst quarter of the slowdown were weak investment (both privateyear, as a result of the negative developments that the economy faced (El Niño Costero and public) and exports (lower ore gradescorruption cases), which was followed by an expansion in key mines). Investment and exports are expectedthe following quarters, after the impact of these developments began to post a contraction in 2014. On the other hand, strong private consumption was the main contributor to growth. El Niño-like climate anomalies during 2014 hurt output from fishing and agriculture, which, combined with the weakness in mining, turned into a contraction of primary GDP, while services and commerce sustained a strong pace of growth.subside.
Consumer prices, as measured by the CPI, increased by 3.2%1.4% in 2014, slightly over2017, within the range of the Peruvian Central Bank’s target (betweenof 1% and 3%),-3% compared with 2.9%3.2% in 20132016 and 2.6%4.4% in 2012. Inflation gained momentum affected by climate changes and currency depreciation.2015.
The Peruvian Central Bank cut its interest key rate by 50100 basis points from 4.25% in 2016 to 3.5%,3.25% in 2017. According to the Central Bank, inflation expectations are within the target range and the reserve requirement deposits rate, from 15% to 9.5%, showing an explicit easing bias.growth of economic activity has been recovering rapidly, although below its potential growth in a context of low inflation.
Due to a positive fiscal impulse, theThe government budget is likely to postshowed a smallrelatively moderate deficit for 2014,of 3.2% of GDP in 2017, compared with a slight fiscal surplusdeficit of 0.9%2.6% in 2013 and around 2.0% in 2012.2016. This is the result of a significant increase on public expenditure.
In the foreign exchange market, the Peruvian Nuevo Sol weakened 6.4 %strengthened by 3.6% against the U.S. dollar in 2014,2017, reaching 2.983.24 Peruvian Nuevo Sol per U.S. dollar at the end of the year, compared with a depreciation of 9.6% in 2013 and an appreciation of 5.4% against the U.S. dollar1.7% in 2012.2016 and a 14.6% depreciation in 2015. The large commercial deficit and slower financial capital inflows lead to a reduction of international net reserves, reaching 62.3 billion U.S. dollars compared to 65.7trade surplus reached 6.3 billion U.S. dollars in 20132017 (considerably higher than the 1.9 billion U.S. dollars surplus in 2016) and 64.0constant financial capital inflows led to an increase of the international net reserves (2.0 billion U.S. dollars), reaching 63.7 billion U.S. dollars in 2012.2017 compared to 61.7 billion U.S. dollars in 2016 and 61.5 billion U.S. dollars in 2015.
Country risk, measured by the J.P. Morgan Emerging Markets Bond Index (EMBIG Peru), rose 20declined 34 basis points to 162136 basis points in 2014. Long-term2017. The long-term sovereign debt rating is currently investment grade rated by Fitch, Standard and Poor’s and Moody’s rating agencies.
Exchange Rate Fluctuations
We publish our Consolidated Financial Statements in euros. Because a substantial portion of our assets, liabilities, revenues and expenses are denominated in currencies other than the euro, we are exposed to fluctuations in the values of these currencies against the euro. Currency fluctuations have had and may continue to have a material impact on our financial condition, results of operations and cash flows.
We estimate that in 20142017 variations in currencies and hyperinflation in Venezuela decreased our cash flows and cash balance by approximately 1,616 million euros and decreased our consolidated revenues by approximately 12.1%3.2%. Currency fluctuations can also have a significant impact on our statement of financial position, particularly equity attributable to equity holders of the parent, and on our statement of cash flows, when
translating the financial statements of subsidiaries located outside the Eurozone into euro. For example, in 2014In 2017 equity attributable to equity holders of the parent decreased by 2,857 million euros due to the translation of the financial statements of our foreign subsidiaries, principally due to the depreciation of the Venezuelan bolívar fuerte and the Argentine peso, partially offset by the appreciation of the pound sterling relative to the euro.
We estimate that in 2013 variations in currencies and hyperinflation in Venezuela decreased our cash flows and cash balance by approximately 1,4684,607 million euros and cash and cash equivalents decreased our consolidated revenues by approximately 7.5%. In 2013 equity attributable to equity holders of the parent decreased by 5,691356 million euros due to the translation of the financial statements of our foreign subsidiaries, principally due to the depreciation of the Brazilian real, the Venezuelan bolívar fuerteArgentinian peso and the Argentine peso,pound sterling relative to the euro.
We estimate that in 20122016 variations in currencies and hyperinflation in Venezuela decreased our cash flows and cash balanceconsolidated revenues by approximately 3828.0%. In 2016 equity attributable to equity holders of the parent increased by 2,049 million euros and cash and cash equivalents increased by approximately 185 million euros due to the translation of the financial statements of our foreign subsidiaries, principally due to the appreciation of the Brazilian real, Chilean peso and the Colombian peso, partially offset, by the depreciation of the pound sterling, Argentinian peso and Mexican peso relative to the euro.
We estimate that in 2015 variations in currencies and hyperinflation in Venezuela decreased our consolidated revenues by approximately 0.1%2.3%. In 20122015 equity attributable to equity holders of the parent decreased by 1,2784,657 million euros and cash and cash equivalents decreased by approximately 1,000 million euros due to the translation of the financial statements of our foreign subsidiaries, principally due to the depreciation of the Brazilian real, Argentine peso and the Venezuelan bolívar, partially offset, by the appreciation of the pound sterling relative to the euro.
Venezuela is considered as a hyperinflationary economy since 2009. The inflation rates used to prepare the financial information included herein are based on the National Consumer Price Index of Venezuela (Indice Nacional de Precios al Consumidor de Venezuela) published by the Central Bank of Venezuela, or where a definitive index is not available, the best estimation. On an annual basis, these rates are 2,874.1%, 511.1% and 190.8% for 2017, 2016 and 2015, respectively. The exchange raterates used to convert items denominated in Venezuelan bolívar, once adjusted for inflation, in the Consolidated Financial Statements are the closing rates as of 6.3December 31, 2017, 2016 and 2015, which were 36,115.28 bolivars per U.S. dollar was used in the translation of the financial information of Venezuelan subsidiaries for the whole year 2013.
During 2014, by virtue of certain Exchange Agreements the allocations conducted through the Complementary System for Administration of Foreign Currency (SICAD I)(by reference to synthetic exchange rate), to which Telefónica Venezuela had access for imports, were expanded and, in addition, a new exchange mechanism with a more widespread use was put in place, called SICAD II.
The exchange rates resulting in the last allocations of SICAD I and SICAD II before December 31, 2014 were 12.0 and 49.988 bolívares674 bolivars per U.S. dollar respectively.
In the absence of auctions since mid-October 2014,(by reference to DICOM) and the lack of expectations of new auctions close199 bolivars per U.S. dollar (by reference to 2014 year-end, in a macroeconomic context aggravated by the fall of the oil price, the Company has decided to take as a reference the rate resulting in the allocations conducted through SICAD II for translating the financial statements of the Venezuelan subsidiaries. The Company considers that it is the most representative among the available official exchange rates at 2014 year-end for the monetary translation of the accounting figures of transactions, cash flows and balances.
The main impacts of using this new exchange rate in the Telefónica Group’s consolidated financial statements as of December 31, 2014 were as follows:
| · | A decrease in equity, within the caption “Translation differences”SIMADI), of approximately 2,950 million euros (see Note 12.f of the Consolidated Financial Statements) as a combined result of the translation to euros at the new exchange rate partially offset by the impact in equity of the inflation adjustment for the period. |
| · | As part of the decrease mentioned in the preceding paragraph, the value in euros of the net financial assets denominated in bolívares decreased by approximately 2,700 million euros, as per the balance as of December 31, 2014. |
| · | The results from the Telefónica’s subsidiaries in Venezuela have been translated at the new exchange rate. This implied a reduction in operating income before depreciation and amortization (OIBDA) and profit for the year of, approximately, 1,730 and 660 million euros, respectively. |
The table below sets forth the average exchange rates against the euro of the U.S. dollar and the key currencies that impacted our consolidated results of operations for the periods indicated. Positive percentage changes represent a decline in the value of the applicable currency relative to the euro, and negative percentage changes represent increases in the value of the applicable currency relative to the euro.
| | | | 2012(1) | 2013(1) | 2014(1) | % change 2012 to 2013 | % change 2013 to 2014 | 2015 (1) |
| 2016 (1) |
| 2017 (1) |
| % change 2015 to 2016 |
| % change 2016 to 2017 |
|
| | Average | Average |
| Average |
| Average |
| Average |
| Average |
|
| Pound Sterling | 0.81 | 0.85 | 0.81 | 4.94% | (4.71)% | 0.73 |
| 0.82 |
| 0.88 |
| 11.92 | % | 7.71 | % |
| U.S. Dollar | 1.29 | 1.33 | 3.10% | − | 1.11 |
| 1.11 |
| 1.13 |
| - |
| — |
|
| Brazilian Real | 2.50 | 2.85 | 3.12 | 14.00% | 9.47% | 3.64 |
| 3.83 |
| 3.59 |
| 5.30 | % | (6.34 | )% |
| Argentine Peso | 5.84 | 7.23 | 10.75 | 23.80% | 48.69% | 10.22 |
| 16.31 |
| 18.56 |
| 59.63 | % | 13.77 | % |
| Peruvian Nuevo Sol | 3.39 | 3.58 | 3.77 | 5.60% | 5.31% | 3.53 |
| 3.73 |
| 3.67 |
| 5.75 | % | (1.69 | )% |
| Chilean Peso | 624.59 | 656.25 | 756.71 | 5.07% | 15.31% | 723.91 |
| 747.50 |
| 731.28 |
| 3.26 | % | (2.17 | )% |
| Mexican Peso | 16.90 | 16.93 | 17.65 | 0.18% | 4.25% | 17.57 |
| 20.63 |
| 21.29 |
| 17.41 | % | 3.20 | % |
| Venezuelan Bolívar Fuerte (2) | 5.67 | 8.69 | 60.69 | 53.26% | n.m. | |
| Czech Crown | 25.14 | 25.99 | 27.53 | 3.38% | 5.93% | |
| Venezuelan Bolívar (2) | | 216.31 |
| 710.23 |
| 43,290.04 |
| n.m. |
| n.m. |
|
| Colombian Peso | 2,308.54 | 2,478.69 | 2,650.03 | 7.37% | 6.91% | 3,016.49 |
| 3,369.06 |
| 3,324.37 |
| 11.69 | % | (1.33 | %) |
| Guatemalan Quetzal | 10.06 | 10.43 | 10.25 | 3.68% | (1.73)% | 8.49 |
| 8.41 |
| 8.29 |
| (0.99 | %) | (1.38 | %) |
Source: Central treasury bank of the respective countries.
(1) | (1) These exchange rates are used to convert the income statements of our subsidiaries from local currency to euro. (2) As Venezuela is considered a hyperinflationary country, the income statement from operations in Venezuela is accounted for pursuant to the closing exchange rate of bolívar to euro. |
(2) | As Venezuela is considered a hyperinflationary country, the income statement from operations in Venezuela is accounted pursuant to the closing exchange rate of bolívar fuerte to euro. |
We describe certain risks relating to exchange rate fluctuations in “Item 3. Key Information—Risk Factors,” and we describe our policy with respect to limiting our exposure to short-term fluctuations in exchange rates under “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
Group Results of Operations
Please see “Item 4. Information4 —Information on the Company — Business Overview — Group Results of Operations.Financial Results.”
Cash Flow Analysis
The table below sets forth consolidated cash flow information for the periodsyears indicated. Positive figures refer to cash inflows and those in parenthesisparentheses refer to cash outflows.
| | | | | 2015 | 2016 |
| 2017 |
|
| (millions of euros) | 2012 | 2013 | 2014 | | |
| |
|
| Net cash from operating activities | 15,213 | 14,344 | 12,193 | 13,615 | 13,338 |
| 13,796 |
|
| Net cash used in investing activities | (7,877) | (9,900) | (9,968) | (12,917) | (8,208 | ) | (10,245 | ) |
| Net cash used in financing activities | (1,243) | (2,685) | (4,041) | (3,612) | (4,220 | ) | (1,752 | ) |
For a discussion of our cash flows for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, please see Note 20 to our Consolidated Financial Statements.
Anticipated Uses of Funds
Our principal liquidity and capital resource requirements consist of the following:
costs and expenses relating to the operation of our business;
| · | costs and expenses relating to the operation of our business; |
debt service requirements relating to our existing and future debt;capital expenditures for existing and new operations;
| · | debt service requirements relating to our existingacquisitions of new licenses or other operators or companies engaged in complementary or related businesses; and future debt; |
| · | capital expenditures for existing and new operations; |
| · | acquisitions of new licenses or other operators or companies engaged in complementary or related businesses; and |
| · | dividend,dividends, other shareholder remuneration, and pre-retirement payments. |
In 2015,2018, we expect to continue transforming our networks, evolving them towards all-IP hyper-connected networks, by investing in FTTx in key markets, and by expanding our mobile networks with LTE in most of our operations, and also with 3G. We also expect to continue investing in IT as a critical factor in our transformation. We willexpect to continue to invest in TV and digital sourcescontent to take advantage of the opportunities in the digital markets. And weWe may also use funds to acquire new licenses engaged in complementary or related businesses in the digital world.
We also have liquidity requirements related to the costs and expenses relating to the operation of our business, financial investments, our payment of dividends, shareholder remuneration and pre-retirement payment commitments. In 2014 cash expenditures consisted principally of: 3,382 million euros in connection with shareholder remuneration (in connection with payment of dividends on Telefónica shares and the acquisition of Telefónica treasury shares), 1,346 million euros principally in connection with net financial investments and 789 million euros in connection with commitments under pre-retirement plans.
We also have liquidity requirements related to debt service requirements in connection with our existing and future debt. At December 31, 2014,2017, we had gross financial debt of 59,78255,746 million euros compared with 60,69960,361 million euros at December 31, 2013.2016. For the amortization schedule of our consolidated gross financial debt at December 31, 20142017 and a further description of financing activity in 2014,2017, see “—Anticipated Sources of Liquidity” below. Our net financial debt decreased by 4,365 million euros to 45,08744,230 million euros at December 31, 2014,2017, compared with 45,38148,595 million euros at December 31, 2013 (excluding2016. The main factors contributing to decreased debt in 2017 include: (i) our 2017 free cash flow generation of 4,947 million euros; (ii) our 40% Telxius divestment for 1,275 million euros and (iii) the implicit devaluationlower euro value of the Venezuelan bolívar ourforeign-denominated net financial debt would have decreased by 2,635amounting to 639 million euros).euros. The decrease in net financial debt was mainly explained by our 2014 cash flow generation before spectrum payments of 4,748 million euros, the issue of equity instruments for a total amount of 4,699 million euros of Telefónica Deutschland (including the portion subscribed by Telefónica Deutschland’s minority shareholders in the capital increase) and proceeds of 3,981 million euros from disposals (relating to the sale of Telefónica Czech Republic and a 2.5% stake in China Unicom). In contrast, factors contributing to increased debt in 2014 include net financial investments (4,949 million
euros), 3,382 million euros as remuneration of equitycapital instruments, (including the purchase of treasury stock), spectrum payments (932stock and payment of coupons on undated deeply subordinated securities) amounting to 1,264 million euros; (ii) the payment of labor-related commitments (696 million euros), the payment of labor commitments mainly associated withrelated to early retirements (789 million euros)retirements; and (iii) other factors that increased debt by 741affecting the liabilities amounting to 536 million euros. euros (including the refinancing of commercial liabilities).
For a reconciliation of net financial debt to gross financial debt, (the sum of current and non-current interest-bearing liabilities), see “—Presentation of Financial Information—Non-GAAP financial information—Net financial debt and net debt”financial debt plus commitments”.
For a discussion of our liquidity risk management policy, see Note 16 to our Consolidated Financial Statements.
Anticipated Sources of Liquidity
Cash flows from operations are our primary source of cash funding for existing operations, capital expenditures, investments, licenses, interest obligations and principal payments. We also rely on external borrowings,financing, including a variety of short- and medium-term financial instruments, principally bonds and debentures, undated deeply subordinated securities and borrowings from financial institutions. Cash and cash equivalents are mainly held in euros and euro-denominated instruments. We believe that, in addition to internal generation of
In recent years, we raised funds our medium-term note program, our euro commercial paper program, our corporate domestic promissory note programby issuing equity instruments, principally undated deeply subordinated securities, mandatory convertible notes, debt securities and available lines of credit will provide us with substantial flexibility for our future capital requirements as existing debt is retired.
new shares.
Financing
The following table shows the amortization schedule of our consolidated gross financial debt at December 31, 20142017 as stated in euro. We may have exchange rate financial derivatives as instruments assigned to the underlying debt instruments. In 2014, the average cost of net debt, which we measure as net financial expense divided by our average net debt which, adjusted for exchange rate differences, was 5.40%. The table below includes the fair value of those derivatives classified as financial liabilities (negative(i.e., those with a negative mark-to-market) under IFRS (401 million euros classified as a current financial liability and 3,231 million euros as a non-current financial liability). The table does not includeexcludes the fair value of derivatives classified as financial assets (positive mark-to-market) under IFRS (813 million euros classified as current financial assets (845 million euros), and 5,499 million eurosthose classified as non-current financial assets)(2,812 million euros) (i.e., those with a positive mark-to-market). For description of the liquidity risk we face, see Note 16 to our Consolidated Financial Statements, and for a description of our financial liabilities, see Note 13 to our Consolidated Financial Statements.
90 |
| | | | | | | | | | | | | | | | |
| Millions of euros |
| | Current | Non-current | | |
| Maturity | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Non-current total |
| Total |
|
| Debentures and bonds | 5,313 |
| 3,599 |
| 5,108 |
| 4,760 |
| 4,903 |
| 17,605 |
| 35,975 |
| 41,288 |
|
| Promissory notes & commercial paper | 2,107 |
| — |
| 112 |
| — |
| — |
| 187 |
| 299 |
| 2,406 |
|
| Total Issues | 7,420 |
| 3,599 |
| 5,220 |
| 4,760 |
| 4,903 |
| 17,792 |
| 36,274 |
| 43,694 |
|
| Loans and other payables | 1,714 |
| 2,250 |
| 819 |
| 918 |
| 531 |
| 2,668 |
| 7,186 |
| 8,900 |
|
| Derivative instruments | 280 |
| 214 |
| 824 |
| 453 |
| 185 |
| 1,196 |
| 2,872 |
| 3,152 |
|
| Total | 9,414 |
| 6,063 |
| 6,863 |
| 6,131 |
| 5,619 |
| 21,656 |
| 46,332 |
| 55,746 |
|
| Millions of euros |
| | Current | | Non-current | | |
| Maturity | 2015 | | 2016 | 2017 | 2018 | 2019 | Subsequent years | Non-current total | Total |
| Debentures and bonds | 4,601 | | 6,722 | 6,392 | 4,834 | 3,465 | 18,214 | 39,627 | 44,228 |
| Promissory notes & commercial paper | 502 | | − | − | − | − | − | − | 502 |
| Other marketable debt securities | − | | − | − | − | − | − | − | − |
| Total Issues | 5,103 | | 6,722 | 6,392 | 4,834 | 3,465 | 18,214 | 39,627 | 44,730 |
| Loans and other payables | 3,590 | | 1,533 | 3,205 | 761 | 849 | 1,482 | 7,830 | 11,420 |
| Other financial liabilities | 401 | | 152 | 347 | 477 | 357 | 1,898 | 3,231 | 3,632 |
| TOTAL | 9,094 | | 8,407 | 9,944 | 6,072 | 4,671 | 21,594 | 50,688 | 59,782 |
- Estimated future interest payments as of December 31, 20142017 on our interest-bearing debt (not included above) are as follows: 2,215 million euros in 2015, 1,960 million euros in 2016, 1,671 million euros in 2017, 1,2791,715 million euros in 2018, 1,0771,525 million euros in 2019, 1,323 million euros in 2020, 1,068 million euros in 2021, 914 million euros in 2022 and 6,5867,037 million euros in subsequent years. With respect to floating rate debt, we estimate future interest payments as the forward rates derived from yield curves quoted for the different currencies on December 31, 2014.2017.
During 2014,2017, we obtained external financing intotaling approximately 10,501 million euros (excluding the formrefinancing of borrowings of approximately 14,740 million euros. The financing activity in 2014 was mainlyeuro commercial paper and short term banking loans) and focused on completing the financing for the acquisition of E-Plus (via the issue ofmaintaining a 1,500 million euro bond mandatorily convertible into Telefónica shares and the execution of a capital increase by Telefónica Deutschland), strengthening thesolid liquidity position, actively managing the cost of debtas well as refinancing and smoothingextending the debt maturity profile for the following years. Therefore, asmaturities (in an environment of December 31, 2014, we believe we maintain an adequate liquidity position to accommodate 2015 and 2016 debt maturities.
very low interest rates).
For a description of our financing, see Note 13 to our Consolidated Financial Statements.
In 2015,2018, through the date of this Annual Report, our debt issuances and principal financing arrangements consisted of:
On January 11, 2018, Telefónica Deutschland Holding AG launched an issuance of debt instruments in the local market (Schuldscheindarlehen and Namensschuldverschreibung) for an aggregate amount up to 200 million euros and maturities of up to 15 years.
| · | On February 19, 2015, Telefónica, S.A. signed a 2,500 million euros syndicated credit facility maturing in 2020 with two twelve month extension options requiring mutual agreement of the parties (which could extend the maturity to as late as 2022). This agreement entered into effect on February 26, 2015 and allowed us to cancel in advance the syndicated loan facility of Telefónica Europe, B.V. dated on March 2, 2012 with two tranches of 756 million euros and 1,469 million pounds sterling originally scheduled to mature in 2017. On the same date, Telefónica S.A. signed an amendment to its 3,000 million euros syndicated credit facility arranged on February 18, 2014 and maturing in 2019 in which the parties mutually agreed two twelve month extension options (which could extend the maturity to as late as 2021). |
On January 22, 2018, Telefónica, S.A. drew down 100 million euros of its bilateral loan signed on December 28, 2017 and maturing in 2020.On January 22, 2018, Telefónica Emisiones S.A.U. issued notes under its EMTN Program filed on June 29, 2017 in an aggregate nominal amount of 1,000 million euros. The notes are due on January 22, 2027, pay an annual coupon of 1.447% and are guaranteed by Telefónica, S.A.
On January 23, 2018, Telefónica, S.A. drew down 385 million euros of its bilateral loan signed on December 20, 2017 and maturing in 2019.
On January 23, 2018, Telefónica Germany GmbH & Co. OHG signed the second extension of its syndicated credit facility dated March 22, 2016, for 750 million euros and new maturity on March 22, 2023.
On January 26, 2018, Telxius drew down 221 million euros and 75 million dollars of its multicurrency syndicated facility signed on December 1, 2017 and maturing in 2022. This syndicated facility allows the parties to extend the maturity up to 2024 by mutual agreement.
On January 30, 2018, Telefónica, S.A. drew down 100 million euros of its bilateral loan signed on November 24, 2017 and maturing in 2026.
Our borrowing requirements are not significantly affected by seasonal trends.
Availability of funds
At December 31, 2014, Telefónica has2017, we had funds available amounting to 19,414(including cash and cash equivalents and undrawn lines of credit) totaling 20,852 million euros, which includes:euros. This amount included: undrawn lines of credit for an amount of 11,54513,531 million euros (10,618(12,541 million euros maturingexpiring in more than 12 months); cash and cash equivalentequivalents and current financial assets other than those in Venezuela (367 million euros)Venezuela.
We believe that, in addition to internal generation of funds, our working capital, our medium-term note program, our euro commercial paper program, our corporate domestic promissory note program and Telefónica’s participation in Telco’s bond (principal amountavailable lines of 1,225 million euros) totalling 7,869 million euros.
credit will allow us to meet our future capital requirements, including (according to our liquidity policy) gross debt maturities over the next twelve months.
For a description of our liquidity and undrawn lines of credit available at December 31, 2014,2017, see Notes 12 and 13 to our Consolidated Financial Statements, and for a discussion of our liquidity risk management and our capital management, see Note 16 to our Consolidated Financial Statements.
Telefónica, S.A. is the parent company of the Telefónica Group and receives funding from its subsidiaries in the form of dividends and loans. Consequently, restrictions on the ability of the Group’s subsidiaries to transfer funds to Telefónica, S.A. in the form of cash dividends, loans or advances, capital repatriation and other forms would negatively affect our liquidity and thus our business.
Certain Latin American economies, such as currently Venezuela, or Argentina and Venezuela,in the past, have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into U.S. dollars. This may limit our ability to repatriate funds out of certain subsidiaries from such countries. However, regarding net repatriation of funds to Spain, in 20142017 we have received 1,118on a net basis 344 million euros from our Latin American subsidiaries, of which 9611,134 million euros was fromrelated to dividends and 157received, which were partly offset by an outlow of 790 million euros was from other items.due mainly to the capital increases of certain Group companies.
Credit Ratings
Our ability to use external sources of financing will depend in large part on our credit ratings. We believe that we are well-positioned to raise capital in financial markets. However, negative conditions in the financial markets or a downgrade of any of the ratings of our debt or the Kingdom of Spain’s debt by any of Fitch, Moody’s and/or Standard & Poor’s may increase the cost of our future borrowings or may make it more difficult to access the public debt markets. In connection with the credit rating agencies’ review of our debt ratings, the rating agencies may give considerable weight to general macroeconomic and political conditions (including sovereign credit rating prospects), the performance of our businesses in countries where we operate, our financial and shareholder remuneration policy, our M&A policy, our ability to integrate acquired companies and our ability to refinance debt.
In 2014,At December 31, 2017, Telefónica, S.A.’s long-term issuer default rating is "BBB stable outlook" from Fitch, “Baa3 stable outlook" from Moody's and "BBB stable outlook" from Standard & Poor's. During 2017, there have not been any changes in the credit ratings by the three agencies. The last changes in the credit ratings took place in 2016 when Moody’s downgraded the rating to “Baa3 stable” from “Baa2 negative” on November 7, 2016, Fitch downgraded the rating to “BBB stable” from “BBB+ stable” on September 5, 2016 and Standard and Poor’s revised the outlook to “stable” from “positive” on May 17, 2016.
The European Commission's decision to block the proposed sale of O2 U.K. to Hutchison's Three U.K. in 2016 had an impact on Telefonica’s credit ratings and outlooks by Moody’s and Standard and Poor’s, as they considered such decision would delay the Company’s deleveraging process. During 2017, we have taken certain measures to protect our credit rating. These measures mainly include: an intensive and prudent financing activity, taking advantage of historical low refinancing rates to extend average debt life, together with a conservativethe maintenance of an appropriate level of liquidity, policy, the implementation of a scrip dividend (instead of a cash only dividend) in November 2014, aan active portfolio rationalizationmanagement through the total or partial salecompletion of certain assets such as Telefónica Ireland, Telefónica Czech Republic and China Unicom, the issuance40% divestment of financial instruments with high equity content to finance the E-Plus acquisition (such as bonds mandatorily convertible into Telefónica shares)Telxius, and the issuance of undated deeply subordinated securities as a solvency protection measure to mitigate negative impacts on our consolidated financial statements deriving from unforeseen events such as the devaluation in Venezuela.
statements.
Intragroup Loans
We lend funds to our operating subsidiaries, directly or through holding companies that head our different lines of business. At December 31, 2014,2017, we had loans outstanding totaling 7,4334,881 million euros (9,806(5,671 million euros at December 31, 2013)2016) to companies in the Telefónica Group (including subsidiaries located in Latin American countries). These funds are derived from retained cash flows, loans, bonds, issuances of undated deeply subordinated securities and other sources (such as asset disposals).
Telefónica remains firmly committed to technological innovation as an essentiala fundamental tool for being one of the main actors in the new digital universe, with the capacity to help to create a more sustainable world while achieving competitive advantages trying to anticipate market trends and differentiating itsdistinctive products. By introducing new technologies and developing new productsbusiness solutions and business processes, we seekaim to become a more effective, efficient and customer-oriented Group.
Telefónica hasbases its innovation strategy on the balance between two main models:
Promoting our internal research, development and innovation (R&D&i) capabilities, for which we have developed an openour own innovation model, for the management of technological innovationwhich allows us to boostpromote the application of technical research in the development of newdeveloping commercial products and services. Telefónica focuses on certain appliedservices using the knowledge developed in research centers, technological institutes and development (R&D) priorities that are aligned with its strategy. Open innovation initiatives driving this model includeuniversities, among other sources; and
Promoting the creation of a venture capital fund and involvement in business collaboration forums, among others. The model also promotes the use of knowledge developed at technology centers, universities and start-ups, among other sources, and encourages innovation in conjunction with other agents (e.g. customers, universities, public administrations, suppliers, content providers and other companies), making them “technological partners.” Within this open innovation strategy,ecosystems, in which the “Open FutureFuture” initiative stands out as a global program was reinforced during 2014. This program is designed to connect entrepreneurs, startups,start-ups, investors, venture capital funds and public and private organizations from all overaround the world which promote innovation in collaboration with a view to fostering innovation and developing viable projects.other actors.
In parallel with these two models, Telefónica seeks to promote the development of sustainable solutions that generate a positive impact on the environment and on the economic, social and technological progress of the regions in which we operate. To this effect, in addition to the investment made in promoting sustainable innovation projects and in the activities that are developed to guarantee the accessibility of our solutions to all groups, Telefónica has a subsidiary focused the development of disruptive technologies.
Telefónica firmly believes itthat competitive advantage cannot relybe based solely on acquired technology, to differentiate its products from thoseand so has always considered the promotion of its competitorsinternal innovation, research and to improve its market positioning. It is also important to encourage R&D initiativesdevelopment activities as a strategic axis, in an effort to achieve this differentiation and make inroadsmove forward in other activities which guarantee the sustainability of our business.
To this effect, the Telefónica Group’s internal innovation activities. The Group’s R&D policy is geared towards:focuses on contributing with solutions that support Telefónica’s commitment to developing a responsible business under the criteria of economic, social and environmental sustainability, by:
Developing new products and services that enable growth and competition in an increasingly global environment, while being adapted to the diversity and local needs of each market;
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Encouraging the return of innovation through open innovation and creating value from the technology generated;Increasing our customers' loyalty and satisfaction;
Increasing the revenues, profits and value of the Company;
Increasing the quality of our infrastructure and services, as well as our relationship with our technology providers and solutions; and,
Improving business processes and operations with the aim of optimizing resources, increasing efficiency and reducing environmental impact.
· | developing new products and services in order to win market share; |
· | boosting customer loyalty; |
· | enhancing innovation management; |
· | improving business practices; |
· | increasing the quality of infrastructure services to improve customer service and reduce costs; |
· | promoting global products; |
· | supporting open innovation; and |
· | creating value from the technology generated. |
In 2014, theDuring 2017 we carried out numerous technological innovation projects undertaken focused on sustainable innovation,sustainability, process efficiency, the creation of new sources of revenue, streams, customer satisfaction, the consolidation of operationsour presence in new markets and technological leadership.
TechnicalWe also develop innovation activities are a key part of Telefónica’s strategy of creating value through latest-generation network communications and services.
In 2014, projects were undertaken to promote greateran increase in the access to information technology in country areas or areas of difficult access (Proyecto Internet para todos), new servicesconnectivity technologies, solutions and applications focused on new internetInternet business models, advanced user interfaces, distribution of TV distribution,and multimedia contentcontents and other added-valuevalue added services, leveraging ontaking advantage of the potential of the new infrastructures.telecommunications infrastructures deployed. These initiatives,projects, among others, were undertaken based on our objective of rapidly identifyingto quickly identify emerging technologies that couldmay have a relevant impact on our businessesbusiness, and pilot testingto test these technologies inon pilots related to new platform services, applications and platform prototypes.
MostA significant part of our R&Dthe innovation activities and projects of research, development and innovations are carried out by the Innovation department of Telefónica, Investigación y Desarrollo, S.A.U. (Telefónica I+D), a wholly-owned subsidiary, which works mainly for the lines of business. In its operations, Telefónica I+D receives the assistance ofsupport from other companies and universities. Telefónica I+D’suniversities in the execution of its functions. Its mission is centeredfocused on enhancing the Company’s competitive positioning by leveragingimproving our competitiveness through technological innovation and product development. Telefónica I+D undertakesAdditionally, it is also responsible for experimental and applied research and new productfor the development with the overriding goal of broadening theproducts to increase our range of services offered and reducingreduce operating costs.
Telefónica I+D’sThe technological innovation activities focusof Telefónica are focused on two bigthree main areas:
| · |
| 1. | Telefónica I+D’s works onThe development of new networks, primarily in collaboration with Telefónica’s Global Resources team.networks. These activities are related to new radio and fibre optic access technologies and fiber;(technologies on the virtualization of network virtualization technologies,functions, in line with the technologytechnological trend known as softwareSDN or defined networks (SDN);via software) and on topics related to network optimization and zero touch developments making networks, which enable us to have a much more flexible and moldableadaptable network that is dynamically adaptable to the new requirements of digital services and ablecustomers.This category also encompasses all innovation activities with a purpose of efficiently deploying the network in remote and difficult-to-access areas to adapt dynamicallybring services that offer connectivity to new digital consumerthe entire population. This project provides connectivity to rural populations through innovative technologies including yet not limited to integration with satellites, flight networks, microcells and service requirements.network virtualization functions. |
| · |
| 2. | R&D activities to developThe development of new products and services which are conducted as partcarried out within the framework of the digital services strategy. These activities include the following:The following stand out among these activities: |
| o |
| ◦ | Natural P2PInterpersonal communication of the future usingwith natural access, taking advantage of the possibilities of the Internet Web 2.0 and smartphones.smartphones; |
| o |
| ◦ | Services related to Big Data, regarding the concept of the Fourth Platform, whose vision is to return the value associated with the data it generates to the customer; |
| |
| ◦ | Video and multimedia services (combining text, audio, images and video) offeringwith a user experience inon all connected devices.devices; |
| o |
| ◦ | Advanced solutions in emerging ITCICT businesses, such as cloud computing security, financial cloud or security; |
| |
| ◦ | Management of Internet of Things (IoT) services, or e-health. |
| o | M2M (machine-to-machine) service management associated withrelated to enriched mobility, energy efficiency and mobilitysmart retail; |
| |
| 3. | Experimental and withapplied research: With a medium and long-term outlook, Telefónica also has “Scientific Groups” whose mission is to investigate the Internetpossibilities of Thingsnew networks and their adoption inservices and to solve the urbantechnological, social and industrial scenario, and as a service creation enabler.environmental challenges that arise. |
| o | Making use of user communication profiles to exploit opportunities to operate different products and business models (marketing campaigns, target marketing, contextual services, churn reduction, cross-selling, etc.). |
the Telefónica Alpha Innovation unit, which was conceived to focus on innovating products and developing disruptive technologies that address the main challenges affecting the planet and society. In addition, Telefónica I+D’s also boasts scientific work groups withD Chile, a more medium- to long-term focus and aims to look into opportunities relating to new networks and services and solutions to the technological challenges that arise.
In100% subsidiary of Telefónica Chile, which was launched in 2014 Telefónica in collaboration with the Chilean government, launched a new R&D centercontinues developing products and generating patents in Chile, with focus on Internet of Things and Big Data, in the field of Smart Cities,"enriched mobility", Smart Industry and Smart Agro.
At December 31, 2014, Telefónica I+D had 652 employees (689 employees in 2013).
Total I+DThe total R&D expense in the Group for 20142017 amounted to 1,111862 million euros, up 6.2% from4.8% less than the 1,046906 million euros incurred in 2013 (1,0712016 (1,055 million euros in 2012)2015). This expense represents 2.2%1.7%, 1.8%1.7% and 1.7%1.9% of the Group’s consolidated revenue for 2014, 20132017, 2016 and 2012,2015, respectively. These figures were calculated using guidelines of the Organization for Economic Co-operation and Development (OECD).
During 2014,2017, Telefónica filed 27registered 32 new patent applications, allincluding two through the American office (USPTO), four through the Chilean office (INAPI) and 26 through the Spanish patent and trademark office (OEPM), 25 of themwhich were European applications and one was an international one (PCT). Moreover, 8 industrial designs with European scope were registered through the Spanish PatentOEPM.
Regarding the development of open innovation in Telefónica, the company has the Open Future unit, which includes an open, global program designed to connect entrepreneurs, startups, investors, and Trademark Office (OEPM),public and private organizations from around the world.
The main objective of Open Future_ is to detect, develop and enhance the talent and technological entrepreneurship in the local ecosystem of the 17 countries in which it is present and in all its phases, for that which drives and accelerates the growth of ideas, projects, initiatives and companies. The integral character of Telefónica Open Future enables innovation to be developed in different stages. It is structured around six initiatives, the objectives of which 25 are European applications (EP)as follows:
Drive (Think Big and 2 are International applications (PCT)Talentum Startups). Additionally 2 utility models were filed, also through OEPM.
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Accelerate (Crowdworking and Wayra).Invest (Telefónica Ventures and the Amérigo Funds).
Telefónica is an integrated diversified telecommunications group that offers a wide rangethe main investors in the Spanish area of services, mainlyopen innovation, positioning itself as one of the major funds in Europe and Latin America. Its coreAmerica in venture capital investment, thus positioning Telefónica as one of the most innovative companies, as also recognized by the Startup Europe Partnership, a European Union platform, appraising the company as the second largest European company to support innovation.
D. Trend Information
In 2017, Telefónica made progress towards long-term sustainable and profitable growth in service revenues, continuing to increase efficiencies and capturing synergies thanks to the integrated vision of the businesses, processes and technologies. This allowed us to maintain a strong investment effort in order to be able to offer our customers excellent connectivity. In recent years, the Company has moved forward in its business transformation:
Firstly, Telefónica preserves a business model with data-oriented offers, bundled services, including converged fixed and mobile services, as well as digital capabilities as part of the global transformation focused on responding to the change in our customers’ consumer habits. An essential part of our effort has been the investment in fiber and LTE networks, which we believe will allow the monetization of data as well as of digital services. In this way, Telefónica has significantly increased data accesses, including 68 million smartphones accesses, 3.3 million Pay TV accesses and 9.2 million fiber accesses during the 2015-2017 period. Additionally, average revenue per access increased by 4.1% year-on-year over the 2016-2017 period, from a year-on-year increase of 2.8% over the 2015-2016 period.
Secondly, changing consumer habits have resulted in a decreasing demand for voice services and an increasing demand for data, due to video downloads and internet connectivity through smartphones. This new trend has allowed us since 2015 to compensate the drop in voice revenues (excluding falls in interconnection tariffs) with higher data and service over connectivity, resulting in a positive trend in average revenue per access in the majority of our markets.
Thirdly, Telefónica launched in 2014 a simplification program focused on increasing growth and capturing synergies across the board; commercial offer simplification; IT network and global process modernization (through higher investments in IT and commercial systems as well as call centre costs reduction); and improving sales channels with a more efficient back office. All these measures allow resource liberation, resources that can be used for improving network. In 2014 we began to prepare our digitalization, designing in 2017 a program that includes from the systems that will facilitate that digitalization, the processes we have to adapt to achieve our digitalization targets that allow us to improve the service for our customers and achieve savings.
On the other hand, various factors have contributed to the fact that Telefónica has experienced a downward trend in some key financial performance indicators during the 2015-2017 period.
First, changes in foreign exchange rates, particularly in 2015 with the depreciation of the Brazilian real against the euro and the effects of the depreciation of the Venezuelan bolivar. In 2016 such currencies continued to depreciate and the Company’s results were also affected by devaluations in the United Kingdom, Argentina and Mexico, adversely and significantly affecting revenue growth.
Second, the high inflation in certain countries affected cost growth in numerous markets where Telefónica is present which were not completely offset by the increase in tariffs.
Third, Telefónica’s business is highly regulated, which affects its revenues and imposes costs on its operations. For example, the regulators have progressively reduced in recent years the fixed rates that Telefónica charges for calls received from other companies’ networks; the new roaming-out regulation (“Roam Like At Home” - RLAH); and the arbitration award of 470 million euros affecting Telefónica Colombia in relation to the reversion of certain assets used for the provision of fixed and mobile telephony, broadband, internet, data, Pay-TV and value-added services among others. The Group’s operationsunder old concession agreements.
Fourth, in 25 countries, managed through a regional organization geared towards certain businesses in global units, enable it to leverage the strong local positioning, as well as the advantages afforded by its scale.
As a multinational telecommunications company that operates in regulated markets,recent years Telefónica is subject to different laws and regulations in each of the jurisdictions in which it provides services. Among other developments, Telefónica may face pressure from regulatory initiatives in some European countries regarding tariffs, the reform of rights of spectrum use and allocation, issues related to the quality of service, and the regulatory treatment of new broadband infrastructure deployments.
Telefónica faceshas experienced an intense competition in the vast majority of the markets where it operates, resulting in more bundled offers and is therefore subjectmaking it difficult to monetize value added services.
Fifth, in the effects of actions taken by its competitors. The intensity oflast three years, within the competition may deepen which could have an impact on tariff structures, consumption, market share and commercial activity and negatively affect the number of customers, revenues and profitability.
However,above mentioned simplification process, Telefónica believes that it ishas redefined its processes, readapting its resource necessities, resulting in a strong competitive positionvarious provisions which have affected, results in most of the markets where it operates, which it expects to help enable it to continue taking advantage of the growth opportunities that arise2016 as well as in these markets, such as by boosting both fixed and mobile broadband services and by furthering the development of services beyond connectivity, information technology services and related businesses.
In 2014, Telefónica took a further step towards its transformation into a leading digital telecommunications company, in a sector which we believe still offers excellent growth potential. Digital capacities were boosted, new products were developed, and new business models were set up. This was achieved as a result of a transformation drive implemented throughout the Company.
2013 marked a turning point with the launch of a multinational program, “Be More”, focused on transformation and growth and the deleveraging of our business in Ireland, Czech Republic and 40% of Central America. This program aims to take advantage of our customer insight, the capture of future Business to Business (B2B) opportunities, further data monetization of our services and reinforcing our video business. In addition, we will seek to simplify our operating model and increase investments in fiber and LTE, transforming the IT in our operating business. In 2014, we made progress in the transformation process of Telefónica, simplifying the Company and building the bases for a new organization, simplifying operations, making provisions for a leaner staffing at a number of group operators and making key changes to our structure.
We believe that both the completion of the consolidation of our operations in Germany and the acquisition of GVT in Brazil (which is still pending approval by the regulator), which entail structural changes to the Company's positioning in two of its largest markets, points to, and strengthens, our capacity for future growth.
2017.
The pace of addition of high-value customers was stepped up in 2014, with more than 21 million new smartphones, 1.5 million new Pay-TV accesses and 927 new fiber accesses. We believe these figures indicate a growing generalization of usage-intensive data and content services.
Intense commercial activity in the area of high-value services was attributable mainly to greater investment, which allowed us to double the size of our FTTH network to 14.7 million premises passed, securing LTE coverage of 41% of the outdoor population in the regions where we operate, thereby increasing the number of LTE base stations to more than 20 thousand in 2014 (2.2X compared to 2013).
Telefónica Spain showed a change in trend due to the in-depth transformation process rolled out by the company to steady the pace of the year-on-year fall in revenue, with the assistance of intense commercial activity, especially in terms of fiber and Pay-TV. “Movistar Fusión” continued to grow steadily mainly as apositive result of the offering of the new bundled portfolio including TV in almost all our portfoliostrategy with a competitive price from 60 euros/month, which continued to attract customers to value-added offers.
Telefónica United Kingdom continued to work on the deployment of its LTE network, reaching 58% outdoor coverage at year-end, keeping the focus on offering a positive network experiencesustainable and profitable growth is reflected in an exclusive content proposition to 4G customers.upward trend in key market indicators as the operating cash flow (OIBDA-Capex) and net income. The operator is still migratingoperating cash flow continues its high-value customers to LTE, with a view to boostinggrowth and was up 123.6% year-on-year over the network experience2016-2015 period and customer satisfaction. Telefónica United Kingdom continues to deliver a good commercial performance with its "Refresh" offer, helping improve21.0% over the market distribution dynamics towards more efficient channels.
On August 29, 2014 the Company was given the green light from the European Commission to purchase the E-Plus Group, and the transaction was completed on October 1, 2014. The E-Plus Group has been part of Telefónica Deutschland since that date. The new company is intent on becoming Germany's leading digital telecommunications company, and aims to secure synergies of more than 5 billion euros of present value, mainly produced by the network, customer service, overheads and new opportunities for generating income.
Telefónica Germany continued to perform well in 2014, mainly2017-2016 period. These better results were also seen in the mobile contract segment, thanks to a strategy focusing on data monetization. This performance was achieved against a more competitive backdrop with growing demand for LTE offers and terminals. Year-on-year revenue stabilized, and mobile revenue rose again year-on-year.net income, which increased by 16% over the 2017-2016 period.
As part of the transformation process, embarked by the Group, a significant provision was recorded for E-Plus in connection with the planned downsizing of its staffing, which aims to lay the foundations for future growth.In Brazil, we consolidated the leadership in the higher-value mobile segments, maintaining our dominance of the market. The Company was awarded one of the three blocks of radioelectric spectrum for LTE auctioned in the 700 MHz band (2x10 MHz) on September 30, 2014, for the minimum reserve price of the block (approximately 619 million euros). This gave Telefónica Brazil the spectrum it needed to expand the 4G services in the medium and long term, and accelerate adoption of data (in 2014, data revenue accounted for 34.3% of the total).
In the fixed business, fiber deployment was key, with 14.7 million premises passed by December 2014, and the number of connected homes gradually rose to 1.8 million.
On September 19, 2014 the Company entered into an agreement with Vivendi to purchase GVT, with a view to creating an integrated operator with national coverage focused on higher-value customers to give a major boost to the Company's market positioning. The purchase is pending approval by the regulator.
Strong commercial activity by Telefónica Hispanoamérica, along with robust investment to improve service quality, continued to drive steady year-on-year growth of revenue and OIBDA, especially in Mexico, Colombia and Peru.
In summary, in the context of intense competition and regulatory pressure on pricing, Telefónica aims to continue strengthening its business model to make it more efficient and capture the synergies arising from the integrated approach of businesses, processes and technologies, while focusing even more on the client and staying ahead of trends in the new digital world.
We have commitments that could require us to make material payments in the future. These commitments are not included in our consolidated statement of financial position at December 31, 20142017 although they are described in the notes to our Consolidated Financial Statements. For summary of our off-balance sheet commitments, see Note 21(b) and Note 16 to our Consolidated Financial Statements.
The following table describes our contractual obligations and commitments with definitive payment terms which may require significant cash outlays in the future. The amounts payable (including accrued interest payments) are as of December 31, 2014.2017. For additional information, see our Consolidated Financial Statements.
| | Payments Due by Period |
| Millions of euros | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
| Financial liabilities (1)(2) | 59,782 | 9,094 | 18,351 | 10,743 | 21,594 |
| Operating lease obligations (3) | 10,197 | 1,643 | 2,669 | 2,068 | 3,817 |
| Purchase and other contractual obligations(4) | 9,037 | 4,295 | 2,071 | 961 | 1,710 |
| Other liabilities (5) | 3,828 | 574 | 3,254 | − | − |
| Total | 82,844 | 15,606 | 26,345 | 13,772 | 27,121 |
|
| | | | | | | | | | |
| | Payments Due by Period |
| Millions of euros | Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
|
| Financial liabilities (1)(2) | 55,746 |
| 9,414 |
| 12,926 |
| 11,750 |
| 21,656 |
|
| Operating lease obligations (3) | 9,099 |
| 1,739 |
| 2,723 |
| 1,912 |
| 2,725 |
|
| Purchase and other contractual obligations(4) | 11,373 |
| 5,326 |
| 2,957 |
| 1,421 |
| 1,669 |
|
| Other liabilities (5) | 4,856 |
| 1,304 |
| 3,552 |
| — |
| — |
|
| Total | 81,074 |
| 17,783 |
| 22,158 |
| 15,083 |
| 26,050 |
|
| |
| (1) | Capital (finance) lease obligations are not calculated separately and are instead included as part of our long-term debt obligations. |
| |
| (2) | Estimated future interest payments as of December 31, 20142017 on our interest-bearing debt (not included above) are as follows: 2,215 million euros in 2015, 1,960 million euros in 2016, 1,671 million euros in 2017, 1,2791,715 million euros in 2018, 1,0771,525 million euros in 2019, 1,323 million euros in 2020, 1,068 million euros in 2021, 914 million euros in 2022 and 6,5867,037 million euros in subsequent years. With respect to floating rate debt, we estimate future interest payments as the forward rates derived from yield curves quoted for the different currencies on December 31, 2014. This item includes the fair value of those derivatives classified as current financial liabilities (negative mark-to-market) under IFRS (401 million euros). It does not include the fair value of derivatives classified as financial assets (positive mark-to-market) under IFRS (813 million euros classified as current financial assets and 5,499 million euros as non-current financial assets). For a more detailed description of our financial derivative transactions, see Note 16 to our Consolidated Financial Statements. For details of the composition of this item, see “Liquidity and Capital Resources– Anticipated Sources of Liquidity”). |
we estimate future interest payments as the forward rates derived from yield curves quoted for the different currencies on December 31, 2017. This item includes the fair value of derivatives classified as financial liabilities (i.e., those with a negative mark-to-market) and excludes the fair value of derivatives classified as current financial assets (845 million euros), and those classified as non-current (2,812 million euros) (i.e., those with a positive mark-to-market). For a more detailed description of our financial derivative transactions, see Note 16 to our Consolidated Financial Statements. For details of the composition of this item, see “Liquidity and Capital Resources– Anticipated Sources of Liquidity”).
| |
| (3) | This item includes definitive payments (non-cancellable without penalty cost). Our operating lease obligations have in some cases extension options conditioned on the applicable law of each country. Accordingly, we have included only those amounts that represent the initial contract period. At December 31, 2014,2017, the present value of future payments for operating leases was approximately 7,9667,344 million euros (1,715(2,239 million euros in Telefónica Brazil, 1,6401,408 million euros in Telefónica Hispanoamérica, 930604 million euros in Telefónica Spain, 7102,258 million euros in Telefónica Germany, 432 million euros in Telefónica United Kingdom 2,837 million euros in Telefónica Germany and 134403 million euros in other companies). For a more detailed information about payments due under this item, see Note 1918 to our Consolidated Financial Statements. |
| |
| (4) | This item includes definitive payments (non-cancellable without penalty cost) due for agreements to purchase goods (such as network equipment) and services. |
| |
| (5) | “Other liabilities” include: (a) long-term obligations that require us to make cash payments, excluding financial debt obligations included in the table under “Financial Liabilities” above and (b) other provisions. Because of the nature of the risks covered by “Other liabilities” such as other provisions, it is not possible to determine a reliable schedule of potential payments, if any. For details of the composition of other provisions, see Note 15 to our Consolidated Financial Statements. |
In addition, at December 31, 2014,2017, we had short-term and long-term employee benefits provisions amounting to 574912 million euros and 3,2545,666 million euros, respectively, not included in the table above (see Note 15 to our Consolidated Financial Statements).
For details of the composition of, and changes in, our debt, see “—Liquidity and Capital Resources—Anticipated Sources of Liquidity” and Note 13 to our Consolidated Financial Statements.
During 2014,2017, our Board of Directors met 14thirteen times. At February 27, 2015,22, 2018, our Board of Directors had met threetwo times during 2015.2018. At February 27, 2015,22, 2018, our directors, their respective positions on our Board and the year they were first appointed to such positionsas a director were as follows:
97 |
| | | | |
| Name | Age |
| First Appointed | Current Term Ends |
| Chairman | |
| | |
| Mr. José María Álvarez-Pallete López (1) | 54 |
| 2006 | 2021 |
| Vice-Chairmen | |
| | |
| Mr. Isidro Fainé Casas (1)(2) | 75 |
| 1994 | 2020 |
| Mr. José María Abril Pérez (1)(3)(6) | 65 |
| 2007 | 2018 |
| Members | | | |
| Mr. Ángel Vilá Boix (1) | 53 |
| 2017 | Next SGM |
| Ms. Eva Castillo Sanz (5)(6)(8) | 55 |
| 2008 | 2018 |
| Mr. Juan Ignacio Cirac Sasturain (6) | 52 |
| 2016 | 2020 |
| Mr. José Javier Echenique Landiríbar (1)(4)(7) | 66 |
| 2016 | 2020 |
| Mr. Peter Erskine (1)(6)(7) | 66 |
| 2006 | 2020 |
| Ms. Sabina Fluxà Thienemann (7) | 37 |
| 2016 | 2020 |
| Mr. Luiz Fernando Furlán (7) | 71 |
| 2008 | 2018 |
| Ms. Carmen García de Andrés (4)(8) | 55 |
| 2017 | 2021 |
| Mr. Jordi Gual Solé (2)(5)(6) | 60 |
| 2018 | Next SGM |
| Mr. Peter Löscher (6) | 60 |
| 2016 | 2020 |
| Mr. Ignacio Moreno Martínez (3)(4)(5)(8) | 60 |
| 2011 | 2021 |
| Mr. Francisco Javier de Paz Mancho (1)(4)(5)(7) | 59 |
| 2007 | 2018 |
| Mr. Francisco José Riberas de Mera | 53 |
| 2017 | 2021 |
| Mr. Wang Xiaochu (9) | 59 |
| 2015 | 2020 |
| Name | Age | First Appointed | Current Term Ends |
| Chairman | | | |
| Mr. César Alierta Izuel(1) | 69 | 1997 | 2017 |
| Vice-chairmen | | | |
| Mr. Isidro Fainé Casas(1)(2) | 72 | 1994 | 2016 |
| Mr. José María Abril Pérez (1)(3)(7) | 62 | 2007 | 2018 |
| Mr. Julio Linares López (5)(7)(8) | 69 | 2005 | 2016 |
Members (vocales) | | | |
| Mr. José María Álvarez-Pallete López (1) | 51 | 2006 | 2017 |
| Mr. José Fernando de Almansa Moreno -Barreda(5)(6)(8) | 66 | 2003 | 2018 |
| Ms. Eva Castillo Sanz (6)(8)(10) | 52 | 2008 | 2018 |
| Mr. Carlos Colomer Casellas(1)(4)(7)(9)(10) | 70 | 2001 | 2016 |
| Mr. Peter Erskine(1)(7)(8)(9) | 63 | 2006 | 2016 |
| Mr. Santiago Fernández Valbuena | 56 | 2012 | 2018 |
| Mr. Alfonso Ferrari Herrero (1)(4)(5)(6)(8)(9)(10) | 73 | 2001 | 2016 |
| Mr. Luiz Fernando Furlán | 68 | 2008 | 2018 |
| Mr. Gonzalo Hinojosa Fernández de Angulo (1)(4)(5)(6)(8)(9)(10) | 69 | 2002 | 2017 |
| Mr. Pablo Isla Álvarez de Tejera(9) | 51 | 2002 | 2017 |
| Mr. Antonio Massanell Lavilla(2)(4)(5)(7)(10) | 60 | 1995 | 2016 |
| Mr. Ignacio Moreno Martínez (3)(4)(6)(10) | 57 | 2011 | 2017 |
| Mr. Francisco Javier de Paz Mancho (1)(5)(6)(10) | 56 | 2007 | 2018 |
| Mr. Chang Xiaobing (11) | 57 | 2011 | 2016 |
| |
| (1) | Member of the Executive Commission of the Board of Directors. |
| |
| (2) | Nominated by Fundación Bancaria Caja de Ahorros y Pensiones de Barcelona (“La Caixa”).CaixaBank, S.A. |
| |
| (3) | Nominated by Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”BBVA”). |
| |
| (4) | Member of the Audit and Control Committee of the Board of Directors.Committee. |
| |
| (5) | Member of the Regulation and Institutional Affairs Committee. |
| |
| (6) | Member of the Regulation Committee. |
(7) | Member of theStrategy and Innovation Committee. |
(8) | Member of the Strategy Committee. |
(9)(7) | Member of the Nominating, Compensation and Corporate Governance Committee. |
(10) | |
| (8) | Member of the Service Quality and Customer Service Committee. |
(11) | |
| (9) | Nominated by China Unicom (Hong Kong) Limited. |
Board Committees
At February 27, 2015,22, 2018, the committees of our Board of Directors and members thereof are as follows:
Executive Commission
Our Board of Directors has expressly delegated all of its authority and power to the Executive Commission except as prohibited by the Spanish Corporation Act, under our Articles of Association, or under our Board Regulations. This commission is made up of fewer directors and meets more frequently than our Board of Directors. The members of the Executive Commission are Mr. César Alierta Izuel,José María Álvarez-Pallete López (Chairman), Mr. Isidro Fainé Casas, Mr. José María Abril Pérez, Mr. Ángel Vilá Boix, Mr. José María Álvarez-Pallete López, Mr. Carlos Colomer Casellas,Javier Echenique Landiríbar, Mr. Peter Erskine, Mr. Alfonso Ferrari Herrero, Mr. Gonzalo Hinojosa Fernández de Angulo, Mr. Francisco Javier de Paz Mancho and Mr. Ramiro SánchezPablo de Lerín García-Ovies,Carvajal González, as secretary. During 2017, the Executive Commission met sixteen times and, as of the date of this Annual Report, had met four times in 2018.
Audit and Control Committee
The Audit and Control Committee functions are regulated by our bylaws, and our Board Regulations and the Audit and Control Committee Regulations. The Audit and Control Committee has the primary objective of providing support to our Board of Directors in its supervisory and oversight functions, specifically having the following responsibilities:
To report to the shareholders at the General Shareholders’ Meeting regarding matters raised therein for which it is responsible.
To submit to the Board of Directors proposals for the selection, appointment, re-election and replacement of the external auditor, as well as the terms and conditions of the contract therewith, and regularly obtain from · | to report, through its chairman, to our shareholders at the general shareholders’ meeting regarding matters raised therein by the shareholders relating to the functions and matters of competence of the committee; |
such external auditor information regarding the audit plan and the implementation thereof, in addition to the preservation of its independence in the performance of its duties. 98To supervise the effectiveness of the Company’s internal control system, the internal audit and the systems for the management of risks, including tax risks, as well as to discuss with the auditor the significant weaknesses in the internal control system detected during the audit.
To supervise the process of preparation and submission of regulated financial information.To establish and maintain appropriate relations with the auditor in order to receive, for review by the Committee, information on all matters that could jeopardize the independence thereof, as well as any other matters relating to the audit procedure, and such other communications as may be provided for in auditing legislation and in technical auditing regulations. In any event, the Audit and Control Committee must receive annually written confirmation from the auditor of its independence vis-á-vis the entity or entities directly or indirectly related thereto, as well as information regarding additional services of any kind provided to such entities by the auditor, or by the persons or entities related thereto, pursuant to the legislation in force.
To report to the Board of Directors in advance on all matters contemplated by law, the By-Laws and the Regulations of the Board of Directors.
Any other powers granted to it under the Regulations of the Board of Directors. · | to propose to our Board of Directors to submit to our general meeting of shareholders the appointment of our auditors referred to in Article 264 of the Spanish Corporation Act, as well as, when appropriate, the terms of their engagement, the scope of their professional assignment and the revocation, re-appointment or non-renewal of their appointment; |
· | to supervise the effectiveness of the Company's internal control system, the internal audit and the risk management systems as well as to discuss with our auditors any significant weaknesses in the internal control system detected during the audit; |
· | to supervise the preparation and submission of regulated financial information; |
· | to establish and maintain the necessary relations with the auditors to receive, for review by the Committee, information on all matters that may put their independence at risk, and any other matters related to the process of auditing our accounts, as well as to receive information and maintain communication with our auditors as required by laws relating to the audit process and with respect to technical regulations on auditing. In any event, the Audit and Control Committee must receive annually written confirmation from our auditors of their independence vis-à-vis the entity or entities directly or indirectly related thereto, as well as information regarding additional services of any kind provided to such entities by our auditors, or by the persons or entities related thereto, pursuant to Law 19/1988, of July 12, on Auditing of Financial Statements; and |
· | to issue on an annual basis, prior to the issuance of the audit report, a report stating an opinion regarding the independence of our auditors. This report must in all cases include an opinion on the provision of the additional services referred to in the immediately preceding paragraph. |
The Audit and Control Committee meets at least once per quarter and as many times as considered necessary. During 2014,2017, the Audit and Control Committee met eleventwelve times and, as of the date of this Annual Report, had met two times in 2015.2018. The members of the Audit and Control Committee are Mr. Carlos Colomer Casellas (chairman)José Javier Echenique Landiríbar (Chairman), Mr. Gonzalo Hinojosa FernándezMs. Carmen García de Angulo, Mr. Antonio Massanell Lavilla, Mr. Alfonso Ferrari Herrero andAndrés, Mr. Ignacio Moreno Martínez.nez and Mr. Francisco Javier de Paz Mancho. Our Board of Directors has determined that Mr. Antonio Masanell Lavilla meetsJosé Javier Echenique Landiríbar and Mr. Ignacio Moreno Martínez meet the requirements of an “audit committee financial expert” as such term is defined by the SEC.
Nominating, Compensation and Corporate Governance Committee
The Nominating, Compensation and Corporate Governance Committee is responsible for, among other things, reporting to our Board of Directors with respect to proposals for the appointment, re-election and removal of directors, members of the Executive CommitteeCommission and the other committees of our Board of Directors and top members of our management and management of our subsidiaries. In addition, the Nominating, Compensation and Corporate Governance Committee is responsible for proposing to the Board of Directors, within the framework established in the bylaws, the compensation for the directors and reviewing it periodically to ensure that it is in keeping with the tasks performed by them, as provided in Article 35 of the Board Regulations, to propose to the Board of Directors, within the framework established in the bylaws, the extent and amount of the compensation, rights and remuneration of a financial nature, of the chairman, the executive directors and the senior executive officers of Telefónica, including the basic terms of their contracts, for purposes of contractual implementation thereof and to supervise compliance with the corporate governance rules in effect from time to time.
The members of the Nominating, Compensation and Corporate Governance Committee are Mr. Alfonso Ferrari Herrero (chairman)Francisco Javier de Paz Mancho (Chairman), Mr. Carlos Colomer Casellas,José Javier Echenique Landiríbar, Mr. Peter Erskine, Mr. Gonzalo Hinojosa Fernández de AnguloMs. Sabina Fluxà Thienemann and Mr. Pablo Isla Álvarez de Tejera.Luiz Fernando Furlán. During 2014,2017, the Nominating, Compensation and Corporate Governance Committee met eleven times, and as of the date of this Annual Report, it had met threetwo times in 2015.
2018.
Regulation and Institutional Affairs Committee
The Regulation Committee’sand Institutional Affairs Committee was created in 2016 by merging the Regulation Committee and the Institutional Affairs Committee. The main objective of the Regulation and Institutional Affairs Committee is to monitor the main regulatory matters which affect us. Another responsibility ofAdditionally, the Regulation and Institutional Affairs Committee is to actacts as a communication and information channel between our management team and our Board of Directors concerning regulatory matters. The members of the Regulation Committee are Mr. Gonzalo Hinojosa Fernández de Angulo (chairman), Mr. José Fernando de Almansa Moreno-Barreda, Ms. Eva Castillo Sanz, Mr. Alfonso Ferrari Herrero, Mr. Ignacio Moreno MartínezAnother responsibility is to review, report and Mr. Francisco Javier de Paz Mancho.
During 2014, the Regulation Committee met five times, and of the date of this Annual Report, it had met one time in 2015.
Service Quality and Customer Service Committee
The Service Quality and Customer Service Committee is responsible for monitoring and reviewing the standards of quality of the main services we provide. The Service Quality and Customer Service Committee acts as an information channel between our senior management team and our Board of Directors. The members of the Service Quality and Customer Service Committee are Mr. Antonio Massanell Lavilla (chairman), Ms. Eva Castillo Sanz, Mr. Carlos Colomer Casellas, Mr. Alfonso Ferrari Herrero, Mr. Gonzalo Hinojosa Fernández de Angulo, Mr. Ignacio Moreno Martínez and Mr. Javier de Paz Mancho. During 2014 the Service Quality and Customer Service Committee met two times, and as of the date of this Annual Report, it had met one time in 2015.
Institutional Affairs Committee
The Institutional Affairs Committee is responsible for reviewing, reporting and proposingpropose to the Board of Directors the principles that are to govern the Group’s Sponsorship and Patronage Policy, to monitor such policy, and to individually approve sponsorships or patronages the amount or importance of which exceed the limit set by the Board and which
require its approval. The Committee is also responsible for promoting the development of the Telefónica Group’s Corporate Reputation and Responsibility project and its institutional affairs.
The members of the Regulation and Institutional Affairs Committee are Mr. Julio Linares López (chairman)Ignacio Moreno Martínez (Chairman), Ms. Eva Castillo Sanz, Mr. José Fernando de Almansa Moreno-Barreda, Mr. Alfonso Ferrari Herrero, Mr. Gonzalo Hinojosa Fernández de Angulo, Mr. Antonio Massanell LavillaJordi Gual Solé and Mr. Francisco Javier de Paz Mancho. During 2014,2017, the InternationalRegulation and Institutional Affairs Committee met sixeleven times, and as of the date of this Annual Report it hadthe Committee has met two times in 2015.2018.
Service Quality and Customer Service Committee
The Service Quality and Customer Service Committee is responsible for monitoring and reviewing the standards of quality of the main services we provide. The Service Quality and Customer Service Committee evaluates the level of quality of the services we provide to our customers. The members of the Service Quality and Customer Service Committee are Ms. Eva Castillo Sanz, Ms. Carmen García de Andrés and Mr. Ignacio Moreno Martínez. During 2017 the Service Quality and Customer Service Committee met five times and as of the date of this Annual Report has met once in 2018.
Strategy and Innovation Committee
TheIn 2016, the Strategy Committee and the Innovation Committee merged into a new Committee, the so-called Strategy and Innovation Committee. Without prejudice to any other tasks that the Board of Directors may assign thereto, the primary duty of this new Committee is to support the Board of Directors in the analysis and implementation of the global strategy policy of the Telefónica Group. The Strategy and Innovation Committee is also responsible for advising and assisting in all matters regarding innovation. Its main object is to examine, analyze and periodically monitor the Group’s innovation projects, provide guidance and help ensure the implementation and development of innovation initiatives across the Group. The members of the Strategy and Innovation Committee are Mr. Carlos Colomer Casellas (chairman)Peter Erskine (Chairman), Mr. José María Abril Pérez, Ms. Eva Castillo Sanz, Mr. Antonio Massanell Lavilla,Juan Ignacio Cirac Sasturain, Mr. Julio Linares LópezJordi Gual Solé and Mr. Peter Erskine. During 2014, theLöscher. The Strategy and Innovation Committee met fiveeleven times during 2017, and as of the date of this Annual Report, it had met two times in 2015.2018.
Strategy Committee
Without prejudice to any other tasks that the Board of Directors may assign thereto, the primary duty of the Strategy Committee is to support the Board of Directors in the analysis and implementation of the global strategy policy of the Telefónica Group. The members of the Strategy Committee are Mr. Peter Erskine (chairman), Mr. José Fernando de Almansa Moreno-Barreda, Ms. Eva Castillo Sanz, Mr. Alfonso Ferrari Herrero, Mr. Julio Linares López and Mr. Gonzalo Hinojosa Fernández de Angulo. The Strategy Committee met five times during 2014, and as of the date of this Annual Report, had met two times in 2015.
Biographies of Directors
Mr. César Alierta IzuelJosé María Álvarez-Pallete López serves as our Executive Chairman and Chairman of our Board of Directors. Mr. AliertaHe is currently a trustee of the Telefónica Foundation and he has served, from September 11, 2011, to September 2012, as Chairman of Telefónica Europe. He began his career at Arthur Young Auditors in 1970 as general manager1987. In 1988, he joined Benito & Monjardín/Kidder, Peabody & Co., where he held various positions in the research and corporate finance departments. In 1991, he held the “Associate” training course in New York and participated in investment projects of the capital markets division at Banco Urquijo,GE Group in Spain. In 1995, he joined Compañía Valenciana de Cementos Portland, S.A. (Cemex) as head of the Investor Relations and Analysis department. In 1996, he was promoted to Chief Financial Officer of Cemex Group in Madrid, whereSpain, and in 1998, to Chief Administration and Financial Officer of Cemex in Indonesia, headquartered in Jakarta, and he workedwas appointed member of the Board of Cemex Asia, Ltd. In February 1999 he joined the Telefónica Group as General Manager of Finance for Telefónica International, S.A. In September of the same year he was promoted to Chief Financial Officer of Telefónica. In July 2002, he was appointed Chairman and Chief Executive Officer of Telefónica Internacional, S.A.; in July 2006 General Manager of Telefónica Latin America, and in March 2009, Chairman of Telefónica Latin America. He has been the Chairman of Telefónica Europa since September 2011 and a member of Telefónica, S.A.'s Board of Directors since July 2006. Since September 2012 and until 1985. Subsequently, he founded andApril 2016, Mr. Álvarez- Pallete served as Chairman of Beta Capital Sociedad de Valores, S.A. which he combined as from 1991 with his post as Chairman of the Spanish Financial Analysts’ Association (Instituto Español de Analistas Financieros). Between 1996 and 2000, he was Director and Chairman of Tabacalera, S.A. At that time Tabacalera, S.A. changed its name into Altadis, S.A. (following its merger with the French Group, Seita-Société Nationale D’Éxplotation Industrielle des Tabacs et Allumettes) and he became Director and Chairman of Altadis, S.A.Chief Operating Officer. He has also been aChairman of the Board of Directors of Telefónica Internacional S.A.U. and of the Supervisory Board of Brasilcel, N.V and Cesky Telecom and Vice-Chairman of the Board of Directors of Telesp, S.A. and Telefónica Móviles México, S.A. He was member of the Board of Directors of the Madrid Stock Exchange (Bolsafollowing companies: Telecomunicaçoes de Madrid)Sao Paulo; Telefónica Datacorp, S.A.; Telefónica del Perú, Plus Ultra CompañíaS.A.A.; Colombia Telecomunicaciones, ESP; Telefónica Móviles México; Telefónica Larga Distancia de Seguros y Reaseguros,Puerto Rico, S.A.; Admira Media; Inmobiliaria Telefónica; TPI; Telefónica Móviles; Telefónica Holding Argentina; Telefónica de España; Telefónica O2 Europe; Portugal Telecom and China Netcom. He was Alternate Director of Iberia,the following companies: Telefónica Chile, S.A.; Telefónica Móviles Colombia, S.A.; Telefónica de Argentina, S.A.; and Telefónica Móviles Chile. He has also been Chairman of Antares, Fonditel, Telfisa and Telefónica North América, and Vice-Chairman of Telefónica del Perú. He has been awarded as ‘CFO Europe Best Practices’ at Mergers & Acquisitions in 2000, and in 2003 as Member of Merit of the Carlos III Foundation of the Iberian-American Forum. In January 1997,July 2007, Mr. AliertaÁlvarez-Pallete was appointed as a Director"Gold Master in Executive Leadership" and in 2011, he received the Personality of Telefónicathe Year in Economics Award granted by “El Economista”. In December 2013, he received the Excellence 2013 Award and on July 26, 2000,Fast Company magazine named him one of the 100 most creative Personalities in Business during 2014. In 2016, he was appointed as our Executive Chairman.named the "Best CEO" in
Spain by Forbes. Mr. Alierta is Director of China Unicom (Hong Kong) Limited since October 15, 2008, and of International Consolidated Airlines Group (IAG) since September 2010. Also, he is Trustee of Fundación Bancaria Caja de Ahorros y Pensión (“La Caixa”). Mr. Alierta has been a Director of Telecom Italia
from November 8, 2007, to December 13, 2013. Mr. AliertaÁlvarez-Pallete holds a Lawdegree in Economics from the Complutense University in Madrid. He also studied Economics at the Université Libre i Belgique and holds an International Management Program degree from the Pan-American Institute of Executive Business Administration (IPADE) and a Diplome of Advanced Studies (DEA) from the Department of Financial Economics and Accounting of the Complutense University of Zaragoza and an MBA from Columbia University (New York) and is currently a member of the Columbia Business School Board of Overseers, and Chairman of the Social Board of the UNED (National Long Distance Spanish University).
Madrid.
Mr. Isidro Fainé Casas serves as Vice-Chairman of our Board of Directors. For over 40 years, Mr. Fainé has worked in several financial institutions, including amongst others: Banco Atlántico, S.A., (1964), Banco de Asunción (Paraguay) (1969), Banca Riva y García, S.A. (1973), Banca Jover, S.A. (1974), and Banco Unión, S.A. (1978). In 1982, he joined ”la Caixa” as Deputy Executive General Manager, subsequently taking on various positions of responsibility. In April 1991, he was appointed Deputy Executive Managing Director and in 1999 rose to General Manager of the bank, before becoming Chairman from June 2007 to June 2014. He was also a member of the Board of Directors of CaixaBank since 2000, presiding from 2009 until his resignation in 2016. Mr. Fainé is currently Chairman of the Board of Trustees of the Fundación Bancaria Caja de Ahorros y PensionesCaixa d’Estalvis i Pensions de Barcelona (“La“la Caixa”) of Caixa Bank, S.A., of Criteria Caixaholding, S.A.Caixa, S.A.U., and of the Spanish Confederation of Savings Banks (CECA). He is also the Chairman of the Board of trustees of the Caixa d’ Estalvis I Pensiones de Barcelona “La Caixa” Banking Foundation; First Deputy Chairman of Abertis Infraestructuras, S.A. of Repsol YPF, S.A. of the European Savings Banks Group (ESGB) and. Additionally, he is Deputy Chairman of the World Savings Banks Institute (WSBI). Furthermore, he is a member of the Boards of Directors of Banco Portugués de Investimento, S.A. (BPI), of the Bank of East Asia and of the Suez EnvironnementEnvironment Company. He is currently the Chairman of the Spanish Confederation of Executives (CEDE), the Spanish Chapter of the Club of Rome and the Círculo Financiero. He is also a memberIn 2008, he was appointed Honorary Chairman of the Business Council for Competitiveness (CEC).Gas Natural, SDG, S.A. Mr. Fainé holds a Doctorate degree in Economics, a Diploma in Senior Management from IESE Business School and an ISMP certificate in Business Administration from Harvard University. He is a member of the Royal Academy of Economics and Finance and of the Royal Academy of Doctorate Holders.
Mr. José María Abril Pérez serves as Vice-Chairman of our Board of Directors. From 1975 to 1982 he served as Financial Manager of Sociedad Anónima de Alimentación (SAAL). Since then, and until he joined the Banco Bilbao Vizcaya Argentaria Group (BBVA), he was Financial Manager of Sancel-Scott Ibérica, S.A. In 1985 he joined Banco Bilbao, S.A. as Managing Director of Investment Corporate Banking. From January to April 1993, he was appointed Executive Coordinator of Banco Español de Crédito, S.A. In 1998, he became General Manager of the Industrial Group of BBV. In 1999, he was appointed member of the Executive Committee of the BBV Group. He has also been a member of the Board of Directors of Repsol, S.A., Iberia, S.A., Corporación IBV, and Vice-Chairman of Bolsas y Mercados Españoles, S.A. In 2002 he became Managing Director of the Wholesale and Investment Banking Division and a member of the Executive Committee of Banco Bilbao Vizcaya Argentaria, S.A., and he is now in retirement. He holds a degree in Economics from the University of Deusto (Bilbao, Spain) and he has beenwas professor of suchthis University for nine years.
Mr. Julio Linares LópezÁngel Vilá Boix serves as Vice-Chairman of our Board of Directors since September 2012 and had been ourthe Chief Operating Officer from December 2007 to September 2012. He is also a member of the Advisory Committee of Telefónica Hispanoamérica(COO) and Telefónica España. In May 1970, he joined our Research and Development Center, where he held several positions until he was appointed head of our Technology Department in 1984. In April 1990, he was appointed General Manager of Telefónica Research and Development, S.A. In December 1994, he became Deputy General Manager of the Marketing and Services Development department in the commercial area and subsequently, Deputy General Manager for Corporate Marketing. In July 1997, he was appointed Chief Executive Officer of Telefónica Multimedia S.A. and Chairman of Telefónica Cable and Producciones Multitemáticas, S.A. in the Telefónica multimedia business. In May 1998 he was appointed General Manager of Strategy and Technology in Telefónica, S.A. In January 2000, he was appointed Executive Chairman of Telefónica de España, S.A., a position which he held until December 2005, when he was appointed our Managing Director for Coordination, Business Development and Synergies. Mr. Linares was a Director of Telecom Italia until December 13, 2013. He is currently member of the GSM Association Board and Executive Committee, and is Chairman of the Strategic Committee. He is a Trustee of the Mobile World Capital Barcelona Foundation, of the Telefónica Foundation and of the CEDE-Confederación Española de Directivos and Ejecutivos Foundation. He is also a member of the Association Management Board for Managerial Progress and of the Social Council of the Complutense University in Madrid. Mr. Linares holds a degree in Telecommunications Engineering from the Polytechnic University of Madrid (Universidad Politécnica de Madrid).
Mr. José María Álvarez-Pallete López serves as a Director of our Board of Directors and, since September 2012 as our Chief Operating Officer. From September 11, 2011, to September 2012, he served as Chairman of Telefónica Europe. He began his career at Arthur Young Auditors in 1987. In 1988, he joined Benito & Monjardín/Kidder, Peabody & Co., where he held various positions in the research and corporate finance departments. In 1995, he joined Compañía Valenciana de Cementos Portland, S.A. (Cemex) as head of the Investor Relations and Analysis department. In 1996 he was promoted to Chief Financial Officer of Cemex Group in Spain, and in 1998, to Chief Administration and Financial Officer of Cemex in Indonesia, headquartered in Jakarta, and he was appointed member of the Board of Cemex Asia, Ltd. In February 1999 he joined the Telefónica Group as General Manager of Finance for Telefónica International, S.A. In September of the same year he was promoted to Chief Financial Officer of Telefónica. In July 2002, he was appointed
Chairman and Chief Executive Officer of Telefónica Internacional, S.A., in July 2006 General Manager of Telefónica Latin America, and in March 2009, Chairman of Telefónica Latin America. Mr. Álvarez-Pallete holds a degree in Economics from the Complutense University in Madrid. He also studied Economics at the Université Libre de Belgique and holds an International Management Program from the Pan-American Institute of Executive Business Administration (IPADE) and a Diplome of Advanced Studies (DEA) from the department of financial economics and accounting of the Complutense University of Madrid.
Mr. José Fernando de Almansa Moreno-Barreda serves as a Director of our Board of Directors. In December 1974Previously, he joinedserved as the Spanish Diplomatic Corps (Cuerpo Diplomático)Chief Strategy and served from 1976 to 1992 as SecretaryFinance Officer and member of the Spanish EmbassyExecutive Committee at Telefónica, S.A. Mr. Vilá joined Telefónica in Brussels, Cultural Counsellor1997. He held positions of the Spanish Delegation to Mexico,Group Controller, CFO of Telefónica Internacional, S.A.U.Group Head of Corporate Development and Chief Director of the General Coordination Branch of Eastern Europe, Director of Atlantic Affairs in the General Directorate of Foreign Policy for EuropeFinancial and Atlantic Affairs, Political Counsellor to the Spanish Permanent Representation to NATO in Brussels, Minister-Counsellor of the Spanish Embassy in the Soviet Union, General Secretary of the National Commission for the 5th Centennial of the Discovery of the Americas and Deputy General Director for Eastern Europe in the General Directorate of Foreign Policy for Europe. From 1993 to 2002, Mr. Fernando de AlmansaCorporate Development Officer. In 2015, he was appointed Chief Strategy and Finance Officer. In his tenure, Ángel Vilá has executed landmark corporate transactions such as the acquisitions of O2, Vivo, EPlus, GVT, Telco/TI or the Royal Household by His Majesty King Juan Carlos I,Telefonica Germany IPO. Prior to joining Telefónica, he held positions at Citigroup, McKinsey&Co, Ferrovial and is currently personal advisor to His MajestyPlaneta. In the King Juan Carlos I. He is also a Directorfinancial sector, he has served in the Board of directors of Banco Bilbao Vizcaya Argentaria (BBVA) and on the Advisory Panel of Macquarie MEIF Infrastructure funds. In the TMT sector, he was Chairman of Telefónica Brasil S.A.Contenidos, Vice Chairman of Telco Spa (Italy) and Board member of Endemol, Digital+, Atento, Telefonica Czech, CTC Chile, Indra SSI and Terra Lycos. Institutional Investor nominated Ángel Vilá as the Best CFO in European Telecoms in 2015. He was also honored with the Thomson Reuters Extel Pan-European Awards as No.1 CFO in Spain both in 2013 and 2014, as well as No.1 CFO for Telecommunications in Europe in 2014. He currently is a Trustee of the Telefónica Móviles México, S.A.Foundation. Mr. Ángel Vilá holds an MBA from Columbia Business School where he studied with a Fulbright La Caixa fellowship. He was distinguished in the Beta Gamma Sigma Honor Society and the Dean’s List. Prior to Columbia University, he graduated in Industrial Engineering from Universitat Politècnica de C.V. and a Deputy Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and of BBVA Bancomer, S.A. He holds a law degree from the University of Deusto (Bilbao, Spain).
Catalunya in Barcelona.
Ms. Eva Castillo Sanz serves as a Director of our Board of Directors. Ms. Castillo began her career at the Spanish broker Beta Capital Sociedad de Valores, S.A., where she worked for five years. After that, she worked for another five years for Goldman Sachs International in London in the International Equity Markets Department. In 1997, Ms. Castillo joined Merrill Lynch as head of Equity Markets for Spain and Portugal. In 1999, she was promoted to Country Manager for Spain and Portugal and in 2000 she became Chief Executive Officer of Merrill Lynch Capital Markets Spain. After that, Ms. Castillo was appointed Chief Operating Officer for EMEA Equity Markets. In October 2003, she was appointed head of Global Markets & Investment Banking in Spain and Portugal, as well as president of Merrill Lynch Spain. Until December 2009, she headed Global Wealth Management business operations in Europe, the Middle East and Africa, including Merrill Lynch Bank (Suisse) and the International Trust and Wealth Structuring business.
She was a member of the Merrill Lynch EMEA Executive Committee, the Global Wealth Management Executive and Operating Committees. Ms. Castillo was Chairwoman of Telefónica Europe and a member of Telefónica’s Executive Committee from September 2012 to February 2014. From February 2011 to February 2013, Ms. Castillo was member of the Board of Directors of Old Mutual, Plc. and from May 2010 until January 2014, she was Chairperson of the Board of Telefónica Czech Republic, a.s. Currently, Ms. Castillo is the Chairperson of the Supervisory Board of Telefónica Deutschland Holding AG, a member of the Board of Directors of Bankia, S.A., of Visa Europea and of the Telefónica Foundation. She is also a member of the Board of the Comillas-ICAI Foundation and member of the Board of Entreculturas Foundation. Ms. Castillo holds degrees in Business and Law (ICADE – E3) from the Universidad Pontificia de Comillas Pontifical University of Madrid.
Mr. Carlos Colomer CasellasJuan Ignacio Cirac Sasturain serves as a Director of our Board of Directors. Mr. ColomerCirac began his career in 1970 as Marketing Vice-Chairmanfull professor at the Applied Physics Department of Henry Colomer, S.A.Castilla La Mancha University, after which he became a research associate at the Joint Institute for Laboratory Astrophysics of the University of Colorado (1993-1994). In 1980,1996, he was appointed Chairmantutoring at Institut für Theoretische Physik of Leopold Franzens Univesität Innsbruck, until 2001, when Mr. Cirac became Director of the Theory Division of Max-Planck Institut für Quantenoptik and a member of the Max Planck Society. Since 2002, he held the title of Honorarporfessor at Technical University of Munich and during 2014 and 2015 Mr. Cirac was the Managing Director if the Technical University of Munich. Since 2016, Mr. Cirac is a speaker of the International Max-Planck Research School Quantum Science and Technology. Among other activities, he is a member of the Advisory Board of the Institute for the Interdisciplinary Information Sciences at Tsinghua University, and a member of the Advisory Board of the Russian Quantum Center since 2012. Mr. Cirac is also a member of the Advisory Board of Annalen der Physik, as well as of the Review Panel, QSIT, of the Swiss National Science Foundation. He has received several awards, such as the Hamburg Prize for Theoretical Physics, the Medal of Honor of Fundación García Cabrerizo or the Wolf Prize in Physics. He holds degree in Theoretical Physics from Universidad Complutense de Madrid as well as a Ph.D. in Physics from this university. He is specialized in Theoretical Quantum Optics, Quantum Information, Atomic Physics, and Quantum Many-Body Physics.
Mr. José Javier Echenique Landiríbar serves as a Director of our Board of Directors. Mr. Echenique has been a Board Member and General ManagerDirector of Henry Colomer,Allianz-Ercos as well as a General Director of BBVA Group, where he was responsible for wholesale business like Global Investment Banking or Global Corporate Banking among others. He has also been Member of the Board of Directors of Telefónica Móviles, S.A. and Haugron Cientifical, S.A. In 1986, heTelefónica Móviles México. Mr. Echenique was also appointed President of Revlon for Europe. In 1989,Banco Guipuzcoano as well as Board of Sevillana de Electricidad, S.A., Acesa and Hidroeléctrica del Cantábrico, Corporation IBV and Metrovacesa. Furthermore, he became Chairmanused to be a member of Revlon International and in 1990, he was appointed Executive Vice-President and Chief Operating Officerthe Board of Revlon Inc. in New York. In 2000, he was appointed Chairman and Chief Executive Officer of The Colomer Group. Currently, he is Chairman of Ahorro Bursátil,Repsol, S.A. SICAV, Inversiones Mobiliarias Urquiola, S.A. SICAV, Haugron Holdings S.L, MDF Family Partners, Corporación Patricio Echeverría, Grupo BBVA Seguros, Grupo Edhardt, Uralita, Grupo Porres (Mexico) and Abertis Infraestructuras, S.A. Mr. Colomer hasEchenique is currently Vice-President of the Board of Directos of Banco Sabadell, S.A. He is also a degreeBoard Member of ACS Actividades de Construcción y Servicios, S.A., ACS Servicios, Comunicaciones y Energía, S.L. and Grupo Empresarial ENCE, S.A. He is also Trustee of the Novia Salcedo Foundation, a Board member of the Deusto Business School and a member of the Círculo de Empresarios Vascos. He holds degrees in Economics and Actuarial Sciences from Basque Country University (UPV), where he was a professor of Social Security’s Quantitative Techniques of the UniversityEconomic Sciences School of Barcelona and an MBA from IESE Business School.
Bilbao for several years.
Mr. Peter Erskine serves as a Director of our Board of Directors. He began his career in the field of marketing in Polycell and in Colgate Palmolive. He worked for several years at the Mars Group, serving as Vice-Chairman for Europe of Mars Electronics. In 1990, he was appointed Vice-Chairman of Marketing and Sales of Unitel. From 1993 to 1998, he held a number of senior positions, including Director of British Telecom (BT) Mobile and President and Chief Executive Officer of Concert. In 1998, he became Managing Director of BT Cellnet. Subsequently, in 2001, he became Chief Executive Officer and a Director of the Board of Directors of Telefónica Europe, Plc. In 2006, he became Executive Chairman of Telefónica Europe, Plc (until December 31, 2007, after which he became a Non-Executive Director) and from July 2006 until December 2007, he served as General Manager of the business unit Telefónica Europe. In January 2009, he joined the Board of Ladbrokes Plc. as a Non-Executive Director until December 2015, becoming Chairman in May 2009. He stood down from the Board in December 2015, having taken a lead role in the merger of Ladbrokes PLC with Gala Coral Group. Currently, he is also Chairman of the AdvisoryHenley Business School Strategy Board, of Henley Management Centre, and a member of the Council of Reading University.University and also serves as a member of the University’s Strategy and Finance Committee. Since May 2016, he serves as a member of the Supervisory Board of Telefónica Deutschland Holding AG. In 1973, he received a degree in Psychology from Liverpool University.
Mr. Santiago Fernández Valbuena is Chief Strategy Officer (CSO)University and Chairman of Fonditel since February 2014. He is also a member of the Board of Telefónica S.A. and Deputy Chairman of Telefônica do Brasil. He has been Chairman & CEO of Telefónica Latin America (2011-2014), Chief Finance and Strategy Officer (2010-2011) and Chief Financial and Corporate Development Officer (2002-2010). Throughout this period he was also responsible (not continuously) for Procurement, IT, HR, Internal Audit and Subsidiaries (Atento, Endemol). From 1997 to 2002 he was CEO of Fonditel, the pension fund manager for Telefónica. Since 2008 he serves as Independent Director at Ferrovial S.A. and member of its Audit Committee. Before joining Telefónica he was Managing Director at Société Générale de Valores and Head of Equities at Beta Capital in Madrid. He holds a degree in Economicsan Honorary Doctorate from the Complutense University of Madrid, a PhD and a Master’s degree in Economics from Northeastern University in Boston. He has been a Professor of Applied Economics at Complutense University in Madrid and the Universidad de Murcia and has lectured at Instituto de Empresa (IE Business School) in Madrid.Reading.
Mr. Alfonso Ferrari HerreroMs. Sabina Fluxà Thienemann serves as a Director of our Board of Directors. From 1968 to 1969 he was Assistant toMs. Fluxà has also completed a High Business Management Program at IESE. In January 2005, she joined Iberostar Group, where she is currently the Financial Manager of Hidroeléctrica del Cantábrico, S.A. From 1969 to 1985, he worked in Banco Urquijo, S.A. holding several positions as Analyst, Manager of Industrial InvestmentsCo-Vice Executive President and as a representative in several subsidiaries of Banco Urquijo, S.A. in his capacity asCEO. She is also Regional Advisory Board member of the Board of Directors. From 1985 to 1996 he wasBBVA and a member of the Board of Directors and Managerof APD Illes Baleares, as well as the Sponsor of the Corporate Finance of Beta Capital Sociedad de Valores, S.A., of which Mr. Ferrari wasIberostar Foundation and Endeavor Foundation. She has received from ESADE a co-founder. From 1996 until 2000 served as Chairmandegree in Business Management and Chief Operating Officer of Beta Capital, S.A. Currently, he is a Director of Telefónica del Perú, S.A.A.,Administration and a Deputy Director of Telefónica Chile, S.A. He has a doctorate in Industrial Engineering from the Industrial Engineers Technical School of the Polytechnic University of Madrid (Escuela Técnica Superior de Ingenieros Industriales de la Universidad Politécnica de Madrid) and holds an MBA from Harvard University.MBA.
Mr. Luiz Fernando Furlán serves as a Director of our Board of Directors. He is currently Chairman of the Board of Directors of Amazonas Sustainability Foundation and member of Global Ocean Commission. He is also a member of the Board of Directors of TelefóTelefônica Brasil, S.A., BRF-Brasil Foods, and BRF, S.A. (BRAZIL), AGCO Corporation (USA), and a member of the Advisory/Consultive Board of Abertis Infraestructuras, S.A. (Spain)(Brazil). Throughout his career, he has been a member of the boardBoard of directorsDirectors of several companies in Brazil and abroad such as Chairman of Sadia, S.A., Co-Chairman of BRF-Brasil Foods, S.A., member of the Board of Redecard, S.A.Directors of AGCO Corporation (USA), and member of the Advisory/ Consultive Board of Panasonic (Japan) and Wal-Mart (USA) and a member of the Advisory/Consultive Board of Abertis Infraestructuras, S.A. (Spain). From 2003 to 2007 he was Minister of Development, Industry and Foreign Trade of Brazil. He holds a degree in Chemical Engineering from the Industrial Engineering Faculty of São Paulo and in Business Administration from the University of Santana (São Paulo), with specialization in financial administration from Fundação Getúlio Vargas (São Paulo).
Mr. Gonzalo Hinojosa FernándezMs. Carmen García de AnguloAndrés serves as a Director of our Board of DirectorsDirectors. Ms. García joined PricewaterhouseCoopers (Coopers & Lybrand Legacy) in 1985, where she held several positions. Thereafter, she held various leadership positions at Ladwell -Abogados y Asesores Fiscales as well as at PwC. She has been representative of the Spanish brand at the International Specialist Group in Indirect Taxation for more than six years. Between 2004 and 2007, she was the Managing Partner of Telefónica del Perúthe Gran Consumo, Distribución, Industria y Servicios Group of Madrid with more than 30 experts in legal and taxation areas, and responsible for the Diversity Program, Women in PwC between 2005 and 2007. She has been member since 2006 of the Trust of Tomillo Foundation, and in March 2008 became the Managing Director of this non-profit institution and its Executive Chairwoman in 2014. Currently she is Chairwoman of the Tomillo Tietar Foundation and member of its Trust, member of the Trust of the Young Business Spain Foundation, Treasurer of the Asociación Española de Fundaciones (AEF), S.A.A. He began his career in 1966 in Cortefiel, S.A.member of the Trust of Rais and served in several management positions since then. From 1976 to 1985 Mr. Hinojosa was General Manager of Cortefiel, S.A. and from 1985 until 2005 he servedXavier de Salas Foundations, as Chief Executive Officer of Cortefiel Group, a post which he combined with his appointment as Chairman from 1998 until 2006. From 1991 through 2002, he servedwell as a Directormember of Banco Central Hispano Americano, S.A. and as a Directorthe Board of Portland Valderribas, S.A. He has also served as a DirectorDirectors of Altadis, S.A. (1998-2007) and of Dinamia Capital Privado, S.A., SCR. Mr. Hinojosa hasthe collective initiative "Juntos por el empleo de los más desfavorecidos". She holds a degree in Industrial EngineeringEconomic and Business Sciences from the Industrial Engineers Technical School of the PolytechnicComillas Pontifical University, of Madrid (Escuela Técnica Superior de Ingenieros Industriales de la Universidad Politécnica de Madrid).ICADE.
Mr. Pablo Isla Álvarez de TejeraJordi Gual Solé serves as a Director of our Board of Directors. Mr. Isla began his careerGual joined “la Caixa” group in 1989 as a State’s Attorney (abogado del estado), holding the first position of his class. He joined the Body of State’s Attorneys that year2005 and was assigned to the Spanish Ministry of Transportation, Tourism and Communications. In 1991 he moved to the General Management of the Legal Services of the Spanish Government (Dirección General del Servicio Jurídico del Estado). From 1992 to 1996, Mr. Islahas served as General ManagerChairman of the Legal Services Department of Banco Popular, S.A. In 1996,CaixaBank since 2016. Previously, he was appointedthe Head of Strategic Planning and Studies for CaixaBank and Director General Manager of the National Heritage Department of the Treasury Department of Spain (Ministerio de Economía y Hacienda).Planning and Strategic Development for CriteriaCaixa. He has also served as General Secretaryeconomics advisor to the European Commission’s Directorate-General for Economic and Financial Affairs and as a visiting professor at the University of Banco Popular Español, S.A. from 1998 to 2000. In July 2000, Mr. Isla was appointedCalifornia, Berkeley. Currently he is a member of the Boards of Directors of Repsol and Erste Bank, a member of the Market Monitoring Group of the Institute of International Finance (IIF), a member of the Board of the European Corporate Governance Institute, Chairman of FEDEA, Vice President of the boardCírculo de Economía, and he serves on the boards of Grupo Altadisthe CEDE Foundation, Institució Cultural del CIC, Real Instituto Elcano, and Co-Chairman of such company.the Cotec Foundation. In June 2005, Mr. Isla was appointed1999 he received the Deputy ChairmanResearch Award of the European Investment Bank. He graduated with honors in 1979 in Economics and Chief Executive OfficerBusiness from University of Inditex, S.A. Since 2011, Mr. Isla has been the Chairman of Inditex, S.A. Mr. Isla hasBarcelona. He holds a degreePhD in LawEconomics from the Complutense University of Madrid.California, Berkeley, and he is a professor of economics at the IESE Business School and a Research Fellow at the Centre for Economic Policy Research (CEPR) in London.
Mr. Antonio Massanell LavillaPeter Löscher serves as a Director of our Board of Directors. In 1971 he joinedMr. Löscher was the Caja de Ahorros y Pensiones de Barcelona (“La Caixa”), where he held several postsPresident of Global Human Health and in 1990, he was appointed Assistant Manager and Secretary of the Steering Committee, and from 1999 to June 2011 he served as Executive General Assistant Manager. In the same year, he was appointeda member of the boardExecutive Board of DirectorsMerck & Co., CEO of Sociedad Española de Medios de Pago, S.A. From 1992 to 1994, Mr. Massanell served as ChairmanGE Healthcare Bio – Sciences and a member of GE’s Corporate Executive Council. He was also COO and a member of the Steering CommitteeBoard of Sistema 6000 de la Confederación Española de Cajas de Ahorros,Amersham Plc. He held a senior leadership position in Aventis and DirectorHoeschst. From 2014 to 2016, he was the CEO of Visa Spain (1995-1998), Director of Autema (1991-2003), Director of Inmobiliaria Colonial (1992-2003), Director of Baqueira Beret (1998-2006), Director of Occidental HotelsRenova Management B.V. (2003-2007), Chairman of Port Aventura Entertainment, S.A. (2009-2012), Director of e-la Caixa, S.A. Director of Caixa Capital Risc, S.G.E.C.R, S.A. and Director of Serveis Informátics “La Caixa”, S.A. Mr. Massanell is Deputy Chairman of Caixa Bank since June 2014. He is alsoAG. In the Chairman of Barcelona Digital Centre Tecnológic (former Fundación Barcelona Digital) and Non-Executive Chairman of Cecabank. He ispast, he was also a member of the BoardsSupervisory Board of Deutsche Bank AG and Chairman and CEO of Siemens AG, among others. Currently, Mr. Löscher is Chairman of the Supervisory Board of OMV Aktiengesellschaft, and of Sulzer AG, and a member of the Board of Directors of Banco Portugués de Investimento, S.A. (BPI), Boursorama, S.A., SAREB (Sociedad de Gestión de Activos Inmobiliarios procedentes de la Reestructuración Bancaria),TBG AG, Switzerland. He is also Honorary Professor at Tongi University Shangai and Mediterránea Beach & Golf Community, S.A.he holds the Grand Decoration of Honor in Gold of the Republic of Austria, the Order of Friendship of the Russian Federation and is a Knight Commander of the Order of Civil Merit of Spain. Mr. Antonio Massanell Lavilla holds a degree inLöscher studied Economics from theat Vienna University of Barcelona.
Economics, where he also got his MBA, and Business at the Chinese University of Hong Kong. He completed the Advanced Management Program (AMP) at Harvard Business School and an Honorary Doctorate of Engineering from Michigan State University and is a Doctor Honoris Causa of Slovak University of Engineering in Bratislava.
Mr. Ignacio Moreno Martínez serves as a Director onof our Board of Directors. Previous posts include head of Corporate Banking and Private Equity at Banco de Vizcaya, Banco Santander de Negocios, and Mercapital. He also served as Deputy General Manager of Corporate and Institutional Banking at Corporación Bancaria de España, S.A. – Argentaria, Chief Executive Officer of Desarrollo Urbanístico Chamartín, S.A., and Chairman of Argentaria Bolsa, Sociedad de Valores. In addition, he also served as General Manager of the Chairman’s Office at Banco Bilbao Vizcaya Argentaria, S.A., Chairman Executive Officer of Vista Capital Expansión, S.A., SGECR – Private Equity and Chairman Executive Officer of N+1 Private Equity. Mr. Moreno is currently Chief Executive OfficerChairman of N+1 Private EquityTesta Residencial, Socimi, S.A. and Non-Executive Chairman of Metrovacesa, S.A., and a member of the Board of Directors of Obrascón Huarte Lain, S.A. (OHL). Mr. Moreno is also Senior Advisor of BC Partners Ltd. Mr. Moreno holds a degree in Economics and Business Studies
from the University of Bilbao, and a Master’s degree in Marketing and Sales Management from the Instituto de Empresa and an MBA from INSEAD.
Mr. Francisco Javier De Paz Mancho serves as a Director of our Board of Directors. From 1984 to 1993 he was the General Secretary of Juventudes Socialistas and a member of the PSOE Executive. From 1990 to 1993, he was general secretary of the Spanish Consumers Association (Unió(Unión de Consumidores de España, UCE)UCE). From 1993 to 1996, he served as General Manager of Internal Trade of the Spanish Ministry of Tourism and Commerce.Commerce and Director of Tabacalera, S.A. From 1994 to 1996, he was Chairman of the Observatory of Trading of the Spanish Ministry of Tourism and Commerce (Observatorio(Observatorio de la Distribución Comercial del Ministerio de Comercio y Turismo)Turismo); from 1996 to 2004, he was Corporate Strategy Manager of the Panrico Donuts Group.Group and Deputy Chairman. From 1998 to 2004, he served as Director of Mutua de Accidentes de Zaragoza (MAZ) and of the Panrico Group.. From 2004 to 2006, he was Director of Tunel de Cadí, S.A.C. and from 2003 to 2004, he served as Chairman of the Patronal Pan y Bollería Marca (COE). From 2004 to 2007, he was Chairman of the National Company MERCASA. He has also been a member of the Board of Directors of Altadis, S.A., and of the Economic and Social Board and its permanent commission.Permanent Commission. From July 2006 to November 2014, he has been a member of the Executive Committee of the Chambers Board (Consejo(Consejo Superior de Cámaras).maras) and from 2008 to 2012 he has been the Chairman of Atento Inversiones y Teleservicios, S.A.U. Currently, he is directorDirector of Telefónica de Argentina, S.A., Telefônica Brasil, S.A. and Telefónica Brasil,Móviles México, S.A. de C.V. He is also Chairman of Telefónica GestiónIngeniería de Servicios Compartidos España,Seguridad, S.A.U. Mr. de Paz has a diploma in Publicity and Information and undertook studies in Law. He completed a Programa de Alta Dirección de Empresas from the IESE Business School (Instituto(Instituto de Estudios Superiores de la Empresa, University of Navarra)Navarra).
Mr. Chang XiaobingFrancisco José Riberas Mera serves as a Director of our Board of Directors. Prior to joining China United Telecommunications Corporation,He started his professional career at the Gonvarri Group, where he became Director of Corporate Development and Chief Executive Officer. Mr. ChangRiberas has been the Chief Executive Officer of Gestamp since its incorporation. He was appointed a member of the Board of Directors of Aceralia Corporación Siderúrgica in 1998, in the context of its privatization process until it was integrated into Arcelor Group. Currently, Mr. Riberas is the Executive Chairman of Gestamp Automoción. He is also part of the management bodies if certain companies of the Gestamp Group as well as other companies of the ACEK Group, including the Gonvarri Group, ACEK Energias Renovables and Inmobiliaria ACEK. Furthermore, he is a member of the Endeavor Foundation and the Instituto de Empresa Familiar. Mr. Riberas holds a Degree in Law (1987) and in Economics and Business Administration (1988) from Comillas Pontifical University (ICADE E-3).
Mr. Wang Xiaochu serves as a Director of our Board of Directors. Mr. Wang served as Deputy Director of the Nanjing Municipal PostsGeneral and Telecommunications Bureau of Jiangsu Province, Deputy Director General of the DirectorateHangzhou Telecommunications Bureau in Zhejiang province; Director General of Telecommunications of the Ministry ofTianjin Posts and Telecommunications Administration; Chairman and DeputyChief Executive Officer of China Mobile (Hong Kong) Limited; Vice President of China Mobile Communications Corporation; an Executive Director, GeneralChairman and director generalChief Executive Officer of the Department of Telecommunications Administration of the former Ministry of Information Industry, as well as vice presidentChina Telecom Corporation Limited; President and Chairman of China Telecommunications Corporation.Corporation; and Chairman and Non-executive Director of China Communications Services Corporation Limited. Furthermore, Mr. Chang becameWang serves as the Chairman of China United Telecommunications Corporation in November 2004. He was appointed in December 2004Network Communications Group Company Limited, and as an Executive Director, Chairman and Chief Executive Officer of China Unicom (Hong Kong) Limited. In December 2008, China United Telecommunications Corporation changed its company name to China United Network Communications Group Company Limited ("Unicom Group"). He serves as the Chairman of Unicom Group, China United Network Communications Limited ("A Share Company") and China United Network Communications Corporation Limited ("CUCL"), respectively. Mr. Changis a professor level senior engineer, graduated in 1982 from the NanjingBeijing Institute of Posts and Telecommunications with a bachelor's degree in Telecommunications Engineering1989 and he received a master'sdoctorate degree in Business Administration from Tsinghua University in 2001. He received a doctorate in Business Administration from the Hong Kong Polytechnic University in 2005.
Executive Officers/Management Team
At February 27, 2015,22, 2018, our executive management team consisted of the following individuals:
| Name | | Position | | Appointed | Age |
| Mr. César Alierta Izuel | | Chairman of the Board of Directors and Chief Executive Officer | | 2000 | 69 |
| Mr. José María Álvarez -Pallete López | | Chief Operating Officer | | 2012 | 51 |
| Mr. Santiago Fernández Valbuena | | Chief Strategy Officer | | 2011 | 56 |
| Mr. Guillermo Ansaldo Lutz | | Chief Global Resources Officer | | 2011 | 53 |
| Mr. Ramiro Sánchez de Lerín Garcia-Ovies | | General Legal Secretary and Secretary to the Board | | 2005 | 60 |
| Mr. Angel Vilá Boix | | Chief Financial and Corporate Development Officer | | 2011 | 50 |
| Mr. Eduardo Navarro de Carvalho | | Chief Commercial Digital Officer | | 2012 | 52 |
| Mr. Ignacio Cuesta | | General Manager of Internal Audit | | 2012 | 52 |
|
| | | | |
| Name | Position | Appointed | Age |
|
| Mr. José María Álvarez-Pallete López | Chairman of the Board of Directors and Chief Executive Officer | 2016 | 54 |
|
| Mr. Ángel Vilá Boix | Chief Operating Officer | 2017 | 53 |
|
| Mr. Guillermo Ansaldo Lutz | Chief Global Resources Officer | 2011 | 56 |
|
| Mr. Pablo de Carvajal González | Secretary to the Board of Directors | 2018 | 54 |
|
| Ms. Laura Abasolo García de Baquedano | Chief Finance and Control Officer | 2017 | 45 |
|
| Mr. Mariano de Beer | Chief Commercial and Digital Officer | 2017 | 47 |
|
| Mr. Juan Francisco Gallego Arrechea | General Manager of Internal Audit | 2016 | 51 |
|
Biographies of the Executive Officers and Senior Management
We present below the biographies of our executive officers and senior management who do not also serve on our Board of Directors.
Mr. Guillermo Ansaldo Lutz serves as Chief Global Resources Officer (CGRO) of the Telefónica Global Resources operating unit since September 2011, he is also member of the Executive Committee of Telefónica. From 1989 to 2000, he worked for McKinsey & Company holding different positions in Spain and Argentina. In 1995, he was appointed a partner of McKinsey & Company in Argentina. From 2000 to 2004 he was the Chief Executive Officer of Telefónica de Argentina, S.A. and since April 2005, he has held the position of Chief Executive Officer of Telefónica de España, S.A. From December 2007 to September 2011, he was the Chairman and Chief Executive Officer of Telefónica de España.a, S.A. He holds a degree in Industrial Engineering from the Universidad de Buenos Aires and an MBA from The Amos Tuck School of Business Administration, Dartmouth College.
Mr. Ramiro SánchezPablo de Lerín García-OviesCarvajal González serves as our General Secretary andthe Secretary to ourthe Board of Directors.Directors of Telefónica and Director of Public Affairs and Regulation. He is also a member of the Executive Committee. From 1988 to 1989, he worked as legal counsel for La Unión y el Fénix Español, Compañía de Seguros y Reaseguros, S.A. In April 1991, he was appointed state attorney (abogado del Estado) until December 1999, when he became legal counsel of Jazz Telecom, S.A. In March 2000, he became secretary to Board and head of the legal department of Yacom Internet Factory, S.A. Since June 1, 2001, he has been the Secretary General of the Board of Directors of Telefónica de España, S.A. and, since April 2013, also Director of Operators and Regulation. He holds a law degree the Universidad Complutense de Madrid and a Master's degree in European law from the Free University of Brussels.
Ms. Laura Abasolo García de Baquedano is the Chief Finance and Control Officer of Telefónica, S.A. She started her professional career at Goldman Sachs International, in the area of Investment Banking in Europe. She joined Telefónica in 1999 as the Management Control Officer at Terra Networks, S.A., where she was also a member of the Executive Committee. In July 2005, she assumed the role of Management Control Officer at Telefónica, S.A. and in December 2007, she became Planning, Budgets and Management Control Officer. In March 2014, she joined the Executive Committee of Telefónica, S.A. and became responsible for the Simplification Office. In 2016, she became responsible for the Consolidation and Accounting Policies, and Tax divisions of the company. She holds a Degree in Economics and Business Administration by the Commercial University of Deusto and MBA in International Businesses by the Norwegian School of Economics and Business Administration.
Mr. Mariano de Beer is the Chief Commercial and Digital Officer of Telefónica S.A. In this role, he is responsible for driving revenue growth globally, developing a holistic view for the consumer and enterprise segments, curating the commercial offer and evolving the channels to ensure the best commercial experience for Telefónica customers. He is in charge of innovation within the group. Mr. De Beer is member of the Telefónica Group Executive Committee. During the past years, he has held the position of President of Microsoft Brazil and most recently President of Microsoft Latam – New Markets, after a solid, successful career in the telecommunications industry. Mariano joined Telefónica's team in Brazil in 1998 from McKinsey & Co., where he held a variety of positions within the company, mainly in the Residential and SME segments. In 2006, he joined the Senior Management Committee of Telefónica International as Director of SME for Latin America, until 2008, when he returned to Brazil as CEO of Telefónica and subsequently Chairman of the Vivo Corporate Unit. After leaving Telefónica and before joining Microsoft, he worked in the RBS Brazilian conglomerate, where he led the Education Unit of the group as CEO, with the mission of expanding and
strengthening the Education Project of RBS. Mariano graduated from UADE in Argentina, obtained an MBA from Georgetown University and he has completed Executive Programs at INSEAD, IESE and Stanford University School of Business.
Mr. Juan Francisco Gallego Arrechea is the General Manager of Internal Audit of the Telefónica Group since 2016. He began his career in Arthur Andersen, firstwhere he specialized in audit and financial consulting for business groups. In June 2000, he joined the Telefónica Group working for its audit departmentas the Chairman of Consolidation and later for its tax department. In 1982, he becameAccounting Policies and serving, from 2009, as Chief Accounting Officer. Mr. Gallego is a State’s Attorney (abogado del estado) and started working for the local tax authorities in Madrid (Delegación de Hacienda de Madrid). Afterwards he was assigned to the State Secretariat for the European Communities and later to the Foreign Affairs Ministry. He has been General Secretary and Secretary of the board of Elosúa, S.A., Tabacalera, S.A., Altadis, S.A. and Xfera Móviles, S.A. He has also held teaching positions in Instituto Católico de Administración y Dirección de Empresas (ICADE), Instituto de Empresa and Escuela de Hacienda Pública.
Mr. Vilá is Chief Financial and Corporate Development Officer (CF&CDO)speaker and member of the Executive Committee of the Telefónica Group. He joined Telefónicawork teams in 1997 as Group Controller, moving on to become CFO of Telefónica Latinoamérica. In 2000 he was appointed Group Head of Corporate Development, in charge of corporate M&A transactions. Mr. Vilá is currently Vice Chairman of the Board of Directors of Telco SpA (Italy),several master programs, conferences and Board member of Telefónica Germany. He previously servedcourses on the Boardsmatter of BBVA, Endemol, Digital Plus, Atento, Telefónica Contenidos, Telefónica Czech Republic, CTC Chile, Indra SSI, Terra Lycosaudit, consolidation and the Advisory panel of Macquarie MEIF funds.accounting practices held by regulators, private institutions and universities. He is a Patron in the Telefónica Foundation. Prior to joining Telefónica, he held positions at Citigroup, McKinsey&Co, Ferrovial and Planeta. Mr. Vilá graduated in Industrial Engineering from Universitat Politècnica de Catalunya and holds an MBA from Columbia University (New York).
Mr. Eduardo Navarro de Carvalho is Chief Commercial Digital Officer at Telefónica S.A and member of the Executive Committee. He joined Telefónica in 1999, and since then he has been responsible for Strategy and Alliances for Telefónica Group from 2010 to February 2014, responsible for Strategy and Regulatory Affairs for Telefónica Latin America from 2005 to 2009, and for Telefónica Brasil from 1999 to 2004. Previously, he worked for five years as a Consultant in Mckinsey & Company, focused on Infrastructure and Telecommunications Projects in several countries and
also worked as Steel Works Manager in the Group ARBED in Brazil. He is a graduate in Metallurgical Engineering from the Federal University of Minas Gerais, Brazil.
Mr. Ignacio Cuesta is the Chief Audit Executive of the Telefónica Group since January 2013. He joined the Telefónica International financial department in January 1995 as Manager. In 1999 he joined Telefónica, S.A., working in the corporate finance department for the next ten years. In 2001, he was appointed Deputy Chief Financial Officer of Telefónica’s Corporation in charge of several areas as accounting, financial planning and taxes among others. In October 2009 he was appointed Telefónica Latin America Chief Financial Officer, working in that role for the next three years. Previously he had worked as a Financial Auditor for an audit firm and as internal auditor and as Chief Consolidation Accounting Officer for the multinational Pedro Domecq. From 2004 to 2009, he was nominated member of the Standard Advisory Committee of the Spanish Institute of Accounting and Auditing and member of the Accounting Experts Group of the CNMV. He holdsobtained a degree in Economics.Economic Science at Universidad Complutense in Madrid.
Please see Note 21(f) and Appendix II to our Consolidated Financial Statements for information on the compensation paid to members of our Board of Directors and Executive Officers/Senior Management Team during the year 2014.2017.
Incentive Plans
Please see Note 19 to our Consolidated Financial Statements.
Please see “—Directors and Senior Management” above.
Please see “ Headcount”“Headcount” in Note 18 to our Consolidated Financial Statements.
In 2015, Telefónica de España, S.A.U., Telefónica Móviles España, S.A.U. and Telefónica Soluciones de Informática y Comunicaciones de España, S.A.U. signed the first Collective Agreement of Related Companies (CEV). This agreement contemplated, among other elements, a plan of measures for individual suspension of the employment relationship in 2016 and 2017. In December 2016, the CEV was extended until 2018, by virtue of the provisions of this same agreement. In 2016, the expense relating to the forecast payments to meet the commitments resulting from the extension of this program was recognized. A total of 789 million euros were recorded for the Individual Suspension Plan in 2016 (2,896 million euros in 2015) (see Note 15 to our Consolidated Financial Statements).
The provision has been updated as of December 31, 2017 according to the current degree of adherence to the plan, which has resulted in an expenditure of 165 million euros in the consolidated income statement of 2017.
E. Share Ownership
At February 27, 2015,22, 2018, the following members of our Board of Directors beneficially owned directly or indirectly an aggregate of 7,447,5035,604,402 shares, representing approximately 0.160%0.1079% of our capital stock.
| Name or corporate name of director | Number of direct voting rights | Number of indirect voting rights | % of total voting rights |
| Mr. César Alierta Izuel | 4,545,928 | - | 0.098 |
| Mr. Isidro Fainé Casas | 523,414 | - | 0.011 |
| Mr. José María Abril Pérez | 97,288 | 111,481 | 0.004 |
| Mr. Julio Linares López | 430,923 | 1,941 | 0.009 |
| Mr. José María Álvarez-Pallete López | 335,260 | - | 0.007 |
| Mr. Alfonso Ferrari Herrero | 603,105 | 20,057 | 0.013 |
| Mr. Antonio Massanell Lavilla | 2,413 | - | 0.000 |
| Mr. Carlos Colomer Casellas | 49,360 | 63,190 | 0.002 |
| Mr. Francisco Javier de Paz Mancho | 57,024 | - | 0.001 |
| Mr. Gonzalo Hinojosa Fernández de Angulo | 47,725 | 197,474 | 0.005 |
| Mr. Ignacio Moreno Martínez | 13,076 | - | 0.000 |
| Mr. José Fernando de Almansa Moreno-Barreda | 19,562 | - | 0.000 |
| Mr. Luiz Fernando Furlán | 35,031 | - | 0.001 |
| Ms. Eva Castillo Sanz | 99,863 | - | 0.002 |
| Mr. Pablo Isla Álvarez de Tejera | 9,067 | - | 0.000 |
| Mr. Peter Erskine | 73,111 | - | 0.002 |
| Mr. Santiago Fernández Valbuena | 111,210 | - | 0.002 |
| Mr. Chang Xiaobing | - | - | 0.000 |
|
| | | | | | |
| Name or corporate name of director | Number of direct voting rights |
| Number of indirect voting rights |
| % of total voting rights |
|
| Mr. José María Álvarez-Pallete López | 1,351,958 |
| — |
| 0.026 |
|
| Mr. Isidro Fainé Casas | 595,382 |
| — |
| 0.011 |
|
| Mr. José María Abril Pérez | 196,061 |
| 192,176 |
| 0.007 |
|
| Mr. Ángel Vilá Boix | 333,463 |
| — |
| 0.006 |
|
Ms. Eva Castillo Sanz
| 113,594 |
| — |
| 0.002 |
|
| Mr. Juan Ignacio Cirac Sasturain | — |
| — |
| — |
|
| Mr. José Javier Echenique Landiríbar | 31,850 |
| 75,712 |
| 0.002 |
|
| Mr. Peter Erskine | 42,733 |
| — |
| 0.001 |
|
| Ms. Sabina Fluxà Thienemann | — |
| — |
| — |
|
Mr. Luiz Fernando Furlán
| 38,423 |
| — |
| 0.001 |
|
Ms. Carmen García de Andrés
| 704 |
| — |
| — |
|
| Mr. Jordi Gual Solé | — |
| — |
| — |
|
Mr. Peter Löscher
| — |
| — |
| — |
|
Mr. Ignacio Moreno Martínez
| 18,311 |
| — |
| — |
|
Mr. Francisco Javier de Paz Mancho
| 64,862 |
| — |
| 0.001 |
|
| Mr. Francisco José Riberas Mera | — |
| 2,549,173 |
| 0.049 |
|
Mr. Wang Xiaochu
| — |
| — |
| — |
|
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At February 27, 2015,22, 2018, members of our executive management team (excluding members of our Board of Directors listed above) beneficially owned an aggregate of 720,009469,420 of our shares, representing approximately 0.02 %0.009% of our capital stock.
None of our directors or executive officers beneficially owned shares representing one percent or more of our share capital at February 27, 2015.
22, 2018.
None of our directors and executive officers held options in respect of shares representing one percent or more of our share capital at February 27, 2015.
22, 2018.
Please see “Share-based payment plans” in Note 19 to our Consolidated Financial Statements.
General
At February 27, 2015,22, 2018, we had 4,657,204,3305,192,131,686 shares outstanding, each having a nominal value of 1.00 euro per share. All outstanding shares have the same rights.
At February 27, 2015,22, 2018, according to information provided to us or to the Spanish National Securities Commission (Comisión Nacional de Mercado de Valores or the “CNMV”“CNMV”), beneficial owners of 3% or more of our voting stock were as follows:
| Name of Beneficial Owner | Number of Shares | Percent |
| | Direct | Indirect | |
| Banco Bilbao Vizcaya Argentaria, S.A.(1) | 291,194,876 | 13,132 | 6.25% |
| Fundación Bancaria Caixa d Estalvis i Pensions de Barcelona (“La Caixa”)(2) | - | 244,647,885 | 5.25% |
| Blackrock, Inc.(3) | - | 177,257,649 | 3.81% |
|
| | | |
| Name of Beneficial Owner | Number of Shares | Percent |
| | Direct | Indirect | |
| Banco Bilbao Vizcaya Argentaria, S.A.(1) | 268,230,302 | — | 5.17% |
| CaixaBank, S.A.(2) | 259,611,788 | 342,072 | 5.01% |
| BlackRock, Inc.(3) | — | 344,259,683 | 6.63% |
| |
| (1) | Based on the information provided by Banco Bilbao Vizcaya Argentaria, S.A. as at December 31, 20142017 for the 20142017 Annual Report on Corporate Governance. |
| |
| (2) | Based on information provided by CaixaBank, S.A. as at December 31, 2017 for the 2017 Annual Report on Corporate Governance. The indirect shareholding is held by BBVA Seguros, S.A. de Seguros y Reaseguros. |
(2) | Based on information provided by Fundación Bancaria Caja de Ahorros y Pensiones de Barcelona, “la Caixa” as at December 31, 2014 for the 2014 Annual Report on Corporate Governance. The indirect shareholding is held by Caixabank, S.A. which owns 244,604,533 shares and by VIDACAIXA,Vidacaixa, S.A. de Seguros y Reaseguros which owns 43,352342,072 shares. |
| |
| (3) | According to notification sentthe form on Schedule 13G filed on January 30, 2018 with the SEC. According to the CNMV, dated February 4, 2010.reported beneficial ownership, however, BlackRock, Inc. has sole voting power with respect to 312,270,990 shares (representing 6.01% of Telefónica’s share capital as of the date of this Annual Report). |
To the extent that our shares are represented by account in the book-entry form, we do not keep a shareholder registry and our ownership structure cannot be known precisely. Based on the information available to us there is no individual or corporation that directly or indirectly through one or more intermediaries may exercise any type of control over us. Nevertheless, we have certain shareholders whose holdings are considered material.
Ownership Limitations
There are no limitations with respect to the ownership of our assets or share capital except those related to assets derived from the application of the reciprocity principle. Article 6 of the General Telecommunications Law, or the GTL, provides for the application of the reciprocity principle under existing international treaties or agreements signed and ratified by Spain. The Spanish government, upon request, may authorize exceptions to the reciprocity principle contained in the GTL.
During 20142015, 2016 and 2017 and through the date of this Annual Report, none of our directors northe Directors and senior executives did not enter into any member of our management team has been involvedtransaction with Telefónica, S.A. or any Telefónica Group company other than those in any related party transactions with us.
the Group’s normal trading activity and business.
Our Board of Directors’ Regulations grant the Board of Directors the exclusive power to authorize any transactions with major shareholders or with our directors. Prior to authorizing any such transaction, our Board will receive an opinion from the Nominating, CompensationAudit and Corporate GovernanceControl Committee addressing the fairness of the transaction to our shareholders and us. Any of our directors that may have an interest in the proposed transaction must abstain from voting on the proposed transaction.
Please see Note 10 to our Consolidated Financial Statements for further information.
Related Party Transactions with Significant Shareholders
Two of our major shareholders are financial institutions (see “—Major Shareholders—General” above). We have entered into related party transactions with both companies within our ordinary course of business, and always on arm’s lengtharm’s-length terms. During 2014,2017 and through the date of this Annual Report, the executed transactions were generally loans, capital markets or derivative transactions provided to us by these financial institutions and agreements for us to provide telecommunications and broadband services to such institutions.
In addition, pleasePlease see Note 10 to our Consolidated Financial Statements.
Statements for further information.
Intra-Group Loans
We are the parent company of the Telefónica Group and operate through our subsidiaries and affiliated companies. We coordinate group policies, including financial policy and, in some cases, actual financial management is conducted by us. Most of the transactions we perform with other members of the Telefónica Group relate to financing transactions, including covering their needs for funds and providing interest rate and exchange rate hedges.
At December 31, 2014,2017, as recorded in our parent company accounts, we loaned a total of 7,4334,881 million euros (9,806(5,671 million euros at December 31, 2013)2016) to companies of the Telefónica Group while companies of the Telefónica Group and their associates loaned us a total of 51,68054,179 million euros (49,895(49,583 million euros at December 31, 2013)2016), of which 8,43711,477 million euros (6,875(10,620 million euros at December 31, 2013)2016) was loaned to us by Telefónica Europe, B.V. and 37,15734,855 million euros (35,930(34,742 million euros at December 31, 2013)2016) was loaned to us by Telefónica Emisiones S.A.U., our financing subsidiaries devoted to raising funds in the capital markets, 1,9127,269 million euros (3,635(3,577 million euros at December 31, 2013) was loaned to us by Telefónica Finanzas, S.A.U., our subsidiary in charge of financial support for Telefónica Group companies and 3,913 million euros (3,455 million euros at December 31, 2013)2016) was loaned by us to Telfisa Global, B.V., our financing subsidiary charged with centralizing and managing the cash pooling of our subsidiaries in Latin America, Europe and the United States.States and 578 million euros (644 million euros at December 31, 2016) was loaned to us by Telefónica Participaciones, S.A.U.
With respect to the balances with associated companies, the line item “Non-current financial assets” on the consolidated statement of financial position at December 31, 2014,2017, includes “Loans to Associates” amounting to 16 million million euros (1,281(16 million euros at December 31, 2013)2016).
Not applicable.
Consolidated Financial Statements
Please see Item 18.
(a) Legal Proceedings
Telefónica and its group companies are party to several legal proceedings which are currently in progress in the courts of law and the arbitration bodies of the various countries in which we are present.
Based on the advice of our legal counsel we believe it is reasonable to assume that these legal proceedings will not materially affect ourthe financial condition or solvency regardless of the outcome.Telefónica Group.
We highlight theThe following unresolved legal proceedings or those underway in 20142017 are highlighted (see Note 17 to ourthe Consolidated Financial Statements for details of tax-related cases):
Cancellation of the UMTS license granted to Quam GMBH in Germany
In December 2004, the German Telecommunications Market Regulator revoked the UMTS license granted in 2000 to Quam GmbH ("Quam"), in which Telefónica has a stake. After obtaining a suspension of the revocation order, on January 16, 2006, Quam filed a suit against the order with the German courts. This claim sought two objectives: 1) to overturn the revocation order issued by the German Telecommunications Market Regulator, and 2) if this failed, to be reimbursed for the total or partial payment of the original amount paid for the license, 8,400 million euros.
This claim was rejected by the Cologne Administrative Court. Quam appealed the decision before the Supreme Administrative Court of North Rhine-Westphalia, which also rejected its appeal.
Finally, Quam filed a new claim in third instance before the Federal Supreme Court for Administrative Cases, which was not admitted for processing.
Quam appealed this decision on August 14, 2009. On August 17, 2011, after the oral hearing, the Federal Administrative Court rejected Quam's appeal at third instance.
In October 2011, Quam filed a constitutional complaint before the German Federal Constitutional Court (Karlsruhe), which is still pending resolution.
Appeal against the European Commission ruling of July 4, 2007 against Telefónica de España’s broadband pricing policy
On July 9, 2007, Telefónica was notified of the decision issued by the European Commission (the "EC") imposing on Telefónica, S.A. and Telefónica de España, S.A.U. ("Telefónica de España") a fine of approximately 152 million euros for breach of the former Article 82 of the Treaty Establishing the European Community for not charging equitable prices to whole and retail broadband access services. The court ruled in favor of the EC accusing Telefónica of applying a margin squeeze between the prices it charged competitors to provide regional and national wholesale broadband services and its retail broadband prices using ADSL technology between September 2001 and December 2006.
On September 10, 2007, Telefónica and Telefónica de España filed an appeal to overturn the decision before the General Court of the European Union. The Kingdom of Spain, as an interested party, also lodged an appeal to overturn the decision. Meanwhile, France Telecom and the Spanish Association of Bank Users (AUSBANC) filed requests to intervene, which the General Court admitted.
In October 2007, Telefónica, S.A. provided a guarantee for an indefinite period of time to secure payment of the principal and interest of the fine.
A hearing was held on May 23, 2011, at which Telefónica presented its case. On March 29, 2012, the General Court rejected the appeal by Telefónica and Telefónica de España, confirming the sanction imposed by the EC. On June 13, 2012, an appeal against this ruling was lodged before the European Union Court of Justice.
On September 26, 2013, the Attorney General presented its conclusions to the court which alluded to a possible breach of the principle of non-discrimination with respect to the sanction and a defective application of the principle of full jurisdiction by the General Court, requesting to return the lawsuit to the instance.
On July 10, 2014 the European Union Court of Justice dismissed the appeal, maintaining the fine imposed for abuse of dominant position (margin squeeze) on wholesale prices charged by Telefónica and Telefónica de España for broadband access in Spain. This ended the appeal process.
The fine was satisfied by Telefónica de España, as indicated in Note 15 to our Consolidated Financial Statements.
Appeal against the decision by Agencia Nacional de Telecomunicações (ANATEL)(“ANATEL”) regarding the inclusion of interconnection and network usage revenues in the Fundo de Universalização de Serviços de Telecomunicações
Vivo Group operators (currently Telefônica de Brasil), together with other cellular operators, appealed ANATEL'sANATEL’s decision of December 16, 2005, to include interconnection and network usage revenues and expenses in the calculation of the amounts payable into the Fund for Universal Access to Telecommunications Services (“FUST”(“FUST”) – a fund which pays for the obligations to provide universal service -withUniversal Service – with retroactive application from 2000. On March 13, 2006, the Brasilia Regional Federal Court no. 1. granted a precautionary measure which stopped the application of ANATEL'sANATEL’s decision. On March 6, 2007, a ruling in favor of the wireless operators was issued, stating that it was not appropriate to include the revenues received by transfer from other operators in the taxable income for the FUST'sFUST’s calculation and rejecting the retroactive application of ANATEL'sANATEL’s decision. On January 26, 2016, ANATEL filed an appeal to overturn this decision with Brasilia Regional Federal Court no. 1. This appeal is pending resolution.1, which was also dismissed. On May 10, 2017 ANATEL appealed to the higher courts on the merits of the case.
At the same time, TelefóTelefônica Brasil and Telefónica Empresas, S.A., together with other wireline operators through ABRAFIX (Associaç(Associação Brasileira de Concessionárias de Serviço Telefonico Fixo Comutado)Comutado) appealed ANATEL'sANATEL’s decision of December 16, 2005, also obtaining the precautionary measures requested. On June 21, 2007, Federal Regional Court no. 1 ruled that it was not appropriate to include the interconnection and network usage revenues and expense in the FUST'sFUST’s taxable income and rejected the retroactive application of ANATEL'sANATEL’s decision. ANATEL filed an appeal to overturn this ruling on April 29, 2008, before Brasilia Federal Regional Court no. 1.1, which was dismissed on May 10, 2016. ANATEL filed an appeal against this dismissal.
The fixed operators filed an appeal to clarify that revenues obtained through interconnection and dedicated line operation should not be included in the calculation of the amounts payable to the FUST. In addition, the court was also requested to rule on two grounds which had not been analyzed in the initial decision: (i) that the FUST has become obsolete, among other reasons, by the advance of mobile telephony; and (ii) that amounts collected are not applied to the purpose for which the FUST was created, since only a very low percentage of the revenues collected by the FUST is used to finance fixed telephony. Although the petition for clarification was dismissed on August 23, 2016, the court noted that the FUST should not be funded with revenues from interconnection and dedicated line operation. ABRAFIX appealed to the higher courts on these two elements that had not been analyzed. ANATEL appealed all the holdings of the ruling to the higher courts.
No further action has been taken since then. The amount of the claim is quantified at 1% of the interconnection revenues.
Public civil procedure by the São Paulo government against TelefóTelefônica Brasil for alleged reiterated malfunctioning in services provided by Telefónica Brasil and request of compensation for damages to the customers affected
This proceeding was filed by the Public Ministry of the State of São Paulo for alleged reiterated malfunctioning in the services provided by TelefóTelefônica Brasil, seeking compensation for damages to the customers affected. A general claim was filed by the Public Ministry of the State of São Paulo, for 1 billion1,000 million Brazilian reais (approximately 370225 million euros), calculated on the company'scompany’s revenue base over the last five years.
In April 2010, a ruling against the Telefónica Group was issued in first instance. The full impact of this proceeding will not be known until there is a final ruling, and the total amount of persons affected by and party to the proceeding is known. At that moment, the amount of the indemnity will be established, ranging between 1 billion1,000 million and 60 million reais (approximately, between 370225 and 2213 million euros), depending on the number of parties. On May 5, 2010, TelefóTelefônica Brasil filed an appeal before the São Paulo Court of Justice, suspending the effect of the ruling. No further action has been taken since then.
On April 13, 2015, the appeal was judged in favor of Telefónica, by unanimous vote, reversing the earlier decision in the first instance.
The Public Prosecutor filed an extraordinary petition for review at the High Court of Brasilia which, on March 15, 2017, refused to consider the petition due to the lack of legal requirements.
Given that the Public Prosecutor did not appeal that refusal, the proceeding concluded in favour of Telefônica Brasil.
Appeal against the Decision of the European CommissionEC dated January 23, 2013 to sanction Telefónica for the infringement of Article 101 of the Treaty on the functioning of the European Union.
Union
On January 19, 2011, the EC initiated formal proceedings to investigate whether Telefónica, S.A. (Telefónica) and Portugal Telecom SGPS, S.A. ("Portugal Telecom")(Portugal Telecom) had infringed European Union anti-trust laws with respect to a clause
contained in the sale and purchase agreement of Portugal Telecom'sTelecom’s ownership interest in Brasilcel, N.V., a joint venture in which both were venturers and which was the owner of the Brazilian company Vivo.
On January 23, 2013, the EC passed a ruling on the formal proceedings. The ruling imposed a fine on Telefónica of 67 million euros, as the EC ruled that Telefónica and Portugal Telecom committed an infraction of Article 101 of the Treaty on the Functioning of the European Union (“TFUE”) for having entered into the agreement set forth in Clause Nine of the sale and purchase agreement referred to above.
of Portugal Telecom’s ownership interest of Brasilcel, N.V.
On April 9, 2013, Telefónica filed an appeal for annulment of this ruling with the European Union General Court. On August 6, 2013, the European Union General Court notified Telefónica of the response issued by the EC, in which the EC reaffirmed the main arguments of its ruling and, specially, that Clause Nine includes a competition restriction. On September 30, 2013, Telefónica filed its reply. On December 18, 2013, the EC filed its appeal.
A hearing was held on May 19, 2015, at the European Union General Court.
On June 28, 2016, the European Union General Court ruled. Although it declares the existence of an infringement of competition law, it annuls Article 2 of the contested Decision and requires the EC to reassess the amount of the fine imposed. The General Court considers that the EC has not neutralized the allegations and evidences provided by Telefónica on services in which there was not potential competition or were outside the scope of Clause Nine.
Telefónica understands that there are grounds for believing that the ruling does not suit at law; consequently, it filed an appeal to the Court of Justice of the European Union, on September 11, 2016.
On November 23, 2016, the EC filed its response against the Telefónica´s appeal. On January 30, 2017, Telefónica filed its response. On March 9, 2017, the European Commission filed its appeal.
Judicial appeals against the decisions by the Conselho Administrativo de Defesa Econômica (CADE) regarding the acquisition by Telefónica, S.A. of stakes in Portugal Telecom and Telco
rejoinder.
On December 4, 2013,13, 2017, the Brazilian Antitrust Regulator, CADE announced,General Court dismissed the two following decisions:appeal filed by Telefónica. In the coming months the European Commission must issue a new resolution in accordance with the judgment of the General Court of June 2016, which urged the Commission to recalculate the amount of the fine.
Claim of consumers association "FACUA" against Telefónica de España in connection with the increase of the price of Movistar Fusión
| 1. | To approve, with the restrictions mentioned below, the acquisition by Telefónica of the entire participation held by Portugal Telecom, SGPS S.A. and PT Móveis - Serviços de Telecomunicações, SGPS, S.A., (the "PT Companies") in Brasilcel, N.V., which controlled the Brazilian mobile company, Vivo Participações, S.A. ("Vivo"): |
On September 5, 2016, notification was given to Telefónica de España of a claim filed against it by the consumers association ("FACUA").Through such claim, the association exercises an action to protect consumers' and users' collective interests stipulated in articles 11 of the Civil Procedure Act (Ley de Enjuiciamiento Civil) and 24.1 of the Consumer and Users
| (a) | The entry of a new shareholder in Vivo, sharing the control of Vivo with Telefónica in conditions identical to those that were applicable to the PT Companies when they had a participation in Brasilcel N.V., or |
| (b) | That Telefónica ceases to have any direct or indirect financial interest in TIM Participações S.A. |
| 2. | To impose on Telefónica a fine of 15 million Brazilian Reals, for having allegedly breached the spirit and the goal of the agreement signed between Telefónica and CADE (as a condition to the approval of Telefónica's original acquisition of an interest in Telecom Italia, S.p.A. in 2007), due to the subscription of non-voting shares of Telco in recent capital increases. This decision also requires Telefónica to divest such non-voting shares of Telco. |
Protection Act (Ley General de Defensa de los Consumidores y Usuarios) on the basis of alleged disloyalty towards the consumers, arising from the raising of the prices of the product "Movistar Fusión" from May 5, 2015, by an amount of 5 euros per month.
The fine imposed by CADE onclaim contains a declaratory statement stating that disloyalty arises from misleading advertising regarding the price rise and a prohibitory injunction, requesting that Telefónica relatesde España be ordered not to the agreement reached on September 24, 2013, betweenapply such price rise and to prohibit its future application to all customers who became customers of Movistar Fusión prior to May 5, 2015. It contains, besides, a third statement, requesting Telefónica andde España to be condemned to repay the other shareholders of Telco (which holds 22.4% of the voting share capital of Telecom Italia, S.p.A.) whereby Telefónica subscribed and paid out a share capital increase in Telco, through a cash contribution of 324 million euros, in exchange for non-voting shares in Telco. Asexcess amounts collected as a result of this capital increase, the rise in prices to those customers who have chosen to maintain the service contracted, together with accrued interest held byon such amount.
The claim was filed for an undetermined amount, given the impossibility of determining a priori the total amount of the claim. On October 28, 2016, Telefónica in the voting share capital of Telco remained unchanged (46.18%), althoughde España filed its interest in the total share capital of Telco stands at 66%.
response.
On July 9, 2014,April 5, 2017, the Court ruled in favour of Telefónica filed de España, judicial appeal against both decisions, requesting they be overturned citing numerous procedural improprieties (the rulings were issued before Telefónica presented its allegations)upholding the objection of unsuitable action and a clear lackordering the dismissal of legal grounds. At the same time, it requestedaction. FACUA appealed that ruling.
Decision by the decisions be rendered null as CADE has not provided any proof that Telefónica's actions undermine competition or infringe on applicable legislation. In this respect, the decisionHigh Court regarding the acquisition by Telefónica of PT Companies' indirect stakeshares in Vivo Participações, S.A.Český Telecom by way of tender offer
Venten Management Limited ("Venten") and Lexburg Enterprises Limited ("Lexburg"), were minority shareholders of CESKY TELECOM. In September 2005 both companies sold their shares to Telefónica in a mandatory tender offer. Subsequently Venten and Lexburg, in 2006 and 2009, respectively, filed actions against Telefónica claiming a higher price than the price for which they sold their shares in the mandatory tender offer.
On August 5, 2016, the hearing before the High Court in Prague took place in order to decide the appeal against the second decision of the Municipal Court, which had been favourable to Telefónica's position (as was also the case with the first decision of the Municipal Court). At the end of the hearing, the High Court announced the Second Appellate Decision by which it reversed the second decision of the Municipal Court and ordered Telefónica to pay 644 million Czech koruna (approximately 23 million euros) to Venten and 227 million Czech koruna (approximately 8 million euros) to Lexburg, in each case plus interest.
On December 28, 2016, the decision was notified to Telefónica. Telefónica has filed an extraordinary appeal, requesting the suspension of the effects of the decision.
In March 2017, Telefónica was notified of the decision of the Supreme Court, which ordered the suspension of the effects of the unfavorable decision to Telefónica issued three yearsby the High Court.
Venten and Lexburg filed with the Supreme Court a motion to partially abolish the suspension of enforceability of the Decision of the High Court in Prague. On January 17, 2018, Telefónica filed its response seeking dismissal of such motion for lack of legal basis.
Claim by Entel against Telefónica de Argentina, SA
In 1999, Entel (the National Telecommunications Company of Argentina before its privatization) sued Telefónica de Argentina, SA ("TASA"), who was the licensee of the telecom service after the deal was approved byprivatization process, seeking detailed and documented accounting and reimbursement of the Brazilian telecommunications regulator (“ANATEL”). The transaction was completed -amounts that it received from and on behalf of Entel after assuming the telecom service as a licensee, and of the amounts deducted as commissions.
In general terms, the items in dispute were the amounts that TASA charged on behalf of Entel soon after having taken possession as a licensee of the telecom service (i.e.; the consumptions charges for telecom services from prior approval by the CADE was not requiredcustomers of Entel, either billed or unbilled, but pending payment at the time - immediately after ANATEL's approvalof the privatization). Entel also challenged the commissions that TASA discounted to Entel in exchange for the service of collection of fees on September 27, 2010.behalf of Entel. Additionally, Entel also claimed several credits received by TASA which allegedly belonged to Entel and had not been transferred to TASA in the privatization process.
Tax proceedings
TASA replied arguing the inadmissibility of the accountability request, since such liquidations had previously been submitted to the Entel Liquidating Commission without being timely challenged.
In December 2012,2010, the National Court of Justice of Spain issued a ruling on the tax inspection for the years 2001 to 2004 partiallyFirst Instance ruled in favor of Entel and held TASA accountable to Entel.
After exhausting all legal appeals available, TASA submitted the Company, acceptingrequested accounting to Entel, which was challenged by the national government on behalf of the liquidated Entel.
Several accounting drafts and cross-claims between the parties followed, with the intervention of a court-appointed expert accountant. After several court decisions, the intervening judge rejected TASA´s objections to the accounting presented by the national government and adopted the calculations made by Entel and the court-appointed expert.
Although this judicial decision was appealed, TASA´s appeal was dismissed by the Court of Appeals in October 2017, confirming, to a large extent, the accounting of Entel and the court-appointed expert, but also ordering Entel to recalculate interests, which has not been made yet. Specifically, the resolution of the Court accepted certain concepts that TASA had questioned and the application of a "judicial" interest rate (average passive rate), which implies a daily capitalization component, in detriment of the rate set forth in the privatization specifications which set a simple annual interest of 8% (which had even been used by the court-appointed expert and Entel in their calculations).
Although Entel has not yet submitted the new interest calculations required by the judge as of the date of this Annual Report, the approximate total amount of the claim considering its prior requests is estimated at 1,744 million Argentine pesos (71 million euros).
The resolution of the Court of Appeals exhausted the ordinary remedies available. TASA filed an extraordinary appeal, which was rejected in November 2017. TASA has submitted an exceptional appeal before the Argentine Supreme Court, although this appeal does not suspend the potential execution by Entel of prior rulings against TASA.
(b) Tax Proceedings
Inspections in the tax losses incurred by the Groupgroup in relation to the transfer of certain interests in TeleSudeste, Telefónica Móviles México and Lycos as tax deductible and rejecting the other allegations of the Company. The Company filed an appeal with respect to the other allegations to the Supreme Court on December 28, 2012, not affecting the 2014 Consolidated Financial Statements.
Also inIn 2012, in Spain the tax inspections for all taxes for the years 2005 to 2007 were completed, with the Company signing consent forms for anoff a corporate income tax paymentassessment of 135 million euros, thatwhich was paid and non-consent formin 2012, whilst disputing other adjustments with which it disagreed. Although the settlement agreement for the items which the Company contests. Thedisputed tax assessment for which a non-consent form was signed did not require payment ofgive rise to any tax because it onlypayment, since the adjustments proposed a reduction inwere offset by unused tax loss carryforwards. Ancarryforwards, the Company filed an appeal was filed with the Large Taxpayers Central OfficeEconomic-Administrative Court against these adjustments in May 2015, regarding the tax treatment of the Spanish State Tax Agency requesting this tax assessment be reversed, although no decision“juros sobre el capital propio” (interest on the appeal has been issuedown capital) as of the date of preparation of this Annual Report.dividends.
In July 2013, new2015 tax inspections of various companies in the 24/90 Tax Group, of which Telefónica, S.A. is the parent were initiated. Thefor all taxes and periods subject to review are corporate income tax for the years 2008 to 2011 VAT, tax withholdings and payments on account in respect of personalwere completed, with the Company signing off certain corporate income tax assessments and disputing others. This resulted in 2015 in an expense amounting to 206 million euros. However, this did not require any tax payment, as the adjustments arising from the inspection were offset by unused tax loss carryforwards, at the corresponding tax rate for each period.
Although the settlement agreement for the disputed tax assessment did not give rise to any tax payment, in July 2015 the Company filed an appeal with the Central Economic-Administrative Court against the adjustments it disputes, regarding the tax treatment of the “juros sobre el capital propio” (interest on investment income, propertyown capital) as dividends, and the criteria to use tax and non-residentloss carryforwards in the years subject to settlement.
In June 2017 the Company received an order of the Audiencia Nacional extending the effects of its ruling from February 27, 2014 from another tax payer to the individual legal status of Telefónica, in connection with the “Juros sobre el capital propio” (interest on own capital). As a consequence of the aforementioned, the Audiencia Nacional has voided the corporate income tax assesment for the second halfyears 2005 to 2007 and 2008 to 2011 related to “Juros sobre el capital propio” settled by the tax authorities.
With respect to the use of 2009 andtax loss carryforwards in the years 2010 and 2011. Itsubject to settlement during the inspection 2008 to 2011, still under litigation, in November 2017 the Company brought a judicial appeal to the Audiencia Nacional, against the alleged dismissal of the claim in the absence of a reply from the authorities.
At 2017 year end, it is not expected that these inspections in progress will result in thethere is any need to recognize any additional liabilities infor the outcome of this litigation.
Telefónica Group's consolidated financial statements.Brazil
State taxes
Meanwhile,The Telefónica Brasil hasGroup is involved in a range of tax litigation in Brazil over direct and indirect taxes (including those relating to GVT). This includes a number of appeals ongoing regarding therelating to ICMS tax (a tax similar to VAT, levied on telecommunications services). There is a dispute with the Brazilian tax authorities over which services should be subject to settlement of this tax. In 2014 the tax authorities embarked upon a new round of inspections in this regard.
To date the most significant issues have focused on the requirement to collect the ICMS on penalties charged to customers for non-compliance, Internet advertising services, and complementary or additional services to the basic telecommunications services such as value-added services, modem rental, and modem rental.the application of this tax on the basic fee (assinatura básica). In the case of the latter (assinatura básica), there is a pending case before the Supreme Court including Oi, which could affect other companies of the telecommunications sector.
All related procedures are being contested in all instances (administrative and court proceedings). The aggregate amount of these assessments,the relevant proceedings, updated to take into account interest, fines and other items, is approximately 9,70018,968 million Brazilian reais (3,010(approximately 4,781 million euros)euros, see Note 15). No provisions have been set aside for these matters, as the risk of them giving rise to liabilities is not probable. Telefónica BrasilBrazil has obtained independent expert reports supporting its position, i.e. that the aforesaid services are not subject to ICMS.
Federal taxes
Regading the ICMS.income tax (federal tax) the tax authorities proposed adjustments in relation to the tax amortization in 2011 and 2012 of the goodwill generated by Telefónica Brasil's acquisition and merger with Vivo. The tax inspections were conducted in 2016 and 2017 and the accumulated amount at December 31, 2017 is 4,744 Brazilian reais (approximately 1,196 million euros). This proceedings are at the administrative stage and no provisions have been made since the potential risk associated to them has been classified as "not probable" and Telefónica Brazil has received independent expert reports that support this view.
Telefónica del Perú
Regarding the Group’s mainWith regard to tax litigationmatters in Peru, litigation continues over corporate income tax for 2000 and 2001, payments on March 20, 2013, notification was receivedaccount in respect of the year 2000, recoverable balances for 1998 and 1999, and the interest and penalties that should apply to these.
In August 2015, the court of second instance handed down a first instance court decisionruling partially upholding the position of Telefónica Peru’s argumentsdel Perú, ruling in its favor on three of the five objections filed by the tax authorities and appealed against in higherto the courts, regardingrelating, inter alia, to corporate income tax in 2000/2001, which accountedfor 2000-2001 (among others). This dispute accounts for more than 75% of the total amount under litigation, amount (thewith the objections related respectivelyrelating to the provision for insolvency provisions, interest on borrowing and leases of space for public telephones). The company also obtained a precautionary measure in this regard amounting to 1,413 million Peruvian soles (391 million euros). Court proceedings are also ongoing concerning the possible offsetting of recoverable balances in 1998 and 1999, and the interest and penalties to be applied.telephones. Both the tax authorities and the company have appealedfiled appeals against the decision in higher courts.
The settlements carried out by SUNAT for 2000 and 2001 are in the courtfinal stage of second instance.the legal process (under review by the Supreme Court) and a ruling has not yet been released in 2017.
In connection with these proceedings in Peru, the Group and its legal advisors consider that the Group’s position continues to be based on robust legal arguments.
In parallel to the aforementioned court proceedings, the tax authorities proceeded to collect tax dues relating to the corporate income tax due for the years 2000-2001 and payments on account of the corporate income tax in respect of the year 2000, considering the recoverable balances for 1998 and 1999.2000. There were successive reductions to the sums claimed in the two cases following appeals submittedfiled by Telefónica del PeruPerú against the settlements and due to the precautionary measure commented above, up until themeasures imposed. The company finally paid out 286 million Peruvian soles (80(approximately, 80 million euros) in 2012 and 2013 pending the related rulings, wherebyfinal rulings.
In the estimated claim amount would be 1,581context of these execution processes, in June 2015 the tax authorities issued Compliance Resolutions demanding payment of 1,521 million Peruvian soles (437(approximately 431 million euros) if the outcome. An appeal was unfavorable. No further action was taken in connection with these administrative procedures in 2014, and therefore they are still pendingfiled against this with the Tax Court, (administrative phase)and the adoption of precautionary suspension measures duly requested from the legal authorities (as a definitive court ruling on these cases is currently pending). An appealNo ruling was made in relation to these appeals in 2017, whilst in January 2018 the Tax Court suspended payment until the final ruling of the Supreme Court.
Given the sentences and rulings handed down in June and August 2015, the Group decided to recognize a provision in the 2015 consolidated financial statements, that at December 31, 2017 amounted to 1,653 million Peruvian soles (approximately 425 million euros )(see Note 15 to the Consolidated Financial Statements).
Tax deductibility of financial goodwill in Spain
The tax regulations added a new article 12.5 to its Corporate Income Tax Law, which came into force on January 1, 2002. The article regulated the deductibility of tax amortization of financial goodwill arising from the acquisition of non-Spanish companies, which could be amortized over 20 years at 5% per annum. Following the entry into force of the Laws 9/2011 of August 19, 2011 and 16/2013 of October 29, 2013, the amount of goodwill amortization deductible for tax purposes under article 12.5 for the years 2011 to 2015 was reduced from 5% to 1%. The effect is temporary because the 4% not amortized during five years (20% in total) will be recovered extending the deduction period from the initial 20 years to 25 years.
The Telefónica Group, under this regulation, has been amortizing for tax purposes the financial goodwill from its investments, both direct and indirect, in O2, BellSouth and Coltel (prior to December 21, 2007) and Vivo (acquired in 2010). The positive accumulated effect in the corresponding settlements of corporate income tax from 2004 to the closing of December 31, 2017, was 1,226 million euros.
In relation to this tax incentive, the European Commission (EC) has in recent years commenced three proceedings against the Spanish State as it deems that this tax benefit could constitute an example of state aid. Although the EC itself acknowledged the validity of its first two decisions for those investors that invested in European companies (for operations carried out before December 21, 2007 in the first decision, and before May 21, 2011 for investments in other countries in the second decision), in its third decision from October 15, 2014 it calls into question the applicability of the principle of legitimate expectations in the application of the incentive for indirect acquisitions, whatever the date of acquisition may be submitted against an adverse outcome,have been.
As of the date of this Annual Report the three decisions continue subject to a final ruling. The first two were annulled by two judgments of the General Court of the European Union, which were appealed by the EC before the Court of Justice of the European Union and an application may be madesent again to the General Court by the Judgment dated December 21, 2016, to reassess the tax incentive. The third decision is still pending a judgment at first instance. Furthermore, there are doubts in the Spanish courts regarding the classification of the incentive as a deduction and if this deduction would remain in the case of a subsequent transfer of the relevant stake.
The Group has continued provisioning the amount of the goodwill amortized for tax purposes, corresponding mainly to the purchase of Vivo, for a suspension injunction.total of 215 million euros at December 31, 2017 (147 million euros at December 31, 2016).
Years open for inspection
In connection with these proceedingsYears open for inspection in Peru, the Group and its legal advisors consider they may have legal arguments to bring about a probable ruling with no significant effect on the Group's financial statements.companies
The years open for review by the tax inspection authorities for the main applicable taxes vary from one consolidated company to another, based on each country’s tax legislation, taking into account their respective statute-of-limitations periods. In Spain, following the tax audit completed in 2012,2015, the corporation tax from 2008 onwards and all other applicable taxes from 20092012 onwards are open to inspection with respect to the main companies of the Spanish tax group.
In the other countries in which the Telefónica Group has a significant presence, the years open for inspection by the relevant authorities are generally as follows:
The last thirteen years in Germany.
112The last nine years in United Kingdom.
The last seven years in Argentina.The last six years in Ecuador
The last five years in Brazil, Mexico, Uruguay, Colombia and the Netherlands.
The last four years in Venezuela, Peru, Guatemala, Nicaragua and Costa Rica.
The last three years in Chile, El Salvador, the United States and Panama.
| • | The last ten years in Germany; |
| • | The last seven years in United Kingdom and Argentina; |
| • | The last five years in Brazil, Mexico, Uruguay, Colombia and the Netherlands; |
| • | The last four years in Venezuela, Peru, Guatemala and Costa Rica; and |
| • | The last three years in Chile, Ecuador, Nicaragua, El Salvador, the United States and Panama. |
The tax inspection of the open years is not expected to give rise to additional material liabilities for the Group.
(c) Other Proceedings
For more information on legal proceedings relatedTelefónica is currently conducting internal investigations covering various countries regarding possible violations of applicable anti-corruption laws. Telefónica has been in contact with governmental authorities about these matters and intends to taxcooperate with those authorities as the investigations continue. It is not possible at this time to predict the scope or duration of these matters see Note 17 to our Consolidated Financial Statements.
or their likely outcome.
Dividend information and shareholders’ return
Dividend background
The table below sets forth the annual dividends declared per share and the year to which such dividends correspond. Generally, the dividend for a given year is paid in two tranches, one in the second-half of the relevant year and the other during the first half of the following year.
| Year ended December 31, | Dividends per share (euro) |
2014 (1) | 0.75 |
2013 (2) | 0.75 |
2012 (3) | − |
2011 (4) | 1.60 |
| 2010 | 1.40 |
| 2009 | 1.15 |
|
| | |
| Year ended December 31, | Dividends per share (euro) |
|
| 2017 (1) | 0.40 |
|
| 2016 (2) | 0.55 |
|
| 2015 (3) | 0.75 |
|
| 2014 (4) | 0.75 |
|
| 2013 (5) | 0.75 |
|
| |
| (1) | Company’s shareholder remuneration in 20142017 consists of paying a dividend of 0.750.40 euros per share. A cash dividend of 0.20 euros was paid on December 14, 2017. The second tranche of the dividend of 0.20 euros per share will be paid in cash in the second quarter of 2018. |
| |
| (2) | A scrip dividend of up to 0.35 euros was paid in November 2016, consisting of the assignment of free allotment rights with an irrevocable purchase commitment by the Company, and a subsequent capital increase by means of the issue of new shares to fulfill said allotments. A cash dividend of 0.20 euros per share charged to unrestricted reserves was paid on June16, 2017. |
(3) A scrip dividend of up to 0.35 euros was paid in November 2015, consisting of the assignment of free allotment rights with an irrevocable purchase commitment by the Company, and a subsequent capital increase by means of the issue of new shares to fulfill said allotments. A cash dividend of 0.40 euros per share charged to unrestricted reserves was paid on May 19, 2016.
| |
| (4) | A scrip dividend of up to 0.35 euros was paid in November 2014, consisting of the assignment of free allotment rights with an irrevocable purchase commitment by the Company, and a subsequent capital increase by means of the issue of new shares to fulfill said allotments. The second tranche of theA cash dividend of 0.40 euros per share will befrom 2015 net income was paid in cash in the second quarter ofon May 12, 2015. |
(2) | |
| (5) | A cash dividend of 0.35 euros per share was paid on November 6, 2013, charged against unrestricted reserves. A cash dividend of 0.40 euros per share from 2014 net income was paid on May 7, 2014. |
(3) | As of July 25, 2012, the Board of Directors cancelled the dividend and share buyback program corresponding to 2012 (including November 2012 and May 2013 cash and scrip payments, respectively). |
(4) | A cash dividend of 0.77 euros per share was paid on November 7, 2011, charged against unrestricted reserves.
A cash dividend of 0.53 euros per share was paid on May 14, 2012, charged against unrestricted reserves. In addition, a scrip dividend of up to 0.30 euros was paid, consisting of the assignment of free allotment rights with an irrevocable purchase commitment by the Company, and a subsequent capital increase by means of the issue of new shares to fulfill said allotments.
|
Payments of any future dividends will be dependent on the Group’s earnings, cash generation, solvency, liquidity, flexibility to make strategic investments, and shareholder and investor expectations at the time, all of which may be influenced by a variety of factors. See “Cautionary Statement Regarding Forward-Looking Statements.”
Treasury shares and share buyback program
We have performed, and may consider performing, transactions with treasury shares and financial instruments or contracts that confer the right to acquire treasury shares or assets whose underlying is Company shares.
Treasury share transactions will always be for legitimate purposes, including:
undertaking treasury share acquisitions approved by the Board of Directors or pursuant to General Shareholders’ Meeting resolutions; 113honoring previous legitimate commitments assumed;
covering requirements for shares to allocate to employees and management under stock option plans; andother purposes in accordance with prevailing legislation. In the past, treasury shares purchased on the stock market were exchanged for other shares or securities (as in the case of preferred capital securities), swapped for stakes in other companies (e.g. China Unicom, Telco, S.p.A., or Telefônica Brasil in 2015) or acquired to
| · | undertaking treasury share acquisitions approved by the Board of Directors or pursuant to General Shareholders' Meeting resolutions; |
| · | honoring previous legitimate commitments assumed; |
| · | covering requirements for shares to allocate to employees and management under stock option plans; and |
| · | other purposes in accordance with prevailing legislation. In the past, treasury shares purchased on the stock market were exchanged for other shares-or securities (as in the case of preferred capital securities), swapped for stakes in other companies (e.g. China Unicom or Telco S.p.A.) or acquired to reduce the number of shares in circulation (by redeeming the shares acquired), thereby improving earnings per share. |
Treasury share transactions will not be performed in any event based on privileged information or in order to intervene in free price formation. In particular, any of the conduct referred to in Articles 83.ter.1 of the Spanish Securities Market Law and 2 of Royal Decree 1333/2005 of November 11 implementing the Spanish Securities Market Law, with regards to market abuse will be avoided.
For a description on treasury shares, see Note 12 g) to our Consolidated Financial Statements.
General
Our ordinary shares, nominal value 1.00 euro each, are currently listed on each of the Madrid, Barcelona, Bilbao and Valencia stock exchanges and are quoted through the Automated Quotation System under the symbol “TEF.” They are also listed on the London and Buenos Aires stock exchanges. Our ADSs are listed on the New York Stock Exchange and the Lima Stock Exchange.
The table below sets forth, for the periods indicated, the reported high and low quoted closing prices, as adjusted for all stock splits, for our shares on the Madrid Stock Exchange, which is the principal Spanish market for our shares, and our ADSs on the New York Stock Exchange:
| | Per Share | Per ADS |
| | (in euro) | (in dollars)(1) |
| | High | Low | High | Low |
| Year ended December 31, 2010 | 19.820 | 14.875 | 28.55 | 17.81 |
| Year ended December 31, 2011 | 18.655 | 12.690 | 27.08 | 16.61 |
| Year ended December 31, 2012 | 13.710 | 8.630 | 17.76 | 10.25 |
| Year ended December 31, 2013 | 13.105 | 9.492 | 18.02 | 12.43 |
| Year ended December 31, 2014 | 13.370 | 10.865 | 17.40 | 13.99 |
| Quarter ended March 31, 2013 | 11.500 | 9.492 | 14.96 | 12.43 |
| Quarter ended June 30, 2013 | 11.350 | 9.613 | 14.86 | 12.60 |
| Quarter ended September 30, 2013 | 11.545 | 9.718 | 15.59 | 12.60 |
| Quarter ended December 31, 2013 | 13.105 | 11.265 | 18.02 | 15.45 |
| Quarter ended March 31, 2014 | 12.515 | 10.865 | 16.90 | 14.96 |
| Quarter ended June 30, 2014 | 12.850 | 11.480 | 17.40 | 15.79 |
| Quarter ended September 30, 2014 | 12.705 | 11.590 | 17.28 | 15.34 |
| Quarter ended December 31, 2014 | 13.370 | 10.965 | 16.39 | 13.99 |
| Month ended August 31, 2014 | 12.135 | 11.590 | 16.15 | 15.39 |
| Month ended September 30, 2014 | 12.390 | 11.910 | 16.02 | 15.34 |
| Month ended October 31, 2014 | 12.200 | 10.965 | 15.30 | 13.99 |
| Month ended November 30, 2014 | 12.880 | 11.810 | 16.00 | 14.70 |
| Month ended December 31, 2014 | 13.370 | 11.875 | 16.39 | 14.21 |
| Month ended January 31, 2015 | 13.380 | 11.355 | 15.19 | 13.45 |
| Month ended February 28, 2015 (through 25, 2015) | 13.800 | 12.950 | 15.64 | 14.61 |
|
| | | | | | | | |
| | Per Share (in euro) | Per ADS (in dollars) |
| | High |
| Low |
| High |
| Low |
|
| Year ended December 31, 2013 | 13.105 |
| 9.492 |
| 18.02 |
| 12.43 |
|
| Year ended December 31, 2014 | 13.370 |
| 10.865 |
| 17.40 |
| 13.99 |
|
| Year ended December 31, 2015 | 14.210 |
| 10.020 |
| 15.64 |
| 10.96 |
|
| Year ended December 31, 2016 | 10.175 |
| 7.661 |
| 11.35 |
| 8.18 |
|
| Year ended December 31, 2017 | 10.600 |
| 8.125 |
| 11.63 |
| 9.33 |
|
| Quarter ended March 31, 2016 | 10.175 |
| 8.484 |
| 11.35 |
| 9.65 |
|
| Quarter ended June 30, 2016 | 10.005 |
| 7.661 |
| 11.27 |
| 8.50 |
|
| Quarter ended September 30, 2016 | 9.750 |
| 8.146 |
| 10.93 |
| 9.12 |
|
| Quarter ended December 31, 2016 | 9.260 |
| 7.700 |
| 10.16 |
| 8.18 |
|
| Quarter ended March 31, 2017 | 10.600 |
| 8.850 |
| 11.36 |
| 9.33 |
|
| Quarter ended June 30, 2017 | 10.515 |
| 9.038 |
| 11.63 |
| 10.39 |
|
| Quarter ended September 30, 2017 | 9.818 |
| 8.864 |
| 11.48 |
| 10.29 |
|
| Quarter ended December 31, 2017 | 9.220 |
| 8.125 |
| 11.63 |
| 9.33 |
|
| Month ended August 31, 2017 | 9.818 |
| 8.975 |
| 11.48 |
| 10.73 |
|
| Month ended September 30, 2017 | 9.245 |
| 8.864 |
| 10.98 |
| 10.54 |
|
| Month ended October 31, 2017 | 9.220 |
| 8.692 |
| 10.88 |
| 10.01 |
|
| Month ended November 30, 2017 | 9.041 |
| 8.475 |
| 10.47 |
| 9.90 |
|
| Month ended December 31, 2017 | 8.626 |
| 8.125 |
| 10.23 |
| 9.62 |
|
| Month ended January 31, 2018 | 8.503 |
| 8.166 |
| 10.55 |
| 9.77 |
|
| Month ended February 28, 2018 (through February 19, 2018) | 8.197 |
| 7.474 |
| 10.22 |
| 9.22 |
|
Source: Madrid Stock Exchange Information and Bloomberg.
(1) Until January 21, 2011, each ADS represented the right to receive three ordinary shares. As of January 21, 2011, the ADS-to-ordinary share ratio was changed, so that each ADS now represents the right to receive one ordinary share. The closing prices prior to January 21, 2011 reflect the adjustment for the ratio change.
On February 25, 2015,19, 2018, the closing price of our shares on the Automated Quotation System of the Spanish Stock Exchanges was 13.808.197 euro per share, equal to 15.6910.022 dollars at the Noon Buying Rate on February 20, 20159, 2018 for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York on that date.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF”. Citibank, N.A. is the Depositary issuing ADSs in form of certificated ADSs (American Depositary Receipts, or ADRs) or uncertificated ADSs pursuant to the deposit agreement dated as of November 13, 1996, as amended as of December 3, 1999 and as further amended as of June 23, 2000, and as of March 9, 2007, among Telefónica, the Depositary and the holders from time to time of ADSs (the “Deposit Agreement”“Deposit Agreement”).
At December 31, 2014, 169,855,2422017, 111,043,154 of our shares were held in the form of ADSs by 762644 holders of record, including Cede & Co., the nominee of Depository Trust Company (“(“DTC”). The number of ADSs outstanding was 184,990,503131,924,178 at December 31, 2013.2016.
Spanish Securities Market Legislation
The Spanish Securities Markets Act (Ley del Mercado de Valores, or the LMV)“LMV”), enacted in 1988 and further amended, regulates the primary and secondary securities markets in Spain by establishing principles for their organization and operation, rules governing the activities of persons and institutions operating in these markets and a system for their supervision. This legislation and the regulation implementing it (mainly, as far as private issuers are concerned, the Royal Legislative Decree 4/2015, of October 23, approving the restated text of the LMV, the Royal Decree 1310/2005, of November 4, in relation to the issuance of securities and its admission to listing in official secondary markets, and Royal Decree 1362/2007, of October 19, concerning the transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market):
establishes an independent regulatory authority, the CNMV, to supervise the securities markets;
| · | establishes an independent regulatory authority, the CNMV, to supervise the securities markets; |
establishes the rules for surveillance, supervision and sanction provided for the representation of transferable securities by book entries or by certificate;establishes a framework for the issuance of securities;
| · | establishes the rules for surveillance, supervision and sanction provided for the representation of transferable securities by book entries or by certificate; |
establishes a framework for trading activities;establishes the disclosure obligations of issuers, particularly the obligation to file annual audited financial statements and to make public quarterly financial information;
| · | establishes a framework for the issuance of securities; |
establishes the framework for tender offers;establishes the code of conduct for all market participants; and
| · | establishes a framework for trading activities; |
| · | establishes the disclosure obligations of issuers, particularly the obligation to file annual audited financial statements and to make public quarterly financial information; |
| · | establishes the framework for tender offers; |
| · | establishes the code of conduct for all market participants; and |
| · | regulates market abuse infringements. |
On March 11, 2005, Royal Decree LawDecree-Law 5/2005 was approved, modifying the LMV in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of the prospectuses in order to grant to the issuer a single passport for such document, valid throughout the European Union; (ii) incorporates the application of the country of origin principle by which the prospectus will be approved by the Member States of the European
Union where the issuer has its registered office but it also introduces the possibility that in certain circumstances, such as issues with high minimum denominations (1,000 euros or more), the issuer may designate the relevant European Union competent authority for prospectus approval.
Subsequently, Royal Decree 1310/2005, further amended by Royal Decree 878/2015, partially developed the LMV in relation to the admission to trading of securities in the official secondary markets, the sales or subscription public offers and the prospectus required to those effects.
Royal Decree 1333/2005, further amended by Royal Decree 364/2007, developed the LMV in relation to market abuse, implementing Directive 2003/6/EC of the European Parliament and of the Council, relating insider dealing and market manipulation practices (“market abuse”).
On April 12, 2007, Law 6/2007 was approved, modifying the LMV in order to implement the Directive 2004/25/EC of the European Parliament and of the Council relating to public tender offers and the Directive 2004/109/EC relating to the transparency of issuers. Law 6/2007 intends: (i) to encourage an efficient market for corporate control, while protecting the rights of minority shareholders of listed companies and (ii) to enforce transparency in financial markets.
In relation to public tender offers, Law 6/2007 (i) establishes the cases in which a company must launch a takeover bid over the whole share capital of the relevant company; (ii) establishes that takeover bids shall be launched once a specific stake on the share capital of the company has been reached; (iii) adds new obligations for the board of directors of the target companies of the takeover bid in terms of defensive measures against the takeover bid; and (iv) regulates the squeeze-out and sell-out procedure when a 90% of the share capital is held following a takeover bid. Royal Decree 1066/2007, as amended, completes the regulation currently in place for takeover bids in Spain.
Regarding transparency of issuers whose shares are accepted to trading on an official market, Law 6/2007 (i) modifies the reporting requirements of the periodic financial information of listed companies and issuers of listed securities; (ii) establishes a new disclosure regime for significant shareholders; (iii) adds new information and disclosure requirements for issuers of listed securities; (iv) establishes a civil liability procedure of the issuer and board of directors in connection with the financial information disclosed by issuers of securities; and (v) confers new supervisory powers upon the CNMV with respect to the review of accounting information.
On December 19, 2007, Law 47/2007 was approved, modifying the LMV in order to implement the Directive 2004/39/EC of the European Parliament and of the Council, on Markets in Financial Instruments (MiFID); the Directive 2006/73/EC of the European Parliament and of the Council on organizational requirements and operating conditions regarding the Market in Financial Instruments Directive, and the Directive 2006/49/EC of the European Parliament and of the Council on the capital adequacy of investment firms and credit institutions. Its principal aim is to establish a general legal framework for financial markets in the European Union, in particular with regard to financial services, as well as to ensure appropriate transparency for investors through a regular flow of the relevant information concerning security issuers. Amongst other things, the new regime (i) establishes new multilateral trading facilities for listing shares apart from the stock markets; (ii) reinforces the measures for the protection of investors; (iii) establishes new organizational requirements for investment firms; (iv) implements new supervisory powers for CNMV, establishing cooperation mechanisms amongst national supervisory authorities.
On July 4, 2009, Law 3/2009, regarding structural modifications on Spanish Corporationscorporations (Ley 3/2009, de 3 de abril, sobre modificaciones estructurales de las sociedades mercantiles) came into force, modifying the maximum threshold established in the Spanish Corporation Act (Ley de Sociedades de Capital para la mejora del gobierno corporativo) as to the number of treasury shares held by listed companies and their subsidiaries from 5% up to 10% of their total capital outstanding.
On August 1, 2011, Law 25/2001,2011, partially reforming the Spanish Corporation Act and transposing Directive 2007/36/EC of the European Parliament and of the Council of July 11 relating to the exercise of certain rights shareholders in listed companies (Ley 25/2001,2011, de 1 de agosto, de reforma parcial de la Ley de Sociedades de Capital y de incorporación de la Directiva 2007/36/CE, del Parlamento Europeo y del Consejo, de 11 de Julio, sobre el ejercicio de determinados derechos de los accionistas de las sociedades cotizadas) was approved.
In December 2012, Royal Decree 1698/2012, amending regulations regarding prospectus and transparency requirements due on securities issues by the transposition of Directive 2010/73/EU of the European Parliament and of the Council of November 24, 2010, by amending Directive 2003/71/EC on the prospectus to be published when securities are
offered to the public or admitted to trading and Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, pursues essentially the reduction of administrative burdens related to the publication of a prospectus for the public offering of securities and admission to trading on markets within the European Union.
On March 20, 2013, ECC/461/2013 regulation was approved. This regulation establishes the content and structure of the annual report on corporate governance, the annual compensation report and other information mechanisms for public listed companies, the savings bankbanks and other entities that issue securities admitted to trading on regulated securities markets. The aforementioned regulation was amended by Order ECC/2515/2013, of December 26, which develops article 86.2 of the LMV.
LMV and by Order ECC/2575/2015, of November 30.
On June 12, 2013, Circular 5/2013 of the National Securities Market Commission (CNMV), was approved. This regulation establishes the templates of the annual report on corporate governance for public listed companies, savings banks and other entities that issue securities admitted to trading on regulated markets. This regulation is applicable to annual reports on corporate governance to be submitted from January 1, 2014 onwards.
On June 12, 2013, Circular 4/2013 of the CNMV was approved. This regulation establishes the templates of the annual report on director´sdirector’s compensation for public listed companies and members of the board of directors and the supervisory board of savings banks that issue securities admitted to trading on regulated securities markets. This regulation is applicable to the compensation report for the year 2013 onwards and will be put to a vote by the next ordinary general shareholders’ meeting on a consultative basis and as a separate item on the agenda.
On June 12, 2014, Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU ("MIFID II"), and Regulation (EU) 600/2014 of the European Parliament and Council of May 15, 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 (MiFIR).
On December 3, 2014, Law 31/2014, amending the Spanish Corporation Act was enacted. The new law introduces changes in matters related to general shareholders’ meetings, and shareholders rights. It also, modifies the legal status of members of the Board of Directors, including their compensation, practices and composition, and sets forth new rules on the composition of Board Committees. Law 31/2014 entered into force on December 24, 2014, although certain specific provisions affecting listed companies will not be effective until after the first general shareholders’ meeting held by such companies in 2015, in which companies will have to amend their bylaws to bring them in line with the new provisions of Law 31/2014.
On April 16, 2014, Regulation (UE) nº 596/2014 (Market Abuse Regulation) of European Parliament and of the Council on market abuse was approved. The regulation repeals Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC. This Regulation has been directly applicable in all European Union Member States since July 3, 2016.
On June 23, 2015, Circular 3/2015 of the CNMV established the information and technical and legal specifications that must be published on public listed companies, savings banks and other entities’ websites, in order to duly comply with the principle of transparency.
On October 2, 2015, Royal Decree 878/2015 was approved with the aim of reaching a greater level of efficiency and safety in the Spanish Automated Quotation System as well as contributing to the development towards an integrated European financial services market. This Royal Decree was enacted to fully implement the provisions of Directive 2013/50/UE of the European Parliament and of the Council, which amended Directive 2004/109/EC of the European Parliament and of the Council on harmonization of transparency requirements for issuers of listed securities, into Spanish legislation.
On October 23, 2015, Royal Legislative Decree 4/2015 was approved to consolidate and unify in a single text the legislative instruments that govern the activities of individuals and institutions in the Spanish securities markets.
On December 22, 2015, Circular 7/2015 of the CNMV amended those provisions of the Circular 5/2013 that relate to the templates of the annual report on corporate governance to be used by public listed companies, savings banks and other entities, and those provisions of Circular 4/2013 that relate to the templates of the annual report on directors' compensation for public listed companies.
On December 22, 2015, Circular 8/2015 of the CNMV published new forms establishing the notification templates for directors, executives and close relatives to communicate their significant shareholdings and for issuers to communicate transactions relating to own shares, with the aim of complying with the obligations introduced by Royal Decree 1362/2007, Royal Decree 878/2015 and Market Abuse Regulation. Individuals bound by such Circular must use the new forms from April 1, 2016.
On July 20, 2017, Regulation (EU) 2017/1129 of the European Parliament and of the Council of June 14, 2017, on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the "Prospectus Regulation"), entered into force and became directly applicable in all European Union Member States on a rolling basis, with full application from July 21, 2019. The Prospectus Regulation replaces the previous EU Directive 2003/71/EC (the Prospectus Directive). The Prospectus Regulation aims at harmonizing the disclosure regime by removing asymmetries of information and, ultimately, at increasing transparency in the markets. The Prospectus Regulation regulates the content of the prospectuses and contains a list of exemptions from the obligation to produce a prospectus in certain cases. Additional new legislation developing the new Regulation is yet to be drafted.
On November 24, 2017, a Royal Decree-Law was approved, implementing in Spain Directive 2014/95/EU of the European Parliament and of the Council of October 22, 2014 as regards disclosure of non-financial and diversity information by certain large undertakings and groups. Such Royal Decree-Law requires certain companies to include in their management report a non-financial statement containing certain additional information relating to environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.
On January 3, 2018, MiFID II became effective in all European Union Member States.
Securities Trading in Spain
The Spanish securities market for equity securities consists of four stock exchanges located in Madrid, Bilbao, Barcelona and Valencia and the Automated Quotation System, or Mercado Continuo.Continuo. During 2009,2017, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.
Automated Quotation System
The Automated Quotation System links the Spanish Stock Exchanges, providing those securities listed on it with a uniform continuous market that eliminates certain of the differences among the local exchanges. The principal features of the system are the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by Sociedad de Bolsas, S.A., a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a brokerage firm, an official stock broker or a dealer firm that is a member of a Spanish Stock Exchange. Beginning January 1, 2000, Spanish banks were allowed to become members of the Spanish Stock Exchanges and, therefore, can trade through the Automated Quotation System.
In a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day, an opening price is established for each security traded on the Automated Quotation System based on a real-time auction. The regime concerning opening prices was changed by an internal rule issued by the Sociedad de Bolsas. Pursuant to such rule, each stock in the continuous market is assigned a static and a dynamic range within which its price can fluctuate. The price of a stock may rise or fall within its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5five minutes, during which time an auction takes place. After this auction, the price of the stock can once again rise or fall within its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock
cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range, a five minutefive-minute auction is triggered. Between 5:30 p.m. and 5:35 p.m. a closing price is established for each security through an auction system similar to the one held for the pre-opening early in the morning.
Trading hours for block trades are also from 9:00 a.m. to 5:30 p.m. Between 5:30 p.m. and 8:00 p.m., certain trades may occur outside the computerized matching system without prior authorization from Sociedad de Bolsas, S.A. at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day if there are no outstanding bids or offers, respectively, on the system matching or bettering the terms of the proposed off-system transaction and, if, among other things, the trade involves more than 300,000 euros and more than 20% of the average daily trading volume of the stock during the preceding three months. These trades must also relate to individual orders from the same person or entity and be reported to the Sociedad de Bolsas, S.A. before 8:00 p.m. At any time trades may take place (with the prior authorization of the Sociedad de Bolsas, S.A.) at any price if:
the trade involves more than 1.5 million euros and more than 40% of the average daily volume of the stock during the preceding three months;
| · | the trade involves more than 1.5 million euros and more than 40% of the average daily volume of the stock during the preceding three months; |
the transaction derives from a merger or spin-off process, or from the reorganization of a group of companies;the transaction is executed for the purposes of settling a litigation or completing a complex group of contracts; or
| · | the transaction derives from a merger or spin-off process, or from the reorganization of a group of companies; |
| · | the transaction is executed for the purposes of settling a litigation or completing a complex group of contracts; or |
| · | Sociedad de Bolsas, S.A. finds other justifiable cause. |
Information with respect to the computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to Sociedad de Bolsas, S.A. by the end of the trading day and published in the Boletín de Cotización and in the computer system by the beginning of the next trading day.
Clearance and settlement system
The Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores S.A.U., formerly Iberclear,(whose commercial name is Iberclear), was created by the Ley 44/2002 de Medidas de Reforma del Sistema Financiero, enacted on November 22, 2002 to increase the efficiency of the Spanish financial markets. Such law introduced a new article, 44-bis to the LMV which established the framework for the constitution of Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores S.A.U.
Iberclear is regulated by the Spanish Securities Act and where appropriate by Royal Decree 505/1987 of April 3, 1987, Royal Decree 166/1992 of February 14, 1992, and by any other related regulation. This company, which is a wholly owned subsidiary of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A. (Bolsas y Mercados Españoles), has the following functions:
Keeping accounting records in the form of book entries of securities traded in Securities Markets or in public debt markets, and securities traded in other secondary official markets or multilateral trading facilities, at the request of their governing bodies.
| · | bookkeeping of securities represented by means of book entries admitted to trading in the stock markets or in the public debt book entry market; |
Keeping accounting records of other securities not listed for trading in secondary official markets, regulated markets or multilateral trading facilities, at the request of their governing bodies.To manage settlement and, if necessary, clearing of securities and cash deriving from transactions executed on securities.
| · | managing the clearance and settlement system for the brokerage transactions in the stock markets and at the public debt book entry market; and |
To render technical and operating services directly related to those of registration, clearing and settlement of securities and any others required for Iberclear to collaborate and coordinate its actions with other areas and systems of registration, clearing and settlement of securities, for which it may have to be authorized under the Rules of Central Securities Depositories. | · | providing technical and operational services directly linked to the registry, clearance and settlement of securities, or any other service required by Iberclear to be integrated with any other registry, clearance, and settlement systems. |
Any other duties assigned by the Spanish Government, subject to prior reports from the CNMV and, if applicable, the Bank of Spain.
Iberclear will provide the CNMV, the Bank of Spain and the Ministry of Economy with the information that these entities may request regarding the registry clearance and settlement performed within the systems managed by Iberclear.
Transactions carried out on the Spanish Stock Exchanges are cleared and settled through Iberclear.
Only members of the system are entitled to use Iberclear, and membership is restricted to authorized broker members of the Spanish Stock Exchanges, the Bank of Spain (when an agreement, approved by the Spanish Ministry of Economy and Finance, is reached with Iberclear) and, with the approval of the CNMV, other brokers not members of the Spanish Stock Exchanges, banks, savings banks and foreign settlement and clearing systems. The clearance and settlement system and its members are responsible for maintaining records of purchases and sales under the book-entry system. Shares of listed Spanish companies are held in book-entry form. Iberclear, which manages the clearance and settlement system, maintains a registry reflecting the number of shares held by each of its member entities (each, an entidad participante)participante) as well as the amount of such shares held on behalf of beneficial owners. Each member entity, in turn, maintains a registry of the owners of such shares. Spanish law considers the legal owner of the shares to be the member entity appearing in the records of Iberclear as holding the relevant shares in its own name or the investor appearing in the records of the member entity as holding the shares.
The settlement of any transactions must be made threetwo business days following the date on which the transaction was carried out.
Obtaining legal title to shares of a company listed on a Spanish Stock Exchange requires the participation of a Spanish official stockbroker, broker-dealer or other entity authorized under Spanish law to record the transfer of shares. To evidence title to shares, at the owner’s request, the relevant member entity must issue a certificate of ownership. In the event the owner is a member entity, Iberclear is in charge of the issuance of the certificate with respect to the shares held in the member entity’s name.
Brokerage commissions are not regulated. Brokers’ fees, to the extent charged, will apply upon transfer of title of shares from the Depositary to a holder of ADRs in exchange for such ADSs, and upon any later sale of such shares by such holder. Transfers of ADSs do not require the participation of an official stockbroker. The Deposit Agreement provides that holders depositing shares with the Depositary in exchange for ADSs or withdrawing shares in exchange for ADSs will pay the fees of the official stockbroker or other person or entity authorized under Spanish law applicable both to such holder and to the Depositary.
In 2015, due to changes introduced into the applicable legislation, Bolsas y Mercados Españoles developed a Clearing and Settlement Reform in Spain, implemented throughout 2016 and 2017 in two main phases:
on April 27, 2016, when a new Central Counterparty (CCP) was implemented and the new platform for equity settlement was introduced; and
on September 18, 2017, when the Fixed Income settlement system was introduced to the new platform and the TARGET2-Securities (TS2) was implemented.
This reform involves the following three fundamental modifications, having impact on several operating practices.
A new Central Counterparty was incorporated, the so- called BME Clearing, whose intervention take place between the contract and settlement date, assuming the risk of the counterparty and, where applicable, conducting the clearing transactions and simplifying the settlement.
Another modification is the application in all kinds of securities of a new system of recording, clearing and settlement. This sole system eliminates the need to use register references by introducing a register based on balances, where Iberclear and each member entity manage their respective records.
The last decision entails the integration of the Central de Anotaciones de Deuda (CADE) and the Servicio de Compensación y Liquidación de Valores (SLCV) system into a unique platform.
The Spanish equity market is structured around three infrastructures, which are the following: the Spanish Stock Exchange Interconnection System (SIBE) trading platform, BME Clearing and Iberclear (the Central Securities Depository).
As consequence of the above, several modifications have occurred such as: (i) financial entities can be members of the new infrastructures; (ii) Stock Exchange members have to contract with a General Clearing member of the CCP; (iii) CCP members have to contract with an Iberclear Settlement Participant; (iv) CCP formulates the netting of transactions prior to settlement instructions; (v) the existence of Individual Accounts in the CCP and the Central Securities Deposit; (vi) the maximization of settle transaction in case of delay of delivery of securities by Iberclear; (vii) Collective Deposit change into the CCP guarantee system; or (viii) the introduction of Post Trading Interface communication system.
Furthermore, changes are also applicable to the Trading Member systems in relation with trading, post trading and control procedures, in order to adapt to the new regime.
B. Plan of Distribution
Not applicable.
Please see “—Offer and Listing Details” above.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
The following summary describes certain material considerations concerning our capital stock and briefly describes certain provisions of our bylaws and Spanish law.
Corporate Objectives
Article 5 of Title I of our bylaws sets forth our corporate purposes:
The provision and operation of all kinds of public or private telecommunications services and, for such purpose, the design, installation, maintenance, repair, improvement, acquisition, disposition, interconnection, management, administration of, and any other activity not included in the preceding enumeration with respect to, all kinds of telecommunications networks, lines, satellites, equipment, systems and technical infrastructure whether now existing or to be created in the future, including the premises in which any and all of the foregoing items are located;
| · | The provision and operation of all kinds of public or private telecommunications services and, for such purpose, the design, installation, maintenance, repair, improvement, acquisition, disposition, interconnection, management, administration of, and any other activity not included in the preceding enumeration with respect to, all kinds of telecommunications networks, lines, satellites, equipment, systems and technical infrastructure whether now existing or to be created in the future, including the premises in which any and all of the foregoing items are located; |
the provision and operation of all kinds of services that are ancillary or supplemental to or result from telecommunications services;the research and development, promotion and application of all kinds of component principles, equipment and systems directly or indirectly used for telecommunications;
| · | the provisionmanufacturing and production activities and, in general, all other forms of industrial activity in connection with telecommunications; and operation of all kinds of services that are ancillary or supplemental to or result from telecommunications services; |
| · | the research and development, promotion and application of all kinds of component principles, equipment and systems directly or indirectly used for telecommunications; |
| · | manufacturing and production activities and, in general, all other forms of industrial activity in connection with telecommunications; and |
| · | acquisition, disposition and, in general, all other forms of commercial activity in connection with telecommunications. |
Director Qualification
In order to be elected as a director, a person must have held a number of our shares representing a nominal value of no less than 3,000 euros for at least three years prior to his or her election. These shares may not be transferred so long as such person remains a director. This requirement does not apply to any person who, at the time of his or her appointment, has either a labor or professional relationship with the company or is expressly exempted from such requirement by a vote of at least 85% of the Board of Directors.
Interested Transactions
When a director or persons related to him or her has an interest in a transaction with us or with any of the companies of our Group, such transaction (if unrelated to the ordinary course of our business or if not performed on an arm’s lengtharm’s-length basis involving consideration that is significant to the Company and otherwise) must be presented to the Nominating, Compensation and Corporate Governance Committee. Such committee shall assess the transaction from the point of view of equal treatment of shareholders and the arm’s lengtharm’s-length basis of the transaction and shall be included in the Annual Corporate Governance Report and in the periodic information of the Company upon the terms set forth in applicable laws and regulations. The performance of such transactions requires the authorization of our Board of Directors, after the favorable report of the committee. The interested director must refrain from participating in votes that affect such transaction.
Significant Differences in Corporate Governance Practices
Corporate governance guidelines
For a description of our corporate governance practices see “Item 16G. Corporate Governance.”
Description of Our Capital Stock
Description of share capital
At February 27, 2015,22, 2018, our issued share capital consisted of 4,657,204,3305,192,131,686 ordinary registered shares with a nominal value of 1.00 euro each.
Our shareholders have delegated to the Board of Directors the authority to issue up to 2,281,998,2422,469,208,757 new shares (equal to half of Telefónica’s share capital on May 18, 2011,June 12, 2015, the date of the authorization). The Board of Directors is authorized to exclude preemptive rights, in whole or in part, pursuant to the applicable provisions of the Spanish Corporation Act. The Board’s authorization to issue new shares expires on May 18, 2016.June 12, 2020.
Meetings and voting rights
We hold our ordinary general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the Board of Directors. Extraordinary general shareholders’ meetings may be called, from time to time, at the discretion of our Board of Directors or upon the request of shareholders representing at least 3% of our paid-in share capital. The minimum percentage required to exercise this right was recently lowered from 5% to 3% by Law 31/2014.
We publish notices of all ordinary and extraordinary general shareholders’ meetings in the Official Gazette of the Commercial Registry or in one of the more widely circulated newspapers in Spain, on the website of the Spanish Securities and Exchange Commission (Comisió(Comisión Nacional del Mercado de Valores (the “CNMV”“CNMV”)), and on our web site in due time pursuant to the Spanish Corporation Act, being on a general basis at least one month before the relevant meeting. Furthermore, the Board of Directors may publish notices in other media, if deemed appropriate to ensure the public and effective dissemination of the notice meeting.
Each share of Telefónica, S.A. entitles the holder to one vote. However, only registered holders of shares representing a nominal value of at least 300 euros (which currently equals at least 300 shares)shares are entitled to attend a general shareholders’ meeting. Holders of a lesser number of shares representingmay grant a nominal value of less than 300 euros (less than 300 shares), may aggregate their shares and jointly appoint a proxy-holder (which needs not be a shareholder) to attend a general shareholders’ meeting or delegate his or her voting rights by proxy in respect thereof to a shareholder who hashaving the right to attend, as well as group together with other shareholders in the shareholders’ meeting.
same situation until reaching the required number of shares, following which a proxy must be granted by the shareholders so grouped together to one of such shareholders. The grouping must be carried out specifically for each General Shareholders’ Meeting and be recorded in writing.
However, under our bylaws, the maximum number of votes that a shareholder may cast is capped at 10% of our total outstanding voting capital. In determining the maximum number of votes that each shareholder may cast, only the shares held by such shareholder are counted, disregarding those that correspond to other shareholders who have appointed such shareholder as his or her proxy, in spite of applying the limit individually to each of the represented shareholders. This cap will also apply to the maximum number of votes that may be collectively or individually cast by two or more shareholder companies belonging to the same group of entities, as well as to the maximum number of votes that may be cast by an individual or corporate shareholder and the entity or entities that are shareholders themselves and which are directly or indirectly controlled by that individual or corporate shareholder. Moreover, in accordance with the Spanish Corporation Act, such cap would become ineffective where the bidder reaches, as a consequence of a tender offer, a percentage equal to or greater than 70% of the share capital carrying voting rights, unless the bidder (or those acting in concert with the bidder) is not subject to equivalent neutralization measures or has not adopted them.
In addition, according to Article 34 of Spanish Royal Decree-Law 6/2000 of June 23 on urgent measures to improve competition in the goods and services markets, individuals and legal entities directly and indirectly holding more than 3% of the total share capital or voting rights of two or more principal operator companies in Spain in, among other markets, the fixed-line and mobile-line telephony markets, may not exercise their voting rights in excess of 3% of the total in more than one company, except with the prior authorization of the Spanish National Markets and Competition Commission (Comisió(Comisión Nacional de los Mercados oy la Competencia (the “CNMC”“CNMC”)). Principal operators are defined as one of the five operators with the largest market share in the corresponding market (“Principal Operators”Operators”). In addition, no individual or
legal entity is allowed to appoint, directly or indirectly, members of the management body of more than one Principal Operator in, among others, the fixed-line or mobile-line telephony markets, except with the prior authorization of the CNMC. Additionally, individuals or legal entities considered Principal Operators are not allowed to exercise more than 3% of the voting rights of another Principal Operator nor to appoint, directly or indirectly, members of the management body of any Principal Operator, except, in both cases, with the prior authorization of the CNMC. Telefónica is considered a Principal Operator for the purposes of Article 34 of Royal Decree-Law 6/2000 of June 23 in the Spanish fixed-line and mobile-line telephony markets.
Any share may be voted by proxy. The proxies may be granted in writing or electronically and are valid only for a single meeting, unless the proxy-holder is the granting shareholder’s spouse, ascendant or descendant, or holds a general power of attorney granted in a public instrument with powers to manage all of the assets held by the shareholder granting the proxy in Spain. Under the Deposit Agreement relating to our ADSs, the Depositary accepts voting instructions from holders of ADSs. The Depositary executes such instructions to the extent permitted by law and by the terms governing the shares and ADSs. The Depositary or its nominee, as the case may be, will be entitled to vote by proxy the shares underlying the relevant ADSs.
Only holders of record five days prior to the day on which a general meeting of shareholders is scheduled to be held may attend and vote at the meeting.
According to the Spanish Corporation Act, as amended by Law 31/2014, the general shareholders’ meeting will be quorate on first call if the shareholders present, in person or by proxy, hold at least 25% of the subscribed share capital carrying voting rights. On second call, the meeting will be quorate regardless of the capital in attendance.
However, if the agenda of the meeting includes resolutions on the amendment of the bylaws, including an increase or reduction of share capital, the transformation, merger, split-off, the en bloc assignment of assets and liabilities, the migration of the registered office abroad, the issuance of debentures or the exclusion or limitation of pre-emptivepreemptive rights, the required quorum on first call must be met by the attendance of shareholders representing at least 50% of the subscribed share capital carrying voting rights (each a “Special Resolution”). On second call, the attendance of 25% of the subscribed share capital carrying voting rights will suffice.
As a general rule, resolutions at the general shareholder’s meeting will be passed by a simple majority of votes cast at such meeting (i.e., provided that the votes for"for" outnumber the votes against"against" the relevant resolution).
In contrast, in order to approve any Special Resolution, if the capital present or represented at the general shareholders’ meeting exceeds 50% of the subscribed share capital carrying voting rights, the favorable vote of the absolute majority (that is, if the votes in favor exceed 50% of the votes corresponding to capital present and represented at the shareholders’ meeting) will be required. If, on second call, shareholders representing 25% or more of the subscribed share capital carrying voting rights are present or represented but fail to reach the 50% threshold, the favorable vote of at least two-thirds of the share capital present or represented at the meeting will be required.
Preemptive Rights
Pursuant to the Spanish Corporation Act, shareholders have preemptive rights to subscribe for any new shares in capital increases with issuances of new shares with a charge to monetary contributions and in issuances of debentures convertible into shares. Such rights may be excluded (partially or totally) under special circumstances by virtue of a resolution passed at a general shareholders’ meeting in accordance with Articles 308, 504 and 506 of the Spanish Corporation Act, or by the Board of Directors, if previously authorized at a general shareholders’ meeting in accordance with Article 506 of the Spanish Corporation Act (for capital increases) and Articles 417 and 511 (for issuances of debentures convertible into shares). Such preemptive rights will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger or demerger of another entity into Telefónica or of all or part of the assets split from another company, in which shares are issued as consideration or, in general, when the increase is carried out as consideration in exchange for non-cash contributions. Such rights are transferable, may be traded on the Automated Quotation System and may be of value to existing shareholders because new shares may be offered for subscription at prices lower than prevailing market prices.
Form and Transfer
Ordinary shares are in book-entry form and are indivisible. Joint holders must nominate one person to exercise their rights as shareholders, though joint holders are jointly and severally liable for all obligations arising from their status as shareholders. Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. Unipersonal (“Iberclear”), which manages the clearance and settlement system of the Spanish Stock Exchanges, maintains the central registry of ordinary shares reflecting the number of ordinary shares held by each of its participant entities (entidades participantes) as well as the number of such shares held by registered legal owners. Each participant entity in turn maintains a register of the owners of such shares.
Transfers of Telefónica’s ordinary shares quoted on the Spanish Stock Exchanges must be made by book-entry registry or delivery of evidence of title to the buyer through, or with the participation of, a member of the Spanish Stock Exchanges that is an authorized broker or dealer. Transfers of Telefónica’s ordinary shares may also be subject to certain fees and expenses.
Reporting Requirements
According to Royal Decree 1362/2007 of October 19 on the disclosure of significant stakes in listed companies (“Royal Decree 1362/2007”2007”), recently modified by Royal Decree 878/2015, of October 2, the acquisition or disposition of shares of Telefónica must be reported within four trading days of the acquisition or disposition to Telefónica and the CNMV, where:
in the case of an acquisition, the acquisition results in that person or group holding a number of voting rights in Telefónica that reaches or surpasses 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights; or
| · | in the case of an acquisition, the acquisition results in that person or group holding a number of voting rights in Telefónica which reaches or surpasses 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights; or |
in the case of a disposal, the disposition reduces the number of voting rights held by a person or group below a threshold of 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights.
| · | in the case of a disposal, the disposition reduces the number of voting rights held by a person or group below a threshold of 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights. |
Royal Decree 878/2015 established a new approach for calculating whether these thresholds are reached, surpassed or fell short which requires adding the voting rights corresponding to shares and financial instruments. Royal Decree 878/2015 also expands the definition of financial instruments which should be reported, including financial instruments having a similar economic effect as the shares of a company, whether the instruments are cash or physically settled, including convertible securities, options, forwards, futures, swaps, CFDs or any other type of instrument which grants the holder the right to acquire shares or a right to receive an equivalent cash settlement amount. Additionally, Royal Decree 878/2015 amends the calculation rules of the voting rights attributable to a financial instrument which, among other changes, shall now be calculated on a daily basis.
The reporting requirements referred to above apply not only to the acquisition or transfer of shares, but also when, without an acquisition or transfer of shares, the proportion of voting rights of an individual or legal entity reaches, exceeds or falls below the threshold that triggers the obligation to report as a consequence of a change in the total number of voting rights of Telefónica on the basis of the information reported to the CNMV and disclosed by it, in accordance with the Royal Decree 1362/2007.
Decree.
Regardless of the actual ownership of the shares, any individual or legal entity with a right to acquire, transfer or exercise voting rights granted by the shares, and any individual or legal entity who owns, acquires or transfers, whether directly or indirectly, other securities or financial instruments which grant a right to acquire shares carrying voting rights (such as transferable securities, options, futures, swaps, forwards and other derivative contracts), will also have an obligation to notify the company and the CNMV of the holding of a significant stake in accordance with the above-mentioned regulations.
Stricter disclosure obligations apply if the person obligated to disclose has residency in a country considered a tax haven by the Spanish authorities, a zero-taxation country or territory or a country or territory that does not share information with the Spanish authorities, in which cases the initial threshold for disclosure is reduced to 1% (and successive multiples of 1%).
Our directors must report to us and the CNMV the percentage and number of voting rights in Telefónica held by them at the time of becoming or ceasing to be a member of the Board of Directors. Furthermore, all members of the Board must report any change in the percentage of voting rights they hold, regardless of the amount, as a result of any acquisition or disposition of our shares or voting rights, or financial instruments which carry a right to acquire or dispose of shares which have voting rights attached, including any stock-based compensation that they may receive pursuant to any of our compensation plans. Members of our senior management must also report any stock-based compensation that they may receive pursuant to any of our compensation plans or any subsequent amendment to such plans. Royal Decree 1362/2007 (as amended) refers to the definition given by Royal Decree 1333/2005 of November 11, which develops the Spanish Securities Market Act, regarding market abuse, which defines senior management (directivos) as those “high-level employees in positions of responsibility with regular access to insider information (información privilegiada) related,
directly or indirectly, to the issuer and that, furthermore, are empowered to adopt management decisions affecting the future development and business perspectives of the issuer”.
issuer."
In addition, pursuant to Royal Decree 1333/2005 of November 11 (implementing European Directive 2004/72/EC)(as amended), any member of our Board and our senior management, or any parties closely related to any of them, as such terms are defined therein, must report to the CNMV any transactions carried out with respect to our shares or derivatives or other financial instruments relating to our shares within five business days of such transaction.shares. The notification of the transaction must include particulars of, among others, the type of transaction, the date of the transaction and the market in which the transactions were carried out, the number of shares traded and the price paid.
These disclosure obligations are primarily regulated by Royal Decree 1362/2007 which contains(as amended) and, since July 3, 2016, by the Regulation (EU) No 596/2014 of the European Parliament and of the Council of April 16, 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, both establish a more detailed set of rules on this legal framework (including, inter alia, rules determining the persons subject to disclosure obligations, the different types of situations triggering disclosure and corresponding exceptions, specific attribution and aggregation rules, the deadlines to notify the transactions, triggering disclosure obligations and incorporation of notices submitted to the CNMV’s public registry).
Disclosure of Net Short Positions
In accordance with Regulation (EU) No. 236/2012 of the European Parliament and of the European Council of March 14, 2012 on short selling and certain aspects of credit default swaps (as further supplemented by several delegated regulations regulating technical aspects necessary for its effective enforceability and to ensure compliance with its provisions), net short positions on shares listed on the Spanish Stock Exchanges equal to, or in excess of, 0.2% of the relevant issuer’s share capital and any increases or reductions thereof by 0.1% are required to be disclosed to the CNMV by no later than the first trading day following the transaction. If the net short position reaches 0.5%, and also at every 0.1% above that, the CNMV will disclose the net short position to the public.
Notification is mandatory even if the same position has been already notified to the CNMV in compliance with reporting requirements previously in force in Spain.
The information to be disclosed is set out in Table 1 of Annex I of Delegated Regulation 826/2012, according to the format approved as Annex II of this Regulation. The information will be published, where appropriate, on a web page operated or supervised by the corresponding authority.
Moreover, pursuant to Regulation (EU) No. 236/2012, where the CNMV considers that (i) there are adverse events or developments that constitute a serious threat to financial stability or to market confidence (serious financial, monetary or budgetary problems, which may lead to financial instability, unusual volatility causing significant downward spirals in any financial instrument, etc.); and (ii) the measure is necessary and will not be disproportionately detrimental to the efficiency of financial markets in view of the advantages sought, it may, following consultation with the European Securities and Market Authority (“ESMA”), take any one or more of the following measures:
impose additional notification obligations by either (a) reducing the thresholds for the notification of net short positions in relation to one or several specific financial instruments; and/or (b) requesting the parties involved in the lending of a specific financial instrument to notify any change in the fees requested for such lending; and
| · | impose additional notification obligations by either (a) reducing the thresholds for the notification of net short positions in relation to one or several specific financial instruments; and/or (b) requesting the parties involved in the lending of a specific financial instrument to notify any change in the fees requested for such lending; and |
| · | restrict short selling activity by either prohibiting or imposing conditions on short selling. |
In addition, according to Regulation (EU) No. 236/2012, where the price of a financial instrument has fallen significantly during a single day in relation to the closing price on the previous trading day (10% or more in the case of a liquid share), the CNMV may prohibit or restrict short selling of financial instruments for a period not exceeding the end of the trading day following the trading day on which the fall in price occurs.
Finally, Regulation (EU) No. 236/2012 also vests powers to ESMA in order to take measures similar to the ones described above in exceptional circumstances, when the purpose of these measures is to deal with a threat affecting several EU member states and the competent authorities of these member states have not taken adequate measures to address it.
Shareholder Agreements
Article 531 et seq. of the Spanish Corporation Act require parties to disclose those shareholders’ agreements in respect of Spanish listed companies that affect the exercise of voting rights at a general shareholders’ meeting or contain restrictions or conditions on the transferability of shares or bonds that are convertible or exchangeable into shares. If any shareholders enter into such agreements with respect to Telefónica’s shares, they must disclose the execution, amendment or extension of such agreements to Telefónica and the CNMV (together with the relevant clauses of said agreements) and file such agreements with the appropriate Commercial Registry. Failure to comply with these disclosure obligations renders any such shareholders’ agreement unenforceable and constitutes a violation of the Spanish Securities Market Act.
Acquisition of Own Shares
Pursuant to Spanish corporate law, we may only repurchase our own shares within certain limits and in compliance with the following requirements:
the repurchase must be authorized by the general shareholders’ meeting by a resolution establishing the maximum number of shares to be acquired, the minimum and maximum acquisition price and the duration of the authorization, which may not exceed five years from the date of the resolution; and
| · | the repurchase must be authorized by the general shareholders’ meeting by a resolution establishing the maximum number of shares to be acquired, the minimum and maximum acquisition price and the duration of the authorization, which may not exceed five years from the date of the resolution; and |
| · | the repurchase, including any shares already held by us or a person acting on our behalf, must not bring our net worth below the aggregate amount of our share capital and legal reserves. |
For these purposes, net worth means the amount resulting from the application of the criteria used to draw up the financial statements, subtracting the amount of profits directly imputed to that net worth, and adding the amount of share capital subscribed but not called and the share capital par and issue premiums recorded in our accounts as liabilities. In addition:
the aggregate par value of the shares directly or indirectly repurchased, together with the aggregate par value of the shares already held by us and our subsidiaries, must not exceed 10% of our share capital; and
| · | the aggregate par value of the shares directly or indirectly repurchased, together with the aggregate par value of the shares already held by us and our subsidiaries, must not exceed 10% of our share capital; and |
| · | the shares repurchased must be fully paid and must be free of ancillary contributions (prestaciones accesorias). |
Voting rights attached to treasury shares will be suspended and economic rights (e.g., the right to receive dividends and other distributions and liquidation rights), except the right to receive bonus shares, will accrue proportionately to all of our shareholders. Treasury shares are counted for the purpose of establishing the quorum for shareholders’ meetings and majority voting requirements to pass resolutions at shareholders’ meetings.
Regulation (EU) No. 596/2014 of April 16, repealing, among others, Directive 2003/6/EC of the European Parliament and the European Council of January 28, on insider dealing and market manipulation establishes rules in order to ensure the integrity of European Community financial markets and to enhance investor confidence in those markets. This regulation maintains an exemption from the market manipulation rules regarding share buy-backbuyback programs by companies listed on a stock exchange in an EU Member State. Commission Regulation (EC) No. 2273/2003, of December 22, implemented the aforementioned directive with regard to exemptions for buy-backbuyback programs. Article 5 of this Regulationregulation states that in order to benefit from the exemption, a buy-backbuyback program must comply with certain requirements established under such Regulationregulation and the sole purpose of the buy-backbuyback program must be to reduce the share capital of an issuer (in value or in number of shares) or to meet obligations arising from either of the following:
debt financial instruments exchangeable into equity instruments; or
| · | debt financial instruments exchangeable into equity instruments; or |
| · | employee share option programs or other allocations of shares to employees of the issuer or an associated company. |
In addition, on December 19, 2007, the CNMV issued Circular 3/2007 setting out the requirements to be met by liquidity contracts entered into by issuers with financial institutions for the management of its treasury shares to constitute an accepted market practice and, therefore, be able to rely on a safe harbor for the purposes of market abuse regulations.
If an acquisition or series of acquisitions of shares of Telefónica reaches or exceeds or causes Telefónica’s and its affiliates’ holdings to reach or exceed 1% of Telefónica’s voting shares, Telefónica must notify its final holding of treasury stock to the CNMV. If such threshold is reached as a result of a series of acquisitions, such reporting obligation will only arise after the closing of the acquisition which, taken together with all acquisitions made since the last of any such notifications, causes the Telefónica’s and its affiliates holdings to exceed, 1% of Telefónica’s voting shares. Sales and other dispositions of Telefónica’s treasury stock will not be deducted in the calculation of such threshold. This requirement also applies if the stock is acquired by a majority-owned subsidiary of Telefónica.
Moreover, pursuant to Spanish corporate law, the audited financial statements of a company must include a reference regarding any treasury shares.
At December 31, 2014,2017, we held 128,227,97165,687,859 shares of treasury stock, representing 2.75332%1.26514% of our capital stock. At December 31, 2013,2016, we held 29,411,832141,229,134 shares of treasury stock, representing 0.64627%2.80339% of our capital stock. As a part of our shareholders’ remuneration policy, we have implemented various share buyback programs since 2003. For further description about our shareholders’ return, see “Item 8. Financial Information—Dividend Information and Share Buyback Programs.”
At our annual general shareholdersshareholders´ meeting held on May 30, 2014, our shareholders extended their prior authorization to the Board of Directors to acquire our shares for an additional five years from the date of such meeting. The authorization also applies to companies under our control. Pursuant to the authorization, the aggregate nominal value of our shares held by us or any of our subsidiaries cannot exceed the limit established by applicable laws (which is, as of the date of this Annual Report, 10% of our outstanding capital).
Change of Control Provisions
Certain antitrust regulations may delay, defer or prevent a change of control of Telefónica or any of its subsidiaries in the event of a merger, acquisition or corporate restructuring. In Spain, the application of both Spanish and European antitrust regulations requires that prior notice of domestic or cross-border merger transactions be given in order to obtain a “non-opposition” ruling from antitrust authorities.
Tender Offers
Tender offers are governed in Spain by the Spanish Securities Markets Act (as amended by Law 6/2007 of April 12) and Royal Decree 1066/2007, of July 27, which have implemented Directive 2004/25/EC of the European Parliament and of the European Council of April 21. Tender offers in Spain may qualify as either mandatory or voluntary offers.
Mandatory public tender offers must be launched for all the shares of the target company or other securities that might directly or indirectly give the right to subscription thereto or acquisition thereof (including convertible and exchangeable bonds) at an equitable price and not subject to any conditions when any person acquires control of a Spanish company listed on the Spanish Stock Exchanges, whether such control is obtained:
by means of the acquisition of shares or other securities that directly or indirectly give voting rights in such company;
| · | by means of the acquisition of sharesthrough agreements with shareholders or other holders of said securities; or other securities that directly or indirectly give voting rights in such company; |
| · | through agreements with shareholders or other holders of said securities; or |
| · | as a result of other situations of equivalent effect as provided in the regulations (i.e., indirect control acquired through mergers, share capital decreases, target’s treasury stock variations or securities exchange or conversion, etc.). |
A person is deemed to have obtained the control of a target company, individually or jointly with concerted parties, whenever:
it acquires, directly or indirectly, a percentage of voting rights equal to or greater than 30%; or | · | it acquires, directly or indirectly, a percentage of voting rights equal to or greater than 30%; or |
| · | it has acquired a percentage of less than 30% of the voting rights and appoints, in the 24 months following the date of acquisition of said percentage, a number of directors that, together with those already appointed, if any, represent more than one-half of the members of the target company’s board of directors. Regulations also set forth certain situations where directors are deemed to have been appointed by the bidder or persons acting in concert therewith unless evidence to the contrary is provided. |
Notwithstanding the above, Spanish regulations establish certain exceptional situations where control is obtained but no mandatory tender offer is required, including, among others:
subject to the CNMV’s approval,
| · | subject to the CNMV’s approval, |
| −– | acquisitions or other transactions resulting from the conversion or capitalization of credits into shares of listed companies, the financial feasibility of which is subject to serious and imminent danger, even if the company is not undergoing bankruptcy proceedings, provided that such transactions are intended to ensure the company’s financial recovery in the long term; or |
| − |
| – | in the event of a merger, provided that those acquiring control did not vote in favor of the merger at the relevant general shareholders’ meeting of the offeree company and provided also that it can be shown that the primary purpose of the transaction is not the takeover but an industrial or corporate purpose; and |
| · | when control has been obtained after a voluntary bid for all of the securities, if either the bid has been made at an equitable price or has been accepted by holders of securities representing at least 50% of the voting rights to which the bid was directed. |
For the purposes of calculating the percentages of voting rights acquired, the regulations establish the following rules:
percentages of voting rights corresponding to (i) companies belonging to the same group of the bidder; (ii) members of the board of directors of the bidder or of companies of its group; (iii) persons acting for the account of or in concert with the bidder (a concert party shall be deemed to exist when two or more persons collaborate
| · | percentages of voting rights corresponding to (i) companies belonging to the same group of the bidder; (ii) members of the board of directors of the bidder or of companies of its group; (iii) persons acting for the account of or in concert with the bidder (a concert party shall be deemed to exist when two or more persons collaborate under an agreement, be it express or implied, oral or written, in order to obtain control of the offeree company); (iv) voting rights exercised freely and over an extended period by the bidder under proxy granted by the actual holders or owners of such rights in the absence of specific instructions with respect thereto; and (v) shares held by a nominee, such nominee being understood as a third party whom the bidder totally or partially covers against the risks inherent in acquisitions or transfers of the shares or the possession thereof, will be deemed to be held by the bidder (including the voting rights attaching to shares that constitute the underlying asset or the subject matter of financial contracts or swaps when such contracts or swaps cover, in whole or in part, against the risks inherent in ownership of the securities and have, as a result, an effect similar to that of holding shares through a nominee); |
under an agreement, be it express or implied, oral or written, in order to obtain control of the offeree company); (iv) voting rights exercised freely and over an extended period by the bidder under proxy granted by the actual holders or owners of such rights in the absence of specific instructions with respect thereto; and (v) shares held by a nominee, such nominee being understood as a third party whom the bidder totally or partially covers against the risks inherent in acquisitions or transfers of the shares or the possession thereof, will be deemed to be held by the bidder (including the voting rights attaching to shares that constitute the underlying asset or the subject matter of financial contracts or swaps when such contracts or swaps cover, in whole or in part, against the risks inherent in ownership of the securities and have, as a result, an effect similar to that of holding shares through a nominee);
| · | both the voting rights arising from the ownership of shares and those enjoyed under a usufruct or pledge or upon any other title of a contractual nature will be counted towards establishing the number of voting rights held; |
the percentage of voting rights shall be calculated based on the entire number of shares carrying voting rights, even if the exercise of such rights has been suspended; voting rights attached to treasury shares shall be excluded; and non-voting shares shall be taken into consideration only when they carry voting rights pursuant to applicable law; and
| · | the percentage of voting rights shall be calculated based on the entire number of shares carrying voting rights, even if the exercise of such rights has been suspended; voting rights attached to treasury shares shall be excluded; and non-voting shares shall be taken into consideration only when they carry voting rights pursuant to applicable law; and |
| · | acquisitions of securities or other financial instruments giving the right to the subscription, conversion, exchange or acquisition of shares which carry voting rights will not result in the obligation to launch a tender offer either until such subscription, conversion, exchange or acquisition occurs. |
Notwithstanding the foregoing, upon the terms established in the regulations, the CNMV will conditionally dispense with the obligation to launch a mandatory bid when another person or entity, individually or jointly in concert, directly or indirectly holds an equal or greater voting percentage than the potential bidder in the target company.
The price of the mandatory tender offer is deemed equitable when it is at least equal to the highest price paid or agreed by the bidder or by any person acting in concert therewith for the same securities during the 12 months prior to the announcement of the tender offer. When the mandatory tender offer must be made without the bidder having previously acquired the shares over the above-mentioned 12-month period, the equitable price shall not be less than the price calculated in accordance with other rules set forth in the regulations. In any case, the CNMV may change the price so calculated in certain circumstances (extraordinary events affecting the price, evidence of market manipulation, etc.).
Mandatory offers must be launched within one month from the acquisition of the control of the target company.
Voluntary tender offers may be launched when a mandatory offer is not required. Voluntary offers are subject to the same rules established for mandatory offers except for the following:
they may be subject to certain conditions (such as amendments to the bylaws or adoption of certain resolutions by the target company, acceptance of the offer by a minimum number of securities, approval of the offer by the shareholders’ meeting of the bidder and any other deemed by the CNMV to be in accordance with law), provided that such conditions can be met before the end of the acceptance period of the offer; and
| · | they might be subject to certain conditions (such as amendments to the bylaws or adoption of certain resolutions by the target company, acceptance of the offer by a minimum number of securities, approval of the offer by the shareholders’ meeting of the bidder and any other deemed by the CNMV to be in accordance with law), provided that such conditions can be met before the end of the acceptance period of the offer; and |
| · | they may be launched at any price, regardless of whether it is lower than the above-mentioned “equitable price”. However, if they are not launched at an equitable price and if the tender offer shares representing at least 50% of the voting rights are tendered in the offer (excluding voting rights already held by the bidder and those belonging to shareholders who entered into an agreement with the bidder regarding the tender offer), the bidder may become obliged to launch a mandatory tender offer. |
In any case, by virtue of an amendment to the Spanish Securities Market Act operated by Law 1/2012, of June 22, the price in a voluntary tender offer must be the higher of (i) the equitable price and (ii) the price resulting from an independent valuation report, and must at least consist of cash as an alternative if certain circumstances have occurred during the two years prior to the announcement of the offer (basically, the trading price for the shares being affected by price manipulation practices, market or share prices being affected by natural disasters, force majeure, or other exceptional events, or the target company being subject to expropriation or confiscation resulting in a significant impairment of the company’s real value).
Spanish regulations on tender offers set forth further provisions, including:
| · | subject to shareholder approval within 18 months from the date of announcement of the tender offer, the board of directors of a target company will be exempt from the rule prohibiting frustrating action against a foreign bidder whose board of directors is not subject to an equivalent passivity rule; |
defensive measures included in a listed company’s bylaws and transfer and voting restrictions included in agreements among a listed company’s shareholders will remain in place whenever the company is the target of a tender offer, unless the shareholders resolve otherwise (in which case any shareholders whose rights are diluted or otherwise adversely affected will be entitled to compensation at the target company’s expense); and
| · | defensive measures included in a listed company’s bylaws and transfer and voting restrictions included in agreements among a listed company’s shareholders will remain in place whenever the company is the target of a tender offer, unless the shareholders resolve otherwise (in which case any shareholders whose rights are diluted or otherwise adversely affected will be entitled to compensation at the target company’s expense); and |
| · | squeeze-out and sell-out rights will apply provided that following a tender offer for all the target’s share capital, the bidder holds securities representing at least 90% of the target company’s voting capital and the tender offer has been accepted by the holders of securities representing at least 90% of the voting rights other than those held by or attributable to the bidder previously to the offer. |
Table of Contentsthe target company’s voting capital and the tender offer has been accepted by the holders of securities representing at least 90% of the voting rights other than those held by or attributable to the bidder previously to the offer.Payment of Taxes
Holders of ordinary shares will be responsible for any taxes or other governmental charges payable on their ordinary shares, including any taxes payable on transfer. The paying agent or the transfer agent, as the case may be, may, and upon instruction from Telefónica, will:
refuse to effect any registration of transfer of such ordinary shares or any split-up or combination thereof until such payment is made; or
| · | refuse to effect any registration of transfer of such ordinary shares or any split-up or combination thereof until such payment is made; or |
| · | withhold or deduct from any distributions on such ordinary shares or sell for the account of the holder thereof any part or all of such ordinary shares (after attempting by reasonable means to notify such holder prior to such sale), and apply, after deduction for its reasonable expenses incurred in connection therewith, the net proceeds of any such sale to payment of such tax or other governmental charge. The holder of such ordinary shares will remain liable for any deficiency. |
Dividends
Shareholders vote on final dividend distributions at the shareholders’ meeting. Distributable profits are equal to:
net profits for the year; plus
profits carried forward from previous years; plus
distributable reserves; minus
losses carried forward from previous years; minus
amounts allocated to reserves as required by law or by our bylaws.
The amount of distributable profits is based on our unconsolidated financial statements prepared in accordance with Spanish GAAP, which differ from the Consolidated Financial Statements prepared in accordance with IFRS included elsewhere in this Annual Report.
The Board of Directors can approve interim dividend payments without a prior shareholder vote on the issue. However, under those circumstances, the dividend is limited to distributable net profits of the current year and is subject to certain legal requirements.
Unclaimed dividends revert to us five years from their date of payment.
Registration and transfers
Our shares are in registered book-entry form. Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures carried out by the Spanish clearing institution. Transfers executed outside of stock exchange systems, that is, over the counter, are implemented pursuant to the general legal regime for book-entry transfer, including registration by the Spanish clearing institution.
There are no restrictions with respect to the transfer of our shares.
Liquidation rights
Under Spanish law, upon our liquidation, the shareholders would be entitled to receive, on a pro rata basis, any assets remaining after the payment of our debts and taxes and liquidation expenses.
Material Contracts Related to Our Investment in Telecom Italia
On April 28, 2007, we, together with a group of Italian investors (the “Italian Investors”), including Assicurazioni Generali S.p.A. (“Generali”), Sintonia S.A. (“Sintonia”), Intesa Sanpaolo S.p.A. (“Intesa Sanpaolo”) and Mediobanca S.p.A. (“Mediobanca”), entered into a co-investment agreement, (the “Co-Investment Agreement”), to establish the terms and conditions for our participation in what is now Telco, S.p.A (“Telco”). Through Telco, on October 23, 2007, we and the Italian Investors purchased the entire share capital of Olimpia S.p.A., or Olimpia, which held approximately 18% of the ordinary share capital of Telecom Italia, S.p.A. (“Telecom Italia”). As of the date of this Annual Report, the Italian Investors hold a total of 34% of Telco’s share capital and we hold the remaining 66%.
In addition to Telco’s participation in Telecom Italia’s ordinary share capital through its interest in Olimpia, pursuant to the Co-Investment Agreement on October 25, 2007, Generali and Mediobanca contributed to Telco ordinary shares of Telecom Italia they held at that date. These shares in the aggregate amounted to 5.6% of Telecom Italia’s ordinary share capital and brought Telco’s direct and indirect participation in Telecom Italia’s ordinary share capital to approximately 23.6%.
On April 28, 2007, we and the Italian Investors also entered into a shareholders’ agreement, (the “Shareholders’ Agreement”), which establishes, among other things, the principles of corporate governance of Telco and Olimpia, respectively, the principles related to the transfer of Telco’s shares and any Olimpia shares or Telecom Italia shares directly or indirectly owned by Telco and the principles of designation, among the parties, of candidates to be included in a common list for the appointment of directors of Telecom Italia pursuant to the voting list mechanism provided for by Telecom Italia’s by-laws.
On November 19, 2007, the parties to the Shareholders’ Agreement amended the Shareholders’ Agreement as well as the bylaws of Telco to include the specific limitations imposed by ANATEL as initially posted on its website on October 23, 2007, and subsequently published on November 5, 2007, as ANATEL’s “Ato” No. 68,276 dated October 31, 2007. We refer to such agreement as the Amendment to the Shareholders’ Agreement.
Pursuant to the Shareholders’ Agreement, we entered into an option agreement (the “Option Agreement”), with Telco on November 6, 2007, which provides that, in the event that a decision to dispose, directly or indirectly, in any form or manner (including through measures with equivalent effect, such as mergers and demergers of Telco or Olimpia) or encumber Telecom Italia shares or Olimpia shares or any rights attached thereto, including but not limited to voting rights, is taken by the board of directors of Telco by a simple majority resolution according to the procedure specifically provided for by the Shareholders’ Agreement and we are a dissenting party, then we will have the right, to be exercised within 30 days of such decision being taken, to buy from Telco the Telecom Italia shares or the Olimpia shares, as the case may be, at the same price and conditions offered by the third party offering to acquire such shares of Telecom Italia or Olimpia.
On December 10, 2007, an agreement was reached to merge Olimpia into Telco, as a result of which Telco’s entire stake in the voting shares of Telecom Italia (23.6%) became a direct stake. In March 2008, Telco acquired 121.5 million additional shares of Telecom Italia, equivalent to 0.9% of its share capital, bringing its total direct interest to 24.5% of Telecom Italia’s voting shares.
On October 28, 2009, Sintonia requested, pursuant to the Shareholders Agreement, the non-proportional de-merger of Telco, with the withdrawal of its pro rata share of the assets and liabilities of Telco (comprised of Telecom Italia shares held by Telco representing approximately 2.1% of Telecom Italia’s share capital). The terms of Sintonia’s exit were approved on November 26, 2009, and the transaction closed on December 22, 2009. Upon Sintonia’s exit, Telco’s interest in Telecom Italia was reduced to 22.45% of Telecom Italia’s share capital. At the same time, our stake in Telco increased from 42.3% to 46.2%, thereby allowing us to maintain our indirect interest in Telecom Italia at 10.5% of Telecom Italia’s voting rights (7.2% of the dividend rights).
On October 28, 2009, Telco investors, other than Sintonia, entered into an agreement (the “Renewal Agreement”), through which they agreed (i) not to request the non-proportional de-merger of Telco with the withdrawal of their corresponding share of Telecom Italia shares held by Telco at that time (as was previously done by Sintonia) and (ii) to extend and modify the Shareholders Agreement for an additional term of three years until April 27, 2013 (effective as of April 28, 2010) substantially on the same terms and conditions, except to provide (a) that the right of Telco’s investors to request the non-proportional de-merger of Telco would only be exercisable in the period between October 1, 2012 and
October 28, 2012, and (b) for an early withdrawal right period exercisable between April 1, 2011 and April 28, 2011. On the same date and in connection with the Renewal Agreement, separately, we entered into an Amendment Deed to the Call Option Agreement with Telco (i) to extend the term of the Option Agreement to coincide with the expiration date of the Renewal Agreement and (ii) to exempt certain transactions regarding the Telecom Italia shares, namely those related to the exercise of de-merger and early withdrawal rights pursuant to the Renewal Agreement.
In line with the commitments assumed by Telco shareholders, on December 22, 2009, the rest of Telco’s financing needs with respect to debt maturities were met with a bridge loan granted by shareholders, including ourselves, Intesa Sanpaolo and Mediobanca for approximately 902 million euros, and a bank bridge loan granted by Intesa Sanpaolo and Mediobanca for the remaining 398 million euros.
On January 11, 2010, Telco arranged a 1,300 million euros loan with Intesa Sanpaolo, Mediobanca, Société Générale, S.p.A. and Unicredito, S.p.A., maturing on May 31, 2012, part of which is secured with the Telecom Italia shares held by Telco. The lending banks have granted Telco shareholders, including ourselves, a call option on the Telecom Italia shares that they may be entitled to receive as a result of the potential execution of the pledge.
The financing from the bridge loans described above was cancelled with the proceeds of a bond issuance subscribed by Telco’s shareholders, on a pro rata basis in accordance with their interests in Telco, on February 19, 2010, for an aggregate principal amount of 1,300 million euros. Our subscription amounted to an aggregate principal amount of 600 million euros.
On October 6, 2010, Telefónica, Intesa Sanpaolo, Mediobanca, and Generali (collectively, the “Existing Shareholders”), Telco, certain companies controlled by Telefónica, Telecom Italia and certain companies controlled by Telecom Italia entered into a “compromiso” (the “Compromiso”) in order to terminate certain administrative and judicial proceedings in Argentina related to the Telco investment in Telecom Italia. The Compromiso was required in order for the Argentine authorities to approve the Telco investment in Telecom Italia and it was accepted by the competent Argentine authorities on October 13, 2010. Pursuant to a deed of amendment dated December 10, 2010 (the “2010 Amendment Deed”), the Existing Shareholders implemented the Compromiso by inserting an additional clause into the Shareholders’ Agreement (with such amendments and integrations from time to time agreed, the “Prior Shareholders’ Agreement”) related to the governance of Telco and Telecom Italia with respect to the operations of Telecom Italia, Telefónica and their respective group companies which offer telecommunications, Internet, data, radio, media and substitute services in Argentina.
On February 29, 2012, the Existing Shareholders entered into a renewal agreement (the “Second Renewal Agreement”) in which the parties agreed to terminate, effective the date of the Second Renewal Agreement, the Prior Shareholders’ Agreement and enter into a new shareholders agreement for a period of three years on the same terms and conditions set out in the original Shareholders’ Agreement dated as of April 28, 2007, between the Existing Shareholders and Sintonia S.A., as subsequently amended and supplemented in 2007, 2009, 2010 and pursuant to the 2010 Amendment Agreement, subject to the amendments and integrations set forth therein (the “New Shareholders’ Agreement”). Further, on February 29, 2012, the call option granted to Telefónica to purchase shares of Telecom Italia held by Telco pursuant to the Prior Shareholders’ Agreement was extended to February 28, 2015, pursuant to an amendment deed to the Option Agreement (the “Telefónica Option Amendment Deed”) entered into between Telefónica and Telco.
In addition, on February 29, 2012, the Existing Shareholders undertook to take actions to ensure the refinancing of Telco’s financial indebtedness through appropriate financial instruments, contractual agreements and/or corporate transactions in proportion to their respective shareholdings of Telco.
On May 31, 2012, Telefónica, Assicurazioni Generali, S.p.A. (for its own account and in the name and on behalf of the following Generali’s subsidiaries, Generali Vie, S.A. Alleanza Toro, S.p.A. Generali Italia, S.p.A. (now incorporating INA Assitalia S.p.A.) Generali Lebensversicherung AG), Intesa Sanpaolo, S.p.A., Mediobanca – Banca di Credito Finanziario, S.p.A. (together the “Shareholders”) and Intesa Sanpaolo, S.p.A., Mediobanca – Banca di Credito Finanziario, S.p.A., Unicredit, S.p.A., Société Générale, HSBC Bank (together the “2012 Lenders”) entered into a Pledged Shares Option Agreement (the “2012 Pledged Shares Option Agreement”) providing, among other things, for the right of the Shareholders to call and acquire from the 2012 Lenders at the terms and conditions referred to therein, any Telecom Italia. ordinary shares that would have been appropriated by the 2012 Lenders in case of enforcement of the pledge (the
“2012 Share Pledge”) created under and pursuant to the share pledge agreement entered into on May 31, 2012, between Telco as pledgor, and the 2012 Lenders, as secured creditors.
• On September 24, 2013, Telefónica and the remaining shareholders of the Italian company Telco. (which holds a capital stake of 22.4% of the voting share capital of Telecom Italia) reached an agreement by virtue of which:
− Telefónica subscribed for and paid out a capital increase in Telco, through the contribution of 324 million euros in cash, receiving in return non-voting shares of Telco. As a result of this capital increase, the interest held by Telefónica in the voting share capital of Telco remained unchanged (i.e. 46.18%), although its interest in the total share capital of Telco. has increased to 66%. The current governance structure at Telco remained unaffected, including the obligation by Telefónica of abstaining from participating or influencing in any decisions which could affect the markets in which both, Telefónica and Telecom Italia, are present.
− Subject to receiving any required anti-trust and telecommunications approvals (including in Brazil and Argentina), Telefónica will subscribe for and pay out a second capital increase in Telco, through the contribution of 117 million euros in cash and will receive in return non-voting shares of Telco. As a result of this second capital increase, the interest of Telefónica in the voting share capital of Telco. will remain unchanged (i.e. 46.18%), although its interest in the total share capital will be then increased to 70%.
− Starting from January 1, 2014, subject to receiving any required anti-trust and telecommunications approvals (including in Brazil and Argentina), Telefónica may convert all or a portion of its non-voting shares in Telco into voting shares in Telco, representing no more than 64.9% of the voting share capital of Telco.
− The Italian shareholders of Telco have granted Telefónica a call option to acquire all of their shares in Telco, whose exercise is subject to receiving any required anti-trust and telecommunications approvals (including in Brazil and Argentina). The call option may be exercised by Telefónica starting from January 1, 2014, while the Shareholders Agreement remains in effect, except (i) between June 1, 2014, and June 30, 2014, and between January 15, 2015, and February 15, 2015, and (ii) during certain periods, if the Italian shareholders of Telco request the demerger of such company.
As of the date of this Annual Report, the approvals that are necessary for the implementation of the transactions contemplated in the agreement dated September 24, 2013 and subscribed between Telefónica and the remaining shareholders of the Italian company Telco S.p.A. have not yet been obtained.
• On December 4, 2013, the Brazilian Antitrust Regulator, Conselho Administrativo de Defesa Econômica (CADE) announced, the two following decisions:
1. To approve, with the restrictions mentioned below, the acquisition by Telefónica of the entire participation held by Portugal Telecom, SGPS S.A., and PT Móveis - Serviços de Telecomunicações, SGPS, S.A., (the “PT Companies”) in Brasilcel N.V., which controlled the Brazilian mobile company, Vivo Participações S.A.
Such transaction was approved by ANATEL and the closing (which did not require CADES’s prior approval at the time), occurred immediately after such ANATEL’s approval, on September 27, 2010.
The above-mentioned decision was granted by CADE conditional on:
(a) The entry of a new shareholder in Vivo, sharing with Telefónica the control of Vivo in conditions identical to those that were applicable to the PT Companies when they had a participation in Brasilcel N.V., or
(b) That Telefónica ceases to have any direct or indirect financial interest in TIM Participações S.A.
2. To impose on Telefónica a fine of 15 million Brazilian Reais, for having allegedly breached the spirit and the goal of the agreement signed between Telefónica and CADE (as a condition to the approval of Telefónica´s original acquisition of an interest in Telecom Italia in 2007), due to the subscription of non-voting shares of Telco on a recent capital increases. This decision also requires Telefónica to divest such non-voting shares of Telco.
The timing for the accomplishment of the conditions and obligations imposed by CADE on both decisions was classified by CADE as confidential and reserved information.
• On December 13, 2013, Telefónica, S.A. announced, in relation to the two decisions adopted by CADE on its December 4, 2013 session that the Company considered that the remedies imposed were unreasonable and therefore, initiated the appropriate legal actions (see “Item 8. Financial Information—Legal proceedings”).
In line with such course of action, and to reinforce our strong commitment with the previous obligations undertaken by Telefónica to remain separate from Telecom Italia´s Brazilian businesses, Telefónica, S.A., highlighted in the aforementioned announcement, that Mr. César Alierta Izuel and Mr. Julio Linares López have decided to resign, with immediate effect, from their positions as Directors of Telecom Italia; and Mr. Julio Linares has decided to resign, with immediate effect, from his position in the slate submitted by Telco. for the potential re-election of the Board of Directors of Telecom Italia in the Shareholders Meeting of the aforementioned company, called for December 20, 2013.
For the same reasons, Telefónica, S.A., indicated that, without prejudice of any of the rights recognized in Telco Shareholder`s Agreement, has decided for the time being not to avail of its right to appoint two Directors in the Board of Directors of Telecom Italia.
On November 27, 2013, the Shareholders and the 2012 Lenders entered into certain contractual arrangements pursuant to which the 2012 Share Pledge was released and the 2012 Pledged Shares Option Agreement was terminated.
On November 27, 2013, a new pledged shares option agreement (the “2013 Pledged Shares Option Agreement”) was entered into between, inter alias, the Shareholders and Intesa Sanpaolo, S.p.A. and Mediobanca - Banca di Credito Finanziario S.p.A. (the “2013 Lenders”) to establish the terms and conditions which would govern the Shareholders’ call option (the “2013 Call Option”) to acquire from the 2013 Lenders at the terms and conditions referred to therein, any Telecom Italia ordinary shares (the “2013 Pledged Shares”) that would have been appropriated by the 2013 Lenders in case of enforcement of the pledge (the “2013 Share Pledge”) created under and pursuant to the share pledge agreement entered into on November 27, 2013 between Telco and 2013 Lenders as security for the obligations of Telco under the new facility agreement entered into between Telco and the 2013 Lenders on October 4, 2013 (the “New Banking Facility Agreement”).
On June 16, 2014, the three Italian shareholders of Telco requested the initiation of a "demerger" process (spin off) of the company, as provided in the shareholder’s agreement. Implementation of the demerger, which was approved by the general shareholder’s meeting held on July 9, 2014, remains subject to obtaining the required anti-trust and telecommunications approvals (including those in Brazil and Argentina). Once the aforementioned approvals are obtained, this decision will be implemented by transferring the current stake of Telco in Telecom Italia to four newly created companies. The share capital of each of these companies will belong in its entirety to each of the shareholders of Telco and each of these companies will receive a number of shares of Telecom Italia proportional to the current economic stake in Telco of each respective shareholder.
The application process of the aforementioned anti-trust and telecommunications approvals (including those in Brazil and Argentina), to proceed to the "demerger" (spin off) of Telco started, once the corresponding corporate documents were entered into in Italy. On December 22, 2014, ANATEL approved the “demerger” (spin off), although CADE (Conselho Administrativo de Defesa Ecônomica do Brasil) and CNDC (Comisión Nacional de Defensa de la Competencia of Argentina) have not rendered any decision yet.
Furthermore, on July 24, 2014, Telefónica issued 750 million euros bonds mandatorily exchangeable into ordinary shares of Telecom Italia maturing on July 24, 2017, representing, as of that date, 6.5% of its voting share capital. The bonds may be exchanged into shares in advance of the maturity date, except under certain circumstances where the company may opt to redeem the bonds in cash.
Within the framework of the proposed GVT transaction (see “—Agreement for the Acquisition of Global Village Telecom, S.A. and its holding company GVT Participações, S.A.” below), Vivendi, S.A. will acquire from Telefónica 1,110 million ordinary shares in Telecom Italia representing 8.3% of Telecom Italia’s voting share capital (equivalent to 5.7% of its total share capital), in exchange for 4.5% of Vivendi, S.A.'s capital in Telefónica Brasil, S.A., after its combination with GVT (which represents all of the voting shares and 0.7% of the preferred shares to be received by Vivendi S.A. in connection with the GVT transaction). The final closing of the operation is subject to obtaining the relevant regulatory authorizations (including telecommunication and anti-trust approval).
Material Contract Related to Our Investment in China Unicom
On September 6, 2009, Telefónica and China Unicom entered into a subscription agreement,(the “Subscription Agreement”), pursuant to which each party conditionally agreed to invest the equivalent of 1 billion U.S. dollars in the other party through the acquisition of shares in the other party. Moreover, both parties entered into a strategic alliance agreement which provides for, among other areas for cooperation, joint procurement of infrastructure and client equipment, common development of mobile service platforms, joint provisions of service to multinational customers, roaming, research and development, sharing of best practices and technical, operational and management know-how, joint development of strategic initiatives in the area of network evolution, joint participation in international alliances and exchanges of senior management.
On October 21, 2009, the mutual share exchange pursuant to the Subscription Agreement was implemented through the subscription by Telefónica Internacional of 693,912,264 newly issued shares of China Unicom and a contribution in kind to China Unicom of 40,730,735 shares of Telefónica.
Following the completion of the transaction, we increased our share of China Unicom’s voting share capital from 5.38% to 8.06% and obtained the right to appoint a member to its board of directors, while China Unicom became owner of approximately 0.87% of our voting share capital at that date. Subsequently, after a capital reduction carried out by China Unicom, we reached a shareholding equivalent to 8.37% of the company’s voting share capital.
Under the Subscription Agreement, we agreed with China Unicom that for a period of one year from completion of the acquisition of the mutual share exchange, we shall not, directly or indirectly, sell, transfer or dispose of any of the China Unicom shares held, directly or indirectly, by us or any of our subsidiaries (save for the transfer of such shares to any member of the Telefónica group). China Unicom has made an analogous undertaking with respect to its participation in our share capital.
In addition, subject to Telefónica or any of its subsidiaries holding in aggregate, directly or indirectly, not less than 5% of the issued share capital of China Unicom from time to time and to the extent not prohibited under applicable law, the articles of association of China Unicom and the Hong Kong Listing Rules, we shall be entitled to nominate one representative to the Board of Directors of China Unicom.
Finally, with effect from completion, and for so long as the strategic alliance agreement is in effect, China Unicom shall not (i) offer, issue or sell any significant number of its ordinary shares (including those held in treasury by the company itself, if any), or any securities convertible into or other rights to subscribe for or purchase a significant number of China Unicom’s ordinary shares (including those held in treasury by the company itself, if any), to any of our current major competitors or (ii) make any significant investment, directly or indirectly, in any of our current major competitors. We have made similar undertakings.
The strategic alliance agreement between the parties terminates on the third anniversary and automatically renews thereafter for one year terms, subject to either party’s right to terminate on six months’ notice. Also, the strategic alliance agreement may be terminated by China Unicom if we sell our shares in China Unicom causing us to own less than 5% of the issued share capital of China Unicom or by us if China Unicom sells our shares and ceases to own at least 0.5% of our issued share capital. In addition, the strategic alliance agreement is subject to termination in the event either party is in default and automatically terminates on a change in control of China Unicom.
On January 23, 2011, Telefónica and China Unicom entered into an extension to their already existing strategic alliance agreement (the “Enhanced Strategic Alliance Agreement”) in which both companies agreed to strengthen and deepen their strategic cooperation in certain business areas and through which, upon the terms and conditions set out thereof, each party agreed to invest the equivalent of 500 million U.S. dollars in ordinary shares of the other party toward the alliance. Furthermore, we agreed to propose the appointment of a director nominated by China Unicom.
Pursuant to the Enhanced Strategic Alliance Agreement, Telefónica, through its wholly-owned subsidiary, Telefónica Internacional acquired 282,063,000 ordinary shares of China Unicom through several transactions executed in the period between January 25, 2011 and September 7, 2011, investing an aggregate amount equivalent to approximately 500 million U.S. dollars (equivalent to 358 million euros).
Additionally, on January 28, 2011, China Unicom acquired 21,827,499 Telefónica shares at the agreed price of 17.16 euros per share, giving it ownership of 1.37% of the Company’s capital (the arithmetic average of the closing price
of Telefónica shares as quoted on the Madrid Stock Exchange for the thirty consecutive trading days ending on January 14, 2011), which represents a total price of 500 million U.S. dollars. In recognition of China Unicom’s stake in Telefónica, the Company nominated Mr. Chang Xiaobing, who was designated by China Unicom, to the Board of Directors at the General Shareholders’ Meeting held on May 18, 2011.
At December 31, 2011, Telefónica’s shareholding in China Unicom amounted to 9.6% of its capital stock.
Since their strategic alliance agreement signed in September 2009, Telefónica and China Unicom have made significant progress in various areas of cooperation. In this respect, we believe that this agreement will enhance this alliance and deepen cooperation between the two companies in the areas of procurement, mobile service platforms, service to multinational customers, wholesale carriers, roaming technology/R&D, international business development, cooperation and sharing of best practices.
On June 10, 2012, Telefónica, S.A. through its 100% subsidiary, Telefónica Internacional, S.A.U., and China United Network Communications Group Company Limited ("Unicom Parent") through a 100% owned subsidiary, signed an agreement for the acquisition by this last company of 1,073,777,121 shares of China Unicom -Hong Kong- Limited, owned by Telefónica, equivalent to 4.56% of the issued share capital.
On July 21, 2012, the aforementioned agreement was complemented by a Supplemental Agreement which determined the acquisition of the shares at a price of HK$10.02 per share, for a total amount of HK$10,759,246,752.42 (approximately 1,142 million euros). The transaction was completed on July 30, 2012 after obtaining the relevant regulatory authorizations.
On November 10, 2014, Telefónica, though its 100% subsidiary Telefónica Internacional, S.A.U., sold 597,844,100 shares of China Unicom (Hong Kong) Limited (representing 2.5% of the share capital of that company), through a block trade process, at a price of HK$ 11.14 per share, for a total amount of HK$ 6,660 million, approximately 687 million euros at the exchange rate as at the date of the sale.
Further to the sale, Telefónica maintains its commitment to the strategic alliance with China Unicom.
As of the date of this Annual Report, Telefónica’s shareholding in China Unicom amounts to 2.51% of its capital stock and Mr. César Alierta, chairman of Telefónica, S.A. is a member of the Board of Directors of China Unicom.
Material Contract related to the saleSale of Customer Relationship Management (CRM) business,(“CRM”) Business, Atento
As a result of the sale agreement of Atento by Telefónica, announced on October 12, 2012, and ratified on December 12, 2012, both companies signed a Master Service Agreement which regulates Atento’s relationship with the Telefónica Group as a service provider for a period of nine years.
years and which was amended on May 16, 2014, and on November 8, 2016. This period was extended only for Spain and Brazil in November 2016, for two additional years until 2023.
By virtue of this agreement, Atento became Telefónica’s preferred Contact Center and Customer Relationship Management (CRM)(“CRM”) service provider, stipulating annual commitments in terms of turnover which updates in line withis updated based on inflation and deflation that vary from country to country, pursuant to the volume of services Atento has been providing to the entire Group. Effective January 1, 2017, the minimum volume commitments that Telefónica must comply with have significantly decreased for Brazil.
In the case of an eventual failureFailure to meet the annual turnover commitments that could resultgenerally results in compensation,the obligation to the counterparty, to pay additional amounts, which would be calculated based on the difference between the actual amount of turnover and the predetermined commitment, applying a percentage based on the ContractContact Center’s business margin to the final calculation.
Lastly, theThe Master Agreement sets forth a reciprocal arrangement, whereby Atento assumes similar commitments to subscribe its telecommunications services to Telefónica.
Agreement for the acquisitionsale of E-Plusa minority stake in Telxius Telecom, S.A.U. (“Telxius”)
On February 20, 2017 Telefónica S.A.reached an agreement for the sale of up to 40% of the total share capital of Telxius to Taurus Bidco S.à.r.l. (hereinafter, ”KKR”) an entity managed by Kohlberg Kravis Roberts & Co. L.P., for a total amount of 1,275 million euros (12.75 euros per share).
The aforementioned agreement included (i) a purchase agreement for the sale of 62 million shares (representing 24.8% of the share capital) of Telxius for a price of 790.5 million euros; as well as (ii) options over 38 million shares (representing 15.2% of the share capital) for a price of at least 484.5 million euros. These options corresponded to a call option exercisable by KKR and to a put option exercisable by Telefónica upon maturity of the call option. The closing was subject to obtaining the corresponding regulatory approvals.
On October 24, 2017, after obtaining the relevant regulatory approvals, Telefónica transferred to KKR 62 million shares of Telxius (representing 24.8% of its German listedshare capital) to KKR in exchange for 790.5 million euros (12.75 euros per share). Following the execution of the sale, a shareholders' agreement among Telefónica, KKR and Telxius became effective on the same date, which regulates the relationships between Telefónica and KKR as shareholders of Telxius.
On November 13, 2017, KKR exercised the call option over 38 million shares (representing 15.2% of Telxius’ share capital) foreseen in the agreement, and on December 7, 2017, Telefónica, transferred to KKR such 38 million shares of Telxius (representing 15.2% of its share capital) in exchange for 484.5 million euros (12.75 euros per share).
Pursuant to these transactions, KKR acquired 40% of the share capital of Telxius in exchange for an aggregate amount of 1,275 million euros (12.75 euros per share) and Telefónica retained the control over Telxius.
Swap Agreement between Telefónica and Koninklijke KPN NV (KPN)
On March 13, 2017 Telefónica entered into a swap agreement with KPN to deliver 72.0 million of its treasury shares (representing 1.43% of its share capital), in exchange for 178.5 million shares of its subsidiary Telefónica Deutschland Holding AG, (hereinafter, “Telefónica Deutschland”) on July, 23, 2013 entered into an agreement (amended on August 26, 2013) with the Dutch company Koninklijke KPN NV (hereinafter, “KPN”) under which Telefónica Deutschland committed itself to acquire the shares of the German subsidiary of KPN, E-Plus Mobilfunk GmbH & Co. KG (hereinafter, “E-Plus”), receiving KPN, as consideration, 24.9% of Telefónica Deutschland and 3,700 million euros.
Telefónica committed to subsequently acquire from KPN, 4.4% of Telefónica Deutschland for a total amount of 1,300 million euros, consequently, after the aforementioned acquisition, KPN’s stake in Telefónica Deutschland will be reduced to 20.5%.
Telefónica also committed to subscribe the proportional corresponding share in the capital increase approved by Telefónica Deutschland in the Extraordinary General Meeting held on February, 11, 2014, to finance the cash consideration of the transaction.
On October 1, 2014, Telefónica Deutschland completed the acquisition of E-Plus, following its execution of a capital increase intended to fund such acquisition. Telefónica owns a 62.37% stake in Telefónica Deutschland, which currently owns 100%representing 6.0% of the share capital of E-Plus, whilethe latter. The swap was executed on March 14, 2017. Under the agreement, KPN holds a 20.5% stake and the rest is free float.
Agreement for the Acquisitioncommitted, among other obligations, to comply with certain restrictions which, in case of Global Village Telecom, S.A. and its holding company GVT Participações, S.A. (“GVT”)
On September 19, 2014, Telefónica, S.A. signed an agreement with Vivendi S.A. for the acquisition by Telefónica Brasil, S.A. of GVT for a cash consideration of 4,663 million euros, and a payment in shares representing 12.00%sale of the share capitalaforementioned Telefónica shares, would ensure an orderly sale of Telefónica Brasil, S.A., after its combination with GVT.such shares.
As parta result of thethis agreement, Vivendi S.A. will acquireTelefónica increased from Telefónica 1,110 million ordinary shares63.2% to 69.2% its shareholding in Telecom Italia currently representing 8.3% of Telecom Italia’s voting share capital (equivalent to 5.7% of its total share capital), in exchange for 4.5% of Vivendi, S.A.'s capital in Telefónica Brasil, S.A., after its combination with GVT (which represents all of the voting shares and 0.7% of the preferred shares to be received by Vivendi S.A. under the agreement referred to above).Telefonica Deutschland Holding AG at that time.
The cash payment for this transaction is expected to be financed via a capital increase by Telefónica Brasil S.A., which Telefónica S.A. intends to subscribe in proportion to its current stake in Telefónica Brasil, S.A. and intends to fund, in turn, via a capital increase.
The final closing of the operation is subject to obtaining the relevant regulatory authorizations (including telecommunication and anti-trust approval). On December 22, 2014, ANATEL approved the acquisition of GVT, although the resolution about the acquisition by Vivendi, S.A. of the 1,110 million of ordinary shares of Telecom Italia is still pending. As of the date of this Annual Report, CADE continues to analyze the process.
Exchange Controls and Other Limitations Affecting Security Holders
Ownership limitations
There are no limitations with respect to the ownership of our assets or share capital except those derived from the application of the reciprocity principle as described above.
Trading by us in our own shares or shares of companies under our control
For information on the requirements applicable to the trading by us in our own shares or shares of companies under our control, see “—Memorandum and Articles of Association- Description of Our Capital Stock—Acquisition of own shares” above.
Other restrictions on acquisitions of shares
For information on reporting requirements and other restrictions “applicable to the acquisition of our shares see “—“—Memorandum and Articles of Association—Description of Our Capital Stock-Reporting requirements” and “—“—Trading by us in our own shares or shares of companies under our control” above.
Dividend and Liquidation Rights
According to Spanish law and our bylaws, dividends may only be paid out of profits or distributable reserves if the value of our net worth is not, and as a result of such distribution would not be, less than our capital stock. Pursuant to Spanish law, we are required to reserve 10% of our fiscal year net income until the amount in our legal reserve reaches 20% of our capital. Our legal reserve is currently at 20%.
Dividends payable by us to non-residents of Spain ordinarily are subject to a Spanish withholding tax. For the tax implications of dividends to U.S. Holders (as defined below), see “—Taxation.”
Upon our liquidation, our shareholders would be entitled to receive pro rata any assets remaining after the payment of our debts and taxes and expenses of such liquidation. Any change in the rights of shareholders to receive dividends and payment upon liquidation would require an amendment to our bylaws by resolution adopted by a general meeting of shareholders. If there were more than one class of shares, such amendment would also require the approval of each class of shareholders affected by the amendment.
Preemptive Rights and Increases of Share Capital
Pursuant to the Spanish Corporations Law, shareholders have preemptive rights to subscribe for any new shares and for bonds convertible into shares. Such rights may not be available under special circumstances if waived by a resolution passed at a general meeting of shareholders in accordance with Article 308 of the Spanish Corporations Law, or the Board of Directors, if authorized (Article 506 of the Spanish Corporation Act). Further, such rights, in any event, will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger in which shares are issued as consideration. Such rights:
are transferable;
may be traded on the Automated Quotation System; and | · | may be traded on the Automated Quotation System; and |
| · | may be of value to existing shareholders because new shares may be offered for subscription at prices lower than prevailing market prices. |
Absent an exemption from registration, shares issuable upon exercise of rights must be registered under the Securities Act in order to be offered to holders of ADRs. If we decided not to register the shares, the rights would not be distributed to holders of ADRs. Pursuant to the Deposit Agreement, however, holders of ADRs are entitled to receive their proportionate share of the proceeds, if any, from sale by the Depositary of any rights accruing to holders of ADRs.
E. Taxation
The following is a general summary of the material Spanish and U.S. federal income tax consequences to U.S. Holders (as defined below)described below of the ownership and disposition of shares or ADSs. This summary is based upon Spanish and U.S. tax laws (including the U.S. Internal Revenue Code of 1986, as amended (the “Code”“Code”), final, temporary and proposed U.S. Treasury regulations, rulings, judicial decisions and administrative pronouncements), and the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed February 22, 1990 (the “Treaty”“Treaty”), all as of the date hereof and all of which are subject to change or changes in interpretation, possibly with retroactive effect. In addition, the summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related agreements will be performed in accordance with its terms.
As used herein, the term “U.S. Holder” means a beneficial owner of one or more shares or ADSs:
that is, for U.S. federal income tax purposes, one of the following:
| (a) | that is, for U.S. federal income tax purposes, one of the following: |
| i.(a) | a citizen or individual resident of the United States,States; |
| ii. |
| (b) | a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States or any state therein or the District of Columbia,Columbia; or |
| iii. |
| (c) | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source; |
who is entitled to the benefits of the Treaty;
who holds the shares or ADSs as capital assets for U.S. federal income tax purposes;
| (b) | who is entitled to the benefits of the Treaty; |
who owns, directly, indirectly or by attribution, less than 10% of the share capital or voting stock of Telefónica; and | (c) | who holds the shares or ADSs as capital assets for U.S. federal income tax purposes; |
| (d) | who owns, directly, indirectly or by attribution, less than 10% of the share capital or voting stock of Telefónica; and |
| (e) | whose holding is not attributable to a fixed base or permanent establishment in Spain. |
This summary does not address all of the tax considerations, including the potential application of the provisions of the Code known as the Medicare contribution tax, that may apply to holders that are subject to special tax rules, such as certain U.S. expatriates, insurance companies, tax-exempt organizations, certain financial institutions, persons subject to the alternative minimum tax, dealers and certain traders in securities, persons holding shares or ADSs as part of a straddle, hedging, conversion or integrated transaction, persons who acquired their shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation, persons owning shares or ADSs in connection with a trade or business outside of the U.S., partnerships or other entities classified as partnerships for U.S. federal income tax purposes or persons whose functional currency is not the U.S. dollar. Such holders may be subject to U.S. federal income tax consequences different from those set forth below.
If a partnership holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds shares or ADSs is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the shares or ADSs.
For purposes of the Treaty and U.S. federal income tax, U.S. Holders of ADSs will generally be treated as owners of the underlying shares represented by such ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom American depositary receipts are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary receipts. Such actions would also be inconsistent with the claiming of the reduced rates of tax applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the availability of foreign tax credits to U.S. Holders of ADSs and the reduced tax rates for dividends received by certain non-corporate U.S. Holders of ADSs, each as described below, could be affected by actions taken by such parties or intermediaries.
This discussion assumes that Telefónica is not, and will not become, a passive foreign investment company (“PFIC”PFIC”), as discussed below under “—U.S. Federal Income Tax Considerations—Passive foreign investment company rules.”
U.S. Holders of shares or ADSs should consult their own tax advisors concerning the specific Spanish and U.S. federal, state and local tax consequences of the ownership and disposition of shares or ADSs in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. In particular, U.S. Holders are urged to consult their own tax advisors concerning their eligibility for benefits under the Treaty.
Spanish Tax Considerations
Taxation of dividends
Under Spanish law, dividends paid by Telefónica to U.S. Holders of ordinary shares or ADSs are subject to Spanish Non-Resident Income Tax, withheld at source, at a rate of 20% for 2015 and at a rate of 19% as from January 1, 2016 (21% for 2014). For these purposes, upon distribution of the dividend, Telefónica or its paying agent will withhold an amount equal to the tax due according to the rules set forth above.
However, under the Treaty, if you are a U.S. Holder, you are entitled to a reduced withholding tax rate of 15%.
To benefit from the Treaty-reduced rate of 15%, you must provide to Telefónica through its paying agent in Spain, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S.
Internal Revenue Service (“IRS”IRS”) stating that, to the best knowledge of the IRS, such U.S. Holders are residents of the United States within the meaning of the Treaty and entitled to its benefits.
If this certificate is not provided within this period, you may afterwards obtainapply for a refund of the amount withheld in excess of the rate provided for in the Treaty by following the procedures described in the next section.
Spanish Refund Procedure
According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Holder, you are required to file:
–the corresponding Spanish tax form;
| · | the corresponding Spanish tax form, |
–the certificate referred to in the preceding section; and | · | the certificate referred to in the preceding section, and |
| · | evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you. |
–evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you.
The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities.
U.S. Holders are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.
Taxation of capital gains
For Spanish tax purposes, income obtained from the sale of ADSs or ordinary shares of Telefónica will be treated as capital gains. Spanish non-resident income tax is levied at a rate of 20% for 2015 and at a rate of 19% as from January 1, 2016 (21% for 2014) on capital gains obtained by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation.
Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is resident in a country that has entered into a treaty for the avoidance of double taxation with an “exchange of information” clause (the Treaty contains such a clause) will be exempt from taxation in Spain. If you are a U.S. Holder, under the Treaty capital gains arising from the disposition of ordinary shares or ADSs will not be taxed in Spain. You will be required to establish that you are entitled to the exemption from tax under the Treaty by providing to the relevant Spanish tax authorities a certificate of residence issued by the IRS stating that to the best knowledge of the IRS, you are a U.S. resident within the meaning of the Treaty.
Spanish wealth tax
Individual U.S. Holders who hold shares or ADSs located in Spain are subject to the Spanish Wealth Tax (Impuesto(Impuesto sobre el Patrimonio)Patrimonio) (Spanish Law 19/1991), which imposes tax on property located in Spain on the last day of any year.
The Spanish As of January 1, 2017 a 100% tax authorities may take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. If such a view wereallowance has been approved by Royal Legislative Decree 13/2011 dated September, 16, 2011 to prevail, non-residents of Spain who held sharesany resident or ADSs on the last day of any year would be subject to the Spanish wealth tax for such year on the average market value of such shares or ADSs during the last quarter of such year.
Non-residents of Spain who held shares, ADSs, or other assets or rights located in Spain according to Spanish wealth tax law, on the last day of the year whose combined value exceeds 700,000 euros would be subject to the Spanish wealth tax on that excess amount at marginal rates varying between 0.2% and 2.5%, and would be obliged to file the corresponding wealth tax return.
non resident taxpayer.
Inheritance and gift tax
Transfers of shares or ADSs on death and by gift to individuals are subject to Spanish inheritance and gift taxes (Impuesto(Impuesto sobre Sucesiones y Donaciones)Donaciones), respectively, if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of death, regardless of the residence of the heir or beneficiary. In this
regard, the Spanish tax authorities may determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The state applicable tax rate, after applying relevant personal, family and wealth factors, generally ranges between 7.65% and 81.6% for individuals.
Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a rate of 20% for 2015 and at a rate of 19% as from January 1, 2016 (21% for 2014) on the fair market value of the shares as a capital gain. If the donee is a United States resident corporation, the exclusions available under the Treaty described in the section “—Taxation of Capital Gains” above will be applicable.
Expenses of Transfer
Transfers of shares or ADSs will be exempt from any transfer tax (Impuesto(Impuesto sobre Transmisiones Patrimoniales)Patrimoniales) or value added tax. Additionally, no stamp tax will be levied on such transfers.
U.S. Federal Income Tax Considerations
Taxation of dividends
Distributions received by a U.S. Holder on shares or ADSs, including the amount of any Spanish taxes withheld therefrom, other than certain pro rata distributions of shares to all shareholders (including ADS holders), will constitute foreign-source dividend income to the extent paid out of Telefónica’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Because Telefónica does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of dividend income paid in euroeuros that a U.S. Holder will be required to include in income will equal the U.S. dollar value of the distributed euro,euros, calculated by reference to the exchange rate in effect on the date the payment is received by the Depositary (in the case of ADSs) or by the U.S. Holder (in the case of shares), regardless of whether the payment is converted into U.S. dollars on the date of receipt. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder will generally not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt. Gain or loss that a U.S. Holder realizes on a sale or other disposition of euroeuros will be U.S.-source ordinary income or loss. Corporate U.S. Holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by Telefónica. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends received by certain non-corporate U.S. Holders will be taxable at rates applicable to long-term capital gains. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.
Spanish income taxes withheld from dividends on shares or ADSs at a rate not exceeding the rate provided in the Treaty will be creditable against a U.S. Holder’s U.S. federal income tax liability, subject to applicable restrictions and limitations that may vary depending upon the U.S. Holder’s circumstances and the discussion above regarding concerns expressed by the U.S. Treasury. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. See “Spanish Tax Considerations—Taxation of dividends” above for a discussion of how to obtain the applicable treaty rate. Instead of claiming a credit, a U.S. Holder may elect to deduct foreign taxes (including the Spanish taxes) in computing its taxable income, subject to generally applicable limitations. An election to deduct foreign taxes (instead of claiming foreign tax credits) applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States. The limitations on foreign taxes eligible for credit are calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex. Therefore, U.S. Holders should consult their own tax advisors regarding the availability of foreign tax credits in their particular circumstances.
Taxation upon sale or other disposition of shares or ADSs
A U.S. Holder will generally recognize U.S. source capital gain or loss on the sale or other disposition of shares or ADSs. Any such gain or loss will be long-term capital gain or loss if the U.S. Holder has held such shares or ADSs for more than one year. The amount of the U.S. Holder’s gain or loss will be equal to the difference between such U.S. Holder’s tax basis in the shares or ADSs sold or otherwise disposed of and the amount realized on the sale or other disposition, as determined in U.S. dollars.
As discussed under “Spanish Tax Considerations—Taxation of capital gains” above, gain realized by a U.S. Holder on the sale or other disposition of shares or ADSs will be exempt from Spanish tax on capital gains under the Treaty. If a U.S. Holder is eligible for the exemption from Spanish tax on capital gains but does not follow appropriate procedures for obtaining the exemption, such holder will not be entitled to credit the amount of Spanish tax on capital gains paid against its U.S. federal income tax liability. U.S. Holders should consult their own tax advisors regarding the potential Spanish tax consequences of a sale or other disposition of shares or ADSs and the procedures available for an exemption from such tax.
Passive foreign investment company rules
Telefónica believes that it was not a PFIC for U.S. federal income tax purposes for its 20142017 taxable year. However, because PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25% owned equity investments) from time to time, there can be no assurance that Telefónica will not be considered a PFIC for any taxable year. If Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder owned a share or ADS, certain adverse tax consequences could apply to the U.S. Holder.
IfIn general, if Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder owned a share or ADS, gain recognized by a U.S. Holder on a sale or other disposition of such share or ADS would be allocated ratably over the U.S. Holder’s holding period for the share or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before Telefónica 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, and an interest charge would be imposed on the resulting tax liability. The same treatment would apply to any distribution in respect of shares or ADSs to the extent it exceeds 125% of the average of the annual distributions on shares or ADSs received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the shares or ADSs.
In addition, if Telefónica were treated as a PFIC in a taxable year in which it pays a dividend or in the prior taxable year, the favorable dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If Telefónica were a PFIC for any taxable year during which a U.S. Holder owned our shares or ADSs, the U.S. Holder will generally be required to file IRS Form 8621 with its annual U.S. federal income tax return.
Information reporting and backup withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless the U.S. Holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. Holders who are individuals and certain specified entities may be required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held through a U.S. financial institution). U.S. Holders are urged to consult their tax advisersadvisors regarding the application, if any, of this legislation to their ownership of shares or ADSs.
Not Applicable.
Not Applicable.
Where You Can Find More Information
We file Annual Reports on Form 20-F and furnish periodic reports on Form 6-K to the SEC. You may read and copy any of these reports at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services. Some of our SEC filings are also available at the website maintained by the SEC at “http://www.sec.gov.”
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF.” You may inspect any periodic reports and other information filed with or furnished to the SEC by us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
As a foreign private issuer, we are exempt from the rules under the Exchange Act which prescribe the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act.
We are subject to the informational requirements of the Spanish securities commission and the Spanish Stock Exchanges, and we file reports and other information relating to our business, financial condition and other matters with the Spanish securities commission and the Spanish Stock Exchanges. You may read such reports, statements and other information, including the annual and biannual financial statements, at the public reference facilities maintained in Madrid and Barcelona. Some of our Spanish securities commission filings are also available at the website maintained by the CNMV at http://www.cnmv.es.
We have appointed Citibank, N.A. to act as Depositary for the Telefónica ADSs. Citibank will, as provided in the Deposit Agreement, arrange for the mailing of summaries in English of such reports and communications to all record holders of the ADSs of Telefónica. Any record holder of Telefónica ADSs may read such reports and communications or summaries thereof at Citibank’s office located at 388 Greenwich Street, 14th Floor, New York, New York 10013.
Not applicable.
We are exposed to various financial market risks as a result of: (i) our ordinary business activity, (ii) debt incurred to finance our business, (iii) our investments in companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting usGroup companies are as follows:
| | Exchange rate risk arises primarily from (i) our international presence, through our investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom), and (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt. |
| | Interest rate risk arises primarily from changes in interest rates affecting (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates. |
Exchange rate risk: arises primarily from: (i) Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom), (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt ,and (iii) for those trade receivables or payables in foreign currency related to the company with the transaction registered.
142
Interest rate risk: arises primarily in connection with changes in interest rates affecting: (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates.TableShare price risk: arises primarily from changes in the value of Contentsthe equity investments (that may be bought, sold or otherwise involved in transactions), from changes in the value of derivatives associated with such investments, from changes in the value of treasury shares and from equity derivatives. | | Share price risk arises primarily from changes in the value of our equity investments that may be bought, sold or otherwise involved in transactions, from changes in the value of derivatives associated with such investments, from changes in the value of our treasury shares and from equity derivatives. |
We areLiquidity risk: the Telefónica Group is also exposed to liquidity risk if a mismatch arises between ourits financing needs (including operating and financial expense, investment, debt redemptions and dividend commitments)
and ourits sources of finance (including revenues, divestments, credit lines from financial institutions and capital market transactions). The cost of financingfinance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.
Finally, we are exposed to “country risk” (which overlaps with market and liquidity risks). ThisCountry risk: refers to the possible decline in the value of assets, cash flows generated or cash flows returned to the parent company as a result of political, economic or social instability in the countries where we operate,the Telefónica Group operates, especially in Latin America.
Credit risk: appears when a counterpart fails to meet or delays its payment obligations in accordance with the agreed terms, driving an impairment in an asset due to: (i) solvency issues, or (ii) no intention to pay.
We seek to actively manage these risks through the use of derivatives (primarily on exchange rates, interest rates and share prices) and by incurring debt in local currencies, where appropriate, with a view to stabilizing cash flows, our income statement and, to a lesser extent, part of the value of our investments. In this way, we attempt to protect our solvency, facilitate financial planning and take advantage of investment opportunities.
We manage our exchange rate risk and interest rate risk in terms of net financial debt and net financial debt plus commitments as calculated by us. We believe that these parameters are more appropriate to understanding our debt position. Net financial debt and net financial debt plus commitments take into account the impact of our cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net financial debt nor net financial debt plus commitments as calculated by us should be considered an alternative toas a substitute for gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of our liquidity.leverage. For a more detailed description on reconciliation of net debt and net financial debt to gross financial debt, see “Item 5. Operating and Financial Review and Prospects—Presentation of Financial Information—Non-GAAP financial information—Net financial debt and net debt.financial debt plus commitments.”
For a more detailed description on quantitative and qualitative disclosures about market risks see Note 16 to our Consolidated Financial Statements.
The Depositary of our ADR program is Citibank, N.A., and the address of its principal executive office is 388 Greenwich Street, 14th Floor, New York, New York 10013.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF.”
Until January 21, 2011, each Each ADS representedrepresents the right to receive threeone ordinary sharesshare of capital stock of 1.00 euros nominal value each, of Telefónica, S.A. Citibank, in its capacity as Depositary, effected a ratio change on the Telefónica, S.A.’s ADR program so that each ADS now represents the right to receive one ordinary share. The effective date of the ratio change was January 21, 2011. The Depositary issues ADSs in the form of certificated ADSs (American Depositary Receipts, or ADRs) or uncertificated ADSs pursuant to the Deposit Agreement.
Under the terms of the Deposit Agreement, as of the date of this Annual Report, an ADS holder may have to pay to the Depositary the services fees specified in the table below:
Category |
| | |
| Category | Depositary Actions | | Associated Fee / Paid By Whom Paid |
| (a) Depositing or substituting the underlying shares | | Issuance of ADSs upon the deposit of shares | | Up to 5.00 dollars for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)(1) |
| (b) Receiving or distributing dividends | | Distribution of cash dividends or other cash distributions; distribution of share dividends or other free share distributions; distribution of securities other than ADSs or rights to purchase additional ADSs | | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held (in the case of cash distributions, deducted from the relevant distribution; in the case of all other distributions, billed to the relevant holder)(2) |
| (c) Selling or exercising rights | | Distribution or sale of securities | | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held (billed to the relevant holder) |
| (d) Withdrawing an underlying security | | Acceptance of ADSs surrendered for withdrawal of deposited securities | | Up to 5.00 dollars for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)(1) |
| (e) Transferring, splitting or grouping receipts | | Transfers | | Up to 1.50 dollars per ADS so presented (charged to person presenting certificate for transfer) |
| (f) General depositary services, particularly those charged on an annual basis | | Other services performed by the Depositary in administering the ADSs | | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held on the applicable record date (billed to person holding ADSs on applicable record date established by the Depositary)(2) |
|
| | |
| (g) Expenses of the Depositary | | Certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges in connection with: · compliance with foreign exchange control regulations or any law or regulation relating to foreign investment; · the Depositary or its custodian’s compliance with applicable law, rule or regulation; · stock transfer or other taxes and other governmental charges; · cable, telex, facsimile transmission/delivery; · expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency); · any other charge payable by Depositary or its agents. | | Expenses payable at the sole discretion of the Depositary (billed or deducted from cash distributions to person holding ADSs on applicable record date established by the Depositary) |
(1) | (1) In the case of ADSs issued by the Depositary into DTC or presented to the Depositary via DTC, the ADS issuance and cancellation fees will be payable to the Depositary by DTC Participant(s) receiving the ADSs from the Depositary or the DTC Participant(s) surrendering the ADSs to the Depositary for cancellation, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC Participant(s) to the account(s) of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participant(s) as in effect at the time. (2) For ADSs held through DTC, the Depositary fees for distributions other than cash and the Depositary service fee are charged by the Depositary to the DTC Participant(s) surrendering the ADSs to the Depositary for cancellation, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC Participant(s) to the account(s) of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participant(s) as in effect at the time. |
(2) | For ADSs held through DTC, the Depositary fees for distributions other than cash and the Depositary service fee are charged by the Depositary to the DTC Participants in accordance with the procedures and practices prescribed by DTC from time to time and the DTC Participants in turn charge the amount of such fees to the beneficial owners for whom they hold ADSs. |
The Depositary has agreed to reimburse or pay on behalf of Telefónica, S.A., certain reasonable expenses related to our ADS program and incurred by us in connection with the program (such as NYSE listing fees, legal and accounting fees incurred in connection with the preparation of Form 20-F and ongoing SEC compliance and listing requirements, distribution of proxy materials, investor relations expenses, etc.). The Depositary has covered all such expenses incurred by us during 20142017 for an amount of 75.5 million dollars. The amounts the Depositary reimbursed or paid are not perforce related to the fees collected by the depositary from ADS holders.
As part of its service to us, the Depositary has agreed to waive certain expenses for the standard costs associated with the administration of our ADS program for the year ended December 31, 2014.2017.
None.
Not applicable.
Disclosure Controls and ProceduresSignificant Differences in Corporate Governance Practices
Corporate governance guidelines
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectivenessFor a description of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Telefónica is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a–15(f) under the Exchange Act. Telefónica’s internal control system is designed to provide reasonable assurance as to the reliability of financial reporting and the preparation of the published financial statements under generally accepted accounting principles.
Any internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of the controls and procedures, which may not prevent or detect misstatements.
Telefónica management assessed the effectiveness of Telefónica’s internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 framework) in Internal Control – Integrated Framework. Based on its assessment and those criteria, Telefónica management believes that at December 31, 2014, Telefónica’s internal control over financial reporting is effective.
Report of the Independent Registered Public Accounting Firm
Telefónica’s independent registered public accounting firm, Ernst & Young, S.L., has issued a report on the effectiveness of the company’s internal control over financial reporting. The report is included on page F-2.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our Board of Directors has determined that Mr. Antonio Massanell Lavilla meets the requirements of an “audit committee financial expert” as such term is defined by the SEC.
Telefónica is governed by a code of business conduct and ethics called the Telefónica Business Principles. The Business Principles are binding on all employees globally, including senior officers, in their daily operations and on the Company in its relations with its stakeholders.
The standards set forth in the Telefónica Business Principles cover ethical issues such as honesty and trust, respect for the law, integrity and the respect of human rights, as well as how these ethical principles should be implemented in our relationships with our stakeholders: employees, customers, shareholders, suppliers and the communities we work in. Issues covered, amongst other, are professional development, health and safety, communications and advertising, corporate governance risk management, conflicts of interest, environmental protection, privacy and data protection, etc.
The Telefónica Business Principles are available and open to consultation for employees on the Telefónica Intranet site as well as for the general public on the Telefónica external website (www.telefonica.com/en/about_telefonica/html/strategy/principactua.shtml). For more information, pleasepractices see “Item 16G. Corporate Governance - CodeGovernance.”
Description of Ethics.”Our Capital Stock
Description of share capital
No amendments were madeAt February 22, 2018, our issued share capital consisted of 5,192,131,686 ordinary registered shares with a nominal value of 1.00 euro each.
Our shareholders delegated to the Board of Directors the authority to issue up to 2,469,208,757 new shares (equal to half of Telefónica Business Principlesnica’s share capital on June 12, 2015, the date of the authorization). The Board of Directors is authorized to exclude preemptive rights, in 2014, nor were there any waivers granted.whole or in part, pursuant to the applicable provisions of the Spanish Corporation Act. The Board’s authorization to issue new shares expires on June 12, 2020.
Please see Note 21(d)We hold our ordinary general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the Board of Directors. Extraordinary general shareholders’ meetings may be called, from time to our Consolidated Financial Statements.
The Audit and Control Committee’s Pre-Approval Policies and Procedures
The engagement of any service rendered by our external auditor or any of its affiliates must always havetime, at the prior approvaldiscretion of our AuditBoard of Directors or upon the request of shareholders representing at least 3% of our paid-in share capital. The minimum percentage required to exercise this right was lowered from 5% to 3% by Law 31/2014.
We publish notices of all ordinary and Control Committee. Such Committee has developedextraordinary general shareholders’ meetings in the Official Gazette of the Commercial Registry or in one of the more widely circulated newspapers in Spain, on the website of the Spanish Securities and Exchange Commission (Comisión Nacional del Mercado de Valores (the “CNMV”)), and on our web site in due time pursuant to the Spanish Corporation Act, being on a Pre-approval Policy regardinggeneral basis at least one month before the engagementrelevant meeting. Furthermore, the Board of professional servicesDirectors may publish notices in other media, if deemed appropriate to ensure the public and effective dissemination of the notice meeting.
Each share of Telefónica, S.A. entitles the holder to one vote. However, only registered holders of at least 300 shares are entitled to attend a general shareholders’ meeting. Holders of a lesser number of shares may grant a proxy in respect thereof to a shareholder having the right to attend, as well as group together with other shareholders in the same situation until reaching the required number of shares, following which a proxy must be granted by the shareholders so grouped together to one of such shareholders. The grouping must be carried out specifically for each General Shareholders’ Meeting and be recorded in writing.
However, under our external auditor,bylaws, the maximum number of votes that a shareholder may cast is capped at 10% of our total outstanding voting capital. In determining the maximum number of votes that each shareholder may cast, only the shares held by such shareholder are counted, disregarding those that correspond to other shareholders who have appointed such shareholder as his or her proxy, in spite of applying the limit individually to each of the represented shareholders. This cap will also apply to the maximum number of votes that may be collectively or individually cast by two or more shareholder companies belonging to the same group of entities, as well as to the maximum number of votes that may be cast by an individual or corporate shareholder and the entity or entities that are shareholders themselves and which are directly or indirectly controlled by that individual or corporate shareholder. Moreover, in accordance with the Spanish AuditCorporation Act, such cap would become ineffective where the bidder reaches, as a consequence of a tender offer, a percentage equal to or greater than 70% of the share capital carrying voting rights, unless the bidder (or those acting in concert with the bidder) is not subject to equivalent neutralization measures or has not adopted them.
In addition, according to Article 34 of Spanish Royal Decree-Law 6/2000 of June 23 on urgent measures to improve competition in the goods and services markets, individuals and legal entities directly and indirectly holding more than 3% of the total share capital or voting rights of two or more principal operator companies in Spain in, among other markets, the fixed-line and mobile-line telephony markets, may not exercise their voting rights in excess of 3% of the total in more than one company, except with the prior authorization of the Spanish National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia (the “CNMC”)). Principal operators are defined as one of the five operators with the largest market share in the corresponding market (“Principal Operators”). In addition, no individual or legal entity is allowed to appoint, directly or indirectly, members of the management body of more than one Principal Operator in, among others, the fixed-line or mobile-line telephony markets, except with the prior authorization of the CNMC. Additionally, individuals or legal entities considered Principal Operators are not allowed to exercise more than 3% of the voting rights of another Principal Operator nor to appoint, directly or indirectly, members of the management body of any Principal Operator, except, in both cases, with the prior authorization of the CNMC. Telefónica is considered a Principal Operator for the purposes of Article 34 of Royal Decree-Law 6/2000 of June 23 in the Spanish fixed-line and mobile-line telephony markets.
Any share may be voted by proxy. The proxies may be granted in writing or electronically and are valid only for a single meeting, unless the proxy-holder is the granting shareholder’s spouse, ascendant or descendant, or holds a general power of attorney granted in a public instrument with powers to manage all of the assets held by the shareholder granting the proxy in Spain. Under the Deposit Agreement relating to our ADSs, the Depositary accepts voting instructions from holders of ADSs. The Depositary executes such instructions to the extent permitted by law and by the terms governing the shares and ADSs. The Depositary or its nominee, as the case may be, will be entitled to vote by proxy the shares underlying the relevant ADSs.
Only holders of record five days prior to the day on which a general meeting of shareholders is scheduled to be held may attend and vote at the meeting.
According to the Spanish Corporation Act, as amended by Law 31/2014, the general shareholders’ meeting will be quorate on first call if the shareholders present, in person or by proxy, hold at least 25% of the subscribed share capital carrying voting rights. On second call, the meeting will be quorate regardless of the capital in attendance.
However, if the agenda of the meeting includes resolutions on the amendment of the bylaws, including an increase or reduction of share capital, the transformation, merger, split-off, the en bloc assignment of assets and liabilities, the migration of the registered office abroad, the issuance of debentures or the exclusion or limitation of preemptive rights, the required quorum on first call must be met by the attendance of shareholders representing at least 50% of the subscribed share capital carrying voting rights (each a “Special Resolution”). On second call, the attendance of 25% of the subscribed share capital carrying voting rights will suffice.
As a general rule, resolutions at the general shareholder’s meeting will be passed by a simple majority of votes cast at such meeting (i.e., provided that the votes "for" outnumber the votes "against" the relevant resolution).
In contrast, in order to approve any Special Resolution, if the capital present or represented at the general shareholders’ meeting exceeds 50% of the subscribed share capital carrying voting rights, the favorable vote of the absolute majority (that is, if the votes in favor exceed 50% of the votes corresponding to capital present and represented at the shareholders’ meeting) will be required. If, on second call, shareholders representing 25% or more of the subscribed share capital carrying voting rights are present or represented but fail to reach the 50% threshold, the favorable vote of at least two-thirds of the share capital present or represented at the meeting will be required.
Preemptive Rights
Pursuant to the Spanish Corporation Act, shareholders have preemptive rights to subscribe for any new shares in capital increases with issuances of new shares with a charge to monetary contributions and in issuances of debentures convertible into shares. Such rights may be excluded (partially or totally) under special circumstances by virtue of a resolution passed at a general shareholders’ meeting in accordance with Articles 308, 504 and 506 of the Spanish Corporation Act, or by the Board of Directors, if previously authorized at a general shareholders’ meeting in accordance with Article 506 of the Spanish Corporation Act (for capital increases) and Articles 417 and 511 (for issuances of debentures convertible into shares). Such preemptive rights will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger or demerger of another entity into Telefónica or of all or part of the assets split from another company, in which shares are issued as consideration or, in general, when the increase is carried out as consideration in exchange for non-cash contributions. Such rights are transferable, may be traded on the Automated Quotation System and may be of value to existing shareholders because new shares may be offered for subscription at prices lower than prevailing market prices.
Form and Transfer
Ordinary shares are in book-entry form and are indivisible. Joint holders must nominate one person to exercise their rights as shareholders, though joint holders are jointly and severally liable for all obligations arising from their status as shareholders. Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. Unipersonal (“Iberclear”), which manages the clearance and settlement system of the Spanish Stock Exchanges, maintains the central registry of ordinary shares reflecting the number of ordinary shares held by each of its participant entities (entidades participantes) as well as the number of such shares held by registered legal owners. Each participant entity in turn maintains a register of the owners of such shares.
Transfers of Telefónica’s ordinary shares quoted on the Spanish Stock Exchanges must be made by book-entry registry or delivery of evidence of title to the buyer through, or with the participation of, a member of the Spanish Stock Exchanges that is an authorized broker or dealer. Transfers of Telefónica’s ordinary shares may also be subject to certain fees and expenses.
Reporting Requirements
According to Royal Decree 1362/2007 of October 19 on the disclosure of significant stakes in listed companies (“Royal Decree 1362/2007”), recently modified by Royal Decree 878/2015, of October 2, the acquisition or disposition of shares of Telefónica must be reported within four trading days of the acquisition or disposition to Telefónica and the Sarbanes-Oxley Act. This Policy establishesCNMV, where:
in the case of an acquisition, the acquisition results in that person or group holding a number of voting rights in Telefónica that reaches or surpasses 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights; or
in the case of a disposal, the disposition reduces the number of voting rights held by a person or group below a threshold of 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights.
Royal Decree 878/2015 established a new approach for calculating whether these thresholds are reached, surpassed or fell short which requires adding the voting rights corresponding to shares and financial instruments. Royal Decree 878/2015 also expands the definition of financial instruments which should be reported, including financial instruments having a similar economic effect as the shares of a company, whether the instruments are cash or physically settled, including convertible securities, options, forwards, futures, swaps, CFDs or any other type of instrument which grants the holder the right to acquire shares or a right to receive an equivalent cash settlement amount. Additionally, Royal Decree 878/2015 amends the calculation rules of the voting rights attributable to a financial instrument which, among other changes, shall now be calculated on a daily basis.
The reporting requirements referred to above apply not only to the acquisition or transfer of shares, but also when, without an acquisition or transfer of shares, the proportion of voting rights of an individual or legal entity reaches, exceeds or falls below the threshold that triggers the obligation to obtain prior approval from our Auditreport as a consequence of a change in the total number of voting rights of Telefónica on the basis of the information reported to the CNMV and Control Committeedisclosed by it, in accordance with the Royal Decree.
Regardless of the actual ownership of the shares, any individual or legal entity with a right to acquire, transfer or exercise voting rights granted by the shares, and any individual or legal entity who owns, acquires or transfers, whether directly or indirectly, other securities or financial instruments which grant a right to acquire shares carrying voting rights (such as transferable securities, options, futures, swaps, forwards and other derivative contracts), will also have an obligation to notify the company and the CNMV of the holding of a significant stake in accordance with the above-mentioned regulations.
Stricter disclosure obligations apply if the person obligated to disclose has residency in a country considered a tax haven by the Spanish authorities, a zero-taxation country or territory or a country or territory that does not share information with the Spanish authorities, in which cases the initial threshold for any servicedisclosure is reduced to 1% (and successive multiples of 1%).
Our directors must report to us and the CNMV the percentage and number of voting rights in Telefónica held by them at the time of becoming or ceasing to be rendered bya member of the Board of Directors. Furthermore, all members of the Board must report any change in the percentage of voting rights they hold, as a result of any acquisition or disposition of our external auditorshares or voting rights, or financial instruments which carry a right to Telefónicaacquire or dispose of shares which have voting rights attached, including any stock-based compensation that they may receive pursuant to any of our compensation plans. Members of our senior management must also report any stock-based compensation that they may receive pursuant to any of our compensation plans or any subsequent amendment to such plans. Royal Decree 1362/2007 (as amended) refers to the definition given by Royal Decree 1333/2005 of its subsidiaries.
November 11, which develops the Spanish Securities Market Act, regarding market abuse, which defines senior management (Tabledirectivos) as those “high-level employees in positions of Contentsresponsibility with regular access to insider information ( This Policy sets forth restrictions on engaging our external auditor forinformación privilegiada) related, directly or indirectly, to the performanceissuer and that, furthermore, are empowered to adopt management decisions affecting the future development and business perspectives of non-audit services, according to which the engagement of our external auditor for the provision of such services is only permitted when there is no other firm available to provide the needed services at a comparable cost and with a similar level of quality. Moreover, this Policy prohibits the engagement of our external auditor for the provision of certain type of services that would be considered as “prohibited services.”
issuer."
In addition, pursuant to Royal Decree 1333/2005 of November 11 (as amended), any member of our Board and our senior management, or any parties closely related to any of them, as such terms are defined therein, must report to the Audit and Control Committee oversees the total amount of fees paidCNMV any transactions carried out with respect to our external auditorshares or derivatives or other financial instruments relating to our shares. The notification of the transaction must include particulars of, among others, the type of transaction, the date of the transaction and the market in which the transactions were carried out, the number of shares traded and the price paid.
These disclosure obligations are primarily regulated by Royal Decree 1362/2007 (as amended) and, since July 3, 2016, by the Regulation (EU) No 596/2014 of the European Parliament and of the Council of April 16, 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, both establish a detailed set of rules on this legal framework (including, inter alia, rules determining the persons subject to disclosure obligations, the different types of situations triggering disclosure and corresponding exceptions, specific attribution and aggregation rules, the deadlines to notify the transactions, triggering disclosure obligations and incorporation of notices submitted to the CNMV’s public registry).
Disclosure of Net Short Positions
In accordance with Regulation (EU) No. 236/2012 of the European Parliament and of the European Council of March 14, 2012 on short selling and certain aspects of credit default swaps (as further supplemented by several delegated regulations regulating technical aspects necessary for its effective enforceability and to ensure compliance with its provisions), net short positions on shares listed on the Spanish Stock Exchanges equal to, or in excess of, 0.2% of the relevant issuer’s share capital and any increases or reductions thereof by 0.1% are required to be disclosed to the CNMV by no later than the first trading day following the transaction. If the net short position reaches 0.5%, and also at every 0.1% above that, the CNMV will disclose the net short position to the public.
Notification is mandatory even if the same position has been already notified to the CNMV in compliance with reporting requirements previously in force in Spain.
The information to be disclosed is set out in Table 1 of Annex I of Delegated Regulation 826/2012, according to the format approved as Annex II of this Regulation. The information will be published, where appropriate, on a web page operated or supervised by the corresponding authority.
Moreover, pursuant to Regulation (EU) No. 236/2012, where the CNMV considers that (i) there are adverse events or developments that constitute a serious threat to financial stability or to market confidence (serious financial, monetary or budgetary problems, which may lead to financial instability, unusual volatility causing significant downward spirals in any financial instrument, etc.); and (ii) the measure is necessary and will not be disproportionately detrimental to the efficiency of financial markets in view of the advantages sought, it may, following consultation with the European Securities and Market Authority (“ESMA”), take any one or more of the following measures:
impose additional notification obligations by either (a) reducing the thresholds for the provisionnotification of non-audit servicesnet short positions in relation to one or several specific financial instruments; and/or (b) requesting the parties involved in the lending of a specific financial instrument to notify any change in the fees requested for such lending; and
restrict short selling activity by either prohibiting or imposing conditions on short selling.
In addition, according to Regulation (EU) No. 236/2012, where the price of a financial instrument has fallen significantly during a single day in relation to the closing price on the previous trading day (10% or more in the case of a liquid share), the CNMV may prohibit or restrict short selling of financial instruments for a period not exceeding the end of the trading day following the trading day on which the fall in price occurs.
Finally, Regulation (EU) No. 236/2012 also vests powers to ESMA in order to assuretake measures similar to the ones described above in exceptional circumstances, when the purpose of these measures is to deal with a threat affecting several EU member states and the competent authorities of these member states have not taken adequate measures to address it.
Shareholder Agreements
Article 531 et seq. of the Spanish Corporation Act require parties to disclose those shareholders’ agreements in respect of Spanish listed companies that affect the exercise of voting rights at a general shareholders’ meeting or contain restrictions or conditions on the transferability of shares or bonds that are convertible or exchangeable into shares. If any shareholders enter into such fees doagreements with respect to Telefónica’s shares, they must disclose the execution, amendment or extension of such agreements to Telefónica and the CNMV (together with the relevant clauses of said agreements) and file such agreements with the appropriate Commercial Registry. Failure to comply with these disclosure obligations renders any such shareholders’ agreement unenforceable and constitutes a violation of the Spanish Securities Market Act.
Acquisition of Own Shares
Pursuant to Spanish corporate law, we may only repurchase our own shares within certain limits and in compliance with the following requirements:
the repurchase must be authorized by the general shareholders’ meeting by a resolution establishing the maximum number of shares to be acquired, the minimum and maximum acquisition price and the duration of the authorization, which may not exceed a certain percentagefive years from the date of the totalresolution; and
the repurchase, including any shares already held by us or a person acting on our behalf, must not bring our net worth below the aggregate amount of feesour share capital and legal reserves.
For these purposes, net worth means the amount resulting from the application of the criteria used to draw up the financial statements, subtracting the amount of profits directly imputed to that net worth, and adding the amount of share capital subscribed but not called and the share capital par and issue premiums recorded in our accounts as liabilities. In addition:
the aggregate par value of the shares directly or indirectly repurchased, together with the aggregate par value of the shares already held by us and our subsidiaries, must not exceed 10% of our share capital; and
the shares repurchased must be fully paid and must be free of ancillary contributions (prestaciones accesorias).
Voting rights attached to treasury shares will be suspended and economic rights (e.g., the right to receive dividends and other distributions and liquidation rights), except the right to receive bonus shares, will accrue proportionately to all of our shareholders. Treasury shares are counted for the provisionpurpose of audit services.establishing the quorum for shareholders’ meetings and majority voting requirements to pass resolutions at shareholders’ meetings.
Not applicable.
Thebuyback program must be to reduce the share capital of an issuer (in value or in number of shares) or to meet obligations arising from either of the following:
debt financial instruments exchangeable into equity instruments; or
employee share option programs or other allocations of shares to employees of the issuer or an associated company.
In addition, on December 19, 2007, the CNMV issued Circular 3/2007 setting out the requirements to be met by liquidity contracts entered into by issuers with financial institutions for the management of its treasury shares to constitute an accepted market practice and, therefore, be able to rely on a safe harbor for the purposes of market abuse regulations.
If an acquisition or series of acquisitions of shares of Telefónica reaches or exceeds or causes Telefónica’s and its affiliates’ holdings to reach or exceed 1% of Telefónica’s voting shares, Telefónica must notify its final holding of treasury stock to the CNMV. If such threshold is reached as a result of a series of acquisitions, such reporting obligation will only arise after the closing of the acquisition which, taken together with all acquisitions made since the last of any such notifications, causes the Telefónica’s and its affiliates holdings to exceed, 1% of Telefónica’s voting shares. Sales and other dispositions of Telefónica’s treasury stock will not be deducted in the calculation of such threshold. This requirement also applies if the stock is acquired by a majority-owned subsidiary of Telefónica.
Moreover, pursuant to Spanish corporate law, the audited financial statements of a company must include a reference regarding any treasury shares.
At December 31, 2017, we held 65,687,859 shares of treasury stock, atrepresenting 1.26514% of our capital stock. At December 31, 2014, amounted to 128,227,971 (29,411,832 at December 31, 2013). These2016, we held 141,229,134 shares of treasury shares are directly owned by Telefónica, S.A.
| Year ended December 31, 2014 | | | | | |
| Period of Fiscal Year | Total Number of Shares Purchased | | Average Price Paid per Share (euro) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) |
| January 1 to January 31 | 10,914,199 | | 11.88 | | 0 |
| February 1 to February 28 | 14,402,765 | | 11.23 | | 0 |
| March 1 to March 31 | 15,056,983 | | 11.15 | | 0 |
| April 1 to April 30 | 5,304,169 | | 11.66 | | 125,080 |
| May 1 to May 31 | 6,097,563 | | 12.01 | | 0 |
| June 1 to June 30 | 3,150,000 | | 12.33 | | 0 |
| July 1 to July 31 | 7,250,000 | | 12.25 | | 4,097 |
| August 1 to August 31 | 9,147,736 | | 11.86 | | 0 |
| September 1 to September 30 | 6,800,000 | | 11.61 | | 0 |
| October 1 to October 31 | 5,950,000 | | 11.38 | | 0 |
| November 1 to November 30 | 2,800,000 | | 11.97 | | 0 |
| December 1 to December 31 | 13,850,000 | | 11.93 | | 0 |
| Total | 100,723,415 | | 11.67 | | 129,177 |
| (1) | Under employee share plans a maximum of 129,177 shares could be assigned to employees participating in voluntary plans. See Note 19 to our Consolidated Financial Statements. |
For a more detailed descriptionstock, representing 2.80339% of our plans orcapital stock. As a part of our shareholders’ remuneration policy, we have implemented various share buyback programs since 2003. For further description about our shareholders’ return, see “Item 8. Financial Information—Dividend Information and Shareholders’ Return”Share Buyback Programs.”
At our annual general shareholders´ meeting held on May 30, 2014, our shareholders extended their prior authorization to the Board of Directors to acquire our shares for an additional five years from the date of such meeting. The authorization also applies to companies under our control. Pursuant to the authorization, the aggregate nominal value of our shares held by us or any of our subsidiaries cannot exceed the limit established by applicable laws (which is, as of the date of this Annual Report, 10% of our outstanding capital).
Change of Control Provisions
Certain antitrust regulations may delay, defer or prevent a change of control of Telefónica or any of its subsidiaries in the event of a merger, acquisition or corporate restructuring. In Spain, the application of both Spanish and European antitrust regulations requires that prior notice of domestic or cross-border merger transactions be given in order to obtain a “non-opposition” ruling from antitrust authorities.
Tender Offers
Tender offers are governed in Spain by the Spanish Securities Markets Act (as amended by Law 6/2007 of April 12) and Royal Decree 1066/2007, of July 27, which have implemented Directive 2004/25/EC of the European Parliament and of the European Council of April 21. Tender offers in Spain may qualify as either mandatory or voluntary offers.
Mandatory public tender offers must be launched for all the shares of the target company or other securities that might directly or indirectly give the right to subscription thereto or acquisition thereof (including convertible and exchangeable bonds) at an equitable price and not subject to any conditions when any person acquires control of a Spanish company listed on the Spanish Stock Exchanges, whether such control is obtained:
by means of the acquisition of shares or other securities that directly or indirectly give voting rights in such company;
through agreements with shareholders or other holders of said securities; or
as a result of other situations of equivalent effect as provided in the regulations (i.e., indirect control acquired through mergers, share capital decreases, target’s treasury stock variations or securities exchange or conversion, etc.).
A person is deemed to have obtained the control of a target company, individually or jointly with concerted parties, whenever:
it acquires, directly or indirectly, a percentage of voting rights equal to or greater than 30%; or
it has acquired a percentage of less than 30% of the voting rights and appoints, in the 24 months following the date of acquisition of said percentage, a number of directors that, together with those already appointed, if any, represent more than one-half of the members of the target company’s board of directors. Regulations also set forth certain situations where directors are deemed to have been appointed by the bidder or persons acting in concert therewith unless evidence to the contrary is provided.
Notwithstanding the above, Spanish regulations establish certain exceptional situations where control is obtained but no mandatory tender offer is required, including, among others:
subject to the CNMV’s approval,
| |
| – | acquisitions or other transactions resulting from the conversion or capitalization of credits into shares of listed companies, the financial feasibility of which is subject to serious and imminent danger, even if the company is not undergoing bankruptcy proceedings, provided that such transactions are intended to ensure the company’s financial recovery in the long term; or |
| |
| – | in the event of a merger, provided that those acquiring control did not vote in favor of the merger at the relevant general shareholders’ meeting of the offeree company and provided also that it can be shown that the primary purpose of the transaction is not the takeover but an industrial or corporate purpose; and |
when control has been obtained after a voluntary bid for all of the securities, if either the bid has been made at an equitable price or has been accepted by holders of securities representing at least 50% of the voting rights to which the bid was directed.
For the purposes of calculating the percentages of voting rights acquired, the regulations establish the following rules:
percentages of voting rights corresponding to (i) companies belonging to the same group of the bidder; (ii) members of the board of directors of the bidder or of companies of its group; (iii) persons acting for the account of or in concert with the bidder (a concert party shall be deemed to exist when two or more persons collaborate
under an agreement, be it express or implied, oral or written, in order to obtain control of the offeree company); (iv) voting rights exercised freely and over an extended period by the bidder under proxy granted by the actual holders or owners of such rights in the absence of specific instructions with respect thereto; and (v) shares held by a nominee, such nominee being understood as a third party whom the bidder totally or partially covers against the risks inherent in acquisitions or transfers of the shares or the possession thereof, will be deemed to be held by the bidder (including the voting rights attaching to shares that constitute the underlying asset or the subject matter of financial contracts or swaps when such contracts or swaps cover, in whole or in part, against the risks inherent in ownership of the securities and have, as a result, an effect similar to that of holding shares through a nominee);
both the voting rights arising from the ownership of shares and those enjoyed under a usufruct or pledge or upon any other title of a contractual nature will be counted towards establishing the number of voting rights held;
the percentage of voting rights shall be calculated based on the entire number of shares carrying voting rights, even if the exercise of such rights has been suspended; voting rights attached to treasury shares shall be excluded; and non-voting shares shall be taken into consideration only when they carry voting rights pursuant to applicable law; and
acquisitions of securities or other financial instruments giving the right to the subscription, conversion, exchange or acquisition of shares which carry voting rights will not result in the obligation to launch a tender offer either until such subscription, conversion, exchange or acquisition occurs.
Notwithstanding the foregoing, upon the terms established in the regulations, the CNMV will conditionally dispense with the obligation to launch a mandatory bid when another person or entity, individually or jointly in concert, directly or indirectly holds an equal or greater voting percentage than the potential bidder in the target company.
The price of the mandatory tender offer is deemed equitable when it is at least equal to the highest price paid or agreed by the bidder or by any person acting in concert therewith for the same securities during the 12 months prior to the announcement of the tender offer. When the mandatory tender offer must be made without the bidder having previously acquired the shares over the above-mentioned 12-month period, the equitable price shall not be less than the price calculated in accordance with other rules set forth in the regulations. In any case, the CNMV may change the price so calculated in certain circumstances (extraordinary events affecting the price, evidence of market manipulation, etc.).
Mandatory offers must be launched within one month from the acquisition of the control of the target company.
Voluntary tender offers may be launched when a mandatory offer is not required. Voluntary offers are subject to the same rules established for mandatory offers except for the following:
they may be subject to certain conditions (such as amendments to the bylaws or adoption of certain resolutions by the target company, acceptance of the offer by a minimum number of securities, approval of the offer by the shareholders’ meeting of the bidder and any other deemed by the CNMV to be in accordance with law), provided that such conditions can be met before the end of the acceptance period of the offer; and
they may be launched at any price, regardless of whether it is lower than the above-mentioned “equitable price”. However, if they are not launched at an equitable price and if the tender offer shares representing at least 50% of the voting rights are tendered in the offer (excluding voting rights already held by the bidder and those belonging to shareholders who entered into an agreement with the bidder regarding the tender offer), the bidder may become obliged to launch a mandatory tender offer.
In any case, by virtue of an amendment to the Spanish Securities Market Act operated by Law 1/2012, of June 22, the price in a voluntary tender offer must be the higher of (i) the equitable price and (ii) the price resulting from an independent valuation report, and must at least consist of cash as an alternative if certain circumstances have occurred during the two years prior to the announcement of the offer (basically, the trading price for the shares being affected by price manipulation practices, market or share prices being affected by natural disasters, force majeure, or other exceptional events, or the target company being subject to expropriation or confiscation resulting in a significant impairment of the company’s real value).
Spanish regulations on tender offers set forth further provisions, including:
subject to shareholder approval within 18 months from the date of announcement of the tender offer, the board of directors of a target company will be exempt from the rule prohibiting frustrating action against a foreign bidder whose board of directors is not subject to an equivalent passivity rule;
defensive measures included in a listed company’s bylaws and transfer and voting restrictions included in agreements among a listed company’s shareholders will remain in place whenever the company is the target of a tender offer, unless the shareholders resolve otherwise (in which case any shareholders whose rights are diluted or otherwise adversely affected will be entitled to compensation at the target company’s expense); and
squeeze-out and sell-out rights will apply provided that following a tender offer for all the target’s share capital, the bidder holds securities representing at least 90% of the target company’s voting capital and the tender offer has been accepted by the holders of securities representing at least 90% of the voting rights other than those held by or attributable to the bidder previously to the offer.
Payment of Taxes
Holders of ordinary shares will be responsible for any taxes or other governmental charges payable on their ordinary shares, including any taxes payable on transfer. The paying agent or the transfer agent, as the case may be, may, and upon instruction from Telefónica, will:
refuse to effect any registration of transfer of such ordinary shares or any split-up or combination thereof until such payment is made; or
withhold or deduct from any distributions on such ordinary shares or sell for the account of the holder thereof any part or all of such ordinary shares (after attempting by reasonable means to notify such holder prior to such sale), and apply, after deduction for its reasonable expenses incurred in connection therewith, the net proceeds of any such sale to payment of such tax or other governmental charge. The holder of such ordinary shares will remain liable for any deficiency.
Dividends
Shareholders vote on final dividend distributions at the shareholders’ meeting. Distributable profits are equal to:
net profits for the year; plus
profits carried forward from previous years; plus
distributable reserves; minus
losses carried forward from previous years; minus
amounts allocated to reserves as required by law or by our bylaws.
The amount of distributable profits is based on our unconsolidated financial statements prepared in accordance with Spanish GAAP, which differ from the Consolidated Financial Statements prepared in accordance with IFRS included elsewhere in this Annual Report.
The Board of Directors can approve interim dividend payments without a prior shareholder vote on the issue. However, under those circumstances, the dividend is limited to distributable net profits of the current year and is subject to certain legal requirements.
Unclaimed dividends revert to us five years from their date of payment.
Registration and transfers
Our shares are in registered book-entry form. Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures carried out by the Spanish clearing institution. Transfers executed outside of stock exchange systems, that is, over the counter, are implemented pursuant to the general legal regime for book-entry transfer, including registration by the Spanish clearing institution.
There are no restrictions with respect to the transfer of our shares.
Liquidation rights
Under Spanish law, upon our liquidation, the shareholders would be entitled to receive, on a pro rata basis, any assets remaining after the payment of our debts and taxes and liquidation expenses.
C. Material Contracts
Agreement related to the Sale of Customer Relationship Management (“CRM”) Business, Atento
As a result of the sale agreement of Atento by Telefónica, announced on October 12, 2012, and ratified on December 12, 2012, both companies signed a Master Service Agreement which regulates Atento’s relationship with the Telefónica Group as a service provider for a period of nine years and which was amended on May 16, 2014, and on November 8, 2016. This period was extended only for Spain and Brazil in November 2016, for two additional years until 2023.
By virtue of this agreement, Atento became Telefónica’s preferred Contact Center and Customer Relationship Management (“CRM”) service provider, stipulating annual commitments in terms of turnover which is updated based on inflation and deflation that vary from country to country, pursuant to the volume of services Atento has been providing to the entire Group. Effective January 1, 2017, the minimum volume commitments that Telefónica must comply with have significantly decreased for Brazil.
Failure to meet the annual turnover commitments generally results in the obligation to the counterparty, to pay additional amounts, which would be calculated based on the difference between the actual amount of turnover and the predetermined commitment, applying a percentage based on the Contact Center’s business margin to the final calculation.
The Master Agreement sets forth a reciprocal arrangement, whereby Atento assumes similar commitments to subscribe its telecommunications services to Telefónica.
Agreement for the sale of a minority stake in Telxius Telecom, S.A.U. (“Telxius”)
On February 20, 2017 Telefónica reached an agreement for the sale of up to 40% of the total share capital of Telxius to Taurus Bidco S.à.r.l. (hereinafter, ”KKR”) an entity managed by Kohlberg Kravis Roberts & Co. L.P., for a total amount of 1,275 million euros (12.75 euros per share).
The aforementioned agreement included (i) a purchase agreement for the sale of 62 million shares (representing 24.8% of the share capital) of Telxius for a price of 790.5 million euros; as well as (ii) options over 38 million shares (representing 15.2% of the share capital) for a price of at least 484.5 million euros. These options corresponded to a call option exercisable by KKR and to a put option exercisable by Telefónica upon maturity of the call option. The closing was subject to obtaining the corresponding regulatory approvals.
On October 24, 2017, after obtaining the relevant regulatory approvals, Telefónica transferred to KKR 62 million shares of Telxius (representing 24.8% of its share capital) to KKR in exchange for 790.5 million euros (12.75 euros per share). Following the execution of the sale, a shareholders' agreement among Telefónica, KKR and Telxius became effective on the same date, which regulates the relationships between Telefónica and KKR as shareholders of Telxius.
On November 13, 2017, KKR exercised the call option over 38 million shares (representing 15.2% of Telxius’ share capital) foreseen in the agreement, and on December 7, 2017, Telefónica, transferred to KKR such 38 million shares of Telxius (representing 15.2% of its share capital) in exchange for 484.5 million euros (12.75 euros per share).
Pursuant to these transactions, KKR acquired 40% of the share capital of Telxius in exchange for an aggregate amount of 1,275 million euros (12.75 euros per share) and Telefónica retained the control over Telxius.
Swap Agreement between Telefónica and Koninklijke KPN NV (KPN)
On March 13, 2017 Telefónica entered into a swap agreement with KPN to deliver 72.0 million of its treasury shares (representing 1.43% of its share capital), in exchange for 178.5 million shares of its subsidiary Telefónica Deutschland Holding AG, representing 6.0% of the share capital of the latter. The swap was executed on March 14, 2017. Under the agreement, KPN committed, among other obligations, to comply with certain restrictions which, in case of sale of the aforementioned Telefónica shares, would ensure an orderly sale of such shares.
As a result of this agreement, Telefónica increased from 63.2% to 69.2% its shareholding in Telefonica Deutschland Holding AG at that time.
D. Exchange Controls
Exchange Controls and Other Limitations Affecting Security Holders
Ownership limitations
There are no limitations with respect to the ownership of our assets or share capital except those derived from the application of the reciprocity principle as described above.
Trading by us in our own shares or shares of companies under our control
For information on the requirements applicable to the trading by us in our own shares or shares of companies under our control, see “—Memorandum and Articles of Association- Description of Our Capital Stock—Acquisition of own shares” above.
Other restrictions on acquisitions of shares
For information on reporting requirements and other restrictions “applicable to the acquisition of our shares see “—Memorandum and Articles of Association—Description of Our Capital Stock-Reporting requirements” and “—Trading by us in our own shares or shares of companies under our control” above.
Dividend and Liquidation Rights
According to Spanish law and our bylaws, dividends may only be paid out of profits or distributable reserves if the value of our net worth is not, and as a result of such distribution would not be, less than our capital stock. Pursuant to Spanish law, we are required to reserve 10% of our fiscal year net income until the amount in our legal reserve reaches 20% of our capital. Our legal reserve is currently at 20%.
Dividends payable by us to non-residents of Spain ordinarily are subject to a Spanish withholding tax. For the tax implications of dividends to U.S. Holders (as defined below), see “—Taxation.”
Upon our liquidation, our shareholders would be entitled to receive pro rata any assets remaining after the payment of our debts and taxes and expenses of such liquidation. Any change in the rights of shareholders to receive dividends and payment upon liquidation would require an amendment to our bylaws by resolution adopted by a general meeting of shareholders. If there were more than one class of shares, such amendment would also require the approval of each class of shareholders affected by the amendment.
Preemptive Rights and Increases of Share Capital
Pursuant to the Spanish Corporations Law, shareholders have preemptive rights to subscribe for any new shares and for bonds convertible into shares. Such rights may not be available under special circumstances if waived by a resolution passed at a general meeting of shareholders in accordance with Article 308 of the Spanish Corporations Law, or the Board of Directors, if authorized (Article 506 of the Spanish Corporation Act). Further, such rights, in any event, will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger in which shares are issued as consideration. Such rights:
are transferable;
may be traded on the Automated Quotation System; and
may be of value to existing shareholders because new shares may be offered for subscription at prices lower than prevailing market prices.
Absent an exemption from registration, shares issuable upon exercise of rights must be registered under the Securities Act in order to be offered to holders of ADRs. If we decided not to register the shares, the rights would not be distributed to holders of ADRs. Pursuant to the Deposit Agreement, however, holders of ADRs are entitled to receive their proportionate share of the proceeds, if any, from sale by the Depositary of any rights accruing to holders of ADRs.
E. Taxation
The following is a general summary of the material Spanish and U.S. federal income tax consequences to U.S. Holders described below of the ownership and disposition of shares or ADSs. This summary is based upon Spanish and U.S. tax laws (including the U.S. Internal Revenue Code of 1986, as amended (the “Code”), final, temporary and proposed U.S. Treasury regulations, rulings, judicial decisions and administrative pronouncements), and the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed February 22, 1990 (the “Treaty”), all as of the date hereof and all of which are subject to change or changes in interpretation, possibly with retroactive effect. In addition, the summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related agreements will be performed in accordance with its terms.
As used herein, the term “U.S. Holder” means a beneficial owner of one or more shares or ADSs:
that is, for U.S. federal income tax purposes, one of the following:
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| (a) | a citizen or individual resident of the United States; |
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| (b) | a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States or any state therein or the District of Columbia; or |
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| (c) | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source; |
who is entitled to the benefits of the Treaty;
who holds the shares or ADSs as capital assets for U.S. federal income tax purposes;
who owns, directly, indirectly or by attribution, less than 10% of the share capital or voting stock of Telefónica; and
whose holding is not attributable to a fixed base or permanent establishment in Spain.
This summary does not address all of the tax considerations, including the potential application of the provisions of the Code known as the Medicare contribution tax, that may apply to holders that are subject to special tax rules, such as certain U.S. expatriates, insurance companies, tax-exempt organizations, certain financial institutions, persons subject to the alternative minimum tax, dealers and certain traders in securities, persons holding shares or ADSs as part of a straddle, hedging, conversion or integrated transaction, persons who acquired their shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation, persons owning shares or ADSs in connection with a trade or business outside of the U.S., partnerships or other entities classified as partnerships for U.S. federal income tax purposes or persons whose functional currency is not the U.S. dollar. Such holders may be subject to U.S. federal income tax consequences different from those set forth below.
If a partnership holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds shares or ADSs is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the shares or ADSs.
For purposes of the Treaty and U.S. federal income tax, U.S. Holders of ADSs will generally be treated as owners of the underlying shares represented by such ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom American depositary receipts are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary receipts. Such actions would also be inconsistent with the claiming of the reduced rates of tax applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the availability of foreign tax credits to U.S. Holders of ADSs and the reduced tax rates for dividends received by certain non-corporate U.S. Holders of ADSs, each as described below, could be affected by actions taken by such parties or intermediaries.
This discussion assumes that Telefónica is not, and will not become, a passive foreign investment company (“PFIC”), as discussed below under “—U.S. Federal Income Tax Considerations—Passive foreign investment company rules.”
U.S. Holders of shares or ADSs should consult their own tax advisors concerning the specific Spanish and U.S. federal, state and local tax consequences of the ownership and disposition of shares or ADSs in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. In particular, U.S. Holders are urged to consult their own tax advisors concerning their eligibility for benefits under the Treaty.
Spanish Tax Considerations
Taxation of dividends
Under Spanish law, dividends paid by Telefónica to U.S. Holders of ordinary shares or ADSs are subject to Spanish Non-Resident Income Tax, withheld at source, at a rate of 19%. For these purposes, upon distribution of the dividend, Telefónica or its paying agent will withhold an amount equal to the tax due according to the rules set forth above.
However, under the Treaty, if you are a U.S. Holder, you are entitled to a reduced withholding tax rate of 15%.
To benefit from the Treaty-reduced rate of 15%, you must provide to Telefónica through its paying agent in Spain, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S. Internal Revenue Service (“IRS”) stating that, to the best knowledge of the IRS, such U.S. Holders are residents of the United States within the meaning of the Treaty and entitled to its benefits.
If this certificate is not provided within this period, you may afterwards apply for a refund of the amount withheld in excess of the rate provided for in the Treaty by following the procedures described in the next section.
Spanish Refund Procedure
According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Holder, you are required to file:
–the corresponding Spanish tax form;
–the certificate referred to in the preceding section; and
–evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you.
The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities.
U.S. Holders are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.
Taxation of capital gains
For Spanish tax purposes, income obtained from the sale of ADSs or ordinary shares of Telefónica will be treated as capital gains. Spanish non-resident income tax is levied at a rate of 19% on capital gains obtained by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation.
Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is resident in a country that has entered into a treaty for the avoidance of double taxation with an “exchange of information” clause (the Treaty contains such a clause) will be exempt from taxation in Spain. If you are a U.S. Holder, under the Treaty capital gains arising from the disposition of ordinary shares or ADSs will not be taxed in Spain. You will be required to establish that you are entitled to the exemption from tax under the Treaty by providing to the relevant Spanish tax authorities a certificate of residence issued by the IRS stating that to the best knowledge of the IRS, you are a U.S. resident within the meaning of the Treaty.
Spanish wealth tax
Individual U.S. Holders who hold shares or ADSs located in Spain are subject to the Spanish Wealth Tax (Impuesto sobre el Patrimonio) (Spanish Law 19/1991), which imposes tax on property located in Spain on the last day of any year. As of January 1, 2017 a 100% tax allowance has been approved by Royal Legislative Decree 13/2011 dated September, 16, 2011 to any resident or non resident taxpayer.
Inheritance and gift tax
Transfers of shares or ADSs on death and by gift to individuals are subject to Spanish inheritance and gift taxes (Impuesto sobre Sucesiones y Donaciones), respectively, if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of death, regardless of the residence of the heir or beneficiary. In this regard, the Spanish tax authorities may determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The state applicable tax rate, after applying relevant personal, family and wealth factors, generally ranges between 7.65% and 81.6% for individuals.
Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a rate of 19% on the fair market value of the shares as a capital gain. If the donee is a United States resident corporation, the exclusions available under the Treaty described in the section “—Taxation of Capital Gains” above will be applicable.
Expenses of Transfer
Transfers of shares or ADSs will be exempt from any transfer tax (Impuesto sobre Transmisiones Patrimoniales) or value added tax. Additionally, no stamp tax will be levied on such transfers.
U.S. Federal Income Tax Considerations
Taxation of dividends
Distributions received by a U.S. Holder on shares or ADSs, including the amount of any Spanish taxes withheld therefrom, other than certain pro rata distributions of shares to all shareholders (including ADS holders), will constitute foreign-source dividend income to the extent paid out of Telefónica’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Because Telefónica does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of dividend income paid in euros that a U.S. Holder will be required to include in income will equal the U.S. dollar value of the distributed euros, calculated by reference to the exchange rate in effect on the date the payment is received by the Depositary (in the case of ADSs) or by the U.S. Holder (in the case of shares), regardless of whether the payment is converted into U.S. dollars on the date of receipt. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder will generally not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt. Gain or loss that a U.S. Holder realizes on a sale or other disposition of euros will be U.S.-source ordinary income or loss. Corporate U.S. Holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by Telefónica. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends received by certain non-corporate U.S. Holders will be taxable at rates applicable to long-term capital gains. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.
Spanish income taxes withheld from dividends on shares or ADSs at a rate not exceeding the rate provided in the Treaty will be creditable against a U.S. Holder’s U.S. federal income tax liability, subject to applicable restrictions and limitations that may vary depending upon the U.S. Holder’s circumstances and the discussion above regarding concerns expressed by the U.S. Treasury. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. See “Spanish Tax Considerations—Taxation of dividends” above for a discussion of how to obtain the applicable treaty rate. Instead of claiming a credit, a U.S. Holder may elect to deduct foreign taxes (including the Spanish taxes) in computing its taxable income, subject to generally applicable limitations. An election to deduct foreign taxes (instead of claiming foreign tax credits) applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States. The limitations on foreign taxes eligible for credit are calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex. Therefore, U.S. Holders should consult their own tax advisors regarding the availability of foreign tax credits in their particular circumstances.
Taxation upon sale or other disposition of shares or ADSs
A U.S. Holder will generally recognize U.S. source capital gain or loss on the sale or other disposition of shares or ADSs. Any such gain or loss will be long-term capital gain or loss if the U.S. Holder has held such shares or ADSs for more than one year. The amount of the U.S. Holder’s gain or loss will be equal to the difference between such U.S. Holder’s tax basis in the shares or ADSs sold or otherwise disposed of and the amount realized on the sale or other disposition, as determined in U.S. dollars.
As discussed under “Spanish Tax Considerations—Taxation of capital gains” above, gain realized by a U.S. Holder on the sale or other disposition of shares or ADSs will be exempt from Spanish tax on capital gains under the Treaty. If a U.S. Holder is eligible for the exemption from Spanish tax on capital gains but does not follow appropriate procedures for obtaining the exemption, such holder will not be entitled to credit the amount of Spanish tax on capital gains paid against its U.S. federal income tax liability. U.S. Holders should consult their own tax advisors regarding the potential Spanish tax consequences of a sale or other disposition of shares or ADSs and the procedures available for an exemption from such tax.
Passive foreign investment company rules
Telefónica believes that it was not a PFIC for U.S. federal income tax purposes for its 2017 taxable year. However, because PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25% owned equity investments) from time to time, there can be no assurance that Telefónica will not be considered a PFIC for any taxable year. If Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder owned a share or ADS, certain adverse tax consequences could apply to the U.S. Holder.
In general, if Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder owned a share or ADS, gain recognized by a U.S. Holder on a sale or other disposition of such share or ADS would be allocated ratably over the U.S. Holder’s holding period for the share or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before Telefónica 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, and an interest charge would be imposed on the resulting tax liability. The same treatment would apply to any distribution in respect of shares or ADSs to the extent it exceeds 125% of the average of the annual distributions on shares or ADSs received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the shares or ADSs.
In addition, if Telefónica were treated as a PFIC in a taxable year in which it pays a dividend or in the prior taxable year, the favorable dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If Telefónica were a PFIC for any taxable year during which a U.S. Holder owned our shares or ADSs, the U.S. Holder will generally be required to file IRS Form 8621 with its annual U.S. federal income tax return.
Information reporting and backup withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless the U.S. Holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. Holders who are individuals and certain specified entities may be required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held through a U.S. financial institution). U.S. Holders are urged to consult their tax advisors regarding the application, if any, of this legislation to their ownership of shares or ADSs.
F. Dividends and Paying Agents
Not Applicable.
G. Statements by Experts
Not Applicable.
H. Documents on Display
Where You Can Find More Information
We file Annual Reports on Form 20-F and furnish periodic reports on Form 6-K to the SEC. You may read and copy any of these reports at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services. Some of our SEC filings are also available at the website maintained by the SEC at “http://www.sec.gov.”
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF.” You may inspect any periodic reports and other information filed with or furnished to the SEC by us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
As a foreign private issuer, we are exempt from the rules under the Exchange Act which prescribe the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act.
We are subject to the informational requirements of the Spanish securities commission and the Spanish Stock Exchanges, and we file reports and other information relating to our business, financial condition and other matters with the Spanish securities commission and the Spanish Stock Exchanges. You may read such reports, statements and other information, including the annual and biannual financial statements, at the public reference facilities maintained in Madrid and Barcelona. Some of our Spanish securities commission filings are also available at the website maintained by the CNMV at http://www.cnmv.es.
We have appointed Citibank, N.A. to act as Depositary for the Telefónica ADSs. Citibank will, as provided in the Deposit Agreement, arrange for the mailing of summaries in English of such reports and communications to all record holders of the ADSs of Telefónica. Any record holder of Telefónica ADSs may read such reports and communications or summaries thereof at Citibank’s office located at 388 Greenwich Street, 14th Floor, New York, New York 10013.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various financial market risks as a result of: (i) our ordinary business activity, (ii) debt incurred to finance our business, (iii) our investments in companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting Group companies are as follows:
Exchange rate risk: arises primarily from: (i) Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom), (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt ,and (iii) for those trade receivables or payables in foreign currency related to the company with the transaction registered.
Interest rate risk: arises primarily in connection with changes in interest rates affecting: (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates.
Share price risk: arises primarily from changes in the value of the equity investments (that may be bought, sold or otherwise involved in transactions), from changes in the value of derivatives associated with such investments, from changes in the value of treasury shares and from equity derivatives.
Liquidity risk: the Telefónica Group is also exposed to liquidity risk if a mismatch arises between its financing needs (including operating and financial expense, investment, debt redemptions and dividend commitments)
and its sources of finance (including revenues, divestments, credit lines from financial institutions and capital market transactions). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.
Country risk: refers to the possible decline in the value of assets, cash flows generated or cash flows returned to the parent company as a result of political, economic or social instability in the countries where the Telefónica Group operates, especially in Latin America.
Credit risk: appears when a counterpart fails to meet or delays its payment obligations in accordance with the agreed terms, driving an impairment in an asset due to: (i) solvency issues, or (ii) no intention to pay.
We seek to actively manage these risks through the use of derivatives (primarily on exchange rates, interest rates and share prices) and by incurring debt in local currencies, where appropriate, with a view to stabilizing cash flows, our income statement and, to a lesser extent, part of the value of our investments. In this way, we attempt to protect our solvency, facilitate financial planning and take advantage of investment opportunities.
We manage our exchange rate risk and interest rate risk in terms of net financial debt and net financial debt plus commitments as calculated by us. We believe that these parameters are more appropriate to understanding our debt position. Net financial debt and net financial debt plus commitments take into account the impact of our cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net financial debt nor net financial debt plus commitments as calculated by us should be considered as a substitute for gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of our leverage. For a more detailed description on reconciliation of net debt and net financial debt to gross financial debt, see “Item 5. Operating and Financial Review and Prospects—Presentation of Financial Information—Non-GAAP financial information—Net financial debt and net financial debt plus commitments.”
For a more detailed description on quantitative and qualitative disclosures about market risks see Note 1916 to our Consolidated Financial Statements.
A. American Depositary Shares
The Depositary of our ADR program is Citibank, N.A., and the address of its principal executive office is 388 Greenwich Street, 14th Floor, New York, New York 10013.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF.” Each ADS represents the right to receive one ordinary share of capital stock of 1.00 euros nominal value each, of Telefónica, S.A. The Depositary issues ADSs in Registrant’s Certifying Accountantthe form of certificated ADSs (American Depositary Receipts, or ADRs) or uncertificated ADSs pursuant to the Deposit Agreement.
DuringUnder the years ended December 31, 2013 and 2014 and throughterms of the Deposit Agreement, as of the date of this Annual Report, an ADS holder may have to pay to the principal independent accountant engagedDepositary the services fees specified in the table below:
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| Category | Depositary Actions | Associated Fee / Paid By Whom |
| (a) Depositing or substituting the underlying shares | Issuance of ADSs upon the deposit of shares | Up to 5.00 dollars for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)(1) |
| (b) Receiving or distributing dividends | Distribution of cash dividends or other cash distributions; distribution of share dividends or other free share distributions; distribution of securities other than ADSs or rights to purchase additional ADSs | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held (in the case of cash distributions, deducted from the relevant distribution; in the case of all other distributions, billed to the relevant holder)(2) |
| (c) Selling or exercising rights | Distribution or sale of securities | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held (billed to the relevant holder) |
| (d) Withdrawing an underlying security | Acceptance of ADSs surrendered for withdrawal of deposited securities | Up to 5.00 dollars for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)(1) |
| (e) Transferring, splitting or grouping receipts | Transfers | Up to 1.50 dollars per ADS so presented (charged to person presenting certificate for transfer) |
| (f) General depositary services, particularly those charged on an annual basis | Other services performed by the Depositary in administering the ADSs | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held on the applicable record date (billed to person holding ADSs on applicable record date established by the Depositary)(2) |
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| (g) Expenses of the Depositary | Certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges in connection with: · compliance with foreign exchange control regulations or any law or regulation relating to foreign investment; · the Depositary or its custodian’s compliance with applicable law, rule or regulation; · stock transfer or other taxes and other governmental charges; · cable, telex, facsimile transmission/delivery; · expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency); · any other charge payable by Depositary or its agents. | Expenses payable at the sole discretion of the Depositary (billed or deducted from cash distributions to person holding ADSs on applicable record date established by the Depositary) |
(1) In the case of ADSs issued by the Depositary into DTC or presented to auditthe Depositary via DTC, the ADS issuance and cancellation fees will be payable to the Depositary by DTC Participant(s) receiving the ADSs from the Depositary or the DTC Participant(s) surrendering the ADSs to the Depositary for cancellation, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC Participant(s) to the account(s) of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participant(s) as in effect at the time.
(2) For ADSs held through DTC, the Depositary fees for distributions other than cash and the Depositary service fee are charged by the Depositary to the DTC Participants in accordance with the procedures and practices prescribed by DTC from time to time and the DTC Participants in turn charge the amount of such fees to the beneficial owners for whom they hold ADSs.
The Depositary has agreed to reimburse or pay on behalf of Telefónica, S.A., certain reasonable expenses related to our financial statements, Ernst & Young, S.L.,ADS program and incurred by us in connection with the program (such as NYSE listing fees, legal and accounting fees incurred in connection with the preparation of Form 20-F and ongoing SEC compliance and listing requirements, distribution of proxy materials, investor relations expenses, etc.). The Depositary has covered all such expenses incurred by us during 2017 for an amount of 5.5 million dollars. The amounts the Depositary reimbursed or paid are not resigned, indicated that it has declinedperforce related to stand for re-election after the completionfees collected by the depositary from ADS holders.
As part of its current audit or been dismissed. For eachservice to us, the Depositary has agreed to waive certain expenses for the standard costs associated with the administration of our ADS program for the yearsyear ended December 31, 20132017.
Part II
Item 13. Defaults, Dividend Arrearages and 2014, Ernst & Young, S.L. has not expressed reliance on another accountant or accounting firm in its report on our audited annual accounts for such periods.Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of ProceedsSignificant Differences in Corporate Governance Practices
Corporate governance guidelines
For a description of our corporate governance practices see “Item 16G. Corporate Governance.”
Description of Our Capital Stock
Description of share capital
At February 22, 2018, our issued share capital consisted of 5,192,131,686 ordinary registered shares with a nominal value of 1.00 euro each.
Our shareholders delegated to the Board of Directors the authority to issue up to 2,469,208,757 new shares (equal to half of Telefónica’s share capital on June 12, 2015, the date of the authorization). The Board of Directors is authorized to exclude preemptive rights, in whole or in part, pursuant to the applicable provisions of the Spanish Corporation Act. The Board’s authorization to issue new shares expires on June 12, 2020.
Meetings and voting rights
We hold our ordinary general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the Board of Directors. Extraordinary general shareholders’ meetings may be called, from time to time, at the discretion of our Board of Directors or upon the request of shareholders representing at least 3% of our paid-in share capital. The minimum percentage required to exercise this right was lowered from 5% to 3% by Law 31/2014.
We publish notices of all ordinary and extraordinary general shareholders’ meetings in the Official Gazette of the Commercial Registry or in one of the more widely circulated newspapers in Spain, on the website of the Spanish Securities and Exchange Commission (Comisión Nacional del Mercado de Valores (the “CNMV”)), and on our web site in due time pursuant to the Spanish Corporation Act, being on a general basis at least one month before the relevant meeting. Furthermore, the Board of Directors may publish notices in other media, if deemed appropriate to ensure the public and effective dissemination of the notice meeting.
Each share of Telefónica, S.A. entitles the holder to one vote. However, only registered holders of at least 300 shares are entitled to attend a general shareholders’ meeting. Holders of a lesser number of shares may grant a proxy in respect thereof to a shareholder having the right to attend, as well as group together with other shareholders in the same situation until reaching the required number of shares, following which a proxy must be granted by the shareholders so grouped together to one of such shareholders. The grouping must be carried out specifically for each General Shareholders’ Meeting and be recorded in writing.
However, under our bylaws, the maximum number of votes that a shareholder may cast is capped at 10% of our total outstanding voting capital. In determining the maximum number of votes that each shareholder may cast, only the shares held by such shareholder are counted, disregarding those that correspond to other shareholders who have appointed such shareholder as his or her proxy, in spite of applying the limit individually to each of the represented shareholders. This cap will also apply to the maximum number of votes that may be collectively or individually cast by two or more shareholder companies belonging to the same group of entities, as well as to the maximum number of votes that may be cast by an individual or corporate shareholder and the entity or entities that are shareholders themselves and which are directly or indirectly controlled by that individual or corporate shareholder. Moreover, in accordance with the Spanish Corporation Act, such cap would become ineffective where the bidder reaches, as a consequence of a tender offer, a percentage equal to or greater than 70% of the share capital carrying voting rights, unless the bidder (or those acting in concert with the bidder) is not subject to equivalent neutralization measures or has not adopted them.
In addition, according to Article 34 of Spanish Royal Decree-Law 6/2000 of June 23 on urgent measures to improve competition in the goods and services markets, individuals and legal entities directly and indirectly holding more than 3% of the total share capital or voting rights of two or more principal operator companies in Spain in, among other markets, the fixed-line and mobile-line telephony markets, may not exercise their voting rights in excess of 3% of the total in more than one company, except with the prior authorization of the Spanish National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia (the “CNMC”)). Principal operators are defined as one of the five operators with the largest market share in the corresponding market (“Principal Operators”). In addition, no individual or legal entity is allowed to appoint, directly or indirectly, members of the management body of more than one Principal Operator in, among others, the fixed-line or mobile-line telephony markets, except with the prior authorization of the CNMC. Additionally, individuals or legal entities considered Principal Operators are not allowed to exercise more than 3% of the voting rights of another Principal Operator nor to appoint, directly or indirectly, members of the management body of any Principal Operator, except, in both cases, with the prior authorization of the CNMC. Telefónica is considered a Principal Operator for the purposes of Article 34 of Royal Decree-Law 6/2000 of June 23 in the Spanish fixed-line and mobile-line telephony markets.
Any share may be voted by proxy. The proxies may be granted in writing or electronically and are valid only for a single meeting, unless the proxy-holder is the granting shareholder’s spouse, ascendant or descendant, or holds a general power of attorney granted in a public instrument with powers to manage all of the assets held by the shareholder granting the proxy in Spain. Under the Deposit Agreement relating to our ADSs, the Depositary accepts voting instructions from holders of ADSs. The Depositary executes such instructions to the extent permitted by law and by the terms governing the shares and ADSs. The Depositary or its nominee, as the case may be, will be entitled to vote by proxy the shares underlying the relevant ADSs.
Only holders of record five days prior to the day on which a general meeting of shareholders is scheduled to be held may attend and vote at the meeting.
According to the Spanish Corporation Act, as amended by Law 31/2014, the general shareholders’ meeting will be quorate on first call if the shareholders present, in person or by proxy, hold at least 25% of the subscribed share capital carrying voting rights. On second call, the meeting will be quorate regardless of the capital in attendance.
However, if the agenda of the meeting includes resolutions on the amendment of the bylaws, including an increase or reduction of share capital, the transformation, merger, split-off, the en bloc assignment of assets and liabilities, the migration of the registered office abroad, the issuance of debentures or the exclusion or limitation of preemptive rights, the required quorum on first call must be met by the attendance of shareholders representing at least 50% of the subscribed share capital carrying voting rights (each a “Special Resolution”). On second call, the attendance of 25% of the subscribed share capital carrying voting rights will suffice.
As a general rule, resolutions at the general shareholder’s meeting will be passed by a simple majority of votes cast at such meeting (i.e., provided that the votes "for" outnumber the votes "against" the relevant resolution).
In contrast, in order to approve any Special Resolution, if the capital present or represented at the general shareholders’ meeting exceeds 50% of the subscribed share capital carrying voting rights, the favorable vote of the absolute majority (that is, if the votes in favor exceed 50% of the votes corresponding to capital present and represented at the shareholders’ meeting) will be required. If, on second call, shareholders representing 25% or more of the subscribed share capital carrying voting rights are present or represented but fail to reach the 50% threshold, the favorable vote of at least two-thirds of the share capital present or represented at the meeting will be required.
Preemptive Rights
Pursuant to the Spanish Corporation Act, shareholders have preemptive rights to subscribe for any new shares in capital increases with issuances of new shares with a charge to monetary contributions and in issuances of debentures convertible into shares. Such rights may be excluded (partially or totally) under special circumstances by virtue of a resolution passed at a general shareholders’ meeting in accordance with Articles 308, 504 and 506 of the Spanish Corporation Act, or by the Board of Directors, if previously authorized at a general shareholders’ meeting in accordance with Article 506 of the Spanish Corporation Act (for capital increases) and Articles 417 and 511 (for issuances of debentures convertible into shares). Such preemptive rights will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger or demerger of another entity into Telefónica or of all or part of the assets split from another company, in which shares are issued as consideration or, in general, when the increase is carried out as consideration in exchange for non-cash contributions. Such rights are transferable, may be traded on the Automated Quotation System and may be of value to existing shareholders because new shares may be offered for subscription at prices lower than prevailing market prices.
Form and Transfer
Ordinary shares are in book-entry form and are indivisible. Joint holders must nominate one person to exercise their rights as shareholders, though joint holders are jointly and severally liable for all obligations arising from their status as shareholders. Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. Unipersonal (“Iberclear”), which manages the clearance and settlement system of the Spanish Stock Exchanges, maintains the central registry of ordinary shares reflecting the number of ordinary shares held by each of its participant entities (entidades participantes) as well as the number of such shares held by registered legal owners. Each participant entity in turn maintains a register of the owners of such shares.
Transfers of Telefónica’s ordinary shares quoted on the Spanish Stock Exchanges must be made by book-entry registry or delivery of evidence of title to the buyer through, or with the participation of, a member of the Spanish Stock Exchanges that is an authorized broker or dealer. Transfers of Telefónica’s ordinary shares may also be subject to certain fees and expenses.
Reporting Requirements
According to Royal Decree 1362/2007 of October 19 on the disclosure of significant stakes in listed companies (“Royal Decree 1362/2007”), recently modified by Royal Decree 878/2015, of October 2, the acquisition or disposition of shares of Telefónica must be reported within four trading days of the acquisition or disposition to Telefónica and the CNMV, where:
in the case of an acquisition, the acquisition results in that person or group holding a number of voting rights in Telefónica that reaches or surpasses 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights; or
in the case of a disposal, the disposition reduces the number of voting rights held by a person or group below a threshold of 3% (or 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%) of Telefónica’s total number of voting rights.
Royal Decree 878/2015 established a new approach for calculating whether these thresholds are reached, surpassed or fell short which requires adding the voting rights corresponding to shares and financial instruments. Royal Decree 878/2015 also expands the definition of financial instruments which should be reported, including financial instruments having a similar economic effect as the shares of a company, whether the instruments are cash or physically settled, including convertible securities, options, forwards, futures, swaps, CFDs or any other type of instrument which grants the holder the right to acquire shares or a right to receive an equivalent cash settlement amount. Additionally, Royal Decree 878/2015 amends the calculation rules of the voting rights attributable to a financial instrument which, among other changes, shall now be calculated on a daily basis.
The reporting requirements referred to above apply not only to the acquisition or transfer of shares, but also when, without an acquisition or transfer of shares, the proportion of voting rights of an individual or legal entity reaches, exceeds or falls below the threshold that triggers the obligation to report as a consequence of a change in the total number of voting rights of Telefónica on the basis of the information reported to the CNMV and disclosed by it, in accordance with the Royal Decree.
Regardless of the actual ownership of the shares, any individual or legal entity with a right to acquire, transfer or exercise voting rights granted by the shares, and any individual or legal entity who owns, acquires or transfers, whether directly or indirectly, other securities or financial instruments which grant a right to acquire shares carrying voting rights (such as transferable securities, options, futures, swaps, forwards and other derivative contracts), will also have an obligation to notify the company and the CNMV of the holding of a significant stake in accordance with the above-mentioned regulations.
Stricter disclosure obligations apply if the person obligated to disclose has residency in a country considered a tax haven by the Spanish authorities, a zero-taxation country or territory or a country or territory that does not share information with the Spanish authorities, in which cases the initial threshold for disclosure is reduced to 1% (and successive multiples of 1%).
Our directors must report to us and the CNMV the percentage and number of voting rights in Telefónica held by them at the time of becoming or ceasing to be a member of the Board of Directors. Furthermore, all members of the Board must report any change in the percentage of voting rights they hold, as a result of any acquisition or disposition of our shares or voting rights, or financial instruments which carry a right to acquire or dispose of shares which have voting rights attached, including any stock-based compensation that they may receive pursuant to any of our compensation plans. Members of our senior management must also report any stock-based compensation that they may receive pursuant to any of our compensation plans or any subsequent amendment to such plans. Royal Decree 1362/2007 (as amended) refers to the definition given by Royal Decree 1333/2005 of November 11, which develops the Spanish Securities Market Act, regarding market abuse, which defines senior management (directivos) as those “high-level employees in positions of responsibility with regular access to insider information (información privilegiada) related, directly or indirectly, to the issuer and that, furthermore, are empowered to adopt management decisions affecting the future development and business perspectives of the issuer."
In addition, pursuant to Royal Decree 1333/2005 of November 11 (as amended), any member of our Board and our senior management, or any parties closely related to any of them, as such terms are defined therein, must report to the CNMV any transactions carried out with respect to our shares or derivatives or other financial instruments relating to our shares. The notification of the transaction must include particulars of, among others, the type of transaction, the date of the transaction and the market in which the transactions were carried out, the number of shares traded and the price paid.
These disclosure obligations are primarily regulated by Royal Decree 1362/2007 (as amended) and, since July 3, 2016, by the Regulation (EU) No 596/2014 of the European Parliament and of the Council of April 16, 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, both establish a detailed set of rules on this legal framework (including, inter alia, rules determining the persons subject to disclosure obligations, the different types of situations triggering disclosure and corresponding exceptions, specific attribution and aggregation rules, the deadlines to notify the transactions, triggering disclosure obligations and incorporation of notices submitted to the CNMV’s public registry).
Disclosure of Net Short Positions
In accordance with Regulation (EU) No. 236/2012 of the European Parliament and of the European Council of March 14, 2012 on short selling and certain aspects of credit default swaps (as further supplemented by several delegated regulations regulating technical aspects necessary for its effective enforceability and to ensure compliance with its provisions), net short positions on shares listed on the Spanish Stock Exchanges equal to, or in excess of, 0.2% of the relevant issuer’s share capital and any increases or reductions thereof by 0.1% are required to be disclosed to the CNMV by no later than the first trading day following the transaction. If the net short position reaches 0.5%, and also at every 0.1% above that, the CNMV will disclose the net short position to the public.
Notification is mandatory even if the same position has been already notified to the CNMV in compliance with reporting requirements previously in force in Spain.
The information to be disclosed is set out in Table 1 of Annex I of Delegated Regulation 826/2012, according to the format approved as Annex II of this Regulation. The information will be published, where appropriate, on a web page operated or supervised by the corresponding authority.
Moreover, pursuant to Regulation (EU) No. 236/2012, where the CNMV considers that (i) there are adverse events or developments that constitute a serious threat to financial stability or to market confidence (serious financial, monetary or budgetary problems, which may lead to financial instability, unusual volatility causing significant downward spirals in any financial instrument, etc.); and (ii) the measure is necessary and will not be disproportionately detrimental to the efficiency of financial markets in view of the advantages sought, it may, following consultation with the European Securities and Market Authority (“ESMA”), take any one or more of the following measures:
impose additional notification obligations by either (a) reducing the thresholds for the notification of net short positions in relation to one or several specific financial instruments; and/or (b) requesting the parties involved in the lending of a specific financial instrument to notify any change in the fees requested for such lending; and
restrict short selling activity by either prohibiting or imposing conditions on short selling.
In addition, according to Regulation (EU) No. 236/2012, where the price of a financial instrument has fallen significantly during a single day in relation to the closing price on the previous trading day (10% or more in the case of a liquid share), the CNMV may prohibit or restrict short selling of financial instruments for a period not exceeding the end of the trading day following the trading day on which the fall in price occurs.
Finally, Regulation (EU) No. 236/2012 also vests powers to ESMA in order to take measures similar to the ones described above in exceptional circumstances, when the purpose of these measures is to deal with a threat affecting several EU member states and the competent authorities of these member states have not taken adequate measures to address it.
Shareholder Agreements
Article 531 et seq. of the Spanish Corporation Act require parties to disclose those shareholders’ agreements in respect of Spanish listed companies that affect the exercise of voting rights at a general shareholders’ meeting or contain restrictions or conditions on the transferability of shares or bonds that are convertible or exchangeable into shares. If any shareholders enter into such agreements with respect to Telefónica’s shares, they must disclose the execution, amendment or extension of such agreements to Telefónica and the CNMV (together with the relevant clauses of said agreements) and file such agreements with the appropriate Commercial Registry. Failure to comply with these disclosure obligations renders any such shareholders’ agreement unenforceable and constitutes a violation of the Spanish Securities Market Act.
Acquisition of Own Shares
Pursuant to Spanish corporate law, we may only repurchase our own shares within certain limits and in compliance with the following requirements:
the repurchase must be authorized by the general shareholders’ meeting by a resolution establishing the maximum number of shares to be acquired, the minimum and maximum acquisition price and the duration of the authorization, which may not exceed five years from the date of the resolution; and
the repurchase, including any shares already held by us or a person acting on our behalf, must not bring our net worth below the aggregate amount of our share capital and legal reserves.
For these purposes, net worth means the amount resulting from the application of the criteria used to draw up the financial statements, subtracting the amount of profits directly imputed to that net worth, and adding the amount of share capital subscribed but not called and the share capital par and issue premiums recorded in our accounts as liabilities. In addition:
the aggregate par value of the shares directly or indirectly repurchased, together with the aggregate par value of the shares already held by us and our subsidiaries, must not exceed 10% of our share capital; and
the shares repurchased must be fully paid and must be free of ancillary contributions (prestaciones accesorias).
Voting rights attached to treasury shares will be suspended and economic rights (e.g., the right to receive dividends and other distributions and liquidation rights), except the right to receive bonus shares, will accrue proportionately to all of our shareholders. Treasury shares are counted for the purpose of establishing the quorum for shareholders’ meetings and majority voting requirements to pass resolutions at shareholders’ meetings.
Regulation (EU) No. 596/2014 of April 16, repealing, among others, Directive 2003/6/EC of the European Parliament and the European Council of January 28, on insider dealing and market manipulation establishes rules in order to ensure the integrity of European Community financial markets and to enhance investor confidence in those markets. This regulation maintains an exemption from the market manipulation rules regarding share buyback programs by companies listed on a stock exchange in an EU Member State. Commission Regulation (EC) No. 2273/2003, of December 22, implemented the aforementioned directive with regard to exemptions for buyback programs. Article 5 of this regulation states that in order to benefit from the exemption, a buyback program must comply with certain requirements established under such regulation and the sole purpose of the buyback program must be to reduce the share capital of an issuer (in value or in number of shares) or to meet obligations arising from either of the following:
debt financial instruments exchangeable into equity instruments; or
employee share option programs or other allocations of shares to employees of the issuer or an associated company.
In addition, on December 19, 2007, the CNMV issued Circular 3/2007 setting out the requirements to be met by liquidity contracts entered into by issuers with financial institutions for the management of its treasury shares to constitute an accepted market practice and, therefore, be able to rely on a safe harbor for the purposes of market abuse regulations.
If an acquisition or series of acquisitions of shares of Telefónica reaches or exceeds or causes Telefónica’s and its affiliates’ holdings to reach or exceed 1% of Telefónica’s voting shares, Telefónica must notify its final holding of treasury stock to the CNMV. If such threshold is reached as a result of a series of acquisitions, such reporting obligation will only arise after the closing of the acquisition which, taken together with all acquisitions made since the last of any such notifications, causes the Telefónica’s and its affiliates holdings to exceed, 1% of Telefónica’s voting shares. Sales and other dispositions of Telefónica’s treasury stock will not be deducted in the calculation of such threshold. This requirement also applies if the stock is acquired by a majority-owned subsidiary of Telefónica.
Moreover, pursuant to Spanish corporate law, the audited financial statements of a company must include a reference regarding any treasury shares.
At December 31, 2017, we held 65,687,859 shares of treasury stock, representing 1.26514% of our capital stock. At December 31, 2016, we held 141,229,134 shares of treasury stock, representing 2.80339% of our capital stock. As a part of our shareholders’ remuneration policy, we have implemented various share buyback programs since 2003. For further description about our shareholders’ return, see “Item 8. Financial Information—Dividend Information and Share Buyback Programs.”
At our annual general shareholders´ meeting held on May 30, 2014, our shareholders extended their prior authorization to the Board of Directors to acquire our shares for an additional five years from the date of such meeting. The authorization also applies to companies under our control. Pursuant to the authorization, the aggregate nominal value of our shares held by us or any of our subsidiaries cannot exceed the limit established by applicable laws (which is, as of the date of this Annual Report, 10% of our outstanding capital).
Change of Control Provisions
Certain antitrust regulations may delay, defer or prevent a change of control of Telefónica or any of its subsidiaries in the event of a merger, acquisition or corporate restructuring. In Spain, the application of both Spanish and European antitrust regulations requires that prior notice of domestic or cross-border merger transactions be given in order to obtain a “non-opposition” ruling from antitrust authorities.
Tender Offers
Tender offers are governed in Spain by the Spanish Securities Markets Act (as amended by Law 6/2007 of April 12) and Royal Decree 1066/2007, of July 27, which have implemented Directive 2004/25/EC of the European Parliament and of the European Council of April 21. Tender offers in Spain may qualify as either mandatory or voluntary offers.
Mandatory public tender offers must be launched for all the shares of the target company or other securities that might directly or indirectly give the right to subscription thereto or acquisition thereof (including convertible and exchangeable bonds) at an equitable price and not subject to any conditions when any person acquires control of a Spanish company listed on the Spanish Stock Exchanges, whether such control is obtained:
by means of the acquisition of shares or other securities that directly or indirectly give voting rights in such company;
through agreements with shareholders or other holders of said securities; or
as a result of other situations of equivalent effect as provided in the regulations (i.e., indirect control acquired through mergers, share capital decreases, target’s treasury stock variations or securities exchange or conversion, etc.).
A person is deemed to have obtained the control of a target company, individually or jointly with concerted parties, whenever:
it acquires, directly or indirectly, a percentage of voting rights equal to or greater than 30%; or
it has acquired a percentage of less than 30% of the voting rights and appoints, in the 24 months following the date of acquisition of said percentage, a number of directors that, together with those already appointed, if any, represent more than one-half of the members of the target company’s board of directors. Regulations also set forth certain situations where directors are deemed to have been appointed by the bidder or persons acting in concert therewith unless evidence to the contrary is provided.
Notwithstanding the above, Spanish regulations establish certain exceptional situations where control is obtained but no mandatory tender offer is required, including, among others:
subject to the CNMV’s approval,
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| – | acquisitions or other transactions resulting from the conversion or capitalization of credits into shares of listed companies, the financial feasibility of which is subject to serious and imminent danger, even if the company is not undergoing bankruptcy proceedings, provided that such transactions are intended to ensure the company’s financial recovery in the long term; or |
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| – | in the event of a merger, provided that those acquiring control did not vote in favor of the merger at the relevant general shareholders’ meeting of the offeree company and provided also that it can be shown that the primary purpose of the transaction is not the takeover but an industrial or corporate purpose; and |
when control has been obtained after a voluntary bid for all of the securities, if either the bid has been made at an equitable price or has been accepted by holders of securities representing at least 50% of the voting rights to which the bid was directed.
For the purposes of calculating the percentages of voting rights acquired, the regulations establish the following rules:
percentages of voting rights corresponding to (i) companies belonging to the same group of the bidder; (ii) members of the board of directors of the bidder or of companies of its group; (iii) persons acting for the account of or in concert with the bidder (a concert party shall be deemed to exist when two or more persons collaborate
under an agreement, be it express or implied, oral or written, in order to obtain control of the offeree company); (iv) voting rights exercised freely and over an extended period by the bidder under proxy granted by the actual holders or owners of such rights in the absence of specific instructions with respect thereto; and (v) shares held by a nominee, such nominee being understood as a third party whom the bidder totally or partially covers against the risks inherent in acquisitions or transfers of the shares or the possession thereof, will be deemed to be held by the bidder (including the voting rights attaching to shares that constitute the underlying asset or the subject matter of financial contracts or swaps when such contracts or swaps cover, in whole or in part, against the risks inherent in ownership of the securities and have, as a result, an effect similar to that of holding shares through a nominee);
both the voting rights arising from the ownership of shares and those enjoyed under a usufruct or pledge or upon any other title of a contractual nature will be counted towards establishing the number of voting rights held;
the percentage of voting rights shall be calculated based on the entire number of shares carrying voting rights, even if the exercise of such rights has been suspended; voting rights attached to treasury shares shall be excluded; and non-voting shares shall be taken into consideration only when they carry voting rights pursuant to applicable law; and
acquisitions of securities or other financial instruments giving the right to the subscription, conversion, exchange or acquisition of shares which carry voting rights will not result in the obligation to launch a tender offer either until such subscription, conversion, exchange or acquisition occurs.
Notwithstanding the foregoing, upon the terms established in the regulations, the CNMV will conditionally dispense with the obligation to launch a mandatory bid when another person or entity, individually or jointly in concert, directly or indirectly holds an equal or greater voting percentage than the potential bidder in the target company.
The price of the mandatory tender offer is deemed equitable when it is at least equal to the highest price paid or agreed by the bidder or by any person acting in concert therewith for the same securities during the 12 months prior to the announcement of the tender offer. When the mandatory tender offer must be made without the bidder having previously acquired the shares over the above-mentioned 12-month period, the equitable price shall not be less than the price calculated in accordance with other rules set forth in the regulations. In any case, the CNMV may change the price so calculated in certain circumstances (extraordinary events affecting the price, evidence of market manipulation, etc.).
Mandatory offers must be launched within one month from the acquisition of the control of the target company.
Voluntary tender offers may be launched when a mandatory offer is not required. Voluntary offers are subject to the same rules established for mandatory offers except for the following:
they may be subject to certain conditions (such as amendments to the bylaws or adoption of certain resolutions by the target company, acceptance of the offer by a minimum number of securities, approval of the offer by the shareholders’ meeting of the bidder and any other deemed by the CNMV to be in accordance with law), provided that such conditions can be met before the end of the acceptance period of the offer; and
they may be launched at any price, regardless of whether it is lower than the above-mentioned “equitable price”. However, if they are not launched at an equitable price and if the tender offer shares representing at least 50% of the voting rights are tendered in the offer (excluding voting rights already held by the bidder and those belonging to shareholders who entered into an agreement with the bidder regarding the tender offer), the bidder may become obliged to launch a mandatory tender offer.
In any case, by virtue of an amendment to the Spanish Securities Market Act operated by Law 1/2012, of June 22, the price in a voluntary tender offer must be the higher of (i) the equitable price and (ii) the price resulting from an independent valuation report, and must at least consist of cash as an alternative if certain circumstances have occurred during the two years prior to the announcement of the offer (basically, the trading price for the shares being affected by price manipulation practices, market or share prices being affected by natural disasters, force majeure, or other exceptional events, or the target company being subject to expropriation or confiscation resulting in a significant impairment of the company’s real value).
Spanish regulations on tender offers set forth further provisions, including:
subject to shareholder approval within 18 months from the date of announcement of the tender offer, the board of directors of a target company will be exempt from the rule prohibiting frustrating action against a foreign bidder whose board of directors is not subject to an equivalent passivity rule;
defensive measures included in a listed company’s bylaws and transfer and voting restrictions included in agreements among a listed company’s shareholders will remain in place whenever the company is the target of a tender offer, unless the shareholders resolve otherwise (in which case any shareholders whose rights are diluted or otherwise adversely affected will be entitled to compensation at the target company’s expense); and
squeeze-out and sell-out rights will apply provided that following a tender offer for all the target’s share capital, the bidder holds securities representing at least 90% of the target company’s voting capital and the tender offer has been accepted by the holders of securities representing at least 90% of the voting rights other than those held by or attributable to the bidder previously to the offer.
Payment of Taxes
Holders of ordinary shares will be responsible for any taxes or other governmental charges payable on their ordinary shares, including any taxes payable on transfer. The paying agent or the transfer agent, as the case may be, may, and upon instruction from Telefónica, will:
refuse to effect any registration of transfer of such ordinary shares or any split-up or combination thereof until such payment is made; or
withhold or deduct from any distributions on such ordinary shares or sell for the account of the holder thereof any part or all of such ordinary shares (after attempting by reasonable means to notify such holder prior to such sale), and apply, after deduction for its reasonable expenses incurred in connection therewith, the net proceeds of any such sale to payment of such tax or other governmental charge. The holder of such ordinary shares will remain liable for any deficiency.
Dividends
Shareholders vote on final dividend distributions at the shareholders’ meeting. Distributable profits are equal to:
net profits for the year; plus
profits carried forward from previous years; plus
distributable reserves; minus
losses carried forward from previous years; minus
amounts allocated to reserves as required by law or by our bylaws.
The amount of distributable profits is based on our unconsolidated financial statements prepared in accordance with Spanish GAAP, which differ from the Consolidated Financial Statements prepared in accordance with IFRS included elsewhere in this Annual Report.
The Board of Directors can approve interim dividend payments without a prior shareholder vote on the issue. However, under those circumstances, the dividend is limited to distributable net profits of the current year and is subject to certain legal requirements.
Unclaimed dividends revert to us five years from their date of payment.
Registration and transfers
Our shares are in registered book-entry form. Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures carried out by the Spanish clearing institution. Transfers executed outside of stock exchange systems, that is, over the counter, are implemented pursuant to the general legal regime for book-entry transfer, including registration by the Spanish clearing institution.
There are no restrictions with respect to the transfer of our shares.
Liquidation rights
Under Spanish law, upon our liquidation, the shareholders would be entitled to receive, on a pro rata basis, any assets remaining after the payment of our debts and taxes and liquidation expenses.
C. Material Contracts
Agreement related to the Sale of Customer Relationship Management (“CRM”) Business, Atento
As a result of the sale agreement of Atento by Telefónica, announced on October 12, 2012, and ratified on December 12, 2012, both companies signed a Master Service Agreement which regulates Atento’s relationship with the Telefónica Group as a service provider for a period of nine years and which was amended on May 16, 2014, and on November 8, 2016. This period was extended only for Spain and Brazil in November 2016, for two additional years until 2023.
By virtue of this agreement, Atento became Telefónica’s preferred Contact Center and Customer Relationship Management (“CRM”) service provider, stipulating annual commitments in terms of turnover which is updated based on inflation and deflation that vary from country to country, pursuant to the volume of services Atento has been providing to the entire Group. Effective January 1, 2017, the minimum volume commitments that Telefónica must comply with have significantly decreased for Brazil.
Failure to meet the annual turnover commitments generally results in the obligation to the counterparty, to pay additional amounts, which would be calculated based on the difference between the actual amount of turnover and the predetermined commitment, applying a percentage based on the Contact Center’s business margin to the final calculation.
The Master Agreement sets forth a reciprocal arrangement, whereby Atento assumes similar commitments to subscribe its telecommunications services to Telefónica.
Agreement for the sale of a minority stake in Telxius Telecom, S.A.U. (“Telxius”)
On February 20, 2017 Telefónica reached an agreement for the sale of up to 40% of the total share capital of Telxius to Taurus Bidco S.à.r.l. (hereinafter, ”KKR”) an entity managed by Kohlberg Kravis Roberts & Co. L.P., for a total amount of 1,275 million euros (12.75 euros per share).
The aforementioned agreement included (i) a purchase agreement for the sale of 62 million shares (representing 24.8% of the share capital) of Telxius for a price of 790.5 million euros; as well as (ii) options over 38 million shares (representing 15.2% of the share capital) for a price of at least 484.5 million euros. These options corresponded to a call option exercisable by KKR and to a put option exercisable by Telefónica upon maturity of the call option. The closing was subject to obtaining the corresponding regulatory approvals.
On October 24, 2017, after obtaining the relevant regulatory approvals, Telefónica transferred to KKR 62 million shares of Telxius (representing 24.8% of its share capital) to KKR in exchange for 790.5 million euros (12.75 euros per share). Following the execution of the sale, a shareholders' agreement among Telefónica, KKR and Telxius became effective on the same date, which regulates the relationships between Telefónica and KKR as shareholders of Telxius.
On November 13, 2017, KKR exercised the call option over 38 million shares (representing 15.2% of Telxius’ share capital) foreseen in the agreement, and on December 7, 2017, Telefónica, transferred to KKR such 38 million shares of Telxius (representing 15.2% of its share capital) in exchange for 484.5 million euros (12.75 euros per share).
Pursuant to these transactions, KKR acquired 40% of the share capital of Telxius in exchange for an aggregate amount of 1,275 million euros (12.75 euros per share) and Telefónica retained the control over Telxius.
Swap Agreement between Telefónica and Koninklijke KPN NV (KPN)
On March 13, 2017 Telefónica entered into a swap agreement with KPN to deliver 72.0 million of its treasury shares (representing 1.43% of its share capital), in exchange for 178.5 million shares of its subsidiary Telefónica Deutschland Holding AG, representing 6.0% of the share capital of the latter. The swap was executed on March 14, 2017. Under the agreement, KPN committed, among other obligations, to comply with certain restrictions which, in case of sale of the aforementioned Telefónica shares, would ensure an orderly sale of such shares.
As a result of this agreement, Telefónica increased from 63.2% to 69.2% its shareholding in Telefonica Deutschland Holding AG at that time.
D. Exchange Controls
Exchange Controls and Other Limitations Affecting Security Holders
Ownership limitations
There are no limitations with respect to the ownership of our assets or share capital except those derived from the application of the reciprocity principle as described above.
Trading by us in our own shares or shares of companies under our control
For information on the requirements applicable to the trading by us in our own shares or shares of companies under our control, see “—Memorandum and Articles of Association- Description of Our Capital Stock—Acquisition of own shares” above.
Other restrictions on acquisitions of shares
For information on reporting requirements and other restrictions “applicable to the acquisition of our shares see “—Memorandum and Articles of Association—Description of Our Capital Stock-Reporting requirements” and “—Trading by us in our own shares or shares of companies under our control” above.
Dividend and Liquidation Rights
According to Spanish law and our bylaws, dividends may only be paid out of profits or distributable reserves if the value of our net worth is not, and as a result of such distribution would not be, less than our capital stock. Pursuant to Spanish law, we are required to reserve 10% of our fiscal year net income until the amount in our legal reserve reaches 20% of our capital. Our legal reserve is currently at 20%.
Dividends payable by us to non-residents of Spain ordinarily are subject to a Spanish withholding tax. For the tax implications of dividends to U.S. Holders (as defined below), see “—Taxation.”
Upon our liquidation, our shareholders would be entitled to receive pro rata any assets remaining after the payment of our debts and taxes and expenses of such liquidation. Any change in the rights of shareholders to receive dividends and payment upon liquidation would require an amendment to our bylaws by resolution adopted by a general meeting of shareholders. If there were more than one class of shares, such amendment would also require the approval of each class of shareholders affected by the amendment.
Preemptive Rights and Increases of Share Capital
Pursuant to the Spanish Corporations Law, shareholders have preemptive rights to subscribe for any new shares and for bonds convertible into shares. Such rights may not be available under special circumstances if waived by a resolution passed at a general meeting of shareholders in accordance with Article 308 of the Spanish Corporations Law, or the Board of Directors, if authorized (Article 506 of the Spanish Corporation Act). Further, such rights, in any event, will not be available in the event of an increase in capital to meet the requirements of a convertible bond issue or a merger in which shares are issued as consideration. Such rights:
are transferable;
may be traded on the Automated Quotation System; and
may be of value to existing shareholders because new shares may be offered for subscription at prices lower than prevailing market prices.
Absent an exemption from registration, shares issuable upon exercise of rights must be registered under the Securities Act in order to be offered to holders of ADRs. If we decided not to register the shares, the rights would not be distributed to holders of ADRs. Pursuant to the Deposit Agreement, however, holders of ADRs are entitled to receive their proportionate share of the proceeds, if any, from sale by the Depositary of any rights accruing to holders of ADRs.
E. Taxation
The following is a general summary of the material Spanish and U.S. federal income tax consequences to U.S. Holders described below of the ownership and disposition of shares or ADSs. This summary is based upon Spanish and U.S. tax laws (including the U.S. Internal Revenue Code of 1986, as amended (the “Code”), final, temporary and proposed U.S. Treasury regulations, rulings, judicial decisions and administrative pronouncements), and the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed February 22, 1990 (the “Treaty”), all as of the date hereof and all of which are subject to change or changes in interpretation, possibly with retroactive effect. In addition, the summary is based in part on representations of the Depositary and assumes that each obligation provided for in or otherwise contemplated by the Deposit Agreement or any other related agreements will be performed in accordance with its terms.
As used herein, the term “U.S. Holder” means a beneficial owner of one or more shares or ADSs:
that is, for U.S. federal income tax purposes, one of the following:
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| (a) | a citizen or individual resident of the United States; |
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| (b) | a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States or any state therein or the District of Columbia; or |
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| (c) | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source; |
who is entitled to the benefits of the Treaty;
who holds the shares or ADSs as capital assets for U.S. federal income tax purposes;
who owns, directly, indirectly or by attribution, less than 10% of the share capital or voting stock of Telefónica; and
whose holding is not attributable to a fixed base or permanent establishment in Spain.
This summary does not address all of the tax considerations, including the potential application of the provisions of the Code known as the Medicare contribution tax, that may apply to holders that are subject to special tax rules, such as certain U.S. expatriates, insurance companies, tax-exempt organizations, certain financial institutions, persons subject to the alternative minimum tax, dealers and certain traders in securities, persons holding shares or ADSs as part of a straddle, hedging, conversion or integrated transaction, persons who acquired their shares or ADSs pursuant to the exercise of employee stock options or otherwise as compensation, persons owning shares or ADSs in connection with a trade or business outside of the U.S., partnerships or other entities classified as partnerships for U.S. federal income tax purposes or persons whose functional currency is not the U.S. dollar. Such holders may be subject to U.S. federal income tax consequences different from those set forth below.
If a partnership holds shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that holds shares or ADSs is urged to consult its own tax advisor regarding the specific tax consequences of owning and disposing of the shares or ADSs.
For purposes of the Treaty and U.S. federal income tax, U.S. Holders of ADSs will generally be treated as owners of the underlying shares represented by such ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom American depositary receipts are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary receipts. Such actions would also be inconsistent with the claiming of the reduced rates of tax applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the availability of foreign tax credits to U.S. Holders of ADSs and the reduced tax rates for dividends received by certain non-corporate U.S. Holders of ADSs, each as described below, could be affected by actions taken by such parties or intermediaries.
This discussion assumes that Telefónica is not, and will not become, a passive foreign investment company (“PFIC”), as discussed below under “—U.S. Federal Income Tax Considerations—Passive foreign investment company rules.”
U.S. Holders of shares or ADSs should consult their own tax advisors concerning the specific Spanish and U.S. federal, state and local tax consequences of the ownership and disposition of shares or ADSs in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. In particular, U.S. Holders are urged to consult their own tax advisors concerning their eligibility for benefits under the Treaty.
Spanish Tax Considerations
Taxation of dividends
Under Spanish law, dividends paid by Telefónica to U.S. Holders of ordinary shares or ADSs are subject to Spanish Non-Resident Income Tax, withheld at source, at a rate of 19%. For these purposes, upon distribution of the dividend, Telefónica or its paying agent will withhold an amount equal to the tax due according to the rules set forth above.
However, under the Treaty, if you are a U.S. Holder, you are entitled to a reduced withholding tax rate of 15%.
To benefit from the Treaty-reduced rate of 15%, you must provide to Telefónica through its paying agent in Spain, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S. Internal Revenue Service (“IRS”) stating that, to the best knowledge of the IRS, such U.S. Holders are residents of the United States within the meaning of the Treaty and entitled to its benefits.
If this certificate is not provided within this period, you may afterwards apply for a refund of the amount withheld in excess of the rate provided for in the Treaty by following the procedures described in the next section.
Spanish Refund Procedure
According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Holder, you are required to file:
–the corresponding Spanish tax form;
–the certificate referred to in the preceding section; and
–evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you.
The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities.
U.S. Holders are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.
Taxation of capital gains
For Spanish tax purposes, income obtained from the sale of ADSs or ordinary shares of Telefónica will be treated as capital gains. Spanish non-resident income tax is levied at a rate of 19% on capital gains obtained by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation.
Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is resident in a country that has entered into a treaty for the avoidance of double taxation with an “exchange of information” clause (the Treaty contains such a clause) will be exempt from taxation in Spain. If you are a U.S. Holder, under the Treaty capital gains arising from the disposition of ordinary shares or ADSs will not be taxed in Spain. You will be required to establish that you are entitled to the exemption from tax under the Treaty by providing to the relevant Spanish tax authorities a certificate of residence issued by the IRS stating that to the best knowledge of the IRS, you are a U.S. resident within the meaning of the Treaty.
Spanish wealth tax
Individual U.S. Holders who hold shares or ADSs located in Spain are subject to the Spanish Wealth Tax (Impuesto sobre el Patrimonio) (Spanish Law 19/1991), which imposes tax on property located in Spain on the last day of any year. As of January 1, 2017 a 100% tax allowance has been approved by Royal Legislative Decree 13/2011 dated September, 16, 2011 to any resident or non resident taxpayer.
Inheritance and gift tax
Transfers of shares or ADSs on death and by gift to individuals are subject to Spanish inheritance and gift taxes (Impuesto sobre Sucesiones y Donaciones), respectively, if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of death, regardless of the residence of the heir or beneficiary. In this regard, the Spanish tax authorities may determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The state applicable tax rate, after applying relevant personal, family and wealth factors, generally ranges between 7.65% and 81.6% for individuals.
Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a rate of 19% on the fair market value of the shares as a capital gain. If the donee is a United States resident corporation, the exclusions available under the Treaty described in the section “—Taxation of Capital Gains” above will be applicable.
Expenses of Transfer
Transfers of shares or ADSs will be exempt from any transfer tax (Impuesto sobre Transmisiones Patrimoniales) or value added tax. Additionally, no stamp tax will be levied on such transfers.
U.S. Federal Income Tax Considerations
Taxation of dividends
Distributions received by a U.S. Holder on shares or ADSs, including the amount of any Spanish taxes withheld therefrom, other than certain pro rata distributions of shares to all shareholders (including ADS holders), will constitute foreign-source dividend income to the extent paid out of Telefónica’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Because Telefónica does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of dividend income paid in euros that a U.S. Holder will be required to include in income will equal the U.S. dollar value of the distributed euros, calculated by reference to the exchange rate in effect on the date the payment is received by the Depositary (in the case of ADSs) or by the U.S. Holder (in the case of shares), regardless of whether the payment is converted into U.S. dollars on the date of receipt. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder will generally not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt. Gain or loss that a U.S. Holder realizes on a sale or other disposition of euros will be U.S.-source ordinary income or loss. Corporate U.S. Holders will not be entitled to claim the dividends-received deduction with respect to dividends paid by Telefónica. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends received by certain non-corporate U.S. Holders will be taxable at rates applicable to long-term capital gains. Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.
Spanish income taxes withheld from dividends on shares or ADSs at a rate not exceeding the rate provided in the Treaty will be creditable against a U.S. Holder’s U.S. federal income tax liability, subject to applicable restrictions and limitations that may vary depending upon the U.S. Holder’s circumstances and the discussion above regarding concerns expressed by the U.S. Treasury. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. See “Spanish Tax Considerations—Taxation of dividends” above for a discussion of how to obtain the applicable treaty rate. Instead of claiming a credit, a U.S. Holder may elect to deduct foreign taxes (including the Spanish taxes) in computing its taxable income, subject to generally applicable limitations. An election to deduct foreign taxes (instead of claiming foreign tax credits) applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States. The limitations on foreign taxes eligible for credit are calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex. Therefore, U.S. Holders should consult their own tax advisors regarding the availability of foreign tax credits in their particular circumstances.
Taxation upon sale or other disposition of shares or ADSs
A U.S. Holder will generally recognize U.S. source capital gain or loss on the sale or other disposition of shares or ADSs. Any such gain or loss will be long-term capital gain or loss if the U.S. Holder has held such shares or ADSs for more than one year. The amount of the U.S. Holder’s gain or loss will be equal to the difference between such U.S. Holder’s tax basis in the shares or ADSs sold or otherwise disposed of and the amount realized on the sale or other disposition, as determined in U.S. dollars.
As discussed under “Spanish Tax Considerations—Taxation of capital gains” above, gain realized by a U.S. Holder on the sale or other disposition of shares or ADSs will be exempt from Spanish tax on capital gains under the Treaty. If a U.S. Holder is eligible for the exemption from Spanish tax on capital gains but does not follow appropriate procedures for obtaining the exemption, such holder will not be entitled to credit the amount of Spanish tax on capital gains paid against its U.S. federal income tax liability. U.S. Holders should consult their own tax advisors regarding the potential Spanish tax consequences of a sale or other disposition of shares or ADSs and the procedures available for an exemption from such tax.
Passive foreign investment company rules
Telefónica believes that it was not a PFIC for U.S. federal income tax purposes for its 2017 taxable year. However, because PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25% owned equity investments) from time to time, there can be no assurance that Telefónica will not be considered a PFIC for any taxable year. If Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder owned a share or ADS, certain adverse tax consequences could apply to the U.S. Holder.
In general, if Telefónica were treated as a PFIC for any taxable year during which a U.S. Holder owned a share or ADS, gain recognized by a U.S. Holder on a sale or other disposition of such share or ADS would be allocated ratably over the U.S. Holder’s holding period for the share or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before Telefónica 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, and an interest charge would be imposed on the resulting tax liability. The same treatment would apply to any distribution in respect of shares or ADSs to the extent it exceeds 125% of the average of the annual distributions on shares or ADSs received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the shares or ADSs.
In addition, if Telefónica were treated as a PFIC in a taxable year in which it pays a dividend or in the prior taxable year, the favorable dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If Telefónica were a PFIC for any taxable year during which a U.S. Holder owned our shares or ADSs, the U.S. Holder will generally be required to file IRS Form 8621 with its annual U.S. federal income tax return.
Information reporting and backup withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless the U.S. Holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle such U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
Certain U.S. Holders who are individuals and certain specified entities may be required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held through a U.S. financial institution). U.S. Holders are urged to consult their tax advisors regarding the application, if any, of this legislation to their ownership of shares or ADSs.
F. Dividends and Paying Agents
Not Applicable.
G. Statements by Experts
Not Applicable.
H. Documents on Display
Where You Can Find More Information
We file Annual Reports on Form 20-F and furnish periodic reports on Form 6-K to the SEC. You may read and copy any of these reports at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services. Some of our SEC filings are also available at the website maintained by the SEC at “http://www.sec.gov.”
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF.” You may inspect any periodic reports and other information filed with or furnished to the SEC by us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
As a foreign private issuer, we are exempt from the rules under the Exchange Act which prescribe the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act.
We are subject to the informational requirements of the Spanish securities commission and the Spanish Stock Exchanges, and we file reports and other information relating to our business, financial condition and other matters with the Spanish securities commission and the Spanish Stock Exchanges. You may read such reports, statements and other information, including the annual and biannual financial statements, at the public reference facilities maintained in Madrid and Barcelona. Some of our Spanish securities commission filings are also available at the website maintained by the CNMV at http://www.cnmv.es.
We have appointed Citibank, N.A. to act as Depositary for the Telefónica ADSs. Citibank will, as provided in the Deposit Agreement, arrange for the mailing of summaries in English of such reports and communications to all record holders of the ADSs of Telefónica. Any record holder of Telefónica ADSs may read such reports and communications or summaries thereof at Citibank’s office located at 388 Greenwich Street, 14th Floor, New York, New York 10013.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various financial market risks as a result of: (i) our ordinary business activity, (ii) debt incurred to finance our business, (iii) our investments in companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting Group companies are as follows:
Exchange rate risk: arises primarily from: (i) Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom), (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt ,and (iii) for those trade receivables or payables in foreign currency related to the company with the transaction registered.
Interest rate risk: arises primarily in connection with changes in interest rates affecting: (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates.
Share price risk: arises primarily from changes in the value of the equity investments (that may be bought, sold or otherwise involved in transactions), from changes in the value of derivatives associated with such investments, from changes in the value of treasury shares and from equity derivatives.
Liquidity risk: the Telefónica Group is also exposed to liquidity risk if a mismatch arises between its financing needs (including operating and financial expense, investment, debt redemptions and dividend commitments)
and its sources of finance (including revenues, divestments, credit lines from financial institutions and capital market transactions). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.
Country risk: refers to the possible decline in the value of assets, cash flows generated or cash flows returned to the parent company as a result of political, economic or social instability in the countries where the Telefónica Group operates, especially in Latin America.
Credit risk: appears when a counterpart fails to meet or delays its payment obligations in accordance with the agreed terms, driving an impairment in an asset due to: (i) solvency issues, or (ii) no intention to pay.
We seek to actively manage these risks through the use of derivatives (primarily on exchange rates, interest rates and share prices) and by incurring debt in local currencies, where appropriate, with a view to stabilizing cash flows, our income statement and, to a lesser extent, part of the value of our investments. In this way, we attempt to protect our solvency, facilitate financial planning and take advantage of investment opportunities.
We manage our exchange rate risk and interest rate risk in terms of net financial debt and net financial debt plus commitments as calculated by us. We believe that these parameters are more appropriate to understanding our debt position. Net financial debt and net financial debt plus commitments take into account the impact of our cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net financial debt nor net financial debt plus commitments as calculated by us should be considered as a substitute for gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of our leverage. For a more detailed description on reconciliation of net debt and net financial debt to gross financial debt, see “Item 5. Operating and Financial Review and Prospects—Presentation of Financial Information—Non-GAAP financial information—Net financial debt and net financial debt plus commitments.”
For a more detailed description on quantitative and qualitative disclosures about market risks see Note 16 to our Consolidated Financial Statements.
Item 12. Description of Securities Other Than Equity Securities
A. American Depositary Shares
The Depositary of our ADR program is Citibank, N.A., and the address of its principal executive office is 388 Greenwich Street, 14th Floor, New York, New York 10013.
Our ADSs are listed on the New York Stock Exchange under the symbol “TEF.” Each ADS represents the right to receive one ordinary share of capital stock of 1.00 euros nominal value each, of Telefónica, S.A. The Depositary issues ADSs in the form of certificated ADSs (American Depositary Receipts, or ADRs) or uncertificated ADSs pursuant to the Deposit Agreement.
Under the terms of the Deposit Agreement, as of the date of this Annual Report, an ADS holder may have to pay to the Depositary the services fees specified in the table below:
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| | |
| Category | Depositary Actions | Associated Fee / Paid By Whom |
| (a) Depositing or substituting the underlying shares | Issuance of ADSs upon the deposit of shares | Up to 5.00 dollars for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)(1) |
| (b) Receiving or distributing dividends | Distribution of cash dividends or other cash distributions; distribution of share dividends or other free share distributions; distribution of securities other than ADSs or rights to purchase additional ADSs | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held (in the case of cash distributions, deducted from the relevant distribution; in the case of all other distributions, billed to the relevant holder)(2) |
| (c) Selling or exercising rights | Distribution or sale of securities | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held (billed to the relevant holder) |
| (d) Withdrawing an underlying security | Acceptance of ADSs surrendered for withdrawal of deposited securities | Up to 5.00 dollars for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)(1) |
| (e) Transferring, splitting or grouping receipts | Transfers | Up to 1.50 dollars per ADS so presented (charged to person presenting certificate for transfer) |
| (f) General depositary services, particularly those charged on an annual basis | Other services performed by the Depositary in administering the ADSs | Up to 5.00 dollars for each 100 ADSs (or portion thereof) held on the applicable record date (billed to person holding ADSs on applicable record date established by the Depositary)(2) |
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| (g) Expenses of the Depositary | Certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges in connection with: · compliance with foreign exchange control regulations or any law or regulation relating to foreign investment; · the Depositary or its custodian’s compliance with applicable law, rule or regulation; · stock transfer or other taxes and other governmental charges; · cable, telex, facsimile transmission/delivery; · expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency); · any other charge payable by Depositary or its agents. | Expenses payable at the sole discretion of the Depositary (billed or deducted from cash distributions to person holding ADSs on applicable record date established by the Depositary) |
(1) In the case of ADSs issued by the Depositary into DTC or presented to the Depositary via DTC, the ADS issuance and cancellation fees will be payable to the Depositary by DTC Participant(s) receiving the ADSs from the Depositary or the DTC Participant(s) surrendering the ADSs to the Depositary for cancellation, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC Participant(s) to the account(s) of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participant(s) as in effect at the time.
(2) For ADSs held through DTC, the Depositary fees for distributions other than cash and the Depositary service fee are charged by the Depositary to the DTC Participants in accordance with the procedures and practices prescribed by DTC from time to time and the DTC Participants in turn charge the amount of such fees to the beneficial owners for whom they hold ADSs.
The Depositary has agreed to reimburse or pay on behalf of Telefónica, S.A., certain reasonable expenses related to our ADS program and incurred by us in connection with the program (such as NYSE listing fees, legal and accounting fees incurred in connection with the preparation of Form 20-F and ongoing SEC compliance and listing requirements, distribution of proxy materials, investor relations expenses, etc.). The Depositary has covered all such expenses incurred by us during 2017 for an amount of 5.5 million dollars. The amounts the Depositary reimbursed or paid are not perforce related to the fees collected by the depositary from ADS holders.
As part of its service to us, the Depositary has agreed to waive certain expenses for the standard costs associated with the administration of our ADS program for the year ended December 31, 2017.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Form 20-F, have concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
The management of Telefónica is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Telefónica’s internal control system is designed to provide reasonable assurance as to the reliability of financial reporting and the preparation of the published financial statements under generally accepted accounting principles.
Any internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of controls and procedures, which may not prevent or detect misstatements.
Telefónica management assessed the effectiveness of Telefónica’s internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO" 2013 framework) in Internal Control - Integrated Framework. Based on its assessment and those criteria, Telefónica management believes that at December 31, 2017, Telefónica’s internal control over financial reporting was effective based on those criteria.
Report of the Independent Registered Public Accounting Firm
Telefónica’s independent registered public accounting firm, PricewaterhouseCoopers Auditores, S.L., has issued a report on the consolidated financial statements as of and for the year ended December 31, 2017 and on the effectiveness of the company’s internal control over financial reporting. The report is included on page F-2.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Mr. José Javier Echenique Landiríbar and Mr. Ignacio Moreno Martínez meet the requirements of an “audit committee financial expert” as such term is defined by the SEC.
Item 16B. Code of Ethics
Telefónica is governed by a code of business conduct and ethics called the Telefónica Business Principles. The Business Principles are binding on all employees globally, including senior officers, in their daily operations and on the Company in its relations with its stakeholders.
The standards set forth in the Telefónica Business Principles cover ethical issues such as honesty and trust, respect for the law, integrity and the respect of human rights, transparency of information, fiscal transparency, fair competition, political neutrality, as well as how these ethical principles should be implemented in our relationships with our stakeholders: employees, customers, shareholders, suppliers and the communities we work in. Issues covered, amongst other, are professional development, diversity, labour rights, compensation, health and safety, communications and advertising, corporate governance, risk management, protection to shareholders, anti-corruption, conflicts of interest, environmental protection, privacy and data protection, commitment to the societies in which operate and responsible management of the supply chain, etc.
The Telefónica Business Principles are available and open to consultation for employees on the Telefónica Intranet site as well as for the general public on the Telefónica external website (https://www.telefonica.com/en/web/about_telefonica/strategy/business-principles).
For more information, please see “Item 16G. Corporate Governance—Code of Ethics.”
Item 16C. Principal Accountant Fees and Services
Please see Note 21(d) to our Consolidated Financial Statements.
The Audit and Control Committee’s Pre-Approval Policies and Procedures
The engagement of any service rendered by our external auditor or any of its affiliates must always have the prior approval of our Audit and Control Committee. Such Committee has developed a Pre-approval Policy regarding the engagement of professional services by our external auditor, in accordance with the Spanish Audit Law and the Sarbanes-Oxley Act. This Policy establishes the obligation to obtain prior approval from our Audit and Control Committee for any service to be rendered by our external auditor to Telefónica or any of its subsidiaries.
This Policy sets forth restrictions on engaging our external auditor for the performance of non-audit services, according to which the engagement of our external auditor for the provision of such services is only permitted when there is no other firm available to provide the needed services at a comparable cost and with a similar level of quality. Moreover, this Policy prohibits the engagement of our external auditor for the provision of certain type of services that would be considered as “prohibited services.”
In addition, the Audit and Control Committee oversees the total amount of fees paid to our external auditor for the provision of non-audit services in order to assure that such fees do not exceed a certain percentage of the total amount of fees paid for the provision of audit services.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The number of shares of treasury stock at December 31, 2017, amounted to 65,687,859 (141,229,134 at December 31, 2016). These treasury shares are directly owned by Telefónica, S.A.
No purchases of shares or other registered equity securities of Telefónica were made during 2017 on behalf of the Company or any affiliated purchaser.
For a more detailed description of our plans or programs, see “Item 8. Financial Information—Dividend Information and Shareholders’ Return” and Note 19 to our Consolidated Financial Statements.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Corporate governance guidelines
In Spain, companies with securities listed on a Spanish Stock Exchange are expected to follow the Spanish CorporateGood Governance Code of Listed Companies (the “Code”) published by the CNMV,in February 2015, which contains corporate governance and shareholder disclosure recommendations. Spanish listed companies are required by law to publish an Annual Report on Corporate Governance and a Report on the Compensation Policy of the Board of Directors. Additionally, Spanish listed companies are required to publish their corporate governance information on their websites. We base our corporate governance procedures on the recommendations of the Code. As part of our corporate governance procedures, we have adopted regulations for our Board of Directors that govern, among other things, director qualification standards, responsibilities, compensation, access to management information, the Board of Directors’ purpose and each of our Board Committee’s purpose and responsibilities. Moreover, we have a Regulation of the General Shareholders’ Meeting that aims to reinforce its transparency, providing shareholders with a framework guaranteeing and facilitating exercise of their rights. Additionally, we also have regulations for the Audit and Control Committee. The Annual Report on Corporate Governance published by us provides a detailed explanation of our corporate governance procedures and explains the role and duties of our Board of Directors and Board Committees. Our Annual Report on Corporate Governance and the Report on the Compensation Policy of the Board of Directors of Telefónica, S.A. are available on our website at www.telefonica.com.www.telefonica.com. None of the information contained on our website is incorporated in this Annual Report.
Committees
We have had an Audit and Control Committee since 1997. Our Audit and Control Committee is composed of fivefour non-executive directors, all of whom are deemed Rule 10A-3 independent by our Board of Directors. The functions, composition and competencies of this Committee are regulated by the Board of Directors’ Regulations and the Regulations of the Audit and Control Committee and are similar to those required by the New York Stock Exchange. The Audit and Control Committee shall consist of not less than three directors appointed by our Board of Directors. All Committee members shall be external directors. When appointing such members, our Board of Directors shall take into account the appointees’ knowledge and experience in matters of accounting, auditing and risk management.
We have had a Nominating, Compensation and Corporate Governance Committee since 1997, which is composed of five external directors. The functions, composition and competencies of this Committee are regulated by the Board of Directors’ Regulations and are very similar to those required by the NYSE. The Nominating, Compensation and Corporate Governance Committee shall consist of not less than three nor more than five directors appointed by the Board of Directors. All members of the Committee must be external directors and the majority thereof must be independent. The chairman of the Nominating, Compensation and Corporate Governance Committee, who shall in all events be an independent director, shall be appointed from among its members.
Additionally we have a Regulation and Institutional Affairs Committee, a Service Quality and Customer Service Committee, an Institutional Affairs Committee,and an Innovation Committee and a Strategy Committee. The functions, composition and competencies are regulated by the Board of Directors’ Regulations.
Independence of the Board
As of the date of this Annual Report, we have 1817 directors, out of which eightnine have been deemed independent by our Board of Directors attending to the director’s classification contained in Spanish Corporations Act (Ley de Sociedades de Capital). All our directors, with the Conthe Corporate Governance Code. A significant majorityexception of our current directors, 15,the Chairman and Mr. Vilá Boix (our Chief Operating Officer), are non-executive directors. We, in accordance with the Conthe Code,Spanish Corporations Act, assess the independence of our directors. Among other things, independent directors: (i) shall not be, past employees or executive directors of any of the Group companies, unless three or five years have elapsed , respectively, (ii) shall not receive any payment or other form of compensation from us or our group on top of their directors’ fees, unless the amount involved is not significant, (iii) shall not be partners, now or on the past three years, in the external auditor or in the firm responsible for the audit report, (iv) shall not be executive directors or senior officers of another company where one of our executive directors or senior officers is an external director, (v) shall not have material business dealings with us or any other company in our group, (vi) shall not be spouses, nor partners maintaining an analogous affective relationship, nor close relative of any of our executive directors or senior officers and (vii) shall not stand in any of the situations listed in (i), (v) or (vi) above in relation to a significant shareholder or a shareholder with board representation.
The classification of each director shall be explained by the Board of Directors to the shareholders at the General Shareholders’ Meeting at which the appointment thereof must be made or ratified. Furthermore, such classification shall be reviewed annually by our Board of Directors after verification by the Nominating, Compensation and Corporate Governance Committee, and reported in the Annual Corporate Governance Report.
Internal Audit Function
We have an Internal Audit Department responsible for internal audit matters and for ensuring the efficiency of the internal audit control process of our different units. This Internal Audit Department reports directly to the Audit and Control Committee, thus supporting the adequate performance of all its functions.
Non-Executive Director Meetings
Pursuant to the NYSE listing standards, non-executive directors of U.S.-listed companies must meet on a regular basis without management present and the company must disclose a method for any interested parties to communicate directly with the non-executive directors. As a group, our non-executive directors do not meet formally without management present. Nevertheless, each of the Audit and Control Committee, the Nominating, Compensation and Corporate Governance Committee, the Regulation and Institutional Affairs Committee, the Service Quality and Customer Service Committee, and the Strategy and Innovation Committee is composed exclusively of non-executive directors, thus giving each of these committees, the chance to analyze and discuss any matter related to our management, within its respective area of responsibility.
In addition, since May 2013, we have a lead independent director who acts as “Coordinating Independent Director”, whoto whom our By-laws grant the right to have a say on key elements of governance structure, thatwhich most companies in Spain and around the world reserve to the Board of Directors.
According to our By-laws (Art. 32) the independent director who acts as “Coordinating Independent Director”, will:shall carry out the following duties and tasks:
a) Coordinate the work of the External Directors that the Company has appointed, in defense of the interests of all the shareholders of the Company, and echo the concerns of such Directors.
| a) | Coordinate the work of the External Directors and echo the concerns of such Directors. |
b) Request the Chairman of the Board of Directors to call meetings of the Board where appropriate in accordance with the rules of corporate governance.c) Request, consequently, the inclusion of certain matters in the agenda of the meetings of the Board of Directors.
| b) | Request the Chairman of the Board of Directors to call a meeting of the Board when appropriate in accordance with the rules of corporate governance. |
| c) | Request the inclusion of certain matters in the agenda of the meetings of the Board of Directors. |
| d) | Oversee the evaluation by the Board of Directors of the Chairman thereof. |
Whistleblowing
We have procedures in place that allow any employee to anonymously and confidentially report instances of fraud, alterations of financial information or specific risks to Telefónica and its subsidiaries.
Code of Ethics
The NYSE listing standards require U.S. companies to adopt a code of business conduct and ethics for directors, officers and employees, which at minimum must address certain specified topics, and promptly disclose any waivers of the code for directors or executive officers. In 2004 we adopted, as required by the Sarbanes-Oxley Act, a code of ethics that applied to our principal executive officer, principal financial officer and to our senior financial officers. In December 2006, we adopted a code of business conduct and ethics, the “Telefónica Business Principles,”Principles”, which apply to all Telefónica Group employees. In March 2008, we decided to modify such Business Principles in order to incorporate within them all components of the code of ethics definition in Section 406 of Sarbanes Oxley Act, and consequently our code of ethics for senior officers was replaced by such Business Principles. These Business Principles were further modified on October 8, 2010in 2016 and 2017 in order to include, aamong others, several new principle ofprinciples related to privacy and data protection.
protection, security, responsible communication practices as well as to reinforce other principles including the anti-corruption principle.
We also have an Internal Codeinternal code of Conductconduct for securities markets issues to prevent insider trading misconduct and to control possible conflicts of interest. In addition, the Regulations of the Board of Directors set out in detail our
directors’ main obligations relating to conflicts of interest concerning business opportunities, misappropriation of our assets, confidentiality and non-competition.
We have responded to Item 18 in lieu of responding to this Item.
Please see pages F-4F-5 through F-157.F-171.
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| Exhibit Number | Description |
| Amended and Restated bylaws (English translation) |
| 4.1 | Shareholders’ Agreement dated as of April 28, 2007 among Telefónica S.A., Assicurazioni Generali S.p.A., Sintonia S.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A.* |
4.2 | Co-investment Agreement dated as of April 28, 2007 among Telefónica S.A., Assicurazioni Generali S.p.A., Sintonia S.A., Intesa Sanpaolo S.p.A., Mediobanca S.p.A.* |
4.3 | Call Option Agreement, dated November 6, 2007, between Telefónica, S.A. and Telco** |
4.4 | Amendment to the Shareholders’ Agreement and Bylaws, dated November 19, 2007 among Telefónica S.A., Generali, Sintonia S.A., Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.** |
4.5 | Renewal Agreement, dated October 28, 2009, by and among Telefónica S.A., Assicurazioni Generali S.p.A. (on its own behalf and on behalf of its subsidiaries Generali Vie S.A., Alleanza Toro S.p.A., INA Assitalia S.p.A., Generali Lebensversicherung A.G.), Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.*** |
4.6 | Amendment Deed to the Call Option, dated October 28, 2009, by and between Telefónica S.A. and Telco S.p.A.*** |
4.7 | Subscription Agreement, dated September 6, 2009 between Telefónica, S.A. and China Unicom (Hong Kong) Limited**** |
4.8 | Enhanced Strategic Alliance Agreement dated January 23, 2011 between Telefónica, S.A. and China Unicom (Hong Kong) Limited***** |
4.9 | Amendment to Shareholders’ Agreement, dated December 10, 2010, by and among Telefónica S.A., Assicurazioni Generali S.p.A. (on its own behalf and on behalf of its subsidiaries Generali Vie S.A., Alleanza Toro S.p.A., INA Assitalia S.p.A. and Generali Lebensversicherung AG), Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.******* |
4.10 | Second Renewal Agreement, dated February 29, 2012, by and among Telefónica S.A., Assicurazioni Generali S.p.A. (on its own behalf and on behalf of its subsidiaries Generali Vie S.A., Alleanza Toro S.p.A., INA Assitalia S.p.A. and Generali Lebensversicherung AG), Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.******* |
4.11 | Amendment Deed to Call Option Agreement, dated February 29, 2012, between Telefónica and Telco******* |
4.12 | Share Purchase Agreement for the Sale and Purchase of Shares in China Unicom (Hong Kong) Limited, dated June 10, 2012 and Supplemental Agreement, dated July 21, 2012, between Telefónica, Internacional S.A.U. and a 100% owned subsidiary of China United Network Communications Group Company Limited******** |
4.13 | Agreement for the Sale and Purchase of Customer Relationship Management business, Atento, dated October 11, 2012*******2012 * |
4.144.2 | Share Purchase Agreement entered into between Koninkijke KPN N.V., Telefónica S.A. and Telefonica Deutschland Holding AG, dated July 23, 2013 (1)********* |
4.15 | First Amendment Agreement to the Share Purchase Agreement entered into between Koninkijke KPN N.V., Telefónica S.A. and Telefonica Deutchsland Holding AG, dated July 23, 2013, dated August 26, 2013.********* |
4.16 | Stock Purchase Agreement and Other Covenants, dated September 18, 2014, by and among Virendi, S.A., Société d’Investissements et de Gestion 72 S.A. and Société d’Investissements et de Gestion 108 SAS, as the sellers, Telefónica Brasil S.A., as purchaser, GVT Participações S.A., as target, Global Village Telecom S.A. and Telefónica, S.A.(1)
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4.17 | Long TermLong-Term Incentive Plan Terms ** |
| 8.1 | Subsidiaries of Telefónica (see Note 1 to the Consolidated Financial Statements and Appendix VII thereto) |
| Certification of César Alierta Izuel,José María Álvarez-Pallete López, Chairman and Chief Executive Officer of Telefónica, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of Miguel Escrig Meliá,Laura Abasolo García de Baquedano, Chief FinancialFinance and Control Officer of Telefónica, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Consent of Independent Registered Public Accounting FirmPricewaterhouseCoopers Auditores, S.L. |
| Consent of Ernst & Young, S.L. |
| 101 | Interactive Data File |
| * | Incorporated by reference to Telefónica’s Schedule 13D/A filed on November 1, 2007. |
| ** | Incorporated by reference to Telefónica’s Schedule 13D/A filed on November 26, 2007. |
| *** | Incorporated by reference to Telefónica’s Schedule 13D/A filed on November 23, 2009. |
| **** | Incorporated by reference to Telefónica’s Schedule 13D/A filed on September 17, 2009. |
| ***** | Incorporated by reference to Telefónica’s Schedule 13D filed on February 8, 2011. |
| ****** | Incorporated by reference to Telefónica’s Schedule 13 D/A filed on March 12, 2012. |
| ******* | Incorporated by reference to Telefónica’s Schedule 13 D/A filed on June 13, 2012 and Schedule 13 D/A filed on August 1, 2012, respectively. |
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| | |
| | ******** | IncorporatedbyIncorporated by reference to Telefónica’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012. |
| | ********* | Incorporated by reference to Telefónica’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013.2014. |
| (1) | Confidential treatment has been requested with respect to certain portions of this agreement. Confidential portions have been redacted and separately filed with the SEC. |
We agree to furnish to the SEC upon request, copies of the instruments defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
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| | TELEFÓNICA, S.A. |
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| | | |
| | By: | /s/ César Alierta Izuel | José María Álvarez-Pallete López |
| | | Name: | César Alierta Izuel
| José María Álvarez-Pallete López |
| | | Title: | Chairman and Chief Executive Officer | |
| | | | |
| | | | | |
| | | | |
| | TELEFÓNICA, S.A. |
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| | |
| | | |
| | By: | /s/ Miguel Escrig Meliá | Laura Abasolo García de Baquedano |
| | | Name: | Miguel Escrig Meliá | Laura Abasolo García de Baquedano |
| | | Title: | Chief FinancialFinance and Control Officer | |
Date: February 27, 201522, 2018
2014
Consolidated Financial Statements (Consolidated
(Consolidated Annual Accounts)
Telefónica, S.A. and subsidiaries composing the Telefónica Group.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
To the Board of Directors and Shareholders of
Telefónica, S.A.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial position of Telefónica, S.A.’s and its subsidiaries (the “Company”) as ofDecember 31, 2017,and the related consolidated income statement, comprehensive income, changes in equity, and cash flows for the year in the period endedDecember 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, 2014,2017, based on criteria established inInternal Control—Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria)(COSO). Telefónica, S.A.’s
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of their operations and their cash flows for the year in the period endedDecember 31, 2017in 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO.
We also have audited the adjustments to the 2016 financial statements to retrospectively reflect the change in presentation of the segment information, as described in note 4. Our audit procedures that were applied to the restated disclosures for comparative 2016 reportable segments included: (i) agreeing the adjusted amounts of each segment to the underlying records obtained from management, and (ii) determining the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2016 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2016 financial statements taken as a whole.
Basis for Opinions
The Company'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 the accompanying AnnualManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionopinions on Telefónica, S.A.’sthe Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 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, andrisk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, /s/ PricewaterhouseCoopers Auditores, S.L.
PricewaterhouseCoopers Auditores, S.L.
Madrid, Spain
February 22, 2018
We have served as the Company’s auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Telefónica, S.A. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance withbefore the standardseffects of the Public Company Accounting Oversight Board (United States),retrospective adjustments related to the consolidated statements of2016 segment disclosures described in note 4, the financial position of Telefónica, S.A. and subsidiaries as of December 31, 2014 and 2013,2016, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the threetwo years in the period ended December 31, 2014 and our report dated February 27, 2015 expressed an unqualified opinion thereon.
ERNST & YOUNG, S.L.
/s/ Ignacio Viota del Corte
Ignacio Viota del Corte
Madrid, Spain
February 27, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Telefónica, S.A.
We have audited2016 (the 2016 consolidated financial statements before the accompanying consolidated statements of financial position of Telefónica, S.A. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for eacheffects of the three yearsretrospective adjustments described in the period ended December 31, 2014.note 4 are not presented herein). These consolidated financial statements are the responsibility of Telefónica, S.A.’s Directors. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2016 and 2015 consolidated financial statements, referredbefore the effects of the retrospective adjustments related to abovethe 2016 segment disclosures described in note 4, present fairly, in all material respects, the consolidated financial position of Telefónica, S.A. and subsidiaries as of December 31, 2014 and 2013,2016, and the consolidated results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 2014,2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We alsowere not engaged to audit, review, or apply any procedures to the retrospective adjustments related to the 2016 segment disclosures described in note 4 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective 2016 adjustments were audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), Telefónica S.A.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.
other auditors.
ERNST & YOUNG, S.L.
/s/ Ignacio Viota del CorteAlicia Martínez Durán
Ignacio Viota del CorteAlicia Martínez Durán
Madrid, Spain
February 27, 2015
| Consolidated Statements of financial position | | | |
| Millions of euros | NOTE | 2014 | 2013 |
| ASSETS | | | |
| A) NON-CURRENT ASSETS | | 99,435 | 89,597 |
| Intangible assets | (Note 6) | 22,353 | 18,548 |
| Goodwill | (Note 7) | 25,111 | 23,434 |
| Property, plant and equipment | (Note 8) | 33,343 | 31,040 |
| Investments accounted for by the equity method | (Note 9) | 788 | 2,424 |
| Non-current financial assets | (Note 13) | 10,973 | 7,775 |
| Deferred tax assets | (Note 17) | 6,867 | 6,376 |
| B) CURRENT ASSETS | | 22,864 | 29,265 |
| Inventories | | 934 | 985 |
| Trade and other receivables | (Note 11) | 10,606 | 9,640 |
| Tax receivables | (Note 17) | 1,749 | 1,664 |
| Current financial assets | (Note 13) | 2,932 | 2,117 |
| Cash and cash equivalents | (Note 13) | 6,529 | 9,977 |
| Non-current assets held for sale | (Note 2) | 114 | 4,882 |
| TOTAL ASSETS (A+B) | | 122,299 | 118,862 |
| | | | |
| | NOTE | 2014 | 2013 |
| EQUITY AND LIABILITIES | | | |
| A) EQUITY | | 30,289 | 27,482 |
| Equity attributable to equity holders of the parent and other holders of equity instruments | (Note 12) | 21,115 | 21,185 |
| Equity attributable to non-controlling interests | (Note 12) | 9,174 | 6,297 |
| B) NON-CURRENT LIABILITIES | | 62,311 | 62,236 |
| Non-current interest-bearing debt | (Note 13) | 50,688 | 51,172 |
| Non-current trade and other payables | (Note 14) | 2,377 | 1,701 |
| Deferred tax liabilities | (Note 17) | 2,566 | 3,063 |
| Non-current provisions | (Note 15) | 6,680 | 6,300 |
| C) CURRENT LIABILITIES | | 29,699 | 29,144 |
| Current interest-bearing debt | (Note 13) | 9,094 | 9,527 |
| Current trade and other payables | (Note 14) | 16,943 | 15,221 |
| Current tax payables | (Note 17) | 2,026 | 2,203 |
| Current provisions | (Note 15) | 1,595 | 1,271 |
| Liabilities associated with non-current assets held for sale | (Note 2) | 41 | 922 |
| TOTAL EQUITY AND LIABILITIES (A+B+C) | | 122,299 | 118,862 |
| The accompanying Notes 1 to 23 and Appendices I to VII are an integral part of these consolidated statements of financial position. |
| Consolidated income statements | | | | |
| Millions of euros | NOTES | 2014 | 2013 | 2012 |
| INCOME STATEMENTS | | | | |
| Revenues | (Note 18) | 50,377 | 57,061 | 62,356 |
| Other income | (Note 18) | 1,707 | 1,693 | 2,323 |
| Supplies | | (15,182) | (17,041) | (18,074) |
| Personnel expenses | | (7,098) | (7,208) | (8,569) |
| Other expenses | (Note 18) | (14,289) | (15,428) | (16,805) |
| Depreciation and amortization | (Note 18) | (8,548) | (9,627) | (10,433) |
| OPERATING INCOME | | 6,967 | 9,450 | 10,798 |
| Share of loss of investments accounted for by the equity method | (Note 9) | (510) | (304) | (1,275) |
| Finance income | | 992 | 933 | 963 |
| Exchange gains | | 4,110 | 3,323 | 2,382 |
| Finance costs | | (3,511) | (3,629) | (4,025) |
| Exchange losses | | (4,413) | (3,493) | (2,979) |
| Net financial expense | (Note 16) | (2,822) | (2,866) | (3,659) |
| PROFIT BEFORE TAX | | 3,635 | 6,280 | 5,864 |
| Corporate income tax | (Note 17) | (383) | (1,311) | (1,461) |
| PROFIT FOR THE YEAR | | 3,252 | 4,969 | 4,403 |
| Non-controlling interests | (Note 12) | (251) | (376) | (475) |
| PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT | | 3,001 | 4,593 | 3,928 |
| Basic and diluted earnings per share attributable to equity holders of the parent (euros) | (Note 18) | 0.61 | 0.99 | 0.85 |
| The accompanying Notes 1 to 23 and Appendices I to VII are an integral part of these consolidated income statements. |
F-5 |
| | | | | |
| Consolidated Statements of financial position | | |
| |
|
| Millions of euros | Notes | 2017 |
| 2016 |
|
| ASSETS | | |
| |
|
| A) NON-CURRENT ASSETS | | 95,135 |
| 103,667 |
|
| Intangible assets | (Note 6) | 18,005 |
| 20,518 |
|
| Goodwill | (Note 7) | 26,841 |
| 28,686 |
|
| Property, plant and equipment | (Note 8) | 34,225 |
| 36,393 |
|
| Investments accounted for by the equity method | (Note 9) | 77 |
| 76 |
|
| Non-current financial assets | (Note 13) | 8,167 |
| 9,765 |
|
| Deferred tax assets | (Note 17) | 7,820 |
| 8,229 |
|
| B) CURRENT ASSETS | | 19,931 |
| 19,974 |
|
| Inventories | | 1,117 |
| 1,055 |
|
| Trade and other receivables | (Note 11) | 10,093 |
| 10,675 |
|
| Tax receivables | (Note 17) | 1,375 |
| 1,533 |
|
| Current financial assets | (Note 13) | 2,154 |
| 2,954 |
|
| Cash and cash equivalents | (Note 13) | 5,192 |
| 3,736 |
|
| Non-current assets classified as held for sale | | — |
| 21 |
|
| TOTAL ASSETS (A+B) | | 115,066 |
| 123,641 |
|
| | | | |
| | Notes | 2017 |
| 2016 |
|
| EQUITY AND LIABILITIES | | |
| |
|
| A) EQUITY | | 26,618 |
| 28,385 |
|
| Equity attributable to equity holders of the parent and other holders of equity instruments | (Note 12) | 16,920 |
| 18,157 |
|
| Equity attributable to non-controlling interests | (Note 12) | 9,698 |
| 10,228 |
|
| B) NON-CURRENT LIABILITIES | | 59,382 |
| 59,805 |
|
| Non-current financial liabilities | (Note 13) | 46,332 |
| 45,612 |
|
| Non-current trade and other payables | (Note 14) | 1,687 |
| 1,925 |
|
| Deferred tax liabilities | (Note 17) | 2,145 |
| 2,395 |
|
| Non-current provisions | (Note 15) | 9,218 |
| 9,873 |
|
| C) CURRENT LIABILITIES | | 29,066 |
| 35,451 |
|
| Current financial liabilities | (Note 13) | 9,414 |
| 14,749 |
|
| Current trade and other payables | (Note 14) | 15,095 |
| 16,150 |
|
| Current tax payables | (Note 17) | 2,341 |
| 2,332 |
|
| Current provisions | (Note 15) | 2,216 |
| 2,220 |
|
| TOTAL EQUITY AND LIABILITIES (A+B+C) | | 115,066 |
| 123,641 |
|
| Consolidated statements of comprehensive income | 2014 | 2013 | 2012 |
| Millions of euros | | | |
| Profit for the year | 3,252 | 4,969 | 4,403 |
| Other comprehensive income (loss) | | | |
| (Losses) gains on measurement of available-for-sale investments | (45) | 32 | (49) |
| Income tax impact | 7 | (10) | 4 |
| Reclassification of losses included in the income statement | − | 51 | 46 |
| Income tax impact | − | (15) | (3) |
| | (38) | 58 | (2) |
| | | | |
| (Losses) gains on hedges | (507) | 831 | (1,414) |
| Income tax impact | 127 | (247) | 376 |
| Reclassification of losses included in the income statement (Note 16) | 163 | 121 | 173 |
| Income tax impact | (49) | (36) | (5) |
| | (266) | 669 | (870) |
| | | | |
| Share of losses recognized directly in equity of associates and others | (27) | (29) | (27) |
| Income tax impact | 3 | 4 | 9 |
| Reclassification of losses included in the income statement | 103 | 1 | 4 |
| Income tax impact | (24) | − | − |
| | 55 | (24) | (14) |
| | | | |
| Translation differences | (2,810) | (6,454) | (1,862) |
| | | | |
| Total other comprehensive loss recognized in the period (Items that may be reclassified subsequently to profit or loss) | (3,059) | (5,751) | (2,748) |
| | | | |
| Actuarial losses and impact of limit on assets for defined benefit pension plans | (173) | (49) | (154) |
| Income tax impact | 38 | 1 | 39 |
| | (135) | (48) | (115) |
| | | | |
| Total other comprehensive loss recognized in the period (Items that will not be reclassified subsequently to profit or loss) | (135) | (48) | (115) |
| | | | |
| Total comprehensive income (loss) recognized in the year | 58 | (830) | 1,540 |
| Attributable to: | | | |
| Equity holders of the parent and other holders of equity instruments | (258) | (434) | 1,652 |
| Non-controlling interests | 316 | (396) | (112) |
| | 58 | (830) | 1,540 |
| The accompanying Notes 1 to 23 and Appendices I to VII are an integral part of these consolidated statements of comprehensive income. |
| |
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | | Attributable to equity holders of the parent and other holders of equity instruments | | Non-controlling interests (Note 12) | | Total equity |
| Millions of euros | | Share capital | | Share premium | | Treasury Shares | | Other equity instruments | | Legal reserve | | Retained earnings | | Available-for-sale investments | | Hedges | | Equity of associates and others | | Translation differences | | Total | | | | |
| Financial position at December 31, 2013 | | 4,551 | | 460 | | (544) | | 2,466 | | 984 | | 22,517 | | 94 | | (37) | | (31) | | (9,275) | | 21,185 | | 6,297 | | 27,482 |
| Profit for the year | | − | | − | | − | | − | | − | | 3,001 | | − | | − | | − | | − | | 3,001 | | 251 | | 3,252 |
| Other comprehensive loss | | − | | − | | − | | − | | − | | (121) | | (39) | | (297) | | 55 | | (2,857) | | (3,259) | | 65 | | (3,194) |
| Total comprehensive income | | − | | − | | − | | − | | − | | 2,880 | | (39) | | (297) | | 55 | | (2,857) | | (258) | | 316 | | 58 |
| Dividends distribution (Note 12) | | 106 | | − | | − | | − | | − | | (2,138) | | − | | − | | − | | − | | (2,032) | | (406) | | (2,438) |
Net movement in treasury shares | | − | | − | | (1,042) | | − | | − | | (113) | | − | | − | | − | | − | | (1,155) | | − | | (1,155) |
| Acquisitions and disposals of non-controlling interests and business combinations (Note 5) | | − | | − | | − | | − | | − | | (307) | | − | | − | | − | | − | | (307) | | 2,965 | | 2,658 |
| Undated Deeply Subordinated Securities and notes mandatorily convertible (Note 12) | | − | | − | | − | | 3,885 | | − | | (129) | | − | | − | | − | | − | | 3,756 | | − | | 3,756 |
| Other movements | | − | | − | | − | | − | | − | | (74) | | − | | − | | − | | − | | (74) | | 2 | | (72) |
| Financial position at December 31, 2014 | | 4,657 | | 460 | | (1,586) | | 6,351 | | 984 | | 22,636 | | 55 | | (334) | | 24 | | (12,132) | | 21,115 | | 9,174 | | 30,289 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial position at December 31, 2012 | | 4,551 | | 460 | | (788) | | − | | 984 | | 19,569 | | 36 | | (715) | | (7) | | (3,629) | | 20,461 | | 7,200 | | 27,661 |
| Profit for the year | | − | | − | | − | | − | | − | | 4,593 | | − | | − | | − | | − | | 4,593 | | 376 | | 4,969 |
| Other comprehensive loss | | − | | − | | − | | − | | − | | (48) | | 58 | | 678 | | (24) | | (5,691) | | (5,027) | | (772) | | (5,799) |
| Total comprehensive loss | | − | | − | | − | | − | | − | | 4,545 | | 58 | | 678 | | (24) | | (5,691) | | (434) | | (396) | | (830) |
| Dividends distribution (Note 12) | | − | | − | | − | | − | | − | | (1,588) | | − | | − | | − | | − | | (1,588) | | (739) | | (2,327) |
| Net movement in treasury shares | | − | | − | | 244 | | − | | − | | (92) | | − | | − | | − | | − | | 152 | | − | | 152 |
| Acquisitions and disposals of non-controlling interests and business combinations (Note 5) | | − | | − | | − | | − | | − | | 66 | | − | | − | | − | | 45 | | 111 | | 238 | | 349 |
| Undated Deeply Subordinated Securities (Note 12) | | − | | − | | − | | 2,466 | | − | | − | | − | | − | | − | | − | | 2,466 | | − | | 2,466 |
| Other movements | | − | | − | | − | | − | | − | | 17 | | − | | − | | − | | − | | 17 | | (6) | | 11 |
| Financial position at December 31, 2013 | | 4,551 | | 460 | | (544) | | 2,466 | | 984 | | 22,517 | | 94 | | (37) | | (31) | | (9,275) | | 21,185 | | 6,297 | | 27,482 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial position at December 31, 2011 | | 4,564 | | 460 | | (1,782) | | − | | 984 | | 19,374 | | 38 | | 154 | | 7 | | (2,163) | | 21,636 | | 5,747 | | 27,383 |
| Profit for the year | | − | | − | | − | | − | | − | | 3,928 | | − | | − | | − | | − | | 3,928 | | 475 | | 4,403 |
| Other comprehensive loss | | − | | − | | − | | − | | − | | (112) | | (2) | | (870) | | (14) | | (1,278) | | (2,276) | | (587) | | (2,863) |
| Total comprehensive income | | − | | − | | − | | − | | − | | 3,816 | | (2) | | (870) | | (14) | | (1,278) | | 1,652 | | (112) | | 1,540 |
| Dividends distribution (Note 12) | | 71 | | − | | − | | − | | − | | (2,907) | | − | | − | | − | | − | | (2,836) | | (442) | | (3,278) |
| Net movement in treasury shares | | − | | − | | (327) | | − | | − | | (299) | | − | | − | | − | | − | | (626) | | − | | (626) |
| Acquisitions and disposals of non-controlling interests and business combinations (Note 5) | | − | | − | | − | | − | | − | | 1,170 | | − | | 1 | | − | | (188) | | 983 | | 1,800 | | 2,783 |
| Capital reduction | | (84) | | − | | 1,321 | | − | | − | | (1,237) | | − | | − | | − | | − | | − | | − | | − |
| Other movements | | − | | − | | − | | − | | − | | (348) | | − | | − | | − | | − | | (348) | | 207 | | (141) |
| Financial position at December 31, 2012 | | 4,551 | | 460 | | (788) | | − | | 984 | | 19,569 | | 36 | | (715) | | (7) | | (3,629) | | 20,461 | | 7,200 | | 27,661 |
| The accompanying Notes 1 to 23 and Appendices I to VII are an integral part of these consolidated statements of changes in equity. |
| Consolidated statements of cash flows | | | | |
| Millions of euros | NOTES | 2014 | 2013 | 2012 |
| Cash flows from operating activities | | | | |
| Cash received from customers | | 61,522 | 69,149 | 75,962 |
| Cash paid to suppliers and employees | | (45,612) | (50,584) | (55,858) |
| Dividends received | | 48 | 49 | 85 |
| Net interest and other financial expenses paid | | (2,578) | (2,464) | (2,952) |
| Taxes paid | | (1,187) | (1,806) | (2,024) |
| | | | | |
| Net cash from operating activities | (Note 20) | 12,193 | 14,344 | 15,213 |
| | | | | |
| Cash flows from investing activities | | | | |
| Proceeds on disposals of property, plant and equipment and intangible assets | | 340 | 561 | 939 |
| Payments on investments in property, plant and equipment and intangible assets | | (9,205) | (9,674) | (9,481) |
| Proceeds on disposals of companies, net of cash and cash equivalents disposed | | 3,615 | 260 | 1,823 |
| Payments on investments in companies, net of cash and cash equivalents acquired | | (5,020) | (398) | (37) |
| Proceeds on financial investments not included under cash equivalents | | 302 | 50 | 30 |
| Payments on financial investments not included under cash equivalents | | (247) | (386) | (834) |
| Proceeds (payments) on placements of cash surpluses not included under cash equivalents | | 217 | (314) | (318) |
| Government grants received | | 30 | 1 | 1 |
| | | | | |
| Net cash used in investing activities | (Note 20) | (9,968) | (9,900) | (7,877) |
| | | | | |
| Cash flows from financing activities | | | | |
| Dividends paid | (Note 12) | (2,328) | (2,182) | (3,273) |
| Transactions with equity holders | | (427) | 65 | 656 |
| Operations with other equity holders | (Note 12) | 3,713 | 2,466 | − |
| Proceeds on issue of debentures and bonds, and other debts | (Note 13) | 4,453 | 5,634 | 8,090 |
| Proceeds on loans, borrowings and promissory notes | | 4,290 | 3,231 | 6,002 |
| Cancellation of debentures and bonds, and other debts | (Note 13) | (5,116) | (5,667) | (4,317) |
| Repayments of loans, borrowings and promissory notes | | (8,604) | (6,232) | (8,401) |
| Payments on financed spectrum licenses | | (22) | − | − |
| | | | | |
| Net cash used in financing activities | (Note 20) | (4,041) | (2,685) | (1,243) |
| Effect of changes in exchange rates | | (1,616) | (1,468) | (382) |
| Effect of changes in consolidation methods | | (16) | (161) | 1 |
| Net increase (decrease) in cash and cash equivalents during the year | | (3,448) | 130 | 5,712 |
| CASH AND CASH EQUIVALENTS AT JANUARY 1 | | 9,977 | 9,847 | 4,135 |
| CASH AND CASH EQUIVALENTS AT DECEMBER 31 | (Note 13) | 6,529 | 9,977 | 9,847 |
| | | | | |
| RECONCILIATION OF CASH AND CASH EQUIVALENTS WITH THE STATEMENT OF FINANCIAL POSITION | | | | |
| | | | | |
| BALANCE AT JANUARY 1 | | 9,977 | 9,847 | 4,135 |
| Cash on hand and at banks | | 7,834 | 7,973 | 3,411 |
| Other cash equivalents | | 2,143 | 1,874 | 724 |
| BALANCE AT DECEMBER 31 | (Note 13) | 6,529 | 9,977 | 9,847 |
| Cash on hand and at banks | | 4,912 | 7,834 | 7,973 |
| Other cash equivalents | | 1,617 | 2,143 | 1,874 |
The accompanying Notes 1 to 23 and Appendices I to VII are an integral part of these consolidated statements of cash flows. |
financial position.
F-8 |
| | | | | | | |
| Consolidated income statements | | |
| |
| |
|
| Millions of euros | Notes | 2017 |
| 2016 |
| 2015 |
|
| INCOME STATEMENTS | | |
| |
| |
|
| Revenues | (Note 18) | 52,008 |
| 52,036 |
| 54,916 |
|
| Other income | (Note 18) | 1,489 |
| 1,763 |
| 2,011 |
|
| Supplies | | (15,022 | ) | (15,242 | ) | (16,547 | ) |
| Personnel expenses | (Note 18) | (6,862 | ) | (8,098 | ) | (10,349 | ) |
| Other expenses | (Note 18) | (15,426 | ) | (15,341 | ) | (16,802 | ) |
| Depreciation and amortization | (Note 18) | (9,396 | ) | (9,649 | ) | (9,704 | ) |
| OPERATING INCOME | | 6,791 |
| 5,469 |
| 3,525 |
|
| Share of income (loss) of investments accounted for by the equity method | (Note 9) | 5 |
| (5 | ) | (10 | ) |
| Finance income | | 1,073 |
| 1,770 |
| 2,076 |
|
| Exchange gains | | 3,958 |
| 5,489 |
| 6,504 |
|
| Finance costs | | (3,363 | ) | (4,476 | ) | (4,417 | ) |
| Exchange losses | | (3,867 | ) | (5,002 | ) | (6,772 | ) |
| Net financial expense | (Note 16) | (2,199 | ) | (2,219 | ) | (2,609 | ) |
| PROFIT BEFORE TAX | | 4,597 |
| 3,245 |
| 906 |
|
| Corporate income tax | (Note 17) | (1,219 | ) | (846 | ) | (155 | ) |
| PROFIT FOR THE YEAR | | 3,378 |
| 2,399 |
| 751 |
|
| Attributable to equity holders of the Parent | | 3,132 |
| 2,369 |
| 616 |
|
| Attributable to non-controlling interests | (Note 12) | 246 |
| 30 |
| 135 |
|
| Basic and diluted earnings per share attributable to equity holders of the parent (euros) | (Note 18) | 0.56 |
| 0.42 |
| 0.07 |
|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated income statements.
|
| | | | | | |
| Consolidated statements of comprehensive income | 2017 |
| 2016 |
| 2015 |
|
| Millions of euros | | | |
| Profit for the year | 3,378 |
| 2,399 |
| 751 |
|
| Other comprehensive (loss) income | (5,148 | ) | 3,339 |
| (6,697 | ) |
| Gains (losses) on measurement of available-for-sale investments | 26 |
| (77 | ) | 415 |
|
| Income tax impact | 6 |
| 22 |
| (123 | ) |
| Reclassification of losses (gains) included in the income statement (Note 16) | 33 |
| 136 |
| (539 | ) |
| Income tax impact | — |
| (19 | ) | 139 |
|
| | 65 |
| 62 |
| (108 | ) |
| Gains (Losses) on hedges | 62 |
| 498 |
| (14 | ) |
| Income tax impact | 6 |
| (120 | ) | (37 | ) |
| Reclassification of losses (gains) included in the income statement (Note 16) | 162 |
| 54 |
| 207 |
|
| Income tax impact | (40 | ) | (14 | ) | (58 | ) |
| | 190 |
| 418 |
| 98 |
|
| Share of gains (losses) recognized directly in equity of associates and others | 8 |
| (8 | ) | 17 |
|
| Income tax impact | (2 | ) | 3 |
| (4 | ) |
| Reclassification of losses (gains) included in the income statement | — |
| — |
| — |
|
| Income tax impact | — |
| — |
| — |
|
| | 6 |
| (5 | ) | 13 |
|
| Translation differences (Note 12) | (5,422 | ) | 3,152 |
| (6,762 | ) |
| Total other comprehensive (loss) income recognized in the period (Items that may be reclassified subsequently to profit or loss) | (5,161 | ) | 3,627 |
| (6,759 | ) |
| Actuarial gains (losses) and impact of limit on assets for defined benefit pension plans | 14 |
| (378 | ) | 94 |
|
| Income tax impact | (1 | ) | 90 |
| (32 | ) |
| | 13 |
| (288 | ) | 62 |
|
| Total other comprehensive income (loss) recognized in the period (Items that will not be reclassified subsequently to profit or loss) | 13 |
| (288 | ) | 62 |
|
| Total comprehensive (loss) income recognized in the year | (1,770 | ) | 5,738 |
| (5,946 | ) |
| Attributable to: | |
| |
| |
|
| Equity holders of the parent and other holders of equity instruments | (1,186 | ) | 4,630 |
| (4,535 | ) |
| Non-controlling interests | (584 | ) | 1,108 |
| (1,411 | ) |
| | (1,770 | ) | 5,738 |
| (5,946 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | Attributable to equity holders of the parent and other holders of equity instruments | Non-controlling interests (Note 12) |
| Total equity |
|
| Millions of euros | Share capital |
| Share premium |
| Treasury Shares |
| Other equity instruments |
| Legal reserve |
| Retained earnings |
| Available-for-sale investments |
| Hedges |
| Equity of associates and others |
| Translation differences |
| Total |
| |
| |
| Financial position at December 31, 2016 | 5,038 |
| 3,227 |
| (1,480 | ) | 7,803 |
| 985 |
| 17,093 |
| 9 |
| 191 |
| 31 |
| (14,740 | ) | 18,157 |
| 10,228 |
| 28,385 |
|
| Profit for the year | — |
| — |
| — |
| — |
| — |
| 3,132 |
| — |
| — |
| — |
| — |
| 3,132 |
| 246 |
| 3,378 |
|
| Other comprehensive income (loss) for the year | — |
| — |
| — |
| — |
| — |
| 16 |
| 65 |
| 193 |
| 6 |
| (4,598 | ) | (4,318 | ) | (830 | ) | (5,148 | ) |
| Total comprehensive income (loss) for the year | — |
| — |
| — |
| — |
| — |
| 3,148 |
| 65 |
| 193 |
| 6 |
| (4,598 | ) | (1,186 | ) | (584 | ) | (1,770 | ) |
| Dividends paid (Note 12) | — |
| — |
| — |
| — |
| 2 |
| (2,021 | ) | — |
| — |
| — |
| — |
| (2,019 | ) | (583 | ) | (2,602 | ) |
| Net movement in treasury shares | — |
| — |
| 35 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 35 |
| — |
| 35 |
|
| Acquisitions and disposals of non-controlling interests and business combinations (Note 5) | — |
| — |
| 754 |
| — |
| — |
| 449 |
| — |
| — |
| — |
| (9 | ) | 1,194 |
| 649 |
| 1,843 |
|
| Undated Deeply Subordinated Securities and Notes mandatorily convertible (Note 12) | 154 |
| 1,311 |
| — |
| (285 | ) | — |
| (443 | ) | — |
| — |
| — |
| — |
| 737 |
| (12 | ) | 725 |
|
| Other movements | — |
| — |
| 3 |
| — |
| — |
| (1 | ) | — |
| — |
| — |
| — |
| 2 |
| — |
| 2 |
|
| Financial position at December 31, 2017 | 5,192 |
| 4,538 |
| (688 | ) | 7,518 |
| 987 |
| 18,225 |
| 74 |
| 384 |
| 37 |
| (19,347 | ) | 16,920 |
| 9,698 |
| 26,618 |
|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated statements of changes in equity.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Attributable to equity holders of the parent and other holders of equity instruments | Non-controlling interests (Note 12) |
| Total equity |
|
| Millions of euros | Share capital |
| Share premium |
| Treasury Shares |
| Other equity instruments |
| Legal reserve |
| Retained earnings |
| Available-for-sale investments |
| Hedges |
| Equity of associates and others |
| Translation differences |
| Total |
| |
| |
|
| Financial position at December 31, 2015 | 4,975 |
| 3,227 |
| (1,656 | ) | 6,803 |
| 984 |
| 18,475 |
| (53 | ) | (231 | ) | 36 |
| (16,789 | ) | 15,771 |
| 9,665 |
| 25,436 |
|
| Profit for the year | — |
| — |
| — |
| — |
| — |
| 2,369 |
| — |
| — |
| — |
| — |
| 2,369 |
| 30 |
| 2,399 |
|
| Other comprehensive income (loss) for the year | — |
| — |
| — |
| — |
| — |
| (267 | ) | 62 |
| 422 |
| (5 | ) | 2,049 |
| 2,261 |
| 1,078 |
| 3,339 |
|
| Total comprehensive income (loss) for the year | — |
| — |
| — |
| — |
| — |
| 2,102 |
| 62 |
| 422 |
| (5 | ) | 2,049 |
| 4,630 |
| 1,108 |
| 5,738 |
|
| Dividends paid (Note 12) | 137 |
| — |
| — |
| — |
| 1 |
| (2,544 | ) | — |
| — |
| — |
| — |
| (2,406 | ) | (524 | ) | (2,930 | ) |
| Net movement in treasury shares | — |
| — |
| (637 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (637 | ) | — |
| (637 | ) |
| Acquisitions and disposals of non-controlling interests and business combinations | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (7 | ) | (7 | ) |
| Capital reduction (Note 12) | (74 | ) | — |
| 813 |
| — |
| — |
| (739 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Undated Deeply Subordinated Securities and Notes mandatorily convertible (Note 12) | — |
| — |
| — |
| 1,000 |
| — |
| (255 | ) | — |
| — |
| — |
| — |
| 745 |
| (14 | ) | 731 |
|
| Other movements | — |
| — |
| — |
| — |
| — |
| 54 |
| — |
| — |
| — |
| — |
| 54 |
| — |
| 54 |
|
| Financial position at December 31, 2016 | 5,038 |
| 3,227 |
| (1,480 | ) | 7,803 |
| 985 |
| 17,093 |
| 9 |
| 191 |
| 31 |
| (14,740 | ) | 18,157 |
| 10,228 |
| 28,385 |
|
| | | | | | | | | | | | | | |
| Financial position at December 31, 2014 | 4,657 |
| 460 |
| (1,586 | ) | 6,351 |
| 984 |
| 22,656 |
| 55 |
| (334 | ) | 24 |
| (12,132 | ) | 21,135 |
| 9,186 |
| 30,321 |
|
| Profit for the year | — |
| — |
| — |
| — |
| — |
| 616 |
| — |
| — |
| — |
| — |
| 616 |
| 135 |
| 751 |
|
| Other comprehensive income (loss) for the year | — |
| — |
| — |
| — |
| — |
| 43 |
| (108 | ) | 103 |
| 12 |
| (5,201 | ) | (5,151 | ) | (1,546 | ) | (6,697 | ) |
| Total comprehensive income (loss) for the year | — |
| — |
| — |
| — |
| — |
| 659 |
| (108 | ) | 103 |
| 12 |
| (5,201 | ) | (4,535 | ) | (1,411 | ) | (5,946 | ) |
| Dividends paid (Note 12) | 111 |
| — |
| — |
| — |
| — |
| (2,360 | ) | — |
| — |
| — |
| — |
| (2,249 | ) | (641 | ) | (2,890 | ) |
| Net movement in treasury shares | — |
| — |
| (1,511 | ) | — |
| — |
| (75 | ) | — |
| — |
| — |
| — |
| (1,586 | ) | — |
| (1,586 | ) |
| Acquisitions and disposals of non-controlling interests and business combinations (Note 5) | — |
| — |
| 555 |
| — |
| — |
| (1,297 | ) | — |
| — |
| — |
| 628 |
| (114 | ) | 2,538 |
| 2,424 |
|
| Capital increase (Note 12) | 281 |
| 2,767 |
| — |
| — |
| — |
| (41 | ) | — |
| — |
| — |
| — |
| 3,007 |
| — |
| 3,007 |
|
| Capital reduction (Note 12) | (74 | ) | — |
| 886 |
| — |
| — |
| (812 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Undated Deeply Subordinated Securities and Notes mandatorily convertible (Note 12) | — |
| — |
| — |
| 452 |
| — |
| (247 | ) | — |
| — |
| — |
| (84 | ) | 121 |
| (7 | ) | 114 |
|
| Other movements | — |
| — |
| — |
| — |
| — |
| (8 | ) | — |
| — |
| — |
| — |
| (8 | ) | — |
| (8 | ) |
| Financial position at December 31, 2015 | 4,975 |
| 3,227 |
| (1,656 | ) | 6,803 |
| 984 |
| 18,475 |
| (53 | ) | (231 | ) | 36 |
| (16,789 | ) | 15,771 |
| 9,665 |
| 25,436 |
|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated statements of changes in equity.
|
| | | | | | | |
| Consolidated statements of cash flows | | | | |
| Millions of euros | Notes | 2017 |
| 2016 |
| 2015 |
|
| Cash received from operations | (Note 20) | 63,456 |
| 63,514 |
| 67,582 |
|
| Cash paid from operations | (Note 20) | (46,929 | ) | (47,384 | ) | (50,833 | ) |
| Net payments of interest and other financial expenses net of dividends received | (Note 20) | (1,726 | ) | (2,143 | ) | (2,445 | ) |
| Taxes paid | (Note 20) | (1,005 | ) | (649 | ) | (689 | ) |
| Net cash flow provided by operating activities | (Note 20) | 13,796 |
| 13,338 |
| 13,615 |
|
| (Payments on investments)/proceeds from the sale in property, plant and equipment and intangible assets, net | (Note 20) | (8,992 | ) | (9,187 | ) | (10,256 | ) |
| Proceeds on disposals of companies, net of cash and cash equivalents disposed | (Note 20) | 40 |
| 767 |
| 354 |
|
| Payments on investments in companies, net of cash and cash equivalents acquired | (Note 20) | (128 | ) | (54 | ) | (3,181 | ) |
| Proceeds on financial investments not included under cash equivalents | (Note 20) | 296 |
| 489 |
| 1,142 |
|
| Payments on financial investments not included under cash equivalents | (Note 20) | (1,106 | ) | (265 | ) | (426 | ) |
| (Payments)/proceeds on placements of cash surpluses not included under cash equivalents | | (357 | ) | 42 |
| (557 | ) |
| Government grants received | | 2 |
| — |
| 7 |
|
| Net cash flow used in investing activities | (Note 20) | (10,245 | ) | (8,208 | ) | (12,917 | ) |
| Dividends paid | (Note 20) | (2,459 | ) | (2,906 | ) | (2,775 | ) |
| Proceeds from share capital increase | (Note 20) | 2 |
| — |
| 4,255 |
|
| Proceeds/(payments) of treasury shares and other operations with shareholders and with minority interests | (Note 20) | 1,269 |
| (660 | ) | (1,772 | ) |
| Operations with other equity holders | (Note 20) | 646 |
| 656 |
| 83 |
|
| Proceeds on issue of debentures and bonds, and other debts | (Note 20) | 8,390 |
| 5,693 |
| 1,602 |
|
| Proceeds on loans, borrowings and promissory notes | (Note 20) | 4,844 |
| 10,332 |
| 8,784 |
|
| Repayments of debentures and bonds, and other debts | (Note 20) | (6,687 | ) | (6,873 | ) | (3,805 | ) |
| Repayments of loans, borrowings and promissory notes | (Note 20) | (6,711 | ) | (8,506 | ) | (9,858 | ) |
| Financed operating payments and investments in property, plant and equipment and intangible assets payments | (Note 20) | (1,046 | ) | (1,956 | ) | (126 | ) |
| Net cash used in financing activities | (Note 20) | (1,752 | ) | (4,220 | ) | (3,612 | ) |
| Effect of changes in exchange rates | | (341 | ) | 185 |
| (1,000 | ) |
| Effect of changes in consolidation methods and others | | (2 | ) | 26 |
| — |
|
| Net increase (decrease) in cash and cash equivalents during the year | | 1,456 |
| 1,121 |
| (3,914 | ) |
| CASH AND CASH EQUIVALENTS AT JANUARY 1 | | 3,736 |
| 2,615 |
| 6,529 |
|
| CASH AND CASH EQUIVALENTS AT DECEMBER 31 | (Note 13) | 5,192 |
| 3,736 |
| 2,615 |
|
| RECONCILIATION OF CASH AND CASH EQUIVALENTS WITH THE STATEMENT OF FINANCIAL POSITION | | |
| |
| |
|
| BALANCE AT JANUARY 1 | | 3,736 |
| 2,615 |
| 6,529 |
|
| Cash on hand and at banks | | 2,077 |
| 1,278 |
| 4,912 |
|
| Other cash equivalents | | 1,659 |
| 1,337 |
| 1,617 |
|
| BALANCE AT DECEMBER 31 | (Note 13) | 5,192 |
| 3,736 |
| 2,615 |
|
| Cash on hand and at banks | | 3,990 |
| 2,077 |
| 1,278 |
|
| Other cash equivalents | | 1,202 |
| 1,659 |
| 1,337 |
|
The accompanying Notes 1 to 23 and Appendices I to VI are an integral part of these consolidated statements of cash flows.
Telefónica, S.A. and subsidiaries composing the Telefónica Group
Notes to the consolidated financial statements (consolidated annual accounts) for the year ended December 31, 2014
Note 1. Background and general information
Telefónica, S.A. and its subsidiaries and investees (“Telefónica”, “the Company”, the “Telefónica Group” or "the Group”) make up an integrated and diversified telecommunications group operating mainly in Europe and Latin America. The Group’s activity is centered around services of wireline and wireless telephony, broadband, internet, data traffic, Pay TV and other digital services.
The parent company of the Group is Telefónica, S.A., a public limited company incorporated on April 19, 1924 for an indefinite period. Its registered office is at calle Gran Vía 28, Madrid (Spain).
Appendix VII lists the main companies composing the Telefónica Group, their corporate purpose, country, functional currency, share capital, the Group’s effective shareholding and their method of consolidation.
The website www.telefonica.com provides more information about the organizational structure of the Group, the sectors in which it operates and the products it offers.
As a multinational telecommunications company which operates in regulated markets, the Group is subject to different laws and regulations in each of the jurisdictions in which it operates, pursuant to which permits, concessions or licenses must be obtained in certain circumstances to provide the various services.
In addition, certain wireline and wireless telephony services are provided under regulated rate and price systems. Key regulatory issues, and concessions and licenses held by the Telefónica Group are detailed in Appendix VI.
Note 2. Basis of presentation of the consolidated financial statements
The accompanying consolidated financial statements were prepared from the accounting records of Telefónica, S.A. and of each of the companies comprising the Telefónica Group, whose separate financial statements were prepared in accordance with the generally accepted accounting principles prevailing in the various countries in which they are located, and for purposes of these consolidated financial statements are presented in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), which for the purposes of the Telefónica Group are not different from those adopted by the European Union, to. These consolidated financial statements give a true and fair view of the consolidated equity and financial position at December 31, 2014,2017, and of the consolidated results of operations, changes in consolidated equity and the consolidated cash flows obtained and used in the year then ended.ended, which for the purposes of the Telefónica Group are not different from those adopted by the European Union. The euro is the Group’s reporting currency. The figures in these consolidated financial statements are expressed in millions of euros, unless otherwise indicated, and therefore may be rounded. The euro is the Group’s reporting currency.
The accompanying consolidated financial statements for the year ended December 31, 20142017 were approved by the Company’s Board of Directors at its meeting on February 23, 201521, 2018 for submission for approval at the General Shareholders’ Meeting, which is expected to occur without modification.
Note 3 contains a detailed description of the most significant accounting policies used to prepare these consolidated financial statements.
Materiality criteria
These consolidated financial statements do not include anycertain information or disclosures that, not requiring presentation due to their qualitative significance, have been determined as immaterial or of no relevance pursuant to the concepts of materiality or relevance defined in the IFRS conceptual framework, insofar as the Telefónica GroupGroup’s consolidated financial statements, taken as a whole, are concerned.
Recognition of Telefónica’s operation in the United Kingdom
On March 24, 2015, Telefónica, S.A. reached an agreement with Hutchison Whampoa Group for the acquisition of Telefónica’s operations in United Kingdom. In accordance with IFRS 5, companies under the sale agreement were classified as a disposal group held for sale at that date, and their operations qualified as discontinued operations in the consolidated financial statements for the year ended December 31, 2015.
On May 11, 2016 the European Commission made public its decision to prohibit the transaction. Following the submission of the consolidated financial information of the second quarter of 2016, Telefónica’s operations in United Kingdom were no longer presented as discontinued operations and their assets and liabilities ceased to be classified as held for sale. Thus, items are presented line by line in the consolidated financial statements. Accordingly, the comparative figures for 2015 were amended in the consolidated financial statements for the year ended December 31, 2016 with respect to those published in the consolidated financial statements for the year ended December 31, 2015.
Comparative information and main changes in the consolidation scope
For comparative purposes, the accompanying consolidated financial statements for 20142017 include the figures for 2013,2016, and in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows, and the notes thereto for the year then ended, they also include those of 2012.
2015.
The main events and changes in the consolidation scope affecting comparability of the consolidated information for 20142017 and 20132016 (see Appendix I for a more detailed explanationdetail of the consolidation scope and the changes in consolidation scope)during the year) are as follows:
a) Capital increase in Coltel, termination of the operating agreement with the PARAPAT and arbitration award
a) Exchange rate regimeColombia Telecomunicaciones, S.A. E.S.P. (Coltel) is a company in Venezuelawhich Telefónica holds a 67.5% stake and the Colombian Government the remaining 32.5% (see Note 21.c).
On August 29, 2017, the shareholders' meeting of ColTel approved:
On February 8, 2013,
a capital increase for an aggregate amount of 4,800,966 million Colombian pesos (capital and premium), 1,384 million euros at the Venezuelan bolivar was devalued from 4.3 bolivars per U.S. dollar to 6.3 bolivars per U.S. dollar.
The exchange rate of 6.3 bolivars per U.S. dollarthe relevant transaction date, so that Coltel would voluntarily pre-pay the entire amount of ColTel's debt derived from the operating agreement dated August 13, 2003 with Patrimonio Autónomo Receptor de Activos de la Empresa Nacional de Telecomunicaciones (the "PARAPAT").
The Telefónica Group and the Colombian Government subscribed the PARAPAT-Capital Increase pro rata to their respective shareholding in ColTel (see Note 12.h). The Telefónica Group disbursed 3,240,652 million Colombian pesos, 934 million euros at the exchange rate of the relevant transaction date. The Government assumed 32.5% of ColTel's payment obligations with the PARAPAT.
The PARAPAT capital Increase was subscribed on September 26, 2017, and on September 27, 2017 ColTel pre-paid all of its debt with the PARAPAT (see Note 22), acquiring the ownership of the assets related to PARAPAT.
As part of the early termination of the operating agreement with the PARAPAT, Coltel acquired control (see Note 5) of the companies Empresa de Telecomunicaciones de Telebucaramanga S.A. ESP (“Telebucaramanga”), Metropolitana de Telecomunicaciones S.A. ESP (“Metrotel”) and Operaciones Tecnológicas y Comerciales S.A.S. (“Optecom”), for a combined total of 509,975 million Colombian pesos (approximately 147 million euros at the date of the transaction).
a capital increase for an aggregate amount of 1,651,012 million Colombian pesos (capital and premium), 470 million euros at the exchange rate of that date.
The proceeds from the Arbitration Award-Capital Increase were used to pay the entire amount set forth in the translationarbitration award issued in the arbitration proceedings initiated by the ITC in connection with its intention to revert certain assets earmarked for the provisions of mobile voice services under former concessions (see Note 6 and Appendix VI).
The Telefónica Group and the Colombian Government subscribed the Arbitration Award-Capital Increase pro rata to their respective shareholding in ColTel. The Telefónica Group disbursed 1,114,433 million Colombian pesos, 317 million euros at the exchange rate of the financial informationrelevant transaction date. The Colombian Government assumed, and consequently offset, a portion of Venezuelan subsidiariesColTel's indebtedness.
b) Individual Suspension Plan
In 2015 Telefónica de España, S.A.U., Telefónica Móviles España, S.A.U. and Telefónica Soluciones de Informática y Comunicaciones de España, S.A.U. signed the 1st Collective Agreement of Related Companies (CEV), wholly backed by the largest labor unions. This agreement considered, among other elements, a plan of measures for individual suspension of the whole year 2013.
During 2014,employment relationship in 2016 and 2017, applying principles of voluntariness, universality, non-discrimination and social responsibility. In December 2016, the Collective Agreement of Related Companies was extended until 2018, by virtue of certain Exchange Agreements the allocations conducted throughprovisions of this same agreement.
The expense relating to the Complementary Systempresent value of the payment flows to meet the commitments resulting from the extension of this program was recognized in 2016. A total of 789 million euros was recorded for Administrationthe Individual Suspension Plan in 2016 (2,896 million euros in 2015). The provision was updated as of Foreign Currency (SICAD I),31 December 2017 according to the present degree of adhesion of the Plan, which, together with the updated termination plans, entailed an expense of 165 million euros in the 2017 consolidated income statement (see Note 15).
c) Sale of 24.8% and 15.2% of the total share capital of Telxius Telecom, S.A. (Telxius)
On October 24, 2017, Telefónica transferred 62 million shares of Telxius (representing 24.8% per cent of its share capital) to Taurus Bidco S.à.r.l. (hereafter, ”KKR”, an entity managed by Kohlberg Kravis Roberts & Co. L.P.) in exchange for 790.5 million euros.
On November 13, 2017 KKR exercised a call option over 38 million shares of Telxius (representing 15.2% of its share capital) in exchange for 484.5 million euros (see Note 5).
Following the closing of this sale of 15.2% of the share capital of Telxius, in December 2017, together with the 24.8% of the share capital acquired in October, the total stake of KKR is 40% of the share capital of Telxius in exchange for an aggregate amount of 1,275 million euros (see Note 20). These transactions had no impact on the consolidated
results of the Telefónica Group as it consisted of the sale of minority interests, with Telefónica retaining control over Telxius. The impact of these transactions in equity attributable to equity holders of the parent was an increase of 570 million euros in retained earnings and a decrease of 9 million euros in translation differences. In addition, there was an increase in equity attributable to non-controlling interests amounting to 690 million euros (see Note 12).
d) Translation of Telefónica Venezolana’s financial statements
Venezuela had access for imports, were expandedhas been considered a hyperinflationary economy since 2009. The Bolivar (VEF) is the functional currency of the Venezuelan subsidiaries. We review on a regular basis the economic conditions in Venezuela and the specific circumstances of our Venezuelan operations. Assessment of the exchange rate that better reflects the economics of Telefónica’s business activities in addition,Venezuela relies on several factors and is performed considering all the information available at each closing date.
Over the year 2017, the economic and political crisis in Venezuela deepened, bringing a substantial increase in inflation rates. However, the official exchange rate has not followed the change in inflation, and therefore is not representative of the value of the local currency as it does not reflect its real loss in purchasing power. On May 2017, the Government issued a new exchange mechanismExchange Agreement that established a foreign currency auctions system with monitored fluctuating bands, although no new currency auctions have been called since August 2017. In January 2018, the Government issued a more widespread use was put in place, called SICAD II.
The exchange rates resulting in the last allocations of SICAD I and SICAD II before December 31, 2014 were 12 and 49.988 bolívares per U.S. dollar, respectively.
In the absence of SICAD I auctions since mid-October 2014, and the lack of expectations ofnew Exchange Agreement establishing a new auctions close to 2014 year-end, in a macroeconomic context aggravated bymechanism where the fall offoreign currency offer will mainly come from the oil price,private sector and eliminating the Company has decided to take as a reference thecurrency protection system ("DIPRO"). The exchange rate resulting in the allocations conducted through SICAD IIfirst currency auction was 30,988 VEF/EUR (equivalent to 25,000 VEF/USD). The structural weaknesses of this exchange mechanism (lack of depth and transparency) suggest there will remain a significant departure between official exchange rates and inflation.
In light of this economic reality and in the absence of official rates that are representative of the situation in Venezuela, in 2017 the Group considers the need to estimate an exchange rate that matches the progression of inflation in Venezuela and contributes to reflect the economic and financial position of the Group’s Venezuelan operations within its consolidated financial statements in a more accurate way (hereinafter, synthetic exchange rate). For these purposes, the calculation method consists of using a representative exchange rate as a starting point, when official exchange rates, existing alternative exchange rates and those rates calculated by using macroeconomic methodologies were more aligned, and restating it for translatinginflation, using the inflation rates applied by the Group to Venezuela (2,874.1% for year 2017, 511.1% for year 2016).
The exchange rate used to translate the financial statements of the Venezuelan subsidiaries. The Company has considered that it is the most representative among the available official exchange rates at 2014 year-end for the monetary translation of the accounting figures of transactions, cash flows and balances.
The main impacts of using this new exchange rate in the Telefónica Group’s consolidated financial statementssubsidiaries as of December 31, 2014 were as follows:2017 resulting from the described calculation methodology amounts to 36,115 VEF/USD. As of December 31, 2017, the SIMADI DICOM exchange rate, used by Telefónica in prior periods, amounted to 3,345 VEF/USD.
The financial result resulting from the hyperinflation adjustment to the net monetary position and from the exchange differences arising from foreign currency items held by Telefónica Venezolana amounted to 84 million euros in 2017 (299 million euros in 2016), see Note 16.
The following table presents the contribution of Telefónica Venezolana to certain items of the consolidated income statement, statement of cash flows and statement of financial position of the Telefónica Group for 2017, applying the synthetic exchange rate:
|
| · | A decrease in Equity, within |
| Million euros | |
Contribution of Telefónica Venezolana to the caption “Translation differences”, of approximately 2,950 million euros (see Note 12.f) as a combined resultconsolidated financial statements of the translation to euros at the new exchange rate partially offset by the impact in equity of the inflation adjustment for the period.Telefónica Group |
| |
·Revenues | As part of the decrease mentioned in the preceding paragraph, the value in euros of the net financial assets denominated in bolivars decreased by approximately 2,700 million euros, as per the balance as of December 31, 2014.106 |
|
| · | The results from the Telefónica’s subsidiaries in Venezuela have been translated at the new exchange rate. This implies a reduction in Operating income before depreciation and amortization (OIBDA) | 34 |
|
Depreciation and profit for the yearamortization | (103 | ) |
| Profit before tax | 9 |
|
| Net result | (129 | ) |
Other comprehensive income (movement of approximately, 1,730 and 660 million euros, respectively.translation differences, see Note 12.f) | (328 | ) |
b) Acquisition of E-Plus
Telefónica finalized the E-Plus Mobilfunk GmbH &Co KG (E-Plus) purchase on October 1, 2014, once the approval of the European Commission was obtained and the share capital increase by Telefónica Deutschland Holding, A.G. to finance the operation was completed.
Following the acquisition of E-Plus, the Telefónica Group’s stake in Telefónica Deutschland Holding, A.G. decreased from 76.83% to 62.1%. The Group consolidates E-Plus from October 1, 2014 using the full consolidation method.
The purchase consideration amounts to 7,463 million euros. The fair value of the assets acquired and the liabilities assumed was 7,460 and 1,683 million euros, respectively. The goodwill generated on the transaction amounts to 1,686 million euros (see Note 5).
c) Recording of the investment in Telecom Italia, S.p.A.
Telefónica, S.A.’s shareholding in Telco, S.p.A., (holding company of our investment in Telecom Italia, S.p.A.), previously accounted for using the equity method (see Note 9), was classified as an available-for-sale financial asset under “Non-current financial assets” (see Note 13), as of December 31, 2014, as it was considered that Telefónica ceased to have significant influence in its indirect stake in Telecom Italia, S.p.A.
The impact of this reclassification, together with the contribution of Telco, S.p.A. to results for the year, led to a negative impact of 464 million euros in 2014 under the heading “Share of loss of investments accounted for by the equity method”.
In 2013, the negative impact of Telco, S.p.A. on “Share of loss of investments accounted for by the equity method” was 267 million euros.
d) Sale of ownership interest in Telefónica Czech Republic, a.s.
On November 5, 2013 Telefónica reached an agreement to sell 65.9% of Telefónica Czech Republic, a.s. to PPF Group N.V.I. for an equivalent of approximately 2,467 million euros in cash at the date of the agreement.
As a result of the transaction, a loss was recognized for the 176 million-euro adjustment to the value of the assets assigned to Telefónica Czech Republic, under "Other expenses" in the consolidated income statement for 2013 (see Note 18).
Consolidated assets and liabilities subject to this transaction were classified under “Non-current assets held for sale” and “Liabilities associated with non-current assets held for sale”, respectively, in the consolidated statement of financial position at December 31, 2013. Their composition is as follows:
Millions of eurosNet cash flow provided by operating activities | 12/31/201335 |
|
| Capital expenditures (CapEx) | 9 |
|
| Non-current assets | 3,436 |
Current assets295 | 412 |
Non-current liabilities | 280 |
Current liabilities | 436
|
Given that Venezuela is considered a hyperinflationary economy, the financial statements are adjusted for inflation (see Note 3.a), with the most significant impact being the adjustment of non-current assets by the inflation index. The transaction was completeddifference between the profit before tax and the net result corresponds to the deferred tax recognized (see Note 17) for the inflation adjustments of the net assets, which are not deductible according to the present tax regime in Venezuela.
At December 31, 2017, the SIMADI/DICOM exchange rate is 10.8 times the synthetic exchange rate. As mentioned above, the official exchange rate resulting from the new Exchange Regime issued in January 2014, once2018 is closer to the pertinent regulatory authorization was obtained, andsynthetic exchange rate estimated by Telefónica. For illustrative purposes, if the entity was removed fromTelefónica Group had used the consolidation scope asSIMADI/DICOM exchange rate, the figures of January 1, 2014. The impact to Equity attributable to non-controlling interests is a 666 million euros decrease (see Note 12.h).
Subsequent tothe above table would have been impacted proportionally by this transaction, Telefónica held a 4.9% stakedifference in the company,exchange rates, except for other comprehensive income, which in turn was sold in October 2014 for 160 million euros.
e) Sale of ownership interest in Telefónica Ireland, Ltd.
In June 2013 Telefónica reached an agreement with Hutchison Whampoa Group for the sale of Telefónica’s 100% participation in Telefónica Ireland, Ltd. for 850 million euros, including an initial cash consideration of 780 million euros to be paid at the closing of the transaction, and an additional deferred payment of 70 million euros to be settled based on the completion of agreed financial objectives.
Consolidated assets and liabilities subject to this transaction have been classified under “Non-current assets held for sale” and “Liabilities associated with non-current assets held for sale”, respectively, in the consolidated statement of financial position at December 31, 2013. Their composition is as follows:
Millions of euros | 12/31/2013 |
Non-current assets | 836 |
Current assets | 191 |
Non-current liabilities | 35 |
Current liabilities | 171 |
The sale was concluded on July 15, 2014, once the pertinent regulatory authorizations were obtained.
Note 3. Accounting policies
As stated in Note 2, the Group’s consolidated financial statements have been prepared in accordance with IFRSs and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC) as endorsed by the European Commission for use in the European Union (IFRSs – EU).
Accordingly, only the most significant accounting policies used in preparing the accompanying consolidated financial statements, in light of the nature of the Group’s activities, are set out below, as well as the accounting policies applied where IFRSs permit a policy choice, and those that are specific to the sector in which the Group operates.
a) Hyperinflationary economies
Venezuela is considered as a hyperinflationary economy since 2011.2009. The inflation rates used to prepare the restated financial information are thosethe “Indice Nacional de Precios al Consumidor de Venezuela”, published by the Central Bank of Venezuela, or the best estimate in case the definitivefinal index is not available. On an annual basis, these rates are 64.1%2,874.1%, 511.1% and 56.2%190.8% for 20142017, 2016 and 2013,2015, respectively.
The exchange rate used to translate inflation-adjusted bolivar-denominated items is the exchange rate as of the closing date of each reporting period, amounting to 36,115.28 bolivars per U.S. dollar (synthetic exchange rate, see Note 2), 673.762 bolivars per U.S. dollar (DICOM) and 198.699 bolivars per U.S. dollar (SIMADI) as of December 31, 2017, 2016 and 2015, respectively.
b) Translation methodology
The income statements and statements of cash flows of the Group’s foreign subsidiaries (except Venezuela) were translated into euros at the average exchange rates for the year.year, as a rate that approximates the exchange rates at the dates of the transactions.
After initial recognition, goodwill is carried at cost, less any accumulated impairment losses. Goodwill is recognized as an asset denominated in the currency of the company acquired and is tested for impairment annually or more frequently, if there are certain events or changes indicating the possibility that the carrying amount may not be fully recoverable. The potential impairment loss is determined by assessing the recoverable amount of the cash generating unit (or group of cash generating units) to which the goodwill is allocated from the acquisition date.
Intangible assets are carried at acquisition or production cost, less any accumulated amortization or any accumulated impairment losses.
Intangible assets are amortized on a straight-line basis according to the following:
Licenses granted to the Telefónica Group by various public authorities to provide telecommunications services and the value allocated to licenses held by certain companies at the time they were included in the Telefónica Group (“Service concession arrangements and licenses”) are amortized on a straight-line basis over the duration of related licenses from the moment commercial operation begins.
| · | Expenditures incurred in developing new products to be available for sale or use within the Group’s own network, and whose future economic viability is reasonably certain (“Development costs”), are amortized on a straight-line basis over the period during which the related development project is expected to generate economic benefits, upon its completion. |
The allocation of acquisition costs attributable to customers acquired in business combinations, as well as the acquisition value of this type of assets in a third-party transaction for consideration (“Customer base”) are amortized on a straight-line basis over the estimated period of the customer relationship. The term length is between 5 to 14 years, based on the customer segment (residential, business, etc.) and the business model (prepaid, postpaid, etc.).
Software is amortized on a straight-line basis over its useful life, generally estimated to be between two and five years.
| · | Licenses granted to the Telefónica Group by various public authorities to provide telecommunications services and the value allocated to licenses held by certain companies at the time they were included in the Telefónica Group (“Service concession arrangements and licenses”) are amortized on a straight-line basis over the duration of related licenses from the moment commercial operation begins. |
e) Property, plant and equipment | · | The allocation of acquisition costs attributable to customers acquired in business combinations, as well as the acquisition value of this type of assets in a third-party transaction for consideration (“Customer base”) are amortized on a straight-line basis over the estimated period of the customer relationship. |
| · | Software is amortized on a straight-line basis over its useful life, generally estimated to be between two and five years. |
| e) Property, plant and equipment |
Property, plant and equipment is carried at cost less any accumulated depreciation and any accumulated impairment in value.
Cost includes, among others, direct labor used in installation and the allocable portion of the indirect costs required for the related asset. The latter two items are recorded as revenue under the concept “Own work capitalized” of the line item “Other income”.
Interest and other financial expenses incurred and directly attributable to the acquisition or construction of qualifying assets are capitalized. Qualifying assets for the Telefónica Group are those assets that require a period of at least 18 months to bring the assets to the condition necessary for their intended use or sale.
The Group’s subsidiaries depreciate their property, plant and equipment, from the time they can be placed in service, amortizing the cost of the assets, net of their residual values on a straight-line basis over the assets’ estimated useful lives, which are calculated in accordance with technical studies that are revised periodically in light of technological advances and the rate of dismantling, as follows:
|
| |
| Years of estimated
useful life
|
| Buildings | 25 – 40 |
| Plant and machinery | 10 – 15 |
| Telephone installations, networks and subscriber equipment | 5 – 20 |
| Furniture, tools and other items | 2 – 10 |
f) Impairment of non-current assets
Non-current assets, including goodwill and intangible assets are assessed at each reporting date for indicators of impairment. WhereverWhenever such indicators exist, or in the case of assets which are subject to an annual impairment test, the recoverable amount is estimated. An asset’s recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future post-tax cash flows deriving from the use of the asset or its cash generating unit, as applicable, are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
asset, whenever the result obtained is the same that would be obtained by discounting pre-tax cash flows at a pre-tax discount rate.
The Group bases the calculation of impairment on the approved business plans of the various cash generating units to which the assets are allocated. The projected cash flows, based on the approved strategic business plans, cover a period of five years. Starting with the sixth year, an expected constant growth rate is applied.
The determination of whether an arrangement is, or contains a lease is based on the substance of the agreement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset and the agreement conveys a right to the use of the asset.
Leases where the lessor does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases.
Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased item to the Group.
h) Investment in associates and joint arrangements
The Group assesses whether it has significant influence not only on the basis of its ownership percentage but also on the existence of qualitative factors such as representation on the board of directors of the investee, its participation in decision-making processes, interchange of managerial personnel and access to technical information.
The Group assesses rights and obligations agreed to by the parties to a joint arrangement and, when relevant, other facts and circumstances in order to determine whether the joint arrangement in which it is involved is a joint venture or a joint operation.
i) Financial assets and liabilities
All regular way purchases and sales of financial assets are recognized in the statement of financial position on the trade date, i.e. the date that the Company commits to purchase or sell the asset.
Financial assets which the Group intends to hold for an indefinite period of time and could be sold at any time in response to needs for liquidity requirements or in response to changes in market conditions are classified as available-for-sale. These investments are presented as non-current assets, unless it is probable and feasible that they will be sold within 12 months.
Derivative financial instruments and hedge accounting
The accounting treatment of any gain or loss resulting from changes in the fair value of a derivative depends on whether the derivative in question meets all the criteria for hedge accounting and, if appropriate, on the nature of the hedge.
Changes in fair value of derivatives that qualify as fair value hedging instruments are recognized in the income statement, together with changes in the fair value of the hedged asset or liability attributable to the risk being hedged.
Changes in the fair value of derivatives that qualify and have been designated as cash flows hedges, which are highly effective, are recognized in equity. The ineffective portion is recognized immediately in the income statement. Fair value changes from hedges that relate to firm commitments or forecast transactions that result in the recognition of non-financial assets or liabilities are included in the initial carrying amount of those assets or liabilities. Otherwise, changes in fair value previously recognized in equity are recognized in the income statement in the period in which the hedged transaction affects profit or loss.
An instrument designated to hedge foreign currency exposure from a net investment in a foreign operation is accounted for in a similar manner to cash flow hedges.
When the Group chooses not to apply hedge accounting criteria, gains or losses resulting from changes in the fair value of derivatives are taken directly to the income statement. In this respect, transactions used to reduce the exchange rate risk of income contributed by foreign subsidiaries are not treated as hedging transactions.
Materials stored for use in investment projects and inventories for consumption and replacement are valued at the lower of weighted average cost and net realizable value.
k) Pensions and other employee obligations
Provisions required to cover the accrued liability for defined-benefit pension plans are determined using “the projected unit credit” actuarial valuation method. The calculation is based on demographic and financial assumptions determined at a country level, and in consideration of the macroeconomic environment. The discount rates are determined based on high quality market yield curves. Plan assets are measured at fair value.
Provisions for post-employment benefits (e.g. early retirement or other) are calculated individually based on the terms agreed with the employees. In some cases, these may require actuarial valuations based on both demographic and financial assumptions.
The Telefónica Group revenues are derived principally from providing the following telecommunications services: traffic, connection fees, regular (normally monthly) network usage fees, interconnection, network and equipment leasing,
handset sales and other digital services such as Pay TV and value-added services (text or data messages, among others) or maintenance. Products and services may be sold separately or bundled in promotional packages.
Revenues from calls carried on Telefónica’s networks (traffic) entail an initial call establishment fee plus a variable call rate, based on call length, distance and type of service. Both wireline and wireless traffic is recognized as revenue as service is provided. For prepaid calls, the amount of unused traffic generates a deferred revenue presented in “Trade and other payables” on the statement of financial position. Prepaid cards generally expire within 12 months and any deferred revenue from prepaid traffic is recognized directly in the income statement when the card expires as the Group has no obligation to provide service after expiry date.
Revenues from traffic sales and services at a fixed rate over a specified period of time (flat rate) are recognized on a straight-line basis over the term covered by the rate paid by the customer.
Connection fees arising when customers connect to the Group’s network are deferred and recognized in the income statement throughout the average estimated customer relationship period, which varies by type of service. All related costs, except those related to network expansion, as well as administrative expenses and overhead, are recognized in the income statement as incurred.
Installation fees are taken to the income statement on a straight-line basis over the related period. Equipment leases and other services are taken to profit or loss as they are consumed.
Interconnection revenues from wireline-wireless and wireless-wireline calls and other customer services are recognized in the period in which the calls are made.
Revenues from handset and equipment sales are recognized once the sale is considered complete, i.e., generally when delivered to the end customer.
For bundled packages that include multiple elements sold in the wireline, wireless, internet and television businesses it is determined whether it is necessary to separate the separately identifiable elements and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values (i.e. the fair value of each element relative to the total fair value of the package).
As connection or initial activation fees, or upfront non-refundable fees, are not separately identifiable elements in these types of packages, any revenues received from the customer for these items are allocated to the remaining elements.
Additionally, when allocating the package revenue to the elements, amounts contingent upon delivery of undelivered elements are not allocated to delivered elements.
All expenses related to bundled promotional packages are recognized in the income statement as incurred.
The key assumptions concerning the future and other relevant sources of uncertainty in estimates at the reporting date that could have a significant impact on the consolidated financial statements within the next financial year are discussed below.
A significant change in the facts and circumstances on which these estimates and related judgments are based could have a material impact on the Group’s results and financial position. Accordingly, sensitivity analyses are disclosed for the most relevant situations (see notesNotes 7 and 15).
Property, plant and equipment, intangible assets and goodwill
The accounting treatment of investments in property, plant and equipment and intangible assets entails the use of estimates to determine the useful life for depreciation and amortization purposes and to assess fair value at their acquisition dates for assets acquired in business combinations.
Determining useful life requires making estimates in connection with future technological developments and alternative uses for assets. There is a significant element of judgment involved in making technological development assumptions, since the timing and scope of future technological advances are difficult to predict.
The decision to recognize an impairment loss involves developing estimates that include, among others, an analysis of the causes of the potential impairment, as well as its timing and expected amount. Furthermore, additional factors, such as technological obsolescence, the suspension of certain services and other circumstantial changes, which highlight the need to evaluate a possible impairment, are taken into account.
The Telefónica Group evaluates its cash-generating units’ performance regularly to identify potential goodwill impairments. Determining the recoverable amount of the cash-generating units to which goodwill is allocated also entails the use of assumptions and estimates and requires a significant element of judgment.
The Group assesses the recoverability of deferred tax assets based on estimates of future earnings.earnings, and of all the options available to achieve an outcome, it considers the most efficient one in tax terms within the legal framework the Group is subject to. Such recoverability ultimately depends on the Group’s ability to generate taxable earnings over the period for which the deferred tax assets remain deductible. This analysis is based on the estimated schedule for reversing deferred tax liabilities, as well as estimates of taxable earnings, which are sourced from internal projections that are continuously updated to reflect the latest trends.
The recognition of tax assets and liabilities depends on a series of factors, including estimates as to the timing and realization of deferred tax assets and the projected tax payment schedule. Actual Group company income tax receipts and payments could differ from the estimates made by the Group as a result of changes in tax legislation or unforeseen transactions that could affect tax balances.
Provisions
The amount are recorded when, at the end of the provision is determined based on the best estimateperiod, we have a present obligation as a result of thepast events, whose settlement requires an outflow of resources that is considered probable and can be measured reliably. This obligation may be legal or constructive, arising from, but not limited to, regulation, contracts, common practice or public commitments, which have created a valid expectation for third parties that we will assume certain responsibilities. The amount recorded is the best estimation performed by the management in respect of the expenditure that will be required to settle the obligation, bearing in mindobligations, considering all the information available information at the statement of financial positionclosing date, including the opinionsadvice of independentexternal experts, such as legal advisors or financial counsel.consultants.
GivenShould we be unable to reliably measure the uncertainties inherentobligation, no provision would be recorded and information would then be presented in the estimates usednotes to determine the amountConsolidated Financial Statements.
Because of provisions,the inherent uncertainties in this estimation, actual outflows of resourcesexpenditures may differbe different from the amounts recognized originally on the basis of the estimates.estimated amount recognized.
Connection fees
Connection fees generated when customers connect to the Group’s network are deferred and recognized as revenue over the average estimated customer relationship period.
The estimate of the average customer relationship period is based on the recent history of customer churn. Potential changes in estimates could lead to changes in both the amount and timing of the future recognition of revenues.
Bundled offers
Bundled offers that combine different elements are assessed to determine whether it is necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values.
Determining fair values for each identified element requires estimates that are complex due to the nature of the business.
A change in estimates of fair values could affect the apportionment of revenue among the elements and, as a result, the date of recognition of revenues.
Exchange rate and inflation rates used to translate the financial statements of our Venezuelan subsidiaries
As of December 31, 2014,2017, there are multiple exchange mechanisms and three published exchange rates potentiallylegally available for translation of the financial statements of the Group’s Venezuelan subsidiaries.
We review, on a regular basis, the economic conditions in Venezuela and the specific circumstances of our Venezuelan operations. In light of the worsening of the economic and political crisis in Venezuela in 2017 and in the absence of official rates that are representative of the situation in such country, at December 31, 2017 the Group considers the need to estimate an exchange rate that matches the progression of inflation in Venezuela and contributes to reflect the economic and financial position of the Group’s Venezuelan operations within its consolidated financial statements in a more accurate way.
Assessment of the exchange rate that best reflects the economics of Telefónica’s business activities in
Venezuela relies on several factors and is performed considering all the information available at the closing date, and entails the use of assumptions and estimates and significant management judgment.
Due to inherent uncertainties in the estimates required to determine the appropriate exchange rate for the conversion of BsF-denominatedVEF-denominated financial statements, actual cash flows denominated in such currency may differ from the amounts currently recognized on the basis of our estimates, as a result of changes in currency laws or changes in exchange mechanisms or published exchange rates that may have a materialan impact on the conversion rate used for our Venezuelan subsidiaries’ financial statements, affecting the net monetary position of VEF-denominated assets (liabilities) denominated.
In addition to this, Venezuela is considered as a hyperinflationary economy since 2009. Telefónica recognizes the effects of inflation by restating the financial information of its Venezuelan operation using the “Indice Nacional de Precios al Consumidor de Venezuela” issued by the Central Bank of Venezuela, or the best estimate in BsF.case the final index is not available.
Significant management judgment is required to determine the appropriate inflation rate where the official rate is not available. The estimates and underlying assumptions are based on careful consideration of factors that are considered
to be relevant and rely on all the information available at the closing date. Actual results may differ from these estimates as a result of changes in circumstances and assumptions about future developments in Venezuela due to evolving market conditions, uncertainty about currency and operating restrictions or other circumstances arising beyond the control of the Company.
n) New IFRS and interpretations of the IFRS Interpretations Committee (IFRIC)
The accounting policies applied in the preparation of the consolidated financial statements for the year ended December 31, 20142017 are consistent with those used in the preparation of the Group’s consolidated annual financial statements for the year ended December 31, 2013, except for the application of new standards,2016. The following amendments to standards and interpretations published by the IASBInternational Accounting Standards Board (IASB) are effective for annual periods beginning on or after January 1, 2017:
Improvements to IFRS 2014-2016
The annual improvements projects provide a vehicle for making non-urgent but necessary amendments to IFRSs, with the aim of removing inconsistencies and clarifying wording. The amendments related to IFRS 12 Disclosure of Interests in other Entities, aimed clarifying the IFRIC, and adoptedscope of the standard, are effective for annual periods beginning on or after January 1, 2017, whereas the rest of the improvements are effective for annual periods beginning on or after January 1, 2018. The amendments related to IFRS 12 have not been endorsed by the European Union, effective as of January 1, 2014, noted below:
| · | IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 |
These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteriaEU for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. The application of these amendments has had no impactuse in the Group’s consolidated financial position or results.
| · | IFRIC Interpretation 21 Levies (IFRIC 21) |
IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The adoption of IFRIC 21 didEurope, but they do not have a material financial impact in the Group’s consolidated financial position or results.
| · | IAS 39 Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39 |
These amendments provide relief from discontinuing hedge accounting when novation (that was not contemplated on the original hedging documentation) of a derivative designated as a hedging instrument meets certain criteria: the novation is made pursuant to laws or regulations, a clearing counterparty becomes the new counterparty to each of the original parties and changes to the terms of the derivative are limited to those necessary to change the counterparty. The application of these amendments has had noan impact on the Group’s consolidated financial position or results.
| · | Recoverable Amount Disclosures for Non-Financial Assets – Amendments to IAS 36 Impairment of Assets |
These amendments remove the unintended consequences of IFRS 13 Fair Value Measurement on the disclosures required under IAS 36. Under the amendments, recoverable amount is required to be disclosed only when an impairment loss has been recognized or reversed during the period. Accordingly, these amendments have been considered while making disclosures for impairment of non-financial assets in these consolidated financial statements.
| · | Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) |
These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries –as well as investments in associates and joint ventures – at fair value through profit or loss. This amendment is not relevant to the Group,statements since, none of the entities in the Group qualifies to be an investment entity under IFRS 10.
New standards and IFRIC interpretations issued but not effective as of December 31, 20142017, the Group does not have interests that are classified as held for sale, as held for distribution or as discontinued operations.
Amendments to IAS 7, Disclosure Initiative
The amendments to IAS 7 require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows, such as the issuance and repayments of loans, and non-cash changes, such as unpaid acquisitions, sales and exchange differences. These amendments have been endorsed by the EU for use in Europe. The Group has considered these amendments in the preparation of these consolidated financial statements.
Amendments to IAS 12, Recognition of Deferred Tax Assets for Unrealised Losses
The amendments clarify the requirements on recognition of deferred taxes when the tax base of an asset exceeds its fair value. These amendments have been endorsed by the EU for use in Europe. These amendments do not have a significant impact on the results or financial position of the Group.
New standards and amendments to standards issued but not effected as of December 31, 2017 .
At the date of authorization for issuepreparation of the accompanying consolidated financial statements, the following IFRS,IFRSs and amendments and IFRIC interpretations had been issued by the IASB,published, but their application was not mandatory:
|
| | |
| Standards and amendments | Mandatory application: annual periods beginning on or after |
| Financial instruments | January 1, 2018 |
| IFRS 15 | Revenue from Contracts with Customers | January 1, 2018 |
| Clarifications to IFRS 15 | Revenue from Contracts with Customers (issued on 12 April 2016) | January 1, 2018 |
| Amendments to IFRS 2 | Classification and Measurement of Share-based Payment Transactions | January 1, 2018 |
| Amendments to IFRS 4 | Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts | January 1, 2018 |
Amendments to IAS 1940 | Defined Benefit Plans: Employee Contributions
| 2018 |
| IFRIC 22 | Foreign Currency Transactions and Advance Consideration | January 1, 2018 |
Improvements to IFRS 2010-2012Standards 2014-2016 Cycle | July
| January 1, 20142017/2018 |
Improvements to IFRS 2011-2013 | | January 1, 20142018 |
Improvements to IFRS 2012-2014
| | January 1, 20162019 |
| IFRIC 23 | Regulatory Deferral Accounts
| 2019 |
| 9 | Accounting for Acquisitions of Interests in Joint Operations
Compensation | 2019 |
| Long-term Interests in Associates and IAS 38Joint Ventures | Clarification of Acceptable Methods of Depreciation and Amortization
| 2019 |
Amendments to IAS 16 and IAS 41
| Agriculture: Bearer Plants
| 2021 |
Amendments to IFRS 10 and IAS 28 | Sale or Contribution of Assets between an Investor and its Associate or Joint Venture | |
| | |
Amendments to IFRS 10, IFRS 12 and IAS 28
| Investment Entities: Applying the Consolidation Exception
| |
| Revenues from Contracts with Customers
| |
| | |
| Disclosures - Transition to IFRS 9
| Deferred
Indefinitely |
Based on the analyses made to date, the Group estimates that the adoption of mostmany of these standards, amendments and improvementsinterpretations will not have a significant impact on the consolidated financial statements in the initial period of application. However, the following issued but not yet effective standards are expected to have a significant impact on the consolidated financial statements at the time of their adoption and prospectively.
IFRS 15 Revenues from Contracts with Customers
IFRS 15 sets out the requirements for recognising revenue from contracts with customers. The new requirements are expected to affect the following aspects, among others:
Under IFRS 15, for bundled packages that combine multiple wireline, wireless, data, internet or television goods or services, the total revenue will be allocated to each performance obligation based on their standalone selling prices in relation to the total consideration of the package and will be recognised when (or as) the obligation is likelysatisfied, regardless of whether there are undelivered items. This differs from current accounting where the portion of the total consideration that is contingent upon delivery of undelivered elements is not allocated to delivered elements. Consequently, when bundles include a discount on equipment, the adoption of these new requirements will result in an increase of revenues recognised from the sale of handsets and other equipment, generally recognised upon delivery to the end customer, in detriment of ongoing service revenue over subsequent periods. To the extent that the packages are marketed at a discount, the difference between the revenue from the sale of equipment and the consideration received from the customer upfront will be recognised as a contract asset on the statement of financial position.
Under the current accounting policy, all expenses directly related with obtaining a contract (sales commissions and other third party acquisition costs) are expensed when incurred. However, IFRS 15 requires the recognition of an asset for those costs that are incremental to obtain a contract and that are expected to be recovered and its subsequent amortisation over the same period as the revenue associated with such asset.
The guidance in IFRS 15 for the distinction between agent and principal is based on the concept of “control” that may differ from the currently applied notion of transfer of “risks and rewards”. However, for the purposes of determining whether the Group acts as principal, selling for its own account (gross revenue), or as an agent in a particular transaction, selling on behalf of others (net revenue), the Group does not expect significant changes to its current accounting policy.
Compared to the current revenue standard, IFRS 15 sets out more detailed requirements on how to account for contract modifications. Certain changes must be accounted for as a retrospective change (i.e. as a continuation of the original contract), while other modifications must be accounted for prospectively as separate contracts, like the end of the original contract and the creation of a new one.
In addition, the Group's financial statements will include more qualitative and quantitative disclosure of income-related accounts.
In addition to this, IFRS 15 allows for two transition methods, namely the full retrospective method and the modified retrospective method with the cumulative effect from initial application recognised as an adjustment to the opening balance of retained earnings at the date of initial application. The Group will adopt the latter and prior-year comparatives will not be restated; instead, the Group will disclose the nature and amount of the changes in items in the statement of financial position and the income statement for the current period as a result of applying IFRS 15 for the first time.
It is also possible to elect to apply certain practical expedients to facilitate the application of the new criteria. The Group has evaluated which of them will be adopted in the implementation of the standard with the objective of reducing the complexity in its application. The main practical expedients that the Group will adopt are:
Completed contracts: the Group will not apply the standard retrospectively to those contracts that are completed at January 1, 2018.
Portfolio approach: the Group will apply the requirements of the standard to groups of contracts with similar characteristics (residential customers and small and medium-sized entities, where standard offers are marketed), since, for the clusters identified, the effects do not differ significantly from an application on a contract by contract basis.
Financial component: it will not be considered significant when the period between the moment when the promised good or service is transferred to a customer and the moment when the customer pays for that good or service is one year or less. Based on the assessment undertaken to date, the vast majority of contracts issued does not include a significant financing component.
Costs to obtain a contract: these costs will be recognised as an expense when incurred if the amortisation period of the asset that the entity would otherwise recognise is one year or less.
The process of implementing the new requirements involves the introduction of modifications to the current information systems, the implementation of new IT tools, and changes in the processes and controls of the entire revenue cycle in the Group companies. This process of implementation in the Group entails a high degree of complexity due to factors such as a large number of contracts, numerous data source systems, diversity of business models in the different locations, as well as the need to make complex estimates.
From the analysis performed on the transactions of the last financial year considering commercial offers as well as the volume of contracts affected, the Group estimates that the adoption of the new revenue recognition requirements on the Group’s equity is expected to result in an increase in retained earnings ranging from 950 to 1,100 million euros before taxes, with the most significant impacts being the first-time recognition of contract assets that, under IFRS 15, lead to the earlier recognition of revenue from the sale of goods, and the activation and deferral of the incremental costs of obtaining contracts that, under IFRS 15, result in the later recognition of customer acquisition costs.
As the accounting effects of the transition to the new standard will be recognized directly in equity, the effects on profit or loss in 2018 will be related to changes in the point in time at which revenue and expenses are recorded. On the assumption that there are no significant changes to business models or products offered, the Group expects that the application of IFRS 15 on an ongoing basis will entail two offsetting effects, considering a market that features a large number of customer contracts that are being executed at different points in time, as follows: (a) for existing contracts, lower service revenues and higher selling expenses from the amortization of capitalized customer acquisition costs should be expected; and (b) for new contracts, higher revenues from the sale of equipment and lower selling expenses from the capitalization of customer acquisition costs should be expected. Assuming there are no major changes in the
business development, the Group expects that such effects may have an impact on net income that will be lower than 0.5% in terms of revenues, and lower than 1% in terms of OIBDA.
These impacts are based on the assessments undertaken to date. The actual impacts of adopting IFRS 15 at January 1, 2018 may change because the Group has not finalised the testing and assessment of controls over its new IT systems, and because the new accounting policies are subject to change until the Group presents its first financial statements that include the date of initial application.
IFRS 9 Financial Instruments
IFRS 9 is applicable to financial assets and financial liabilities. As a result of the analysis of the effects of the new requirements introduced by this standard certain expected impacts have been identified in relation with to the following aspects, among others:
IFRS 9 simplifies the current measurement model for financial assets and establishes three main categories: amortized cost, fair value through profit or loss and fair value through Other Comprehensive Income (OCI), depending on the business model and the characteristics of the contractual cash flows. Regarding recognition and measurement of financial liabilities there are not significant changes from current criteria except for the recognition of changes in own credit risk in OCI for those liabilities measured at fair value through profit or loss. Quoted equity shares currently held as available-for-sale with gains and losses recorded in OCI will be measured at fair value through OCI under IFRS 9 and hence there will be no change to the accounting for these assets. However, gains or losses arising from changes in fair value recognized in OCI will no longer be transferred to profit or loss on sale, but instead reclassified to retained earnings. Dividends from these investments are recognized in the income statement when the Group has the right to receive the dividend.
IFRS 9 introduces a new model for impairment losses on financial assets, i.e. the expected credit loss model, which replaces the current incurred loss model. The Group will apply the simplified approach and record lifetime expected losses on all trade receivables. The application of the new requirements will probably lead to an acceleration in the recognition of impairment losses on its financial assets measured at amortized cost, mainly trade receivables.
Under current accounting, a hedge must be highly effective both, prospective and retrospectively, while IFRS 9 introduces a new, less restrictive, accounting model for hedging, requiring an economic relationship between the hedged item and the hedging instrument and that the coverage ratio be the same as that applied by the entity for its risk management. Likewise, the new standard modifies the criteria for documentation of hedging relationships.
In addition to this, the Group's financial statements will include more detailed disclosures with relevant information regarding financial assets and liabilities.
As a result of the analysis of the new standard, the Group expects that the key changes will relate to documentation of policies and hedging strategies, as well as the estimation and timing of recognition of expected losses on receivables from customers. The Group has decided to apply the option that allows not to restate comparative periods to be presented in the year of initial application.
Based on the analysis performed to date, the Group estimates that the initial adoption of the new impairment requirements is expected to result in an increase of around 200 million euro over the bad debt provision balance on customer receivables previously recognized under IAS 39. This impact is based on the assessments undertaken to date. The actual impacts of adopting IFRS 9 at 1 January 2018 may change because the Group has not finalized the testing of its new calculation procedures, and amountbecause the new accounting policies are subject to change until the Group presents its first financial statements that include the date of revenue recognitioninitial application.
IFRS 16 Leases
IFRS 16 requires lessees to recognize assets and liabilities arising from all leases (except for short-term leases and leases of low-value assets) in connectionthe statement of financial position.
The Group acts as a lessee on a very significant number of lease agreements over different assets, such as third-party towers, circuits, office buildings and stores and land where the towers are located, mainly. A significant portion of these contracts is accounted for as operating lease under the current lease standard, with certain bundled revenue transactions, lease payments being recognised generally on a straight-line basis over the contract term.
The Group is currently assessingin the process of estimating the impact of this new standard on such contracts. This analysis includes the estimation of the lease term, based on the non-cancellable period and the periods covered by options to extend the lease, when the exercise depends only on Telefónica and where such exercise is reasonably certain. This will depend, to a large extent, on the specific facts and circumstances by class of assets in the telecom industry (technology, regulation, competition, business model, among others). In addition to this, the Group will make assumptions to calculate the discount rate, which will mainly be based on the incremental borrowing rate of interest for the estimated term. On the other hand, the Group is considering not to separately recognise non-lease components from lease components for those classes of assets in which non-lease components are not material with respect to the total value of the lease.
In addition to the mentioned estimations, the standard allows for two transition methods: retrospectively for all periods presented, or using a modified retrospective approach where the cumulative effect of adoption is recognised at the date of initial application. The Group has tentatively decided to adopt the latter transition method; therefore the Group would recognise the cumulative effect of initial application as an adjustment to retained earnings in the year of initial application of IFRS 16. Also, certain practical expedients are available on first-time application in connection with the right of use asset measurement, discount rates, impairment, leases that finish within the twelve months subsequent to the date of first application, initial direct costs, and term of the lease. The Group is evaluating which of these practical expedients will be adopted. In this standard. Also,regard, the Group is considering opting for the practical expedient that allows not reassessing whether a contract is or contains a lease on the date of initial application of IFRS 16 but to directly apply the new requirements to all those contracts which under current accounting were identified as a lease.
Due to the different alternatives available, together with the complexity of the estimations and the significant number of lease contracts, the Group has not yet completed the implementation process, so at present it is not possible to make a reasonable estimation of the impact of initial application of the new requirements. However, based on the volume of contracts affected, as well as the magnitude of the future lease commitments, as disclosed in Note 18 herein, the Group expects that the changes introduced by IFRS 916 will affecthave a significant impact on its financial instrumentsstatements from the date of adoption, including the recognition on the balance sheet of right of use assets and transactionstheir corresponding lease obligations in connection with financial instruments carried outthe majority of contracts that are classified as operating leases under the current lease standard. Also, amortization of the right of use assets and recognition of interest costs on or after January 1, 2018.
the lease obligation on the statements of income will replace amounts recognized as lease expense under the current lease standard. Classification of lease payments in the statement of cash flows will also be affected by the requirements of the new lease standard. On the other side, the Group's Financial Statements will include broader disclosures with relevant information regarding lease contracts.
Note 4. Segment information
On February 26, 2014,The organizational structure approved by the Board of Directors of Telefónica, S.A. approved the implementation of a new organizational structure completely focused on clients and which incorporates the digital offering as the main focus for commercial policies. The structure gives greater visibility to local operators, bringing them closer to the corporate decision-making center, simplifying the Group’s global structure and strengthening the transverse areas to improve flexibility and agility in decision making.
As a result of this organization, the new structureFebruary 26, 2014 is made up of the following segments: Telefónica Spain, Telefónica Brazil,United Kingdom, Telefónica Germany, Telefónica UKBrazil and Telefónica Hispanoamérica (formed by the Group’s operators in Argentina, Chile, Peru, Colombia, Mexico, Venezuela, and Central America, Ecuador and Uruguay).
These segments include allthe information relatingrelated to wireline, wireless, cable, data, internet and television businesses and other digital services provided in accordance with each location. "Othercountry or countries. Any services not specifically included in these segments are part of “Other companies and eliminations"eliminations”, which includes, in particular, Telxius (as further explained below), the companies belonging to the transversecross-sectional areas, other Group companies as well as other Group companies and eliminations in the consolidation process. Inter-segment transactions are carried out at market prices.
Telxius' results are fully reported under "Other companies and eliminations" since January 1, 2017, reflecting the integration within Telxius of the mobile telecommunications towers transferred from the Telefónica Spain, Telefónica Germany, Telefónica Brazil and Telefónica Hispanoamérica segments and the international submarine fiber optic cable (which had already been previously reported under "Other companies and eliminations"). The 2016 comparative segment results have been revised, accordingly. Based on the different dates on which assets were contributed to Telxius by each operating segment, this has affected the results of Telefónica Spain (since January 1, 2016), Telefónica Germany (since May 1, 2016), Telefónica Brazil (since April 1, 2016) and Telefónica Hispanoamérica (Telefónica Perú since April 1, 2016 and Telefónica Chile since May 1, 2016). The results of the segments do not include the intra-group capital gains resulting from the transfer of towers to Telxius.
Revenues of Telxius in 2017 amounted to 730 million euros (645 million euros in 2016), of which 449 million euros correspond to inter-segment revenues (451 million euros in 2016). OIBDA of Telxius in 2017 amounted to 346 million euros (266 million euros in 2016). The Group’scapital expenditures of 2017 in Telxius amounted to 203 million euros (119 million euros in 2016).
In addition, in 2017 Telefónica Spain includes the companies Telefónica Studios and Telefónica Servicios Audiovisuales (which had been previously reported under “Other companies and eliminations”), and Telefónica Spain and Telefónica Hispanoamérica include the results of the data center business in Spain and Chile, respectively (which had been previously reported under “Other companies and eliminations”). As a consequence, the 2016 comparative segment results have also been revised accordingly.
These changes in the segments have had no impact on the consolidated results of the Group.
The Telxius subsidiaries currently holding the telecommunications towers did not exist in 2015 as such towers were part of the operating companies of the relevant countries. Thus, segment information of years before 2014 werecould not be retrospectively revised in the accompanying consolidated financial statements to reflect this new organization.
Segmentfor 2015. The segment reporting takes into account the impactfor 2016 is being presented under two different bases: (i) for purposes of the purchase price allocationcomparison against 2017, 2016 segment information has been revised so that the telecommunications towers are part of Telxius (since the dates on which the relevant assets were transferred to assets acquiredTelxius); and (ii) for purposes of the liabilities assumed fromcomparison against 2015, the companies includedtelecommunications towers are integrated in each relevant segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.
The Group manages borrowing activities and taxes centrally. Also, Telefónica, S.A. is the head of the Telefónica tax group in Spain (see Note 17). Therefore, it does not disclosea significant part of the related assets and liabilities revenueis included under “Other companies and expenses by reportable segments. In addition, revenueeliminations” and the results of the segments are disclosed up to operating income. Revenue and expenses arising from intra-group invoicing for the use of the trademark and management services have been eliminated from the operating results of each Group segment. These adjustments have no impact on the Group’s consolidated results.
Segment reporting takes into account the impact of the purchase price allocation to the assets acquired and the liabilities assumed for the companies included in each segment. The assets and liabilities presented in each segment are those managed by the heads of each segment, irrespective of their legal structure.
Inter-segment transactions are carried out at market prices.
Telefónica uses operatingOperating income before depreciation and amortization (OIBDA) is calculated by excluding solely depreciation and amortization from operating income. OIBDA is used to track the performance of the business and to establish operating and strategic targets. OIBDA is calculated by excluding depreciation and amortization from operating income to eliminatetargets of the impact of investments in fixed assets that cannot be directly controlled by management in the short term. Therefore, it is considered to be more important for investors as it provides a gauge of segment operating performance and profitability using the same measures utilized by management. This metric also allows for comparisons with other companies in the telecommunications sector without consideration of their asset structure.
Telefónica Group companies. OIBDA is a commonly reported measure and is widely used among analysts, investors and other interested parties in the telecommunications industry, although not a measure explicitly defined in IFRS, and therefore, may not be comparable to similar indicators used by other companies. OIBDA should not be considered as an alternative toa substitute for operating income as a measurement of our consolidated.
The following table presents income and CapEx information (capital expenditures in intangible assets and property, plant and equipment, see Notes 6 and 8) regarding the Group’s operating results or as an alternative to consolidated cash flows from operating activities as a measurement of our liquidity.segments:
|
| | | | | | | | | | | | | | |
| 2017 |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Revenues | 12,653 |
| 6,540 |
| 7,296 |
| 12,019 |
| 12,552 |
| 948 |
| 52,008 |
|
| External revenues | 12,364 |
| 6,505 |
| 7,252 |
| 11,994 |
| 12,394 |
| 1,499 |
| 52,008 |
|
| Inter-segment revenues | 289 |
| 35 |
| 44 |
| 25 |
| 158 |
| (551 | ) | — |
|
| Other operating income and expenses | (7,701 | ) | (4,901 | ) | (5,475 | ) | (7,828 | ) | (9,014 | ) | (902 | ) | (35,821 | ) |
| OIBDA | 4,952 |
| 1,639 |
| 1,821 |
| 4,191 |
| 3,538 |
| 46 |
| 16,187 |
|
| Depreciation and amortization | (1,688 | ) | (1,047 | ) | (1,954 | ) | (2,228 | ) | (2,191 | ) | (288 | ) | (9,396 | ) |
| Operating income | 3,264 |
| 592 |
| (133 | ) | 1,963 |
| 1,347 |
| (242 | ) | 6,791 |
|
| Capital expenditures (CapEx) | 1,683 |
| 827 |
| 951 |
| 2,225 |
| 2,678 |
| 333 |
| 8,697 |
|
|
| | | | | | | | | | | | | | |
| 2016 (revised) |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Revenues | 12,815 |
| 6,861 |
| 7,503 |
| 11,090 |
| 12,579 |
| 1,188 |
| 52,036 |
|
| External revenues | 12,512 |
| 6,821 |
| 7,460 |
| 11,060 |
| 12,337 |
| 1,846 |
| 52,036 |
|
| Inter-segment revenues | 303 |
| 40 |
| 43 |
| 30 |
| 242 |
| (658 | ) | — |
|
| Other operating income and expenses | (8,412 | ) | (5,152 | ) | (5,732 | ) | (7,388 | ) | (9,105 | ) | (1,129 | ) | (36,918 | ) |
| OIBDA | 4,403 |
| 1,709 |
| 1,771 |
| 3,702 |
| 3,474 |
| 59 |
| 15,118 |
|
| Depreciation and amortization | (1,827 | ) | (1,090 | ) | (2,200 | ) | (2,036 | ) | (2,189 | ) | (307 | ) | (9,649 | ) |
| Operating income | 2,576 |
| 619 |
| (429 | ) | 1,666 |
| 1,285 |
| (248 | ) | 5,469 |
|
| Capital expenditures (CapEx) | 1,852 |
| 931 |
| 1,107 |
| 2,137 |
| 2,615 |
| 286 |
| 8,928 |
|
|
| | | | | | | | | | | | | | |
| 2016 (previous segmentation) |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Revenues | 12,713 |
| 6,861 |
| 7,503 |
| 11,097 |
| 12,579 |
| 1,283 |
| 52,036 |
|
| External revenues | 12,410 |
| 6,822 |
| 7,460 |
| 11,067 |
| 12,337 |
| 1,940 |
| 52,036 |
|
| Inter-segment revenues | 303 |
| 39 |
| 43 |
| 30 |
| 242 |
| (657 | ) | — |
|
| Other operating income and expenses | (8,246 | ) | (5,152 | ) | (5,709 | ) | (7,383 | ) | (9,102 | ) | (1,326 | ) | (36,918 | ) |
| OIBDA | 4,467 |
| 1,709 |
| 1,794 |
| 3,714 |
| 3,477 |
| (43 | ) | 15,118 |
|
| Depreciation and amortization | (1,830 | ) | (1,090 | ) | (2,211 | ) | (2,038 | ) | (2,190 | ) | (290 | ) | (9,649 | ) |
| Operating income | 2,637 |
| 619 |
| (417 | ) | 1,676 |
| 1,287 |
| (333 | ) | 5,469 |
|
| Capital expenditures (CapEx) | 1,847 |
| 931 |
| 1,108 |
| 2,138 |
| 2,613 |
| 291 |
| 8,928 |
|
|
| | | | | | | | | | | | | | |
| 2015 |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Revenues | 12,402 |
| 7,837 |
| 7,888 |
| 11,060 |
| 14,387 |
| 1,342 |
| 54,916 |
|
| External revenues | 12,194 |
| 7,787 |
| 7,874 |
| 11,027 |
| 14,147 |
| 1,887 |
| 54,916 |
|
| Inter-segment revenues | 208 |
| 50 |
| 14 |
| 33 |
| 240 |
| (545 | ) | — |
|
| Other operating income and expenses | (10,066 | ) | (5,908 | ) | (6,030 | ) | (7,487 | ) | (10,031 | ) | (2,165 | ) | (41,687 | ) |
| OIBDA | 2,336 |
| 1,929 |
| 1,858 |
| 3,573 |
| 4,356 |
| (823 | ) | 13,229 |
|
| Depreciation and amortization | (1,898 | ) | (1,196 | ) | (2,128 | ) | (1,916 | ) | (2,241 | ) | (325 | ) | (9,704 | ) |
| Operating income | 438 |
| 733 |
| (270 | ) | 1,657 |
| 2,115 |
| (1,148 | ) | 3,525 |
|
| Capital expenditures (CapEx) | 1,827 |
| 883 |
| 2,230 |
| 2,105 |
| 3,060 |
| 356 |
| 10,461 |
|
The following table presents segment assets, liabilities and investments accounted for by the equity method:
F-19 |
| | | | | | | | | | | | | | |
| 2017 |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Investments accounted for by the equity method | 2 |
| 7 |
| — |
| 2 |
| 1 |
| 65 |
| 77 |
|
| Fixed assets | 15,288 |
| 9,198 |
| 14,611 |
| 23,845 |
| 13,931 |
| 2,198 |
| 79,071 |
|
| Total allocated assets | 22,722 |
| 11,610 |
| 17,225 |
| 30,229 |
| 20,226 |
| 13,054 |
| 115,066 |
|
| Total allocated liabilities | 13,391 |
| 4,063 |
| 5,889 |
| 8,130 |
| 10,716 |
| 46,259 |
| 88,448 |
|
|
| | | | | | | | | | | | | | |
| 2016 (revised) |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Investments accounted for by the equity method | 1 |
| 6 |
| — |
| 2 |
| 1 |
| 66 |
| 76 |
|
| Fixed assets | 15,306 |
| 9,771 |
| 15,572 |
| 27,489 |
| 15,089 |
| 2,370 |
| 85,597 |
|
| Total allocated assets | 22,138 |
| 12,025 |
| 18,510 |
| 35,104 |
| 21,655 |
| 14,209 |
| 123,641 |
|
| Total allocated liabilities | 12,999 |
| 3,907 |
| 6,006 |
| 9,643 |
| 13,004 |
| 49,697 |
| 95,256 |
|
Key segment information is as follows:
| 2014 |
| Millions of euros | Telefónica Spain | Telefónica UK | Telefónica Germany | Telefónica Brazil | Telefónica Hispanoamérica | Other and eliminations | Total Group |
| Revenues | 12,023 | 7,062 | 5,522 | 11,231 | 13,155 | 1,384 | 50,377 |
| External revenues | 11,832 | 7,021 | 5,500 | 11,200 | 13,013 | 1,811 | 50,377 |
| Inter-segment revenues | 191 | 41 | 22 | 31 | 142 | (427) | − |
| Other operating income and expenses | (6,352) | (5,318) | (4,789) | (7,688) | (9,087) | (1,628) | (34,862) |
| OIBDA | 5,671 | 1,744 | 733 | 3,543 | 4,068 | (244) | 15,515 |
| Depreciation and amortization | (1,805) | (1,121) | (1,426) | (1,762) | (2,034) | (400) | (8,548) |
| Operating income | 3,866 | 623 | (693) | 1,781 | 2,034 | (644) | 6,967 |
| Capital expenditures | 1,732 | 755 | 849 | 2,933 | 2,842 | 337 | 9,448 |
| Investments accounted for by the equity method | 2 | 2 | − | 3 | 2 | 779 | 788 |
| Fixed assets | 14,057 | 11,173 | 16,703 | 21,795 | 14,922 | 2,157 | 80,807 |
| Total allocated assets | 18,520 | 14,105 | 21,186 | 28,570 | 21,800 | 18,118 | 122,299 |
| Total allocated liabilities | 9,599 | 4,740 | 6,645 | 8,898 | 14,480 | 47,648 | 92,010 |
|
| | | | | | | | | | | | | | |
| 2016 (previous segmentation) |
| Millions of euros | Telefónica Spain |
| Telefónica United Kingdom |
| Telefónica Germany |
| Telefónica Brazil |
| Telefónica Hispano- américa |
| Other companies and eliminations |
| Total Group |
|
| Investments accounted for by the equity method | 1 |
| 6 |
| — |
| 2 |
| 1 |
| 66 |
| 76 |
|
| Fixed assets | 15,559 |
| 9,771 |
| 15,825 |
| 27,522 |
| 15,126 |
| 1,794 |
| 85,597 |
|
| Total allocated assets | 22,353 |
| 12,025 |
| 18,835 |
| 35,192 |
| 21,694 |
| 13,542 |
| 123,641 |
|
| Total allocated liabilities | 13,009 |
| 3,907 |
| 6,078 |
| 9,636 |
| 13,002 |
| 49,624 |
| 95,256 |
|
2013 (*) |
| Millions of euros | Telefónica Spain | Telefónica UK | Telefónica Germany | Telefónica Brazil | Telefónica Hispanoamérica | Other and eliminations | Total Group |
| Revenues | 12,959 | 6,692 | 4,914 | 12,217 | 16,855 | 3,424 | 57,061 |
| External revenues | 12,734 | 6,652 | 4,876 | 12,186 | 16,736 | 3,877 | 57,061 |
| Inter-segment revenues | 225 | 40 | 38 | 31 | 119 | (453) | − |
| Other operating income and expenses | (6,619) | (5,055) | (3,606) | (8,277) | (11,324) | (3,103) | (37,984) |
| OIBDA | 6,340 | 1,637 | 1,308 | 3,940 | 5,531 | 321 | 19,077 |
| Depreciation and amortization | (1,903) | (1,016) | (1,231) | (2,109) | (2,524) | (844) | (9,627) |
| Operating income | 4,437 | 621 | 77 | 1,831 | 3,007 | (523) | 9,450 |
| Capital expenditures | 1,529 | 1,385 | 666 | 2,127 | 3,118 | 570 | 9,395 |
| Investments accounted for by the equity method | 6 | 11 | − | 2 | 1 | 2,404 | 2,424 |
| Fixed assets | 14,191 | 10,781 | 9,143 | 20,648 | 16,071 | 2,188 | 73,022 |
| Total allocated assets | 18,895 | 13,144 | 11,682 | 27,324 | 24,432 | 23,385 | 118,862 |
| Total allocated liabilities | 9,258 | 4,051 | 3,213 | 8,294 | 16,177 | 50,387 | 91,380 |
(*) Revised
2012 (*) |
| Millions of euros | Telefónica Spain | Telefónica UK | Telefónica Germany | Telefónica Brazil | Telefónica Hispanoamérica | Other and eliminations | Total Group |
| Revenues | 14,996 | 7,042 | 5,213 | 13,618 | 16,741 | 4,746 | 62,356 |
| External revenues | 14,725 | 6,922 | 5,186 | 13,585 | 16,638 | 5,300 | 62,356 |
| Inter-segment revenues | 271 | 120 | 27 | 33 | 103 | (554) | − |
| Other operating income and expenses | (8,181) | (5,440) | (3,862) | (8,457) | (10,758) | (4,427) | (41,125) |
| OIBDA | 6,815 | 1,602 | 1,351 | 5,161 | 5,983 | 319 | 21,231 |
| Depreciation and amortization | (2,063) | (995) | (1,233) | (2,318) | (2,762) | (1,062) | (10,433) |
| Operating income | 4,752 | 607 | 118 | 2,843 | 3,221 | (743) | 10,798 |
| Capital expenditures | 1,692 | 748 | 609 | 2,444 | 2,988 | 977 | 9,458 |
| Investments accounted for by the equity method | 4 | − | − | 1 | 2 | 2,461 | 2,468 |
| Fixed assets | 14,618 | 10,636 | 9,713 | 24,743 | 17,327 | 8,025 | 85,062 |
| Total allocated assets | 19,848 | 13,451 | 11,701 | 33,926 | 26,793 | 24,054 | 129,773 |
| Total allocated liabilities | 10,623 | 3,161 | 2,718 | 10,212 | 17,811 | 57,587 | 102,112 |
(*) Revised
The composition of segment revenues, detailed by the main countries in which the Group operates, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Millions of euros | 2017 | 2016 (revised) | 2016 (previous segmentation) | 2015 |
| Country | Fixed |
| Mobile |
| Other and elims. |
| Total |
| Fixed |
| Mobile |
| Other and elims. |
| Total |
| Fixed |
| Mobile |
| Other and elims. |
| Total |
| Fixed |
| Mobile |
| Other and elims. |
| Total |
|
| Spain (*) |
|
|
|
|
|
| 12,653 |
|
|
|
|
|
|
| 12,815 |
| 9,795 |
| 4,149 |
| (1,231 | ) | 12,713 |
| 9,359 |
| 4,337 |
| (1,294 | ) | 12,402 |
|
| United Kingdom (**) | — |
| 6,216 |
| 324 |
| 6,540 |
| — |
| 6,572 |
| 289 |
| 6,861 |
| — |
| 6,861 |
| — |
| 6,861 |
| — |
| 7,837 |
| — |
| 7,837 |
|
| Germany | 862 |
| 6,415 |
| 19 |
| 7,296 |
| 981 |
| 6,498 |
| 24 |
| 7,503 |
| 981 |
| 6,498 |
| 24 |
| 7,503 |
| 1,043 |
| 6,832 |
| 13 |
| 7,888 |
|
| Brazil | 4,659 |
| 7,360 |
| — |
| 12,019 |
| 4,427 |
| 6,663 |
| — |
| 11,090 |
| 4,428 |
| 6,669 |
| — |
| 11,097 |
| 4,154 |
| 6,906 |
| — |
| 11,060 |
|
| Hispano-américa | 3,964 |
| 8,588 |
| — |
| 12,552 |
| 3,999 |
| 8,580 |
| — |
| 12,579 |
| 3,732 |
| 8,882 |
| (35 | ) | 12,579 |
| 4,070 |
| 10,347 |
| (30 | ) | 14,387 |
|
| Argentina | 1,216 |
| 2,279 |
| — |
| 3,495 |
| 1,133 |
| 1,867 |
| — |
| 3,000 |
| 1,133 |
| 1,867 |
| — |
| 3,000 |
| 1,376 |
| 2,539 |
| — |
| 3,915 |
|
| Chile | 926 |
| 1,259 |
| — |
| 2,185 |
| 926 |
| 1,237 |
| — |
| 2,163 |
| 925 |
| 1,238 |
| — |
| 2,163 |
| 928 |
| 1,292 |
| — |
| 2,220 |
|
| Peru | 1,092 |
| 1,226 |
| — |
| 2,318 |
| 1,126 |
| 1,373 |
| — |
| 2,499 |
| 1,126 |
| 1,373 |
| — |
| 2,499 |
| 1,200 |
| 1,566 |
| — |
| 2,766 |
|
| Colombia | 554 |
| 909 |
| — |
| 1,463 |
| 548 |
| 861 |
| — |
| 1,409 |
| 548 |
| 861 |
| — |
| 1,409 |
| 566 |
| 942 |
| — |
| 1,508 |
|
| Mexico | — |
| 1,336 |
| — |
| 1,336 |
| — |
| 1,410 |
| — |
| 1,410 |
| — |
| 1,410 |
| — |
| 1,410 |
| — |
| 1,783 |
| — |
| 1,783 |
|
| Remaining operators and segment eliminations | 176 |
| 1,579 |
| — |
| 1,755 |
| 266 |
| 1,832 |
| — |
| 2,098 |
| — |
| 2,133 |
| (35 | ) | 2,098 |
| — |
| 2,225 |
| (30 | ) | 2,195 |
|
| Other and inter-segment eliminations | — |
| — |
| 948 |
| 948 |
| — |
| — |
| 1,188 |
| 1,188 |
| — |
| — |
| — |
| 1,283 |
| — |
| — |
| — |
| 1,342 |
|
| Total Group | — |
| — |
| — |
| 52,008 |
| — |
| — |
| — |
| 52,036 |
| — |
| — |
| — |
| 52,036 |
| — |
| — |
| — |
| 54,916 |
|
| Millions of euros | | 2014 | | 2013 | | 2012 |
| Country | | Fixed | | Mobile | | Other and elims. | | Total | | Fixed | | Mobile | | Other and elims. | | Total | | Fixed | | Mobile | | Other and elims. | | Total |
| Spain | | 8,543 | | 4,556 | | (1,076) | | 12,023 | | 8,861 | | 5,121 | | (1,023) | | 12,959 | | 9,541 | | 6,464 | | (1,009) | | 14,996 |
| UK | | − | | 7,062 | | − | | 7,062 | | − | | 6,692 | | − | | 6,692 | | 242 | | 6,800 | | − | | 7,042 |
| Germany | | 1,138 | | 4,375 | | 9 | | 5,522 | | 1,235 | | 3,673 | | 6 | | 4,914 | | 1,363 | | 3,845 | | 5 | | 5,213 |
| Brazil | | 3,613 | | 7,618 | | − | | 11,231 | | 4,125 | | 8,092 | | − | | 12,217 | | 5,045 | | 8,573 | | − | | 13,618 |
| Hispanoamérica | | 3,604 | | 9,578 | | (27) | | 13,155 | | 4,272 | | 13,020 | | (437) | | 16,855 | | 4,424 | | 12,724 | | (407) | | 16,741 |
| Argentina | | 1,055 | | 2,008 | | − | | 3,063 | | 1,247 | | 2,434 | | − | | 3,681 | | 1,274 | | 2,423 | | − | | 3,697 |
| Chile | | 842 | | 1,247 | | − | | 2,089 | | 988 | | 1,495 | | − | | 2,483 | | 1,045 | | 1,524 | | − | | 2,569 |
| Peru | | 1,077 | | 1,427 | | − | | 2,504 | | 1,121 | | 1,333 | | − | | 2,454 | | 1,135 | | 1,265 | | − | | 2,400 |
| Colombia | | 629 | | 1,090 | | − | | 1,719 | | 652 | | 1,053 | | − | | 1,705 | | 695 | | 1,070 | | − | | 1,765 |
| Mexico | | − | | 1,649 | | − | | 1,649 | | − | | 1,580 | | − | | 1,580 | | − | | 1,596 | | − | | 1,596 |
| Venezuela and Central America | | − | | 1,420 | | − | | 1,420 | | − | | 4,228 | | − | | 4,228 | | − | | 4,009 | | − | | 4,009 |
| Remaining operators and segment eliminations | | 1 | | 737 | | (27) | | 711 | | 264 | | 897 | | (437) | | 724 | | 275 | | 837 | | (407) | | 705 |
Other and inter-segment eliminations (1) | | | | | | | | 1,384 | | | | | | | | 3,424 | | | | | | | | 4,746 |
| Total Group | | | | | | | | 50,377 | | | | | | | | 57,061 | | | | | | | | 62,356 |
Note: In some operating business of Telefónica Hispanoamérica segment, the breakdown of revenues is presented allocating intercompany eliminations to fixed and mobile businesses. Therefore, the comparative information for the years 2013 and 2012 has been revised. (1) "Other and inter-segment eliminations" included in 2013 revenues in Czech Republic amounted to 1,818 million euros (2,010 million euros in 2012) and revenues in Ireland amounted to 556 million euros (629 million euros in 2012). |
(*) The detail of revenues for Telefónica Spain is shown in the table below.
(**) Telefónica United Kingdom mobile revenues include revenues from MVNOs since 1 January 2017, which were previously accounted as "others". Comparative figures for 2016 have been revised accordingly.
Given the convergence reached at Telefónica Spain due to the high penetration of the convergent offers in Telefónica Spain, the revenue breakdown by fixed and mobile is less relevant in this segment. For this reason, the following revenue breakdown is shown, which management believes is more meaningful.
F-23 |
| | | | |
| Millions of euros | | |
| Telefónica Spain | 2017 |
| 2016 (revised) |
|
| Mobile handset sale | 379 |
| 497 |
|
| Ex-Mobile handset sale | 12,274 |
| 12,318 |
|
| Consumer | 6,602 |
| 6,536 |
|
| Corporate | 3,401 |
| 3,445 |
|
| Others | 2,271 |
| 2,337 |
|
| Total | 12,653 |
| 12,815 |
|
Note 5. Business combinations and acquisitions of non-controlling interests
Business combinations
2017
Acquisition by Coltel of E-Pluscontrol over Telebucaramanga, Metrotel and Optecom
On July 23, 2013 Telefónica, S.A. and its listed German subsidiary Telefónica Deutschland Holding, A.G. (Telefónica Deutschland) signed a contract (subsequently amended until a final version was produced on30 September 30, 2014) with Koninklijke KPN, N.V. (hereinafter, KPN), whereby Telefónica Deutschland undertook to buy up 100%2017, as part of the sharesearly termination agreement regarding the contract with PARAPAT (refer to Note 2), Colombia Telecomunicaciones, S.A. ESP (Coltel) acquired control of the German subsidiary of KPN, E-Plus Mobilfunk GmbH &Co. KG (E-Plus). In return KPN received a 24.9% holding in Telefónica Deutschland and a cash amount, which was established as 3,636 million euros.
In addition,Colombian companies Empresa de Telecomunicaciones de Telebucaramanga S.A. ESP (“Telebucaramanga”), operating in the contextcity of this transaction, Telefónica,Bucaramanga; Metropolitana de Telecomunicaciones S.A. entered intoESP (“Metrotel”); and Operaciones Tecnológicas y Comerciales S.A.S. (“Optecom”), operating in the city of Barranquilla, for an agreement with KPN to buy a 4.4% stakeoverall price of Telefonica Deutschland for 1,300509,975 million Colombian pesos (approximately 147 million euros and a call option agreement that will entitle Telefónica, S.A. to acquire an additional stake of up to 2.9% in this company, such right being exercisable on the first anniversarytransaction date). These companies primarily provide fixed telephony, data, pay TV, installation and maintenance services.
As a result of assuming control over these companies, Coltel buttressed its position as the telecom leader in Colombia. The combination of infrastructures, product portfolio and commercial network will be useful for maximizing the penetration of products in mobile and fixed segments of both customer bases, and also increasing the volume of corporate and SME customers. Synergies can also be built to reduce operating expenses and lower investments in transmission networks, and the economy of scale can be harnessed regarding installation expenses and possibly duplicated infrastructure.
The following table summarizes the consideration, fair values of the closing dateassets and liabilities identified on acquisition and the generated goodwill:
|
| | |
| Millions of euros | |
Consideration paid for the acquisition of control (1) | 147 |
|
| Fair value of the prior stake | 41 |
|
| Fair value of the minority stake | 3 |
|
| Consideration | 191 |
|
| Intangible assets | 21 |
|
| Customer relationships | 20 |
|
| Other intangible assets | 1 |
|
| Property, plant and equipment | 113 |
|
| Deferred tax assets | 10 |
|
| Other non-current assets | 7 |
|
| Cash and cash equivalents | 13 |
|
| Other current assets | 22 |
|
| Deferred tax liabilities | (10 | ) |
| Other non-current liabilities | (99 | ) |
| Current liabilities | (33 | ) |
| Fair value of net assets | 44 |
|
| Goodwill (Note 7) | 147 |
|
(1) Excluding the proportion assumed by the non-controlling shareholder and the cash and cash equivalents contributed by the companies at a strike pricethe moment of up to 510 million euros.
E-Plus dates back to 1993. It provides customers in Germany mainly with multi-brand mobile telecommunications services. The integration with Telefonica Deutschland notably reinforces the competitive position of Telefonicaits inclusion in the largest market in Europe, with around 47 million accesses, and implies significant value creation on synergies generation, particularly with respect to network, distribution and customer service, selling, general and administration as well as CapEx.
On July 2, 2014consolidation scope, the European Commission issued conditional authorization for Telefónica Deutschland to purchase E-Plus. Final authorization by the European Commission for the purchase of E-Plus was obtained on August 29, 2014.
On October 1, 2014, following the share capital increase by Telefónica Deutschland to finance the purchase of E-Plus, the latter was finally acquired by Telefónica Deutschland. Telefónica then purchased a 4.4% stake in Telefónica Deutschland from KPN, thereby reducing KPN's stake in Telefónica Deutschland to 20.5%. The Telefónica Group considerers these two transactions together, as a single acquisition.
Following the acquisition of E-Plus, the Telefónica Group’s stake in Telefónica Deutschland fell from 76.83% to 62.1% (increased to 62.37% at December 31, 2014). The share capital increase at Telefónica Deutschland and this dilution of the Group’s percentage stake affected the “Equity attributable to non-controlling interests”impact in the amount of 3,615consolidated cash flow amounted to 85 million euros (see Note 12.h)20).
The fair valueAs of the ordinarydate when the present consolidated financial statements were drawn up, the process for allocating the purchase price is provisional. This analysis should conclude in the coming months, yet will not last longer than twelve months from the acquisition date stipulated in the standard.
2016
No significant business combinations were carried out in 2016.
2015
Acquisition of GVT
On September 19, 2014 Telefónica, S.A. signed an agreement with Vivendi, S.A. for the acquisition by Telefónica Brasil, S.A. of Global Village Telecom, S.A. and its holding company GVT Participações, S.A. (jointly "GVT") for a cash consideration of 4,663 million euros (through payment in cash and debt assumption), as well as delivery of shares of Telefonica Deutschland delivered to KPN as part of payment was calculated on the basis of their opening price at the date of closingrepresenting 12% of the operation (October 1, 2014). As a resultshare capital of the difference betweennew Telefónica Brasil, S.A. resulting from the fair value andintegration with GVT.
Once the carrying amountpertinent regulatory authorizations were obtained, the Extraordinary General Shareholders Meeting of Telefónica Deutschland’s net assets,Brasil, S.A. held on 28 May, 2015, approved the dilution of the Group’s percentage stake had an adverse effect on “Equity attributable to the parent company” in the amount of 307 million euros, under “Retained earnings”.acquisition.
The following table below sets out the consideration paid,transferred, the fair values of the assets and liabilities identified at the time of purchase,acquisition date, and the goodwill generated. At
|
| | |
| Millions of euros | |
|
| Gross cash consideration (date of agreement) | 4,663 |
|
| Contingent consideration | 102 |
|
| Fair value of 12% of Telefónica Brasil transferred | 2,476 |
|
| Consideration transferred | 7,241 |
|
| Price adjustment for net debt and hedges | (2,168 | ) |
| Intangible assets | 835 |
|
| Customer relationships | 751 |
|
| Other intangible assets | 84 |
|
| Property, plant and equipment | 2,374 |
|
| Deferred tax assets | 182 |
|
| Accounts receivable | 282 |
|
| Other assets | 256 |
|
| Cash and cash equivalents | 116 |
|
| Financial debt | (2,102 | ) |
| Trade and other payables | (202 | ) |
| Provisions | (208 | ) |
| Other liabilities | (217 | ) |
| Fair value of net assets | 1,316 |
|
| Goodwill | 3,757 |
|
Acquisition of control of DTS
Once the time these consolidated financial statementsrelevant competence authorizations were drawn up,obtained, on April 30, 2015 the purchase price allocation process had not been completed, and thus changes may be madeacquisition by Telefónica of 56% of the share capital of Distribuidora de Televisión Digital, S.A. (DTS). The total consideration amounted to 725 million euros.
The table below sets out the total consideration, the fair values of the assets and liabilities particularlyidentified at acquisition date, and the licenses for the use of spectrum, for which there are certain pending regulatory analyses (see Appendix VII). In addition, the final adjustment to the cash consideration, based on the determination of working capital and net debt as established in the aforementioned share purchase agreement, has not yet been completed.
goodwill generated.
Million |
| | |
| Millions of euros | |
|
| Cash payment 56% stake | 4,936725 |
|
Fair value of the T. Deutschland shares purchased by KPNprior stake | 2,527 |
Consideration paid739 | 7,463
|
| Intangible assets | 4,328378 |
|
| Customer relationships | 2,718 |
Frequency usage rights362 | 1,342
|
| Other intangible assets | 26816 |
|
| Property, plant and equipment | 1,93191 |
|
InventoriesDeferred tax assets | 21454 |
|
| Trade and other receivables | 677137 |
|
Other financial assets | 19213 |
|
Other non-financial assetsFinancial debt | 93(350 | ) |
Cash and cash equivalents | 396 |
Deferred revenue | (220) |
Provisions | (254) |
Interest-bearing debt | (505) |
Current tradeTrade and other payables | (709)(367 | ) |
| Other liabilities | (66 | ) |
| Fair value of net assets | 5,777490 |
|
Goodwill (Note 7) | 1,686974 |
|
Frequency usage rights were valued using the Greenfield method, which consists of the valuation of a hypothetical newly created company that starts its business with no assets except the asset being measured. The cash flows attributable to the build-up and operation of the company are determined and discounted to the present value.
Customer relationships were valued using the MEEM (“Multiple Excess Earnings Method”), which is based on calculating the discounted cash flows reflecting the economic benefits attributable to the customer base after consideration of all value contributions of other assets.
The detail of the fair value of trade and other receivables is as follows:
| Millions of euros | Gross amount | Impairment | Preliminary fair value |
| Trade receivables | 797 | (164) | 633 |
| Other receivables | 44 | - | 44 |
| Total trade and other receivables | 841 | (164) | 677 |
The Group consolidates E-Plus as of October 1, 2014 using the full consolidation method. Had the acquisition occurred on January 1, 2014, the Telefónica Group’s revenues and profit for the year would have reached approximately 52,640 and 2,798 million euros, respectively.
At the date of the operation, tax-deductible goodwill in Germany amounted to 1,252 million euros. Differences between applicable IFRS and tax rules create a difference between the accounting goodwill and the tax deductible goodwill, and consists mainly of the different dates used to consider the acquisition of the company, the determination of the purchase price and the allocation of the purchase price.
Transactions with non-controlling interests
2017
2014Share swap with KPN
In March 2017 Telefónica entered into a swap agreement with Koninklijke KPN NV (hereinafter, KPN) to deliver 72.0 million of its treasury shares (representing 1.43% of its share capital) in exchange for 178.5 million shares of its subsidiary Telefónica Deutschland Holding AG, representing 6.0% of the share capital of the latter (see Note 12). Thus, this transaction did not imply any cash movements.
The exchange ratio was determined based on the average of the volume weighted average price of the respective shares over the last five trading sessions. The impact in the consolidated statement of changes in equity was a decrease in net equity attributable to minority interests amounting to 671 million euros (Note 12.h), an increase in treasury shares amounting to 754 million euros and a decrease in retained earnings amounting to 83 million euros.
As a result of this agreement, Telefónica increased from 63.2% to 69.2% its shareholding in Telefonica Deutschland.
Sale of 24.8% and 15.2% of the total share capital of Telxius Telecom, S.A.
On February 20, 2017 Telefónica reached an agreement for the sale of up to 40% of the total share capital of Telxius Telecom, S.A. to KKR, for a total amount of 1,275 million euros (12.75 euros per share).
The aforementioned agreement included a purchase agreement for the sale of 62 million shares (representing 24.8% of the share capital) of Telxius Telecom, S.A. for a price of 790.5 million euros, as well as options over 38 million shares (representing 15.2% of the share capital) for a price of at least 484.5 million euros.
These options corresponded to a call option exercisable by KKR and to a put option exercisable by Telefónica upon maturity of the call option.
On October 24, 2017, after obtaining all the relevant regulatory approvals, Telefónica transferred 62 million shares of Telxius (representing 24.8% of its share capital) to KKR in exchange for 790.5 million euros (12.75 euros per share).
On November 13, 2017 KKR exercised the call option foreseen in the Agreement over 38 million shares of Telxius (representing 15.2% of its share capital) in exchange for 484.5 million euros (12.75 euros per share).
Following the closing of this sale of 15.2% of the share capital of Telxius, in December 2017, together with 24.8% of the share capital acquired on October 24, 2017, KKR had acquired 40% of the share capital of Telxius in exchange for an aggregate amount of 1,275 million euros (see Note 20).
These transactions had no impact on the consolidated results of the Telefónica Group as it consisted of the sale of minority interests, with Telefónica retaining control over Telxius. The impact in the consolidated statement of changes in equity was an increase in net equity attributable to minority interests amounting to 690 million euros (Note12.h), an
increase in retained earnings amounting to 570 million euros, and a decrease in translation differences of 9 million euros.
2016
No materialsignificant transactions with non-controlling interests were carried out that were significant forin 2016.
2015
Acquisition from Vivendi of 4.5% of Telefónica Brasil
On June 24, 2015 in accordance with the Groupcommitments undertaken in 2014, except for those detailed above regarding the E-Plus acquisition.
2013
Sale of 40%acquisition agreement with GVT, Telefónica proceeded to deliver (through its fully-owned subsidiary Telco TE, S.p.A.) 1,110 million ordinary shares in Telecom Italia, S.p.A. representing 8.2% of the stake in Telefónica’s subsidiaries in Guatemala, El Salvador, Nicaraguavoting equity of Telecom Italia, S.p.A. (equivalent to 5.7% of its share capital) to Vivendi, S.A. and Panama
In April 2013 Telefónica reached an agreement with Corporación Multi Inversiones to sell 40% of Telefónica’s stake in its subsidiaries in Guatemala, El Salvador, Nicaragua and Panama, through Telefónica Centroamérica Inversiones, S.L.
The closingreceived from Vivendi, S.A. all of the transaction was on August 2, 2013, upon the fulfillmentordinary shares and part of the preference shares of Telefônica Brasil, S.A. which Vivendi, S.A. had received from the sale conditions.of GVT, which jointly represent 4.5% of the share capital of Telefônica Brasil, S.A. The fair value of the sale amountedTelecom Italia, S.p.A. shares delivered to 500 million U.S. dollars (equivalent to 377 million eurosVivendi as part of the consideration has been calculated on the basis of their market price at the date of closingthe approval of the sale), plus payment of an additional variable amount of upoperation, amounting to 721,264 million U.S. dollars, depending toeuros. The difference between the evolutionaforementioned value and operational performancethe valuation of the transferred assets.
The Telefóminority interest in Telefônica Group maintains control of these companies, and therefore the transactionBrasil had no impactan adverse effect on the consolidated income statement at its completion, as it is a transaction with non-controlling interests. The impact of this transaction on the consolidated equity was a 111 million euros increase in “Equity attributable to equity holdersthe parent Company” in the amount of 277 million euros.
After the acquisition of the parent and other holders4.5% stake of equity instruments”Telefônica Brasil, S.A. from Vivendi, S.A., and a 283 million euros increase in “Equity attributable to non-controlling interests”.
2012
Restructuring of the wireline and wireless businesses in Colombia
In 2012, Telefónica Móviles Colombia, S.A. (a wholly-owned subsidiarystake of the Telefónica Group)Group increased to 70.13% (70.22% considering Telefônica Brasil, S.A. treasury shares).
Agreement with Vivendi for the exchange of shares of Telefônica Brasil for treasury shares of Telefónica, S.A.
In September 2015, after the regulatory approval from CADE, Telefónica delivered to Vivendi 46.0 million of its treasury shares representing 0.95% of its share capital with an effect on treasury shares and in retained earnings in the amount of 555 million euros and 69 million euros, respectively (see Note 12), in exchange for 58.4 million preferred shares of Telefônica Brasil, S.A, (received by Vivendi, S.A. in the Colombian National Government and Colombia Telecomunicaciones,context of the acquisition of GVT Participaçoes, S.A. ESP (a company 52% owned by) representing approximately 3.5% of the share capital of Telefônica Brasil, S.A.
After the acquisition the stake of Telefónica Group and 48% by the Colombian government) signed an agreementincreased to restructure their wireline and wireless businesses in Colombia, which culminated in the merger of the two companies. Telefónica obtained 70% shareholding in the resulting company and the Colombian government obtained the remaining 30% shareholding.
Public offering of shares in Telefónica Deutschland Holding, A.G.
On October 29, 2012, the public offering of shares of the subsidiary Telefónica Deutschland Holding, A.G. was finalized, corresponding to 23.17% of the capital of that company.
73.6%.
Note 6. Intangible assets
The composition of and movements in net intangible assets in 20142017 and 20132016 are as follows:
| | | 2017 | | |
| Millions of euros | | Balance at 12/31/2013 | | Additions | | Amortization | | Disposals | | Transfers and others | | Translation differences and hyperinflation adjustments | | Inclusion of companies | | Exclusion of companies | | Balance at 12/31/2014 | Balance at 12/31/2016 |
| Additions |
| Amortization |
| Disposals |
| Transfers and others |
| Translation differences and hyperinflation adjustments |
| Inclusion of companies |
| Balance at 12/31/2017 |
|
| Service concession arrangements and licenses | | 12,034 | | 1,294 | | (1,154) | | − | | 31 | | 58 | | 1,342 | | − | | 13,605 | 11,594 |
| 493 |
| (1,234 | ) | — |
| 852 |
| (920 | ) | — |
| 10,785 |
|
| Software | | 3,044 | | 665 | | (1,432) | | (5) | | 632 | | (143) | | 144 | | − | | 2,905 | 2,892 |
| 640 |
| (1,441 | ) | — |
| 1,109 |
| (216 | ) | 3 |
| 2,987 |
|
| Customer base | | 1,022 | | − | | (349) | | − | | (47) | | 22 | | 2,718 | | − | | 3,366 | 3,435 |
| — |
| (639 | ) | — |
| 1 |
| (87 | ) | 21 |
| 2,731 |
|
| Trademarks | | 912 |
| — |
| (74 | ) | — |
| — |
| (58 | ) | — |
| 780 |
|
| Other intangible assets | | 1,487 | | 40 | | (256) | | (4) | | 12 | | 30 | | 121 | | − | | 1,430 | 127 |
| 18 |
| (55 | ) | 2 |
| (5 | ) | (4 | ) | 3 |
| 86 |
|
| Intangible assets in process | | 961 | | 389 | | − | | − | | (314) | | 8 | | 3 | | − | | 1,047 | 1,558 |
| 667 |
| — |
| — |
| (1,559 | ) | (30 | ) | — |
| 636 |
|
| Total intangible assets | | 18,548 | | 2,388 | | (3,191) | | (9) | | 314 | | (25) | | 4,328 | | − | | 22,353 | 20,518 |
| 1,818 |
| (3,443 | ) | 2 |
| 398 |
| (1,315 | ) | 27 |
| 18,005 |
|
| Millions of euros | | Balance at 12/31/2012 | | Additions | | Amortization | | Disposals | | Transfers and others | | Translation differences and hyperinflation adjustments | | Inclusion of companies | | Exclusion of companies | | Balance at 12/31/2013 |
| Service concession arrangements and licenses | | 13,545 | | 1,223 | | (1,116) | | − | | (406) | | (1,212) | | − | | − | | 12,034 |
| Software | | 3,529 | | 717 | | (1,701) | | (8) | | 709 | | (202) | | − | | − | | 3,044 |
| Customer base | | 1,932 | | 1 | | (415) | | − | | (360) | | (136) | | − | | − | | 1,022 |
| Other intangible assets | | 1,839 | | 66 | | (216) | | (8) | | (86) | | (108) | | − | | − | | 1,487 |
| Intangible assets in process | | 1,233 | | 302 | | − | | (2) | | (561) | | (11) | | − | | − | | 961 |
| Total intangible assets | | 22,078 | | 2,309 | | (3,448) | | (18) | | (704) | | (1,669) | | − | | − | | 18,548 |
|
| | | | | | | | | | | | | | | | |
| 2016 | | | | | | | | |
| Millions of euros | Balance at 12/31/15 |
| Additions |
| Amortization |
| Disposals |
| Transfers and others |
| Translation differences and hyperinflation adjustments |
| Inclusion of companies |
| Balance at 12/31/2016 |
|
| Service concession arrangements and licenses | 11,881 |
| 340 |
| (1,230 | ) | (15 | ) | (2 | ) | 620 |
| — |
| 11,594 |
|
| Software | 2,722 |
| 836 |
| (1,686 | ) | (16 | ) | 866 |
| 170 |
| — |
| 2,892 |
|
| Customer base | 3,932 |
| — |
| (632 | ) | — |
| — |
| 135 |
| — |
| 3,435 |
|
| Trademarks | 978 |
| 1 |
| (87 | ) | — |
| — |
| 20 |
| — |
| 912 |
|
| Other intangible assets | 147 |
| 32 |
| (63 | ) | 1 |
| 7 |
| 2 |
| 1 |
| 127 |
|
| Intangible assets in process | 1,489 |
| 471 |
| — |
| 2 |
| (390 | ) | (14 | ) | — |
| 1,558 |
|
| Total intangible assets | 21,149 |
| 1,680 |
| (3,698 | ) | (28 | ) | 481 |
| 933 |
| 1 |
| 20,518 |
|
The gross cost, accumulated amortization and impairment losses of intangible assets at December 31, 20142017 and 20132016 are as follows:
| Balance at 12/31/2014 | |
| | | Balance at 12/31/2017 | | Balance at 12/31/2017 |
| Millions of euros | Gross cost | Accumulated amortization | Impairment losses | Intangible assets | Gross cost |
| Accumulated amortization |
| Impairment losses |
| Intangible assets |
|
| Service concession arrangements and licenses | 22,297 | (8,692) | − | 13,605 | 21,333 |
| (10,548 | ) | — |
| 10,785 |
|
| Software | 14,168 | (11,260) | (3) | 2,905 | 16,407 |
| (13,420 | ) | — |
| 2,987 |
|
| Customer base | 5,974 | (2,606) | (2) | 3,366 | 6,931 |
| (4,200 | ) | — |
| 2,731 |
|
| Trademarks | | 1,909 |
| (1,129 | ) | — |
| 780 |
|
| Other intangible assets | 3,647 | (2,212) | (5) | 1,430 | 1,081 |
| (993 | ) | (2 | ) | 86 |
|
| Intangible assets in process | 1,046 | − | 1 | 1,047 | 636 |
| — |
| — |
| 636 |
|
| Intangible assets | 47,132 | (24,770) | (9) | 22,353 | 48,297 |
| (30,290 | ) | (2 | ) | 18,005 |
|
| | |
| Balance at 12/31/2013 |
| Millions of euros | Gross cost | Accumulated amortization | Impairment losses | Intangible assets |
| Service concession arrangements and licenses | 19,763 | (7,729) | − | 12,034 |
| Software | 14,320 | (11,259) | (17) | 3,044 |
| Customer base | 4,257 | (3,235) | − | 1,022 |
| Other intangible assets | 3,433 | (1,938) | (8) | 1,487 |
| Intangible assets in process | 962 | − | (1) | 961 |
| Intangible assets | 42,735 | (24,161) | (26) | 18,548 |
| |
“Inclusion |
| | | | | | | | |
| Balance at 12/31/2016 |
| Millions of euros | Gross cost |
| Accumulated amortization |
| Impairment losses |
| Intangible assets |
|
| Service concession arrangements and licenses | 21,843 |
| (10,249 | ) | — |
| 11,594 |
|
| Software | 16,361 |
| (13,466 | ) | (3 | ) | 2,892 |
|
| Customer base | 7,253 |
| (3,818 | ) | — |
| 3,435 |
|
| Trademarks | 2,017 |
| (1,105 | ) | — |
| 912 |
|
| Other intangible assets | 1,135 |
| (1,003 | ) | (5 | ) | 127 |
|
| Intangible assets in process | 1,558 |
| — |
| — |
| 1,558 |
|
| Intangible assets | 50,167 |
| (29,641 | ) | (8 | ) | 20,518 |
|
Colombia Telecomunicaciones (Coltel), 67.5% of companies”which is owned by Telefónica and 32.5% of which is owned by the Goverment of the Colombian Nation, availed itself to the general authorization regime on November 28, 2013, applying for the renewal of the spectrum licenses. The Colombian Ministry of Information Technologies and Communication (MinTIC) issued a resolution in March 2014 corresponds to renew 850 MHz / 1,900 MHz licenses for 10 additional years. During the settlement of the concession contract, the reversion of certain assets involved in the provisions of mobile voice services (different from radio frequencies) and their scope were discussed. Discussions on the matter concluded in February 2016 without reaching an agreement and the MinTIC convened the Arbitral Tribunal, in accordance with the concession contract (see Appendix VI).
On July 25, 2017, Coltel and another telecom operator were notified of the arbitration award issued in the arbitration proceedings initiated by the MinTIC. The arbitration award was not favorable to the co-defendants and as a consequence the shareholders' meeting of Coltel approved a capital increase for an aggregate amount of 1,651,012 million Colombian pesos (approximately 470 million euros) to pay the entire amount set forth in the arbitration award (see Note 2). Both ColTel and Telefónica have initiated legal actions (see Appendix VI). The payment of the sum awarded was recognized as an additional cost of the license since this cost was mandatory and unavoidable in order to continue using the license.
During 2017, the investment effort also reflects the renewal of spectrum of 25 MHz in 850 MHz band by Telefónica El Salvador for 15 million euros and the spectrum swap (AWS by 1,900 MHz) in the Region 8 by Telefónica México for 4 million euros.
“Additions” of intangible assets in progress in 2017 includes the acquisition of E-Plus (see Note 5).
Outstanding among “Additions” in 2014 is the acquisition by Telefónica Brasil of a LTE block2x5 MHz blocks in the 700 MHz band by Telefónica Uruguay for 88923 million euros (added to 4 million euros included in additions of service concession arrangements and licenses)and the acquisition of spectrum in the band of 1,800 MHz by Telefónica Costa Rica for 21 million euros. Additions
Outstanding among “Additions” of service concession arrangements and licenses in 2014 include2016 was the acquisition of an LTE block of 2x15 MHz in the 700 MHz band by Telefónica Peru for 284 million euros. The acquired frequency was immediate availability and allowed enhancing LTE coverage and capacity across the country.
During 2016, the investment effort also reflected the acquisition of 7 LTE licenses acquiredRegional blocks of 2x10 MHz in the 2.5 GHz band by the Telefonica operating companies in Argentina, Colombia, Panama, Venezuela and Nicaragua,Telefónica Brazil for 40548 million euros.
“Inclusion of companies” in 2017 mainly corresponds to Coltel acquiring control over the companies Telebucaramanga, Metrotel and Optecom(see Note 5).
"Additions" in 2013 include Telefónica UK Ltd.’s acquisition of two 10 MHz blocks in the 800 MHz spectrum band for 719 million euros.
The spectrum licenses in the 800 MHz and 900 MHz acquired by Telefónica Móviles España in 2011 for 793 million euros are recognized under “Intangible assets in process” as their availability will begin in 2015.
The net balance of “Transfers and others” for 2013 primarily includes the reclassification to “Non-current assets held for sale” of the intangible assets of Telefónica Ireland and Telefónica Czech Republic (see Note 2).
Details of the principal concessions and licenses with which the Group operates are provided in Appendix VII.VI.
“Other intangible assets” includes the amounts allocated to trademarks acquired in business combinations, of 2,119 million euros and 1,951 million euros at December 31, 2014 and 2013, respectively (1,133 million euros and 1,071 million euros, respectively, net of the related accumulated amortization).
The impact of the monetary adjustments due to hyperinflation in Venezuela is included under “Translation differences and hyperinflation adjustments”.
Note 7. Goodwill
The movement in this heading assigned to each Group segment was the following:
| 2014 | |
| | | 2017 | | 2017 |
| Millions of euros | Balance at 12/31/13 | Acquisitions | Transfers | Translation differences and hyperinflation adjustments | Balance at 12/31/14 | Balance at 12/31/16 |
| Acquisitions |
| Write-offs |
| Translation differences and other |
| Balance at 12/31/17 |
|
| Telefónica Spain | 3,332 | − | 3,332 | 4,306 |
| — |
| — |
| 4 |
| 4,310 |
|
| Telefónica Brazil | 8,392 | − | 15 | 8,407 | 11,565 |
| — |
| — |
| (1,508 | ) | 10,057 |
|
| Telefónica Germany | 2,779 | 1,686 | (4) | − | 4,461 | 4,787 |
| 28 |
| — |
| — |
| 4,815 |
|
| Telefónica United Kingdom | 4,948 | − | 348 | 5,296 | 4,824 |
| — |
| — |
| (176 | ) | 4,648 |
|
| Telefonica Hispanoamérica | 3,748 | − | (383) | 3,365 | |
| Telefónica Hispanoamérica | | 3,040 |
| 147 |
| — |
| (262 | ) | 2,925 |
|
| Others | 235 | 1 | − | 14 | 250 | 164 |
| — |
| — |
| (78 | ) | 86 |
|
| Total | 23,434 | 1,687 | (4) | (6) | 25,111 | 28,686 |
| 175 |
| — |
| (2,020 | ) | 26,841 |
|
| | |
| 2013 |
| Millions of euros | Balance at 12/31/12 | Acquisitions | Transfers | Translation differences and hyperinflation adjustments | Balance at 12/31/13 |
| Telefónica Spain | 3,332 | − | − | − | 3,332 |
| Telefónica Brazil | 10,056 | − | − | (1,664) | 8,392 |
| Telefónica Germany | 2,779 | − | − | − | 2,779 |
| Telefónica United Kingdom | 5,055 | − | − | (107) | 4,948 |
| Telefónica Hispanoamérica | 4,210 | − | − | (462) | 3,748 |
| Others | 2,531 | 2 | (2,089) | (209) | 235 |
| Total | 27,963 | 2 | (2,089) | (2,442) | 23,434 |
| |
|
| | | | | | | | | | |
| 2016 |
| Millions of euros | Balance at 12/31/15 |
| Acquisitions |
| Write-offs |
| Translation differences and other |
| Balance at 12/31/16 |
|
| Telefónica Spain | 4,306 |
| — |
| — |
| — |
| 4,306 |
|
| Telefónica Brazil | 9,345 |
| — |
| — |
| 2,220 |
| 11,565 |
|
| Telefónica Germany | 4,787 |
| — |
| — |
| — |
| 4,787 |
|
| Telefónica United Kingdom | 5,621 |
| — |
| — |
| (797 | ) | 4,824 |
|
| Telefónica Hispanoamérica | 3,187 |
| — |
| (215 | ) | 68 |
| 3,040 |
|
| Others | 149 |
| 26 |
| (13 | ) | 2 |
| 164 |
|
| Total | 27,395 |
| 26 |
| (228 | ) | 1,493 |
| 28,686 |
|
The amountTelefónica Hispanoamérica in “Acquisitions” of the Telefónica Germany segment for 2014 corresponds2017 relate to the acquisition of E-Pluscontrol by Coltel of the companies Empresa de Telecomunicaciones de Telebucaramanga S.A. ESP, Metropolitana de Telecomunicaciones S.A. ESP and Operaciones Tecnológicas y Comerciales S.A.S. (see Note 5). Additions of Telefónica Germany relate to Minodes GmbH and Co-Trade GmbH (see Appendix I).
Additions in 2016 related to the acquisitions of Nova Casiopea and Saluspot (see Appendix I).
The column “Transfers”In 2016, after analyzing the business plan approved in 2013 mainly includesOctober 2016 by the reclassificationBoard of Directors of Telefónica, S.A., and as a result of applying the inflation index to “Non-currentits assets, held for sale”an impairment loss of 124 million euros was recognized on the total goodwill assigned to Telefónica Venezuela, with a balancing entry in “Other expenses” (see Note 18). Likewise, an impairment loss of 91 million euros was also recognized in relation to the goodwill allocated toof Telefónica Ireland and Telefónica Czech RepublicMóviles México, with a balancing entry in “Other expenses” (see Note 2)18).
A write-off of 13 million euros was recognized in 2016 in relation to the sale of Televisión Federal, S.A. (see Note 18).
In order to test for impairment, goodwill has been allocated to the different cash-generating units (CGUs), which are grouped into the following reportable operating segments:
| | 12/31/2014 | 12/31/2013 |
| Telefónica Spain | 3,332 | 3,332 |
| Telefónica Brazil | 8,407 | 8,392 |
| Telefónica Germany | 4,461 | 2,779 |
| Telefónica United Kingdom | 5,296 | 4,948 |
| Telefónica Hispanoamérica | 3,365 | 3,748 |
| Chile | 978 | 996 |
| Peru | 788 | 738 |
| Mexico | 558 | 554 |
| Argentina | 349 | 403 |
| Others Telefónica Hispanoamérica | 692 | 1,057 |
| Others | 250 | 235 |
| TOTAL | 25,111 | 23,434 |
The |
| | | | |
| | 12/31/2017 |
| 12/31/2016 |
|
| Telefónica Spain | 4,310 |
| 4,306 |
|
| Telefónica Brazil | 10,057 |
| 11,565 |
|
| Telefónica Germany | 4,815 |
| 4,787 |
|
| Telefónica United Kingdom | 4,648 |
| 4,824 |
|
| Telefónica Hispanoamérica | 2,925 |
| 3,040 |
|
| Chile | 978 |
| 1,022 |
|
| Peru | 739 |
| 813 |
|
| Mexico | 339 |
| 368 |
|
| Argentina | 161 |
| 217 |
|
| Others Telefónica Hispanoamérica | 708 |
| 620 |
|
| Others | 86 |
| 164 |
|
| TOTAL | 26,841 |
| 28,686 |
|
Goodwill is tested for impairment at the end of the year using the strategic plans of the various cash-generating units (CGU) to which the goodwill is allocatedassigned, approved by the Board of Directors. The strategic plans cover a period of four years, including the closing year. Therefore, in order to complete the five years of cash flows after the closing year, as a general rule an additional two-year normalization period is added to the strategic plan based on the operating variables until the terminal parameters are reached; the consensus of analysts' forecasts is used as a reference. For specific cases in which the normalization period does not properly reflect the expected behavior of the business, locally drawn up strategic plans will be used to performcover the impairment test at year-end. five-year period of cash flows.
The process of preparing the CGUs’ strategic plans takes into consideration the current condition of each CGU’s market, analyzing the macroeconomic, competitive, regulatory and technological climate together with each CGU’s position in this contextcompetitive positioning and the growth opportunities given the market projections, and their competitive positioning.as well as the operators' ability to set them apart from the competition. A growth target is thentherefore defined for each CGU in terms of market share, which is a critical factor when forecasting future revenues. Theand the operating resources and fixed asset investments that need to be assigned in order to reach thethis growth target are estimated following a basic premise ofestimated. In addition, premises are defined for boosting operating efficiency, in line with the strategic transformation initiatives defined, with a view to increaseincreasing operating cash flow over the life of the plan. In this process, the Group has also assessed the level of fulfillment of the strategic plans in the past.
Main assumptions used in calculating value in use
Value in use is calculated for the various CGUs based on the aforementioned approved business plans and takingplans. Subsequently, certain variables are taken into account certain variables such as the OIBDA margin and the CAPEXCapital Expenditure ratio for non-current assets, expressed(expressed as a percentage of revenue,revenue), which are considered the key operating variables to measure the business performance and to set financial targets. Finally, the discount rates and the perpetuity growth rates. rates are taken into account.
In terms of revenue, the plan is in line with the average three-year estimates made by analysts, which include a trend towards stability or improvement. This trend is supported by service revenue which, leveraging the distinctiveness and quality of the Group's products and services thanks to the investments made, includes growth in the high-value customer base and monetization of the growing data consumption in rational markets, although it is highly competitive in certain segments.
Revenue therefore reflects, in the case of Spain, the growth in penetration and revenue of customers converging on a high quality network; in Germany, the strong growth of high-value mobile data customers; in Brazil, the strength of Telefónica's leadership driven by its leadership and quality and capturing integration synergies; and in the United Kingdom, the drive of mobile data.
Following is a description of the principal variables considered for each CGU with significant goodwill (Brazil, Spain, GermanyUnited Kingdom and United Kingdom)Germany).
OIBDA margin and long-term Capital Expenditure (CapEx)
ratio
The values obtained, as described in the precedingprevious paragraphs, are compared with the available data of ouron competitors in the geographicalgeographic markets in which thewhere Telefónica Group operates. This analysis has identified thatWith regard to Europe, the long-term OIBDA margin determined for the operations in Spain is 39% whilst in Germany (27%) and the United Kingdom (24%), it is below this figure. The long-
term OIBDA margin is therefore in line with analysts' forecasts over a three year horizon, with Spain estimated at 41%, Germany at 28% and the average for European peers, which standsUnited Kingdom at approximately 33%25%. With respect to
Regarding the ratio of CapEx over revenues, over the term of the strategic plan, the Group’s European operators invest at a percentage of revenue that lies at the bottom end ofaligned with the range for peers in the region. However, the valuations performed for the impairment tests for Spain, Germany and United Kingdom take into account the opinions of Telefónica Group’s analysts for Spain and United Kingdom, and Telefónica Deutschland’s analysts for Germany with regard to investment needs (around 13% for the three countries).
The OIBDA margin for Brazil is in line with the average of analysts' long-term forecasts for peers, in emerging markets ofat approximately 36%37%. Over the term of the strategic plan, the Group’s operator in Brazil investswill invest a percentage locatedin line with the investment needs identified by analysts (17%).
There were no significant changes in the lower range estimated asoperating indicators compared to the average for its peers.previous year.
Discount rate
The discount rate, applied to measure freethe cash flow,flows, is the weighted average cost of capital (WACC), determined by the weighted average cost of equity and debt according the finance structure established for each CGU.
This rate is calculated using the capital asset pricing model (CAPM), which takes into account the asset’s systemic risk, and the impact of risks on cash flows not generated internally, such as country risk, business-specific credit risk, currency risk and price risk specific to the financial asset.
The most significant components of WACC are summarized as follows:
Risk-Free Rate: understood as the interest rate offered by long-term sovereign bonds. The rate is determined using current market data and estimates of equilibrium levels (according to standard econometric models) between which the interest rates should fall, thus adjusting the return in low rates as a result of the high influence on term premiums of public debt purchased by central banks.
Political Risk Premium: incorporates the insolvency risk inherent to the country due to political and/or financial events, the calculation of which is based on the quoted prices of credit default swaps for each country or, failing this, the EMBI+ index, published by JP Morgan, based on the information available and the liquidity conditions of these swaps.
Equity Risk Premium (ERP), which measures the additional risk required for equity assets with a return greater than risk-free assets, is determined using a combination of historical approaches (ex post), backed by external publications and studies of various past returns, and prospective approaches (ex ante), based on market publications, taking into account the medium- and long-term profit expectations based on the degree of maturity and development of each country.
Beta Coefficient: is a multiplier of the equity risk premium, considered to be systematic risk. It is estimated based on a series of historical share prices of comparable companies listed on the stock exchange, thus determining the correlation between the return on the companies' shares and the return on the general index that is representative of the stock exchange of the country where said company is listed.
The main underlying data used in these calculations are obtained from independent and renowned public external information sources.
The after-tax discount rates applied to the cash flow projections in 20142017 and 20132016 for the main CGUs are as follows:
| | | Discount rate in local currency | 2014 | 2013 | 2017 | 2016 |
| Spain | 6.1% | 6.3% | 5.9% | 6.2% |
| Brazil | 10.9% | 11.6% | 10.9% | 11.3% |
| United Kingdom | 6.2% | 6.1% | 6.3% | 7.1% |
| Germany | 5.5% | 5.3% | 4.7% | 5.7% |
The main variation relates to Brazil, where a combination of a reduction in the systemic risk and an improvement in the terms of financing in U.S. dollars has contributed to the decrease in the discount rate.
Perpetuity growth rate
In all cases, impairment tests are performed using the projected cash flows estimated according to the strategic plans over a five-year period. Cash flow projections as from the sixth year are calculated using an expected constant growth rate taking as(g), considering the perpetuity growth rate consensus estimates among analysts for each business and country, based on the maturity of the industry depending on and
technology, and the degree of development of each country. Each indicator is compared to the forecasted long-term real and nominal GDP growth of each country and growth data from external sources, adjusted for any specific characteristics of the business.
The perpetuity growth rates applied to the cash flow projections in 20142017 and 20132016 for the main CGUs are as follows:
| | Perpetuity growth rate in local currency | 2014 | 2013 | 2017 | 2016 |
| Spain | 0.8% | 0.8% | 0.8% |
| Brazil | 4.8% | 5.0% | 4.5% | 5.0% |
| United Kingdom | 1.0% | 0.8% |
| Germany | 1.2% | 1.1% | 1.0% | 1.0% |
There were no significant changes in the perpetuity growth rates for 2017 compared to those used in 2016, except for Brazil, which decreased 50 basic points. Europe remains around 1%.
In the case of Brazil, although the perpetuity growth rate in nominal terms is above 3%, it is in line with the Brazilian Central Bank’s medium-term inflation target (4.5%(4%, within a range of ±2±1.5 p.p.) and is belowaligned with the analyst consensus forecasted near-term inflation rates offor the Strategic Plan (approximately 5%-6%horizon (around 4.5%) and below the forecast nominal GDP growth rate (which oscillates around 7.5%). Stripping out the differenceA conservative outlook has been maintained, in inflation between Brazil and the Eurozone, the equivalent rate in euros would be below 3% in both years.line with analysts’ expectations.
Sensitivity to changes in assumptions
The Group carries out a sensitivity analysis of the impairment test by considering reasonable changes in the main assumptions used in such test. For eachthe main CGU with significant goodwill (Brazil, Spain, Germany and United Kingdom) the following maximum increases or decreases, expressed in percentage points (p.p.), were assumed:
|
| | | |
| Changes in key assumptions,
In percentage points (p.p.)
| Germany
Spain | United Kingdom Germany | Brazil |
| Financial variables | | | |
| Discount rate | +/- 0.5 | +/- 0.5 | +/- 1 |
| Perpetuity growth rates | +/- 0.25 | +/- 0.25 | +/- 0.5 |
| Operating variables | | | |
| OIBDA Margin | +/- 2 | +/- 1.5 | +/- 2 |
Ratio of CAPEX/CapEx/Revenues | +/- 1 | +/- 0.75 | +/- 1 |
The sensitivity analysis performedrevealed that at year-end 2014 indicates thatDecember 31, 2017 there are no significant risks arising from reasonably possible changesis a comfortable gap between the recoverable value and the carrying amount for the main CGU.
For Telefónica Móviles México, the local economy has shown strength in an externally complicated context primarily caused by the growing interest rates in the USA and the uncertainty surrounding NAFTA renegotiations. Reforms implemented in recent years have proven to be crucial for enabling different industries to compete by addressing some inefficiencies in the public sector, education system and labor market. The 2017 economic growth forecasts have been trending upward, particularly in light of private consumption, which, despite increased inflation, has been growing at an annual rate of approximately 3%, driven by the labor market with unemployment at its lowest since 2006. Moreover, this growth has enabled a reduction in the fiscal deficit with a primary surplus in pre-crisis conditions. This situation has been reflected in the financial markets and operating variables, considered individually.the ratings of the leading rating agencies. Starting with the financial markets, the country risk has fallen nearly 50 basis points on average versus the previous year and the Mexican peso has been less volatile throughout 2017. Regarding the rating agencies, both Fitch and S&P raised their outlook for Mexico to stable during the past year. In contrast to the improvements in the economic environment, the telecommunications market and, in particular, mobile telephony continue to display significant asymmetry between the dominant operator and all other words,competitors, which continues to enjoy a market share of above 65% in telephony and mobile broadband (measured in number of active lines), despite the Company considers that withinreform in the above ranges, reasonably wide,sector initiated by the government, boosting increased competition and entry of new operators.
In this context, the impairment test conducted at year-end revealed no impairment losses would be recognized over the carrying amounts of the CGUs with significant goodwill identified.assigned to Telefónica Móviles México. The sensitivity analysis revealed that a Weighted Average Cost of Capital (WACC) increase of 50 basis points (9.55% to 10.05%) and a smaller terminal growth rate that shrunk by the same amount, could generate a negative impact on goodwill by impairment of approximately 65 million euros. An independent deterioration of one of these two variables would have no impact on the goodwill's carrying value. In turn, a 1.5 percentage point (p.p.) drop in the OIBDA margin and a 0.75 p.p. increase in the investment/sales ratio would not have any impact on the goodwill's carrying value either.
Note 8. Property, plant and equipment
The composition of and movement in the items comprising net “Property, plant and equipment” in 20142017 and 20132016 were the following:
| | | 2017 | | |
| |
| |
| |
| |
| |
| |
| |
|
| Millions of euros | Balance at 12/31/13 | Additions | Depreciation | Disposals | Transfers and others | Translation differences and hyperinflation adjustments | Inclusion of companies | Exclusion of companies | Balance at 12/31/14 | Balance at 12/31/16 |
| Additions |
| Depreciation |
| Disposals |
| Transfers and others |
| Translation differences and hyperinflation adjustments |
| Inclusion of companies |
| Balance at 12/31/17 |
|
| Land and buildings | 5,234 | 70 | (468) | (43) | 360 | (131) | 43 | − | 5,065 | 4,858 |
| 64 |
| (391 | ) | (14 | ) | 139 |
| (293 | ) | 20 |
| 4,383 |
|
| Plant and machinery | 21,246 | 1,290 | (4,349) | (22) | 4,756 | (814) | 1,712 | − | 23,819 | 26,770 |
| 2,096 |
| (5,062 | ) | 4 |
| 3,455 |
| (2,039 | ) | 73 |
| 25,297 |
|
| Furniture, tools and other items | 1,328 | 178 | (540) | (25) | 382 | (20) | 8 | − | 1,311 | 1,426 |
| 223 |
| (500 | ) | (4 | ) | 230 |
| (117 | ) | 9 |
| 1,267 |
|
| PP&E in progress | 3,232 | 5,522 | − | (9) | (5,616) | (149) | 168 | − | 3,148 | 3,339 |
| 4,496 |
| — |
| (8 | ) | (4,237 | ) | (323 | ) | 11 |
| 3,278 |
|
| Total PP&E | 31,040 | 7,060 | (5,357) | (99) | (118) | (1,114) | 1,931 | − | 33,343 | 36,393 |
| 6,879 |
| (5,953 | ) | (22 | ) | (413 | ) | (2,772 | ) | 113 |
| 34,225 |
|
| | | |
| Millions of euros | Balance at 12/31/12 | Additions | Depreciation | Disposals | Transfers and others | Translation differences and hyperinflation adjustments | Inclusion of companies | Exclusion of companies | Balance at 12/31/13 |
| Land and buildings | 6,049 | 51 | (598) | (50) | 119 | (337) | − | − | 5,234 |
| Plant and machinery | 23,213 | 1,565 | (4,860) | (67) | 3,059 | (1,663) | − | (1) | 21,246 |
| Furniture, tools and other items | 2,007 | 174 | (721) | (27) | 13 | (114) | − | (4) | 1,328 |
| PP&E in progress | 3,752 | 5,296 | − | (8) | (5,426) | (382) | − | − | 3,232 |
| Total PP&E | 35,021 | 7,086 | (6,179) | (152) | (2,235) | (2,496) | − | (5) | 31,040 |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| 2016 | |
| |
| |
| |
| |
| |
| |
| |
|
| Millions of euros | Balance at 12/31/15 |
| Additions |
| Depreciation |
| Disposals |
| Transfers and others |
| Translation differences and hyperinflation adjustments |
| Exclusion of companies |
| Balance at 12/31/16 |
|
| Land and buildings | 4,851 |
| 59 |
| (386 | ) | (36 | ) | 198 |
| 173 |
| (1 | ) | 4,858 |
|
| Plant and machinery | 24,682 |
| 1,325 |
| (5,034 | ) | (22 | ) | 4,464 |
| 1,369 |
| (14 | ) | 26,770 |
|
| Furniture, tools and other items | 1,412 |
| 190 |
| (531 | ) | (19 | ) | 344 |
| 30 |
| — |
| 1,426 |
|
| PP&E in progress | 2,965 |
| 5,674 |
| — |
| (12 | ) | (5,365 | ) | 89 |
| (12 | ) | 3,339 |
|
| Total PP&E | 33,910 |
| 7,248 |
| (5,951 | ) | (89 | ) | (359 | ) | 1,661 |
| (27 | ) | 36,393 |
|
The gross cost, accumulated depreciation and impairment losses of property, plant and equipment at December 31, 20142017 and 20132016 are as follows:
| Balance at December 31, 2014 | |
| | | Balance at December 31, 2017 | | Balance at December 31, 2017 |
| Millions of euros | Gross cost | Accumulated depreciation | Impairment losses | PP&E | Gross cost |
| Accumulated depreciation |
| Impairment losses |
| PP&E |
|
| Land and buildings | 11,493 | (6,427) | (1) | 5,065 | 11,344 |
| (6,958 | ) | (3 | ) | 4,383 |
|
| Plant and machinery | 92,061 | (68,183) | (59) | 23,819 | 96,335 |
| (70,969 | ) | (69 | ) | 25,297 |
|
| Furniture, tools and other items | 6,487 | (5,165) | (11) | 1,311 | 6,900 |
| (5,624 | ) | (9 | ) | 1,267 |
|
| PP&E in progress | 3,160 | − | (12) | 3,148 | 3,289 |
| — |
| (11 | ) | 3,278 |
|
| Total PP&E | 113,201 | (79,775) | (83) | 33,343 | 117,868 |
| (83,551 | ) | (92 | ) | 34,225 |
|
| | | |
F-32 |
| | | | | | | | |
| Balance at December 31, 2016 |
| Millions of euros | Gross cost |
| Accumulated depreciation |
| Impairment losses |
| PP&E |
|
| Land and buildings | 11,930 |
| (7,069 | ) | (3 | ) | 4,858 |
|
| Plant and machinery | 99,945 |
| (73,021 | ) | (154 | ) | 26,770 |
|
| Furniture, tools and other items | 7,288 |
| (5,852 | ) | (10 | ) | 1,426 |
|
| PP&E in progress | 3,350 |
| — |
| (11 | ) | 3,339 |
|
| Total PP&E | 122,513 |
| (85,942 | ) | (178 | ) | 36,393 |
|
| Balance at December 31, 2013 |
| Millions of euros | Gross cost | Accumulated depreciation | Impairment losses | PP&E |
| Land and buildings | 11,633 | (6,398) | (1) | 5,234 |
| Plant and machinery | 90,723 | (69,420) | (57) | 21,246 |
| Furniture, tools and other items | 6,487 | (5,148) | (11) | 1,328 |
| PP&E in progress | 3,255 | − | (23) | 3,232 |
| Total PP&E | 112,098 | (80,966) | (92) | 31,040 |
| | | | | |
“Inclusion of companies” in 2014 corresponds to the acquisition of E-Plus (see Note 5).
Investment by Telefónica Spain in property plant and equipment in 20142017 and 20132016 amounted to 1,5001,451 and 1,1821,615 million euros, respectively. FiberRapid fiber optic was rolledroll out, rapidly, and by year-end 2014 Telefónica Spain reached more than 10exceeding 19 million premises passed in Spain, and had invested moreby year-end 2017, together with investments in LTE networks.network, with 97% population coverage, and transport network modernization.
Investment by Telefónica UKUnited Kingdom in 2014property plant and 2013equipment in 2017 and 2016 amounted to 617727 and 593775 million euros, respectively. The increased investment in the UK was due to greaterhas been focused on increasing LTE coverage, which outdoor extends toachieving 99% population coverage by year-end 2017, and also pursuing the areas where 58%improvement of the population is concentrated, and a network capacity ramped up to cope with denser 3G and 4G traffic.quality of customer experience.
Investment by Telefónica Germany in 2014property plant and 2013equipment in 2017 and 2016 amounted to 656675 and 524742 million euros, respectively. The operator continuescompany is focused on network integration which are allowing to focus on itsenhance customer experience and to capture integration synergies, further LTE roll-out strategy, securing 61%network rollout achieving a coverage in 2014. Telefónica Germany consolidated E-Plus as of October , 2014 (see Note 5).82% by year-end 2017.
Investment by Telefónica Brazil in 2014property plant and 2013equipment in 2017 and 2016 amounted to 1,7981,842 and 1,6741,782 million euros, respectively. The investment was mainly dedicated to extending the coverage and capacity of 4G and 3G mobile segment featured a continuationnetworks, the deployment and connection of LTE roll-outs in 2014, improvingfiber network capacity, systems and applications. Investment in the fixed linebusiness as well as network was used to expand roll-outintegration and simplification of fiber optic, larger volumes of IPTV customersprocesses and corporate projects.systems.
Investment by Telefónica Hispanoamérica in 2014 and 2013 amounted to 2,282 and 2,742 million euros, respectively. Higher levels of investment mainly focused on LTE roll-outs in practically all operations in the region. Investment was also allocated to the densification of the 3G network, optimization of fixed-mobile convergence systems, the continuation of ultra broad band (UBB) roll-out for fixed broadband by speed upgrades and network digitalization, television and digital initiatives.
“Disposals” mainly include the impact of the disposal by the Group of non-strategic assets (see Note 18).
The column “Transfers and others” in 2013 mainly includes the reclassification to “Non-current assets held for sale” of the property plant and equipment in 2017 and 2016 amounted to 1,926 and 2,164 million euros, respectively. This investment has been mainly focused on improving the coverage and capacity of Telefónica Ireland4G and Telefónica Czech Republic (see3G networks, the roll out of ultra-broadband fixed capabilities (fiber / HFC) and the simplification and digitalization of processes and systems.
“Inclusion of companies” in 2017 mainly corresponds to Coltel acquiring control over the companies Telebucaramanga, Metrotel and Optecom(see Note 2)5).
The impact of the monetary adjustments due to hyperinflation in Venezuela is included under “Translation differences and hyperinflation adjustments”.
Telefónica Group companies have purchased insurance policies to reasonably cover the possible risks to which their property, plant and equipment used in operations are subject, with suitable limits and coverage. In addition, as part of its commercial activities and network roll-out,deployment, the Group maintains several property acquisition commitments. The timing of scheduled payments in this regard is disclosed in Note 18.
Property, plant and equipment deriving from finance leases amounted to 419254 million euros at December 31, 2014 (4632017 (476 million euros at December 31, 2013)2016). The most significant finance leases are disclosed in Note 22.
Note 9. Associates and joint ventures
The breakdown of amountsitems related to associates and joint ventures recognized in the consolidated statements of financial position and income statements is as follows:
| | | Millions of euros | | 12/31/2017 |
| 12/31/2016 |
|
| | 12/31/14 | 12/31/13 | |
| Investments accounted for by the equity method | 788 | 2,424 | 77 |
| 76 |
|
| Loans to associates and joint ventures | 16 | 1,281 | 16 |
| 16 |
|
| Receivables from associates and joint ventures for current operations (Note 11) | 43 | 85 | 32 |
| 28 |
|
| Financial debt, associates and joint ventures | 21 | 20 | 10 |
| 9 |
|
| Payables to associates and joint ventures (Note 14) | 724 | 578 | 491 |
| 497 |
|
| Millions of euros | | | |
| | 2014 | 2013 | 2012 |
| Share of (loss) of investments accounted for by the equity method | (510) | (304) | (1,275) |
| Revenue from operations with associates and joint ventures | 472 | 524 | 535 |
| Expenses from operations with associates and joint ventures | 503 | 552 | 634 |
| Financial income with associates and joint ventures | 49 | 38 | 32 |
| Financial expenses with associates and joint ventures | 16 | 10 | 4 |
|
| | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
|
| Share of income (loss) of investments accounted for by the equity method | 5 |
| (5 | ) | (10 | ) |
| Revenue from operations with associates and joint ventures | 218 |
| 213 |
| 217 |
|
| Expenses from operations with associates and joint ventures | 20 |
| 32 |
| 85 |
|
| Financial expenses with associates and joint ventures | — |
| 2 |
| 17 |
|
The Group has entered into factoring agreements in 2014 through the associate Telefónica Factoring España, S.A. amounting to 176 million euros (386 million euros in 2013).
The detail of the movement in investments in associates in 20142017 and 20132016 was the following:
|
| | |
| Investments accounted for by the equity method | Millions of euros |
|
Balance at 12/31/1215 | 2,46880 |
|
| Additions | 363 |
Disposals17 | (2)
|
| Translation differences and other comprehensive income | (121)2 |
|
| Income (loss) | (304)(5 | ) |
| Dividends | (28)(13 | ) |
| Transfers and other | 48(5 | ) |
Balance at 12/31/1316 | 2,42476 |
|
| Additions | 382 |
Disposals8 | (697)
|
| Translation differences and other comprehensive income | (20)(1 | ) |
| Income (loss) | (510)5 |
|
| Dividends | (34) |
Transfers and other(11 | (757)) |
Balance at 12/31/1417 | 78877 |
|
In November 2014 Telefónica, through its subsidiary Telefónica Internacional, S.A.U., sold shares representing 2.5% of the share capital of China Unicom (Hong Kong) Limited for 687
Additions in 2016 included 7 million euros at the exchange rate of the date of the transaction. Following this transaction, the remainder of Telefónica’s China Unicom investment (equivalentrelated to 2.51% of its share capital) was reclassified as an available-for-sale financial assetThe Smart Steps Data Technology Company (see Note 13); nevertheless, a representative from Telefónica remains on China Unicom’s board of directors, and vice versa.
In July 2014 Telefónica officially purchased a further 22% of the share capital of Distribuidora de Televisión Digital, S.A. for 295 million euros. A payment of 30 million euros was also agreed in return for a waiver by Mediaset of preferential purchase rights to the stake held by Promotora de Informaciones, S.A. in this company (see Note 21)10).
On June 16, 2014 the three Italian shareholders who, together with Telefónica, S.A., form the shareholder structure of Telco, S.p.A., requested that a demerger process be initiated for this company in accordance with that established in the Shareholders’ Agreement. The implementation of this demerger process, approved at the Telco, S.p.A. General Shareholders’ Meeting on July 9, 2014, is subject to prior approval by the competition and telecommunication authorities where necessary, including those in Brazil and Argentina (see Note 21).
At a meeting on December 22, 2014, the Brazilian telecommunications regulator (ANATEL) approved the demerger on condition of suspension of Telefónica’s voting rights in Telecom Italia, S.p.A. and its subsidiaries, among certain other measures. Telefónica has agreed with the aforementioned suspension of voting rights and has offered the presentation of a formal statement to ANATEL in this regard. Therefore, on the same date Telefónica ceased to have significant influence through its indirect holding in Telecom Italia, S.p.A. and reclassified this investment as an available-for-sale financial asset (see Note 13). The quoted price of Telecom Italia, S.p.A. shares at the reference date was 0.89 euros per share. The impact of the value adjustment of the stake in Telco, S.p.A., together with its contribution to results for the year, led to a negative impact of 464 million euros in 2014 “Share of loss of investments accounted for by the equity method” (see Note 2).
As a result of the classification of the investment in Telco, S.p.A. as an available-for-sale financial asset, the bond of this company subscribed by Telefónica, S.A. (see Note 13), which amounted to 1,307 million euros at December 31, 2014, including principal and interest (1,258 million euros at December 31, 2013), was excluded from the breakdown of amounts related to associates and joint ventures at 2014 year end in the table above.
In 2013 Telefónica and the other Telco, S.p.A. shareholders established an agreement whereby Telefónica increased its ownership interest in Telco, S.p.A. through a cash contribution of 324 million euros. Likewise, in 2013 a valuation adjustment was recognized in respect of the stake held by Telco, S.p.A. in Telecom Italia, S.p.A. which, together with the contribution to results for the year, led to a negative impact of 267 million euros in 2013 under the heading “Share of loss of investments accounted for by the equity method” (see Note 2).
The breakdown of the main investments accounted for by the equity method and key financial highlights for the last 12-month period available at the time of preparation of the consolidated financial statements for 2014 and 2013 are as follows:
| December 31, 2014 |
| Millions of euros | | | | | | |
| COMPANY | % holding | Total assets | Total liabilities | Operating revenue | Profit (loss) for the year | Carrying amount |
| DTS Distribuidora de Televisión Digital, S.A. (Spain) | 44% | 1,265 | 622 | 1,168 | (210) | 703 |
| Other | | | | | | 85 |
| TOTAL | | | | | | 788 |
| |
| December 31, 2013 |
| Millions of euros | | | | | | |
| COMPANY | % holding | Total assets | Total liabilities | Operating revenue | Profit (loss) for the year | Carrying amount |
| Telco, S.p.A. (Italy) (Note 21.b) | 66% | 3,001 | 2,416 | − | (474) | 390 |
| DTS Distribuidora de Televisión Digital, S.A. (Spain) | 22% | 1,381 | 528 | 1,166 | (74) | 434 |
| China Unicom (Hong Kong) Limited | 5.01% | 61,320 | 35,389 | 34,775 | 1,227 | 1,539 |
| Other | | | | | | 61 |
| TOTAL | | | | | | 2,424 |
| |
| |
Note 10. Related parties
Significant shareholders
The significant shareholders of the Company are Blackrock, Inc., Bilbao Vizcaya Argentaria, S.A. (BBVA) and Caja de Ahorros y Pensiones de Barcelona (“la Caixa”) with stakes in Telefónica, S.A. of 6.63%,5.17% and 5.01%, respectively.
During 2017 and 2016 the Group did not carry out any significant transactions with Blackrock, Inc., other than the dividends paid corresponding to its stake.
A summary of significant transactions between the Telefónica Group and the companies of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)BBVA and those of Caja de Ahorros y Pensiones de Barcelona (“la Caixa”), significant shareholders of the Company with stakes in Telefónica, S.A. of 6.25% and 5.25%, respectively, at December 31, 2014, is as follows:
All of these transactions wereCaixa, carried out at market prices.
| Millions of euros | | |
| 2014 | BBVA | La Caixa |
| Finance costs | 26 | 2 |
| Receipt of services | 8 | 59 |
| Other expenses | 3 | − |
| Total costs | 37 | 61 |
| Finance income | 14 | 19 |
Dividends received(1) | 14 | N/A |
| Services rendered | 61 | 95 |
| Sale of goods | 5 | 2 |
| Other income | 3 | − |
| Total revenue | 97 | 116 |
| Finance arrangements: loans and capital contributions (borrower) | 417 | 31 |
| Guarantees | 529 | 75 |
| Commitments | 32 | 67 |
| Finance arrangements: loans and capital contributions (lender) | 1,107 | 1,173 |
Dividends(2) | 194 | 98 |
| Other operations (factoring operations) | 112 | − |
| |
|
| | | | |
| Millions of euros | |
| |
|
| 2017 | BBVA |
| La Caixa |
|
| Finance costs | 35 |
| 5 |
|
| Receipt of services | 2 |
| 9 |
|
| Purchase of goods | — |
| 56 |
|
| Other expenses | 7 |
| — |
|
| Total costs | 44 |
| 70 |
|
| Finance income | 28 |
| — |
|
| Contracts of management | 1 |
| — |
|
Dividends received(1) | 11 |
| N/A |
|
| Services rendered | 38 |
| 71 |
|
| Sale of goods | 4 |
| 43 |
|
| Other income | — |
| — |
|
| Total revenue | 82 |
| 114 |
|
| Finance arrangements: loans and capital contributions (borrower) | 1,038 |
| 292 |
|
| Finance arrangements: loans and capital contributions (lender) | — |
| 14 |
|
| Guarantees | 222 |
| 51 |
|
| Commitments | — |
| 85 |
|
| Finance arrangements: loans and capital contributions (lessee) | 1,209 |
| 414 |
|
| Dividends paid | 128 |
| 104 |
|
| Factoring operations | — |
| 250 |
|
( (1)1) At December 31, 2014,2017, Telefónica holds a 0.72%0.66% stake (0.67% at December 31, 2016) in the share capital of Banco Bilbao Vizcaya Argentaria, S.A. (see Note 13.a)13.1).
(2) The shares received by la Caixa for the scrip dividend paid on December 2014 should be considered in addition to the amount included in this file.
| Millions of euros | | |
| 2013 | BBVA | La Caixa |
| Finance costs | 45 | 2 |
| Receipt of services | 19 | 57 |
| Other expenses | 1 | − |
| Total costs | 65 | 59 |
| Finance income | 35 | 8 |
| Dividends received | 14 | N/A |
| Services rendered | 68 | 78 |
| Sale of goods | 5 | 3 |
| Other income | 2 | − |
| Total revenue | 124 | 89 |
| Finance arrangements: loans and capital contributions (borrower) | 399 | 214 |
| Guarantees | 452 | 134 |
| Commitments | 32 | 69 |
| Commitments/guarantees canceled | 69 | − |
| Finance arrangements: loans and capital contributions (lender) | 1,626 | 1,671 |
| Financial lease contracts (lessee) | 5 | − |
| Amortization or cancellation of credits and lease contracts (lessee) | 13 | − |
| Dividends | 108 | 89 |
| Other operations (factoring operations) | 210 | − |
| |
In addition, the nominal value of outstanding derivatives held with BBVA and la Caixa in 20142017 amounted to 24,26621,749 and 1,221404 million euros, respectively (13,352(18,047 million euros held with BBVA and 1,200392 million euros held with la Caixa in 2013)2016). As explained in Derivatives policy in Note 16, this figure is inflated by the use in some cases of several levels of derivatives applied to the nominal value of a single underlying. The net fair value of these same derivatives in the statement of financial position is 390 and -28 million euros, respectively, at December 31, 2017 (988 and -35 million euros, respectively, at December 31, 2016). Additionally, at December 31, 2017 there were collateral guarantees on derivatives with BBVA amounting to 286 million euros (240 million euros at December 31, 2016).
|
| | | | |
| Millions of euros | |
| |
|
| 2016 | BBVA |
| La Caixa |
|
| Finance costs | 36 |
| 2 |
|
| Receipt of services | 5 |
| 4 |
|
| Purchase of goods | — |
| 65 |
|
| Other expenses | 1 |
| — |
|
| Total costs | 42 |
| 71 |
|
| Finance income | 22 |
| — |
|
| Contracts of management | 1 |
| — |
|
| Dividends received | 15 |
| N/A |
|
| Services rendered | 40 |
| 66 |
|
| Sale of goods | 3 |
| 42 |
|
| Other income | 11 |
| — |
|
| Total revenue | 92 |
| 108 |
|
| Finance arrangements: loans and capital contributions (borrower) | 396 |
| 45 |
|
| Finance arrangements: loans and capital contributions (lender) | — |
| 10 |
|
| Guarantees | 314 |
| 50 |
|
| Commitments | — |
| 84 |
|
| Finance arrangements: loans and capital contributions (lessee) | 244 |
| 203 |
|
| Dividends | 243 |
| 185 |
|
| Factoring operations | 533 |
| 250 |
|
Other related parties
The most significant balances and transactions with associates and joint ventures are detailed in Note 9.
During the financial year to which these accompanying consolidated financial statements refer, the Directors and senior executives did not perform any transactions with Telefónica, S.A. or any Telefónica Group company other than those in the Group’s normal trading activity and business.
Compensation and other benefits paid to members of the Board of Directors and senior executives are detailed in Note 21.f and Appendix IIII.
Telefónica contracted a civil liability insurance scheme (D&O) for Directors, managers and staff with similar functions in the Telefónica Group, with standard conditions in these type of these consolidated financial statements.
Certain membersinsurance and a premium attributable to 2017 of 1,943,007 euros (2,088,500 euros in 2016). This scheme provides coverage for Telefónica, S.A.’s Board and its subsidiaries, in certain cases.
Certain Telefónica Group subsidiaries performed in 2017 transactions with Global Dominion Access Group, related to the Group´s ordinary course of Directors are alsobusiness (mainly in Telefónica de España amounting to 23 million euros). Furthermore, certain Telefónica Group subsidiaries performed in 2016 transactions with the Inditex Group, related to the Group's ordinary course of business, concerning telecommunications and related services, amounting to 36 million euros. In 2017 the aforementioned company is not related parties anymore.
A representative from Telefónica remains on China Unicom’s board members of Abertis Infraestructuras, S.A., parent of Abertis.directors, and vice versa (see Note 13.1). In addition, Telefónica has signed agreementsmaintains an industrial alliance with Abertis,this company. In 2015 a joint venture with China Unicom was incorporated, for the development of Big Data services in China using “Smart Steps” technology, developed by Telefónica. Telefónica’s stake in this company is 45% through its subsidiary Abertis Tower, S.A.U., by virtue of which Telefónica Spain has sold 1,725 and 690 mobile phone towers in 2014 and 2013, respectively, generating Digital España, gain of 193S.L.; China Unicom Broadband Online Limited Corp. owns the remaining 55% stake. In 2016, Telefónica paid 7 million euros in 2014 and a gain of 70 million euros in 2013.
An agreement has also been signed through which Abertis Tower, S.A.U. leases certain spacefor its shareholding in the aforesaid infrastructures for Telefónica Móviles Españcompany (see Note 9). The company is commercially operational and obtained a S.A.U.turnover in 2017 equivalent to install its communications equipment.
8 million euros.
Note 11. Trade and other receivables
The breakdown of this consolidated statement of financial position heading at December 31, 20142017 and 20132016 is as follows:
| | | Millions of euros | Balance at 12/31/2014 | Balance at 12/31/2013 | 12/31/2017 |
| 12/31/2016 |
|
| Trade receivables billed | 9,172 | 8,184 | 7,876 |
| 8,620 |
|
| Trade receivables unbilled | 2,529 | 2,258 | 3,015 |
| 3,003 |
|
| Impairment of trade receivables | (2,757) | (2,598) | (2,563 | ) | (2,795 | ) |
| Receivables from associates and joint ventures (Note 9) | 43 | 85 | 32 |
| 28 |
|
| Other receivables | 540 | 571 | 367 |
| 418 |
|
| Short-term prepayments | 1,079 | 1,140 | 1,366 |
| 1,401 |
|
| Total | 10,606 | 9,640 | 10,093 |
| 10,675 |
|
Public-sector net trade receivables at December 31, 20142017 and 20132016 amounted to 437346 million euros and 577331 million euros, respectively.
The movement in impairment of trade receivables in 20142017 and 20132016 is as follows:
|
| | |
| | Millions of euros |
|
Impairment provision at December 31, 20122015 | 3,1962,787 |
|
| Allowances | 674915 |
|
| Amounts applied | (809)(1,044 | ) |
| Translation differences and other | (463)137 |
|
Impairment provision at December 31, 20132016 | 2,5982,795 |
|
| Allowances | 808 |
Amounts applied998 | (801)
|
| Inclusion of companies | 15214 |
|
| Amounts applied | (1,019 | ) |
| Translation differences and other | −(225 | ) |
Impairment provision at December 31, 20142017 | 2,7572,563 |
|
The balance of trade receivables billed and receivables from associates and joint ventures net of impairment losses at December 31, 20142017 amounted to 6,4155,345 million euros (5,586(5,853 million euros at December 31, 2013)2016), of which 4,1623,312 million euros were not yet due (3,056(3,672 million euros at December 31, 2013)2016).
Net balance of trade receivables billed of 207197 million euros and 354260 million euros are over 360 days due at December 31, 20142017 and 2013,2016, respectively. They are mainly with the public sector.
Note 12. Equity
a) Share capital and share premium
2017
On September 20, 2017, the public deed evidencing the conversion of bonds, share capital increase and amortization of bonds was registered, on which were issued 154,326,696 new ordinary shares, of a nominal value of 1 euro each, within the framework of the conversion of the bonds mandatorily convertible into shares of Telefónica, S.A. that were issued by its wholly owned subsidiary, Telefónica Participaciones, S.A.U. on September 24, 2014, guaranteed by Telefónica, S.A. As a result of the aforementioned conversion and the referred capital increase, the share capital of Telefónica, S.A. was set at 5,192,131,686 euros, divided into 5,192,131,686 ordinary shares of the same class and series, with a nominal value of 1 euro each of them.
At December 31, 2014,2017, Telefónica, S.A.’s´s share capital amounted to 4,657,204,3305,192,131,686 euros and consisted of 4,657,204,3305,192,131,686 fully paid ordinary shares of a single series, par value of 1 euro, all recorded by the book-entry system and traded on the Spanish electronic trading system (“Continuous Market”), where they form part of the “Ibex 35” Index, on the four Spanish Stock Exchanges (Madrid, Barcelona, Valencia and Bilbao) and listed on the London and Buenos Aires Stock Exchanges, and on the New York and Lima Stock Exchanges, through American Depositary Shares (‘ADSs’).
2016
On October 11, 2016, the deed of a share capital decrease was registered, cancelling 74,627,988 of own shares, reducing the company´s share capital by 74,627,988 euros.
On December 9, 2014,7, 2016, the deed of a share capital increase of 106,179,744137,233,781 euros was executed, during which 106,179,744137,233,781 ordinary shares with a par value of 1 euro each were issued, with a charge to reserves,reserves; as part of the scrip dividend shareholder remuneration deal. Share capital amounts to 4,657,204,3305,037,804,990 euros subsequent to this increase.
At December 31, 2016, Telefónica, S.A.´s share capital amounted to 5,037,804,990 euros and consisted of 5,037,804,990 fully paid ordinary shares of a single series, par value of 1 euro.
Authorizations by Shareholders’ Meeting
With respect to authorizations given regarding share capital, on May 18, 2011,June 12, 2015, authorization was given at the Annual Shareholders’ Meeting of Telefónica, S.A. for the Board of Directors, at its discretion and in accordance with the Company’s needs, to increase the Company’s capital, once or several times, within a maximum period of five years from that date, up to a maximum nominal increase of 2,281,998,242.502,469,208,757 euros, equivalent to half of Telefónica, S.A.’s share capital at that date, by issuing and placing new shares, of any type permitted by the Law, with or without a fixed or variableshare premium, and, in all cases, in exchange for cash, expressly considering the possibility that the new shares may not be fully subscribed. The Board of Directors was also empowered to exclude, partially or fully, pre-emptive subscription rights under the terms of Sectionarticle 506 of the Spanish Enterprises Act.
However, the power to exclude preemptive rights is limited to 20% of the Company’s share capital on the date of adoption of this resolution.Pursuant to the aforementioned authorizations, as of December 2017, the Board of Directors is empowered to increase the share capital up to the maximum nominal amount of 2,469,208,757 euros.
Furthermore, on June 2, 2010,May 30, 2014, shareholders voted to authorize the acquisition by the Board of Directors of Telefónica, S.A. treasury shares, up to the limits and pursuant to the terms and conditions established at the Shareholders’ Meeting, within a maximum period of five years from that date. However, it specified that in no circumstances could the par value of the shares acquired, added to that of the treasury shares already held by Telefónica, S.A. and by any of its controlled subsidiaries, exceed the maximum legal percentage at any time (currently 10% of Telefónica, S.A.’s share capital).
In addition, at the May 30, 2014June 9, 2017 Shareholders’ Meeting of Telefónica, S.A., authorization was given for the Board of Directors to issue debentures, bonds, promissory notes and other fixed-income securities and hybrid instruments, including preferred shares, in all cases be they simple, exchangeable, and/or convertible and/or granting the holders thereof a share in the earnings of the company, as well as warrants, with the power to exclude the pre-emptive rights of shareholders. The issuance of the aforementioned securities may be issued at one or several times, at any time, within a maximum period of five years from that date. These securities may be in the form of debentures, bonds, promissory notes or any other kind of fixed-income security, or debt instruments of similar category or hybrid instruments whatever may be the forms admitted in law (including, among others, preferred shares), plain or, in the case of debentures, bonds and hybrid instruments convertible into shares of the Company and/or exchangeable for shares of any of the Group companies, or any other company.company and/or giving the holders thereof a share in the earnings of the Company. This delegation also includes warrants or other similar securities that might give the right to directly or indirectly subscribe or acquire shares, of the Company, whether newly issued or outstanding, and which may be paid for by physical delivery or by offset. The aggregated amount of the issuance(s) of securities approved under this delegation of powers may not exceed, at any given time, the sum of 25,000 million euros or the equivalent in another currency. For promissory notes, the outstanding balance of promissory notes issued under this authorization will be calculated for purposes of the aforementioned limit. Also for purposes of the foregoing limit, in the case of warrants, the sum of the premiums and exercise prices of the warrants for each issuance that is approved under this delegation shall be taken into account.
b) Dividends
Dividends distribution in 2017
TableApproval was given at the General Shareholders Meeting of ContentsJune 9, 2017 to pay a gross dividend of 0.40 for each company share issued, in circulation and carrying entitlement to this distribution against unrestricted reserves, payable in two tranches. The first payment of a gross amount of 0.20 in cash per share was made on June 16, 2017 amounting to 994 million euros and the second payment of a gross amount of 0.20 in cash per share was made on December 14, 2017 amounting to 1,025 million euros. Dividends distribution in 2016 and capital increase
Approval was given at the Shareholder´s Meeting of Telefónica S.A. of May 12, 2016 to pay a dividend with a charge to unrestricted reserves of a fixed gross 0.40 euros per outstanding share carrying dividend rights. The dividend was paid in full on May 19, 2016, and the total amount paid was 1,906 million euros.
On November 11, 2016 the Executive Commission of Telefónica, S.A.’s Board of Directors approved to pay a scrip dividend amounting to approximately 0.35 euros per share consisting of the assignment of free allotment rights with an irrevocable purchase commitment by the Company, and a subsequent capital increase with a charge to reserves by such amount as may be determined pursuant to the terms and conditions of the resolution, by means of the issue of new ordinary shares having a par value of one euro, to fulfill said allotments. The payment was made on December 7, 2016, with and impact in equity amounting to 500 million euros.
Additionally, the shareholders of 70.01% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica, S.A. Thus, the final number of shares issued in the capital increase was 137,233,781 shares with a nominal value of 1 euro each.
Proposed distribution of profit attributable to equity holders of the parent
Telefónica, S.A. generated 2,604554 million euros of profit in 2014.
2017.
The Company’s Board of Directors will submit the following proposed distribution of 20142017 profit for approval at the Shareholders’ Meeting:
|
| | |
| | Millions of euros |
Goodwill reserve | 2
|
VoluntaryLegal reserve | 51 |
|
| Other reserves | 812 |
Interim dividend503 | 1,790
|
| Total | 2,604554 |
|
Dividends distribution in 20142015 and capital increase
Approval was given at the Board of Directors’ Meeting of April 25, 201429, 2015 to pay a gross 0.40 euros dividend per outstanding share against 20142015 profit. This dividend was paid on May 7, 2014 for a12, 2015 and the total gross amount of 1,790paid was 1,912 million euros.
In accordance with Article 277 of the Corporate Enterprises Act, the following table presents the mandatory statement of accounts prepared to confirm the existence of sufficient liquidity to pay the dividend at the date of its approval.
Liquidity statement | Millions of euros |
Income from January 1 through March 31, 2014 | 3,177 |
Mandatory appropriation to reserves | - |
Distributable income | 3,177 |
Proposed interim dividend (maximum amount) | 1,820 |
| |
Cash position | |
Funds available for distribution: | |
Cash and cash equivalents | 4,135 |
Unused credit facilities | 4,397 |
Proposed interim dividend (maximum amount) | 1,820 |
Difference | 6,712 |
|
The Telefónica Group manages its liquidity risks (see Note 16) in order to have cash available for 2015.
At its meeting held on November 14, 2014,13, 2015, the Executive Commission of Telefonica,Telefónica, S.A.’s Board of Directors agreed to carry out the execution of the increase in paid-up capital, related to the shareholders compensation by means of a scrip dividend, approved by the Annual General Shareholder´sShareholder’s Meeting of Telefónica, S.A. held on May 30, 2014.
June 12, 2015.
Thus, each shareholder received one free allotment right for each Telefónica share held. Such free allotment rights were traded on the Continuous Market in Spain during a period of fifteen15 calendar days. Once this trading period ended, the shareholders of 15.8%20.01% of the free-of-charge allotment rights accepted the irrevocable purchase commitment assumed by Telefónica, S.A. Cash payment to these shareholders was made on December 8, 2014,7, 2015, representing an impact in equity of 242337 million euros.
The shareholders of 84.2%79.99% of the free-of-charge allotment rights were entitled, therefore, to receive new shares of Telefónica, S.A. Nevertheless, Telefónica, S.A. has waived the subscription of new shares corresponding to its treasury shares, so the final number of shares issued in the capital increase was 106,179,744110,857,946 shares with a nominal value of 1 euro each.
Dividends distribution in 2013
At its meeting of May 31, 2013, Telefónica, S.A.’s Board of Directors resolved to pay a dividend with a charge to unrestricted reserves of a fixed gross 0.35 euros per outstanding share carrying dividend rights. This dividend was paid in full on November 6, 2013, and the total amount paid was 1,588 million euros.
Dividends distribution in 2012 and capital increase
Approval was given at the General Shareholders’ Meeting of May 14, 2012 to pay a gross 0.53 euros dividend per share outstanding with a charge to unrestricted reserves. The dividend was paid on May 18, 2012 and the total amount paid was 2,346 million euros.
In addition, approval was given to pay a scrip dividend consisting of the assignment of free allotment rights with an irrevocable purchase obligation on the Company, and a subsequent capital increase by means of the issue of new shares to fulfill said allotments.
At the close of the trading period for these rights, the holders of 37.68% of the Company’s shares had accepted the Company’s irrevocable commitment to buy. These rights were repurchased and cancelled by the Company for the amount of 490 million euros.
Therefore, holders of 62.32% of free subscription rights were entitled to receive new Telefónica shares. However, Telefónica, S.A. waived the subscription of new shares corresponding to treasury shares, so the final number of shares issued in the bonus issue was 71,237,464 shares with a nominal value of 1 euro each.
c) Other equity instruments
Undated deeply subordinated securities
Issued in 2014
| · | On March 25, 2014, Telefónica Europe, B.V.The undated deeply subordinated securities have been issued undated deeply subordinated reset rate guaranteed securities in an aggregate principal amount of 1,750 million euros. This issue entails two tranches: one of them subject to a call option exercisable by Telefónica Europe, B.V. starting on the sixth anniversary of the issuance date in an aggregate principal amount of 750 million euros (the “Sixth-Year Non-Call Securities”), and the other subject to a call option exercisable by Telefónica Europe, B.V. starting on the tenth anniversary of the issuance date in an aggregate principal amount of 1,000 million euros (the “Tenth-Year Non-Call Securities”). In both tranches there is an early redemption option for the issuer. |
The Sixth-Year Non-Call Securities will accrue a fixed coupon at a rate of 5% annually as from the issuance date up to March 31, 2020 (not inclusive). From March 31, 2020 (inclusive) onwards, the Sixth-Year Non-Call Securities will accrue a fixed coupon equal to the applicable 6 year euro swap rate plus a margin of: (i) 3.804% per year as from March 31, 2020 up to March 31, 2024 (not inclusive); (ii) 4.054% per year as from March 31, 2024 up to March 31, 2040 (not inclusive); and (iii) 4.804% per year as from March 31, 2040.
The Tenth-Year Non-Call Securities will accrue a fixed coupon at a rate of 5.875% annually as from the issuance date up to March 31, 2024 (not inclusive). From March 31, 2024 (inclusive) onwards, the Tenth-Year Non-Call Securities will accrue a fixed coupon equal to the applicable 10 year euro swap rate plus a margin of: (i) 4.301% per year as from March 31, 2024 up to March 31, 2044 (not inclusive); (ii) 5.051% per year as from March 31, 2044.
| · | On December 4, 2014, Telefónica Europe, B.V. issued undated deeply subordinated reset rate guaranteed securities in an aggregate principal amount of 850 million euros and subject to a call option exercisable by Telefónica Europe, B.V. starting on the fifth anniversary of the issuance date. The Securities will accrue a fixed coupon at a rate of 4.20% annually as from the issuance date up to December 4, 2019 (not inclusive). From December 4, 2019 (inclusive) onwards, the Securities will accrue a fixed coupon equal to the applicable 5 year swap rate plus a margin of: (i) 3.806% per year as from December 4, 2019 up to December 4, 2024 (not inclusive); (ii) 4.056% per year as from December 4, 2024 up to December 4, 2039 (not inclusive); and (iii) 4.806% per year as from December 4, 2039. |
Issued in 2013
| · | On September 18, 2013, Telefónica Europe, B.V. issued undated deeply subordinated reset rate guaranteed securities in an aggregate principal amount of 1,750 million euros. This issue entails two tranches: one of them subject to a call option exercisable by Telefónica Europe, B.V. starting on the fifth anniversary of the issuance date in an aggregate principal amount of 1,125 million euros (the “Five-Year Non-Call Securities”), and the other |
subject to a call option exercisable by Telefónica Europe, B.V. starting on the eighth anniversaryunless specified otherwise.
The characteristic of the issuance date in an aggregate principal amountundated deeply subordinated securities are the following (millions of 625euros):
|
| | | | | | | | | | |
| Issue date | Annual Fix |
| Variable | Exercisable from issuer | 2017 |
| 2016 |
| 2015 |
|
| 12/07/17 | 2.625 | % | from 06/07/23 rate SWAP + spread incremental | 2023 | 1,000 |
| — |
| — |
|
| 09/15/16 | 3.750 | % | from 03/15/22 rate SWAP + spread incremental | 2022 | 1,000 |
| 1,000 |
| — |
|
| 03/30/15(*) | 8.50 | % | from 03/30/20 rate SWAP + spread incremental | 2020 | 452 |
| 452 |
| 452 |
|
| 12/04/14 | 4.20 | % | from 12/04/19 rate SWAP + spread incremental | 2019 | 850 |
| 850 |
| 850 |
|
| 03/25/14 | 5 | % | from 03/25/20 rate SWAP + spread incremental | 2020 | 750 |
| 750 |
| 750 |
|
| 5.875 | % | from 03/25/24 rate SWAP + spread incremental | 2024 | 1,000 |
| 1,000 |
| 1,000 |
|
| 11/26/13 | 6.75 | % | from 11/26/20 rate SWAP + spread incremental | 2020 | 716 |
| 716 |
| 716 |
|
| 09/18/13 | 6.5 | % | from 09/18/18 rate SWAP + spread incremental | 2018 | 1,125 |
| 1,125 |
| 1,125 |
|
| 7.625 | % | from 09/18/21 rate SWAP + spread incremental | 2021 | 625 |
| 625 |
| 625 |
|
| | |
| | | 7,518 |
| 6,518 |
| 5,518 |
|
(*) Issued by Colombia Telecomunicaciones, S.A. ESP (500 million euros (the “Eight-Year Non-Call Securities”). In both tranches there is an early redemption option for the issuer.
The Five-Year Non-Call Securities will accrue a fixed coupon at a rate of 6.5% annually as from the issuance date (inclusive) up to September 18, 2018. From September 18, 2018 (inclusive) onwards, the Five-Year Non-Call Securities will accrue a fixed coupon equal to the applicable 5 year swap rate plus a margin of: (i) 5.038% per year as from September 18, 2018 up to September 18, 2023 (not inclusive); (ii) 5.288% per year as from September 18, 2023 up to September 18, 2038 (not inclusive); and (iii) 6.038% per year as from September 18, 2038 (inclusive).
The Eight-Year Non-Call Securities will accrue a fixed coupon at a rate of 7.625% annually as from the issuance date (inclusive) up to September 18, 2021. From September 18, 2021 (inclusive) onwards, the Eight-Year Non-Call Securities will accrue a fixed coupon equal to the applicable 8 year swap rate plus a margin of: (i) 5.586% per year as from September 18, 2021 up to September 18, 2023 (not inclusive); (ii) 5.836% per year as from September 18, 2023 up to September 18, 2041 (not inclusive); and (iii) 6.586% per year as from September 18, 2041 (inclusive).
| · | On November 26, 2013, Telefónica Europe, B.V. issued undated deeply subordinated reset rate guaranteed securities, with the subordinated guarantee of Telefónica, S.A., for an aggregate principal amount of 600 million pounds sterling (equivalent to 716 million euros at the closing date) and subject to a call option exercisable by Telefónica Europe, B.V. starting on the seventh anniversary of the issuance date. The securities will accrue a coupon at a rate of 6.75% annually as from the issuance date (inclusive) up to November 26, 2020. From November 26, 2020 (inclusive), the securities will accrue a fixed coupon equal to the applicable five years swap rate resettable every five years plus a margin of: (i) 4.458% per year as from November 26, 2020 up to November 26, 2025 (not inclusive); (ii) 4.708% per year as from November 26, 2025 up to November 26, 2040 (not inclusive); and (iii) 5.458% per year as from November 26, 2040 (inclusive). |
US dollars)
In all issuances of undated deeply subordinated perpetual instruments in 2014 and 2013,securities, the issuer has an option to defer the payment of coupons; holders of these securities cannot call for payment.
As the repayment of principal and the payment of coupons depend solely on Telefónica’s decision, these undated deeply subordinated perpetual instrumentssecurities are equity instruments and are presented under “Other equity instruments” in the accompanying consolidated statement of changes in equity.
On December 7, 2017, Telefónica Europe, B.V. issued undated deeply subordinated guaranteed fixed rate reset securities, with the subordinated guarantee of Telefónica, S.A., in an aggregate principal amount of 1,000 million euros and subject to a call option exercisable starting on the fifth anniversary and a half from the issuance date. The Securities will accrue interest at a rate of 2.625% annually as from (and including) the issue date up to June 7, 2023. From (and
The
including) June 7, 2023, the Securities will accrue a fixed rate of interest equal to the applicable 5.5 Swap Rate plus a margin of: (i) 2.327% per year as from June 7, 2023 up to (but excluding) June 7, 2028; (ii) 2.577% per year as from June 7, 2028 up to (but excluding) June 7, 2043; and (iii) 3.327% per year as from (and including) June 7, 2043.
In 2017, the payment of the coupons related to the undated deeply subordinated securities issued in 2013 in an aggregate amount, net of tax effects, of 129263 million euros with negative impact on(255 million and 247 million euros in 2016 and 2015, respectively), was recorded as “Retained earnings” in the consolidated statements of changes in equity, was recorded in September 2014.
equity.
Notes mandatorily convertible into shares of Telefonica,Telefónica, S.A.
On September 24, 2014, Telefónica Participaciones, S.A.U., issued 1,500 million euros of notes mandatorily convertible into new and/or existing shares of Telefónica, S.A. at a nominal fixed interest rate of 4.9%, due on September 25, 2017, guaranteed by Telefónica, S.A. The notes could be converted at the optionAt maturity of the noteholders or the issuernotes Telefónica, S.A. on behalf of Telefónica Participaciones, S.A.U. delivered a total of 154,341,669 shares of Telefónica S.A. at any time from the 41st day after the issue date up to the 25th trading day prior to the maturity date. The minimuma conversion price of the notes will be equal to 11.99.7174 euros per share and the maximum(minimum conversion price will be equalafter the standard adjustments included in the terms of the notes). In order to 14.5775 euros per share, resultingmeet the conversion of the notes, Telefónica S.A. issued 154,326,696 new shares in execution of a premium equal to 22.5% over the minimum conversion price.capital increase and delivered 14,973 treasury shares.
These notes mandatorily convertible arewere compound instruments that have been split into its two components: a debt component amounting 215 million euros, corresponding to the present value of the coupons; and an equity component, for the remaining amount, due to the issuer option to convert the treasury shares to a fix ratio, included in the heading “other equity instruments”. The third coupon was paid in 2017 amounting to 74 million euros (74 million euros in 2016).
According to the consolidated text of the Spanish Corporate Enterprises Act, companies must transfer 10% of profit for the year to a legal reserve until this reserve reaches at least 20% of share capital. The legal reserve can be used to increase capital by the amount exceeding 10% of the increased share capital amount. Except for this purpose, until the legal reserve
exceeds the limit of 20% of share capital, it can only be used to offset losses, if there are no other reserves available. At December 31, 2014,2016, this reserve was amounting to 985 million euros. The Shareholders´ Meeting at June 9, 2017 approved an allocation of 2 million with a charge to the profit of exercise 2016. At December 31, 2017, after the capital increase carried forward in 2017, the Company had duly set asideneeds to increase the legal reserve by 51 million euros additionally, until obtain the legal reserve will fully constituted. The proposed distribution of 2017 profit includes an allocation of 51 million euros regarding this reserve, amounting to 984 million euros.
concept.
e) Retained earnings
These reserves include undistributed profits of companies comprising the consolidated Group less interim dividends paid against profit for the year, actuarial gains and losses, the impact of the asset ceiling on defined-benefit plans and the payment of coupons related to subordinated securities, if applicable.
In addition, these reserves include revaluation reserves and reserve for cancelled share capital. These reserves are regulated by some restrictions for their distribution.
Revaluation reserves
The balance of “Revaluation reserves” arose as a result of the revaluation made pursuant to Royal Decree-Law 7/1996 dated June 7 and may be used, free of tax, to offset any losses incurred in the future and to increase capital. Also it may be allocated to unrestricted reserves, provided that the capital gain has been realized.
The capital gain will be deemed to have been realized in respect of the portion on which the depreciation has been recorded for accounting purposes or when the revalued assets have been transferred or derecognized. In this respect, an amount of 86 million euros was reclassified to “Retained earnings"earnings” in 2014 (72017 (8 million euros in 20132016 and 108 million euros in 2012)2015), corresponding to revaluation reserves subsequently considered unrestricted. At December 31, 20142017, this reserve amounts to 10178 million euros.
euros (85 million euros at December 31, 2016).
Reserve for cancelled share capital
In accordance with Section 335.c) of the Spanish Corporate Enterprises Act and to render null and void the right of opposition provided for in Section 334 of the same Act, whenever the Company decreases capital it records a reserve for cancelled share capital for an amount equal to the par value of the cancelled shares, which can only be used if the same requirements as those applicable to the reduction of share capital are met. No additional amounts have been added toIn 2017, no amount was recorded
in this reserve in 2014 and 2013, and the cumulative amount of theaccount. In 2016, a reserve for cancelled share capital amounting to 75 million euros, the same amount as the capital reduction made in the year. The cumulative amount at December 31, 20142017 and 20132016 was 582731 million euros.euros, respectively.
f) Translation differences
The breakdown of the accumulated contribution of translation differences attributable to equity holders of the parent at December 31 is as follows:
| | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Brazilian real | (5,552) | (5,556) | (2,395) | (8,710 | ) | (5,999 | ) | (9,884 | ) |
| Venezuelan bolivar | (2,923) | 27 | 645 | |
Venezuelan bolivars (see Note 2.a) | | (3,493 | ) | (3,165 | ) | (3,141 | ) |
| Pound sterling | (1,901) | (2,455) | (2,251) | (3,223 | ) | (2,918 | ) | (1,395 | ) |
| Other currencies | (1,756) | (1,291) | 372 | (3,921 | ) | (2,658 | ) | (2,369 | ) |
| Total Group | (12,132) | (9,275) | (3,629) | (19,347 | ) | (14,740 | ) | (16,789 | ) |
| | |
| | |
The translation differences movement in 2014 is mainly due to thecumulative impact of translating the financial statementsaccounting restatement to adjust for the effects of the Group’s subsidiarieshyperinflation in Venezuela to SICAD II (see Note 2).is also included in the “Translation Differences” line item.
g) Treasury share instruments
At December 31, 2014, 20132017, 2016 and 2012,2015, Telefónica, Group companiesS.A. held the following shares in the Telefónica, S.A. parent company:
| | | Euros per share | | |
| | Number of shares | Acquisition price | Trading price | Market value* | % |
| Treasury shares at 12/31/14 | 128,227,971 | 11.68 | 11.92 | 1,528 | 2.75332% |
| Treasury shares at 12/31/13 | 29,411,832 | 11.69 | 11.84 | 348 | 0.64627% |
| Treasury shares at 12/31/12 | 47,847,810 | 10.57 | 10.19 | 488 | 1.05136% |
| (*) Millions of euros | | | | | |
treasury shares:
F-43 |
| | | | | | | | | | |
| | |
| Euros per share | |
| |
|
| | Number of shares |
| Acquisition price |
| Trading price |
| Market value* |
| % |
|
| Treasury shares at 12/31/17 | 65,687,859 |
| 10.48 |
| 8.13 |
| 534 |
| 1.26514 | % |
| Treasury shares at 12/31/16 | 141,229,134 |
| 10.48 |
| 8.82 |
| 1,246 |
| 2.80339 | % |
| Treasury shares at 12/31/15 | 141,639,159 |
| 11.69 |
| 10.24 |
| 1,450 |
| 2.84690 | % |
Telefónica, S.A. directly owns all treasury shares in the Group at December 31, 2014.
euros
In 2014, 20132017, 2016 and 20122015 the following transactions involving treasury shares were carried out:
|
| | |
| | Number of shares |
Treasury shares at 12/31/11 | 84,209,364 |
Acquisitions | 126,489,372 |
Disposals | (76,569,957) |
Employee share option plan | (2,071,606) |
Capital reduction | (84,209,363) |
Treasury shares at 12/31/12 | 47,847,810 |
Acquisitions | 113,154,549 |
Disposals | (131,590,527) |
Treasury shares at 12/31/13 | 29,411,832 |
Acquisitions | 100,723,415 |
Disposals | (129,177) |
Employee share option plan | (1,778,099)
|
| Treasury shares at 12/31/14 | 128,227,971 |
|
| Acquisitions | 138,036,450 |
|
| Disposals | (47,824,300 | ) |
| Employee share option plan | (2,724,699 | ) |
| Capital reduction | (74,076,263 | ) |
| Treasury shares at 12/31/15 | 141,639,159 |
|
| Acquisitions | 77,087,297 |
|
| Employee share option plan | (2,869,334 | ) |
| Capital reduction | (74,627,988 | ) |
| Treasury shares at 12/31/16 | 141,229,134 |
|
| Acquisitions | — |
|
| Employee share option plan | (3,518,795 | ) |
| Other movements | (72,022,480 | ) |
| Treasury shares at 12/31/17 | 65,687,859 |
|
TreasuryThere has not been treasury shares purchases in 2014 amounted to 1,1762017 (668 million euros (1,216 million euros and 1,3461,654 million euros in 20132016 and 2012,2015, respectively).
The most significant transaction with treasury shares in 2017 was the swap with Koninklijke KPN NV (hereinafter, KPN) by which Telefónica delivered 72.0 million of its treasury shares (representing 1.43% of its share capital) in
Treasury
exchange for 178.5 million shares disposed of in 2014, 2013 and 2012 amountedits subsidiary Telefónica Deutschland Holding AG, representing 6.0% of the share capital of the latter, amounting to 1754 million euros 1,423 million euros and 801 million euros, respectively.(see Note 5).
The main disposalsale of treasury shares in 2014 are mainly due2015 was the exchange with Vivendi, S.A. of 46 million of treasury shares, for 58.4 million preferred shares of Telefônica Brasil, S.A., amounting to 555 million euros (see Note 5).
On September 30, 2017, the first phase of the Telefónica, S.A. long-term incentive plans called “Performance and Investment Plan 2014-2019” (“PIP 2014-2019”) and "Talent for the Future Share Plan (TFSP)" ended, which did not entail the delivery of any shares (see Note 19).
On July 31, 2017 the Global Employee Share Plan III matured and 3,187,055 treasury shares were delivered to the shares delivered to Group employees whenwho met the requirements (see Note 19).
On June 30, 2016, the third phase of the Telefónica, S.A. long-term incentive plan called ���Performance and Investment Plan 2011-2016” (“PIP 2011-2016”) ended, which did not entail the delivery of any shares to Telefónica Group managers.
On June 30, 2015, the second phase of the Global Employee ShareTelefónica, S.A. long-term incentive plan called “Performance and Investment Plan 2011-2016” (“PIP 2011-2016”) ended. According to the GESP”) maturedlevel of “Total Shareholder Return” (TSR) achieved, 77%, 2,724,699 shares were delivered (see Note 19).
The main salesOn October 13, 2016, pursuant to the resolution of treasurythe share capital reduction, by the cancellation of own shares, in 2013 are as follows:
| · | An agreement was reached with qualified and professional investors on March 26, 2013 whereby the Company disposedadopted by the Annual General Shareholders’ Meeting of all the treasury shares it held (90,067,896 shares) at a price of 10.80 euros per share. |
| · | On September 24, 2013 Telefónica, S.A. acquired from the remaining shareholders of Telco, S.p.A. 23.8% of the non-convertible bonds issued by Telco, S.p.A. (Note 13.a). The payment of this transaction consisted of the transmission of 39,021,411 treasury shares of the Company (see Note 13.a). |
At December 31, 2014, Telefónica held 76on May 12, 2016, the public deed of this share capital reduction was registered. Therefore, 74,627,988 of the own shares of Telefónica, S.A. totalling 813 million call optionseuros were cancelled.
On July 24, 2015, pursuant to the resolution of the share capital reduction, by the cancellation of own shares, adopted by the Annual General Shareholders’ Meeting of Telefónica held on treasuryJune 12, 2015, the public deed of this share capital reduction was registered. Therefore, 74,076,263 of the own shares subject to physical delivery at a fixed price (134 and 178of Telefónica, S.A. totalling 886 million options on treasury shares at December 31, 2013 and 2012, respectively), which are presented as a reduction in equity under the caption “Treasury shares”. They are valued at the amount of premium paid, and upon maturity if the call options are exercised the premium is reclassified as treasury shares together with the price paid. If they are not exercised upon maturity their value is recognized directly in equity.euros were cancelled.
The Company also hasmaintains a derivative financial instrument subject to net settlement on a notional equivalent to 3235.2 million of Telefónica shares in 2017 (same figure in 2016), recognized under “Current interest-bearing debt” in the accompanying consolidated statement of financial position (derivative over 30 million equivalent shares in 2013 recognized under “Current interest-bearing debt” and derivative over 28 million equivalent shares in 2012 recognized under “Current financial assets”).statements for both fiscal years.
h) Equity attributable to non-controlling interests
“Equity attributable to non-controlling interests” represents the share of non-controlling interests in the equity and income or loss for the year of fully consolidated Group companies. The movements in this heading of the 2014, 20132017, 2016 and 20122015 consolidated statement of financial position are as follows:
|
| | | | | | | | | | | | | | | | |
| Millions of euros | Balance at 12/31/16 |
| Sales of non-controlling interests and inclusion of companies |
| Acquisitions of non-controlling interests and exclusion of companies |
| Dividends paid |
| Profit/(loss) for the year |
| Change in translation differences |
| Other movements |
| Balance at 12/31/17 |
|
| Telefônica Brasil, S.A. | 5,756 |
| 25 |
| — |
| (320 | ) | 336 |
| (772 | ) | (7 | ) | 5,018 |
|
| Telefónica Deutschland Holding, A.G. | 4,150 |
| — |
| (671 | ) | (229 | ) | (140 | ) | — |
| 4 |
| 3,114 |
|
| Colombia Telecomunicaciones, S.A., ESP | (88 | ) | 605 |
| — |
| — |
| 26 |
| (4 | ) | (16 | ) | 523 |
|
| Telefónica Centroamericana Inversiones, S.L. | 354 |
| — |
| — |
| (22 | ) | 18 |
| (43 | ) | — |
| 307 |
|
| Telxius Telecom, S.A. | — |
| 690 |
| — |
| — |
| 7 |
| (3 | ) | — |
| 694 |
|
| Other | 56 |
| — |
| — |
| (12 | ) | (1 | ) | (2 | ) | 1 |
| 42 |
|
| Total | 10,228 |
| 1,320 |
| (671 | ) | (583 | ) | 246 |
| (824 | ) | (18 | ) | 9,698 |
|
F-44 |
| | | | | | | | | | | | | | | | |
| Millions of euros | Balance at 12/31/15 |
| Sales of non-controlling interests and inclusion of companies |
| Acquisitions of non-controlling interests and exclusion of companies |
| Dividends paid |
| Profit/(loss) for the year |
| Change in translation differences |
| Other movements |
| Balance at 12/31/16 |
|
| Telefônica Brasil, S.A. | 4,644 |
| — |
| — |
| (232 | ) | 257 |
| 1,099 |
| (12 | ) | 5,756 |
|
| Telefónica Deutschland Holding, A.G. | 4,638 |
| — |
| — |
| (263 | ) | (217 | ) | — |
| (8 | ) | 4,150 |
|
| Colombia Telecomunicaciones, S.A., ESP | (30 | ) | — |
| — |
| — |
| (32 | ) | (7 | ) | (19 | ) | (88 | ) |
| Telefónica Centroamericana Inversiones, S.L. | 354 |
| — |
| — |
| (28 | ) | 19 |
| 8 |
| 1 |
| 354 |
|
| Other | 59 |
| 1 |
| (8 | ) | (1 | ) | 3 |
| 3 |
| (1 | ) | 56 |
|
| Total | 9,665 |
| 1 |
| (8 | ) | (524 | ) | 30 |
| 1,103 |
| (39 | ) | 10,228 |
|
| Millions of euros | | Balance at 12/31/13 | | Sales of non-controlling interests and inclusion of companies | | Acquisitions of non-controlling interests and exclusion of companies | | Dividends distribution | | Profit/(loss) for the year | | Change in translation differences | | Other movements | | Balance at 12/31/14 |
| Telefónica Czech Republic, a.s. | | 666 | | − | | (666) | | − | | − | | − | | − | | − |
| Telefónica Brasil, S.A. | | 3,491 | | − | | − | | (269) | | 423 | | (5) | | 16 | | 3,656 |
| Telefónica Deutschland Holding, A.G. | | 1,962 | | 3,615 | | − | | (122) | | (277) | | − | | (12) | | 5,166 |
| Colombia Telecomunicaciones, S.A., ESP | | (165) | | − | | − | | − | | 91 | | 7 | | 17 | | (50) |
| Telefónica Centroamericana Inversiones, S.L. | | 283 | | 6 | | − | | (14) | | 9 | | 41 | | 1 | | 326 |
| Other | | 60 | | 10 | | − | | (1) | | 5 | | 4 | | (2) | | 76 |
| Total | | 6,297 | | 3,631 | | (666) | | (406) | | 251 | | 47 | | 20 | | 9,174 |
| Millions of euros | | Balance at 12/31/12 | | Sales of non-controlling interests and inclusion of companies | | Acquisitions of non-controlling interests and exclusion of companies | | Dividends distribution | | Profit/(loss) for the year | | Change in translation differences | | Other movements | | Balance at 12/31/13 |
| Telefónica Czech Republic, a.s. | | 813 | | − | | (46) | | (100) | | 63 | | (64) | | − | | 666 |
| Telefónica Brasil, S.A. | | 4,373 | | − | | − | | (522) | | 335 | | (694) | | (1) | | 3,491 |
| Telefónica Deutschland Holding, A.G. | | 2,084 | | − | | − | | (117) | | (1) | | (1) | | (3) | | 1,962 |
| Colombia Telecomunicaciones, S.A., ESP | | (139) | | − | | − | | − | | (37) | | 21 | | (10) | | (165) |
| Telefónica Centroamericana Inversiones, S.L. | | − | | 283 | | − | | − | | 11 | | (12) | | 1 | | 283 |
| Other | | 69 | | 1 | | − | | − | | 5 | | (13) | | (2) | | 60 |
| Total | | 7,200 | | 284 | | (46) | | (739) | | 376 | | (763) | | (15) | | 6,297 |
| Millions of euros | | Balance at 12/31/11 | | Sales of non-controlling interests and inclusion of companies | | Acquisitions of non-controlling interests and exclusion of companies | | | | Profit/(loss) for the year | | Change in translation differences | | Other movements | | Balance at 12/31/12 |
| Telefónica Czech Republic, a.s. | | 940 | | − | | (113) | | (107) | | 66 | | 27 | | − | | 813 |
| Telefónica Brasil, S.A. | | 4,745 | | − | | (12) | | (331) | | 454 | | (478) | | (5) | | 4,373 |
| Telefónica Deutschland Holding, A.G. | | − | | 2,043 | | − | | − | | 41 | | − | | − | | 2,084 |
| Colombia Telecomunicaciones, S.A., ESP | | − | | − | | (116) | | − | | (93) | | (138) | | 208 | | (139) |
| Other | | 62 | | − | | (2) | | (4) | | 7 | | 5 | | 1 | | 69 |
| Total | | 5,747 | | 2,043 | | (243) | | (442) | | 475 | | (584) | | 204 | | 7,200 |
|
| | | | | | | | | | | | | | | | |
| Millions of euros | Balance at 12/31/14 |
| Sales of non-controlling interests and inclusion of companies |
| Acquisitions of non-controlling interests and exclusion of companies |
| Dividends paid |
| Profit/(loss) for the year |
| Change in translation differences |
| Other movements |
| Balance at 12/31/15 |
|
| Telefônica Brasil, S.A. | 3,656 |
| 4,359 |
| (1,714 | ) | (346 | ) | 288 |
| (1,603 | ) | 4 |
| 4,644 |
|
| Telefónica Deutschland Holding, A.G. | 5,178 |
| — |
| (116 | ) | (268 | ) | (159 | ) | — |
| 3 |
| 4,638 |
|
| Colombia Telecomunicaciones, S.A., ESP | (50 | ) | 17 |
| — |
| — |
| (8 | ) | 8 |
| 3 |
| (30 | ) |
| Telefónica Centroamericana Inversiones, S.L. | 326 |
| — |
| — |
| (25 | ) | 18 |
| 34 |
| 1 |
| 354 |
|
| Other | 76 |
| (8 | ) | — |
| (2 | ) | (4 | ) | — |
| (3 | ) | 59 |
|
| Total | 9,186 |
| 4,368 |
| (1,830 | ) | (641 | ) | 135 |
| (1,561 | ) | 8 |
| 9,665 |
|
Revenues, OIBDA, capital expenditure and the main items of the statement of financial position for the main companies of the Telefónica Group with non-controlling interests, Telefówhich are Telefônica BrazilBrasil and Telefónica Germany, are included in the Note 4. The statements of cash flows of these companies are as follows:
2014 |
| | | | | | |
| Millions of euros | |
| |
| |
|
| Telefônica Brasil | 2017 |
| 2016 |
| 2015 |
|
| Net cash flow provided by operating activities | 3,710 |
| 3,123 |
| 2,893 |
|
| Net cash flow used in investing activities | (2,285 | ) | (2,039 | ) | (4,111 | ) |
| Net cash flow used in financing activities | (1,653 | ) | (1,218 | ) | 1,530 |
|
| | (228 | ) | (134 | ) | 312 |
|
|
| | | | | | |
| Millions of euros | |
| |
| |
|
| Telefónica Germany | 2017 |
| 2016 |
| 2015 |
|
| Net cash flow provided by operating activities | 1,942 |
| 2,154 |
| 2,081 |
|
| Net cash flow used in investing activities | (1,223 | ) | (1,252 | ) | (2,180 | ) |
| Net cash flow used in financing activities | (706 | ) | (1,323 | ) | (1,023 | ) |
| | 13 |
| (421 | ) | (1,122 | ) |
2017
In 2014,2017 “Sales of non-controlling interests and inclusion of companies” reflects the effect of the capital increase in Colombia Telecom (see Note 2) and the sale of 40% of the total share capital of Telxius Telecom, S.A.U. to KKR amounting to 1,275 million euros (see Note 5). In addition, it is remarkable the impact of the swap agreement with KPN, by which Telefónica delivered 72.0 million of its treasury shares (representing 1.43% of its share capital) in exchange for 178.5 million shares of its subsidiary Telefónica Deutschland Holding AG, representing 6.0% of the share capital of the latter (see Note 5).
2016
In 2016 it was remarkable the effect of dividends declared by Telefónica Brazil, S.A. and Telefónica Deutschland Holding, A.G., as well as the impact of translation differences, mainly by the evolution of the Brazilian real.
2015
In 2015, “Sales of non-controlling interests and inclusion of companies” reflected the effect of the capital increase in Telefônica Brasil, S.A. for the acquisition of E-Plus,GVT, and the changes in the investment percentages related to the same operation amounting to 3,615 million euros (see Notes 2 and 5). The removal of Telefónica Czech Republic, a.s. from the scope of consolidation is also significant (see Note 2).
2013
In 2013, “Sales of non-controlling interests and inclusion of companies” reflects the effect of the sale of 40% of the investment through Telefónica Centroamérica Inversiones, S.L. in Guatemala, El Salvador, Nicaragua and Panama, with an impact of 283 million euros (see Note 5).
2012
In 2012, “Sales of non-controlling interests and inclusion of companies” reflects Additionally, it is worth highlighting the effectchanges in the investment percentages in Colombia Telecomunicaciones, pursuant to amendment nº 1 of the public offering of shares in Telefónica Deutschland Holding, A.G. This share offering, which totaled 23.17% of capital, entailed non-controlling interests of 2,043 million euros. The heading also includesFramework investment Agreement executed with the impact of the corporate reorganization agreement in the fixed and mobile businesses in Colombia, with an impact of 116 million eurosColombian Government (see Note 5)21.c).
Note 13. Financial assets and liabilities
1.- Financial assets
The breakdown of financial assets of the Telefónica Group at December 31, 2014 and 2013 is as follows:
| | | Fair value through profit or loss | | | | | | Measurement hierarchy | | | | | | | | |
| Millions of euros | | Held for trading | | Fair value option | | Available-for-sale | | Hedges | | Level 1 (Quoted prices) | | Level 2 (Other directly observable market inputs) | | Level 3 (Inputs not based on observable market data) | | Held-to-maturity investments | | Rest of financial assets at amortized cost | | Total carrying amount | | Total fair value |
| Non-current financial assets | | 2,453 | | 245 | | 1,875 | | 3,046 | | 1,492 | | 6,114 | | 13 | | 137 | | 3,217 | | 10,973 | | 10,981 |
| Investments | | − | | − | | 1,278 | | − | | 1,170 | | 108 | | − | | − | | − | | 1,278 | | 1,278 |
| Long-term credits | | − | | 245 | | 597 | | − | | 84 | | 745 | | 13 | | 47 | | 2,248 | | 3,137 | | 2,643 |
| Deposits and guarantees | | − | | − | | − | | − | | − | | − | | − | | 90 | | 1,471 | | 1,561 | | 1,561 |
| Derivative instruments | | 2,453 | | − | | − | | 3,046 | | 238 | | 5,261 | | − | | − | | − | | 5,499 | | 5,499 |
| Impairment losses | | − | | − | | − | | − | | − | | − | | − | | − | | (502) | | (502) | | − |
| Current financial assets | | 500 | | 97 | | 63 | | 571 | | 423 | | 808 | | − | | 9 | | 8,221 | | 9,461 | | 9,454 |
| Financial investments | | 500 | | 97 | | 63 | | 571 | | 423 | | 808 | | − | | 9 | | 1,692 | | 2,932 | | 2,925 |
| Cash and cash equivalents | | − | | − | | − | | − | | − | | − | | − | | − | | 6,529 | | 6,529 | | 6,529 |
| Total financial assets | | 2,953 | | 342 | | 1,938 | | 3,617 | | 1,915 | | 6,922 | | 13 | | 146 | | 11,438 | | 20,434 | | 20,435 |
December 31, 2013
| | | Fair value through profit or loss | | | | | | Measurement hierarchy | | | | | | | | |
| Millions of euros | | Held for trading | | Fair value option | | Available-for-sale | | Hedges | | Level 1 (Quoted prices) | | Level 2 (Other directly observable market inputs) | | Level 3 (Inputs not based on observable market data) | | Held-to-maturity investments | | Rest of financial assets at amortized cost | | Total carrying amount | | Total fair value |
| Non-current financial assets | | 1,462 | | 356 | | 1,101 | | 1,205 | | 746 | | 3,378 | | − | | 36 | | 3,615 | | 7,775 | | 7,775 |
| Investments | | − | | − | | 550 | | − | | 433 | | 117 | | − | | − | | − | | 550 | | 550 |
| Long-term credits | | − | | 356 | | 551 | | − | | 171 | | 736 | | − | | 7 | | 2,562 | | 3,476 | | 3,127 |
| Deposits and guarantees | | − | | − | | − | | − | | − | | − | | − | | 29 | | 1,403 | | 1,432 | | 1,431 |
| Derivative instruments | | 1,462 | | − | | − | | 1,205 | | 142 | | 2,525 | | − | | − | | − | | 2,667 | | 2,667 |
| Impairment losses | | − | | − | | − | | − | | − | | − | | − | | − | | (350) | | (350) | | − |
| Current financial assets | | 548 | | 146 | | 54 | | 125 | | 327 | | 546 | | − | | 727 | | 10,494 | | 12,094 | | 12,094 |
| Financial investments | | 548 | | 146 | | 54 | | 125 | | 327 | | 546 | | − | | 727 | | 517 | | 2,117 | | 2,117 |
| Cash and cash equivalents | | − | | − | | − | | − | | − | | − | | − | | − | | 9,977 | | 9,977 | | 9,977 |
| Total financial assets | | 2,010 | | 502 | | 1,155 | | 1,330 | | 1,073 | | 3,924 | | − | | 763 | | 14,109 | | 19,869 | | 19,869 |
The calculation of the fair values of the Telefónica Group’s debt instruments required an estimate, for each currency and counterparty, of a credit spread curve using the prices of the Group’s bonds and credit derivatives.
Derivatives are measured using the valuation techniques and models normally used in the market, based on money-market curves and volatility prices available in the market.
a) Non-current financial assets
The movement in items composing “Non-current financial assets” in 20142017 and 20132016, is as follows:
| | | Millions of euros | Investments | Long-term credits | Deposits and guarantees | Derivative financial assets | Impairment provision | Total | Investments |
| Long-term credits |
| Deposits and guarantees |
| Derivative financial assets |
| Impairment provision |
| Non-current prepayments |
| Non-current financial assets |
|
| Balance at 12/31/12 | 586 | 2,940 | 1,986 | 4,213 | (386) | 9,339 | |
| Balance at 12/31/15 | | 1,289 |
| 2,512 |
| 1,425 |
| 5,315 |
| (507 | ) | 371 |
| 10,405 |
|
| Acquisitions | 10 | 1,269 | 158 | 188 | (4) | 1,621 | 73 |
| 952 |
| 169 |
| 73 |
| (13 | ) | 43 |
| 1,297 |
|
| Disposals | (106) | (462) | (61) | − | 1 | (628) | (446 | ) | (955 | ) | (102 | ) | (270 | ) | 402 |
| (20 | ) | (1,391 | ) |
| Translation differences | (12) | (111) | (285) | 73 | 29 | (306) | 8 |
| (37 | ) | 337 |
| (15 | ) | 30 |
| 6 |
| 329 |
|
| Fair value adjustments | 80 | (85) | 38 | (1,459) | − | (1,426) | |
| Transfers | (8) | (75) | (404) | (348) | 10 | (825) | |
| Balance at 12/31/13 | 550 | 3,476 | 1,432 | 2,667 | (350) | 7,775 | |
| Fair value adjustments and financial updates | | (103 | ) | (21 | ) | 102 |
| 151 |
| — |
| — |
| 129 |
|
| Transfers and other | | 4 |
| (681 | ) | 7 |
| (206 | ) | (66 | ) | (62 | ) | (1,004 | ) |
| Balance at 12/31/16 | | 825 |
| 1,770 |
| 1,938 |
| 5,048 |
| (154 | ) | 338 |
| 9,765 |
|
| Acquisitions | 58 | 916 | 161 | 423 | (5) | 1,553 | 16 |
| 960 |
| 955 |
| — |
| (12 | ) | 170 |
| 2,089 |
|
| Disposals | (21) | (451) | (148) | (16) | 6 | (630) | (155 | ) | (232 | ) | (156 | ) | (120 | ) | 41 |
| (24 | ) | (646 | ) |
| Translation differences | (5) | 18 | (25) | 124 | 5 | 117 | (7 | ) | (81 | ) | (258 | ) | (57 | ) | 16 |
| (19 | ) | (406 | ) |
| Fair value adjustments | (113) | 35 | 103 | 2,538 | − | 2,563 | |
| Transfers and others | 809 | (857) | 38 | (237) | (158) | (405) | |
| Balance at 12/31/14 | 1,278 | 3,137 | 1,561 | 5,499 | (502) | 10,973 | |
| | |
| Fair value adjustments and financial updates | | 5 |
| (1 | ) | 84 |
| (1,251 | ) | — |
| — |
| (1,163 | ) |
| Transfers and other | | (34 | ) | (594 | ) | 62 |
| (808 | ) | (29 | ) | (69 | ) | (1,472 | ) |
| Balance at 12/31/17 | | 650 |
| 1,822 |
| 2,625 |
| 2,812 |
| (138 | ) | 396 |
| 8,167 |
|
Investments
“Investments” includes the fair value of investments in companies where Telefónica does not exercise significant control and for which there is no specific disposal plan for the short term (see Note 3.i).
In June 2017, Telefonica sold its entire shareholding in Mediaset Premium representing 11.1%, which had a negative impact in Net financial expense amounting to 76 million euros.
In “Transfers” in 2014 there is mainly the reclassification as “non-current financial assets available-for-sale”2017 shares of our investment in China Unicom (Hong Kong) Limited and Telco, S.p.A.were sold representing 0.24% of its share capital for 72 million euros, that had a negative impact in Net financial expense to 4 million euros. On July 10, 2016, Telefónica sold 1.51% of the share capital of China Unicom (Hong Kong) Limited for 322 million euros (see Note 9)20), that had a negative impact of 155 million euros on consolidated until that moment by the equity method.financial results.
At December 31, 20142017, Telefónica maintained a 0.59% stake in the Telefónica Group’s shareholding inshare capital of China Unicom (Hong Kong) Limited, is 2.51%, valued at 662205 million euros. Ateuros (1% at December 31, 2016, valued at 263 million euros).
Additionally, the same date, the stake in Telco, S.p.A. is 66% (see Note 21.b) amounting to a book value of 73 million euros.
Additionally, theTelefónica Group’s shareholding in Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) amounts to 347314 million euros (383(283 million euros at December 31, 2013)2016), representing 0.72%0.66% of its share capital at December 31, 2014.2017 (0.67% at December 31, 2016).
Disposals"Transfer and other" in 2013 mainly include2017 principally includes the full divestmentprior stake of the stake in Portugal Telecom.Colombian companies Telebucaramanga, Metrotel y Optecom (see Note 5).
At year-end the Group assessed the securities in its portfolio of listed available-for-sale assets individually for impairment. The analysis did not uncover the need to recognize any significant impairment losses.
Long-term credits and impairment provisionlosses
The composition of long-term credits is as follows:
| Millions of euros | 12/31/2014 | 12/31/2013 |
| Long-term loans to associates | - | 1,225 |
| Long-term trade receivables | 825 | 444 |
| Long-term prepayments | 338 | 154 |
| Long-term receivables for indirect taxes | 112 | 121 |
| Other long-term credits | 1,862 | 1,532 |
| Total | 3,137 | 3,476 |
|
| | | | |
| Millions of euros | 12/31/2017 |
| 12/31/2016 |
|
| Long-term trade receivables | 638 |
| 593 |
|
| Long-term receivables for indirect taxes | 189 |
| 144 |
|
| Other long-term credits | 995 |
| 1,033 |
|
| Total | 1,822 |
| 1,770 |
|
“Other“Other long-term credits” includes long-term financial assets of the subsidiary Seguros de Vida y Pensiones Antares, S.A., fundamentally fixed-income securities, amounting to 816692 million euros and 795749 million euros at December 31, 20142017 and 2013,2016, respectively. These assets are mainly intended to cover the obligations from the defined benefit plans of Telefónica de España (ITP and Survival), though they do not qualify as “plan assets” under IAS 19 (see Note 15).
“Other Additionally, this line item includes long-term credits” in 2014 includes the deferred account receivable generated from the salefinancial assets of Telefónica Czech Republic, a.s. (see Note 2), in the amount of 217 million euros. This same item amountsGermany amounting to 86 million euros on a current basis. The sale agreement contemplates a payment schedule that extends to January 2018.
In 2013, Telefónica acquired 23.8% of the non-convertible bonds of Telco, S.p.A. from this company’s other shareholders, through the transfer of 39,021,411 treasury shares (see Note 12.g). This transaction is recognized under “Long-term credits” for 417 million euros. At December 31, 2013, Telefónica, S.A. had subscribed Telco, S.p.A. bonds totaling 1,225 million euros, transferred to short term in 2014 (see Note 9).
Additionally, “Acquisitions” in 2013 included the purchase of exchangeable bond into Telecom Italia, S.p.A. shares for a nominal amount of 103 million euros, which was cancelled in 2014.
Impairment provision for long-term credits amounted to 50258 and 3508 million euros at December 31, 20142017 and 2016, respectively, that are mainly intended to cover the obligations from the defined benefit plan of Telefónica Germany, though they do not represent "plan assets" in accordance with IAS 19 (see Note 15).
The movement in impairment corrections in 2016 was mainly due to the write-off of long-term receivables after the agreement reached by Telefónica Móviles México with other operators on disputes over interconnection tariffs in prior years.
Deposits and guarantees
Telefónica Brasil has non-current judicial deposits constituted amounting to 1,598 million euros (see Note 15) at December 31, 2013, respectively.2017 (1,761 million euros at December 31, 2016).
At December 31, 2017 there were deposits related to the collateral guarantees on derivatives signed by Telefonica, S.A. and its counterparties for the credit risk management of derivatives amounting to 902 million euros that includes 286 million euros with BBVA (240 millioneuros at December 31, 2016, see Note 10).
Derivative financial assets
In 2017 “Fair value adjustments and financial updates” mainly relates to the change of value of the long-term derivative financial assets (see section 2.a of this note).
b) Current financial assets
This heading of financial investments includes the following items:
| · | Short-term credits amounting to 1,527 million euros, mainly including Telco, S.p.A.’s bond totaling 1,307 million euros at December 31, 2014 (principal plus interests). |
| | On July 9, 2014, each of the Telco shareholders, among which TelefóDerivative financial assets with a short-term maturity or not used to hedge non-current items in the consolidated statement of financial position, in the amount of 845 million euros at December 31, 2017 (1,872 million euros at December 31, 2016, see section 2.a of this Note).nica is one of them, executed with Telco a shareholders loan agreement with a maturity date no later than April 30, 2015. The aggregate amount of shareholders loans made available pursuant to such loans is up to 2,550 million euros (1,683 million euros corresponding to Telefónica, S.A. according to its stake in Telco), which will enable Telco to repay in full all amounts due by Telco under its banking debt and the subordinated bond. As of December 31, 2014 there was no outstanding amount under these loans.
|
| · | Short-term investments in financial instruments recognized at fair value to cover commitments undertaken by the Group’s insurance companies, amounting to 377 million euros at December 31, 2014 (430 million euros at December 31, 2013). |
Short-term investments in financial instruments recognized at fair value to cover commitments undertaken by the Group’s insurance companies, amounting to 130 million euros at December 31, 2017 (304 million euros at December 31, 2016), recorded at fair value.
Short-term deposits and guarantees amounting to 125 million euros at December 31, 2017 (450 million euros at December 31, 2016) which include current judicial deposits amounting 82 million euros (see Note 15) constituted by Telefónica Brasil (88 million euros at December 31, 2016).
| · | Derivative financial assets with a short-term maturity or not used to hedge non-current items in the consolidated statement of financial position, in the amount of 813 million euros (412 million euros in 2013). |
Short-term credits, net of impairment provisions, amounting to 877 million euros at December 31, 2017 (205 million euros at December 31, 2016). At December 31, 2017 include bank deposits with a maturity beyond three and twelve months formalized by Telefónica, S.A. amounting to 700 million euros.
| · | Short-term deposits and guarantees amounting to 179 million euros at December 31, 2014 (175 million euros at December 31, 2013). |
| · | Current investments of cash surpluses which, given their characteristics, have not been classified as “Cash and cash equivalents.” |
Current financial assets that are highly liquid and have maturity periods of three months or less from the date contracted, and present an insignificant risk of value changes, are recorded under “Cash and cash equivalents” on the accompanying consolidated statement of financial position.
c) Breakdown of financial assets
The breakdown of financial assets of the Telefónica Group at December 31, 2017 and 2016, without considering non-current prepayments, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| | Fair value through profit or loss | |
| |
| Measurement hierarchy | |
| |
| |
| |
|
| Millions of euros | Held for trading |
| Fair value option |
| Available- for-sale |
| Hedges |
| Level 1 (Quoted prices) |
| Level 2 (Other directly observable market inputs) |
| Level 3 (Inputs not based on observable market data) |
| Held-to-maturity invest-ments |
| Rest of financial assets at amortized cost |
| Total carrying amount |
| Total fair value |
|
| Non-current financial assets | 1,074 |
| 250 |
| 1,117 |
| 1,738 |
| 822 |
| 3,339 |
| 18 |
| — |
| 3,592 |
| 7,771 |
| 7,771 |
|
| Investments | — |
| — |
| 650 |
| — |
| 567 |
| 83 |
| — |
| — |
| — |
| 650 |
| 650 |
|
| Long-term credits | — |
| 250 |
| 467 |
| — |
| 86 |
| 613 |
| 18 |
| — |
| 1,105 |
| 1,822 |
| 1,684 |
|
| Deposits and guarantees | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,625 |
| 2,625 |
| 2,625 |
|
| Derivative instruments | 1,074 |
| — |
| — |
| 1,738 |
| 169 |
| 2,643 |
| — |
| — |
| — |
| 2,812 |
| 2,812 |
|
| Impairment losses | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (138 | ) | (138 | ) | — |
|
| Current financial assets | 163 |
| 60 |
| 66 |
| 731 |
| 105 |
| 915 |
| — |
| 169 |
| 6,157 |
| 7,346 |
| 7,346 |
|
| Financial investments | 163 |
| 60 |
| 66 |
| 731 |
| 105 |
| 915 |
| — |
| 169 |
| 965 |
| 2,154 |
| 2,154 |
|
| Cash and cash equivalents | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 5,192 |
| 5,192 |
| 5,192 |
|
| Total | 1,237 |
| 310 |
| 1,183 |
| 2,469 |
| 927 |
| 4,254 |
| 18 |
| 169 |
| 9,749 |
| 15,117 |
| 15,117 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| | Fair value through profit or loss | |
| |
| Measurement hierarchy | |
| |
| |
| |
|
| Millions of euros | Held for trading |
| Fair value option |
| Available- for-sale |
| Hedges |
| Level 1 (Quoted prices) |
| Level 2 (Other directly observable market inputs) |
| Level 3 (Inputs not based on observable market data) |
| Held-to-maturity invest-ments |
| Rest of financial assets at amortized cost |
| Total carrying amount |
| Total fair value |
|
| Non-current financial assets | 1,716 |
| 270 |
| 1,333 |
| 3,332 |
| 864 |
| 5,766 |
| 21 |
| — |
| 2,776 |
| 9,427 |
| 9,427 |
|
| Investments | — |
| — |
| 825 |
| — |
| 620 |
| 205 |
| — |
| — |
| — |
| 825 |
| 825 |
|
| Long-term credits | — |
| 270 |
| 508 |
| — |
| 76 |
| 681 |
| 21 |
| — |
| 992 |
| 1,770 |
| 1,616 |
|
| Deposits and guarantees | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,938 |
| 1,938 |
| 1,938 |
|
| Derivative instruments | 1,716 |
| — |
| — |
| 3,332 |
| 168 |
| 4,880 |
| — |
| — |
| — |
| 5,048 |
| 5,048 |
|
| Impairment losses | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (154 | ) | (154 | ) | — |
|
| Current financial assets | 883 |
| 118 |
| 115 |
| 1,173 |
| 483 |
| 1,806 |
| — |
| 39 |
| 4,362 |
| 6,690 |
| 6,690 |
|
| Financial investments | 883 |
| 118 |
| 115 |
| 1,173 |
| 483 |
| 1,806 |
| — |
| 39 |
| 626 |
| 2,954 |
| 2,954 |
|
| Cash and cash equivalents | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3,736 |
| 3,736 |
| 3,736 |
|
| Total | 2,599 |
| 388 |
| 1,448 |
| 4,505 |
| 1,347 |
| 7,572 |
| 21 |
| 39 |
| 7,138 |
| 16,117 |
| 16,117 |
|
2.-The calculation of the fair values of the Telefónica Group’s debt instruments required an estimate, for each currency and counterparty, of a credit spread curve using the prices of the Group’s bonds and credit derivatives.
The derivatives portfolio was measured through the techniques and models normally used in the market, based on money market curves and volatility prices available in the markets. Additionally, the credit valuation adjustment or net CVA per counterparty (CVA+DVA) is calculated on that measurement as the method used to measure the credit risks of the counterparties and also Telefónica for the purpose of adjusting the fair value valuation of the derivatives. This adjustment reflects the possibility of bankruptcy or credit rating impairment of the counterparty and Telefónica.
2. Financial liabilities
TheThe breakdown of financial liabilities at December 31, 20142017 and the corresponding maturities schedule is as follows:
| | Millions of euros | | | Current | Non-current | | Current | Non-current | |
| Maturity | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Non-current total | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Subsequent years | Non-current total | Total |
| Debentures and bonds | 4,601 | 6,722 | 6,392 | 4,834 | 3,465 | 18,214 | 39,627 | 44,228 | 5,313 |
| 3,599 |
| 5,108 |
| 4,760 |
| 4,903 |
| 17,605 |
| 35,975 |
| 41,288 |
|
| Promissory notes & commercial paper | 502 | − | 502 | 2,107 |
| — |
| 112 |
| — |
| — |
| 187 |
| 299 |
| 2,406 |
|
| Other marketable debt securities | − | |
| Total Issues | 5,103 | 6,722 | 6,392 | 4,834 | 3,465 | 18,214 | 39,627 | 44,730 | 7,420 |
| 3,599 |
| 5,220 |
| 4,760 |
| 4,903 |
| 17,792 |
| 36,274 |
| 43,694 |
|
| Loans and other payables | 3,590 | 1,533 | 3,205 | 761 | 849 | 1,482 | 7,830 | 11,420 | 1,714 |
| 2,250 |
| 819 |
| 918 |
| 531 |
| 2,668 |
| 7,186 |
| 8,900 |
|
| Other financial liabilities (Note 16) | 401 | 152 | 347 | 477 | 357 | 1,898 | 3,231 | 3,632 | |
| TOTAL | 9,094 | 8,407 | 9,944 | 6,072 | 4,671 | 21,594 | 50,688 | 59,782 | |
| | |
| | |
| Derivative instruments (Note 16) | | 280 |
| 214 |
| 824 |
| 453 |
| 185 |
| 1,196 |
| 2,872 |
| 3,152 |
|
| Total | | 9,414 |
| 6,063 |
| 6,863 |
| 6,131 |
| 5,619 |
| 21,656 |
| 46,332 |
| 55,746 |
|
The estimate of future payments for interest on these financial liabilities at December 31, 20142017 is as follows: 2,215 million euros in 2015, 1,960 million euros in 2016, 1,671 million euros in 2017, 1,2791,715 million euros in 2018, 1,0771,525 million euros in 2019, 1,323 million euros in 2020, 1,068 million euros in 2021, 914 million euros in 2022 and 6,5867,037 million euros in years after 2019.2022. For floating rate financing, the Group mainly estimates future interest using the forward curve of the various currencies at December 31, 2014.2017.
The amounts shown in this tableDerivative instruments take into account the fair value of derivatives classified as financial liabilities (i.e., those with a negative mark-to-market) and excludeexcludes the fair value of derivatives classified as current financial assets for 813(845 million euros,euros), and those classified as non-current for 5,499(2,812 million euroseuros) (i.e., those with a positive mark-to-market).
Table of ContentsIn 2016 and 2017 the Group entered into agreements to extend payment terms with various suppliers, and with factoring companies when such payments are discounted. When the new extended payment terms exceed customary payment terms in the industry, trade liabilities are reclassified to other financial liabilities and the deferred payments made are recognized in net cash flow used in financing activities (see Note 20)
The composition of these financial liabilities, by category, at December 31, 20142017 and 20132016 is as follows:
| December 31, 2014 | |
| | | December 31, 2017 | | December 31, 2017 |
| | Fair value through profit or loss | | Measurement hierarchy | | Fair value through profit or loss | | Measurement hierarchy | |
| Millions of euros | Held for trading | Fair value option | Hedges | Level 1 (Quoted prices) | Level 2 (Other directly observable market inputs) | Level 3 (Inputs not based on observable market data) | Liabilities at amortized cost | Total carrying amount | Total fair value | Held for trading |
| Fair value option |
| Hedges |
| Level 1 (Quoted prices) |
| Level 2 (Other directly observable market inputs) |
| Level 3 (Inputs not based on observable market data) |
| Liabilities at amortized cost |
| Total carrying amount |
| Total fair value |
|
| Issues | − | 44,730 | 49,434 | — |
| — |
| — |
| — |
| — |
| — |
| 43,694 |
| 43,694 |
| 47,166 |
|
| Loans, other payables and other financial liabilities | 2,562 | − | 1,070 | 105 | 3,527 | − | 11,420 | 15,052 | 15,212 | |
| Loans and other payables | | — |
| — |
| — |
| — |
| — |
| — |
| 8,900 |
| 8,900 |
| 9,010 |
|
| Derivative instruments | | 1,180 |
| — |
| 1,972 |
| 80 |
| 3,072 |
| — |
| — |
| 3,152 |
| 3,152 |
|
| Total financial liabilities | 2,562 | − | 1,070 | 105 | 3,527 | − | 56,150 | 59,782 | 64,646 | 1,180 |
| — |
| 1,972 |
| 80 |
| 3,072 |
| — |
| 52,594 |
| 55,746 |
| 59,328 |
|
| | |
| December 31, 2013 |
| | Fair value through profit or loss | | Measurement hierarchy | | | |
| Millions of euros | Held for trading | Fair value option | Hedges | Level 1 (Quoted prices) | Level 2 (Other directly observable market inputs) | Level 3 (Inputs not based on observable market data) | Liabilities at amortized cost | Total carrying amount | Total fair value |
| Issues | − | − | − | − | − | − | 43,418 | 43,418 | 46,120 |
| Loans, other payables and other financial liabilities | 1,315 | − | 1,631 | 111 | 2,835 | − | 14,335 | 17,281 | 17,401 |
| Total financial liabilities | 1,315 | − | 1,631 | 111 | 2,835 | − | 57,753 | 60,699 | 63,521 |
| |
|
| | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| | Fair value through profit or loss | | Measurement hierarchy | | | |
| Millions of euros | Held for trading |
| Fair value option |
| Hedges |
| Level 1 (Quoted prices) |
| Level 2 (Other directly observable market inputs) |
| Level 3 (Inputs not based on observable market data) |
| Liabilities at amortized cost |
| Total carrying amount |
| Total fair value |
|
| Issues | — |
| — |
| — |
| — |
| — |
| — |
| 45,444 |
| 45,444 |
| 48,686 |
|
| Loans and other payables | — |
| — |
| — |
| — |
| — |
| — |
| 11,398 |
| 11,398 |
| 11,398 |
|
| Derivative instruments | 2,299 |
| — |
| 1,220 |
| 64 |
| 3,455 |
| — |
| — |
| 3,519 |
| 3,519 |
|
| Total financial liabilities | 2,299 |
| — |
| 1,220 |
| 64 |
| 3,455 |
| — |
| 56,842 |
| 60,361 |
| 63,603 |
|
The calculation of the fair values of the Telefónica Group’s debt instruments required an estimate, for each currency and subsidiary, of the credit spread curve using the prices of the Group’s bonds and credit derivatives.
At December 31, 2014,2017, some of the financing arranged by Telefónica Group companies in Latin America (Brazil, Colombia, ChilePanama, Ecuador and Panama),Guatemala) which amount to approximately 5%3% of the Telefónica Group’s gross debt was subject to compliance with certain financial covenants. To date, these covenants are being met. Due to the absence of cross-defaults, breach of the covenants would not affect the debt at a Telefónica, S.A. level.
Part of the amount owed by the Telefónica Group includes restatements to amortized cost at December 31, 20142017 and 20132016 as a result of fair value interest rate and exchange rate hedges.
a) IssuesFinancial liabilities associated to financing activities
The following movement presents the detail of changes in the financial liabilities in 2017 that arise from the financial activities:
|
| | | | | | | | | | | | | | |
| | Cash used in financing activities
| |
| Millions of euros | Balance at 12/31/16 |
| Acquisitions |
| Disposals |
| Translation differences
|
| Fair value adjustment and financial updates
|
| Others movements
|
| Balance at 12/31/17
|
|
| Issues | 42,084 |
| 8,390 |
| (6,687 | ) | (2,178 | ) | (296 | ) | (25 | ) | 41,288 |
|
| Promissory notes and commercial paper | 3,360 |
| 60 |
| (1,008 | ) | (6 | ) | — |
| — |
| 2,406 |
|
| Loans and other payables | 11,397 |
| 4,209 |
| (6,241 | ) | (699 | ) | (16 | ) | 250 |
| 8,900 |
|
| Net derivative instruments | (3,401 | ) | — |
| 396 |
| 87 |
| 3,075 |
| (662 | ) | (505 | ) |
| Total | 53,440 |
| 12,659 |
| (13,540 | ) | (2,796 | ) | 2,763 |
| (437 | ) | 52,089 |
|
The positive fair value of the Telefónica Group derivatives at December 31, 2017 amounted to 505 million euros (accounts receivable). The variation versus the previous year end represents a reduction of 2,896 million euros mainly due to the dollar devaluation against the euro. This variation is offset mainly by the variation of the different Telefónica Group issues and loans performed in dollars (see Note 16).
b) Issues
The movement in issues of debentures, bonds and other marketable debt securities in 20142017 and 20132016 is as follows:
| | | Millions of euros | Debenture and bond issues | Short-term promissory notes and commercial paper | Other non-Current Marketable debt securities | Total | Debenture and bond issues |
| Promissory notes and commercial paper |
| Total |
|
| Balance at 12/31/12 | 44,142 | 1,128 | 59 | 45,329 | |
| Balance at 12/31/15 | | 43,557 |
| 1,815 |
| 45,372 |
|
| New issues | 5,634 | 195 | − | 5,829 | 5,693 |
| 1,566 |
| 7,259 |
|
| Redemptions, conversions and exchanges | (5,667) | (45) | − | (5,712) | (6,873 | ) | (25 | ) | (6,898 | ) |
| Revaluation and other movements | (2,029) | 1 | − | (2,028) | (293 | ) | 4 |
| (289 | ) |
| Balance at 12/31/13 | 42,080 | 1,279 | 59 | 43,418 | |
| Balance at 12/31/16 | | 42,084 |
| 3,360 |
| 45,444 |
|
| New issues | 4,453 | 27 | − | 4,480 | 8,390 |
| 60 |
| 8,450 |
|
| Redemptions, conversions and exchanges | (5,057) | (805) | (59) | (5,921) | (6,687 | ) | (1,008 | ) | (7,695 | ) |
| Revaluation and other movements | 2,751 | 2 | − | 2,753 | (2,499 | ) | (6 | ) | (2,505 | ) |
| Balance at 12/31/14 | 44,228 | 502 | − | 44,730 | |
| | |
| Balance at 12/31/17 | | 41,288 |
| 2,406 |
| 43,694 |
|
Debentures and bonds
At December 31, 2014,2017, the nominal amount of outstanding debentures and bonds issues was 42,083is 39,581 million euros (41,036(40,055 million euros at December 31, 2013)2016). Appendix III presents the characteristics of all outstanding debentures and bond issues at year-end 2014,2017, as well as the significant issues made in the year.
On July, 24, 2017 there was the maturity date of the mandatory exchangeable bonds into ordinary shares of Telecom Italia, S.p.A., issued by Telefónica, S.A. on July 24, 2014, for 750 million euros. At the maturity date, the Company fulfilled its commitments to deliver the shares with the vesting of the equity swap instrument arranged for that purpose.
Telefónica, S.A. has a full and unconditional guarantee on issues made by Telefónica Emisiones, S.A.U., Telefónica Finanzas México, S.A. de C.V., Telefónica Europe, B.V. and Telefónica Participaciones, S.A.U., all of which are, directly or indirectly, wholly-ownedfully-owned subsidiaries of Telefónica, S.A.
Short-term promissoryPromissory notes and commercial paper
The main programs for issuance of promissory notes and commercial paper are the following:
At December 31, 2017, Telefónica Europe, B.V. had a program for issuance of commercial paper, guaranteed by Telefónica, S.A., for up to 5,000 million euros. The outstanding balance of commercial paper issued under this program at December 31, 2017 was 1,850 million euros, issued at an average interest rate of -0.17% for 2017 (2,630 million euros issued in 2016 at an average rate of -0.01%).
| · | At December 31, 2014, Telefónica Europe, B.V., had a program for issuance of commercial paper, guaranteed by Telefónica, S.A., for up to 3,000 million euros. The outstanding balance of commercial paper issued under this program at December 31, 2014 was 496 million euros, issued at an average interest rate of 0.36% for 2014 (920 million euros issued in 2013 at an average rate of 0.42%)At December 31, 2017, Telefónica, S.A. had a corporate promissory note program for 500 million euros, which can be increased to 2,000 million euros, with an outstanding balance at December 31, 2017 amounting to 204 million euros (370 million euros in 2016). |
| · | At December 31, 2014, Telefónica, S.A. had a corporate promissory note program for 500 million euros, which can be increased to 2,000 million euros, with an outstanding balance at that date of 6 million euros (359 million euros in 2013). |
Other long-term marketable debt securities
On October 31, 2012, an offer to purchase the preferred securities of Telefónica Finance USA, LLC. was launched. Holders accepting such offer would receive, concurrently and in connection with, Telefónica’s ordinary shares and they would subscribe new debt securities of Telefónica. As a result of this offer, on November 29, 2012, the Group purchased 1,941,235 preferred securities (representing 97.06% of total). On June 30, 2014, the remaining 58,765 preferred securities were fully redeemed at face value of 1,000 euros. There were no outstanding preferred securities after this redemption.
b)c) Interest-bearing debt
The average interest rate on outstanding loans and other payables at December 31, 20142017 was 2.88% (3.43%2.01% (3.84% in 2013)2016). This percentage does not include the impact of hedges arranged by the Group.
The main financing transactions included under “Interest-bearing debt” outstanding at December 31, 20142017 and 20132016 and their nominal amounts are provided in Appendix V.
Interest-bearing debt arranged or repaid in 20142017 mainly includes the following:
|
| | | | | | | | | | | |
| Description | Limit 12/31/2017 (million euros) | Currency | Outstanding balance 12/31/2017 (million euros) | Arrangement date | Maturity date | Drawndown 2017 (million euros) | Repayment 2017 (million euros) |
| Telefónica, S.A. | |
| | |
| | | |
| |
|
| Syndicated facility | 2,500 |
| EUR | — |
| 02/19/2015 | 02/19/2022 | — |
| (550 | ) |
Syndicated facility (1) | — |
| EUR | — |
| 11/17/2015 | 03/30/2017 | — |
| — |
|
Structured financing (*)
| 679 |
| USD | 566 |
| 12/11/2015 | 03/11/2026 | 329 |
| (48 | ) |
Structured financing (*) | 469 |
| EUR | 423 |
| 12/11/2015 | 03/11/2026 | 217 |
| (34 | ) |
Structured financing (2)(*) | — |
| EUR | — |
| 06/13/2014 | 12/15/2017 |
|
| (185 | ) |
Bilateral loan (3) | — |
| EUR | — |
| 02/23/2016 | 02/23/2017 | — |
| (100 | ) |
Bilateral loan (4) | — |
| EUR | — |
| 11/13/2015 | 05/16/2017 | — |
| (100 | ) |
Bilateral loan (5) | 1,500 |
| EUR | 1,500 |
| 06/26/2014 | 06/26/2019 | — |
| — |
|
Bilateral loan (6) | — |
| EUR |
|
| 06/30/2015 | 12/29/2017 | — |
| (200 | ) |
Bilateral loan (7) | 150 |
| EUR | 150 |
| 10/24/2016 | 03/19/2019 | — |
| (150 | ) |
| Credit facility | 380 |
| EUR | 292 |
| 12/27/2002 | 12/27/2020 | 292 |
| — |
|
| Credit facility | 200 |
| EUR | 167 |
| 03/27/2013 | 03/14/2020 | 167 |
| — |
|
| Telefónica Germany GmbH & Co. OHG |
|
|
|
|
|
|
|
|
|
|
|
Syndicated facility (8) | 750 |
| EUR | — |
| 03/22/2016 | 03/22/2022 | 650 |
| (700 | ) |
| EIB Financing | — |
| EUR | 450 |
| 06/13/2016 | 06/13/2025 | 200 |
| — |
|
| Telefónica Europe, B.V. |
|
|
|
|
|
|
|
|
|
|
|
Structured financing (*) | 750 |
| EUR | 750 |
| 11/28/2016 | 11/28/2024 | 750 |
| — |
|
| · |
| (1) | On February 7, 2014, Telefónica, S.A. madeMarch 30, 2017 an early repaymentcancellation was made for 923the 1,500 million euros of its syndicated loan (Tranche D2) dated March 2, 2012 andfacility originally scheduled to mature on December 14, 2015.in 2019. |
| · |
| (2) | On February 7, 2014, Telefónica Europe, B.V. madeDecember 15, 2017 an early repayment was made for 801 million euros of its syndicated loan (Tranche D1) dated March 2, 2012 andthe long-term financing originally scheduled to mature on December 14, 2015. This financing was guaranteed by Telefónica, S.A.in 2019. |
| · |
| (3) | On February 18, 2014, Telefónica, S.A. signed a 3,000 million euros syndicated revolving credit facility maturing on February 18, 2019. This agreement entered into effect on February 25, 2014 cancelling23, 2017 an early cancellation was made for the 3,000 million euros syndicated credit facility (Tranche B) signed on July 28, 2010 (originallybilateral loan originally scheduled to mature in 2015). At December 31, 2014 there2019. |
| |
| (4) | On May 16, 2017 an early cancellation was nomade for the bilateral loan originally scheduled to mature in 2020. |
| |
| (5) | On January 17, 2017 an amendment was made to the bilateral loan, with an outstanding amount under this facility.of 1,500 million euros, split into two tranches with a new amortization schedule: tranche A for 500 million euros maturing on June 26, 2017 and tranche B for 1,000 million euros maturing on June 26, 2019. Later, on February 17, 2017 a new amendment was signed extending the maturity of the tranche A for 500 million euros up to June 26, 2019. |
| · |
| (6) | On June 26, 2014, Telefónica, S.A. signed a 2,000December 29, 2017 an early repayment was made for the 200 million euros bilateral loan maturing on June 26, 2017. At the same date it was fully disbursed. |
| · | On August 28, 2014, Telefónica Europe, B.V. cancelled 356 million US dollars (293 million euros) of the limit of its bilateral loan on supplies of 1,200 million US dollars (988 million euros) with an outstanding balance at December 31, 2014 that amounted to 844 million US dollars (695 million euros). |
| · | During 2014, Telefónica, S.A., made an early repayment for 1,672 million euros of its syndicated loan, Tranche A3, dated July 28, 2010 and originally scheduled to mature on July 28, 2016. As ofin 2020. |
| |
| (7) | On December 31, 2014 the outstanding balance of this financing19, 2017 an early repayment was 328made for 150 million euros (2,000of the 300 million euros in 2013). |
| · | During 2014, Telefónica, S.A. repaid in full its syndicatedbilateral loan (Tranche A2) of 2,000 million euros dated July 28, 2010 and originally scheduled to mature on July 28, 2014. Atin 2019.
|
| |
| (8) | On February 17, 2017 a twelve-month extension was signed for the same time, its forward start facilities (Tranche A2A and A2B) dated February 22, 2013 and available as of July 28, 2014 were fully canceled.750 million euros syndicated facility originally scheduled to mature in 2021. |
| · | During 2014, Telefónica, S.A. drew down an aggregate principal amount of 310 million US dollars (255 million euros) of its bilateral loan on supplies of 1,001 million US dollars (825 million euros); the outstanding balance at December 31, 2014 amounted to 694 million US dollars (571 million euros). |
(*) Facility with amortization schedule showing in the column "Limit 12/31/2017" the undrawn amount.
At December 31, 2014,2017, the Telefónica Group presented availabilities of financing from different sources amounting approximately to 11,54513,531 million euros (13,197(14,627 million euros at December 31, 2013).
2016), of which 12,541 million euros maturing in more than twelve months.
Loans by currency
The breakdown of “Loans and other payables” by currency at December 31, 20142017 and 2013,2016, along with the equivalent value of foreign-currency loans in euros, is as follows:
| | | | Outstanding balance (in millions) | Outstanding balance (in millions) |
| | Currency | Euros | Currency | Euros |
| Currency | 12/31/14 | 12/31/13 | 12/31/14 | 12/31/13 | 12/31/17 |
| 12/31/16 |
| 12/31/17 |
| 12/31/16 |
|
| Euro | 5,077 | 7,918 | 5,077 | 7,918 | 4,682 |
| 5,174 |
| 4,682 |
| 5,174 |
|
| US dollar | 3,683 | 3,622 | 3,033 | 2,626 | 2,936 |
| 2,812 |
| 2,448 |
| 2,668 |
|
| Brazilian Real | 3,010 | 3,667 | 933 | 1,135 | 3,939 |
| 4,744 |
| 993 |
| 1,381 |
|
| Colombian Peso | 5,592,388 | 5,377,545 | 1,925 | 2,024 | 1,398,550 |
| 5,473,409 |
| 391 |
| 1,731 |
|
| Pounds Sterling | 140 | 189 | 180 | 227 | 106 |
| 109 |
| 120 |
| 127 |
|
Peruvian nuevo sol
| | 462 |
| 527 |
| 119 |
| 149 |
|
| Other currencies | | 272 | 405 |
| 147 |
| 168 |
|
| Total Group | | 11,420 | 14,335 |
| 8,900 |
| 11,398 |
|
The decrease in debt denominated in Colombian peso is mainly due to the pre-paid of all the debt with the PARAPAT (see Note 22).
Note 14. Trade and other payables
The composition of “Trade and other payables” is as follows:
| | | Millions of euros | 12/31/2014 | 12/31/2013 | 12/31/2017 | 12/31/2016 |
| | Non-current | Current | Non-current | Current | Non-current |
| Current |
| Non-current |
| Current |
|
| Trade payables | − | 8,770 | − | 8,144 | 86 |
| 7,943 |
| 80 |
| 8,043 |
|
| Payables to suppliers of property, plant and equipment | | 5 |
| 3,580 |
| 9 |
| 3,816 |
|
| Debt for spectrum acquisition | | 569 |
| 172 |
| 608 |
| 504 |
|
| Other payables | 1,500 | 6,008 | 1,324 | 5,146 | 253 |
| 1,522 |
| 325 |
| 1,721 |
|
| Deferred revenue | 877 | 1,441 | 377 | 1,353 | 774 |
| 1,387 |
| 903 |
| 1,569 |
|
Payable to associates and joint ventures (Note 9) | − | 724 | − | 578 | — |
| 491 |
| — |
| 497 |
|
| Total | 2,377 | 16,943 | 1,701 | 15,221 | 1,687 |
| 15,095 |
| 1,925 |
| 16,150 |
|
| | |
“Deferred revenue” principally includes the amount of deferred revenue from sales of prepaid cards, from handsets transferred to the distributor, rights of use on the cable network, activation fees not yet recognized in the income statement and loyalty campaigns.
In addition, grants are included amounting to 87 million euros at December 31, 2017 (110 million euros at December 31, 2016).
At December 31, 2014, non-current “Other payables” comprise2017, “Debt for spectrum acquisition” comprises the deferred portion of the payment for acquiring the spectrum use license in Mexico in 2010, for an equivalent of 849598 million euros (856(654 million euros at December 31, 2013)2016), and the deferred portion of the payment for the refarming of the radioelectric spectrum acquired in 2014 by Telefónica Brasil,Brazil, amounting to 237an equivalent of 65 million euros (see(288 million euros at December 31, 2016, see Appendix VII)VI).
The short term payables in Mexico and Brazil for the concepts previously mentioned, at December 31, 2017, amounted to 72 and 36 million euros, respectively (73 and 261 million euros, respectively at December 31, 2016).
Payments for financed licenses for the years 2017 and 2016 amounted to 329 and 198 million euros, respectively (see Note 20).
The detail of current “Other payables” at December 31, 20142017 and 20132016 is as follows:
| | | Millions of euros | Balance at 12/31/2014 | Balance at 12/31/2013 | 12/31/2017 |
| 12/31/2016 |
|
| Dividends pending payment to non-controlling interests | 231 | 228 | 235 |
| 257 |
|
| Payables to suppliers of property, plant and equipment | 3,890 | 3,248 | |
| Short term debt for spectrum acquisition | 272 | 211 | |
| Accrued employee benefits | 821 | 745 | 696 |
| 774 |
|
| Advances received on orders | 216 | 126 | 172 |
| 189 |
|
| Other non-financial non-trade payables | 578 | 588 | 419 |
| 501 |
|
| Total | 6,008 | 5,146 | 1,522 |
| 1,721 |
|
| | |
“Other non-financial non-trade payables” at December 31, 2017 included the pending payment of 145 million euros corresponding to Telefónica, S.A.’s irrevocable commitment acquired in 2015 to pay a 325 million euros donation to Fundación Telefónica (see Note 18) to provide this entity with the financing required to implement the social programs and activities it currently performs or could initiate in the short and mid term to fulfill its purpose as a foundation.
Information on average payment period to supplierssuppliers. Third additional provision, “Information requirement” of Law 15/2010 of July 5.
In accordance with the aforementioned Law, the following information corresponding to the Spanish companies of the Telefónica Group is disclosed:
|
| | | | |
| | 2017 |
| 2016 |
|
| Number of days | | |
| Weighted average maturity period | 53 |
| 45 |
|
| Ratio of payments | 54 |
| 45 |
|
| Ratio of outstanding invoices | 41 |
| 42 |
|
| Million of euros | | |
| Total payments | 6,703 |
| 6,727 |
|
| Outstanding invoices | 847 |
| 651 |
|
The Telefónica Group’s Spanish companies have adapted their internal processes and payment schedules to the provisions of Law 15/2010 (amended by Law 31/2014) and Royal Decree-Law 4/2013, amending Law 3/2004, which establishes measures against late payment in commercial transactions. Engagement conditions with commercial suppliers in 20142017 included payment periods of up to 60 days, according to the terms agreed between the parties.
For efficiency purposes and in line with general business practice, the Telefónica Group’s companies in Spain have agreed payment schedules with suppliers, whereby most of the payments are made on set days of each month. Invoices falling due between two payment days are settled on the following payment date in the schedule.
Payments to Spanish suppliers in 2014 and 20132017 surpassing the established legal limit were the result of circumstances or incidents beyond the payment policies, mainly the delay in issuing invoices (legal obligation of the supplier), the closing of agreements with suppliers over the delivery of goods or the rendering of services, or occasional processing issues.
Information of payments to commercial suppliers that exceed the maximum period established in the Spanish Law is as follows:
| | 2014 | 2013 |
| Millions of euros | Amount | % | Amount | % |
| Payments within allowable period | 5,408 | 95.0 | 5,897 | 94.0 |
| Other | 277 | 5.0 | 375 | 6.0 |
| Total payments to commercial suppliers | 5,685 | 100.0 | 6,272 | 100.0 |
| Weighted average days past due | 28 | | 35 | |
Deferrals at year-end that exceed the limit (*) | 11 | | 17 | |
(*) At the date of authorization for issue of these consolidated financial statements, the Group had made the outstanding payments, except in exceptional cases where an agreement with suppliers was being negotiated.
According to such criteria, theThe average payment period to suppliers of the Telefónica Group’s companies in Spain in 2014, according to our best estimates,2017, calculated in accordance with the only additional provision of the Resolution of the Instituto de Contabilidad y Auditoría de Cuentas (Spanish Accounting and Audit Institute) dated January 29, 2016, amounted to 51 days.
53 days (45 days in 2016).
Note 15. Provisions
The amounts of provisions in 20142017 and 20132016 are as follows:
| | | | 12/31/2014 | 12/31/2013 | 12/31/2017 | 12/31/2016 |
| Millions of euros | Current | Non-current | Total | Current | Non-current | Total | Current |
| Non-current |
| Total |
| Current |
| Non-current |
| Total |
|
| Employee benefits | 1,021 | 3,426 | 4,447 | 763 | 3,722 | 4,485 | 912 |
| 5,666 |
| 6,578 |
| 1,002 |
| 6,147 |
| 7,149 |
|
| Termination plans | 956 | 2,430 | 3,386 | 703 | 2,762 | 3,465 | 515 |
| 1,282 |
| 1,797 |
| 709 |
| 1,685 |
| 2,394 |
|
| Post-employment defined benefit plans | − | 872 | − | 799 | 9 |
| 1,030 |
| 1,039 |
| 3 |
| 935 |
| 938 |
|
| Other benefits | 65 | 124 | 189 | 60 | 161 | 221 | 388 |
| 3,354 |
| 3,742 |
| 290 |
| 3,527 |
| 3,817 |
|
| Other provisions | 574 | 3,254 | 3,828 | 508 | 2,578 | 3,086 | 1,304 |
| 3,552 |
| 4,856 |
| 1,218 |
| 3,726 |
| 4,944 |
|
| Total | 1,595 | 6,680 | 8,275 | 1,271 | 6,300 | 7,571 | 2,216 |
| 9,218 |
| 11,434 |
| 2,220 |
| 9,873 |
| 12,093 |
|
| | |
a) Employee benefits
TheIn 2017 the Group maderecorded a provision in 2014 amounting to 652the amount of 340 million euros (1,380 million euros in 2016) in order to increase the efficiency for employee restructuring coststhe future representing a further step towards the initiatives focusing on the simplification and other non-recurring costs, withtransformation of Telefónica. Of this amount, 165 million euros correspond to Teléfonica España, mainly relating to the aim of enchanting the Company’s future efficiency (adjusting the structure to reduce complexityTelefónica de España, S.A.U., Telefónica Móviles España, S.A.U. and gain agilityTelefónica Soluciones de Informática y Comunicaciones de España, S.A.U. Individual Suspension Plan described in execution)“Other benefits” (837 million euros in 2016).
The movement in provisions for post-employment plans in 20142017 and 20132016 is as follows:
|
| | |
| Millions of euros | Total |
|
Provisions for post-employment plans at 12/31/1215 | 4,1512,583 |
|
| Additions | 68571 |
|
| Retirements/amount applied | (688)(822 | ) |
| Transfers | (4)35 |
|
| Translation differences and accretion | (62)27 |
|
Provisions for post-employment plans at 12/31/1316 | 3,4652,394 |
|
| Additions | 525179 |
|
| Retirements/amount applied | (733)(759 | ) |
| Transfers | (14) |
Inclusion of companies(8 | 12) |
| Translation differences and accretion | 131(9 | ) |
Provisions for post-employment plans at 12/31/1417 | 3,386 |
| 1,797 |
|
Telefónica Germany
Within the context of transformation of Telefónica Deutschland following the purchase of E-Plus (see Note 5) in a bid to increase profitability by securing operational synergies, an employee restructuring plan is being carried out in respect of which a provision of 321 million euros was recorded in 2014. The plan is expected to reduce 1,600 of the approximately 9,100 current full-time positions of Telefonica Deutschland in the period from 2015-2018.
Telefónica Spain
In the last few years, the Telefónica Group carried out early retirement plans in order to adapt its cost structure to the prevailing environment in the markets where it operates, making certain strategic decisions relating to its size and organization.
Concerning the 2003-2007 labor force reduction plan in Telefónica de España, concluded with 13,870 employees taking part, provisions recorded at December 31, 20142017 and 20132016 amounted to 45483 and 701152 million euros, respectively.
The amount for this provision classified as current totaled 37 million euros at December 31, 2017.
Concerning the 2011-2013 labor force reduction plan in Telefónica de España, concluded with 6,830 employees taking part, provisions recorded at December 31, 20142017 and 20132016 amounted to 2,0971,061 and 2,3661,353 million euros, respectively.
The amount for this provision classified as current totaled 301 million euros at December 31, 2017.
The companies bound by these commitments calculated provisions required at 20142017 and 20132016 year-end using actuarial assumptions pursuant to current legislation, including the PERM/F- 2000 C2000C mortality tables and a high quality credit market based interest rate.
The discount rate used for these provisions at December 31, 2014,2017, was 0.97%0.53%, with an average length of the plans of 3.92.1 years.
Telefónica Germany
Within the context of transformation of Telefónica Deutschland following the purchase of E-Plus in a bid to increase profitability by securing operational synergies, a provision for employee restructuring was made in 2014 amounting to 321 million euros. In 2017 an additional provision was made amounting to 44 million euros (additional 46 million euros in 2016).
This provision amounted to 65 million euros at December 31, 2017 (100 million euros at December 31, 2016).
Telefónica, S.A.
With respect to the simplification and transformation process of the Telefónica Group, Telefónica, S.A. launched in 2015 a voluntary termination plan for the employees who met the requirements defined by the Plan regarding age and seniority in the Company, among others. Following this transformation and simplification framework, the Company has, on the one hand, extended the plan termination until 2018 and on the other hand, set up in December 2016 a new voluntary programme aimed at some employees who met certain requirements related to seniority in the Company. In 2017 a similar programme has been launched. The provision for this concept at December 31, 2017 totals 159 million euros (184 million euros in 2016).
Post-employment defined benefit plans
The Group has a number of defined-benefit plans in the countries where it operates. The following tables present the main data of these plans:
| 12/31/2014 |
| Millions of euros | Spain | United Kingdom | Germany | Brazil | Hispano américa | Others | Total |
| Obligation | 593 | 1,529 | 201 | 239 | 37 | 11 | 2,610 |
| Assets | − | (1,567) | (112) | (145) | − | (11) | (1,835) |
| Net provision before asset ceiling | 593 | (38) | 89 | 94 | 37 | − | 775 |
| Asset ceiling | − | − | − | 42 | − | 3 | 45 |
| Net provision | 593 | 9 | 89 | 141 | 37 | 3 | 872 |
| Net assets | − | 47 | − | 5 | − | − | 52 |
| |
| 12/31/2013 | |
| | | 12/31/2017 | | 12/31/2017 |
| Millions of euros | Spain | United Kingdom | Germany | Brazil | Hispano américa | Others | Total | Spain |
| United Kingdom |
| Germany |
| Brazil |
| Hispano- américa |
| Others |
| Total |
|
| Obligation | 567 | 1,251 | 93 | 211 | 93 | 9 | 2,224 | 490 |
| 1,828 |
| 235 |
| 734 |
| 80 |
| 16 |
| 3,383 |
|
| Assets | − | (1,236) | (91) | (146) | − | (6) | (1,479) | — |
| (1,651 | ) | (84 | ) | (835 | ) | — |
| (9 | ) | (2,579 | ) |
| Net provision before asset ceiling | 567 | 15 | 2 | 65 | 93 | 3 | 745 | 490 |
| 177 |
| 151 |
| (101 | ) | 80 |
| 7 |
| 804 |
|
| Asset ceiling | − | 3 | 45 | − | 48 | — |
| — |
| — |
| 232 |
| — |
| — |
| 232 |
|
| Net provision | 567 | 15 | 5 | 116 | 93 | 3 | 799 | 490 |
| 177 |
| 151 |
| 134 |
| 80 |
| 7 |
| 1,039 |
|
| Net assets | − | 6 | − | 6 | — |
| — |
| — |
| 3 |
| — |
| — |
| 3 |
|
| | | |
F-58 |
| | | | | | | | | | | | | | |
| 12/31/2016 |
| Millions of euros | Spain |
| United Kingdom |
| Germany |
| Brazil |
| Hispano- américa |
| Others |
| Total |
|
| Obligation | 533 |
| 1,834 |
| 233 |
| 737 |
| 25 |
| 16 |
| 3,378 |
|
| Assets | — |
| (1,662 | ) | (128 | ) | (982 | ) | — |
| (8 | ) | (2,780 | ) |
| Net provision before asset ceiling | 533 |
| 172 |
| 105 |
| (245 | ) | 25 |
| 8 |
| 598 |
|
| Asset ceiling | — |
| — |
| — |
| 337 |
| — |
| — |
| 337 |
|
| Net provision | 533 |
| 172 |
| 105 |
| 95 |
| 25 |
| 8 |
| 938 |
|
| Net assets | — |
| — |
| — |
| 3 |
| — |
| — |
| 3 |
|
The movement in the present value of obligations in 20142017 and 20132016 is as follows:
| | | Millions of euros | Spain | United Kingdom | Germany | Brazil | Hispano américa | Other | Total | Spain |
| United Kingdom |
| Germany |
| Brazil |
| Hispano- américa |
| Other |
| Total |
|
| Present value of obligation at 12/31/12 | 654 | 1,139 | 81 | 298 | 76 | 9 | 2,257 | |
| Present value of obligation at 12/31/15 | | 552 |
| 1,613 |
| 198 |
| 449 |
| 31 |
| 15 |
| 2,858 |
|
| Translation differences | − | (21) | − | (43) | (39) | − | (103) | — |
| (251 | ) | — |
| 125 |
| (9 | ) | — |
| (135 | ) |
| Current service cost | 2 | 4 | 3 | 44 | − | 56 | 7 |
| — |
| 6 |
| 1 |
| 7 |
| — |
| 21 |
|
| Past service cost | − | (4) | − | (4) | |
| Interest cost | 12 | 49 | 3 | 24 | 6 | − | 94 | 8 |
| 54 |
| 5 |
| 59 |
| 4 |
| 1 |
| 131 |
|
| Actuarial losses and gains | (49) | 106 | 7 | (58) | 22 | − | 28 | 17 |
| 444 |
| 31 |
| 149 |
| 2 |
| — |
| 643 |
|
| Benefits paid | (52) | (22) | (1) | (13) | (16) | − | (104) | (51 | ) | (26 | ) | (3 | ) | (46 | ) | (3 | ) | — |
| (129 | ) |
| Present value of obligation at 12/31/13 | 567 | 1,251 | 93 | 211 | 93 | 9 | 2,224 | |
| Other movements | | — |
| — |
| (4 | ) | — |
| (7 | ) | — |
| (11 | ) |
| Present value of obligation at 12/31/16 | | 533 |
| 1,834 |
| 233 |
| 737 |
| 25 |
| 16 |
| 3,378 |
|
| Translation differences | − | 95 | − | (1) | (68) | 1 | 27 | — |
| (67 | ) | — |
| (109 | ) | (15 | ) | (2 | ) | (193 | ) |
| Current service cost | 3 | − | 4 | 1 | 11 | − | 19 | 6 |
| — |
| 9 |
| 3 |
| 2 |
| 1 |
| 21 |
|
| Interest cost | 15 | 58 | 4 | 23 | 2 | − | 102 | 6 |
| 46 |
| 4 |
| 73 |
| 6 |
| 1 |
| 136 |
|
| Actuarial losses and gains | 59 | 147 | 47 | 19 | 4 | 1 | 277 | (9 | ) | 60 |
| (8 | ) | 85 |
| 8 |
| — |
| 136 |
|
| Benefits paid | (51) | (22) | (2) | (14) | (5) | − | (94) | (46 | ) | (46 | ) | (3 | ) | (55 | ) | (3 | ) | (1 | ) | (154 | ) |
| Inclusion of companies | − | 55 | − | 55 | — |
| — |
| — |
| — |
| 61 |
| — |
| 61 |
|
| Present value of obligation at 12/31/14 | 593 | 1,529 | 201 | 239 | 37 | 11 | 2,610 | |
| | | |
| Other movements | | — |
| 1 |
| — |
| — |
| (4 | ) | 1 |
| (2 | ) |
| Present value of obligation at 12/31/17 | | 490 |
| 1,828 |
| 235 |
| 734 |
| 80 |
| 16 |
| 3,383 |
|
Movements in the fair value of plan assets in 20142017 and 20132016 are as follows:
| | | Millions of euros | United Kingdom | Germany | Brazil | Other | Total | United Kingdom |
| Germany |
| Brazil |
| Other |
| Total |
|
| Fair value of plan assets at 12/31/12 | 1,191 | 76 | 225 | 6 | 1,498 | |
| Fair value of plan assets at 12/31/15 | | 1,753 |
| 122 |
| 637 |
| 10 |
| 2,522 |
|
| Translation differences | (27) | − | (32) | − | (59) | (256 | ) | — |
| 171 |
| — |
| (85 | ) |
| Expected return on plan assets | 54 | 2 | 18 | − | 74 | |
| Interest income | | 59 |
| 3 |
| 86 |
| 1 |
| 149 |
|
| Actuarial losses and gains | (19) | − | (57) | − | (76) | 134 |
| (2 | ) | 132 |
| — |
| 264 |
|
| Company contributions | 59 | 14 | 3 | − | 76 | — |
| 9 |
| 1 |
| — |
| 10 |
|
| Benefits paid | (22) | (1) | (11) | − | (34) | (26 | ) | (2 | ) | (45 | ) | — |
| (73 | ) |
| Fair value of plan assets at 12/31/13 | 1,236 | 91 | 146 | 6 | 1,479 | |
| Other movements | | (2 | ) | (2 | ) | — |
| (3 | ) | (7 | ) |
| Fair value of plan assets at 12/31/16 | | 1,662 |
| 128 |
| 982 |
| 8 |
| 2,780 |
|
| Translation differences | 95 | − | 2 | 97 | (61 | ) | — |
| (130 | ) | (1 | ) | (192 | ) |
| Expected return on plan assets | 59 | 4 | 17 | 1 | 81 | |
| Interest income | | 42 |
| 2 |
| 99 |
| 1 |
| 144 |
|
| Actuarial losses and gains | 118 | (1) | (6) | 1 | 112 | 55 |
| — |
| (64 | ) | — |
| (9 | ) |
| Company contributions | 81 | 9 | − | 1 | 91 | — |
| 6 |
| 1 |
| 1 |
| 8 |
|
| Benefits paid | (22) | (2) | (12) | − | (36) | (46 | ) | (2 | ) | (52 | ) | (1 | ) | (101 | ) |
| Inclusion of companies | − | 11 | − | 11 | |
| Fair value of plan assets at 12/31/14 | 1,567 | 112 | 145 | 11 | 1,835 | |
| | |
| Other movements | | (1 | ) | (50 | ) | (1 | ) | 1 |
| (51 | ) |
| Fair value of plan assets at 12/31/17 | | 1,651 |
| 84 |
| 835 |
| 9 |
| 2,579 |
|
The amount"Other movements" of Telefónica Germany in “Inclusion of companies” corresponds2017 relate to the post-employment defined benefitreclassification of long-term financial assets that do not qualify as plan of E-Plus employeesassets under IAS 19 amounting to 50 million euros (see Note 5)13).
The Group’s principal defined-benefit plans are:
a) ITP (Spain)
Telefónica Spain reached an agreement with its employees whereby it recognized supplementary pension payments for employees who had retired as of June 30, 1992, equal to the difference between the pension payable by the social security system and that which would be paid to them by ITP (Institución Telefónica de Previsión). Once the aforementioned supplementary pension payments had been quantified, they became fixed, lifelong and non-updateable and 60% of the payments are transferable to the surviving spouse, recognized as such as of June 30, 1992, and to underage children.
The amount for this provision totaled 326233 million euros at December 31, 2014 (3342017 (265 million euros at December 31, 2013)2016).
b)Survival (Spain)
Serving employees who did not join the defined pension plan are still entitled to receive survivorship benefits at the age of 65.
The amount for this provision totaled 267257 million euros at December 31, 2014 (2332017 (268 million euros at December 31, 2013)2016).
As detailed in Note 13, the Group has long-term financial assets to cover the obligations of these two defined benefit plans.
The discount rate used for these provisions at December 31, 2014, was 1.49%, with an average length of the plans of 10is 8 years.
The main actuarial assumptions used in valuing these plans are as follows:
| Survival | ITP |
| 12/31/2014 | 12/31/2013 | 12/31/2014 | 12/31/2013 |
Discount rate | 0.494%-2.011% | 0.683%-3.286% | 0.494%-2.011% | 0.683%-3.286% |
Expected rate of salary increase | 0% - 0.5% | 0.00% | − | − |
Mortality tables | PERM/F-2000C - OM77 | PERM/F-2000C - OM77 | 90% PERM 2000C/98% PERF 2000 C | 90% PERM 2000C/98% PERF 2000 C |
|
| | | | | | | | |
| | Survival | ITP |
| | 12/31/2017 |
| 12/31/2016 |
| 12/31/2017 |
| 12/31/2016 |
|
| Discount rate | 1.45 | % | 1.26 | % | 1.37 | % | 1.16 | % |
| Expected rate of salary increase | 0%-0.5% |
| 0% - 0.5% |
| − |
| − |
|
| Mortality tables | PERM/F 2000P OM77 |
| PERM/F-2000P OM77 |
| 90%PERM 2000C/98% PERF 2000C |
| 90% PERM 2000C/98% PERF 2000 C |
|
The table below shows the sensitivity of the value of termination, post-employment and post-employmentother obligations, among which is included the Individual Suspension Plan, of Telefónica Group companies in Spain to changes in the discount rate:
-100 b.p. | +100 b.p. | |
| | | -100 b.p. | | -100 b.p. | +100 b.p. |
| Impact on value | Impact on income statement | Impact on value | Impact on income statement |
| Impact on income statement |
| Impact on value |
| Impact on income statement |
|
| -146 | -94 | 134 | 89 | |
| Variations of less than -100bp are considered for terms of less than five years to prevent negative rates. | |
| | |
| (270 | | ) | (230 | ) | 248 |
| 213 |
|
A 100 b.p. increase in the discount rate would reduce the value of the liabilities by 134248 million euros and have a positive impact on income statement of 89213 million euros before tax. However,On the other hand, a 100 b.p. decrease in the discount rate would increase the value of the liabilities by 146270 million euros and have a negative impact on income statement of 94230 million euros before tax.
The Telefónica Group actively manages this position and has arranged a derivatives portfolio to minimizesignificantly reduce the impact of changes in the discount rate (see Note 16).
Telefónica UKUnited Kingdom Pension Plan
The Telefónica UKUnited Kingdom Pension Plan provides pension benefits to the various companies of the Telefónica Group in UKUnited Kingdom coming from the O2 Group. The Plan is comprised of defined contribution and defined benefit sections. The defined
benefit sections were closed to future accrual with effect from February 28, 2013. The companies continued to provide retirement benefits through the defined contribution sections of the Plan.
The number of beneficiaries of these plans at December 31, 20142017 and 20132016 are 4,5634,491 and 4,5724,532 respectively. At December 31, 2014,2017, the weighted average duration of the Plan was 23 years.
The main actuarial assumptions used in valuing the Plan are as follows:
F-61 |
| | | | |
| | 12/31/2017 |
| 12/31/2016 |
|
| Nominal rate of pension payment increase | 3.15 | % | 3.15 | % |
| Discount rate | 2.45 | % | 2.60 | % |
| Expected inflation | 3.30 | % | 3.35 | % |
| Mortality tables | 95% S2NA, |
| 95% S2NA, |
|
| CMI 2016 1% 7.5 |
| CMI 2015 1% |
|
| | 12/31/2014 | 12/31/2013 |
| Nominal rate of pension payment increase | 3.05% | 3.25% |
| Discount rate | 3.70% | 4.50% |
| Expected inflation | 3.20% | 3.40% |
| Mortality tables | 95% S2NA, CMI 2014 1% | S1NA_L, CMI 2013 1% |
the obligation in 2016 was mainly a result of the decrease of the rate used to discount it, decisively affected by the fall in interest rates. The methodology used to calculate the discount rate was the same as that of the prior year.
Fair value of Plan assets is as follows:
| | | Millions of euros | 12/31/2014 | 12/31/2013 | 12/31/2017 |
| 12/31/2016 |
|
| Shares | 328 | 259 | — |
| 357 |
|
| Bonds | 1,205 | 977 | 1,651 |
| 1,306 |
|
| Cash equivalents | 34 | - | — |
| (1 | ) |
| Total | 1,567 | 1,236 | 1,651 |
| 1,662 |
|
At December 31, 2014,2017, reasonably possible changes to one of the following actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:
|
| | |
| Millions of euros | Increase in defined benefit obligation |
|
| Discount rate (0.25% decrease) | 90121 |
|
| Expected inflation (0.25% increase) | 78104 |
|
| Life expectancy (1 year longer) | 3654 |
|
TelefóTelefônica Brazil pension plans
TelefóTelefônica Brazil and its subsidiaries had various pension plan, medical insurance and life insurance obligations with employees.sponsors the following post-employment benefit plans:
|
| | |
| Plans | Management entity | Sponsor |
| Health plans | | |
| Plano de Assistência Médica ao Aposentado y Programa de Coberturas Especiais (PAMA/PCE) | Fundação Sistel de Seguridade Social | Telefônica Brasil, jointly and severally with other companies resulting from the privatization of Telebrás (Telecomunicações Brasileiras, S.A.) |
| Assistencia médica – Lei 9.656/98 | Telefônica Brasil | Telefônica Brasil, TData, Terra Networks and TGLog |
| Pension plans | | |
PBS Assistidos (PBS-A) | Fundação Sistel de Seguridade Social | Telefônica Brasil, jointly and severally with other companies resulting from the privatization of Telebrás (Telecomunicações Brasileiras, S.A.) |
| CTB | Telefônica Brasil | Telefônica Brasil |
| Telefônica BD | Visão Prev | Telefônica Brasil |
| Planes PREV | Visão Prev | Telefônica Brasil |
| Planes VISAO | Visão Prev | Telefônica Brasil, TData, Terra Networks and TGLog |
The main actuarial assumptions used in valuing these plans are as follows:
| | | | 12/31/2014 | 12/31/2013 | 12/31/2017 |
| 12/31/2016 |
|
| Discount rate | 11.17% - 11.31% | 10.77% | 9.46% - 9.88% |
| 10.77% - 10.85% |
|
| Nominal rate of salary increase | 6.69% | 6.18% | 5.93 | % | 6.18 | % |
| Expected inflation | 5.00% | 4.50% | |
| Cost of health insurance | 8.15% | 7.64% | |
| Long term inflation rate | | 4.25 | % | 4.50 | % |
| Growth rate for medical costs | | 7.38 | % | 7.64 | % |
| Mortality tables | AT 2000 M/F | AT 2000 M/F |
| AT 2000 M/F |
|
The discount rate and the growth rate for medical costs are considered to be the most significant actuarial assumptions with a reasonable possibility of fluctuations depending on demographic and economic changes and that may significantly change the amount of the post-employment benefit obligation. The sensitivity to changes in these assumptions is shown below:
|
| | | | | | |
| | Present value of the discounted obligation at the current discount rate |
| Present value of the obligation by increasing the discount rate by 0.5% |
| Present value of the obligation by reducing the discount rate by 0.5% |
|
| Pension plans | 469 |
| 450 |
| 490 |
|
| Health plans | 265 |
| 246 |
| 286 |
|
| Total obligation | 734 |
| 696 |
| 776 |
|
|
| | | | | | |
| | Present value of the obligation at the current growth rate for medical costs |
| Present value of the obligation by increasing the rate by 1% |
| Present value of the obligation by reducing the rate by 1% |
|
| Pension plans | 469 |
| 469 |
| 469 |
|
| Health plans | 265 |
| 308 |
| 230 |
|
| Total obligation | 734 |
| 777 |
| 699 |
|
Other benefits
Teléfonica de España, Telefónica Móviles España and Telefónica Soluciones Individual Suspension Plan
In addition,2015 Telefónica Brazil, alongde España, S.A.U., Telefónica Móviles España, S.A.U. and Telefónica Soluciones de Informática y Comunicaciones de España, S.A.U. signed the 1st Collective Agreement of Related Companies (CEV), wholly backed by the largest labor unions. This agreement considered, among other elements, a plan of measures for individual suspension of the employment relationship in 2016 and 2017, applying principles of voluntariness, universality, non-discrimination and social responsibility. In December 2016, the Collective Agreement of Related Companies was extended until 2018, by virtue of the provisions of this same agreement.
This plan is based on mutual agreement between the company and the employees, and implies the possibility of voluntarily suspending the employment relationship for an initial three-year period, renewable for consecutive three-year periods until the retirement age. The employees who meet the age and seniority requirements may enter into the Individual Suspension Plan (PSI) in the periods opened for this purposes.
In 2017, the current value of the forecast payment flows to meet the commitments of this program (applying certain hypothesis about estimated number of accessions and future reintegration ratio) was recognized. This figure was calculated using actuarial criteria (PERM/F-2000C tables, combined with other companies resulting from the privatization of Telebrás (Telecomunicações Brasileiras, S.A.)invalidity table published in 1998, adhered to PBS-A,the 1977 ministerial order) and a non-contribution defined benefit plan managed by Fundação Sistel de Seguridade Social, whose beneficiaries are employees that retired prior to January 31, 2000. At December 31, 2014 net plan assets amounted to 999 million Brazilian reais (918 million Brazilian reaishigh quality credit market based interest rate.
The corresponding provision is recognized under “Other provisions” in the above table. The provision at December 31, 2013), equivalent2017 amounted to 3103,580 million euros (284(3,666 million euros at December 31, 2013)2016). This plan does not have
The discount rate used for these provisions at December 31, 2017, was 1.05%, with an impact on the consolidated statement of financial position, given that recoveryaverage length of the assets is not foreseeable.Plan of 5.2 years.
The valuations used to determine the value of obligations and plan assets, where appropriate, were performed as of December 31, 2014 by external and internal actuaries. The projected unit credit method was used in all cases.
b) Other provisions
The movement in “Other provisions” in 20142017 and 20132016 is as follows:
|
| | |
| | Millions of euros |
|
Other provisions at December 31, 20122015 | 3,3924,098 |
|
| Additions and accretion | 9681,403 |
|
| Retirements/amount applied | (735)(889 | ) |
| Translation differences and other | (539)332 |
|
Other provisions at December 31, 20132016 | 3,0864,944 |
|
| Additions and accretion | 1,1491,497 |
|
| Retirements/amount applied | (853) |
Inclusion of companies(1,127 | 197) |
| Translation differences and other | 249(458 | ) |
Other provisions at December 31, 20142017 | 3,8284,856 |
|
With respectThe Group is exposed to the European Commission Decisionrisks of July 4, 2007 concerning Telefónica Spain's broadband pricing policy, on July 10, 2014 the European Union Court of Justice dismissed the appeal submitted by Telefónica, S.A.claims and Telefónica de España, maintained the finelitigation, mainly related to tax and terminated the appeal (see Note 21). Consequently the Group paid a fine of 152 million eurosregulatory proceedings, and 58 million euros of interest. Provision for this item totaled 205 million euros at December 31, 2013.labor and civil claims.
In addition to the employee restructuring plan in Telefonica Deutschland described above, this company made a provision of 87 million euros in 2014, primarily to cover the costs linked to the cancellation of certain contracts as a result of the integration with E-Plus (see Note 5).
“Other provisions” include the provisions for dismantling of assets recognized by Group companies in the amount of 883 million euros (483 million euros at the 2013 year end), of which 501 million euros correspond to Telefonica Germany (79 million euros at the 2013 year end).
At December 31, 2014, Telefónica Brazil has the following provisions for an amount of 1,501 million euros equivalent to cover the risks to which it is exposed:
| · | Provisions for disputes regarding federal, state and municipal taxes totaling approximately 813 million euros (735 million euros at December 31, 2013). |
| · | Provisions for labor-related contingencies of approximately 315 million euros (307 million euros at December 31, 2013), which basically relate to claims filed by former and outsourced employees. |
| · | Civil claims by private consumers and consumer associations regarding services rendered, and other legal proceedings related with normal operations. Certain administrative proceedings are also in progress concerning disputes about obligations established in sector regulations. The amount accrued for these matters totals approximately 373 million euros (303 million euros at December 31, 2013). |
Given the nature of the risks covered by these provisions, it is not possible to determine a reliable schedule of potential payments, if any.
Telefónica Brasil
Telefônica Brasil, S.A. and its subsidiaries are party to administrative and judicial proceedings and labor, tax and civil claims filed in different courts. The management of Telefónica Group, based in the opinion of its legal counsel, recognized provisions for proceedings for which an unfavorable outcome is considered probable.
The balance of these provisions at December 31, 2017 and December, 31 2016 is shown in the following table:
|
| | | | |
| Millions of euros | 12/31/2017 |
| 12/31/2016 |
|
| Provisions for tax proceedings | 902 |
| 911 |
|
| Provisions for regulatory proceedings | 278 |
| 241 |
|
| Provisions for labor claims | 247 |
| 403 |
|
| Provisions for civil proceedings | 266 |
| 303 |
|
| Total | 1,693 |
| 1,858 |
|
Additionally, Telefónica Brasil recognized contingent liabilities according to IFRS 3 generated on acquisition of the controlling interest of Vivo Participaçoes in 2011 and GVT in 2015. These contingent liabilities amounted to 213 million euros at December 31, 2017 (256 million euros at December 31, 2016).
The detail of provisions for tax proceedings by nature of risk is as follows:
|
| | | | |
| Millions of euros | 12/31/2017 |
| 12/31/2016 |
|
| Federal taxes | 127 |
| 100 |
|
| State taxes | 58 |
| 66 |
|
| Municipal taxes | 8 |
| 9 |
|
| FUST, FISTEL and EBC | 709 |
| 736 |
|
| Total | 902 |
| 911 |
|
Breakdown of changes in provisions for tax proceedings in 2017 and 2016 is as follows:
|
| | |
| Millions of euros |
|
| Balance at 12/31/2015 | 644 |
|
| Additions (income) | 33 |
|
| Write-offs due to reversal (income) | (14 | ) |
| Write-offs due to payment | (41 | ) |
| Monetary updating | 99 |
|
| Translation differences | 165 |
|
| Other movements | 25 |
|
| Balance at 12/31/2016 | 911 |
|
| Additions (income) | 63 |
|
| Write-offs due to reversal (income) | (20 | ) |
| Write-offs due to payment | (47 | ) |
| Monetary updating | 97 |
|
| Translation differences | (134 | ) |
| Other movements | 32 |
|
| Balance at 12/31/2017 | 902 |
|
In addition, the management of the Group and its legal counsel understand that losses are possible from tax contingencies in federal, state, municipal and other taxes for an aggregated amount of 8.919 million euros (8.748 million euros as of 31 December 2016). Noteworthy state tax-related contingencies include the "ICMS" tax (see Note 17), while the federal taxes include the corporate income tax (see Note 17). Moreover, Telefónica Brasil presently has different open proceedings regarding the Fundo de Universalização de Serviços de Telecomunicações (FUST, refer to Note 21).
With regard to regulatory proceedings, Telefónica Brasil is party to administrative proceedings against Agencia Nacional de Telecomunicações (ANATEL) based on an alleged failure to meet sector regulations, and to judicial proceedings to contest sanctions applied by ANATEL at the administrative level. At December 31, 2017, consolidated provisions totaled 278 million euros (241 million euros at Diciembre 31, 2016). In addition, the management of the Group and its legal counsel understand that losses are possible from regulatory contingencies amounting to 1,277 million euros at December 31, 2017 (1,461 million euros at December 31, 2016).
In some situations, in connection with a legal requirement or presentation of guarantees, judicial deposits are made to secure the continuance of the claims under discussion. The judicial deposits by nature of risk at December 31, 2017 and December 31, 2016 are as follows:
|
| | | | |
| Millions of euros | 12/31/2017 |
| 12/31/2016 |
|
| Tax proceedings | 1,066 |
| 1,094 |
|
| Labor claims | 223 |
| 306 |
|
| Civil proceedings | 304 |
| 323 |
|
| Regulatory proceedings | 51 |
| 81 |
|
| Garnishments | 36 |
| 45 |
|
| Total | 1,680 |
| 1,849 |
|
| Current (see Note 13.b) | 82 |
| 88 |
|
| Non-current (see Note 13.a) | 1,598 |
| 1,761 |
|
Telefónica del Perú
In 2015, the Group established a provision of 1,521 million Peruvian soles (approximately 431 million euros) in relation to tax claims involving Telefónica Peru (see Note 17). At December 31, 2017 this provision amounted to 425 million euros (464 million euros at December 31, 2016).
Telefónica, S.A.
The Group has continued provisioning the amount of the goodwill amortized for tax purposes (see Note 17), for a total of 215 million euros at December 31, 2017 (147 million euros at December 31, 2016).
Dismantling of assets
"Other provisions" include the provisions for dismantling of assets recognized by the Group companies in the amount of 973 million euros (1,001 million euros at December 31, 2016), of which 450 million euros correspond to Telefónica Germany (457 million euros at December 31, 2016) and 146 million euros correspond to Telefónica Brazil (159 million euros at December 31, 2016).
Note 16. Derivative financial instruments and risk management policies
The Telefónica Group is exposed to various financial market risks as a result of: (i) its ordinary business activity, (ii) debt incurred to finance its business, (iii) its investments in companies, and (iv) other financial instruments related to the above commitments.
The main market risks affecting Group companies are as follows:
Exchange rate risk
Exchange rate risk: arises primarily from: (i) Telefónica’s international presence, through its investments and businesses in countries that use currencies other than the euro (primarily in Latin America, but also in the United Kingdom), and (ii) debt denominated in currencies other than that of the country where the business is conducted or the home country of the company incurring such debt.debt ,and (iii) for those trade receivables or payables in foreign currency related to the company with the transaction registered.
Interest rate risk
Interest rate risk: arises primarily in connection with changes in interest rates affecting: (i) financial expenses on floating rate debt (or short-term debt likely to be renewed), due to changes in interest rates and (ii) the value of long-term liabilities at fixed interest rates.
Share price risk
Share price risk: arises primarily from changes in the value of the equity investments (that may be bought, sold or otherwise involved in transactions), from changes in the value of derivatives associated with such investments, from changes in the value of treasury shares and from equity derivatives.
Other risks
TheLiquidity risk: the Telefónica Group is also exposed to liquidity risk if a mismatch arises between its financing needs (including operating and financial expense, investment, debt redemptions and dividend commitments) and its sources of finance (including revenues, divestments, credit lines from financial institutions and capital market transactions). The cost of finance could also be affected by movements in the credit spreads (over benchmark rates) demanded by lenders.
Finally, the Telefónica Group is exposed to countryCountry risk (which overlaps with market and liquidity risks). This: refers to the possible decline in the value of assets, cash flows generated or cash flows returned to the parent company as a result of political, economic or social instability in the countries where the Telefónica Group operates, especially in Latin America.
Credit risk: appears when a counterpart fails to meet or delays its payment obligations in accordance with the agreed terms, driving an impairment in an asset due to: (i) solvency issues, or (ii) no intention to pay.
Risk management
The Telefónica Group actively manages these risks through the use of derivatives (primarily on exchange rates, interest rates, share prices and share prices)commodities) and by incurring debt in local currencies, where appropriate, with a view to optimize the financial cost and to stabilizing cash flows, the income statement and investments. In this way, it attempts to protect the Telefónica Group’s solvency, facilitate financial planning and take advantage of investment opportunities.
The Telefónica Group manages its exchange rate risk and interest rate risk in terms of net financial debt plus commitments and net financial debt as calculated by them. The Telefónica Group believes that these parameters are more appropriate to understanding its debt position. Net financial debt and net financial debt plus commitments take into account the impact of the Group’s cash balance and cash equivalents including derivatives positions with a positive value linked to liabilities. Neither net financial debt nor net financial debt plus commitments as calculated by the Telefónica Group should be considered an alternative toas a substitute for gross financial debt (the sum of current and non-current interest-bearing debt) as a measure of liquidity.
.
For a more detailed description on reconciliation of net financial debt and net financial debt plus commitments to gross financial debt, see Note 2.
Exchange rate risk
The fundamental objective of the exchange rate risk management policy is that, in event of depreciation in foreign currencies relative to the euro, any potential losses in the value of the cash flowsOIBDA generated by the businesses in such currencies, caused by depreciation in exchange rates of a foreign currency relative to the euro, are offset (to some extent) by savings from the reduction in the euro value of debt denominated in such currencies. This objective is also reflected on the decrease of the sensitivity to exchange rate variations of the net debt to OIBDA ratio, in order to protect the Group solvency. The degree of exchange rate hedging employed varies depending on the type of investment.investment and may easily and actively be adjusted. For transactions of purchase or sale of business in currencies other than euro, additional hedges can be made on the estimate prices of the transactions or on estimated cash flows and OIBDA.
At December 31, 2014,2017, the net financial debt in Latin American currencies was equivalent to approximately 8,3794,689 million euros.euros (6,355 million euros in 2016). However, the Latin American currencies in which this debt is denominated is not distributed in proportion to the cash flows
OIBDA generated in each currency. The future effectiveness of the strategy described above as a hedge of exchange rate risks therefore depends on which currencies depreciate relative to the euro.
Telefónica occasionally takes out dollar-denominated debt to hedge the euro-dollar intermediate component in the relation Euro-Latin American currencies, either in Spain (where such debt is associated with an investment as long as it is considered to be an effective hedge) or in the country itself, where the market for local currency financing or hedges may be inadequate or non-existent. At December 31, 2014,2017, the Telefónica Group’s net financial debt denominated in dollars to hedge that component was equivalent to 1,254146 million euros.euros (480 million euros in 2016).
At December 31, 2014, pound sterling-denominated2017, the net financial debt in pounds sterling was approximately 1.821.97 times the value of the 2014business' operating income before depreciation and amortization (OIBDA) from the businessin 2017 for Group companies in the United Kingdom, helping to reducewhich is in line with the sensitivitytarget of the Telefónica Group net debt over OIBDA ratio to changes in the valuetwice that of the pound sterling against euro. Pound sterling-denominated net debt atprevious years. At December 31, 2014,2017, the net financial debt denominated in pounds sterling was equivalent to 3,0433,089 million euros, lowerwhich is more than the 3,3422,828 million euros at December 31, 2013.
After the completion of the sale of Telefónica Czech Republic, a.s., the exchange rate risk in Czech crowns is limited only to deferred price amounts which as of December 31, 2014 are totally hedged.
2016.
The Telefónica Group also manages exchange rate risk by seeking to minimizereduce the negative impact of any remaining exchange rate exposure on the income statement, as a result of transactions recognized on the balance sheet and highly probable transactions, regardless of whether there are open positions. Such open position exposure can arise for any of three reasons: (i) a thin market for local derivatives or difficulty in sourcing local currency finance which makes it impossible to arrange a low-cost hedge (as in Argentina and Venezuela), (ii) financing through intra-group loans, where the accounting treatment of exchange rate risk is different from that for financing through capital contributions, and (iii) as the result of a deliberate policy decision, to avoid the high cost of hedges that are not warranted by expectations or high risk of depreciation.
The main transactions that generate or may generate exchange rate risk (regardless of whether or not they have an impact on the income statement) are, among others, as follows: issues in currencies other than the functional currency of the Group company, highly probable transactions in other currencies, future cash inflows in other currencies, investments and divestments, provisions for collections or payments in foreign currency, the actual value of the investments (subsidiaries) in currencies other than the euro.
Exchange rate management in 2014 produced aIn 2017, net negative impact in the amount of 293foreign exchange differences (excluding monetary correction) amounted to 419 million euros (disregarding the effect of monetary correction)(694 million euros in 2016), mainly due to the fluctuationfluctuations in the exchange rate of the Venezuelan bolivar from 6.30673.76 to 49.988 bolivars36,115.28 Venezuelan bolívar per US dollar, and, to a lesser extent, the difficultythat resulted in covering commercial positions in US dollars in Argentina, compared to the negative impactexchange losses of 111426 million euros recognized in 2013.euros.
The following table illustrates the sensitivity of foreign currency gains and losses and of equity to changes in exchange rates, where: a) in calculating the impact on the income statement, the exchange rate position affecting the income statement at the end of 20142017 was considered constant during 2015;2018; b) in calculating the impact on equity, only monetary items have been considered, namely debt and derivatives such as hedges of net investment and loans to subsidiaries related to the investment, whose breakdown is considered constant in 20152018 and identical to that existing at the end of 2014.2017. In both cases, Latin American currencies are assumed to depreciatechange their value against the dollar and the rest of the currencies against the euro by 10%.
| Millions of euros | | | |
| Currency | Change | Impact on the consolidated income statement | Impact on consolidated equity |
| All currencies vs EUR | 10% | 76 | (284) |
| USD vs EUR | 10% | 2 | (107) |
| European currencies vs EUR | 10% | 1 | (230) |
| Latin American currencies vs USD | 10% | 73 | 53 |
| All currencies vs EUR | (10)% | (76) | 284 |
| USD vs EUR | (10)% | (2) | 107 |
| European currencies vs EUR | (10)% | (1) | 230 |
| Latin American currencies vs USD | (10)% | (73) | (53) |
The exchange position of the Venezuelan bolivar affects the estimates made by the Group of the net asset value of the foreign currency position related to investments in Venezuela, the negative impact of which on the 2014 financial statements amounted to 271 million euros.
|
| | | | | |
| Millions of euros | | |
| |
|
| Currency | Change | Impact on the consolidated income statement |
| Impact on consolidated equity |
|
| All currencies vs EUR | 10% | 17 |
| (352 | ) |
| USD vs EUR | 10% | (2 | ) | (66 | ) |
| European currencies vs EUR | 10% | (1 | ) | (303 | ) |
| Latin American currencies vs USD | 10% | 20 |
| 17 |
|
| All currencies vs EUR | (10)% | (17 | ) | 352 |
|
| USD | (10)% | 2 |
| 66 |
|
| European currencies vs EUR | (10)% | 1 |
| 303 |
|
| Latin American currencies vs USD | (10)% | (20 | ) | (17 | ) |
The Group’s monetary position in Venezuela at December 31, 20142017 is a net creditordebt position of 12,4047,358,790 million Venezuelan bolivars (equivalent to approximately 204-170 million euros). It had a debtor position until July; nevertheless theThe average exposure in 20142017 has been a creditordebtor position, which led to a higher financial expenseincome in the amount of 11510 million euros due to the effect of the monetary correction for inflation during the year.
Interest rate risk
The main objective of the interest rate risk management policy is to bring the Company's financing costs into line with the budget for financial expenses for the current year, as well as that indicated in the current strategic plan. In accordance with this objective, Telefónica decided to actively adjust the exposure of its debt to interest rates, i.e., the amount of debt that would accrue interest at fixed rates and variable rates.
In order to meet this target, Telefónica mainly carry out the following:
a) The interest rate of borrowings tied to a variable interest rate was set.
b) Interest rate fluctuations of debt tied to a variable interest rate were reduced.
c) Fixed rate debt instruments were converted into variable market rate debt instruments.
These transactions may be carried out against an existing underlying asset or those that are highly likely to take place in the future (for example, a highly probable future issue of debt).
The Telefónica Group’s financial expenses are exposed to changes in interest rates. In 2014, the rates applied to the largest amount of short-term debt were mainly based on2017 the Euribor, the dollar Libor, the Brazilian SELIC, the US dollar and pound sterling Libor, the Mexican UDI and the Colombian UVR.UVR were the short term rates that accounted for most of the exposure. In nominal terms, at December 31, 2014, 70%2017, 71.0% of Telefónica’s net financial debt (or 70% of long-term net debt)plus commitments was pegged to fixed interest rates for a period greater than one year, compared to 71%50.8% of net financial debt (74% of long-term net debt)plus commitments in 2013.2016. Of the remaining 30%29.0% (net debt at floating rates or at fixed rates maturing in underwithin one year), 100.8 percentage points had interest rates collaredbounded in a period over one year, (or 3% of long-term debt), while at December 31, 2013 this was the case for 11versus 0.5 percentage points of net debt at floating rates or with fixed rates maturing within one year (3% of long-term net debt).
at December 31, 2016.
In addition, early retirement and Individual Suspension Plan liabilities (see Note 15) were discounted to present value over the year, based on the curve for instruments with very high credit quality. The decreaseincrease in interest rates during the year has increasedleaded to a decrease the market value of these liabilities. However, this increasedecrease was nearly completely offset by the increasedecrease in the market value of the hedges on these positions.
Net financial expenseresults amounted to 2,8222,199 million euros in 2014 (-1.6% year-on-year), and includes 293 million euros due to net negative foreign exchange differences primarily as2017, 0.9% lower than the previous year, on one hand thanks a result of the Company’s decision to adopt the SICAD II exchange rate of the Venezuelan bolivar. Excluding this effect, net financial expenses fell 8.2% year-on-year, mainly due to a 9.1% reduction in the average debt, placing the effectivelower cost of debt over the last twelve months at 5.40%, 6 basis points higher than in December 2013. The greater weight of debt in European and Latin AmericaAmerican currencies and repaymenton the other hand, partially offsetting this effect lower impact associated to Venezuela and maturity of cheap debtnot repeating savings from the FX hedge linked to United Kingdom in euros increases the average cost in 47 basis points, while the lowest rates in Latin America and Europe reduce it in 41 basis points.
2016.
To illustrate the sensitivity of the Company's net financial expensesexpense to variabilityfluctuations in short-term interest rates, on one hand a 100 basis pointspoint increase in interest rates in all currencies in which Telefónica has financial positions at December 31, 20142017, and a 100 basis point decrease in all currencies has been assumed, and a 100 basis points decrease in interest rates in all currencies except those currencies with low interest rates, in order to avoid negative rates (euro, pound sterling andon the US dollar) andother hand a constant position equivalentequal to that prevailingthe position at the end of 2014.
year-end has been considered.
To illustratecalculate the sensitivity of equity to variabilityfluctuations in interest rates, on one hand a 100 basis point increase in interest rates in all currencies and terms ofin all periods on the yield curve in which Telefónica holdshas financial positions at December 31, 2014 was assumed, as well as2017, and a 100 basis point decrease in all currencies and terms (except those below 1% in order to avoid negative rates). Cashall periods was assumed, and on the other hand only positions with cash flow hedge positionshedges were also considered, as theywhich are fundamentallybasically the only positions wherein which changes in market value due to interest-rateinterest rate fluctuations are recognized in equity.
| | Millions of euros | | Change in basis points (bp) | Impact on consolidated income statement | Impact on consolidated equity | Impact on consolidated income statement |
| Impact on consolidated equity |
|
| +100bp | (111) | 370 | |
| -100bp | 68 | (113) | |
| +100pb | | (91 | ) | 335 |
|
| -100pb | | 74 |
| (331 | ) |
Share price risk
The Telefónica Group is exposed to changes in the value of equity investments that may be bought, sold or otherwise involved in transactions, from changes in the value of derivatives associated with such investments, from convertible or exchangeable instruments issued by Telefónica Group, from Share-based payments plans, from treasury shares and from equity derivatives.
derivatives over treasury shares.
According to the Share-based payments plans (see Note 19) the shares to be delivered to employees under such plan may be either the parent company treasury shares, acquired by them or any of its Group companies; or newly-issued shares. The possibility of delivering shares to beneficiaries of the plan in the future, implies a risk since there could be an obligation to hand over a maximum number of shares at the end of each phase, whose acquisition (in the event of acquisition in the market) in the future could imply a higher cash outflow than required on the start date of each phase if the share price is above the corresponding price on the phase start date. In the event that new shares are issued for delivery to the beneficiaries of the plan, there would be a dilutive effect for ordinary shareholders of Telefónica as a result of the higher number of shares delivered under such plan outstanding.
In 20142015, a new cycle of the long-term incentive Plan consisting of the delivery of shares of Telefónica, S.A. aimed at members of the Executives of Telefónica Group was launched denominated Performance Share Plan (PIP). Furthermore 2014 Ordinary General Shareholders’ Meeting approved a Global incentive Telefónica, S.A. shares purchaseThe third and last cycle of this Plan, initially scheduled for the Employees of the Telefónica Group.
2016, was cancelled (see Note 19).
To reduce the risk associated with variations in share price under these plans, Telefónica could acquire instruments that replicatehedge the risk profile of some of these plans as it was done in previous years.
plans.
In addition, the Group may use part of the treasury shares of Telefónica, S.A. held at December 31, 20142017 to cover shares deliverable under the PIP or the Global Employee Share Plan.PIP. The net asset value of the treasury shares could increase or decrease depending on variations in Telefónica, S.A.’s share price.
Liquidity risk
The Telefónica Group seeks to match the schedule for its debt maturity payments to its capacity to generate cash flows to meet these maturities, while allowing for some flexibility. In practice, this has been translated into two key principles:
| |
| 1. | The Telefónica Group’s average maturity of net financial debt is intended to stay above 6 years, or be restored above that threshold in a reasonable period of time if it eventually falls below it. This principle is considered as a guideline when managing debt and access to credit markets, but not a rigid requirement. When calculating the average maturity for the net financial debt and part of the undrawn credit lines can be considered as offsetting the shorter debt maturities, and extension options on some financing facilities may be considered as exercised, for calculation purposes. |
| |
| 2. | The Telefónica Group must be able to pay all commitments over the next 12 months without accessing new borrowing or tapping the capital markets (although drawing(drawing upon firm credit lines arranged with banks), assuming budget projections are met. |
At December 31, 2014,2017, the average maturity of net financial debt (45,087(44,230 million euros) was 6.2 years.8.08 years (liquidity included).
At December 31, 2014,2017, gross financial debt scheduled to mature in 20152018 amounted to approximately 8,4919,414 million euros (which includes the net position of derivative financial instruments and certain current payables). euros. These maturities are lower than the amount of funds available, calculated as the sum of: a) cash and cash equivalents and current financial assets other than those in Venezuela (367 million euros) and Telefónica’s participation in Telco’s bond (principal amount of 1,225 million euros) totalling 7,869 million euros;assets; b) annual cash generation projected for 2015,2018, and c) undrawn credit facilities arranged with banks whose original maturity is over one year (an aggregate of more than 10,61812,541 million euros at December 31, 2014)2017), providing flexibility to the Telefónica Group with regard to accessing capital or credit markets in the next 12 months.2 years. For a further description of the Telefónica Group’s liquidity and capital resources in 2014,2017, see Note 13.2 Financial Liabilities"Financial Liabilities" and Appendix V.
Country risk
The Telefónica Group managed or mitigated country risk by pursuing two lines of action (in addition to its normal business practices):
| |
| 1. | Partly matching assets to liabilities (those not guaranteed by the parent company) in the Telefónica Group’s Latin American companies such that any potential asset impairment would be accompanied by a reduction in liabilities; and |
| |
| 2. | Repatriating funds generated in Latin America that are not required for the pursuit of new, profitable business development opportunities in the region. |
Regarding the first point, at December 31, 2014,2017, the Telefónica Group’s Latin American companies had net financial debt not guaranteed by the parent company of 5,0493,079 million euros, which represents 10.7%7% of net debt.financial debt of the Group. Nevertheless, in certain countries, such as Venezuela, there is a net cash balance (instead of a net liability balance).
Regarding the net repatriation of funds to Spain, 1,118344 million euros from Latin America companies have been received in 2014,2017, of which 9611,134 million euros werewas from dividends and 157on the other hand cash outflows of 790 million euros, were for other items.mainly, due to capital increases of Group companies.
In this regard, it is worth noting that since February 2003, Venezuela has had an exchange control mechanism in place, managed by the Centro Nacional de Comercio Exterior (CENCOEX). The body has issued a number of regulations (“providencias”) governing the modalities of currency sales in Venezuela at official exchange rates. Foreign companies which are duly registered as foreign investors are entitled to request approval to acquire currencies at the official exchange rate by the CENCOEX, in line with regulation number 056, article 2, section c) "Remittance of profits, income, interest and dividends from international investment” Telefónica Venezolana, C.A. (formerly Telcel, C.A.), a Telefónica Group subsidiary in Venezuela, obtained the aforementioned requested approval on 295 million Venezuelan bolivars in 2006, 473 million Venezuelan bolivars in 2007 and 785 million Venezuelan Bolivars in 2008. At December 31, 2014, payment of two dividends agreed by the company in the amount of 5,882 million Venezuelan bolivars is pending approval by the CENCOEX.
Credit risk
The Telefónica Group trades in derivatives with creditworthy counterparties. Therefore, Telefónica, S.A. generally trades with credit entities whose “senior debt” ratings are of at least “A”“A-” or in case of Spanish entities in line with the credit rating of Kingdom of Spain. In Spain, where most of the Group’s derivatives portfolio is held, there are netting agreements with financial institutions, with debtor or creditor positions offset in case of bankruptcy, limiting the risk to the net position. In addition, the CDS (Credit Default Swap) of all the counterparties with which Telefónica, S.A. operates is monitored at all times in order to assess the maximum allowable CDS for operating at any given time. Transactions are generally only carried out with counterparties whose CDS is below the threshold.
CVA or Credit Valuation Adjustment is the method used to measure credit risk for both counterparties and Telefonica in order to determine the fair value of the derivatives portfolio. This adjustment reflects the probability of default or the deterioration of the credit quality of both Telefonica and its counterparties. The simplified formula to calculate CVA is Expected Exposure times Probability of Default times Loss Given Default. In order to calculate these variables standard market practices are used.
When managing credit risk, Telefonica considers the use of CDS, novations, derivatives with Break Clauses and signing CSA´s under certain conditions.
For other subsidiaries, particularly those in Latin America, assuming a stable sovereign rating provides a ceiling which is below “A”, trades are with local financial entities whose rating by local standards is considered to be of high creditworthiness.
Meanwhile, with credit risk arising from cash and cash equivalents, the Telefónica Group places its cash surpluses in high quality and highly liquid money-market assets. These placements are regulated by a general framework, revised annually. Counterparties are chosen according to criteria of liquidity, solvency and diversification based on the conditions of the market and countries where the Group operates. The general framework sets: the maximum amounts to be invested by counterparty based on its rating (long-term debt rating); and the instruments in which the surpluses may be invested (money-market instruments).
The Telefónica Group considers customer credit risk management as a key element to achieve its sustainable business and customer base growth targets in a manner that is consistent with Telefónica Corporate Risk Management Policy.sustainable way. This management approach relies on the active monitoringevaluation of the risk assumed and the resources necessary to grant the adequate risk-reward balance inwithin the commercial operations and on the adequate separation between the risk ownership areas and risk management areas.functions.
Customer-financing products and those debtors that could cause a material impact on the Group’s consolidated financial statements are subject to specific management practices to mitigate exposure to credit risk, according to the segment and risk profile of the customer.
Uniform policies, procedures,Formal delegation of authority procedures and management practices are establishedimplemented in allthe different Group companies, taking into account benchmark risk management techniques but adapted to the local characteristics of each market. ThisCommercial debtors that may cause a relevant impact on the Telefónica Group consolidated financial statements and increased risk profile products - due to customer target, term, channels or other commercial characteristics - are subject to specific management practices in order to mitigate the exposure to credit risk.
This customer credit risk management model is embedded intoin the Group’s decision-makingday-to-day operational processes both from a strategic and, especially, day-to-day operating perspective,of the different companies, where the credit risk assessment guides both the product and services available for the different customer profiles.
customers and the collection strategy.
The Telefónica Group’s maximum exposure to credit risk is initially represented by the carrying amounts of the financial assets (Notes 11 and 13) and the guarantees given by the Telefónica Group.
Several Telefónica Group companies provide operating guarantees granted by external counterparties, which are offered during their normal commercial activity, in bids for licenses, permits and concessions, and spectrum acquisitions. At December 31, 2014,2017, these guarantees amounted to approximately 4,4015,144 million euros.
euros (5,134 million euros at December 31, 2016).
Capital management
Telefónica’s corporate finance department takes into consideration several factors for the evaluation of the Telefónica’s capital structure, with the aim of maintaining the solvency and creating value to the shareholders.
The corporate finance department estimates the cost of capital on a continuous basis through the monitoring of the financial markets and the application of standard industry approaches for calculating weighted average cost of capital, or WACC, so that it can be applied in the valuation of businesses in course and in the evaluation of investment projects. Telefónica also uses as reference a net financial debt ratio below 2.35x OIBDA in the medium term (excluding items of a non-recurring or exceptional nature), with the objective of protecting the that allows for a comfortable investment grade credit rating over the medium term,as assigned by credit rating agencies, aiming at protecting credit solvency and making this ratingit compatible with alternative uses of cash flow that could arise at any time. These general principles are refined by other considerations and the application of specific variables, such as country risk in the broadest sense, or the volatility in cash flow generation that are considered, when evaluating the financial structure of the Telefónica Group and its different areas.
Derivatives policy
At December 31, 2014,2017, the nominal value of outstanding derivatives with external counterparties amounted to 193,152145,166 million equivalent, a 17% increase4.6% decrease from December 31, 2013 (164,4872016 (152,096 million euros equivalent). This figure is inflated by the use in some cases of several levels of derivatives applied to the nominal value of a single underlying liability. For example, a foreign currency loan can be hedged into floating rate, and then each interest rate period can be fixed using a fixed rate hedge, or FRA (forward rate agreement). The high volume is also due to the fact that when a derivative transaction is cancelled, the company may either cancel the derivative or take the opposite position, which cancels out the variability thereof. The second option is usually chosen in order to cut costs. Even using such techniques to reduce the position, it is still necessary to take extreme care in the use of derivatives to avoid potential problems arising through error or a failure to understand the real position and its associated risks.
The main principles in the management of derivatives are detailed as follow:
1) Derivatives based on a clearly identified underlying.
hedged items.
Telefónica’s derivatives policy emphasizes the following points:
Acceptable underlyings include assets and liabilities, profits, revenues and cash flows in either a company’s functional currency or another currency. These flows can be contractual (debt and interest payments, settlement of foreign currency payables, etc.), reasonably certain or foreseeable (PP&E purchases, future debt issues, commercial paper programs, etc.). The acceptability of an underlying asset in the above cases does not depend on whether it complies with accounting rules requirements for hedge accounting, as is required in the case of certain intragroup transactions, for instance. Parent company investments in subsidiaries with functional currencies other than the euro also qualify as acceptable underlying assets.
Economic hedges which are hedges withthat have a designated underlying asset and which inthat, under certain circumstances, may offset fluctuationsthe changes in the value of the underlying asset value, doasset. These economic hedges may not always meet the requirements and pass the effectiveness tests laid downestablished by accounting standards to be treated as hedges for treatment as hedges.accounting purposes. The decision to maintain positions that cease to qualify as effectivearrange these hedges even if they fail the effectiveness test or fail toif they do not meet othercertain requirements will depend on the marginal impact on the income statement and, therefore, on how far this mightmay compromise the goal of having a stable income statement. In any event,case, the variationschanges are recognized in the income statement.
2) Matching of the underlyinghedged item to one side of the derivative.
This matching basically applies to foreign currency debt and derivatives hedging foreign currency payments by Telefónica Group subsidiaries. The aim is to eliminate the risk arising from changes in foreign currency interest rates. Nonetheless, even when the aim is to achieve perfect hedging for all cash flows, the lack of liquidity in certain markets, especially in Latin American currencies, has meant that historically there have been mismatches between the terms of the hedges and those of the debts they are meant to hedge. The Telefónica Group intends to reduce these mismatches, provided that doing so does not involve disproportionate costs. In this regard, if adjustment does prove too costly, the financial timing of the underlying asset in foreign currency will be modified in order to minimize interest rate risk in foreign currency.
In certain cases, the timing of the underlying as defined for derivative purposes may not be exactly the same as the timing of the contractual underlying.
3) Matching the company contracting the derivative and the company that owns the underlying.
hedged item.
Generally, the aim is to ensure that the hedging derivative and the hedged asset or liability belong to the same company. Sometimes, however, the holding companies (Telefónica, S.A. and Telefónica Internacional, S.A.Latinoamérica Holding, S.L.) have arranged hedges on behalf of a subsidiary that owns the underlying asset. The main reasons for separating the hedge and the underlying asset were possible differences in the legal validity of local and international hedges (as a result of unforeseen legal changes) and the different credit ratings of the counterparties (of the Telefónica Group companies as well as those of the banks).
4) Ability to measure the derivative’s fair value using the valuation systems available to the Telefónica Group.
The Telefónica Group uses a number ofseveral tools to measureevaluate and manage risksthe risk involved in derivatives and debt. The main ones areThese tools most notably include the Kondor+, system, licensed by Reuters, which is widely used byfor extended use among various financial institutions, as well as the specialized libraries in the MBRM financial calculation, both of which are widespread throughout the market and MBRM specialist financial calculator libraries.
have shown proven reliability. In order to perform these calculations, customary market techniques are used when configuring the calculation methods and information from money market curves is used on a daily basis as market inputs (swaps, depos, FRAs, etc.) for interest rates, official fixings for exchange rates and the interest rates and volatility matrices for interest and FX rates that are listed in the multi-contributor systems, Reuters and Bloomberg. For those yield curves that are less liquid or whose prices published in Reuters and Bloomberg are considered not to adequately reflect the market situation, these curves will be requested from relevant banks in these markets.
5) Sale of options only when there is an underlying exposure.
Telefónica considers the sale of options when: i) there is an underlying exposure (on the consolidated statement of financial position or associated with a highly probable cash outflow) that would offset the potential loss for the year if the counterparty exercised the option. This exposure does not have to be treated as a purchased option, but rather it can be another type of hedged item (in these cases, hedge accounting does not apply since this hedging instrument does not meet the criteria required by accounting standards to treat the sale of options as hedging instruments), or ii) the option is part of a structure in which another derivative offsets any loss. The sale of options is also permitted in option structures where, at the moment they are taken out, the net premium is either positive or zero.
For instance, it would be possible to sell short-term options on interest rate swaps that entitle the counterparty to receive a certain fixed interest rate, below the level prevailing at the time the option was sold. This would mean that if rates fell and the counterparty exercised its option, the Group would swap part of its debt from floating rate to a lower fixed rate, having received a premium.
6) Hedge accounting.
The main risks that may qualify for hedge accounting are as follows:
Variations in market interest rates (either money-market rates, credit spreads or both) that affect the value of the underlying asset or the measurement of the cash flows.
| · | Variations in market interest rates (either money-market rates, credit spreads or both) that affect the value of the underlying asset or the measurement of the cash flows. |
Variations in exchange rates that change the value of the underlying asset in the company’s functional currency and affect the measurement of the cash flow in the functional currency.Variations in the volatility of any financial variable, asset or liability that affect either the valuation or the measurement of cash flows on debt or investments with embedded options, whether or not these options are separable.
| · | Variations in exchange rates that change the value of the underlying asset in the company’s functional currency and affect the measurement of the cash flow in the functional currency. |
Variations in the valuation of any financial asset, particularly shares of companies included in the portfolio of “Available-for-sale financial assets”. | · | Variations in the volatility of any financial variable, asset or liability that affect either the valuation or the measurement of cash flows on debt or investments with embedded options, whether or not these options are separable. |
| · | Variations in the valuation of any financial asset, particularly shares of companies included in the portfolio of “Available-for-sale financial assets”. |
Variations in the price of commodities related to contracts that the Group has with third parties.
Regarding the underlying:
Hedges can cover all or part of the value of the underlying.
| · | Hedges can cover all or part of the value of the underlying. |
The risk to be hedged can be for the whole period of the transaction or for only part of the period.
| · | The risk to be hedged can be for the whole period of the transaction or for only part of the period. |
| · | The underlying may be a highly probable future transaction, or a contractual underlying (loan, foreign currency payment, investment, financial asset, etc.) or a combination of both that defines an underlying with a longer term. |
This may on occasion mean that the hedging instruments have longer terms than the related contractual underlying. This happens when the Group enters into long-term swaps, caps or collars to protect ourselves against interest rate rises that may raise the financial expense of its promissory notes, commercial paper and some floating rate loans which mature earlier than their hedges. These floating rate financing programs are highly likely to be renewed and Telefónica commits
to this by defining the underlying asset in a more general way as a floating rate financing program whose term coincides with the maturity of the hedge.
In those cases in which the underlying assets representing the risk hedged are cancelled or refinanced early, and if there is an open risk with similar characteristics as the underlying asset that was cancelled or refinanced early, either because there is new financing or because there is an underlying asset with similar characteristics and risk profile, the hedge may remain in force with the derivatives assigned thereto and the risk will be subject to the hedge arranged in the aforementioned refinancing. When either of these situations occurs, the effectiveness of the hedge will be reviewed taking into account the new situation.
Hedges can be of three types:
Fair value hedges.
Cash flow hedges. Such hedges can be set at any value of the risk to be hedged (interest rates, exchange rates, etc.) or for a defined range (interest rates between 2% and 4%, above 4%, etc.). In this last case, the hedging instrument used is options and only the intrinsic value of the option is recognized as an effective hedge. | · | Cash flow hedges. Such hedges can be set at any value of the risk to be hedged (interest rates, exchange rates, etc.) or for a defined range (interest rates between 2% and 4%, above 4%, etc.). In this last case, the hedging instrument used is options and only the intrinsic value of the option is recognized as an effective hedge. |
| · | Hedges of net investment in consolidated foreign subsidiaries. Generally such hedges are arranged by the parent company and the other Telefónica holding companies. Wherever possible, these hedges are implemented through real debt in foreign currency. Often, however, this is not always possible as many Latin American currencies are non-convertible, making it impossible for non-resident companies to issue local currency debt. It may also be that the debt market in the currency concerned is too thinHedges of net investment in consolidated foreign subsidiaries. Generally such hedges are arranged by the parent company and the other Telefónica holding companies. Wherever possible, these hedges are implemented through real debt in foreign currency. Often, however, this is not always possible as many Latin American currencies are non-convertible, making it impossible for non-resident companies to issue local currency debt. It may also be that the debt in the currency concerned is not enough to accommodate the required hedge (for example, pounds sterling), or that an acquisition is made in cash with no need for market financing. In these circumstances derivatives, either forwards or cross-currency swaps are used to hedge the net investment. |
Hedges can comprise a combination of different derivatives.
Management of accounting hedges is not static, and the hedging relationship may change before maturity. Hedging relationships may change to allow appropriate management that serves the Group’s stated principles of stabilizing cash flows, stabilizing net financial income/expense and protecting share capital. The designation of hedges may therefore be cancelled, before maturity, because of a change in the underlying, a change in perceived risk on the underlying or a change in market view. Derivatives included in these hedges may be reassigned to new hedges where they meet the effectiveness test and the new hedge is well documented. To gauge the efficiency of transactions defined as accounting hedges, the Group analyzes the extent to which the changes in the fair value or in the cash flows attributable to the hedged item would offset the changes in fair value or cash flows attributable to the hedged risk using a linear regression model both prospectively and retrospectively.
The main guiding principles for risk management are laid down by Telefónica’s Finance Department and implemented by company financial officers (who are responsible for balancing the interests of each company and those of the Telefónica Group). The Corporate Finance Department may allow exceptions to this policy where these can be justified, normally when the market is too thin for the volume of transactions required or on clearly limited and small risks. New companies joining the Telefónica Group as a result of mergers or acquisitions may also need time to adapt.
7) Cancellation of derivatives. F-71When a derivative transaction is cancelled, the company may:
Cancel the derivative and pay its market value.Take the opposite position which cancels out the variability thereof, if cancellation costs are high or if it is recommended for operating or business reasons.
The breakdown of the financial results recognized in 2014, 20132017, 2016 and 20122015 is as follows:
| | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Interest income | 553 | 613 | 557 | 638 |
| 723 |
| 1,068 |
|
| Dividends received | 5 | 11 | 28 | 16 |
| 19 |
| 30 |
|
| Other financial income | 228 | 203 | 276 | 17 |
| 38 |
| 250 |
|
| Subtotal | 786 | 827 | 861 | 671 |
| 780 |
| 1,348 |
|
| Changes in fair value of financial assets at fair value through profit or loss | 1,004 | (427) | 648 | 35 |
| 438 |
| (317 | ) |
| Changes in fair value of financial liabilities at fair value through profit or loss | (1,059) | 388 | (550) | (97 | ) | (463 | ) | 189 |
|
| Transfer from equity to profit and loss from cash flow hedges | (163) | (121) | (173) | |
| Transfer from equity to profit and loss from cash flow hedges (*) | | (162 | ) | (238 | ) | (207 | ) |
| Transfer from equity to profit and loss from available-for-sale assets and others | − | (52) | (50) | (33 | ) | (136 | ) | 539 |
|
| Gain/(loss) on fair value hedges | 865 | (935) | 198 | (150 | ) | (26 | ) | 62 |
|
| (Loss)/gain on adjustment to items hedged by fair value hedges | (796) | 961 | (145) | 194 |
| (6 | ) | 24 |
|
| Subtotal | (149) | (186) | (72) | (213 | ) | (431 | ) | 290 |
|
| Interest expenses | (2,556) | (2,898) | (3,094) | (1,975 | ) | (2,225 | ) | (3,146 | ) |
| Ineffective portion of cash flow hedges | − | 1 | (10 | ) | 1 |
| — |
|
| Accretion of provisions and other liabilities | (400) | (201) | (469) | (453 | ) | (466 | ) | (313 | ) |
| Other financial expenses | (200) | (238) | (289) | (310 | ) | (365 | ) | (520 | ) |
| Subtotal | (3,156) | (3,337) | (3,851) | (2,748 | ) | (3,055 | ) | (3,979 | ) |
| Net finance costs excluding foreign exchange differences and hyperinflationary adjustments | (2,519) | (2,696) | (3,062) | (2,290 | ) | (2,706 | ) | (2,341 | ) |
| | |
(*)The difference in 2016 between this amount and the impact in the consolidated statement of comprehensive income (184 million euros) is because of recycling the hedges related to the operation of Telefónica United Kingdom, recorded in the exchange differences account in the consolidated income statement.
The breakdown of Telefónica’s derivatives at December 31, 2014,2017, their fair value at year-end and the expected maturity schedule is as set forth in the table below:
| 2014 | |
| | | 2017 | | 2017 |
| Millions of euros | Fair value (**) | Notional amount Maturities (*) | Fair value (**) | Notional amount Maturities (*) |
| Derivatives | | 2015 | 2016 | 2017 | Subsequent years | Total | | 2018 | 2019 | 2020 | Subsequent years | Total |
| Interest rate hedges | (482) | (1,384) | 1,877 | 292 | (3,502) | (2,717) | (285 | ) | (1,596 | ) | (901 | ) | 1,563 |
| 1,701 |
| 767 |
|
| Cash flow hedges | 648 | (1,050) | 706 | 460 | 3,265 | 3,381 | 140 |
| (1,015 | ) | (658 | ) | 1,399 |
| 3,778 |
| 3,504 |
|
| Fair value hedges | (1,130) | (334) | 1,171 | (168) | (6,767) | (6,098) | (425 | ) | (581 | ) | (243 | ) | 164 |
| (2,077 | ) | (2,737 | ) |
| Exchange rate hedges | (966) | 7,784 | 3,141 | 913 | 3,799 | 15,637 | 339 |
| (220 | ) | 547 |
| 2,219 |
| 4,720 |
| 7,266 |
|
| Cash flow hedges | (964) | 7,992 | 3,141 | 913 | 3,799 | 15,845 | 344 |
| 1,700 |
| 621 |
| 2,219 |
| 4,720 |
| 9,260 |
|
| Fair value hedges | (2) | (208) | | (208) | (5 | ) | (1,920 | ) | (74 | ) | — |
| — |
| (1,994 | ) |
| Interest and exchange rate hedges | (890) | (538) | 422 | 64 | 1,495 | 1,443 | (546 | ) | 344 |
| 963 |
| 952 |
| 4,419 |
| 6,678 |
|
| Cash flow hedges | (592) | (373) | 465 | 167 | 2,675 | 2,934 | (422 | ) | 344 |
| 963 |
| 800 |
| 3,744 |
| 5,851 |
|
| Fair value hedges | (298) | (165) | (43) | (103) | (1,180) | (1,491) | (124 | ) | — |
| — |
| 152 |
| 675 |
| 827 |
|
| Net investment hedges | (121) | (1,436) | (750) | (60) | | (2,246) | |
| Other derivatives | (221) | 7,957 | 51 | (1,183) | (1,437) | 5,388 | |
| Net investment Hedges | | — |
| (140 | ) | — |
| — |
| — |
| (140 | ) |
| Other Derivatives | | (13 | ) | (2,431 | ) | 1,840 |
| (495 | ) | (2,451 | ) | (3,537 | ) |
| Interest rate | 34 | 7,893 | 452 | (325) | (1,557) | 6,463 | (109 | ) | (3,035 | ) | 1,840 |
| (495 | ) | (3,051 | ) | (4,741 | ) |
| Exchange rate | (145) | 91 | (401) | (108) | 120 | (298) | 26 |
| (209 | ) | — |
| — |
| — |
| (209 | ) |
| Others | (110) | (27) | | (750) | | (777) | 70 |
| 813 |
| — |
| — |
| 600 |
| 1,413 |
|
| (*) For interest rate hedges, the positive amount is in terms of fixed “payment.” For foreign currency hedges, a positive amount means payment in functional vs. foreign currency. | |
| (**) Positive amounts indicate payables. | |
| (***)The fair value of the Telefónica Group derivatives amounted to a positive MTM (accounts receivable) of 2,680 million euros. | |
| | |
(*) For interest rate hedges, the positive amount is in terms of fixed “payment.” For foreign currency hedges, a positive amount means payment in functional vs. foreign currency.
(**) Positive amounts indicate payables.
The positive fair value of the Telefónica Group derivatives atDecember 31, 2017amounted to 505 million euros (accounts receivable). The variation versus the previous year end represents a reduction of 2,896 million euros mainly due to the dollar devaluation against the euro. This variation is offset mainly by the variation of the different Telefónica Group issues and loans performed in dollars. F-73Net financial debt as of December 31, 2017 includes a positive value of the derivatives portfolio for a net amount of 505 million euros. This amount includes a negative value of 104 million euros due to hedges (cross currency swaps) to tranfer financial debt issued in foreign currency to local currency.
Derivatives arranged by the Group at December 31, 2017 are detailed in Appendix IV.
The breakdown of Telefónica’s derivatives at December 31, 2013,2016, their fair value at year-end and the expected maturity schedule are as set forth in the table below:
| 2013 | |
| | | 2016 | | 2016 |
| Millions of euros | Fair value (**) | Notional amount Maturities (*) | Fair value (**) | Notional amount Maturities (*) |
| Derivatives | | 2014 | 2015 | 2016 | Subsequent years | Total | | 2017 | 2018 | 2019 | Subsequent years | Total |
| Interest rate hedges | 456 | (4,266) | 1,934 | 845 | (2,079) | (3,566) | (407 | ) | (535 | ) | (481 | ) | (653 | ) | 667 |
| (1,002 | ) |
| Cash flow hedges | 758 | (3,462) | 2,099 | (96) | 8,143 | 6,684 | 172 |
| (505 | ) | 150 |
| (417 | ) | 3,597 |
| 2,825 |
|
| Fair value hedges | (302) | (804) | (165) | 941 | (10,222) | (10,250) | (579 | ) | (30 | ) | (631 | ) | (236 | ) | (2,930 | ) | (3,827 | ) |
| Exchange rate hedges | 355 | (467) | 1,551 | 3,128 | 4,709 | 8,921 | (1,038 | ) | 823 |
| 1,170 |
| 359 |
| 2,760 |
| 5,112 |
|
| Cash flow hedges | 357 | (330) | 1,551 | 3,128 | 4,709 | 9,058 | (1,062 | ) | 1,028 |
| 1,170 |
| 359 |
| 2,760 |
| 5,317 |
|
| Fair value hedges | (2) | (137) | | (137) | 24 |
| (205 | ) | — |
| — |
| — |
| (205 | ) |
| Interest and exchange rate hedges | (233) | (468) | (321) | 465 | 1,923 | 1,599 | (1,842 | ) | (260 | ) | 24 |
| 1,149 |
| 4,273 |
| 5,186 |
|
| Cash flow hedges | (58) | (383) | (200) | 566 | 2,779 | 2,762 | (1,707 | ) | (277 | ) | 309 |
| 1,160 |
| 4,215 |
| 5,407 |
|
| Fair value hedges | (175) | (85) | (121) | (101) | (856) | (1,163) | (135 | ) | 17 |
| (285 | ) | (11 | ) | 58 |
| (221 | ) |
| Net investment hedges | (277) | (1,992) | (162) | (1,151) | (60) | (3,365) | |
| Other derivatives | (434) | 1,918 | (63) | (710) | (1,928) | (783) | |
| Net investment Hedges | | (7 | ) | (2,309 | ) | (33 | ) | (36 | ) | — |
| (2,378 | ) |
| Other Derivatives | | (107 | ) | 1,256 |
| (332 | ) | (437 | ) | (2,702 | ) | (2,215 | ) |
| Interest rate | (359) | 2,353 | (141) | (710) | (1,941) | (439) | 9 |
| 1,232 |
| (471 | ) | (456 | ) | (2,818 | ) | (2,514 | ) |
| Exchange rate | (75) | (435) | 78 | | 13 | (344) | (101 | ) | (574 | ) | 139 |
| 19 |
| 116 |
| (299 | ) |
| Others | | − | (15 | ) | 598 |
| — |
| — |
| — |
| 598 |
|
| (*) For interest rate hedges, the positive amount is in terms of fixed “payment.” For foreign currency hedges, a positive amount means payment in functional vs. foreign currency. | |
| (**) Positive amounts indicate payables. | |
| | |
A list(*) For interest rate hedges, the positive amount is in terms of derivative products entered intofixed “payment.” For foreign currency hedges, a positive amount means payment in functional vs. foreign currency.
(**) Positive amounts indicate payables.
The fair value of the Telefónica Group derivatives at December 31, 2014 is provided in Appendix IV.
2016 amounted to a positive MTM (accounts receivable) of 3,401 million euros.
Note 17. Income tax matters
Consolidated tax group in Spain
Pursuant to a Ministerial Order dated December 27, 1989, Telefónica, S.A. files consolidated tax returns in Spain for certain Group companies. The consolidated tax group comprised 4945 companies at December 31, 2017 (58 companies at December, 31 2016).
This tax consolidation regime applies indefinitely providing the companies continue to meet the requirements set down in prevailing legislation, and 51 companies in 2014 and 2013, respectively.
Amendment to the Spanish Corporate Income Tax Law
Spanish Law 27/2014 of 27 November on Corporate Income Tax stipulates a reductionthat application of the current tax rate for financial year endingregime is not expressly waived.
Group companies resident in 2014 (30%). It has been set at 28% for financial year ending in 2015, and at 25% for financial year ending in 2016 and following years.
In addition, although a limit is established to offset tax loss carryforwards at 60% for 2016 and at 70% for 2017 and subsequent years, the time limit to offset them, which was 18 years, is removed.
These 2014 consolidated financial statements include the effect of the lower rate on the deferred tax assets and liabilities of companies formingSpain that are not part of this consolidation regime and non-resident companies file individual or aggregated tax returns under the tax grouplaw applicable in Spain. The net effect is an income tax expense amounting to 50 million euros.
each country.
Deferred taxes movement
The movements in deferred taxes in the TelefóTelefónica Group in 20142017 and 20132016 are as follows:
|
| | | | |
| Millions of euros | Deferred tax assets |
| Deferred tax liabilities |
|
| Balance at December 31, 2016 | 8,229 |
| 2,395 |
|
| Additions | 1,702 |
| 579 |
|
| Disposals | (1,711 | ) | (413 | ) |
| Transfers | (196 | ) | (391 | ) |
| Translation differences and hyperinflation adjustments | (211 | ) | (70 | ) |
| Company movements and others | 7 |
| 45 |
|
| Balance at December 31, 2017 | 7,820 |
| 2,145 |
|
|
| | | | |
| Millions of euros | Deferred tax assets |
| Deferred tax liabilities |
|
| Balance at December 31, 2015 | 8,675 |
| 2,550 |
|
| Additions | 2,141 |
| 327 |
|
| Disposals | (2,325 | ) | (519 | ) |
| Transfers | (194 | ) | (12 | ) |
| Translation differences and hyperinflation adjustments | (28 | ) | 14 |
|
| Company movements and others | (40 | ) | 35 |
|
| Balance at December 31, 2016 | 8,229 |
| 2,395 |
|
Main changes registered in 2017
| Millions of euros | Deferred tax assets | Deferred tax liabilities |
| Balance at December 31, 2013 | 6,376 | 3,063 |
| Additions | 1,763 | 408 |
| Disposals | (1,152) | (1,009) |
| Transfers | (132) | 58 |
| Translation differences and hyperinflation adjustments | 3 | 22 |
| Company movements and others | 9 | 24 |
| Balance at December 31, 2014 | 6,867 | 2,566 |
| |
| Millions of euros | Deferred tax assets | Deferred tax liabilities |
| Balance at December 31, 2012 | 7,308 | 4,788 |
| Additions | 1,662 | 614 |
| Disposals | (1,007) | (691) |
| Transfers | (1,442) | (1,516) |
| Translation differences and hyperinflation adjustments | (156) | (149) |
| Company movements and others | 11 | 17 |
| Balance at December 31, 2013 | 6,376 | 3,063 |
| |
“Additions”After the early termination of the contract with PARAPAT (refer to Note 2), Colombia Telecomunicaciones, S.A. ESP derecognized tax credits due to temporary differences associated with the debt with PARAPAT amounting to 324 million euros, and recognized tax credits for negative tax bases and temporary differences of 233 million euros and 63 million euros, respectively. Besides, after the completion of a deferred tax assets in 2014 includes the impact of the Law 12,973/14, resulting from the conversion of Interim Measure 627/13, published in Brazil on May 13, 2014. As a result of the entry into force of this new law, the tax effects were revisited for certain assets arising from the business combination of Telesp and Vivo Participaçoes and, therefore, the Telefónica Group revised the deferred tax assets associated with such assets. The impact on “Corporate income tax”asset recoverability analysis, based in the consolidated income statement for 2014 is a reduction in the expense of 394 million euros.
“Additions” in 2014 includes among others, theCompany financial projections, tax effect of the 70% limitation on assets depreciation in Spain of 118losses carryforwards amounting to 163 million euros in 2014 and 128 million euros in 2013, the adjustment of the value of the investment of have also been capitalized.
Telefónica S.A in Telco, S.p.A. of 108 million euros (108 million euros in 2013), and 189 million euros due to the impact of the application of the rate resulting in the allocations
conducted through SICAD II, as reference rate to translate the Venezuelan bolivar (see Note 2), which is not tax deductible in 2014.
Also, Colombia Telecom, which generated in 2014 taxable profit,Brasil recognized tax credits for loss carryforwards andamounting to 198 million euros, mainly generated in the year. On the other hand, the evolution of temporary differences chieflyresulted in additions and disposals of deferred tax assets amounting to 258 million euros and 281 million euros, respectively. In addition, Telefónica Brasil recognized deferred tax liabilities amounting to 317 million euros, mainly related to the tax amortization of goodwill.
After the merger through absorption of its subsidiary Telefónica Móviles Chile, S.A., Inversiones Telefónica Móviles Holding, S.A. recognized deferred tax assets totaling 193 million euros.
The deferred tax assets of Telefónica Germany decreased from 427 million euros at December 31, 2016 to 162 million euros at December 31, 2017, mainly due to the finance lease agreement with PARAPATevolution of temporary differences for the tax amortization of intangible assets.
Given that Venezuela is considered a hyperinflationary economy, the financial statements of Telefónica Venezolana are adjusted for inflation (see Note 22)3.a). The hyperinflation adjustment is not deductible according to the present tax regime in Venezuela, thus it generates deferred taxes for the differences between the accounting value and the tax
value of the net assets. These deferred taxes do not represent a cash outflow and the net impact in equity will be neutral when the assets are totally amortized. The movement of these deferred taxes in 2017 generated a tax expense of 138 million euros (see Note 2).
The additions of deferred tax assets included tax credits recognized in the amount of 1,032 million Colombian pesos (roughly 39082 million euros by the German company Group 3G UMTS Holding GmbH. Furthermore, this company applied tax loss carryforwards in 2017 amounting to 78 million euros.
In 2017 the additions of which 126deferred tax assets recognized in the amount of 84 million euros correspondwere the result of the provisions recognized during the year in relation to the various workforce restructuring plans of the companies included in the tax credits for loss carryforwards and 264 million euros correspond to temporary differences).
In 2014 the Group recorded 64 million euros of tax credits for tax deductions, mainly for R+Dgroup in Spain (146 million euros in 2013)(see Note 15).
“Additions”The disposals of deferred tax assets in 2013 mainly2017 also included the positive impact of the recognition of tax credits for tax losses carryforwards at several Group companies in Spain, Germany and Brazil of 547 million euros. In 2014 the recognition of tax credits for tax losses carryforwards from prior years amounted to 255 million euros, which includes 126 million euros recognized in Colombia Telecom commented before.
Transfers during 2013 mainly relate to the offsetting of deferred tax assets and liabilities as a result of the merger of Telefónica companies in Brazil completed in 2013.
“Disposals” of deferred tax assets include the impact of the Group’s labor force reduction plans in Spain, amounting to 207192 million euros.
Furthermore, in compliance with the sixteenth transitional provision of this amended Royal Decree-Law, which requires the inclusion of one-fifth of the investment portfolio impairment losses which had been deductible in the tax base before January 1, 2013, the Group reclassified 229 million euros of deferred tax liabilities in order to recognize a higher tax payable to the Spanish tax authorities, corresponding to one-fifth of the tax losses affected by this law.
The companies in the Spanish tax group recognized on disposals deferred tax assets totaling 134 million euros in 20142017, as a result of the limit placed on deductible financial expenses.
The movements relating deferred tax recognized directly in equity in 2017 amounted to 24 million euros of additions and 18696 million euros of disposals.
Main changes registered in 2016
Among other changes, the amendment to the Spanish Corporate Income Tax Law by Royal Decree-Law (RDL) 3/2016, of 2 December, limited the use of tax loss carryforwards to 25%. As a result of the testing on the recoverability of deferred tax assets, carried out by the Group under the new legislative framework, it derecognized deferred tax assets relating to tax loss carryforwards amounting to 866 million euros.
Furthermore, in compliance with the sixteenth transitional provision of this amended Royal Decree-Law, which requires the inclusion of one-fifth of the investment portfolio impairment losses which had been deductible in the tax base before January 1, 2013, the Group reclassified 237 million euros of deferred tax liabilities in order to recognize a higher tax payable to the Spanish tax authorities, corresponding to one-fifth of the tax losses affected by this law.
Likewise, as a result of the testing on the recoverability mentioned before, the Group capitalized tax deductions in the companies of the tax group in Spain amounting to 755 million euros, which had yet to be recognized at December 31, 2015.
In 2016 the additions of deferred tax assets recognized in the amount of 334 million euros were the result of the provisions recognized during the year in relation to the various workforce restructuring plans of the companies included in the tax group in Spain (see Note 15).
The companies in the Spanish tax group recognized on disposals deferred tax assets totaling 134 million euros in 2013.2016, as a result of the limit placed on deductible financial expenses.
The disposals of deferred tax assets in 2016 also included the impact of the Group’s labor force reduction plans in Spain, amounting to 224 million euros.
In 2014The additions of deferred tax assets included tax credits recognized in the amount of 115 million euros by the German company Group recorded disposals3G UMTS Holding GmbH. Furthermore, this company applied tax loss carryforwards in 2016 amounting to 89 million euros.
As a result of the testing on the recoverability of deferred tax assets in Telefónica Germany GmbH & Co OHG at year-end, this company capitalized tax losses in the amount of 112 million euros, and derecognized temporary differences in deferred tax assets amounting to 307201 million euros, andeuros.
The disposals inof deferred tax liabilities amounting to 226in 2016 included 112 million euros corresponding to the tax on dividends to foreign beneficiaries in relation withArgentina, repealed during the aforementioned reduction of the current tax rate.year.
The movements inrelating deferred tax assets, recognized directly in equity in 2014 amount2016 amounted to 9569 million euros of “additions”additions and 2664 million euros of “disposals” (38 million euros of “additions” and 225 million euros of “disposals” in 2013). The movements in deferred tax liabilities, recognized directly in equity in 2014 amount to 32 million euros of “additionsdisposals.” and 73 million euros of “disposals” (7 million euros of “additions” and 1 million euros of “disposals” in 2013).
Expected realization of deferred tax assets and liabilities
In the majority of cases, realization of the Group’s deferred tax assets and liabilities depends on the future activities carried out by the different companies, on tax regulations in the different countries in which these companies operate, and on the strategic decisions affecting the companies. Under the assumptions made, the estimated realization of deferred tax assets and liabilities recognized in the consolidated statement of financial position at December 31, 20142017 is as follows:
| 12/31/2014 | Total | Less than 1 year | More than 1 year |
| Deferred tax assets | 6,867 | 1,239 | 5,628 |
| Deferred tax liabilities | 2,566 | 269 | 2,297 |
| |
|
| | | | | | |
| Millions of euros | Total |
| Less than 1 year |
| More than 1 year |
|
| Deferred tax assets | 7,820 |
| 922 |
| 6,898 |
|
| Deferred tax liabilities | 2,145 |
| (86 | ) | 2,231 |
|
Deferred tax assets
Deferred tax assets in the accompanying consolidated statements of financial position include the tax loss carryforwards, unused tax credits recognized and deductible temporary differences recognized at the end of the reporting period.
|
| | | | |
| Millions of euros | 12/31/2017 |
| 12/31/2016 |
|
| Tax credits for loss carryforwards | 2,776 |
| 2,513 |
|
| Unused tax deductions | 1,858 |
| 1,727 |
|
| Deferred tax assets for temporary differences | 3,186 |
| 3,989 |
|
| Total deferred tax assets | 7,820 |
| 8,229 |
|
Tax credits for loss carryforwards
The movements in Tax credits for loss carryforwards in the Telefónica Group in 2017 and 2016 are as follows:
|
| | | | | | | | | | | | |
| Location of the company (Millions of euros) | Balance at 12/31/2016 |
| Additions |
| Reversals |
| Perimeter changes |
| Translation differences and other |
| Balance at 12/31/2017 |
|
| Spain | 1,617 |
| — |
| (114 | ) | (1 | ) | (2 | ) | 1,500 |
|
| Germany | 550 |
| 82 |
| (160 | ) | — |
| — |
| 472 |
|
| Hispanoamérica | 321 |
| 675 |
| (53 | ) | — |
| (144 | ) | 799 |
|
| Other countries | 25 |
| — |
| (20 | ) | — |
| — |
| 5 |
|
| Total tax credits for loss carryforwards | 2,513 |
| 757 |
| (347 | ) | (1 | ) | (146 | ) | 2,776 |
|
|
| | | | | | | | | | | | |
| Location of the company (Millions of euros) | Balance at 12/31/2015 |
| Additions |
| Reversals |
| Perimeter changes |
| Translation differences and other |
| Balance at 12/31/2016 |
|
| Spain | 2,520 |
| 2 |
| (866 | ) | — |
| (39 | ) | 1,617 |
|
| Germany | 413 |
| 226 |
| (89 | ) | — |
| — |
| 550 |
|
| Hispanoamérica | 192 |
| 157 |
| — |
| — |
| (28 | ) | 321 |
|
| Other countries | 24 |
| 6 |
| (2 | ) | — |
| (3 | ) | 25 |
|
| Total tax credits for loss carryforwards | 3,149 |
| 391 |
| (957 | ) | — |
| (70 | ) | 2,513 |
|
The Spanish tax group in Spain had unused tax loss carryforwards at December 31, 20142017 amounting to 9,94011,132 million euros:
|
| | | | | |
| Million of euros | Total | Less than 1 year |
| More than 1 year |
|
| Tax loss carryforwards generated in the tax group | 8,077 | 237 |
| 7,840 |
|
| Tax loss carryforwards generated before consolidation in the tax group | 3,055 | — |
| 3,055 |
|
In 2016, after the amendment to the Spanish Corporate Income Tax Law by Royal Decree-Law 3/2016, of December 2, that limits the use of tax loss carryforwards to 25% and as a result of the testing on the recoverability of deferred tax assets, carried out by the Group under the new legislative framework, deferred tax assets relating to tax loss carryforwards were derecognized, amounting to 866 million euros. The estimated schedule is
In 2017, as a result of the following:
| | Total | Less than 1 year | More than 1 year |
| Tax loss carryforwards | 9,940 | - | 9,940 |
In 2012, subsequent totesting on the inspectionrecoverability of deferred tax assets, carried out by the Group under the new legislative framework, it has derecognized deferred tax authorities, theassets relating to tax group in Spain reevaluated itsloss carryforwards amounting to 98 million euros. Total tax credits based on the business plans of the companies in the tax group and the best estimate of taxable income, over a period of time that is in line with the state of the various markets in which they operate. As a result, a reduction of 458 million euros in “Corporate income tax" was recognized in 2012. In 2013, the tax credits of the tax group in Spain were reevaluated using the same criteria as in the prior year, resulting in a reduction in “Corporate income tax" of 190 million euros.
Total taxfor loss carryforwards in Spain in the statement of financial position at December 31, 2014 amount2017 amounted to 1,1681,500 million euros.euros (1,617 million euros at December 31, 2016). Total unrecognized tax credits of the Spanish tax group amounted to 1,283 million euros at December 31, 2017. These tax credits do not expire.
The Group companies in Germany have recognized 472 million euros of tax credits for loss carryforwards at December 31, 2017. Total unrecognized tax credits for tax lawloss carryforwards of these companies amount to 1,3176,500 million euros. These tax credits do not expire.
The various Group companies in the rest of Europe have recognized 847 million euros of unrecognized tax credits, mainly from the tax loss carryforwards of the Telefónica companies in Germany. Total unrecognized tax credits for tax loss carryforwards of these companies amount to 6,045 million euros. These tax credits do not expire.
Recognized tax credits in the consolidated statement of financial arising from the Latin American subsidiaries at December 31, 20142017 amounted to 280799 million euros. Total unrecognized tax credits for tax loss carryforwards in Latin America amount to 422165 million euros.
Deductions
The tax groupGroup has recognized 2461,858 million euros corresponding to the total amount of unused tax deductions in the consolidated statement of financial position at December 31, 2014,2017, of the tax group in Spain, generated primarily from export activity, R+D+i, double taxation and donations to non-profit organizations.
In 2017 and 2016, tax credits from deductions were recognized, in the amount of 71 and 755 million euros, respectively.
Temporary differences
The sources of deferred tax assets and liabilities from temporary differences recognized at December 31, 20142017 and 20132016 are as follows:
| | | Millions of euros | 12/31/2014 | 12/31/2013 | 12/31/2017 |
| 12/31/2016 |
|
| Goodwill and intangible assets | 792 | 1,239 | 1,044 |
| 1,347 |
|
| Property, plant and equipment | 793 | 651 | 1,139 |
| 1,243 |
|
| Personnel commitments | 969 | 1,238 | 1,562 |
| 1,665 |
|
| Provisions | 1,381 | 1,017 | 1,079 |
| 1,134 |
|
| Investments in subsidiaries, associates and other shareholdings | | 869 | 4 |
| — |
|
| Inventories and receivables | 436 | | 301 |
| 356 |
|
| Other | 1,746 | 1,035 | 746 |
| 1,154 |
|
| Total deferred tax assets for temporary differences | 6,984 | 6,252 | 5,875 |
| 6,899 |
|
| | |
| Deferred tax assets and liabilities offset | | (2,689 | ) | (2,910 | ) |
| Total deferred tax assets for temporary differences registered in the statement of financial position | | 3,186 |
| 3,989 |
|
F-77 |
| | | | |
| Millions of euros | 12/31/2017 |
| 12/31/2016 |
|
| Goodwill and intangible assets | 2,192 |
| 2,308 |
|
| Property, plant and equipment | 1,168 |
| 1,190 |
|
| Personnel commitments | 35 |
| 34 |
|
| Provisions | 42 |
| 31 |
|
| Investments in subsidiaries, associates and other shareholdings | 1,015 |
| 1,299 |
|
| Inventories and receivables | 53 |
| 85 |
|
| Other | 329 |
| 358 |
|
| Total deferred tax liabilities for temporary differences | 4,834 |
| 5,305 |
|
| Deferred tax assets and liabilities offset | (2,689 | ) | (2,910 | ) |
| Total deferred tax liabilities for temporary differences registered in the statement of financial position | 2,145 |
| 2,395 |
|
| Millions of euros | 12/31/2014 | 12/31/2013 |
| Goodwill and intangible assets | 1,550 | 1,659 |
| Property, plant and equipment | 1,395 | 1,304 |
| Personnel commitments | 25 | − |
| Provisions | 28 | 15 |
| Investments in subsidiaries, associates and other shareholdings | 1,366 | 1,653 |
| Inventories and receivables | 89 | 26 |
| Other | 771 | 282 |
| Total deferred tax liabilities for temporary differences | 5,224 | 4,939 |
| |
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. At December 31, 2014, deferred tax assets and liabilities amounting to 2,658 million euros were offset, affected by the inclusion of E-Plus in the scope of consolidation (1,876 million euros at December 31, 2013).
The heading "Other” includes, among others, the difference between the accounting and tax values created by the value of financial derivatives at year end (see Note 16) and deferred tax assets in relation with the finance lease of handsets.
.
Tax payables and receivables
Current tax payables and receivables at December 31, 20142017 and 20132016 are as follows:
| Millions of euros | Balance at 12/31/2014 | Balance at 12/31/2013 |
| Taxes payable | | |
| Tax withholdings | 126 | 103 |
| Indirect taxes | 1,012 | 896 |
| Social security | 168 | 152 |
| Current income taxes payable | 335 | 575 |
| Other | 385 | 477 |
| Total | 2,026 | 2,203 |
| |
F-78 |
| | | | |
| Millions of euros | Balance at 12/31/2017 |
| Balance at 12/31/2016 |
|
| Taxes payable | |
| |
|
| Tax withholdings | 154 |
| 81 |
|
| Indirect taxes | 1,030 |
| 1,086 |
|
| Social security | 151 |
| 157 |
|
| Current income taxes payable | 580 |
| 486 |
|
| Other | 426 |
| 522 |
|
| Total | 2,341 |
| 2,332 |
|
| |
| Millions of euros | Balance at 12/31/2017 |
| Balance at 12/31/2016 |
|
| Tax receivables | |
| |
|
| Indirect tax | 618 |
| 790 |
|
| Current income taxes receivable | 618 |
| 601 |
|
| Other | 139 |
| 142 |
|
| Total | 1,375 |
| 1,533 |
|
| Millions of euros | Balance at 12/31/2014 | Balance at 12/31/2013 |
| Tax receivables | | |
| Indirect tax | 595 | 620 |
| Current income taxes receivable | 953 | 870 |
| Other | 201 | 174 |
| Total | 1,749 | 1,664 |
| |
Reconciliation of book profit before taxes to taxable income
The reconciliation between book profit before tax and the income tax expense from continuing operations for 2014, 20132017, 2016 and 20122015 is as follows:
| | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Accounting profit before tax | 3,635 | 6,280 | 5,864 | 4,597 |
| 3,245 |
| 906 |
|
| Tax expense at prevailing statutory rate | 1,046 | 1,935 | 1,903 | 1,310 |
| 897 |
| 209 |
|
| Permanent differences | 317 | (124) | 307 | (186 | ) | (42 | ) | 177 |
|
| Changes in deferred tax charge due to changes in tax rates | 89 | (21) | (27) | 19 |
| 1 |
| (8 | ) |
| Capitalization of tax deduction and tax relief | (74) | (146) | (81) | |
| Use/ Capitalization of loss carryforwards | (255) | (547) | (404) | |
| Increase / (Decrease) in tax expense arising from temporary differences | (792) | 95 | (297) | |
| (Capitalization)/reversal of tax deduction and tax relief | | (79 | ) | (762 | ) | 453 |
|
| (Capitalization)/reversal of loss carryforwards | | (123 | ) | 714 |
| (1,200 | ) |
| (Increase)/decrease in tax expense arising from temporary differences | | 157 |
| (8 | ) | 72 |
|
| Other | 52 | 119 | 60 | 121 |
| 46 |
| 452 |
|
| Income tax expense | 383 | 1,311 | 1,461 | 1,219 |
| 846 |
| 155 |
|
| Breakdown of current/deferred tax expense | | |
| |
| |
|
| Current tax expense | 1,480 | 2,221 | 1,726 | 968 |
| 1,012 |
| 1,753 |
|
| Deferred tax benefit | (1,097) | (910) | (265) | |
| Deferred tax expense / (benefit) | | 251 |
| (166 | ) | (1,598 | ) |
| Total income tax expense | 383 | 1,311 | 1,461 | 1,219 |
| 846 |
| 155 |
|
| | |
Tax“Other” in 2015 includes the impacts of the inspections and tax-related lawsuits
Tax Groupin the tax group in Spain
In December 2012 and the National Court of Justice issued a ruling on the tax inspection for the years 2001 to 2004, accepting the tax losses incurred by the Groupprovision recognized in relation to the transfer of certain interests in TeleSudeste, Telefónica Móviles México and Lycos as tax deductible and rejecting the other allegations. On December 28, 2012, the Company filed an appeal with the Supreme Court.del Perú.
Also in 2012,Tax deductibility of financial goodwill in Spain the tax inspections for all taxes for the years 2005 to 2007 were completed, with the Company signing consent forms for an income tax payment of 135 million euros that was paid and non-consent form for the items which the Company contests.
The tax assessment for which a non-consent form was signed did not require payment of any tax because it only proposed a reduction in unused tax loss carryforwards. An appeal was filed with the Large Taxpayers Central Office of the Spanish State Tax Agency requesting this tax assessment be reversed, although no decision on the appeal has been issued as of the date of preparation of these consolidated financial statements.
In July 2013, new inspections of various companies in the 24/90 Tax Group, of which Telefónica, S.A. is the parent were initiated. The taxes and periods subject to review are corporate income tax for the years 2008 to 2011, VAT, tax withholdings and payments on account in respect of personal income tax, tax on investment income, property tax and non-resident income tax for the second half of 2009 and the years 2010 and 2011. It is not expected that these inspections in progress will result in the need to recognize any additional liabilities in the Telefónica Group’s consolidated financial statements.
b) | Tax deductibility of financial goodwill (Article 12.5) |
Spainregulations added a new Articlearticle 12.5 to its Corporate Income Tax Law, which came into force on January 1, 2002. The article regulated the deductibility of tax amortization of financial goodwill arising from the acquisition of non-Spanish companies, which could be amortized over 20 years at 5% per annum. Following the entry into force of the Laws 9/2011 of August 19, 2011 and 16/2013 of October 29, 2013, the amount of goodwill amortization deductible for tax purposes under article 12.5 for the years 2011 to 2015 was reduced from 5% to 1%. The effect is temporary because the 4% not amortized during five years (20% in total) will be recovered extending the deduction period from the initial 20 years to 25 years.
The Telefónica Group, under this regulation, has been amortizing for tax purposes the financial goodwill from its investments, both direct and indirect, in O2, Cesky Telecom, BellSouth and Coltel (all predating(prior to December 21, 2007) with a cumulativeand Vivo (acquired in 2010). The positive impact on consolidatedaccumulated effect in the corresponding settlements of corporate income tax expense from 2004 to 2014the closing of 795December 31, 2017, was 1,226 million euros.
On December 20, 2007In relation to this tax incentive, the European Commission challenged(EC) has in recent years commenced three proceedings against the Spanish law, on the groundsState as it deems that this tax benefit constituted Statecould constitute an example of state aid. On October 28, 2009Although the Commission issued a First Decision rulingEC itself acknowledged the validity of its first two decisions for those investors that Article 12.5 constituted State aid, although it upheld the legitimacy ofinvested in European companies (for operations carried out prior to publication of the commencement of the investigation procedurebefore December 21, 2007 in the EU's Official Journal.
On January 12, 2011 the Commission issued a Second Decision ruling that, in the case of acquisitions in non-European Union countries up tofirst decision, and before May 21, 2011 the system establishedfor investments in other countries in the original version of Article 12.5 could still be applied, provided certain conditions were fulfilled.
After the proceedings initiated on July 17, 2013, onsecond decision), in its third decision from October 15, 2014 the Commission declared that the Binding Consultation in connection with financial goodwill on indirect acquisitions also constituted State aid and cast doubt onit calls into question the applicability of the principle of legitimate expectations acknowledged in the two previous Decisions, now disallowing itapplication of the incentive for indirect acquisitions.acquisitions, whatever the date of acquisition may have been.
On November 7, 2014As of the date of these consolidated financial statements, the three decisions continue subject to a final ruling. The first two were annulled by two judgments of the General Court of the European Union, which were appealed by the EC before the Court of Justice of the European Union and sent again to the General Court issued two rulings overturningby the FirstJudgment dated December 21, 2016, to reassess the tax incentive. The third decision is still pending a judgment at first instance. Furthermore, there are doubts in the Spanish courts regarding the classification of the incentive as a deduction and Second European Union Decisions, asif this deduction would remain in the case of a subsequent transfer of the relevant stake.
The Group has continued provisioning the amount of the goodwill amortized for tax purposes, corresponding mainly to the purchase of Vivo, for a total of 215 million euros at December 31, 2017 (147 million euros at December 31, 2016).
Inspections of the tax group in Spain
In 2012, tax inspections for all taxes for the years 2005 to 2007 were completed, with the Company signing off a corporate income tax assessment of 135 million euros, which was paid in 2012, whilst disputing other adjustments with which it has considered thatdisagreed. Although the system permitting amortization of goodwill in Spainsettlement agreement for the disputed tax assessment did not constitute State aid becausegive rise to any tax payment, since the adjustments proposed were offset by unused tax loss carryforwards, the Company filed an appeal with the Central Economic-Administrative Court against these adjustments in May 2015, regarding the tax treatment of the “juros sobre el capital propio” (interest on own capital) as dividends.
In July 2015 tax inspections for all taxes for the years 2008 to 2011 were completed, with the Company signing off certain corporate income tax assessments and disputing others. This resulted in 2015 in an expense amounting to 206 million euros. However, this did not require any tax payment, as the adjustments arising from the inspection were offset by unused tax loss carryforwards, at the corresponding tax rate for each period.
Although the settlement agreement for the disputed tax assessment did not give rise to any tax payment, in July 2015 the Company filed an appeal with the Central Economic-Administrative Court against the adjustments it had not been proven thatdisputes, regarding the action takentax treatment of the “juros sobre el capital propio” (interest on own capital) as dividends, and the criteria to use tax loss carryforwards in the years subject to settlement.
In June 2017 the Company received an order of the Audiencia Nacional extending the effects of its ruling from February 27, 2014 from another tax payer to the individual legal status of Telefónica, in connection with the “Juros sobre el capital propio” (interest on own capital). As a consequence of the aforementioned, the Audiencia Nacional has voided the corporate income tax assesment for the years 2005 to 2007 and 2008 to 2011 related to “Juros sobre el capital propio” settled by the Spanish authorities was selective. The European Commission submitted an appeal against both rulingstax authorities.
With respect to the EU's Courtuse of Justice.tax loss carryforwards in the years subject to settlement during the inspection 2008 to 2011, still under litigation, in November 2017 the Company brought a judicial appeal to the Audiencia Nacional, against the alleged dismissal of the claim in the absence of a reply from the authorities.
At 2017 year end, it is not expected that there is any need to recognize additional liabilities for the outcome of this litigation.
Tax litigation in Telefónica BrasilBrazil
State taxes
The Telefónica Brasil hasGroup is involved in a range of tax litigation in Brazil over direct and indirect taxes (including those relating to GVT). This includes a number of appeals ongoing regarding therelating to ICMS tax (a tax similar to VAT, levied on telecommunications services). There is a dispute with the Brazilian tax authorities over which services should be subject to settlement of this tax. In 2014 the tax authorities embarked upon a new round of inspections in this regard.
To date the most significant issues have focused on the requirement to collect the ICMS on penalties charged to customers for non-compliance, Internet advertising services, and complementary or additional services to the basic telecommunications services such as value-added services, modem rental, and modem rental.the application of this tax on the basic fee (assinatura básica). In the case of the latter (assinatura básica), there is a pending case before the Supreme Court including Oi, which could affect other companies of the telecommunications sector.
All related procedures are being contested in all instances (administrative and court proceedings). The aggregate amount of these assessments,the relevant proceedings, updated to take into account interest, fines and other items, is approximately 9,70018,968 million Brazilian reais (3,010(approximately 4,781 million euros)euros, see Note 15). No provisions have been set aside for these matters, as the risk of them giving rise to liabilities is not probable. Telefónica BrasilBrazil has obtained independent expert reports supporting its position, i.e. that the aforesaid services are not subject to ICMS.
Federal taxes
Regading the ICMS.income tax (federal tax) the tax authorities proposed adjustments in relation to the tax amortization in 2011 and 2012 of the goodwill generated by Telefónica Brasil's acquisition and merger with Vivo. The tax inspections were conducted in 2016 and 2017 and the accumulated amount at December 31, 2017 is 4,744 million Brazilian reais (approximately 1,196 million euros). This proceedings are at the administrative stage and no provisions have been made since the potential risk associated to them has been classified as "not probable" and Telefónica Brazil has received independent expert reports that support this view.
Tax litigation in Telefónica del Perú
Regarding the Group’s mainWith regard to tax litigationmatters in Peru, litigation continues over corporate income tax for 2000 and 2001, payments on March 20, 2013, notification was receivedaccount in respect of the year 2000, recoverable balances for 1998 and 1999, and the interest and penalties that should apply to these.
In August 2015, the court of second instance handed down a first instance court decisionruling partially upholding the position of Telefónica Peru’s argumentsdel Perú, ruling in its favor on three of the five objections filed by the tax authorities and appealed against in higherto the courts, regardingrelating, inter alia, to corporate income tax in 2000/2001, which accountedfor 2000-2001 (among others). This dispute accounts for more than 75% of the total amount under litigation, amount (thewith the objections related respectivelyrelating to the provision for insolvency provisions, interest on borrowing and leases of space for public telephones). The company also obtained a precautionary measure in this regard amounting to 1,413 million Peruvian soles (391 million euros). Court proceedings are also ongoing concerning the possible offsetting of recoverable balances in 1998 and 1999, and the interest and penalties to be applied.telephones. Both the tax authorities and the company have appealedfiled appeals against the decision in higher courts.
The settlements carried out by SUNAT for 2000 and 2001 are in the court of second instance.
In parallel to the aforementioned court proceedings, the tax authorities proceeded to collect tax dues relating to the corporate income tax for the years 2000-2001 and payments on accountfinal stage of the corporate income taxlegal process (under review by the Supreme Court) and a ruling has not yet been released in respect of the year 2000, considering the recoverable balances for 1998 and 1999. There were successive reductions to the sums
claimed in the two cases following appeals submitted by Telefónica del Peru against the settlements and the precautionary measure commented above, up until the company finally paid out 286 million Peruvian soles (80 million euros) in 2012 and 2013 pending the related rulings, whereby the estimated claim amount would be 1,581 million Peruvian soles (437 million euros) if the outcome was unfavorable. No further action was taken in connection with these administrative procedures in 2014, and therefore they are still pending with the Tax Court (administrative phase). An appeal may be submitted against an adverse outcome, and an application may be made for a suspension injunction.
In connection with these proceedings in Peru, the Group and its legal advisors consider they may havethat the Group’s position continues to be based on robust legal argumentsarguments.
In parallel to bring aboutthe aforementioned court proceedings, the tax authorities proceeded to collect corporate income tax due for the years 2000-2001 and payments on account of corporate income tax in respect of the year 2000. There were successive reductions to the sums claimed in the two cases following appeals filed by Telefónica del Perú against the settlements and due to the precautionary measures imposed. The company paid out 286 million Peruvian soles (approximately, 80 million euros) in 2012 and 2013 pending the final rulings.
In the context of these execution processes, in June 2015 the tax authorities issued Compliance Resolutions demanding payment of 1,521 million Peruvian soles (approximately 431 million euros). An appeal was filed against this with the Tax Court, and the adoption of precautionary suspension measures duly requested from the legal authorities (as a probable favorabledefinitive court ruling with no significant effect on these cases is currently pending). No ruling was made in relation to these appeals in 2017, whilst in January 2018 the Group'sTax Court suspended payment until the final ruling of the Supreme Court.
Given the sentences and rulings handed down in June and August 2015, the Group decided to recognize a provision in the 2015 consolidated financial statements.
statements, that at December 31, 2017 amounted to 1,653 million Peruvian soles (approximately 425 million euros, see Note 15).
Years open for inspection in the Group companies
The years open for review by the tax inspection authorities for the main applicable taxes vary from one consolidated company to another, based on each country’s tax legislation, taking into account their respective statute-of-limitations periods. In Spain, following the tax audit completed in 2012,2015, the corporation tax from 2008 onwards and all other applicable taxes from 20092012 onwards are open to inspection with respect to the main companies of the Spanish tax group.
In the other countries in which the Telefónica Group has a significant presence, the years open for inspection by the relevant authorities are generally as follows:
The last thirteen years in Germany.
| · | The last ten years in Germany. |
The last nine years in United Kingdom.
The last seven years in Argentina.
| · | The last seven years in United Kingdom and Argentina. |
The last six years in Ecuador.
The last five years in Brazil, Mexico, Uruguay, Colombia and the Netherlands.
| · | The last five years in Brazil, Mexico, Uruguay, Colombia and the Netherlands. |
The last four years in Venezuela, Peru, Guatemala, Nicaragua and Costa Rica.
The last three years in Chile, El Salvador, the United States and Panama.
| · | The last four years in Venezuela, Peru, Guatemala and Costa Rica. |
| · | The last three years in Chile, Ecuador, Nicaragua, El Salvador, the United States and Panama. |
The tax inspection of the open years is not expected to give rise to additional material liabilities for the Group.
Note 18. Revenue and expenses
Revenues
The breakdown of “Revenues” is as follows:
| | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Rendering of services | 46,007 | 52,386 | 57,810 | 47,175 |
| 47,321 |
| 49,681 |
|
| Net sales | 4,370 | 4,675 | 4,546 | 4,833 |
| 4,715 |
| 5,235 |
|
| Total | 50,377 | 57,061 | 62,356 | 52,008 |
| 52,036 |
| 54,916 |
|
| | |
Other income
The breakdown of “Other income” is as follows: | | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Own work capitalized | 774 | 794 | 822 | 863 |
| 867 |
| 946 |
|
| Gain on disposal of companies | 5 | 63 | 123 | 3 |
| 228 |
| 18 |
|
| Gain on disposal of other assets | 367 | 336 | 802 | 176 |
| 130 |
| 298 |
|
| Government grants | 36 | 42 | 51 | 23 |
| 28 |
| 33 |
|
| Other operating income | 525 | 458 | 525 | 424 |
| 510 |
| 716 |
|
| Total | 1,707 | 1,693 | 2,323 | 1,489 |
| 1,763 |
| 2,011 |
|
| | |
“Gain on disposal of companies” in 2016 includes the gain on disposal of Telefónica Media Argentina, S.A. and Atlántida Comunicaciones, S.A., holding companies of the Group’s stake in Televisión Federal, S.A. (Telefé), amounting to 199 million euros.
“Gain on disposal of other assets” includes gains from the sale of telephone towers of 1987 million euros, 1131 million euros and 62065 million euros in 2014, 20132017, 2016 and 2012,2015, respectively. In 2015 it is also included the result of a spectrum swap with AT&T carried out by Telefónica Móviles México, amounting to 79 million euros.
“Other operating income” in 2015 included the registered result from the difference between the preliminary purchase price of E-Plus estimated at the end of the valuation period and the final price agreed with KPN, which amounted to 104 million euros. In 2015 it is also included an income resulting from the expiration of an account payable in Telefónica Brazil, amounting to 98 million euros.
Other expenses
The breakdown of “Other expenses” in 2014, 2013 and 2012 is as follows:
| | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Leases | 1,039 | 947 | 1,159 | 1,069 |
| 1,076 |
| 1,163 |
|
| Advertising | 1,226 | 1,290 | 1,528 | 1,211 |
| 1,256 |
| 1,367 |
|
| Other external services | 9,811 | 10,590 | 10,800 | 10,445 |
| 10,436 |
| 11,586 |
|
| Taxes other than income tax | 1,094 | 1,335 | 1,436 | 1,285 |
| 1,136 |
| 1,232 |
|
| Change in trade provisions | 693 | 701 | 777 | 863 |
| 799 |
| 831 |
|
| Losses on disposal of fixed assets and changes in provisions for fixed assets | 58 | 277 | 706 | 44 |
| 71 |
| 39 |
|
| Goodwill impairment (Note 7) | | — |
| 215 |
| 104 |
|
| Other operating expenses | 368 | 288 | 399 | 509 |
| 352 |
| 480 |
|
| Total | 14,289 | 15,428 | 16,805 | 15,426 |
| 15,341 |
| 16,802 |
|
| | |
In 2013, “Losses on disposal of fixed assets and changes“Other external services” in provisions for fixed assets” mainly includes2015 included a 325 million euros expense in relation with the value adjustment on assets allocated to Telefónica, Czech Republic amountingS.A.’s irrevocable commitment to 176pay a 325 million euros (see Note 2). This headingdonation to Fundación Telefónica to provide this entity with the financing required to implement the social programs and activities it currently performs or could initiate in 2012 mainly included the impact of the write-offs of the customer portfolio allocatedshort and medium term to the business in Ireland for 113 million euros and the related allocated goodwill for 414 million euros.fulfill its purpose as a foundation.
Estimated payment schedule
The estimated payment schedule in millions of euros for the next few years on operating leases and purchase and other contractual commitments (non-cancellable without penalty cost) are as follows:
F-82 |
| | | | | | | | | | |
| 12/31/2017 | Total | Less than 1 year |
| 1 to 3 years |
| 3 to 5 years |
| More than 5 years |
|
| Telefónica Brazil | 3,451 |
| 514 |
| 1,001 |
| 718 |
| 1,218 |
|
| Telefónica Germany | 2,340 |
| 520 |
| 660 |
| 453 |
| 707 |
|
| Telefónica Hispanoamérica | 1,793 |
| 376 |
| 582 |
| 409 |
| 426 |
|
| Telefónica Spain | 621 |
| 104 |
| 201 |
| 164 |
| 152 |
|
| Telefónica United Kingdom | 464 |
| 139 |
| 135 |
| 79 |
| 111 |
|
| Others | 430 |
| 86 |
| 144 |
| 89 |
| 111 |
|
Operating lease obligations(1) | 9,099 |
| 1,739 |
| 2,723 |
| 1,912 |
| 2,725 |
|
Purchase and other contractual obligations(2) | 11,373 |
| 5,326 |
| 2,957 |
| 1,421 |
| 1,669 |
|
(1) This item includes definitive payments (non-cancellable without penalty cost). Our operating lease obligations have in some cases extension options conditioned on the applicable law of each country. Accordingly, we have included only those amounts that represent the initial contract period.
| 12/31/2014 | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years |
| Telefónica Brazil | 3,077 | 399 | 744 | 623 | 1,311 |
| Telefónica Germany | 2,976 | 549 | 816 | 580 | 1,031 |
| Telefónica Hispanoamérica | 2,222 | 380 | 609 | 481 | 752 |
| Telefónica Spain | 975 | 153 | 242 | 198 | 382 |
| Telefónica United Kingdom | 801 | 127 | 206 | 162 | 306 |
| Others | 146 | 35 | 52 | 24 | 35 |
| Operating lease obligations | 10,197 | 1,643 | 2,669 | 2,068 | 3,817 |
| Purchase and other contractual obligations | 9,037 | 4,295 | 2,071 | 961 | 1,710 |
(2) This item includes definitive payments (non-cancellable without penalty cost) due for agreements to purchase goods (such as network equipment) and services.
At December 31, 2014,2017, the present value of future payments for Telefónica Group operating leases was 7,9667,344 million euros (1,715(2,239 million euros in Telefónica Brazil, 2,8372,258 million euros in Telefónica Germany, 1,6401,408 million euros in Telefónica Hispanoamérica, 930604 million euros in Telefónica Spain, 710432 million euros in Telefónica United Kingdom and 134403 million euros in other companies classified as “Others” on the table above).
The main finance lease transactions are described in Note 22.
Headcount
The table below presents the breakdown of the Telefónica Group’s average number of employees by segment (see Note 4) in 2014, 20132017, 2016 and 2012,2015, together with total headcount at December 31 each year. The employees shown for each subgroup include the Telefónica Group companies with similar activities in accordance with the segment reporting (see Note 4).
| | | | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 |
| | Average | Year-end | Average | Year-end | Average | Year-end | Average |
| Year-end |
| Average |
| Year-end |
| Average |
| Year-end |
|
| Telefónica Spain | 29,840 | 30,020 | 30,551 | 29,764 | 31,979 | 31,332 | 28,084 |
| 27,291 |
| 30,214 |
| 28,772 |
| 31,354 |
| 32,171 |
|
| Telefónica United Kingdom | 7,404 | 7,436 | 9,413 | 7,432 | 11,341 | 10,986 | 6,776 |
| 6,687 |
| 7,454 |
| 7,075 |
| 7,677 |
| 7,616 |
|
| Telefónica Germany | 6,596 | 10,848 | 5,655 | 5,572 | 5,592 | 5,638 | 8,653 |
| 8,535 |
| 8,341 |
| 8,517 |
| 9,941 |
| 8,557 |
|
| Telefónica Brazil | 18,337 | 18,419 | 18,930 | 18,388 | 20,008 | 19,481 | 33,991 |
| 34,125 |
| 34,247 |
| 33,782 |
| 28,488 |
| 33,847 |
|
| Telefónica Hispanoamérica | 38,098 | 38,104 | 38,733 | 38,638 | 38,303 | 38,771 | 38,043 |
| 37,539 |
| 38,889 |
| 38,901 |
| 38,232 |
| 37,951 |
|
| Other companies | 20,222 | 18,873 | 26,611 | 26,936 | 165,375 | 26,978 | 9,824 |
| 8,541 |
| 12,975 |
| 10,276 |
| 17,877 |
| 17,364 |
|
| Total | 120,497 | 123,700 | 129,893 | 126,730 | 272,598 | 133,186 | 125,371 |
| 122,718 |
| 132,120 |
| 127,323 |
| 133,569 |
| 137,506 |
|
| | |
The Group consolidates E-PlusGVT and DTS from October 1, 2014May 2015 (see Note 5). The number of employees of the E-Plus GroupGVT and DTS at that date was 5,033.
Employees corresponding to the business in Telefónica Ireland18,179 and Telefónica Czech Republic are included in the average headcount until the date they were removed from the consolidation scope (see Note 2). The average number of employees in 2014, 2013 and 2012 corresponding to these companies was 753, 6,820 and 7,502.
Employees corresponding to the Atento business are included in the average headcount until the date of the sale in December 2012. The average number of employees in 2012 corresponding to the Atento companies sold was 137,454.
1,818, respectively.
Of the final headcount at December 31, 2014,2017, approximately 37.8%37.7% are women (38.2%(37.6% at December 31, 2013)2016).
At December 31, 2017, the number of employees with disabilities is 842 (239 in Spain).
Depreciation and amortization
The breakdown of “Depreciation and amortization” on the consolidated income statement is as follows:
| | | Millions of euros | 2014 | 2013 | 2012 | 2017 |
| 2016 |
| 2015 |
|
| Depreciation of property, plant and equipment | 5,357 | 6,179 | 6,931 | |
| Amortization of intangible assets | 3,191 | 3,448 | 3,502 | |
| Depreciation of property, plant and equipment (Note 8) | | 5,953 |
| 5,951 |
| 6,071 |
|
| Amortization of intangible assets (Note 6) | | 3,443 |
| 3,698 |
| 3,633 |
|
| Total | 8,548 | 9,627 | 10,433 | 9,396 |
| 9,649 |
| 9,704 |
|
| | |
Earnings per share
Basic earnings per share amounts are calculated by dividing (a) the profit for the year attributable to equity holders of the parent, adjusted for the net coupon corresponding to the undated deeply subordinated securities and for the interest cost accrued in the period in relation to the debt component of the mandatorily convertible notes of the parent company issued in 2014 (see(which matured on September 25, 2017, see note 12) by (b) the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued upon the conversion of the said mandatorily convertible notes from the date of their issuance.
Diluted earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent, adjusted as described above, by the weighted average number of ordinary shares adjusted as described in the preceding paragraph, plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
Both basic and diluted earnings per share attributable to equity holders of the parent are calculated based on the following data:
| Millions of euros | 2014 | 2013 | 2012 |
| Profit attributable to ordinary equity holders of the parent | 3,001 | 4,593 | 3,928 |
| Adjustment for the net coupon corresponding to undated deeply subordinated securities | (187) | (27) | − |
| Adjustment for the financial expense of the debt component of the mandatorily convertible notes | − | − | − |
| Total profit attributable to ordinary equity holders of the parent for basic and diluted earnings per share | 2,814 | 4,566 | 3,928 |
| |
F-84 |
| | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
|
| Profit attributable to ordinary equity holders of the parent from continuing operations | 3,132 |
| 2,369 |
| 616 |
|
| Adjustment for the net coupon corresponding to undated deeply subordinated securities | (277 | ) | (257 | ) | (250 | ) |
| Adjustment for the financial expense of the debt component of the mandatorily convertible notes | 1 |
| 1 |
| 2 |
|
| Total profit attributable to ordinary equity holders of the parent for basic and diluted earnings per share from continuing operations | 2,856 |
| 2,113 |
| 368 |
|
|
| | | | | | |
| Thousands | |
| |
| |
|
| Number of shares | 2017 |
| 2016 |
| 2015 |
|
| Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share | 5,110,188 |
| 4,909,254 |
| 4,931,472 |
|
| Adjustment for mandatorily convertible notes | — |
| 151,265 |
| 139,116 |
|
| Adjusted number of shares for basic earnings per share (excluding treasury shares) | 5,110,188 |
| 5,060,519 |
| 5,070,588 |
|
| Telefónica, S.A. share option plans | — |
| 2,716 |
| 5,093 |
|
| Weighted average number of ordinary shares outstanding for diluted earnings per share | 5,110,188 |
| 5,063,235 |
| 5,075,681 |
|
| Thousands | | | |
| Number of shares | 2014 | 2013 (*) | 2012 (*) |
| Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share | 4,573,586 | 4,627,912 | 4,603,539 |
| Adjustment for mandatorily convertible notes | 32,803 | − | − |
| Adjusted number of shares (excluding treasury shares) for basic earnings per share | 4,606,389 | 4,627,912 | 4,603,539 |
| Telefónica, S.A. share option plans | 11,407 | 4,816 | 1,998 |
| Weighted average number of ordinary shares (excluding treasury shares) outstanding for diluted earnings per share | 4,617,796 | 4,632,728 | 4,605,537 |
| |
(*) Restated data due to the scrip dividend.
For the purposes of calculating the earnings per share ratios (basic and diluted), the weighted average number of shares outstanding is retrospectively adjusted for transactions that have changed the number of shares outstanding without a corresponding change in equity, as if such transactions had occurred at the beginning of the earliest period presented. For instance,Such is the case of the bonus share issues carried out to meet the scrip dividends paid in 20142015 and 2012 have been taken into account2016 (see Note 12).
BasicThus, basic and diluted earnings per share attributable to equity holders of the parent are as follows:
| | | Figures in euros | 2014 | 2013 (*) | 2012 (*) | 2017 |
| 2016 |
| 2015 |
|
| Basic earnings per share | 0.61 | 0.99 | 0.85 | 0.56 |
| 0.42 |
| 0.07 |
|
| Diluted earnings per share | 0.61 | 0.99 | 0.85 | 0.56 |
| 0.42 |
| 0.07 |
|
| (*) Restated data due to the scrip dividend. | |
| | |
Note 19. Share-based payment plans
The main share-based payment plans in place in the 2012-20142015-2017 period are as follows:
a) Long-term incentive plan based on Telefónica, S.A. shares: "Performance“Performance and Investment Plan 2011-2016"
2011-2016”At the General Shareholders’ Meeting held on May 18, 2011, a long-term share-based incentive plan called “Performance and Investment Plan” was approved for Telefónica Group directors and executive officers. This plan took effect following completion of the Performance Share Plan (see section c) below).
Under this plan, a certain number of shares of Telefónica, S.A. arewere delivered to plan participants selected by the Company who decidedecided to participate on compliance with stated requirements and conditions.
The plan lastslasted five years and iswas divided into three independent phases.
The first phase expired on June 30, 2014. The maximum number of shares assigned to this phase of the plan was 5,545,628 shares assigned on July 1, 2011, with a fair value of 8.28 euros per share. Delivery of shares was not required at the end of the phase according to the general conditions of the plan; therefore, managers did not receive any shares.
Regarding theThe second and third allocations of shares under this plan, thephase expired on June 30, 2015. The maximum number of shares assigned (includingto this phase of the amountplan was 7,347,282, assigned on July 1, 2012, with a fair value of co-investment)5.87 euros per share. At the end date of this phase, it was determined that 77% of “Total Shareholder Return” (TSR) had been achieved, under the terms and conditions of the plan. Therefore, the eligible Telefónica Group executives received a total of 2,724,699 shares (corresponding to a total of 3,691,582 gross shares, of which 966,883 shares were withheld at the option of the employee prior to distribution).
The third and final phase expired on June 30, 2016. The maximum number of shares outstanding at December 31, 2014 is as follows:
| Phase / assignment date | No. of shares assigned | Outstanding shares at 12/31/14 | Unit fair value | End date |
2nd phase July 1, 2012 | 7,347,282 | 6,007,909 | 5.87 | June 30, 2015 |
3rd phase July 1, 2013 | 7,020,473 | 6,494,041 | 6.40 | June 30, 2016 |
Thisthe plan is equity-settled via the deliverywas 7,020,473 shares assigned on July 1, 2013, with a fair value of 6.40 euros per share. Delivery of shares was not required at the end of the phase according to the participants. Accordingly, a balancing entry forgeneral conditions of the 40 million euros, 39 million euros and 22 million euros of employee benefits expenses recorded in 2014, 2013 and 2012, respectively, was made in shareholders’ equity.plan; therefore, managers did not receive any shares.
b) Long-term incentive plan based on Telefónica, S.A. shares: "Performance“Performance and Investment Plan 2014-2019"
2014-2019”The Telefónica, S.A. General Shareholders’ Meeting on May 30, 2014 approved a new instalment of the long-term share-based incentive “Performance and Investment Plan” for certain senior executives and members of the Group’s management team, operational on completion of the first “Performance and Investment Plan”.
Like its predecessor, the term of the new plan is a total of five years divided into three phases.
The initial and the second share allocationallocations took place on October 1, 2014, and the second and third allocations are scheduled foron October 1, 2015, respectively. Regarding the third phase of this 2016-2019 Plan, the Company's Board of Directors, following a favorable report from the Nomination, Compensation and Corporate Governance Committee, resolved not to execute or implement it, after having decided that it was not sufficiently in 2015 and 2016.
The maximum number of shares allocated underline with the Plan (including the amount of co-investment) and the number of shares outstanding at December 31, 2014 are set out below:
| Phase / assignment date | No. of shares assigned | Outstanding shares at 12/31/14 | Unit fair value | End date |
| 1st phase / October 1, 2014 | 6,927,953 | 6,918,686 | 6.82 | September 30, 2017 |
| c) Telefónica, S.A. share plan: “Performance Share Plan” (PSP) (2006-2013) |
At the General Shareholders’ Meeting of Telefónica S.A. on June 21, 2006, its shareholders approvedGroup's strategic plan, taking into account the introduction of a long-term incentive plan for managerscircumstances and senior executives of Telefónica, S.A. and other Telefónica Group companies. Under this plan, selected participants who met the qualifying requirements were given a certain number of Telefónica, S.A. shares as a form of variable compensation.macroeconomic environment.
The term of the plan is seven years divided into five phases.
The fifth and lastfirst phase expired on JuneSeptember 30, 2013.2017. The maximum number of shares assigned to this phase of the plan was 5,025,6576,927,953 shares assigned on JulyOctober 1, 2010,2014, with a fair value of 9.08 6.82euros per share. Delivery of shares was not required at the end of the phase according to the general conditions of the plan; therefore managers did not receive any shares.
With regard to the second phase of this plan, the maximum number of shares allocated (including the amount of co-investment) and the number of shares outstanding at December 31, 2017 are set out below:
| d) Telefónica, S.A. global share plan: “Global Employee Share Plan II” (2012-2014) |
|
| | | | | | |
| Phase / assignment date | No. of shares assigned | Outstanding shares at 12/31/2017 | Unit fair value |
| End date |
| 2nd phase / October 1, 2015 | 6,775,445 | 5,021,426 |
| 6.46 |
| September 30, 2018 |
Thec) Telefónica, S.A. Ordinary General Shareholders’ Meeting on May 18, 2011 approved a voluntary plan for incentivized purchases of Telefónica, S.A. shares for all employees of the Telefónica Group worldwide, with certain exceptions. Under this plan, participants who met certain requirements were offered the possibility of buying shares in Telefónica, S.A., which undertook to deliver them a certain number of free shares.
global share plan: “Global Employee Share Plan III” (2015-2017)
The plan’s share holding period came to an end in December 2014. More than 21,000 employees on the scheme were rewarded with a total of 1,778,099 shares from Telefónica, valued at approximately 20 million euros at the time they were delivered with effect in equity.
Likewise, the Telefónica, S.A. Ordinary General Shareholders’ Meeting on May 30, 2014 approved a new voluntary plan for incentivized purchases of shares for the employees of the Group. Under this Plan, employees were offered the option to acquire Telefónica, S.A. shares during a twelve month period (the acquisition period), with the company undertaking
to deliver a certain number of free shares to participants, subject to certain requirements. Each employee was limited to buying a maximum of 1,800 euros in Telefónica, S.A. shares, subject to a minimum of 300 euros. The employees that remained part of the Telefónica Group whichand held on to the shares for one year following the acquisition period (the shareholding period), were entitled to receive one free share for each share they acquired and retained throughout the shareholding period.
The acquisition period commenced in July 2015 and ended in June 2016. The share holding period ended in August 2017. 27,018 employees on the scheme were rewarded with a total of 3,187,055 Telefónica shares, valued at approximately 33 million euros at the datetime they were delivered.
d) Long-term incentive plan based on Telefónica, S.A. shares: “Talent for the Future Share Plan” (TFSP)
At the General Shareholders’ Meeting held on May 30, 2014, a long-term share-based incentive plan called “Talent for the Future Share Plan” was approved for certain Telefónica Group employees.
Under this Plan, a certain number of preparationshares of these consolidated financial statementsTelefónica, S.A. will be delivered to participants selected by the Company who have opted to take part in the scheme and meet the requirements and conditions stipulated to this end.
The term of the plan is pendingfive years and it is divided into three phases. The initial and the second share allocations took place on October 1, 2014, and on October 1, 2015, respectively. Regarding the third phase of this 2016-2019 Plan, the Company's Board of Directors, following a favorable report from the Nomination, Compensation and Corporate Governance Committee, resolved not to be implemented.execute or implement it, after having decided that it was not sufficiently in line with the Telefónica Group's strategic plan, taking into account the circumstances and macroeconomic environment.
The first phase expired on September 30, 2017. The maximum number of shares assigned to this phase of the plan was 556,795 shares assigned on October 1, 2014, with a fair value of 6.82 euros per share. Delivery of shares was not required at the end of the phase according to the general conditions of the plan.
The maximum number of shares assigned and the number of shares outstanding at December 31, 2017 is as follows:
|
| | | | | |
| Phase /assignment date | No. of shares assigned | No. of shares assigned at 12/31/17 |
| Unit fair value | End date |
| 2nd phase October 1, 2015 | 618,000 | 553,500 |
| 6.46 | September 30, 2018 |
Note 20. Cash flow analysis
Net cash fromflow provided by operating activities
In 2014, the Telefónica Group obtained operating cash flow (operating revenue less payments to suppliers for expenses and employee benefits expenses) totaling 15,910 million euros, 14.30% less than the 18,565 million euros generated in 2013.
Net cash flow fromprovided by operating activities decreased from 14,344amounted to 13,796 million euros in 2013 to 12,1932017, an increase of 3.4% on the 13,338 million euros in 2014, down 15.0%, afterof 2016, which itself was a decrease on the figure of 5.7% from 2012 (15,213 million euros) to 2013.2.0% recognized in 2015.
The detail of net cash flow provided by operating activities is the following:
|
| | | | | | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
| Var
17 vs 16 |
| Var
16 vs 15 |
|
| Cash received from operations | 63,456 |
| 63,514 |
| 67,582 |
| (0.1 | %) | (6.0 | %) |
| Cash paid from operations | (46,929 | ) | (47,384 | ) | (50,833 | ) | (1.0 | %) | (6.8 | %) |
| Cash paid to suppliers | (40,508 | ) | (40,831 | ) | (43,650 | ) | (0.8 | %) | (6.5 | %) |
| Cash paid to employees | (5,725 | ) | (5,815 | ) | (6,462 | ) | (1.5 | %) | (10.0 | %) |
| Payments related to cancellation of commitments | (696 | ) | (738 | ) | (721 | ) | (5.7 | %) | 2.4 | % |
| Net payments of interest and other financial expenses net of dividends received | (1,726 | ) | (2,143 | ) | (2,445 | ) | (19.5 | %) | (12.4 | %) |
| Net interest and other financial expenses paid | (1,755 | ) | (2,187 | ) | (2,490 | ) | (19.8 | %) | (12.2 | %) |
| Dividends received | 29 |
| 44 |
| 45 |
| (34.1 | %) | (2.2 | %) |
| Taxes paid | (1,005 | ) | (649 | ) | (689 | ) | 54.9 | % | (5.8 | %) |
| Net cash flow provided by operating activities | 13,796 |
| 13,338 |
| 13,615 |
| 3.4 | % | (2.0 | %) |
The changes in the main items included in the net cash flow from operating activities are as follows:
Cash received from operations in 2017 is in line with respect to the amount recognized in 2016 (-0.1% year on year). It is worth highlighting the continuation of the management of current assets through the factoring of collections and the monetization of income from sales financed.
Cash received from operationsfell 6% in 2016 with respect to the amount recognized in 2015, mainly due to exchange rate changes. In addition, the Company continued its active working capital management policy, focused on factoring and the advance monetization of revenues from financed sales.
Cash paid from operations in 2017, was down1.0% with respect to 2016, reflecting the continuity of the active management of current liabilities through payment terms agreements with the factoring company where these were discounted.
Cash paid from operations in 2016, was down 6.8% on 2015, principally as a result of changes in the exchange rate and due to the active management of current liabilities through improvements in the processes and agreements to extend payment terms with suppliers, or factoring companies when payments are the following:discounted (Note 13).
| · | Cash received from customers decreased by 11.03% to 61,522 million euros (from 69,149 million euros in 2013). Driven by the revenues evolution in Brazil and Spain, mainly due to the ARPU decrease and lower accesses, partially offset by the increase in the sale of handsets. Active management of collection assets and monetization of revenues on financed sales also helped maintain the levels observed during the previous period. The departure of Telefónica Czech Republic from the scope of consolidation, partially offset by the arrival of E-Plus, contributed to the year-on-year reduction in cash collections. |
| · | Cash payments to suppliers and employees in 2014 amounted to 45,612 million euros, down 9.83% from the 50,584 million euros recorded in 2013. Due to fewer payments in Spain and Brazil and the changes in the consolidation perimeter explained above. |
CashNet payments of interest and other financial expenses net of dividends received in 2017 amounts to employees in 2014 (6,1641,726 million euros) decreased by 9.16% from 2013 (6,786 million euros)euros, decreasing 19.5% with respect to 2016 mainly due to the lower costs associatedcost of debt in European and Latin America currencies.
Net payments of interest and other financial expenses net of dividends received in 2016, fell by 12.4% compared with 2015, largely due to the changelower cost of debt in average headcount.European currencies.
Taxes paid increase 356 million euros in 2017 with respect to 2016 mainly due to the absence of tax refunds in Spain and higher payment in Argentina in 2017.
| · | Cash flows arising from payments of interest and other finance costs and from dividends stood at 2,530 million euros in 2014, up 4.8% from 2013 (2,415 million euros) even though the Telefónica Group's average debt was reduced in 2014. The increase in interest payments was offset by non-recurring impacts such as payment of interest in 2014 on a zero-coupon 15-year bond, the cash receipt of the interest on settlement of tax inspections in 2013, and differences in the debt payment schedule for the 2014 financial year with respect to 2013. |
Taxes paid fell 5.8% in 2016 compared to the payments made in 2015, mainly due to the lower payments in advance in Argentina and Brazil, and the exchange rate effect, offset by lower tax refunds and higher payments in advance in Spain. | · | Tax payments amount to 1,187 million euros in 2014, 34.3% lower than those made in 2013 (1,806 million euros), mainly due to the impact of adopting the new exchange rate in Venezuela, the decrease of the operating results and changes in the consolidation perimeter. |
In 2013, the Telefónica Group obtained operatingNet cash flow (operating revenue less paymentsused in investing activities
Net cash flow used in investing activities amounted to suppliers for expenses and employee benefits expenses) totaling 18,56510,245 million euros 7.7% less thanin 2017, an increase of 24.8% with respect to 2016 (8,208 million euros), a figure which represented a decrease of 36.5% on that of 2015 (12,917 million euros).
In respect of the 20,104 million euros generated in 2012.
The main items included in the net flow from operations are the following:
| · | Cash received from customers decreased by 9.0% to 69,149 million euros (from 75,962 million euros in 2012). The decrease was mainly due to the exchange rate impact, and also to the decrease in the sale of handsets, as a consequence of the elimination of the subsidy and the reduction of the interconnection tariff in Europe, offset by the revenues increase in Latin America and the proactive policy of short term assets management reducing customer financing. |
| · | Cash payments to suppliers and employees in 2013 amounted to 50,584 million euros, down 9.4% from the 55,858 million euros recorded in 2012. Excluding the exchange rate effect, there was a decrease of 1.9% in payments to suppliers, driven by the new commercial model of cost reductions in Europe and the containment of short term liabilities of the Group, that have offset the increase in commercial activity in Latin America. |
Cash payments to employees in 2013 (6,786 million euros) decreased by 16.73% from 2012 (8,149 million euros) due to the lower costs associated with the change in average headcount due to the sale of the Atento Group.
| · | Cash flows arising from payments of interest and other finance costs and from dividends stood at 2,415 million euros in 2013, down 452 million from 2012. The 15.8% decreased in payments is primarily the result of the 11.4% reduction in the average debt and other non-recurring items. |
| · | Tax payments amounted to 1,806 million euros in 2013, 10.8% lower than those made in 2012 (2,024 million euros). The main reason for this decrease was the reduction in profit, since the non-recurring payments in 2012 of 246 million euros arising from the settlement of tax assessments raised on inspection and court decisions affecting the consolidated tax Group and the return of 284 million euros in 2013 were offset by higher payments on account in Spain in 2013 due to the latest legislative amendments. |
Net cash used in investing activities
Net cashflow used in investing activities, increasedthe detail is the following:
(Payments on investments)/proceeds from the sale in property, plant and equipment and intangible assets, net in 2017, decreased by 0.7%2.1% compared to 2016. The detail is the following:
|
| | | | | | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
| Var
17 vs 16 |
| Var
16 vs 15 |
|
| Proceeds from the sale in property, plant and equipment and intangible assets | 148 |
| 134 |
| 254 |
| 10.4 | % | (47.2 | %) |
| Payments on investments in property, plant and equipment and intangible assets | (9,140 | ) | (9,321 | ) | (10,510 | ) | (2.0 | %) | (11.3 | %) |
| (Payments on investments)/proceeds from the sale in property, plant and equipment and intangible assets, net | (8,992 | ) | (9,187 | ) | (10,256 | ) | (2.1 | %) | (10.4 | %) |
Payments on investments in 2014property, plant and equipment and intangible assets fell by 2.0% in 2017 compared to 9,968 million euros from 9,900a year earlier. Spectrum license payments totaled 352 million euros in 2013,2017, notably in Group companies in Colombia, related to the arbitration award amounting to 317 million euros (see Note 2).
Payments on investments in property, plant and equipment and intangible assetsfell by 11.3% in 2016 compared to a year earlier, mainly due to lower payments in Telefónica Germany, which itself was due to the increasesignificant impact of spectrum licenses in the 2015. Spectrum license payments totaled 349 million euros in 2016, notably in Group companies in Peru and Brazil.
The detail of proceeds on disposaldisposals of companies, net of cash and cash equivalents disposedand payments on investments in companies, net of cash and cash equivalents acquired is the increase in the amountfollowing:
|
| | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
|
| Sale of Televisión Federal, S.A. (Telefé) (see Note 18) | — |
| 306 |
| — |
|
| Proceeds arising from hedges associated with Telefónica United Kingdom | — |
| 399 |
| — |
|
| Sale of Yourfone GmbH | — |
| — |
| 57 |
|
| Sale of Telefónica Czech Republic | — |
| — |
| 313 |
|
| Sale of Telefónica Telecomunicaciones Públicas, S.A.U. | 28 |
| 2 |
| — |
|
| Others | 12 |
| 60 |
| (16 | ) |
| Proceeds on disposals of companies, net of cash and cash equivalents disposed | 40 |
| 767 |
| 354 |
|
Acquisition of DTS (see Note 5) | — |
| (36 | ) | (697 | ) |
| Acquisition of GVT (see Note 5) | — |
| — |
| (2,450 | ) |
| Acquisition of Coltel affiliates (Note 5) | (85 | ) | — |
| — |
|
| Acquisition of Minodes GmbH | (9 | ) | — |
| — |
|
| Acquisition of Co-trade GmbH | (20 | ) | — |
| — |
|
| Others | (14 | ) | (18 | ) | (34 | ) |
| Payments on investments in companies, net of cash and cash equivalents acquired | (128 | ) | (54 | ) | (3,181 | ) |
The detail of payments madeproceeds on financial investments not included under cash equivalents.
| · | Payments on investments in property, plant and equipment and intangible assets totaled 9,205 million euros in 2014, 4.8% lower than 2013 (9,674 million euros). This decrease has been negatively affected by the exchange rate evolution. Spectrum license payments totaled 932 million euro in 2014, mainly in Brazil, Argentina, Colombia and Panama. |
| · | Proceeds on disposals of property, plant and equipment and intangible assets amounted to 340 million euros in 2014, a decrease of 39.4% mainly due to a reduction in the disposal of non-strategic assets (180 million euros, compared to 205 million euros in 2013) and lower receivables this year because of the sale of some fixed wireless assets in United Kingdom in 2013. |
| · | During the year, proceeds on disposals of companies, net of cash and cash equivalents, amounted to 3,615 million euros, being the most important divestments the sale of Telefónica Czech Republic, the sale of Telefónica Ireland and the sale of 2.5% of China Unicom (Hong Kong) Limited, which entailed a net collection of 2,163, 754 and 687 million euros, respectively (see Note 2 and 9). |
| · | During 2014, the payment on investments in companies, net of cash and cash equivalents acquired amounted to 5,020 million euros, mainly due to the acquisition of E-Plus (see Note 5) and the acquisition of a 22% stake in Distribuidora de Televisión Digital, S.A. (see Note 9). |
| · | During 2014, proceeds on financial investments not included under cash equivalents, amounted to 302 million euros, mainly due to the sale of Telecom Italia´s bond for a nominal amount of 103 million euros, plus interest. |
| · | Payments on financial investments not included under cash equivalents totaled 247 million euros for 2014, mainly reflected legal deposits, financial investments by Telefónica insurance companies and options on equity instruments. |
| · | In 2014, net cash flows in respect of cash surpluses not included under cash equivalents amounted to 217 million euros, up 531 million from 2013, mainly due to the exchange rate effect in Venezuela. |
Net cash used in investing activities increased by 25.7% in 2013 to 9,900 million euros from 7,877 million euros in 2012, mainly due to the decrease in the proceeds on disposal of companies, net of cashequivalents and cash equivalents, and the decrease in the amount of payments made on financial investments not included under cash equivalents.equivalents is the following:
| · | Payments on investments in property, plant and equipment and intangible assets totaled 9,674 million euros in 2013, 2.0% higher than 2012 (9,481 million euros). This increase was due to higher purchases of spectrum licenses in Brazil and the United Kingdom, amounting to 531 and 669 million euros, respectively. |
| · | Proceeds on disposals of property, plant and equipment and intangible assets amounted to 561 million euros in 2013, a decrease of 40.3% mainly due to a reduction in the disposal of non-strategic assets (205 million euros). |
| · | During the year, proceeds on disposals of companies, net of cash and cash equivalents, amounted to 260 million euros. The most significant divestment was the sale of Hispasat, which entailed a net collection of 123 million euros. |
| · | During 2013, the payment on investments in companies, net of cash and cash equivalent acquired amounted to 398 million euros, mainly due to the share capital increase in Telco, S.p.A. (324 million euros, see Note 9). |
|
| | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
|
| Sale of stake in Indra | — |
| 85 |
| — |
|
| Sale of stake in China Unicom (Hong Kong) Limited (see Note 13) | 72 |
| 322 |
| — |
|
| Sale of stake in Telecom Italia, S.p.A. | — |
| — |
| 1,025 |
|
| Investments of Seguros de Vida y Pensiones Antares, S.A. | 49 |
| — |
| — |
|
| Others | 175 |
| 82 |
| 117 |
|
| Proceeds on financial investments not included under cash equivalents | 296 |
| 489 |
| 1,142 |
|
| Legal deposits | (75 | ) | (104 | ) | (86 | ) |
| Investment in Mediaset Premium | — |
| (20 | ) | (100 | ) |
| Payment to shareholders of Telco, S.p.A. | — |
| — |
| (60 | ) |
| Long term deposits | (150 | ) | — |
| — |
|
| Collateral guarantees on derivatives | (709 | ) | — |
| — |
|
| Others | (172 | ) | (141 | ) | (180 | ) |
| Payments on financial investments not included under cash equivalents | (1,106 | ) | (265 | ) | (426 | ) |
| · | Payments on financial investments not included under cash equivalents totaled 386 million euros for 2013, and mainly reflected the acquisition of a Telecom Italia, S.p.A. bond for 103 million euros, as well as legal deposits, financial investments by Telefónica insurance companies and options on equity instruments. |
| · | In 2013, net cash flows in respect of cash surpluses not included under cash equivalents amounted to 314 million euros, in line with the 318 million euros recorded in 2012. Net investments in 2011 amounted to 646 million euros. |
Net cash flow used in financing activities
In 2014, netNet cash flow used in financing activities has been negative of 4,041 amounted as net payment to 1,752million euros, a decrease of 58.5% with respect to 2016.
In 2016, the negative cash flow used in comparation with a negative amount 2,685financing activities amounted to 4,220 million euros in 2013, primarilyincreasing by 16.8% year-on-year, mainly due to the increase of financed operating payments in property, plant and equipment and intangible assets payments and the proceeds from the share capital increase of Telefónica S.A. and Telefônica Brasil, S.A.
The detail of dividends paid, proceeds from issue of share capital increase, payments and proceeds of treasury shares and other operations with shareholder and minority interest, and operations with other equity holders is the following:
|
| | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
|
Dividends paid byTelefónica, S.A. (*) | (1,904 | ) | (2,395 | ) | (2,237 | ) |
| Payments to non-controlling interests of Telefônica Brasil, S.A. | (290 | ) | (216 | ) | (239 | ) |
| Payments to non-controlling interests of Telefónica Deutschland Holding, A.G. | (229 | ) | (263 | ) | (267 | ) |
| Payments to non-controlling interests of Telefónica Centroamérica Inversiones | (23 | ) | (27 | ) | (28 | ) |
| Others | (13 | ) | (5 | ) | (4 | ) |
Dividends paid (see Note 12) | (2,459 | ) | (2,906 | ) | (2,775 | ) |
| Share capital increase of Telefónica, S.A. | — |
| — |
| 3,048 |
|
| Share capital increase of Telefônica Brasil, S.A. | — |
| — |
| 1,258 |
|
| Others | 2 |
| — |
| (51 | ) |
| Proceeds from share capital increase | 2 |
| — |
| 4,255 |
|
Transactions with Telefónica, S.A. treasury shares (see Note 12 g) | — |
| (645 | ) | (1,615 | ) |
| Transactions with Telefónica Deutschland Holding, A.G. treasury shares | — |
| — |
| (133 | ) |
| Transactions with Telefônica Brasil, S.A. treasury shares | — |
| — |
| (24 | ) |
Sale of 40% of Telxius Telecom, S.A. to Taurus
Bidco S.à.r.l. (Note 2)
| 1,275 |
| — |
| — |
|
| Others | (6 | ) | (15 | ) | — |
|
| (Payments)/proceeds of treasury shares and other operations with shareholders and with minority interests | 1,269 |
| (660 | ) | (1,772 | ) |
| Issuance of undated deeply subordinated securities (Note 12) | 1,000 |
| 1,000 |
| 419 |
|
| Payment of the coupon related to the issuances of undated deeply subordinated securities issued (See Note 12) | (354 | ) | (344 | ) | (336 | ) |
| Operations with other equity holders | 646 |
| 656 |
| 83 |
|
(*) This amount differs from that indicated in Note 12 because of withholding taxes deducted in the payment to certain major shareholders.
The detail of proceeds on issue of debentures and bonds, and other debts, proceeds on loans, borrowings and promissory notes, amortization of debentures and bonds, and other debts, repayments of loans, borrowings and promissory notes as a consequenceand financed operating payments and investments in property, plant and equipment and intangible assets payments is the following:
|
| | | | | | |
| Millions of euros | 2017 |
| 2016 |
| 2015 |
|
Issued under the EMTN program of Telefónica Emisiones, S.A.U. (see Appendix III) (*) | 3,517 |
| 4,900 |
| 1,467 |
|
Issued of non-dilutive convertible debentures in Telefónica Participaciones, S.A.U. (Appendix III) | — |
| 600 |
| — |
|
Issued under the SHELF program of Telefónica Emisiones, S.A.U. (see Appendix III) (*) | 3,335 |
| — |
| — |
|
| Issuance of Telefônica Brazil, S.A. | 756 |
| — |
| — |
|
| Others | 782 |
| 193 |
| 135 |
|
| Proceeds on issue of debentures and bonds, and other debts | 8,390 |
| 5,693 |
| 1,602 |
|
| Syndicated loan of 3,000 million euros by Telefónica, S.A. (see Note 13) | — |
| 3,070 |
| — |
|
| Syndicated loan of 2,500 million euros by Telefónica, S.A. | — |
| — |
| 2,060 |
|
| Syndicated loan of 3,000 million euros by Telefónica, S.A. (see Note 13) | — |
| 1,280 |
| 1,890 |
|
| Issuance of debt instruments in the local market by Telefónica Germany GmbH&Co OHG | — |
| — |
| 300 |
|
| Structured financing (see Note 13) | 750 |
| — |
| — |
|
| Syndicated loan of 750 million euros by Telefónica Germany (see Note 13) | 650 |
| — |
| — |
|
| Others | 3,444 |
| 5,982 |
| 4,534 |
|
Proceeds on loans, borrowings and promissory notes (see Appendix V) | 4,844 |
| 10,332 |
| 8,784 |
|
| Repayments of debentures and bonds, and other debts | (6,687 | ) | (6,873 | ) | (3,805 | ) |
| Syndicated loan of 3,000 million euros by Telefónica, S.A. (see Note 13) | — |
| (3,070 | ) | — |
|
| Syndicated loan of 2,500 million euros by Telefónica, S.A. | (550 | ) | — |
| (1,560 | ) |
| Syndicated loan of 3,000 million euros by Telefónica, S.A. (see Note 13) | — |
| (1,980 | ) | (1,190 | ) |
| Loans paid by GVT | — |
| (93 | ) | (1,766 | ) |
| Syndicated loan of 750 million euros by Telefónica Germany GmbH (see Note 13) | (700 | ) | — |
| — |
|
| Others | (5,461 | ) | (3,363 | ) | (5,342 | ) |
Repayments of loans, borrowings and promissory notes (see Appendix V) | (6,711 | ) | (8,506 | ) | (9,858 | ) |
| Financed spectrum licences payments (Note 14) | (329 | ) | (198 | ) | (121 | ) |
Payments to suppliers with extended payment terms (Note 13) | (717 | ) | (1,758 | ) | (5 | ) |
Financed operating payments and investments in property, plant and equipment and intangible assets payments (see Note 13.2) | (1,046 | ) | (1,956 | ) | (126 | ) |
(*)Dataconverted at the exchange rate at the end of prepayments.
| · | Dividends payments are related mainly to the dividends paid by Telefónica, S.A. as well as payments to non-controlling interests of Telefónica Brasil, S.A. (187 million euros) and Telefonica Deutchland Holding, A.G. (122 million euros).
|
| · | Transactions with shareholders amounted to 427 million euros in 2014 (65 million in 2013). In 2014 the share capital increase by the non-controlling interests in Telefónica Deutschland amounted to 814 million euros received, offset by to net payments for transactions with Telefónica, S.A. treasury shares. In 2013 the proceeds received from the sale of 40% of the assets in Guatemala, Nicaragua, El Salvador and Panama in 2013 (377 million euros) offset by operations with Telefónica, S.A.’s treasury shares as in 2013 there were two relevant share transactions (see Note 12). |
| · | The proceeds on operations with other equity holders amounted to 3,713 million euros in 2014, and include the amount related to the issuances of undated deeply subordinated securities of 1,000, 750 and 850 million euros and the issuance of notes mandatorily convertible into shares of Telefónica, S.A. amounting to 1,285 million euros (see Note 12). It also includes the payment of the coupon related to the two issuances of undated deeply subordinated securities issued in 2013 amounting to 172 million euros. |
| · | In 2014, proceeds from new issues on bonds totaled 4,453 million euros, 21% lower than the 2013 proceeds (5,634 million euros), mainly issued under the London Stock Exchange’s EMTN program (equivalent to 2,550 million euros) of Telefónica Emisiones, S.A.U. and under the SHELF program (500 million dollars, equivalent to 368 million euros). Additionally, it includes the issue mandatorily convertible into Telecom Italia, S.p.A. shares amounting to 750 million euros, and the bond issue by Telefónica Deutschland Holding, A.G. amounting to 500 million euros. The cancellation of debentures and bonds amounted to 5,116 million euros, in line with 2013 and related to the maturity of bonds. |
| · | In 2014, proceeds on loans, borrowings and promissory notes amounted to 4,290 million euros mainly related to borrowings proceeds of 2,000 million euros in Telefónica, S.A. (see Appendix V). |
| · | In 2014, repayment of loans, borrowings and promissory notes amounted to 8,604 million euros (6,232 million euros in 2013) mainly related to prepayments of loans and the maturity of 2,000 million euros of Tranche A2, 1,672 million euros of Tranche A3 and 923 million euros of Tranche D2 of the syndicated loan of Telefónica, S.A. and 801 million euros of Tranche D1 of the syndicated loan of Telefónica Europe, B.V.
|
In 2013, net cash used in financing activities was negativeDecember 2017. The impact of 2,685 million euros in comparationthe exchange rate with a negative amount, 1,243 million euros in 2012, primarily duerespect to the decreasedate of the proceeds coming from loans, borrowings and promissory notes, as a consequence of a higher activitytransaction is included in the financial markets in previous periods.
| · | Transactions with shareholders amounted to 65 million euros in 2013 (656 million in 2012). The year 2013 mainly reflected the sale of 40% of the assets in Guatemala, Nicaragua, El Salvador and Panama which brought in net proceeds of 377 million euros, partially offset by the shares acquired from non-controlling interests mainly by Telefónica Czech Republic (61 million euros), and net payments for transactions with Telefónica, S.A. treasury shares. The year 2012 mainly reflected the public share offer of Telefónica Deutschland that brought in net proceeds |
"Others" line within the same sub-heading.
of 1,429 million euros, which offset by the shares acquired from non-controlling interests mainly by Telefónica Czech Republic, entailed a total payment of 99 million euros and net payments for transaccions with Telefónica, S.A. treasury shares stood at 590 million euros.
| · | The proceeds on operations with other equity holders amounted to 2,466 million euros in 2013, and included the amount related to the two issuances of undated deeply subordinated securities of 1,750 and 716 million euros, respectively (see Note 12). |
| · | In 2013, proceeds from new issues on bonds totaled 5,634 million euros, 30.4% lower than the 2012 proceeds (8,090 million euros), mainly made under the London Stock Exchange’s EMTN program (3,432 million euros equivalents) of Telefónica Emisiones. The cancellation of debentures and bonds amounted to 5,667 million euros, a 31.3% increase compared to 2012, related to the maturity of bonds. |
| · | In 2013, repayment of loans, borrowings and promissory notes amounted to 6,232 million euros (8,041 million euros in 2012) and were mainly related to the maturity of Tranche A1 of the syndicated loan signed by Telefónica, S.A. on July 28, 2010 (1,000 million euros), and also to the reduction of the outstanding principal of Tranche B of the same syndicated loan by 3,000 million euros. |
Note 21. Other information
a) Litigation and arbitration
Telefónica and its group companies are party to several legal proceedings which are currently in progress in the courts of law and the arbitration bodies of the various countries in which we are present.
Based on the advice of our legal counsel it is reasonable to assume that these legal proceedings will not materially affect the financial condition or solvency of the TelefonicaTelefónica Group.
The contingencies arising from the litigation and commitments described below were evaluated (see Note 3.m) when the consolidated financial statements for the year ended December 31, 20142017 were prepared. The provisions recorded in respect of the commitments taken as a whole are not material.
The following unresolved legal proceedings or those underway in 20142017 are highlighted (see Note 17 for details of tax-related cases):
Cancellation of the UMTS license granted to Quam GMBH in Germany
In December 2004, the German Telecommunications Market Regulator revoked the UMTS license granted in 2000 to Quam GmbH ("Quam"), in which Telefónica has a stake. After obtaining a suspension of the revocation order, on January 16, 2006, Quam filed a suit against the order with the German courts. This claim sought two objectives: 1) to overturn the revocation order issued by the German Telecommunications Market Regulator, and 2) if this failed, to be reimbursed for the total or partial payment of the original amount paid for the license, 8,400 million euros.
This claim was rejected by the Cologne Administrative Court. Quam appealed the decision before the Supreme Administrative Court of North Rhine-Westphalia, which also rejected its appeal.
Finally, Quam filed a new claim in third instance before the Federal Supreme Court for Administrative Cases, which was not admitted for processing.
Quam appealed this decision on August 14, 2009. On August 17, 2011, after the oral hearing, the Federal Administrative Court rejected Quam’s appeal at third instance.
In October 2011, Quam filed a constitutional complaint before the German Federal Constitutional Court (Karlsruhe), which is still pending.
Appeal against the European Commission Ruling of July 4, 2007 against Telefónica de España’s broadband pricing policy
On July 9, 2007, Telefónica was notified of the Decision issued by the European Commission (the "EC") imposing on Telefónica, S.A. and Telefónica de España, S.A.U. ("Telefónica de España") a fine of approximately 152 million euros for breach of the former Article 82 of the Treaty Establishing the European Community for not charging equitable prices to whole and retail broadband access services. The court ruled in favor of the EC accusing Telefónica of applying a margin squeeze between the prices it charged competitors to provide regional and national wholesale broadband services and its retail broadband prices using ADSL technology between September 2001 and December 2006.
On September 10, 2007, Telefónica, S.A. and Telefónica de España filed an appeal to overturn the decision before the General Court of the European Union. The Kingdom of Spain, as an interested party, also lodged an appeal to overturn the decision. Meanwhile, France Telecom and the Spanish Association of Bank Users (AUSBANC) filed requests to intervene, which the General Court admitted.
In October 2007, Telefónica, S.A. presented a guarantee for an indefinite period of time to secure the principal and interest.
A hearing was held on May 23, 2011, at which Telefónica presented its case. On March 29, 2012, the General Court ruled rejecting the appeal by Telefónica and Telefónica de España, confirming the sanction imposed by the EC. On June 13, 2012, an appeal against this ruling was lodged before the European Court of Justice.
On September 26, 2013, the Attorney General presented its conclusions to the court stating a possible breach of the principle of non-discrimination with respect to the sanction and a defective application of the principle of full jurisdiction by the General Court, requesting the return of the lawsuit to the court of first instance.
On July 10, 2014, the European Union Court of Justice dismissed the appeal, maintaining the fine imposed for abuse of dominant position (margin squeeze) on wholesale prices charged by Telefónica and Telefónica de España, for broadband access in Spain. This ended the appeal process.
The fine was satisfied by Telefónica de España, as indicated in Note 15.
Appeal against the Decision by Agencia Nacional de Telecomunicações (ANATEL)(“ANATEL”) regarding the inclusion of interconnection and network usage revenues in the Fundo de Universalização de Serviços de Telecomunicações ("FUST"(“FUST”)
Vivo Group operators (currently Telefônica de Brasil), together with other cellular operators, appealed ANATEL’s Decisiondecision of December 16, 2005, to include interconnection and network usage revenues and expenses in the calculation of the amounts payable into the Fund for Universal Access to Telecommunications Services (“FUST”) – aFUST (Fundo de Universalização de Serviços de Telecomunicações) –a fund which pays for the obligations to provide universal service -Universal Service- with retroactive application from 2000. On March 13, 2006, the Brasilia Regional Federal Court no. 1. granted a precautionary measure which stopped the application of ANATEL’s Decision.decision. On March 6, 2007, a ruling in favor of the wireless operators was issued, stating that it was not appropriate to include the revenues received by transfer from other operators in the taxable income for the FUST’s calculation and rejecting the retroactive application of ANATEL’s Decision.decision. On January 26, 2016, ANATEL filed an appeal to overturn this decision with Brasilia Regional Federal Court no. 1. This appeal is pending resolution.
1, which was also dismissed. On May 10, 2017 ANATEL appealed to the higher courts on the merits of the case.
At the same time, TelefóTelefônica BrazilBrasil and Telefónica Empresas, S.A., together with other wireline operators through the AssociaçABRAFIX (Associação Brasileira de Concessionárias de Serviço Telefonico Fixo Comutado (ABRAFIX)Comutado) appealed ANATEL’s Decisiondecision of December 16, 2005, also obtaining the precautionary measures requested. On June 21, 2007, Federal Regional Court no. 1 ruled that it was not appropriate to include the interconnection and network usage revenues and expense in the FUST’s taxable income and rejected the retroactive application of ANATEL’s decision. ANATEL filed an appeal to overturn this ruling on April 29, 2008, before Brasilia Federal Regional Court no. 1.1, which was dismissed on May 10, 2016. ANATEL filed an appeal against this dismissal.
The fixed operators filed an appeal to clarify that revenues obtained through interconnection and dedicated line operation should not be included in the calculation of the amounts payable to the FUST. In addition, the court was also requested to rule on two grounds which had not been analyzed in the initial decision: (i) that the FUST has become obsolete, among other reasons, by the advance of mobile telephony; and (ii) that amounts collected are not applied to the purpose for which the FUST was created, since only a very low percentage of the revenues collected by the FUST is used to finance fixed telephony. Although the petition for clarification was dismissed on August 23, 2016, the court noted that the FUST should not be funded with revenues from interconnection and dedicated line operation. ABRAFIX appealed to the higher courts on these two elements that had not been analyzed. ANATEL appealed all the holdings of the ruling to the higher courts.
No further action has been taken since then. The amount of the claim is quantified at 1% of the interconnection revenues.
Public civil procedure by the São Paulo government against TelefóTelefônica BrazilBrasil for alleged reiterated malfunctioning in services provided by Telefónica Brazil and request of compensation for damages to the customers affected
This proceeding was filed by the Public Ministry of the State of São Paulo for alleged reiterated malfunctioning in the services provided by TelefóTelefônica Brazil,Brasil, seeking compensation for damages to the customers affected. A general claim iswas filed by the Public Ministry of the State of São Paulo, for 1,000 million Brazilian reais (approximately 370225 million euros), calculated on the company’s revenue base over the last five years.
In April 2010, a ruling in first instance against the Telefónica Group was issued therein first instance. The full impact of this proceeding will not be a precision of its effectsknown until there is a final ruling, and the total amount of persons affected by and party into the procedureproceeding is known. At that moment, the amount of the indemnity will be established, ranging between 1,000 million reais and 60 million reais (approximately, between 370 million euros225 and 2213 million euros), depending on the number of parties. On May 5, 2010, TelefóTelefônica BrazilBrasil filed an appeal before the São Paulo Court of Justice, suspending the effect of the ruling. No further action has been taken since then.
On April 13, 2015, the appeal was judged in favor of Telefónica, by unanimous vote, reversing the earlier decision in the first instance.
The Public Prosecutor filed an extraordinary petition for review at the High Court of Brasilia which, on March 15, 2017, refused to consider the petition due to the lack of legal requirements.
Given that the Public Prosecutor did not appeal that refusal, the proceeding concluded in favour of Telefônica Brasil.
Appeal against the Decision of the European CommissionEC dated January 23, 2013, to sanction Telefónica for the infringement of Article 101 of the Treaty on the functioning of the European Union
On January 19, 2011, the EC initiated formal proceedings to investigate whether Telefónica, S.A. (Telefónica) and Portugal Telecom SGPS, S.A. ("Portugal Telecom")(Portugal Telecom) had infringed on European Union anti-trust laws with respect to a clause contained in the sale and purchase agreement of Portugal Telecom’s ownership interest in Brasilcel, N.V., a joint venture in which both were venturers and which was the owner of the Brazilian company Vivo.
On January 23, 2013, the EC passed a ruling on the formal proceedings. The ruling imposed a fine on Telefónica of 67 million euros, as the EC ruled that Telefónica and Portugal Telecom committed an infraction as stipulated inof Article 101 of the Treaty on the Functioning of the European Union for having entered into the agreement set forth in Clause Nine of the sale and purchase agreement of Portugal Telecom’s ownership interest of Brasilcel, N.V.
On April 9, 2013, Telefónica filed an appeal for annulment of this ruling with the European Union General Court. On August 6, 2013, the European Union General Court notified Telefónica of the response issued by the European Commission,EC, in which the EC reaffirmed the main arguments of its ruling and, specially, that Clause Nine isincludes a competition restriction. On September 30, 2013, Telefónica filed its reply. On December 18, 2013, the EC filed its appeal.
A hearing was held on May 19, 2015, at the European Union General Court.
On June 28, 2016, the European Union General Court ruled. Although it declares the existence of an infringement of competition law, it annuls Article 2 of the contested Decision and requires the EC to reassess the amount of the fine imposed. The General Court considers that the EC has not neutralized the allegations and evidences provided by Telefónica on services in which there was not potential competition or were outside the scope of Clause Nine.
Telefónica understands that there are grounds for believing that the ruling does not suit at law; consequently, it filed an appeal to the Court of Justice of the European Union, on September 11, 2016.
On November 23, 2016, the EC filed its response against the Telefónica´s appeal. On January 30, 2017, Telefónica filed its response. On March 9, 2017, the European Commission filed its appeal.
Judicial appeals against the decisions by the Conselho Administrativo de Defesa Econômica (CADE) regarding the acquisition by Telefónica, S.A. of stakes in Portugal Telecom, SGPS S.A. and Telco, S.p.A.
rejoinder.
On December 4, 2013,13, 2017, the Brazilian Antitrust Regulator, CADE, announcedGeneral Court dismissed the two following decisions:
| § | To approve, with the restrictions mentioned below, the acquisition by Telefónica of the entire participation held by Portugal Telecom, SGPS S.A., and PT Móveis - Serviços de Telecomunicações, SGPS, S.A., (the "PT Companies") in Brasilcel, N.V., which controlled the Brazilian mobile company, Vivo Participações, S.A. ("Vivo"): |
| o | The entry of a new shareholder in Vivo, sharing the control of Vivo with Telefónica in conditions identical to those that were applicable to the PT Companies when they had a participation in Brasilcel N.V., or |
| o | That Telefónica ceases to have any direct or indirect financial interest in TIM Participações S.A. |
| § | To impose on Telefónica a fine of 15 million Brazilian reais, for having allegedly breached the spirit and the goal of the agreement signed between Telefónica and CADE (as a condition to the approval of Telefónica's original acquisition of an interest in Telecom Italia, S.p.A. in 2007), due to the subscription of non-voting shares of Telco on a recent capital increases. This decision also requires Telefónica to divest such non-voting shares of Telco. |
The fine imposedappeal filed by CADE on Telefónica, S.A. relates tonica. In the agreement reached on September 24, 2013, between Telefónica andcoming months the other shareholdersEuropean Commission must issue a new resolution in accordance with the judgment of the Italian company Telco (which holds a 22.4% stake with voting rightsGeneral Court of Telecom Italia, S.p.A.) wherebyJune 2016, which urged the Commission to recalculate the amount of the fine.
Claim of consumers association "FACUA" against Telefónica subscribedde España in connection with the increase of the price of Movistar Fusión
On September 5, 2016, notification was given to Telefónica de España of a claim filed against it by the consumers association ("FACUA"). Through such claim, the association exercises an action to protect consumers' and paid outusers' collective interests stipulated in articles 11 of the Civil Procedure Act (Ley de Enjuiciamiento Civil) and 24.1 of the Consumer and Users Protection Act (Ley General de Defensa de los Consumidores y Usuarios) on the basis of alleged disloyalty towards the consumers, arising from the raising of the prices of the product "Movistar Fusión" from May 5, 2015, by an amount of 5 euros per month.The claim contains a share capital increase in Telco, throughdeclaratory statement stating that disloyalty arises from misleading advertising regarding the price rise, and a cash contributionprohibitory injunction requesting that Telefónica de España be ordered not to apply such price rise and to prohibit its future application to all customers who became customers of 324 million euros, in exchange for shares with non-voting rights in Telco. AsMovistar Fusión prior to May 5, 2015. It contains, besides, a third statement, requesting Telefónica de España to
be condemned to repay the excess amounts collected as a result of this capital increase, the rise in prices to those customers who have chosen to maintain the service contracted, together with accrued interest held byon such amount.
The claim was filed for an undetermined amount, given the impossibility of determining a priori the total amount of the claim. On October 28, 2016, Telefónica in the voting share capital of Telco remained unchanged (46.18%), althoughde España filed its interest in the total share capital of Telco stands at 66%.
On July 9, 2014,April 5, 2017, the Court ruled in favour of Telefónica filed de España, judicial appeal against both decisions, requesting they be overturned citing numerous procedural improprieties (the rulings were issued before Telefónica presented its allegations)upholding the objection of unsuitable action and a clear lackordering the dismissal of legal grounds. At the same time, it requestedaction. FACUA appealed that ruling.
Decision by the decisions be rendered null as CADE has not provided any proof that Telefónica's actions undermine competition or infringe on applicable legislation. In this respect, the decisionHigh Court regarding the acquisition by Telefónica of PT Companies' indirect stakeshares in Vivo Participações, S.A.Český Telecom by way of tender offer
Venten Management Limited ("Venten") and Lexburg Enterprises Limited ("Lexburg"), were minority shareholders of CESKY TELECOM. In September 2005 both companies sold their shares to Telefónica in a mandatory tender offer. Subsequently Venten and Lexburg, in 2006 and 2009, respectively, filed actions against Telefónica claiming a higher price than the price for which they sold their shares in the mandatory tender offer.
On August 5, 2016, the hearing before the High Court in Prague took place in order to decide the appeal against the second decision of the Municipal Court, which had been favourable to Telefónica's position (as was also the case with the first decision of the Municipal Court). At the end of the hearing, the High Court announced the Second Appellate Decision by which it reversed the second decision of the Municipal Court and ordered Telefónica to pay 644 million Czech koruna (approximately 23 million euros) to Venten and 227 million Czech koruna (approximately 8 million euros) to Lexburg, in each case plus interest.
On December 28, 2016, the decision was notified to Telefónica. Telefónica has filed an extraordinary appeal, requesting the suspension of the effects of the decision.
In March 2017, Telefónica was notified of the decision of the Supreme Court, which ordered the suspension of the effects of the unfavorable decision to Telefónica issued three yearsby the High Court.
Venten and Lexburg filed with the Supreme Court a motion to partially abolish the suspension of enforceability of the Decision of the High Court in Prague. On January 17, 2018, Telefónica filed its response seeking dismissal of such motion for lack of legal basis.
Claim by Entel against Telefónica de Argentina, SA
In 1999, Entel (the National Telecommunications Company of Argentina before its privatization) sued Telefónica de Argentina, SA ("TASA"), who was the licensee of the telecom service after the deal was approved byprivatization process, seeking detailed and documented accounting and reimbursement of the Brazilian telecommunications regulator (“ANATEL”). The transaction was completed -amounts that it received from and on behalf of Entel after assuming the telecom service as a licensee, and of the amounts deducted as commissions.
In general terms, the items in dispute were the amounts that TASA charged on behalf of Entel soon after having taken possession as a licensee of the telecom service (i.e.; the consumptions charges for telecom services from prior approval by the CADE was not requiredcustomers of Entel, either billed or unbilled, but pending payment at the time - immediately after ANATEL's approvalof the privatization). Entel also challenged the commissions that TASA discounted to Entel in exchange for the service of collection of fees on September 27, 2010.behalf of Entel. Additionally, Entel also claimed several credits received by TASA which allegedly belonged to Entel and had not been transferred to TASA in the privatization process.
TASA replied arguing the inadmissibility of the accountability request, since such liquidations had previously been submitted to the Entel Liquidating Commission without being timely challenged.
In 2010, the Court of First Instance ruled in favor of Entel and held TASA accountable to Entel.
After exhausting all legal appeals available, TASA submitted the requested accounting to Entel, which was challenged by the national government on behalf of the liquidated Entel.
Several accounting drafts and cross-claims between the parties followed, with the intervention of a court-appointed expert accountant. After several court decisions, the intervening judge rejected TASA´s objections to the accounting presented by the national government and adopted the calculations made by Entel and the court-appointed expert.
Although this judicial decision was appealed, TASA´s appeal was dismissed by the Court of Appeals in October 2017, confirming, to a large extent, the accounting of Entel and the court-appointed expert, but also ordering Entel to recalculate interests, which has not been made yet. Specifically, the resolution of the Court accepted certain concepts
that TASA had questioned and the application of a "judicial" interest rate (average passive rate), which implies a daily capitalization component, in detriment of the rate set forth in the privatization specifications which set a simple annual interest of 8% (which had even been used by the court-appointed expert and Entel in their calculations).
Although Entel has not yet submitted the new interest calculations required by the judge as of the date of this Annual Report, the approximate total amount of the claim considering its prior requests is estimated at 1,744 million Argentine pesos (71 million euros).
The resolution of the Court of Appeals exhausted the ordinary remedies available. TASA filed an extraordinary appeal, which was rejected in November 2017. TASA has submitted an exceptional appeal before the Argentine Supreme Court, although this appeal does not suspend the potential execution by Entel of prior rulings against TASA.
b) Commitments
Other Proceedings
Telefónica Internacional, S.A.U.is currently conducting internal investigations covering various countries regarding possible violations of applicable anti-corruption laws. Telefónica has been in contact with governmental authorities about these matters and intends to cooperate with those authorities as the investigations continue. It is not possible at this time to predict the scope or duration of these matters or their likely outcome.
c) Commitments
Agreement related to the Sale of Customer Relationship Management (“CRM”) Business, Atento
As a result of the sale agreement of Atento by Telefónica, announced on October 12, 2012, and ratified on December 12, 2012, both companies signed a Master Service Agreement which regulates Atento’s relationship with the Telefónica Group as a service provider for a period of nine years and which was amended on May 16, 2014, and on November 8, 2016. This period was extended only for Spain and Brazil in November 2016, for two additional years until 2023.
By virtue of this Agreement, Atento became Telefónica’s preferred Contact Center and Customer Relationship Management (“CRM”) service provider, stipulating annual commitments in terms of turnover which is updated based on inflation and deflation that vary from country to country, pursuant to the volume of services Atento has been providing to the entire Group. Effective January 1, 2017, the minimum volume commitments that Telefónica must comply with have significantly decreased from Brazil.
Failure to meet the annual turnover commitments generally results in the obligation to the counterparty, to pay additional amounts, which would be calculated based on the difference between the actual amount of turnover and the predetermined commitment, applying a percentage based on the Contact Center’s business margin to the final calculation.
The Master Agreement sets forth a reciprocal arrangement, whereby Atento assumes similar commitments to subscribe its telecommunications services to Telefónica.
Telefónica Latinoamérica Holding, S.L. as strategic partner of Colombia Telecomunicaciones, S.A. ESP
Pursuant to amendment nº 12 of the Framework Investment Agreement executed on March 30, 2012,as of September 21, 2017, after the closing of the merger between Colombia Telecomunicaciones, S.A. ESP and Telefónica Móviles Colombia, S.A., the Colombian Government may, at any time, offer to Telefónica all or part of the shares it holds in the company, the latter being obliged to acquire them, (directly or via one of its subsidiaries) providedin the event that any of the following circumstances becomes applicable: (i)increase in Colombia Telecomunicaciones, S.A. ESP fails to meet its payment obligations under the terms of the ”Contrato de Explotación”, of two accumulated bi-monthly installments of the consideration fees; (ii) the increase inESP's EBITDA (CAGR) is less than 5.75% in the measurement periods, and provided that during the twelve (12) months following the ordinary shareholders’ meetings during which the measurement was made, at least one of the following occurs: 1) Colombia Telecomunicaciones S.A. ESP makes capital investments (CAPEX) exceeding 12.5% of its revenues for services; 2) Colombia Telecomunicaciones S.A. ESP has paid a brand fee or any other type of payment to the Strategic Partner for the use of its brands; or 3)2) Colombia Telecomunicaciones S.A. ESP orders and/or pays dividends with the favorable vote of the Strategic Partner.
From January 1, 2013, the Colombian Government can require Telefónica to vote in favor of the register of the shares of Colombia Telecomunicaciones, S.A. ESP in the National Securities and Issuer’s Registry and in the Colombia Stock Exchange.
In addition, (a) if Telefónica decides to dispose or transfer of all or part of its shareholding in Colombia Telecomunicaciones, S.A. ESP to third parties, Telefónica commits that(i)that: (i) the acquirer or transferee will be obliged to adhere to the Framework Investment Agreement; and (ii) that the acquirer or transferee will be obliged to present an offer to purchase all of the shares in Colombia Telecomunicaciones, S.A. ESP held by the Colombian Government
(that amounts to 32.5% of the share capital) at the same price and under the same terms and conditions negotiated with Telefónica, through the legally-established procedure for disposal of shares held by public entities.
Lastly, in 2015,entities and, (b) if the Colombian Government will be entitled to subscribe or acquire, at no cost or compensation, a number oftransfer its shares necessary to bring its aggregate holding in Colombia Telecomunicaciones, S.A. ESP under certain circumstances, the Strategic Partner shall subscribe with the acquirer of the shares a new shareholders agreement which will have to be then negotiated by the parties and which, as the case may be, will include some of the rights currently held by the Colombian Government under the Framework Investment Agreement currently in force.
Communications Investment Platform ("CIP")
On May 8, 2015, Telefónica Open Future, S.L.U. (“TOF”) signed a Limited Partnership Agreement (and related agreements) with Coral Group, L.L.C. (and affiliates thereof) ("Coral") pursuant thereto, TOF has committed to undertake investments up to 3%, depending on200 million U.S. dollar over a 7 year period (expandable up to two additional years) in technology companies that fall within the compound growth in EBITDA between 2011 and 2014, the impact of this commitment not being relevant to the consolidated financial statements of the Company. To enforce this right of the nation, the parties will have three months since ordinary shareholders meeting approving the 2014 accounts, is held in 2015.
Atento
strategic priorities jointly agreed with Telefónica.
As a result of the sale agreementaddition of Atento by Telefónica, announcedan additional Strategic Investor to the CIP in 2017, on October 12, 201225, 2017, TOF and ratified on December 12, 2012, both companies have signedCoral entered into a Master Servicenew Amended and Restated Limited Partnership Agreement, which regulates Atento’s relationshipretains TOF’s original capital commitment, but also amends certain terms and conditions to provide TOF with the Telefónica Group as a service provider for a period of nine years.certain early termination and capital commitment reduction rights upon certain events.
By virtue of this Agreement, Atento become Telefónica’s preferred Contact Centre and Customer Relationship Management (CRM) service provider, stipulating annual commitments in terms of turnover which updates in line with inflation and deflation that vary from country to country, pursuant to the volume of services Atento has been providing to the entire Group.
In the case of an eventual failure to meet the annual turnover commitments that could result in a compensation, which would be calculated based on the difference between the actual amount of turnover and the predetermined commitment, applying a percentage based on the Contract Centre’s business margin to the final calculation.
Lastly, the Master Agreement sets forth a reciprocal arrangement, whereby Atento assumes similar commitments to subscribe its telecommunications services to Telefónica.
Share purchase Agreement for the acquisitionsale of Distribuidorathe shares of Telefónica Gestión de TelevisióServicios Compartidos España, S.A.U., Telefónica Gestión de Servicios Compartidos Argentina, S.A. (DTS).
and T-Gestiona Servicios Contables y Capital Humano, S.A.C.
On June 2, 2014, Telefónica de Contenidos, S.A.U. ("Telefónica Contenidos") executedMarch 1, 2016, a share purchase agreement jointly and severally guaranteed bybetween, on one hand, Telefónica, S.A., with PromotoraTelefónica Servicios Globales, S.L.U. and Telefónica Gestión de Informaciones,Servicios Compartidos Perú, S.A.C. (as sellers), and, on the other hand, IBM Global Services España, S.A., IBM del Perú, S.A.C., IBM Canada Limited and IBM Americas Holding, LLC (as purchasers) for the acquisition of a 56%sale of the share capitalcompanies Telefónica Gestión de Servicios Compartidos España, S.A.U., Telefónica Gestión de Servicios Compartidos Argentina, S.A. and Tgestiona Servicios Contables y Capital Humano, S.A.C., for a total price of Distribuidora de Televisión Digital, S.A. (DTS) for amount of 750 million euros. The closing of this purchase agreement is subject to obtaining the relevant authorization of the competition authorities.
Moreover, on July 4, 2014, Telefónica de Contenidos acquired 22% of the share capital of DTS owned by Mediaset España Comunicación, S.A. ("Mediaset") for an amount of 295 million euros. Furthermore, a payment of an amount of 30approximately 22 million euros, was satisfied as considerationratified before Notary Public. This share purchase agreement was subscribed on December 31, 2015.
Following the aforementioned share purchase agreement and in connection with the latter transaction, also, on December 31, 2015, Telefónica subscribed a master services agreement with IBM for the waiveroutsourcing of Mediaset's pre-emptive rights relating the stake held by PRISA in DTS referred in the paragraph above.
Pursuanteconomic-financial and HR activities and functions to the agreement, Mediaset will receive an amount of 10 million euros in the event that Telefónica de Contenidos closes the acquisition of the 56% stake of DTS held by PRISA and, in that case, an amount of upbe provided to 30 million euros depending on the evolution of the Pay-TV customers in Spain of the Telefónica Group during the 4a period of ten years, following the closingfor a total amount of such acquisition.
Agreement with the shareholders of Telco, S.p.A.
On June 16, 2014, the three Italian shareholders of Telco requested the initiationapproximately 450 million euros. Most of the process of "demerger" (spin off) ofTelefónica Group’s subsidiary companies have already adhered to that master services agreement.
d) Environmental matters
Telefónica has a global Environmental Strategy that arises from the company, as provided in the shareholders’ agreement. Implementation of the demerger,Environmental Policy and Energy Policy approved by the General MeetingBoard of ShareholdersDirectors which sets out the road map for the Company to advance towards a green economy, reducing the environmental impact of Telco, S.p.A. held on July 9, 2014, remains subjectits facilities at the same time as developing the potential for digital services to obtainingreduce the required anti-trust and telecommunications approvals (including those from Brazil and Argentina). Once the aforementioned approvals are obtained, this decision will be implemented by transferring all the current stakeenvironmental footprint of Telco, S.p.A. in Telecom Italia to four newly created companies. The share capital of each of these companies will belong in its entirety to eachother sectors.
Currently 90% of the shareholders of Telco, S.p.A. and each of these companies will receive a number of shares of Telecom Italia, S.p.A. (“Telecom Italia”) proportionalCompany has Environmental Management Systems (EMS) in accordance with Regulation ISO 14001, certified by an external body, which contribute to the current economic stakeproper management of its environmental aspects and to extending a culture of environmental responsibility across the whole supply chain. Telefónica has set itself the target of certifying 100% of operators under ISO 14001.
The greatest environmental impact is in Telco, S.p.A.the network due to energy consumption, but also with physical elements, such as visual impact or waste. For responsible network deployment and maintenance, Telefónica has common standards (rules, regulations and policies) for all our companies that go beyond existing legislation in force and comprise the principle of each respective shareholder.precaution and establish the minimum environmental management guidelines with a view to minimizing the impact of infrastructures, e.g., in the context of air pollution, waste and noise. We also extend compliance to these standards to our vendors (suppliers and providers) and contractors. Turning to water consumption, we foster initiatives for more efficient usage, particularly in regions with an elevated water stress.
e) Auditors’ fees
Group's main auditor
The application processexpenses accrued in 2017 in respect of the aforementioned anti-trust and telecommunications approvals (including those in Brazil and Argentina), to proceedfees for services rendered to the "demerger" (spin off)various member firms of Telco started, once the corresponding corporate documents were entered into in Italy. On December 22, 2014, ANATEL (Brazilian Telecommunications Regulator) approvedPwC international organization, of which PricewaterhouseCoopers Auditores, S.L. (the auditors of the “demerger” (spin off) subject to compliance with certain obligations (see Note 9), although CADE (Brazilian Conselho Administrativo de Defesa Econômica) and CNDC (Comisión Nacional de Defensa de la Competencia of Argentina) have not rendered any decision yet.
Furthermore, on July 24, 2014, Telefónica issued 750Group) forms part, amounted to 19.78 million euros bonds mandatorily exchangeable into ordinary shares of Telecom Italia maturing on July 24, 2017, representing, as of that date, 6.5% of its current voting share capital. The bonds may be exchanged in advance of the transfer of the shares, except under certain circumstances where the Company may opt to redeem the bonds in cash.
It is also significant that, within the framework of the GVT transaction and its holding company GVT Participações, SA, Vivendi, S.A. will acquire 1,110 million ordinary shares owned by Telefonica in Telecom Italia.
Agreement for the Acquisition of Global Village Telecom, S.A. and its holding company GVT Participações, S.A.
On September 19, 2014, Telefónica, S.A. signed an agreement with Vivendi S.A. for the acquisition by Telefónica Brasil, S.A. of Global Village Telecom, S.A. and its holding company GVT Participações, S.A. (jointly “GVT”) for a cash consideration of 4,663 million euros, and a payment in shares representing 12.0% of the share capital of Telefónica Brasil, S.A., after its combination with GVT.
As part of the agreement, Vivendi, S.A. will acquire from Telefónica 1,110 million ordinary shares in Telecom Italia currently representing 8.3% of Telecom Italia’s voting share capital (equivalent to 5.7% of its total share capital), in exchange for 4.5% of Vivendi, S.A.'s capital in Telefónica Brasil, S.A., after its combination with GVT (which represents all of the voting shares and 0.7% of the preferred shares to be received by Vivendi S.A. under the agreement referred to above).
The cash payment for this transaction is expected to be financed via a capital increase by Telefónica Brasil S.A., which Telefónica S.A. intends to subscribe in proportion to its current stake in Telefónica Brasil, S.A. and intends to fund, in turn, via a capital increase.
The final closing of the operation is subject to obtaining the relevant regulatory authorizations (including telecommunication and anti-trust approval). On December 22, 2014, ANATEL approved the acquisition of GVT,subject to compliance with certain obligations (see Appendix VII), although the resolution about the acquisition by Vivendi, S.A. of the 1,110 million of ordinary shares of Telecom Italia is still pending. Meanwhile, CADE continues to analyze the process.
c) Environmental matters
Telefónica has an integrated Green ICT and Environment strategy with three common goals. The first concerns environmental risk management, the second the promoting of internal eco-efficiency, and the third the unlocking of business opportunities to offer end-to-end telecommunications services that support a low-carbon economy.
The Group has an Environmental Policy covering all its companies, as well as a Global Environmental Management System to ensure compliance with local environmental laws and continuously improve management processes. The Climate Change and Energy Efficiency Corporate Office is also responsible for rolling out processes to boost energy efficiency and shrink the Group’s carbon footprint.
d) Auditors’ fees
The expenses accrued in 2016 in respect of the fees for services rendered to the various member firms of the EY international organization, of which Ernst & Young, S.L. (the auditors of the Telefónica Group) forms part, amounted to 21.3026.47 million euros and 22.72 million euros in 2014 and 2013, respectively.euros.
The detail of these amounts is as follows:
| Millions of euros | 2014 | 2013 |
| Audit services (1) | 20.02 | 21.25 |
| Audit-related services (2) | 1.28 | 1.47 |
| Total | 21.30 | 22.72 |
| |
| (1) Audit services: services included under this heading are mainly the audit of the annual and reviews of interim financial statements, work to comply with the requirements of the Sarbanes-Oxley Act (Section 404) and the review of the 20-F report to be filed with the US Securities and Exchange Commission (SEC). |
| (2) Audit-related services: This heading mainly includes services related to the review of the information required by regulatory authorities, agreed financial reporting procedures not requested by legal or regulatory bodies and the review of corporate responsibility reports. |
|
| | | | |
| Millions of euros | 2017 |
| 2016 |
|
| Audit services | 18.33 |
| 23.37 |
|
| Audit-related services | 0.49 |
| 3.10 |
|
| Tax services | 0.20 |
| 0.00 |
|
| All other services (consulting, advisory, etc.) | 0.76 |
| 0.00 |
|
| Total | 19.78 |
| 26.47 |
|
Audit services: mainly audit services of the annual and reviews of interim financial statements, services related to the issuance of comfort letters, work to comply with the requirements of the Sarbanes-Oxley Act (Section 404) and the work in connection with the 20-F report to file with the US Securities and Exchange Commission (SEC).
Audit-related services: services related to the review of the information required by regulatory authorities, agreed financial reporting procedures not requested by legal or regulatory bodies and the review of corporate responsibility reports.
Tax Services: permitted services by the applicable independence regulation, basically, they are tax advice and studies of transference prices.
All other services: permitted services by the applicable independence regulation, mainly advisory services on migration questions to expatriates employees.
In particular, the auditor of the Telefónica Group, PricewaterhouseCoopers Auditores, SL, during the year 2017 has provided services related to the issuance of the following reports: audit of the financial statements (includes SOX and 20-F), limited reviews of the intermediate periods, comfort letters, agreed procedures and corporate social responsibility.
EY has not rendered tax services or any other service other than those mentioned above to Telefónica Group companies.Other auditors
The expenses accrued in respect of the fees for services rendered toby other auditors in 20142017 and 20132016 amounted to 47.0740.50 million euros and 43.8634.85 million euros, respectively, as follows:
| Millions of euros | 2014 | 2013 |
| Audit services | 1.17 | 1.11 |
| Audit-related services | 1.18 | 0.36 |
| Tax services | 7.29 | 7.59 |
| All other services (consulting, advisory, etc.) | 37.43 | 34.80 |
| Total | 47.07 | 43.86 |
F-95 |
| | | | |
| Millions of euros | 2017 |
| 2016 |
|
| Audit services | 2.80 |
| 0.94 |
|
| Audit-related services | 0.48 |
| 2.69 |
|
| Tax services | 5.75 |
| 8.56 |
|
| All other services (consulting, advisory, etc.) | 31.47 |
| 22.66 |
|
| Total | 40.50 |
| 34.85 |
|
e)f) Trade and other guarantees
The Company is required to issue trade guarantees and deposits for concession and spectrum tender bids (see Note 16) and in the ordinary course of its business. No significant additional liabilities in the accompanying consolidated financial statements are expected to arise from guarantees and deposits issued.
f)g) Directors’ and Senior Executives’ compensation and other benefits
Board of Directors’ and Senior Executives’ compensation
The compensation of the members of Telefónicanica’s Board of Directors is governed by article 35 of the Company’s By-Laws, which provides that the annual amount of the compensation to be paid thereby to all of the Directors in their capacity as such, i.e., as members of the Board of Directors is governed by Article 35and for the performance of the Bylaws, which states that the compensation amount that the Company may pay to allduty of its Directors as remunerationsupervision and attendance feescollective decision-making inherent in such body, shall be fixed by the shareholders at the General Shareholders’Shareholders' Meeting. The Board of Directors shall determine the exact amount to be paid within such limit and the distribution thereof among the directors. ThisDirectors, taking into account the duties and responsibilities assigned to each Director, their membership on Committees within the Board of Directors and other objective circumstances that it deems relevant. Furthermore, Executive Directors shall receive such compensation as established in said articlethe Board determines for the performance of executive duties delegated or entrusted to them by the Bylaws, is compatible with other professional or employmentBoard of Directors. Such compensation accruingshall conform to the DirectorsDirector compensation policy approved by reason of any executive or advisory duties that they perform for the Company, other than the supervision and collective decision-making duties inherent in their capacity as Directors.
Accordingly, the shareholders at the Annual General ShareholdersShareholders’ Meeting.
In accordance with the foregoing, the shareholders acting at the Ordinary General Shareholders’ Meeting held on April 11, 2003 set at 6 million euros the maximum amount of annual gross annual amountcompensation to be paid toreceived by the Board of Directors at 6 million euros, includingas a fixed paymentallotment and as attendance fees for attending the meetings of the Advisory or Control Committees of the Board of Director’s Advisory or Control Committees. TotalDirectors. Thus, as regards fiscal year 2017, the total amount of compensation paid toreceived by the Directors of Telefónica’s Directorsnica, in their capacity as such, was 3,277,934 euros for discharging their duties in 2014 amounted to 3,486,935 euros inthe fixed compensationallocation and for attendance fees.
The compensation of the Directors of Telefónica S.A. directors in their capacity as members of the Board of Directors, of the Executive Commission and/or of the Advisory andor Control Committees consists of a fixed amount payable monthly and of attendance fees for attending the meetings of the Board’s Advisory or Control Committees. Executive Directors other than
Set forth below are the Chairman do not receive any amounts for their directorships, but only the corresponding amounts for discharging their executive duties as stipulated in their respective contracts.
The tables below presents the fixed amounts established in 2014fiscal year 2017 as fixed amounts for membershipbelonging to Telefónica’sthe Board of Directors, the Executive Commission and the Advisory or Control Committees of Telefónica and the attendance fees for attending meetings of the Advisory or Control Committees:
Committees of the Board of Directors:
Compensation of the Board of Directors and of the Committees thereof
|
| | | | | | |
| Amounts in euros | |
| |
| |
|
| Position | Board of Directors |
| Executive Commission |
| Advisory or Control Committees (*) |
|
| Chairman | 240,000 |
| 80,000 |
| 22,400 |
|
| Vice chairman | 200,000 |
| 80,000 |
| — |
|
| Executive Member | — |
| — |
| — |
|
| Proprietary Member | 120,000 |
| 80,000 |
| 11,200 |
|
| Independent Member | 120,000 |
| 80,000 |
| 11,200 |
|
| Other external | 120,000 |
| 80,000 |
| 11,200 |
|
In this regard, it is noted that the current Executive Chairman, Mr. José María Álvarez-Pallete López, has waived the receipt of the above amounts (i.e., 240,000 euros as Chairman of the Board of Directors and 80,000 euros as Chairman of the Executive Commission).
Likewise, the fixed remuneration of 1,923,100 euros that the Executive Chairman, Mr. José María Álvarez-Pallete López, has established for the 2018 financial year is equal to the one received in the years 2017 and 2016, which was set in his capacity as Chief Executive Officer, remaining invariably after his appointment as Chairman. This compensation is a 13.8% lower to the compensation established for the position of Executive Chairman prior to his appointment as such.
Individualized description
Annex II provides an individual breakdown by item of the compensation and benefits that the members of the Board of Directors and Board Committees
Amounts in euros Position | Board of Directors | Executive Committee | Advisory or Control Committees (*) |
| Chairman | 240,000 | 80,000 | 22,400 |
| Vice Chairman | 200,000 | 80,000 | − |
| Executive | − | − | − |
| Proprietary | 120,000 | 80,000 | 11,200 |
| Independent | 120,000 | 80,000 | 11,200 |
| Other external | 120,000 | 80,000 | 11,200 |
(*) In addition, the amounts paid for attendance to each of the Advisory or Control Committee’s meetings is 1,000 euros.
Individual breakdown
Appendix II provides a detail by individual, by compensation item,Senior Management of the compensation and benefits paid byCompany have received from Telefónica, S.A. and from other companies of the Telefónica Group toduring fiscal year 2017. Likewise, the compensation and benefits received, during such year, by the members of the Company’s Board of Directors in 2014.
Company's Senior Management are broken down.
Note 22. Finance leases
The principalmain finance leases at the Telefónica Group are as follows:
a) Finance lease agreement at Colombia Telecomunicaciones, S.A. ESP
The Group, through its subsidiary Colombia Telecomunicaciones, S.A., ESP has(Coltel), had a finance lease agreement with Patrimonio Autónomo Receptor de Activos de la Empresa Nacional de Telecomunicaciones (PARAPAT), the consortium which ownsowned the telecommunications assets and managesmanaged the pension funds for the entities which were predecessors to Colombia Telecomunicaciones, S.A. ESP, andColtel, which regulated the operation of assets, goods and rights relating with the provision of telecommunications services by the company, in exchange for financial consideration.
This agreement includesincluded the transfer of these assets and rights to Colombia Telecomunicaciones, S.A. ESP onceColtel.
On August 29, 2017, the last installmentShareholders’ Meeting of Coltel approved a capital increase used to pre-pay the entire amount of Coltel´s debt with PARAPAT with the consequent transfer of the consideration has been paidlegal ownership of the assets of the operating agreement. Telefónica disbursed the corresponding amount pro rata to its shareholding in lineColTel and the Colombian Government assumed 32.5% of ColTel's payment obligations with the PARAPAT (see Note 2). The present value of the payment schedule:obligations with the PARAPAT at the date of termination of the contract amounted to 4,290,992 Colombian pesos (1,236 million euros).
| Millions of euros | Present value | Revaluation | Pending payment |
| Within one year | 167 | − | 167 |
| From one to five years | 608 | 87 | 695 |
| More than five years | 596 | 1,412 | 2,008 |
| Total | 1,371 | 1,499 | 2,870 |
The net amountpresent value of property, plant and equipment recorded under the terms of this lease was 247 million eurospayment obligations with the PARAPAT at December 31, 2014.2016 amounted to 1,275 million euros, as follows:
|
| | | | | | |
| Millions of euros | Present value |
| Revaluation |
| Pending payment |
|
| Within one year | 152 |
| 9 |
| 161 |
|
| From one to five years | 517 |
| 207 |
| 724 |
|
| More than five years | 606 |
| 951 |
| 1,557 |
|
| Total | 1,275 |
| 1,167 |
| 2,442 |
|
b) Future minimum lease payment commitments in relation to finance leases at Telefónica GermanyBrasil companies
The payment schedule of finance leases of Telefónica GermanyBrasil at December 31, 2014,2017, is as follows:
| Millions of euros | Present value | Revaluation | Pending payment |
| Within one year | 374 | 21 | 395 |
| From one to five years | 197 | 6 | 203 |
| More than five years | − | − | − |
| Total | 571 | 27 | 598 |
|
| | | | | | |
| Millions of euros | Present value |
| Revaluation |
| Pending payment |
|
| Within one year | 13 |
| 2 |
| 15 |
|
| From one to five years | 37 |
| 14 |
| 51 |
|
| More than five years | 48 |
| 85 |
| 133 |
|
| Total | 98 |
| 101 |
| 199 |
|
At December 31, 20142017 there are net assets under these leasesfinance lease agreements amounting to 6471 million euros recognized under property, plant and equipment.
Additionally, the companyTelefónica Brasil acts as a lessor in financial leases related to those described above. The minimum lease payment receivables at December 31, 2017 are scheduled as follows:
| | | Millions of euros | Present value | Revaluation | Pending receivables | Present value |
| Revaluation |
| Pending receivables |
|
| Within one year | 223 | 3 | 226 | 58 |
| — |
| 58 |
|
| From one to five years | 99 | 1 | 100 | 43 |
| 8 |
| 51 |
|
| More than five years | − | |
| Total | 322 | 4 | 326 | 101 |
| 8 |
| 109 |
|
| Impairment provision | (36) | − | |
| Total present value after impairment provision | 286 | 4 | − | |
| Accumulated allowance | | (39 | ) | |
| Total after accumulated allowance | | 62 |
| |
c) Future minimum lease payment commitments in relation to finance leases at Telefónica de España, S.A.U.
The payment schedule of finance leases of Telefónica de España, S.A.U. at December 31, 2017, is as follows:
|
| | | | | | |
| Millions of euros | Present value |
| Revaluation |
| Pending payment |
|
| Within one year | 79 |
| 3 |
| 82 |
|
| From one to five years | 32 |
| 1 |
| 33 |
|
| Total | 111 |
| 4 |
| 115 |
|
Additionally, Telefónica de España, S.A.U. acts as a lessor in financial leases related to those described above. The minimum lease payment receivables at December 31, 2017 are scheduled as follows:
|
| | | | | | |
| Millions of euros | Present value |
| Revaluation |
| Pending receivables |
|
| Within one year | 71 |
| — |
| 71 |
|
| From one to five years | 47 |
| — |
| 47 |
|
| Total | 118 |
| — |
| 118 |
|
d) Future minimum lease payment commitments in relation to finance leases at Telefónica Germany companies
The payment schedule of finance leases of Telefónica Germany at December 31, 2017, is as follows:
|
| | | | | | |
| Millions of euros | Present value |
| Revaluation |
| Pending payment |
|
| Within one year | 18 |
| 1 |
| 19 |
|
| From one to five years | 15 |
| — |
| 15 |
|
| Total | 33 |
| 1 |
| 34 |
|
At December 31, 2017 there are net assets under finance lease agreements amounting to 124 million euros recognized under property, plant and equipment.
Additionally, Telefónica Germany acts as a lessor in financial leases related to those described above. The minimum lease payment receivables at December 31, 2017 are scheduled as follows:
|
| | | | | | |
| Millions of euros | Present value |
| Revaluation |
| Pending receivables |
|
| Within one year | 8 |
| — |
| 8 |
|
| Total | 8 |
| — |
| 8 |
|
| Accumulated allowance | (2 | ) | | |
| Total after accumulated allowance | 6 |
| | |
Note 23. Events after the reporting period
The following events regarding the Telefónica Group took place between December 31, 20142017 and the date of authorization for issue of the accompanying consolidated financial statements:
Financing
Financing
On January 9, 2015,11, 2018, Telefónica Europe, B.V. madeDeutschland Holding AG launched an early repaymentissuance of debt instruments in the local market (schuldscheindarlehen and namensschuldverschreibung) for 844an aggregate amount up to 200 million US dollars (695 euros and maturities of up to 15 years.
On January 22, 2018, Telefónica, S.A. drew down 100 million euros) euros of its bilateral loan on supplies signed on AugustDecember 28, 20122017 and originally scheduled to maturematuring in 2020.
On January 22, 2018, Telefónica Emisiones S.A.U. issued notes under its EMTN Program filed on October 31, 2023. This loan wasJune 29, 2017 in an aggregate nominal amount of 1,000 million euros. The notes are due on January 22, 2027, pay an annual coupon of 1.447% and are guaranteed by Telefónica, S.A.
On January 15, 2015,23, 2018, Telefónica, S.A. drew down 385 million euros of its bilateral loan signed on December 20, 2017 and maturing in 2019.
On January 23, 2018, Telefónica Germany GmbH & Co. OHG signed the second extension of its syndicated credit facility dated March 22, 2016, for 750 million euros and new maturity on March 22, 2023.
On January 26, 2018, Telxius Telecom, S.A. drew down 221 million euros and 75 million dollars of its multicurrency syndicated facility signed on December 1, 2017 and maturing in 2022. This syndicated facility includes an option by mutual agreement between the parties to extend the maturity up to 2024.
On January 30, 2018, Telefónica, S.A. drew down 100 million euros of its bilateral loan signed on November 24, 2017 and maturing in 2026.
On February 2, 2018, Telefónica Emisiones, S.A.U. redeemed 1,250750 million US dollars (1,068 million euros) sterling pounds of its notes issued on July 6, 2009.February 2, 2006. The notes were guaranteed by Telefónica, S.A.
New organizational structure
On January 30, 2015, the 375 and 100 million euros loan facilities arranged betweenThe Board of Directors of Telefónica, Finanzas, S.A.U.S.A., at its meeting held on January 31, 2018, resolved to adopt a new organizational structure in order to make the Company more agile, simple and focused on management, customer service, growth, efficiency and profitability.
The main changes are detailed below:
the European Investment Bank (EIB) maturedareas of General Counsel, and Public Affairs and Regulation, up until now led by Mr. Ramiro Sánchez de Lerín and Mr. Carlos López Blanco respectively, is unified and headed by Mr. Pablo de Carvajal.
Mr. Emilio Gayo will replace Mr. Luis Miguel Gilpérez as scheduled. These loans were guaranteed byExecutive Chairman of Telefónica S.A.
On February 19, 2015,España and member of the Executive Committee of Telefónica, S.A. signed
Telefónica Hispanoamérica, until now headed by Mr. Eduardo Caride (also a 2,500 million euros syndicated credit facility maturing in 2020, with two twelve month extension options requiring mutual agreementmember of the parties (which could extendExecutive Committee), is split into two new units in order to more effectively manage the maturity to as late as 2022). This agreement entered into effect on February 26, 2015different market situations: Telefónica Hispam Sur unit is created (encompassing operations in Argentina, Chile, Peru and allowed us to cancelUruguay), which is led by Mr. Bernardo Quinn (until now Director of Global Human Resources), and Telefónica Hispam Norte unit is created (encompassing the operations in advance the syndicated loan facility of Telefónica Europe, B.V. dated on March 2, 2012 with two tranches of 756 million eurosColombia, México, Central America, Ecuador and 1,469 million pounds sterling originally scheduled to mature in 2017. On the same date, Telefónica S.A. signed an amendment to its 3,000 million euros syndicated credit facility arranged on February 18, 2014 maturing in 2019 inVenezuela), which the parties mutually agreed two twelve month extension options (which could extend the maturity to as late as 2021).
Exclusive negotiations with Hutchison Whampoa Group
On January 23, 2015 Telefónica and Hutchison Whampoa Group agreed to enter into exclusive negotiations for the potential acquisitionis led by the latter of Telefónica’s subsidiary in the United Kingdom (O2 UK) for an indicative price in cash (firm value) of 10.25 billion pounds (approximately 13.5 billion euros); composed of (i) an initial amount of 9.25 billion pounds (approximately 12.2 billion euros) which would be paid at closing and (ii) an additional deferred payment of 1.0 billion pounds (approximately 1.3 billion euros) to be paid once the cumulative cash flow of the combined company in the UK has reached an agreed threshold.
The exclusivity period will last several weeks, allowing Telefónica and Hutchison Whampoa Group to negotiate definitive agreements, while Hutchison Whampoa Group completes its due diligence over Telefónica’s subsidiary in the United Kingdom (O2 UK).
Mr. Alfonso Gómez Palacio.
F-98
the area of People (Human Resources) is enhanced and will report directly to the Executive Chairman. This area will be led by Ms. Marta Machicot, who will join the Executive Committee.
Appendix I: Changes in theScope of consolidation scope
2014
Telefónica Germany
When the approvalThe main Companies of the European Commission had been obtainedTelefónica Group
The table below lists the main companies comprising the Telefónica Group at December 31, 2017 and the main investments consolidated using the equity method.
Included for each company are the company name, corporate purpose, country, functional currency, share capital increase by Telefónica Deutschland Holding, A.G. to finance the operation had been completed, Telefónica finalized the E-Plus Mobilfunk GmbH &Co KG (E-Plus) purchase on October 1, 2014.
Following the acquisition(in millions of E-Plus,functional currency units), the Telefónica Group’s stake in Telefónica Deutschland Holding, A.G. fell from 76.83% to 62.1% (increased to 62.37% at December 31, 2014). Theeffective shareholding and the company or companies through which the Group consolidates E-Plus from October 1, 2014 using the full consolidation method (see Note 5).holds a stake.
Parent Company
Telefónica, HispanoaméricaS.A.
Telefónica Investigación y Desarrollo Chile, S.p.A. was incorporated on May 23, 2014. Telefónica Móviles Chile, S.A. holds 100% of the shares. This company is included |
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Telefónica Spain |
| | | | |
Telefónica de España, S.A.U.
Telecommunications service provider | Spain | EUR | 1,024 |
| 100 | % | Telefónica, S.A. |
Telefónica Móviles España, S.A.U.
Wireless communications services provider | Spain | EUR | 209 |
| 100 | % | Telefónica, S.A. |
Acens Technologies, S.L.
Holding housing and telecommunications solutions Service provider | Spain | EUR | 23 |
| 100 | % | Telefónica de España, S.A.U. |
Teleinformática y Comunicaciones, S.A.U. (Telyco)
Promotion, marketing and distribution of telephone and telematic equipment and services | Spain | EUR | 8 |
| 100 | % | Telefónica de España, S.A.U. |
Telefónica Soluciones de Informática y Com. de España S.A.U.
Telecommunications systems, networks and infrastructure engineering | Spain | EUR | 2 |
| 100 | % | Telefónica de España, S.A.U. |
Telefónica Soluciones de Outsourcing, S.A.
Promotion and networks management | Spain | EUR | 1 |
| 100 | % | Telefónica Soluc. De Informática y Com. de España, S.A.U |
Telefónica Servicios Integrales de Distribución S.A.U.
Logistic service provider | Spain | EUR | 2 |
| 100 | % | Telefónica de España, S.A.U. |
DTS Distribuidora de Televisión Digital, S.A.
Broacasting satellite TV signal transmission and linkage services | Spain | EUR | 80 |
| 100 | % | Telefónica de España, S.A.U. |
Telefónica Servicios Audiovisuales, S.A.U.
Provision of all type of audiovisual telecommunications services | Spain | EUR | 6 |
| 100 | % | Telefónica de Contenidos, S.A.U. |
Telefónica Broadcast Services, S.L.U.
DSNG-based transmission and operation services | Spain | EUR | — |
| 100 | % | Telefónica Servicios Audiovisuales, S.A.U. |
| Telefónica United Kingdom |
| | | |
|
Telefónica Europe plc
Holding company | UK | GBP | 9 |
| 100 | % | Telefónica, S.A. (99.99%)
Telefónica Capital S.A. (0.01%) |
MmO2 plc
Holding company | UK | GBP | 20 |
| 100 | % | O2 Secretaries Ltd. (0.01%)
Telefónica Europe plc (99.99%) |
O2 Holdings Ltd
Holding company | UK | GBP | 12 |
| 100 | % | Telefónica Europe plc |
Telefónica United Kingdom Ltd.
Wireless communications | UK | GBP | 10 |
| 100 | % | O2 Holdings Ltd. |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Telefónica United Kingdom (cont.) | | | | | |
Giffgaff Ltd
Wireless communications services provider | UK | GBP | — |
| 100 | % | Telefónica United Kingdom Ltd. |
O2 Networks Ltd.
Holding company | UK | GBP | — |
| 100 | % | O2 Holdings Ltd. |
Cornerstone Telecomunications
Network sharing | UK | GBP | — |
| 50 | % | O2 Networks Ltd. (40%)
O2 Cedar Ltd (10%) |
| Telefónica Germany |
|
|
|
|
|
Telefónica Deutschland Holding A.G
Holding company | Germany | EUR | 2,975 |
| 69.22 | % | Telefónica Germany Holdings Limited |
Telefónica Germany GmbH & Co. OHG
Wireless communications services operator | Germany | EUR | 51 |
| 69.22 | % | Telefónica Deutschland Holding A.G (69.21%)
T. Germany Management, GmbH (0.01%) |
E-Plus Services GmbH
Wireless communications services operator | Germany | EUR | 288 |
| 69.22 | % | Telefónica Germany GmbH & Co. OHG |
Telefónica Germany Next GmbH
Technological and consulting services in Big Data provider | Germany | EUR | — |
| 69.22 | % | Telefónica Germany GmbH & Co. OHG |
Minodes GmbH
Technological and consulting services in Big Data provider | Germany | EUR | — |
| 69.22 | % | Telefónica Germany Next Gmbh |
Co-Trade GmbH
Technological services | Germany | EUR | — |
| 69.22 | % | Telefónica Germany Retail Gmbh |
| Telefónica Brazil |
|
|
|
|
|
Telefônica Brasil, S.A.
Wireline telephony operator | Brazil | BRL | 63,571 |
| 73.68 | % | Telefónica Latinoamérica Holding, S.L. (24.18%)
Telefónica, S.A. (29.77%)
Sao Paulo Telecomunicaçoes Participaçoes, Ltda. (19.67%)
Telefónica Chile, S.A. (0.06%) |
Terra Networks Brasil, S.A.
ISP and portal | Brazil | BRL | — |
| 100 | % | Telefônica Data S.A. |
| Telefónica Hispanoamérica |
|
|
|
|
|
Telefónica de Argentina, S.A.
Telecommunications service provider | Argentina | ARS | 1,097 |
| 100 | % | Telefónica Móviles Argentina, S.A. (80.14%)
Telefónica Latinoamérica Holding, S.L. (17.54%)
Telefónica, S.A. (1.52%)
Telefónica International Holding, B.V. (0.80%) |
Telefónica Móviles Argentina, S.A.
Telecommunications service provider | Argentina | ARS | 278 |
| 100 | % | Telefónica, S.A. (73.20%)
Telefónica Latinoamérica Holding, S.L. (25.28%)
Telefónica International Holding, B.V. (1.52%) |
Telefónica Venezolana, C.A.
Wireless communications operator | Venezuela | VEF | 2,368,408 |
| 100 | % | Latin America Cellular Holdings, S.L. (97.04%)
Comtel Comunicaciones Telefónicas, S.A. (2.87%)
Telefónica, S.A. (0.09%) |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Telefónica Hispanoamérica (cont.) | | | | | |
Telefónica Móviles Chile, S.A.
Wireless communications services operator | Chile | CLP | 1,257,872 |
| 100 | % | Inversiones Telefónica Móviles Holding Limitada (98.87%)
Telefónica, S.A. (1.13%) |
Telefónica Chile, S.A.
Local and international long distance telephony services provider | Chile | CLP | 570,535 |
| 99.14 | % | Telefónica Móviles Chile, S.A. |
Telefónica del Perú, S.A.A.
Local, domestic and international long distance telephone service provider | Peru | PEN | 2,954 |
| 98.57 | % | Telefónica Latinoamérica Holding, S.L. (50.26%)
Latin American Cellular Holdings, S.L. (48.31%) |
Colombia Telecomunicaciones, S.A. ESP
Communications services operator | Colombia | COP | 3,410 |
| 67.50 | % | Telefónica Latinoamérica Holding, S.L. (51.52%)
Latin American Cellular Holdings, S.L. (8.08%)
Telefónica, S.A. (7.90%) |
Empresa de Telecomunicaciones de Bucaramanga S.A. E.S.P
Communications services operator | Colombia | COP | 83,191 |
| 63.77 | % | Colombia Telecomunicaciones, S.A. ESP (35.71%)
Metropolitana de Telecomunicaciones S.A E.S.P (28.06%) |
Metropolitana de Telecomunicaciones S.A E.S.P
Communications services operator | Colombia | COP | 50,212 |
| 59.03 | % | Colombia Telecomunicaciones, S.A. ESP (30.89%)
Empresa de Telecomunicaciones de Bucaramanga S.A. E.S.P (28.14%) |
Operaciones Tecnológicas y Comerciales S.A.S
Communications services operator | Colombia | COP | 2,330 |
| 60.93 | % | Empresa de Telecomunicaciones de Bucaramanga S.A. E.S.P (24.37%)
Metropolitana de Telecomunicaciones S.A E.S.P (36.56%) |
Telefónica Móviles México, S.A. de C.V.
Holding Company | Mexico | MXN | 88,834 |
| 100 | % | Telefónica, S.A. |
Telefónica Móviles del Uruguay, S.A.
Wireless communications and services operator | Uruguay | UYU | 1,107 |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Telefónica Móviles Panamá, S.A.
Wireless telephony services | Panama | USD | 45 |
| 60 | % | Telefónica Centroamérica Inversiones, S.L. |
Telefónica Móviles El Salvador, S.A. de C.V.
Provision of wireless and international long distance communications services | El Salvador | USD | 42 |
| 59.58 | % | Telefónica Centroamérica Inversiones S.L. (59.46%)
Telefónica Multiservicios S.A. de C.V. (0.12%) |
Telefónica Móviles Guatemala, S.A.
Wireless, wireline and radio paging communications services provider | Guatemala | GTQ | 1,396 |
| 60 | % | Telefónica Centroamérica Inversiones S.L. (0.01%)
Guatemala Cellular Holdings, B.V. (59.99%) |
Telefonía Celular de Nicaragua, S.A.
Wireless telephony services | Nicaragua | NIO | 247 |
| 60 | % | Telefónica Centroamérica Inversiones S.L. (59.99%)
Guatemala Cellular Holdings, B.V. (0.01%) |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Telefónica Hispanoamérica (cont.) | | | | | |
Otecel, S.A.
Wireless communications services provider | Ecuador | USD | 183 |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Telefónica de Costa Rica TC, S.A.
Wireless communications | Costa Rica | CRC | 203,511 |
| 100 | % | Telefónica, S.A. |
Terra Networks Perú, S.A.
ISP and portal | Peru | PEN | 10 |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Terra Networks México, S.A. de C.V.
ISP, portal and real-time financial information services | Mexico | MXN | 305 |
| 100 | % | Terra Networks Mexico Holding, S.A. de C.V. |
Terra Networks Argentina, S.A.
ISP and portal | Argentina | ARS | 7 |
| 100 | % | Telefónica Latinoamérica Holding, S.L. (99.99%)
Telefónica International Holding, B.V. (0.01%) |
| Other Companies |
| | | |
|
O2 International Holdings Ltd.
Holding company | UK | GBP | — |
| 100 | % | O2 (Europe) Ltd. |
Telefónica Germany Holdings Ltd.
Holding company | UK | EUR | — |
| 100 | % | O2 (Europe) Ltd. |
O2 (Europe) Ltd.
Holding company | UK | EUR | 1,239 |
| 100 | % | Telefónica, S.A. |
Telefónica International Holding, B.V
Holding company | Netherlands | EUR | — |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Telefónica Latinoamérica Holding, S.L.
Holding company | Spain | EUR | 237 |
| 100 | % | Telefónica, S.A. |
Telxius Telecom, S.A.
Holding company | Spain | EUR | 250 |
| 60 | % | Telefónica, S.A. |
Telxius Cable América, S.A.
Provision of high bandwidth communications services | Uruguay | USD | 429 |
| 60 | % | Telxius Telecom, S.A. |
Telxius Cable España, S.L.U.
Any type of infrastructures and/or communications networks institution and operation | Spain | EUR | 5 |
| 60 | % | Telxius Telecom, S.A. |
Telxius Cable República Dominicana, S.A.S.
Any type of infrastructures and/or communications networks institution and operation | Republica Dominicana | USD | — |
| 60 | % | Telxius Cable América, S.A. (59.40%)
Telxius Cable España, S.L.U. (0.60%) |
Telxius Cable Argentina, S.A.
Any type of infrastructures and/or communications networks institution and operation | Argentina | USD | 78 |
| 60 | % | Telxius Cable América, S.A. (59.96%)
Telxius Cable España, S.L.U. (0.04%) |
Telxius Cable Panamá, S.A.
Any type of infrastructures and/or communications networks institution and operation | Panama | USD | — |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable Puerto Rico, Inc.
Any type of infrastructures and/or communications networks institution and operation | Puerto Rico | USD | 24 |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable USA, Inc.
Any type of infrastructures and/or communications networks institution and operation | US | USD | 58 |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable Ecuador, S.A.
Any type of infrastructures and/or communications networks institution and operation | Ecuador | USD | 5 |
| 60 | % | Telxius Cable América, S.A. (59.99%)
Telxius Cable Perú, S.A.C. (0.01%) |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Other Companies (cont.) | | | | | |
Telxius Cable Chile, S.A.
Any type of infrastructures and/or communications networks institution and operation | Chile | USD | 37 |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable Guatemala, S.A.
Any type of infrastructures and/or communications networks institution and operation | Guatemala | USD | 16 |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable Perú, S.A.C.
Any type of infrastructures and/or communications networks institution and operation | Peru | USD | 20 |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable Colombia, S.A.
Any type of infrastructures and/or communications networks institution and operation | Colombia | USD | 4 |
| 60 | % | Telxius Cable América, S.A. (56.99%)
Telxius Cable Chile, S.A. (1.00%)
Telxius Cable Perú, S.A.C. (1.00%)
Telxius Cable Guatemala, S.A. (1.00%)
Telxius Cable Argentina, S.A. (0.01%) |
Telxius Cable Brasil Participaçoes, Ltda.
Any type of infrastructures and/or communications networks institution and operation | Brazil | USD | 62 |
| 60 | % | Telxius Cable América, S.A. |
Telxius Cable Brasil, Ltda.
Any type of infrastructures and/or communications networks institution and operation | Brazil | USD | 74 |
| 60 | % | Telxius Cable Brasil Participaçoes, Ltda. |
Telxius Torres Latam, S.L.U.
Any type of infrastructures and/or communications networks institution and operation | Spain | EUR | 8 |
| 60 | % | Telxius Telecom, S.A. |
Telxius Torres España, S.L.U.
Any type of infrastructures and/or communications networks institution and operation | Spain | EUR | 10 |
| 60 | % | Telxius Telecom, S.A. |
Telxius Towers Germany, Gmbh.
Any type of infrastructures and/or communications networks institution and operation | Germany | EUR | — |
| 60 | % | Telxius Telecom, S.A. |
Telxius Torres Perú S.A.C.
Any type of infrastructures and/or communications networks institution and operation | Peru | PEN | 104 |
| 60 | % | Telxius Torres Latam, S.L.U. |
Telxius Torres Chile Holding, S.A.
Holding company | Chile | EUR | 8 |
| 60 | % | Telxius Torres Latam, S.L.U. (59.99%)
Telxius Torres España, S.L.U. (0.01%) |
Telxius Torres Chile, S.A.
Any type of infrastructures and/or communications networks institution and operation | Chile | CLP | 7,770 |
| 60 | % | Telxius Torres Chile Holding, S.A. |
Telxius Torres Brasil, Ltda.
Any type of infrastructures and/or communications networks institution and operation | Brazil | BRL | 764 |
| 60 | % | Telxius Torres Latam, S.L.U. |
Telxius Torres Argentina, S.A.
Any type of infrastructures and/or communications networks institution and operation | Argentina | ARS | 629 |
| 60 | % | Telxius Torres Latam, S.L.U. (57%)
Telxius Telecom, S.A. (3%) |
Latin American Cellular Holdings, S.L.
Holding company | Spain | EUR | — |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Telefónica International Wholesale Services II, S.L.
International services provider | Spain | EUR | 231 |
| 100 | % | Telefónica, S.A |
Telefónica International Wholesale Services México, S.A.
Telecommunications research activities and proyects | Mexico | MXN | 31 |
| 100 | % | Telefónica International Wholesale Services II, S.L. |
Telefónica Digital España, S.L.
Developer Telco Services Holding Company | Spain | EUR | 15 |
| 100 | % | Telefónica, S.A |
Wayra Investigación y Desarrollo S.L.
Talent identification and development in ICT. | Spain | EUR | 2 |
| 100 | % | Telefónica Digital España, S.L. |
Telefónica Digital Inc.
IP telephony platform | US | USD | — |
| 100 | % | Telefónica Digital Ltd |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Other Companies (cont.) | | | | | |
Wayra Chile Tecnología e Innovación Limitada
Technological innovation based business project development | Chile | CLP | 28,223 |
| 100 | % | Wayra Investigacion y Desarrollo, S.L. |
Wayra Brasil Aceleradora de Projetos Ltda.
Technological innovation based business project development | Brazil | BRL | 39 |
| 100 | % | Wayra Investigación y Desarrollo S.A.U. |
WY Telecom, S.A. de C.V.
Talent identification and development in ICT | Mexico | MXN | 140 |
| 100 | % | Wayra Investigacion y Desarrollo, S.L. |
Wayra Argentina, S.A.
Talent identification and development in ICT | Argentina | ARS | 56 |
| 100 | % | Telefónica Móviles Argentina, S.A. |
Wayra Colombia, S.A.S.
Technological innovation based business project development | Colombia | COP | 2,400 |
| 100 | % | Wayra Investigacion y Desarrollo, S.L. |
Proyecto Wayra, C.A.
Commercial, industrial and mercantile activities | Venezuela | VEF | 13,805 |
| 100 | % | Telefónica Venezolana, C.A. |
Wayra Perú Aceleradora de Proyectos, S.A.C.
Technological innovation based business project development | Peru | PEN | 18 |
| 100 | % | Wayra Investigacion y Desarrollo, S.L. |
Wayra UK Ltd.
Technological innovation based business project development | UK | GBP | — |
| 100 | % | Wayra Investigación y Desarrollo, S.L. |
Axonix Ltd
Digital and mobile advertising | UK | USD | — |
| 78 | % | Telefónica Digital Ltd |
Telfisa Global, B.V.
Integrated cash management, consulting and financial support for Group companies | Netherlands | EUR | — |
| 100 | % | Telefónica, S.A. |
Telefónica Global Activities Holding, B.V.
Holding Company | Netherlands | EUR | — |
| 100 | % | Telfisa Global, B.V. |
Telefónica Global Services, GmbH
Purchasing services | Germany | EUR | — |
| 100 | % | Group 3G UMTS Holding, GmbH |
Telefónica Global Roaming, GmbH
Optimization of network traffic | Germany | EUR | — |
| 100 | % | Telefónica Global Services, GmbH |
Group 3G UMTS Holding GmbH
Holding Company | Germany | EUR | 250 |
| 100 | % | Telefónica Global Activities Holdings, B.V |
Telefónica Compras Electrónicas, S.L.
Development and provision of information Society services | Spain | EUR | — |
| 100 | % | Telefónica Global Services, GmbH |
Telefónica de Contenidos, S.A.U.
Organization and operation of multimedia service-related business | Spain | EUR | 226 |
| 100 | % | Telefónica, S.A. |
Telefónica On The Spot Services, S.A.U.
Provision of telemarketing services | Spain | EUR | — |
| 100 | % | Telefónica de Contenidos, S.A.U. |
Telefónica Educación Digital, S.L.
Vertical e learning portal | Spain | EUR | 1 |
| 100 | % | Telefónica Digital España, S.L. |
Telfin Ireland Ltd.
Intragroup financing | Ireland | EUR | — |
| 100 | % | Telefónica, S.A. |
Telefónica Ingeniería de Seguridad, S.A.U.
Security services and systems | Spain | EUR | 12 |
| 100 | % | Telefónica, S.A. |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Other Companies (cont.) | | | | | |
Telefónica Engenharia de Segurança do Brasil Ltda
Security services and systems | Brazil | BRL | 131 |
| 99.99 | % | Telefónica Ingeniería de Seguridad, S.A. |
Telefónica Capital, S.A.U.
Finance company | Spain | EUR | 7 |
| 100 | % | Telefónica, S.A. |
Lotca Servicios Integrales, S.L.
Aircraft ownership and operation | Spain | EUR | 17 |
| 100 | % | Telefónica, S.A. |
Fonditel Pensiones, Entidad Gestora de Fondos de Pensiones, S.A
Administration of pension funds | Spain | EUR | 16 |
| 70 | % | Telefónica Capital, S.A. |
Fonditel Gestión, Soc. Gestora de Instituciones de Inversión Colectiva, S.A.
Administration and representation of collective investment schemes | Spain | EUR | 2 |
| 100 | % | Telefónica Capital, S.A. |
Telefónica Investigación y Desarrollo, S.A.U.
Telecommunications research activities and projects | Spain | EUR | 7 |
| 100 | % | Telefónica, S.A. |
Media Networks Latin America, S.A.C
Telecommunications research activities and proyects | Peru | PEN | — |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Telefónica Luxembourg Holding, S.à.r.L.
Holding company | Luxembourg | EUR | 3 |
| 100 | % | Telefónica, S.A. |
Casiopea Reaseguradora, S.A.
Reinsurance | Luxembourg | EUR | 4 |
| 100 | % | Telefónica Luxembourg Holding, S.à.r.L. |
Nova Casiopea RE S.A.
Reinsurance | Luxembourg | EUR | 15 |
| 100 | % | Telefónica Luxembourg Holding, S.à.r.L. |
Telefónica Insurance, S.A.
Direct insurance transactions | Luxembourg | EUR | 23 |
| 100 | % | Telefónica Luxembourg Holding, S.à.r.L. |
Seguros de Vida y Pensiones Antares, S.A.
Life insurance, pensions and health insurance | Spain | EUR | 51 |
| 100 | % | Telefónica, S.A. |
Telefónica Finanzas, S.A.U.
Integrated cash management, consulting and financial support for Group companies | Spain | EUR | 3 |
| 100 | % | Telefónica, S.A. |
Pléyade Peninsular, Correduría de Seguros y Reaseguros del Grupo Telefónica, S.A.
Distribution, promotion or preparation of insurance contracts | Spain | EUR | — |
| 100 | % | Telefónica Finanzas, S.A.U. (TELFISA) (83.33%)
Telefónica, S.A. (16.67%) |
Fisatel Mexico, S.A. de C.V.
Integrated cash mangement, consulting and financial support for Group companies | Mexico | MXN | 3,505 |
| 100 | % | Telefónica, S.A. |
Telefónica Europe, B.V.
Fund raising in capital markets | Netherlands | EUR | — |
| 100 | % | Telefónica, S.A. |
Telefónica Participaciones, S.A.U.
Financial debt instrument issuer | Spain | EUR | — |
| 100 | % | Telefónica, S.A. |
Telefónica Emisiones, S.A.U.
Financial debt instrument issuer | Spain | EUR | — |
| 100 | % | Telefónica, S.A. |
Telefónica Global Technology, S.A.U.
Global management and operation of IT systems | Spain | EUR | 16 |
| 100 | % | Telefónica, S.A. |
| Aliança Atlântica Holding B.V. Holding company | Netherlands | EUR | 150 |
| 100 | % | Telefónica, S.A. (50%)
Telefônica Brasil, S.A. (50%) |
|
| | | | | | | |
| Name and corporate purpose | Country | Currency | Capital |
| %Telefónica Group |
| Holding Company |
| Other Companies (cont.) | | | | | |
| Telefónica Transportes e Logística Ltda. Logistics services rendered | Brazil | BRL | — |
| 99.99 | % | Telefónica Data, S.A. (Brasil) |
Telefónica Serviços Empresariais do BRASIL, Ltda.
Management and administrative services rendered | Brazil | BRL | 35 |
| 99.99 | % | Telefónica Servicios Globales, S.L.U. |
Telefónica Gestión de Servicios Compartidos México, S.A. de C.V.
Management and administrative services rendered | Mexico | MXN | 50 |
| 100 | % | Telefónica Servicios Globales, S.L.U. |
Telefónica Gestión Logística, S.A.C
Logistic service provider | Peru | PEN | 15 |
| 100 | % | Telefónica Servicios Globales, S.L.U. (99.49%)
Telefónica del Perú, S.A.A. (0.51%) |
Telefónica Gestión Integral de Edificios y Servicios S.L.
Management and administrative services rendered | Spain | EUR | — |
| 100 | % | Telefónica Servicios Globales, S.L.U. |
Tempotel, Empresa de Trabajo Temporal, S.A.
Temporary employment agency | Spain | EUR | — |
| 100 | % | Telefónica Servicios Globales, S.L.U. |
O2 Worldwide Limited
Wireless telecommunications activities | UK | GBP | — |
| 100 | % | Telefónica, S.A. |
Synergic Partners, S.L.
Technological and consulting services in Big Data provider | Spain | EUR | — |
| 100 | % | Telefónica Digital España, S.L. |
Telefónica Innovación Alpha, S.L.
Electronic communications and audiovisual services provider | Spain | EUR | — |
| 100 | % | Telefónica, S.A. |
Telefónica Chile Holdings, S.L.
Holding Company | Chile | CLP | — |
| 100 | % | Telefónica, S.A. |
Telefónica Holding Atticus, B.V.
Holding company | Netherlands | EUR | — |
| 100 | % | Telefónica Latinoamérica Holding, S.L. |
Telefónica Servicios Globales, S.L.U.
Holding Company | Spain | EUR | 1 |
| 100 | % | Telefónica, S.A. |
|
| | | | | | | |
| Companies accounted for using the equity method |
| | | | |
Telefónica Factoring España, S.A.
Factoring services provider | Spain | EUR | 5 |
| 50 | % | Telefónica, S.A. |
Telefónica Factoring Do Brasil, Ltd.
Factoring services provider | Brazil | BRL | 5 |
| 50 | % | Telefónica, S.A. (40.00%)
Telefónica Factoring España, S.A. (10.00)% |
Telefónica Factoring Mexico, S.A. de C.V. SOFOM ENR
Factoring services provider | Mexico | MXN | 34 |
| 50 | % | Telefónica, S.A. (40.50%)
Telefónica Factoring España, S.A. (9.50)% |
Telefónica Factoring Perú, S.A.C.
Factoring services provider | Peru | PEN | 6 |
| 50 | % | Telefónica, S.A. (40.50%)
Telefónica Factoring España, S.A. (9.50%) |
Telefónica Factoring Colombia, S.A.
Factoring services provider | Colombia | COP | 4,000 |
| 50 | % | Telefónica, S.A. (40.50%)
Telefónica Factoring España, S.A. (9.50%) |
Mobile Financial Services Holding SPRL
Financial services | Belgica | USD | 190 |
| 50 | % | Telefónica Internacional Holding, B.V (26.28%)
Telefónica Holding Atticus, B.V (23.72%) |
Telefónica Consumer Finance, Establecimiento Financiero de Crédito, S.A.
Specialised credit institution | Spain | EUR | 5 |
| 50 | % | Telefónica, S.A. |
Tesco Mobile Ltd.
Wireless telephony services | UK | GBP | — |
| 50 | % | O2 Communication Ltd. |
The Smart Steps Data Technology Company
Big data services in China | China | CNY | — |
| 45 | % | Telefónica Digital España, S.L. |
Main changes in the scope of consolidation usingfor the full consolidation method.year 2017
OtherConstitution of new companies
In June 2013 Telefónica reached an agreement to sell its entire stake in the share capital |
| | | | |
| Companies/Segment/Subsidiaries | Country | Date of inclusion | % Acquisition |
|
| Other companies |
|
|
|
|
Telxius Torres Argentina, S.A.
Any type of infrastructures and/or communications networks institution and operation | Argentina | 05/31/2017 | 60 | % |
Acquired companies
|
| | | | |
| Companies/Segment/Subsidiaries | Country | Date of inclusion | % Acquisition |
|
| Telefónica Germany | | | |
Minodes GmbH
Technological and consulting services in Big Data provider | Germany | 05/31/2017 | 69.22 | % |
Co-Trade GmbH
Technological services | Germany | 10/31/2017 | 69.22 | % |
Acquisition of Telefónica Ireland, Ltd. The transaction was completed on June 15, 2014, after authorization had been obtained from the competition authorities (see Note 2). Telefónica Ireland was deconsolidated as of July 1, 2014.control
On November 5, 2013, Telefónica also signed an agreement to sell 65.9% of the share capital of Telefónica Czech Republic, a.s. to PPF Group N.V.I. The transaction was completed on January 28, 2014, after proper authorization had been obtained, and the company was deconsolidated as of January 1, 2014. |
| | | | |
| Companies/Segment/Subsidiaries | Country | Date of inclusion | % Acquisition |
|
| | | |
| Telefónica Hispanoamérica | | | |
Empresa de Telecomunicaciones de Bucaramanga S.A. E.S.P
Communications services operator | Colombia | 09/30/2017 | 63.77 | % |
Metropolitana de Telecomunicaciones S.A E.S.P
Communications services operator | Colombia | 09/30/2017 | 59.03 | % |
Operaciones Tecnológicas y Comerciales S.A.S
Communications services operator | Colombia | 09/30/2017 | 60.93 | % |
Sold companies
In the consolidated statement of financial position at December 31, 2013, consolidated assets and liabilities subject to the two transactions were classified under “Non-current assets held for sale” and “Liabilities associated |
| | | | |
| Companies/Segment/Subsidiaries | Country | Date of deconsolidated | % Sold |
|
| Telefónica Hispanoamérica | | | |
Compañía Señales del Norte, S.A. de C.V
Other business support services | Mexico | 12/31/2017 | 100 | % |
| Other companies | | | |
Telefónica Gestión de Servicios Compartidos Perú, S.A.C.
Management and administrative services rendered | Peru | 10/31/2017 | 100 | % |
Merged companies
|
| | | |
| Companies/Segment/Subsidiaries | Country | Date | Surviving company |
| Telefónica Spain | | | |
Telefónica Telecomunicaciones Públicas, S.A.U.
Installation of public telephones | Spain | 05/29/2017 | Telefónica de España, S.A.U. |
Tuenti Technologies, S.L.
Telecommunications service provider | Spain | 10/31/2017 | Telefónica Móviles España, S.A.U. |
Iberbanda, S.A.
Broadband telecommunications operator | Spain | 10/31/2017 | Telefónica de España, S.A.U. |
Telefónica Studios S.L.
Audiovisual Productions | Spain | 09/30/2017 | Telefónica
Audiovisual Digital, S.L.U. |
| Telefónica Germany |
|
|
|
E-Plus Mobilfunk GmbH &Co. KG, GmbG
Wireless communications services operator | Germany | 07/31/2017 | E-Plus Services GmbH |
| Telefónica Hispanoamérica |
|
|
|
Compañía Internacional de Telecomunicaciones, S.A.
Holding company | Argentina | 05/31/2017 | Telefónica Móviles Argentina, S.A. |
Telefónica Móviles Argentina Holding, S.A.
Holding company | Argentina | 05/31/2017 | Telefónica Móviles Argentina, S.A. |
Telefónica Móviles Chile, S.A.
Wireless communications services operator | Chile | 05/31/2017 | Inversiones Telefónica Móviles Holding, S.A. |
| Other companies |
|
|
|
Telefónica Datacorp, S.A.U
Holding company | Spain | 09/30/2017 | Telefónica Latinoamérica Holding, S.L. |
Eyeos, S.L
Cloud Computing | Spain | 09/30/2017 | Telefónica Investigación y Desarrollo, S.A.U. |
Telefónica International Wholesale Services, S.L.
International services provider | Spain | 12/31/2017 | Telefónica International Wholesale Services II, S.L. |
Wayra Ireland Ltd
Technological innovation based business project development | Ireland | 12/31/2017 | Wayra Investigación y Desarrollo S.L |
Companies liquidation
|
| | | | |
| Companies/Segment/Subsidiaries | Country | Date of deconsolidated | % Participation |
|
| | | |
| Other companies | | | |
Saluspot Spain, S.L.
Medical services and articles through internet provider | Spain | 12/31/2017 | 65 | % |
Operations with non-current assets held for sale”, respectively (see Note 2).minority interests
On February 6, 2014, Telefónica, S.A. drew up an agreement with CaixaBank (through its Finconsum subsidiary) to incorporate Telefónica Consumer Finance, E.F.C., S.A. with a 50% stake, included |
| | | | |
| Companies/Segment/Subsidiaries | Country | Date | % Participation after operation |
|
| | | |
| Telefónica Germany | | | |
Telefónica Deutschland Holding A.G
Exchange of shares with KPN | Germany | 03/31/2017 | 69.22 | % |
| Other companies |
|
|
|
|
Telxius Telecom, S.A.
Sold to Taurus Bidco S.à.r.l. (“KKR”) | Spain | 12/31/2017 | 60 | % |
Main changes in the scope of consolidation for the year 2016
Constitution of new companies
|
| | | | |
| Companies/Segment/Subsidiaries | Country | Date of inclusion | % Acquisition |
|
| Telefónica Spain | | | |
|
Telecomunicaciones Personalizadas, S.L.U Telecommunications service provider | Spain | 09/30/2016 | 100 | % |
| Other companies | | | |
|
Telxius Torres Latam, S.L.U. Any type of infrastructures and/or communications networks institution and operation | Spain | 04/30/2016 | 100 | % |
Telxius Torres España, S.L.U. Any type of infrastructures and/or communications networks institution and operation | Spain | 02/29/2016 | 100 | % |
Telxius Towers Germany, Gmbh. Any type of infrastructures and/or communications networks institution and operation | Germany | 02/29/2016 | 100 | % |
Acquired companies
|
| | | | |
| Company/Segment/Subsidiaries | Country | Date of inclusion | % Acquisition |
|
| Telefónica Spain | | | |
|
Nova Casiopea RE S.A. Reinsurance | Luxembourg | 10/31/2016 | 100 | % |
Saluspot Spain, S.L. (*) Medical services and articles through internet provider | Spain | 05/31/2016 | 65 | % |
(*) In 2016 Healthcommunity, S.L., in which the Group holds a 50% stake and which is consolidated using the equity method.
On February 11, 2014, Telefónica Digital España, S.L.U. took up a 49% stake in Healthcommunity,method, was spun off into two companies: Saluspot Spain, S.L and Salupro Spain, S.L. It was included inAfter completing the scopespin off process, the Group held 65% of consolidation using the equity method.
On March 27, 2014, Telefónica Digital España, S.L.U. purchased 100% of the shares of EYEOS,in Saluspot Spain, S.L and transferred its stake to Salupro Spain, S.L., and this was included in the scope of consolidation using the equity method.
On April 4, 2014, Telefónica Digital Ltd. purchased a 30% stake in Axonix Ltd., and took control of the company through the shareholders' agreement and designation of a majority of members of the board. It Saluspot Spain, S.L is was included in the scope of consolidation using the full consolidation method.
On July 4, 2014, Telefónica de Contenidos, S.A.U. officially purchased a 22% stake in Distribuidora de Televisión Digital, S.A. (DTS), owned by Mediaset España Comunicación, S.A. (Mediaset). This brought the stake held by Telefónica Contenidos, S.A.U. in DTS to 44%, and it is still included in the scope of consolidation using the equity method (see Note 9).Sold companies
|
| | | | |
| Company/Segment/Subsidiaries | Country | Date of deconsolidated | % Sold |
|
| Telefónica Spain | | | |
|
Telecomunicaciones Personalizadas, S.L.U Telecommunications service provider | Spain | 12/31/2016 | 100 | % |
| Other companies | | | |
|
Televisión Federal S.A.- TELEFE Provision and operation TV and radio broadcasting-services | Argentina | 11/30/2016 | 100 | % |
Atlántida Comunicaciones, S.A. Participation in public media | Argentina | 11/30/2016 | 100 | % |
Telefónica Media Argentina, S.A. Participation in public media | Argentina | 11/30/2016 | 100 | % |
Vocem 2013 Teleservicios, S.A. Call center services | Venezuela | 06/31/2016 | 100 | % |
Telefónica Gestión de Servicios Compartidos Argentina, S.A. Management and administrative services rendered | Argentina | 03/31/2016 | 100 | % |
Telefónica Gestión de Servicios Compartidos España, S.A. Management and administrative services rendered | Spain | 03/31/2016 | 100 | % |
On October 31, 2014 the subsidiary of Telefónica Europe, B.V., Telefónica Finance USA L.L.C., was dissolved, and was removed from the scope of consolidation.Merged companies
In November 2014 Telefónica, through its subsidiary Telefónica Internacional, S.A.U., sold off a 2.5% stake in China Unicom (Hong Kong) Limited for 687 million euros at the exchange rate of the date of the transaction (see Note 9). The
|
| | | |
| Company/Segment/Subsidiaries | Country | Date | Surviving company |
| Telefónica Brazil | | | |
GVT Participaçoes Holding company | Brazil | 04/01/2016 | Telefônica Brasil, S.A. |
| Other companies | | | |
Telefónica Internacional, S.A.U. Holding Company | Spain | 10/31/2016 | Telefónica Latinoamérica Holding, S.L. |
remainder of Telefónica's China Unicom (Hong Kong) Limited investment (equivalent to 2.51% of its share capital) was reclassified as an available-for-sale financial asset (see Note 13).
At a meeting on December 22, 2014, the Brazilian telecommunications regulator (ANATEL) approved the demerger of Telco, S.p.A on condition of suspension of Telefónica’s voting rights in Telecom Italia, S.p.A. and its subsidiaries, among certain other measures. Telefónica has agreed with the aforementioned suspension of voting rights and has offered the presentation of a formal statement to ANATEL in this regard. Therefore, on the same date Telefónica ceased to have significant influence through its indirect holding in Telecom Italia, S.p.A. and reclassified this investment as an available-for-sale financial asset (see Note 9).
2013
Telefónica Spain
In October, Telefónica Remesas, S.A. was liquidated and removed from the consolidation scope.
In November 2013, Telefónica Móviles España, S.A.U. acquired the remaining shares it did not previously hold in Tuenti Technologies, S.L., thereby obtaining a 100% stake. The Group continued to consolidate this company using the full consolidation method.
Telefónica Germany
The sale of Telefónica Germany Online Services GmbH was recognized on October 31, 2013, which generated a gain of 30 million euros. This company, which had been fully consolidated, was removed from the consolidation scope.
Telefónica Hispanoamérica
On August 2, 2013 Telefónica completed the sale of 40% of its subsidiaries in Guatemala, El Salvador, Nicaragua and Panama to Corporación Multi Inversiones. The sale was executed by means of the creation of a new company, Telefónica Centroamérica Inversiones, S.L., to which Telefónica contributed its stakes in the subsidiaries in Guatemala, Panama, El Salvador and Nicaragua in exchange for a 60% stake in this company (Note 5). The Group consolidates this company using the full consolidation method.
Other companies
In April, Telefónica de Contenidos, S.A.U. completed the sale of its remaining stake in Hispasat, S.A., i.e. 19,359 shares, to Eutelsat Services & Beteiligungen, GmbH for a total of 56 million euros.
On September 24, 2013, Telefónica and the other shareholders of the Italian company Telco, S.p.A. reached an agreement whereby Telefónica, S.A. subscribed and paid out a share capital increase in Telco, S.p.A., through a cash contribution of 324 million euros, in exchange for shares without voting rights in Telco, S.p.A. As a result of this capital increase, the interest held by Telefónica in the voting share capital of Telco, S.p.A. remained unchanged, although its interest in the total share capital of Telco, S.p.A. grew to 66%. Telco, S.p.A. remained included in the consolidation scope using the equity method.
In September 2013, the company Ecosistema Virtual Para la Promoción del Comercio, S.L. was incorporated, in which Telefónica Digital España, S.L. holds a 33% interest. The other shareholders are, with equal stakes, Banco Santander, S.A. and Caixa Card 1 Establecimiento Financiero de Crédito, S.A.U.
In 2013, the companies Telefónica On the Spot Soluciones Digitales, S.A. de C.V. (Mexico) and Telefónica On The Spot Services Soluciones Digitales Perú, S.A.C. were incorporated, which are wholly-owned by Telefónica On the Spot Services.
In 2013, the companies Telefónica Learning Services Chile SpA, Telefónica Learning Services Chile Capacitación, Ltda., Telefónica Learning Services Colombia SAS, Telefónica Learning Services Perú, SAC and Telefónica Serviços de Ensino, Ltda. (Brasil) were incorporated, which are solely owned by Telefónica Learning Services.
In 2013, Telefónica Global Solutions Panama, S.A. (wholly-owned by TIWS América, S.A.) and Telefónica Global Solutions, Singapore PTE. LTD. (wholly-owned by TIWS II, S.L.) were incorporated.
In 2013, the company Estrella Soluciones Prácticas, S.A. was incorporated through the spin-off of Telefónica Móviles Soluciones y Aplicaciones, S.A. The sale of Estrella Soluciones Prácticas, S.A. to Amdocs Chile SpA was formalized in December, whereby it was removed from the consolidation scope.
Appendix II: Board of Director’sand Senior Management Compensation
TELEFÓNICA, S.A.
(Amounts in euros)
| Director | Wage / Compen-sation1 | Fixed payment2 | Attendance fees3 | Short term variable compen-sation4 | Fixed payments Board Committees5 | Other items6 | Total |
| Mr. César Alierta Izuel | 2,230,800 | 240,000 | - | 3,050,000 | 80,000 | 155,110 | 5,755,910 |
| Mr. Isidro Fainé Casas | - | 200,000 | - | - | 80,000 | 8,000 | 288,000 |
| Mr. José María Abril Pérez | - | 200,000 | 3,000 | - | 91,200 | - | 294,200 |
| Mr. Julio Linares López | - | 200,000 | 16,000 | - | 45,733 | - | 261,733 |
| Mr. José María Alvarez-Pallete López | 1,923,100 | - | - | 2,900,000 | - | 128,415 | 4,951,515 |
| Mr. Fernando de Almansa Moreno-Barreda | - | 120,000 | 14,000 | - | 33,600 | 8,000 | 175,600 |
Ms. Eva Castillo Sanz7 | 1,264,000 | - | - | 1,463,712 | - | 53,554 | 2,781,266 |
| Mr. Carlos Colomer Casellas | - | 120,000 | 24,000 | - | 147,200 | 8,000 | 299,200 |
| Mr. Peter Erskine | - | 120,000 | 17,000 | - | 124,800 | - | 261,800 |
| Mr. Santiago Fernández Valbuena | - | - | - | - | - | - | - |
| Mr. Alfonso Ferrari Herrero | - | 120,000 | 35,000 | - | 158,400 | 8,000 | 321,400 |
| Mr. Luiz Fernando Furlán | - | 120,000 | - | - | - | - | 120,000 |
| Mr. Gonzalo Hinojosa Fernández de Angulo | - | 120,000 | 30,000 | - | 158,400 | 8,000 | 316,400 |
| Mr. Pablo Isla Álvarez de Tejera | - | 120,000 | 6,000 | - | 22,400 | - | 148,400 |
| Mr. Antonio Massanell Lavilla | - | 120,000 | 13,000 | - | 56,000 | 8,000 | 197,000 |
| Mr. Ignacio Moreno Martínez | - | 120,000 | 15,000 | - | 33,600 | - | 168,600 |
| Mr. Javier de Paz Mancho | - | 120,000 | 9,000 | - | 113,600 | - | 242,600 |
| Mr. Chang Xiaobing | - | 120,000 | - | - | - | - | 120,000 |
|
| | | | | | | |
| Directors | Salary1 | Fixed compen-sation2 | Attendance fees3 | Short-term variable compensation4 | Compensation for belonging to Committees of the Board5 | Other items6 | Total |
| Mr. José María Álvarez-Pallete López | 1,923,100 | — | — | 3,430,430 | — | 5,802 | 5,359,332 |
| Mr. Isidro Fainé Casas | — | 200,000 | — | — | 80,000 | — | 280,000 |
| Mr. José María Abril Pérez | — | 200,000 | 7,000 | — | 91,200 | — | 298,200 |
Mr. Ángel Vilá Boix7 | 697,490 | — | — | — | — | 7,341 | 704,831 |
| Ms. Eva Castillo Sanz | — | 120,000 | 27,000 | — | 33,600 | — | 180,600 |
| Mr. Juan Ignacio Cirac Sasturain | — | 120,000 | 9,000 | — | 11,200 | — | 140,200 |
| Mr. José Javier Echenique Landiríbar | — | 120,000 | 18,000 | — | 109,867 | — | 247,867 |
| Mr. Peter Erskine | — | 120,000 | 17,000 | — | 113,600 | — | 250,600 |
| Ms. Sabina Fluxà Thienemann | — | 120,000 | 10,000 | — | 11,200 | — | 141,200 |
| Mr. Luiz Fernando Furlán | — | 120,000 | 5,000 | — | 7,467 | — | 132,467 |
Ms. Carmen García de Andrés7 | — | 78,667 | 8,000 | — | 12,009 | — | 98,676 |
| Mr. Peter Löscher | — | 120,000 | 9,000 | — | 11,200 | — | 140,200 |
| Mr. Ignacio Moreno Martínez | — | 120,000 | 28,000 | — | 38,267 | — | 186,267 |
| Mr. Francisco Javier de Paz Mancho | — | 120,000 | 34,000 | — | 124,800 | — | 278,800 |
Mr. Francisco José Riberas Mera7 | — | 78,667 | — | — | — | — | 78,667 |
| Mr. Wang Xiaochu | — | 120,000 | — | — | — | — | 120,000 |
1 Wage: Non-variable compensation accrued bySalary: Regarding Mr. José María Álvarez-Pallete López, it includes the Directoramount of non-variable payments and that which the Board Member has received for discharginghis executive duties.tasks. Regarding Mr. Ángel Vilá Boix, he was appointed Board Member of the Company on July 26, 2017, including from this date the amount of non-variable payments and that which the Board Member has received for his executive tasks.
2 Fixed Payment: Cashremuneration: Amount of the compensation in cash, with a predefinedpre-established payment frequency, accruableperiod, whether or not overconsolidated at the time and accruedreceived by the DirectorBoard Member for their membership to the Board, regardless of Directors, irrespectivethe effective attendance of affective attendance by the Director at Board Meetings.Member to the Board meetings.
3 Attendance fees: Amounts payableAllowance: Total amount of the allowances for attendance toattending the meetings of the Advisory or Control Committees.
4 Short-term variable remuneration (bonus): Variable amount linked to the performance or the achievement of a series of individual or group objectives (quantitative or qualitative) in a period equal to or less than one year, corresponding to 2016 and paid in 2017. With regard to the bonus corresponding to 2017, and which will be paid in 2018, Executive Board Member Mr. José María Álvarez-Pallete López will earn 3,426,964 euros and Executive Board Member Mr. Ángel Vilá Boix will earn 990,000 euros (the Bonus of Mr. Vilá only includes the amount accrued since his appointment as Director of the Company, on July 26, 2017).
5 Remuneration for membership to the Board Committees: Amount of the compensation in cash, with a pre-established payment period, whether or not consolidated at the time and received by the Board Member for their membership to the Delegated Committee and to the Advisory or Control Committees, regardless of the effective attendance of the Board Member to the Advisory or Control Committee meetings.
6 Other items: Among others, it includes the amounts received in concept of payment in kind (general medical insurance and dental and vehicle coverage), fulfilled by Telefónica, S.A.
7 Ms. Carmen García de Andrés and Mr. Francisco José Riberas Mera were appointed Board Members of the Company on May 4, 2017, and Mr. Ángel Vilá Boix was appointed Board Member on July 26, 2017, reflecting, therefore, the received payment, respectively, from the dates mentioned.
Likewise, Mr. César Alierta Izuel, Mr. Gonzalo Hinojosa Fernández de Angulo, and Mr. Pablo Isla Álvarez de Tejera, stood down as Board Members on May 4, 2017, Mr. Julio Linares López stood down as Board Member on July 26, 2017, and Mr. Antonio Massanell Lavilla stood down as Board Member on December 21, 2017, reflecting below the payment received by them, respectively, in 2017 until the dates mentioned.
|
| | | | | | | |
| Directors | Salary1 | Fixed compen-sation2 | Attendance fees3 | Short-term variable compensation4 | Compensation for belonging to Committees of the Board5 | Other items6 | Total |
| Mr. César Alierta Izuel | — | 213,556 | — | — | — | 169 | 213,725 |
| Mr. Gonzalo Hinojosa Fernández de Angulo | — | 41,333 | 4,000 | — | 46,845 | — | 92,178 |
| Mr. Pablo Isla Álvarez de Tejera | — | 41,333 | — | — | 3,858 | — | 45,191 |
| Mr. Julio Linares López | — | 116,667 | 11,000 | — | 19,600 | — | 147,267 |
| Mr. Antonio Massanell Lavilla | — | 120,000 | 30,000 | — | 56,000 | — | 206,000 |
1 Salary: Includes the amount of non-variable payments and that which the Board Member has received for their executive tasks.
2 Fixed remuneration: Amount of the compensation in cash, with a pre-established payment period, whether or not consolidated at the time and received by the Board Member for their membership to the Board, regardless of the effective attendance of the Board Member to the Board meetings.
3 Allowance: Total amount of the allowances for attending the meetings of the Advisory or Control Committees.
4 Short-term variable remuneration (bonus): Variable amount linked to the performance or achievement of a series of individual or group objectives (quantitative or qualitative) forin a period equal to or up to aless than one year, corresponding to 20132016 and paid in 2014. Concerning the bonus referred to 2014, to be paid during 2015, the Executive Directors will perceive the following amounts: Mr. César Alierta Izuel, 4,027,486 euros and Mr. José María Álvarez-Pallete López, 3,471,965 euros. In January 2015, Ms. Eva Castillo received variable remuneration of 1,200,000 euros corresponding to fiscal year 2014.2017.
5 Fixed Payment Board Committees: Cash compensation with a predefined payment frequency, accruable or not over time and accrued by the DirectorRemuneration for membership to the ExecutiveBoard Committees: Amount of the compensation in cash, with a pre-established payment period, whether or not consolidated at the time and received by the Board Member for their membership to the Delegated Committee orand to the Advisory or Control Committees, regardless of Telefónica, S.A., irrespective ofthe effective attendance of the Board Member to meetings of said Committees.the Advisory or Control Committee meetings.
6 Other items: Includes, inter alia, Among others, it includes the amounts paid for membership of the Regional Advisory Committeesreceived under payment in Spain (Valencia, Andalusia and Catalonia) and other “in- kind compensation” (such as general(general medical insurance and dental coverage), paidfulfilled by Telefónica, S.A.
7 On February 26, 2014, Ms. Eva Castillo Sanz ceased to hold office as Chair
Likewise, specifying the figures included in the previous box, the payment received by the Board Members of Telefónica Europe, although she continuedfor their membership to fulfill duties atthe different Advisory or Control Committees during 2017 is specifically detailed below, including both fixed allocation and attendance allowances.
ADVISORY OR CONTROL COMMITTEES OF TELEFÓNICA, S.A.
(Amounts in euros)
|
| | | | | | |
| Directors | Audit and Control | Nominating, Compensation and Corporate Governance | Service Quality and Customer Service | Strategy and Innovation | Regulation and Institutional Affairs | TOTAL 2017 |
| Mr. José María Álvarez-Pallete López | — | — | — | — | — | — |
| Mr. Isidro Fainé Casas | — | — | — | — | — | — |
| Mr. José María Abril Pérez | — | — | — | 18,200 | — | 18,200 |
| Mr. Ángel Vilá Boix | — | — | — | — | — | — |
| Ms. Eva Castillo Sanz | — | — | 17,200 | 22,200 | 21,200 | 60,600 |
| Mr. Juan Ignacio Cirac Sasturain | — | — | — | 20,200 | — | 20,200 |
| Mr. José Javier Echenique Landiríbar | 34,400 | 13,467 | — | — | — | 47,867 |
| Mr. Peter Erskine | — | 19,200 | — | 31,400 | — | 50,600 |
| Ms. Sabina Fluxà Thienemann | — | 21,200 | — | — | — | 21,200 |
| Mr. Luiz Fernando Furlán | — | 12,467 | — | — | — | 12,467 |
| Ms. Carmen García de Andrés | 13,342 | — | 6,667 | — | — | 20,009 |
| Mr. Peter Löscher | — | — | — | 20,200 | — | 20,200 |
| Mr. Ignacio Moreno Martínez | 22,200 | — | 17,200 | — | 26,867 | 66,267 |
| Mr. Francisco Javier de Paz Mancho | 23,200 | 33,400 | — | — | 22,200 | 78,800 |
| Mr. Francisco José Riberas Mera | — | — | — | — | — | — |
| Mr. Wang Xiaochu | — | — | — | — | — | — |
Mr. César Alierta Izuel, Mr. Gonzalo Hinojosa Fernández de Angulo, and Mr. Pablo Isla Álvarez de Tejera, stood down as Board Members on May 4, 2017, Mr. Julio Linares López stood down as Board Member on July 26, 2017, and Mr. Antonio Massanell Lavilla stood down as Board Member on December 21, 2017, reflecting below the payment received by them, respectively, in 2017 until the dates mentioned.
|
| | | | | | |
| Directors | Audit and Control | Nominating, Compensation and Corporate Governance | Service Quality and Customer Service | Strategy and Innovation | Regulation and Institutional
Affairs | TOTAL 2017 |
| Mr. César Alierta Izuel | — | — | — | — | — | — |
| Mr. Gonzalo Hinojosa Fernández de Angulo | 4,858 | 5,858 | 3,858 | 3,858 | 4,858 | 23,290 |
| Mr. Pablo Isla Álvarez de Tejera | — | 3,858 | — | — | — | 3,858 |
| Mr. Julio Linares López | — | — | 9,533 | — | 21,067 | 30,600 |
| Mr. Antonio Massanell Lavilla | 23,200 | — | 28,400 | 15,200 | 19,200 | 86,000 |
The following table breaks down the amounts received from other companies of the Telefónica Group other than those inherent in her capacity as Director through December 31, 2014. The table above setting forth the total remuneration receivedTelefónica, S.A. individually, by the directors during the fiscal year includes the remuneration received by Ms Eva Castillo Sanz through December 31, 2014. After that date, Ms. Eva Castillo Sanz stopped performing any duties other than those inherent in her capacity as Director, and received 2,405,000 euros in January 2015 as compensation for the aforementioned termination, and the sum of 862,475 euros in settlement of her participation in the “Performance & Investment Plan” (equal to the valueBoard Members of the Telefónica, S.A. shares to which she was entitled for participating in such plan), forCompany, by the two cycles covering 2012-2015 and 2013-2016.
In addition, to detail the amounts included in the preceding table, the following table presents the specific compensation paid to Directorsperformance of Telefónica for membership of the various Advisory or Control Committees in 2014, including both fixed payments and fees for attending meetings:
TELEFÓNICA, S.A. ADVISORY OR CONTROL COMMITEES
(Euros)
| Director | Audit and Control | Nomination, Compensation and Corporate Governance | Regulation | Service Quality and Customer Service | Innovation | Strategy | Institutional Affairs | TOTAL 2014 |
| Mr. César Alierta Izuel | - | - | - | - | - | - | - | - |
| Mr. Isidro Fainé Casas | - | - | - | - | - | - | - | - |
| Mr. José María Abril Pérez | - | - | - | - | 14,200 | - | - | 14,200 |
| Mr. Julio Linares López | - | - | - | - | 17,133 | 16,200 | 28,400 | 61,733 |
| Mr. José María Álvarez-Pallete López | - | - | - | - | - | - | - | - |
| Mr. José Fernando de Almansa Moreno-Barreda | - | - | 15,200 | - | - | 16,200 | 16,200 | 47,600 |
| Ms. Eva Castillo Sanz | - | - | - | - | - | - | - | - |
| Mr. Carlos Colomer Casellas | 33,400 | 18,200 | - | 12,200 | 27,400 | - | - | 91,200 |
| Mr. Peter Erskine | - | 19,200 | - | - | 15,200 | 27,400 | - | 61,800 |
| Mr. Santiago Fernández Valbuena | - | - | - | - | - | - | - | - |
| Mr. Alfonso Ferrari Herrero | 21,200 | 31,400 | 15,200 | 12,200 | - | 16,200 | 17,200 | 113,400 |
| Mr. Luiz Fernando Furlán | - | - | - | - | - | - | - | - |
| Mr. Gonzalo Hinojosa Fernández de Angulo | 20,200 | 19,200 | 26,400 | 12,200 | - | 15,200 | 15,200 | 108,400 |
| Mr. Pablo Isla Álvarez de Tejera | - | 17,200 | 11,200 | - | - | - | - | 28,400 |
| Mr. Antonio Massanell Lavilla | 21,200 | - | - | 23,400 | 12,200 | - | 12,200 | 69,000 |
| Mr. Ignacio Moreno Martínez | 22,200 | - | 14,200 | 12,200 | - | - | - | 48,600 |
| Mr. Francisco Javier de Paz Mancho | - | - | 14,200 | 12,200 | - | - | 16,200 | 42,600 |
| Mr. Chang Xiaobing | - | - | - | - | - | - | - | - |
On the other hand, the following table presents an individual breakdown of the amounts received from other Telefónica Group companies other than Telefónica, S.A., by Company’s Directors for discharging executive duties or for membership of the companies’ governing bodies and/or Advisory Boards of such companies:
OTHER TELEFÓNICA GROUP COMPANIES
(Euros)
Director | Wage / Compen-sation1
| Fixed payment2
| Attendance fees3
| Short term variable compen-sation4
| Fixed payments Board Committees5
| Other items6
| Total |
| Mr. César Alierta Izuel | - | - | - | - | - | - | - |
| Mr. Isidro Fainé Casas | - | - | - | - | - | - | - |
| Mr. José María Abril Pérez | - | - | - | - | - | - | - |
| Mr. Julio Linares López | - | - | - | - | - | 200,000 | 200,000 |
| Mr. José María Álvarez-Pallete López | - | - | - | - | - | - | - |
| Mr. José Fernando de Almansa Moreno-Barreda | - | 162,557 | - | - | - | 120,000 | 282,557 |
| Ms. Eva Castillo Sanz | - | 3,876 | - | - | - | - | 3,876 |
| Mr. Carlos Colomer Casellas | - | - | - | - | - | 10,000 | 10,000 |
| Mr. Peter Erskine | - | - | - | - | - | 151,056 | 151,056 |
| Mr. Santiago Fernández Valbuena (*) | 1,177,811 | - | - | 1,318,677 | - | 260,799 | 2,757,287 |
| Mr. Alfonso Ferrari Herrero | - | 69,628 | - | - | - | 120,000 | 189,628 |
| Mr. Luiz Fernando Furlán | - | 94,455 | - | - | - | 140,000 | 234,455 |
| Mr. Gonzalo Hinojosa Fernández de Angulo | - | 21,895 | - | - | - | 60,000 | 81,895 |
| Mr. Pablo Isla Álvarez de Tejera | - | - | - | - | - | - | - |
| Mr. Antonio Massanell Lavilla | - | - | - | - | - | 10,000 | 10,000 |
| Mr. Ignacio Moreno Martínez | - | - | - | - | - | - | - |
| Mr. Francisco Javier de Paz Mancho | - | 128,383 | - | - | - | 120,000 | 248,383 |
| Mr. Chang Xiaobing | - | - | - | - | - | - | - |
1 Wage: Non-variable compensation accrued by the Director for discharging executive duties of any Telefónica Group company.
2 Fixed Payment: Cash compensation with a predefined payment frequency, accruable or not over time and accrued by the Director fortheir membership to the Board of Directors irrespective of affective attendancesaid companies:
OTHER COMPANIES OF THE TELEFÓNICA GROUP
(Amounts in euros)
|
| | | | | | | |
| Directors | Salary1 | Fixed compen-sation2 | Attendance fees3 | Short-term variable compensation4 | Compensation for belonging to Committees of the Board5 | Other items6 | Total |
| Mr. José María Álvarez-Pallete López | — | — | — | — | — | — | — |
| Mr. Isidro Fainé Casas | — | — | — | — | — | — | — |
| Mr. José María Abril Pérez | — | — | — | — | — | — | — |
| Mr. Ángel Vilá Boix | — | — | — | — | — | — | — |
| Ms. Eva Castillo Sanz | — | 80,000 | — | — | — | — | 80,000 |
| Mr. Juan Ignacio Cirac Sasturain | — | — | — | — | — | — | — |
| Mr. José Javier Echenique Landiríbar | — | — | — | — | — | — | — |
| Mr. Peter Erskine | — | 12,403 | — | — | — | — | 12,403 |
| Ms. Sabina Fluxà Thienemann | — | — | — | — | — | — | — |
| Mr. Luiz Fernando Furlán | — | 98,418 | — | — | — | — | 98,418 |
| Ms Carmen García de Andrés | — | — | — | — | — | — | — |
| Mr. Peter Löscher | — | — | — | — | — | — | — |
| Mr. Ignacio Moreno Martínez | — | — | — | — | — | — | — |
| Mr. Francisco Javier de Paz Mancho | — | 285,464 | — | — | — | — | 285,464 |
| Mr. Francisco José Riberas Mera | — | — | — | — | — | — | — |
| Mr. Wang Xiaochu | — | — | — | — | — | — | — |
1 Salary: Amount of non-variable payments and that which the Board Member of other companies of the Telefónica Group has received for their executive tasks.
2 Fixed remuneration: Amount of the compensation in cash, with a pre-established payment period, whether or not consolidated at the time and received by the Director at Board MeetingsMember for their membership to the board of anydirectors of other Companies of the Telefónica Group company.Group.
It is hereby clarified that Mr. Eva Castillo Sanz has accrued an amount of 80,000 euros during 2017, for his membership to the Supervisory Board of Telefónica Deutschland Holding, A.G. Likewise, Mr. Peter Erskine has accrued an amount of 20,000 euros during 2017, for his membership to the Supervisory Board of Telefónica Deutschland Holding, A.G. Likewise, Mr. Ángel Vilá Boix has accrued an amount of 2,000 euros during 2017, for his membership to the Supervisory Board of Telefónica Deutschland Holding, A.G. On the drawing date of this document, none of the amounts mentioned have been paid, which is why they have not been consigned in the box (that only includes amounts received in 2017).
3 Attendance fees: Amounts payableAllowance: Total amount of the allowances for attendance toattending the board of director meetings of the Boardother Companies of Directors or similar bodies of anythe Telefónica Group company.Group.
4 Short-term variable compensationremuneration (bonus): Variable amount linked to the performance or achievement of a series of individual or group objectives (quantitative or qualitative) forin a period equal to or up to aless than one year, corresponding to 20132016 and paid in 2014. Concerning2017, by other companies of the bonus referred to 2014, the amount that will be perceived by the Executive Director Mr. Santiago Fernández Valbuena is 1,417,613 euros.Telefónica Group.
5 Fixed PaymentRemuneration for membership to the Board Committees: CashCommittees of other companies of the Telefónica Group: Amount of the compensation in cash, with a predefinedpre-established payment frequency, accruableperiod, whether or not overconsolidated at the time and accrued by the DirectorBoard Member for their membership to the board of directors committees of other Companies of the Telefónica Group.
6 Other items: Among others, it includes the amounts received under payment in kind (general medical insurance and dental and vehicle coverage), fulfilled by other companies of the Telefónica Group.
Likewise, Mr. César Alierta Izuel, Mr. Gonzalo Hinojosa Fernández de Angulo, and Mr. Pablo Isla Álvarez de Tejera, stood down as Board Members on May 4, 2017, Mr. Julio Linares López stood down as Board Member on July 26, 2017, and Mr. Antonio Massanell Lavilla stood down as Board Member on December 21, 2017, reflecting below the payment received by them, respectively, in 2017 until the dates mentioned.
|
| | | | | | | |
| Directors | Salary1 | Fixed compen-sation2 | Attendance fees3 | Short-term variable compensation4 | Compensation for belonging to Committees of the Board5 | Other items6 | Total |
| Mr. César Alierta Izuel | — | — | — | — | — | — | — |
| Mr. Gonzalo Hinojosa Fernández de Angulo | — | 9,125 | — | — | — | — | 9,125 |
| Mr. Pablo Isla Álvarez de Tejera | — | — | — | — | — | — | — |
| Mr. Julio Linares López | — | — | — | — | — | — | — |
| Mr. Antonio Massanell Lavilla | — | — | — | — | — | — | — |
1 Salary: Amount of non-variable payments and that which the Board Member of other companies of the Telefónica Group has received for their executive tasks.
2 Fixed remuneration: Amount of the compensation in cash, with a pre-established payment period, whether or not consolidated at the time and received by the Board Member for their membership to the board of directors of other Companies of the Telefónica Group.
3 Allowance: Total amount of the allowances for attending the board of director meetings of other Companies of the Telefónica Group.
4 Short-term variable remuneration (bonus): Variable amount linked to the performance or achievement of a series of individual or group objectives (quantitative or qualitative) in a period equal to or less than one year, corresponding to 2016 and paid in 2017, by other companies of the Telefónica Group.
5 Remuneration for membership to the Executive Committee or Advisory or ControlBoard Committees of other companies of the Telefónica S.A., irrespectiveGroup: Amount of effective attendancethe compensation in cash, with a pre-established payment period, whether or not consolidated at the time and accrued by the Board Member for their membership to meetingsthe board of said Committees.directors committees of other Companies of the Telefónica Group.
6 Other items: Includes, inter alia,Among others, it includes the amounts paid for membership of Regional and Business Advisory Committees (Europe –from June 2014 is the Advisory Committee of Spain-, Latam and Digital-removedreceived under payment in June 2014) and other “in- kind compensation” (such as general(general medical insurance and dental and vehicle coverage), paidfulfilled by anyother companies of the Telefónica Group Company.Group.
(*) It is hereby stated for the record that Executive Director Mr. Santiago Fernández Valbuena collects his remuneration in Brazilian reais, and accordingly, the stated amount of his remuneration may vary, depending on the exchange rate applicable at any particular time.
Furthermore,Additionally, as explainedmentioned in the Compensation policyRetributive Policy section, the Executive Directors receiveBoard Members have a series of employee benefits. The following table presents a breakdown ofAssistance Services. Below, the contributions made in 2014 byduring 2017 are detailed for the Company toCompany's two long-term savings schemessystems (Pension Plans and Pension Plan for Senior Executives)Social Welfare Plan):
LONG-TERM SAVINGS SCHEMESSYSTEMS
(Amounts in euros)
Director | 2014 Contributions |
Mr. César Alierta Izuel | 1,023,193 | |
| Directors | Contributions for fiscal year 2017 |
| Mr. José María Álvarez-Pallete López | 550,436 |
Ms. Eva Castillo Sanz673,085 | 393,796
|
Mr. Santiago Fernández ValbuenaÁngel Vilá Boix (since July 26, 2017) | 935,010268,922 |
|
The following table presents a breakdown of the long-term savings schemes, comprisingsaving systems includes contributions to Pension Plans, to the Benefit Plan and to the Pension Plan:Unit link-type Insurance, as set out below:
(Euros)
| Director | Contributions to Pension Plans | Contributions to Benefits Plan1 |
| Mr. César Alierta Izuel | 8,402 | 1,014,791 |
| Mr. José María Álvarez-Pallete López | 9,468 | 540,968 |
| Ms. Eva Castillo Sanz | 8,402 | 385,394 |
| Mr. Santiago Fernández Valbuena | 109,167 | 825,843 |
(Amounts in euros)
|
| | | |
| Directors | Contributions to Pension Plans | Contributions to Benefits Plan1 | Contributions to Unit link-type Insurance/Pension Plan Surplus |
| Mr. José María Álvarez-Pallete López | 6,060 | 540,968 | 126,057 |
| Mr. Ángel Vilá Boix (since July 26,2017) | — | 212,665 | 56,257 |
PensionExecutive Benefits Plan for Executives set up in 2006, funded exclusivelysolely by the Company, to complementsupplement the existing Pension Plan. ItPlan in effect, which entails defined contributions equivalentequal to a certainparticular percentage of the Director´sOfficer’s fixed remuneration in accordance with theircompensation based on professional categorylevels within the Telefónica Group´sGroup’s organization.
It is also statednoted that in 2015 applicable law reduced the financial and tax limits of the contributions to Pension Plans; for this reason, in order to compensate for the record thatdifference in February 2015, the golden parachute provisions included in the four-year contractfavor of the Executive Chairman, Mr. César Alierta Izuel, were replaced by an extraordinary one-time contribution of 35.5 million eurosBeneficiaries, a Unit-link type group insurance policy was arranged to a benefit plan,channel such differences that occur during each fiscal year.
This Unit-link type insurance is arranged with the entity Seguros de Vida y Pensiones Antares, S.A., and covers the same contingencies as partthose of the company’s policy of reducing indemnity provisions, in line with best corporate governance practices. After this extraordinary contribution, Telefónica, S.A. will not contribute any additional annual amounts to the Benefit Plan for Officers with respect to Mr. Alierta Izuel. Such contribution would be received by Mr. Alierta Izuel in“Pension Plan” and the same instances establishedexceptional liquidity events in the Benefit Plancase of serious illness or long-term unemployment.
The 2017 amounts for Officers (plan de previsión social de directivos or PPSD) applicable to the other officers.
Lifelife insurance premiums paid in 2014 arewere as follows:
LIFE INSURANCE PREMIUMS
(Amounts in euros)
Director |
| |
| Directors | Life insurance premiums |
Mr. César Alierta Izuel | 73,952 |
| Mr. José María Álvarez-Pallete López | 19,935 |
Ms. Eva Castillo Sanz | 9,66714,270 |
Mr. Santiago Fernández ValbuenaÁngel Vilá Boix (since July 26,2017) | 8,0507,759 |
| Mr. César Alierta Izuel (until May 4,2017) | 855 |
Regarding share-basedWith regard to payment plans (those exclusively forbased on shares (in those in which the Executive Directors)Board Members participate exclusively), there werethe following two long-term variable compensationpayment plans existed in place in 2014:effect for 2017:
1. The one named "Performance & Investment Plan" ("PIP") composed of three cycles (2014-2017; 2015-2018; 2016-2019), approved by the General Shareholder's Meeting held on May 30, 2014. The first Plan is the so-called “Performance & Investment Plan“ (“PIP”), approved at the General Shareholders’ Meeting of May 18, 2011 whose first phase began in 2011 and ended in July 2014, second phase began in 2012 and will end in July 2015, and third phase began in 2013 and will end in July 2016.
It is hereby stated that regarding the first phasecycle of this Plan (2011-2014), thestarted in 2014 and concluded in October of 2017. In accordance with that established in its general terms forconditions, the delivery of shares weredid not met. Therefore,occur in the first cycle of the Plan (2014-2017), therefore no shares wereshare was delivered to the Executive Directors.
The number of shares assigned and the maximum possible number of shares to be received by the Directors of Telefónica for discharging executive duties in each phase, if the co-investment requirement established in the Plan and the maximum target TSR established for each phase are met, are as follows:
FIRST PIP- Second phase / 2012-2015
| Directors | Theoretical shares assigned | Maximum number of shares* |
| Mr. César Alierta Izuel | 324,417 | 506,901 |
| Mr. Julio Linares López(1) | 13,878 | 21,686 |
| Mr. José María Álvarez-Pallete López | 188,131 | 293,955 |
| Mr. Santiago Fernández Valbuena | 103,223 | 161,287 |
(1) | The number of shares assigned to Mr. Linares was calculated in proportion to the time he discharged executive duties as Chief Operating Officer –COO- (from July 1, 2012 to September 17, 2012) during the second phase of the Plan. |
* Maximum possible number of shares to be received if the “co-investment” requirement and maximum target TSR are met. | |
FIRST PIP- Third phase / 2013-2016
| Directors | Theoretical shares assigned | Maximum number of shares* |
| Mr. César Alierta Izuel | 324,000 | 506,250 |
| Mr. José María Álvarez-Pallete López | 192,000 | 300,000 |
| Mr. Santiago Fernández Valbuena | 104,000 | 162,500 |
| * Maximum possible number of shares to be received if the “co-investment” requirement and maximum target TSR are met. | |
It is further stated for the recordBoard Members that as of December 31, 2014, a maximum of 149,787 shares and 162,500 shares had been allocated to Ms. Eva Castillo Sanz for her participation in the Performance & Investment Plan, for the two cycles of 2012-2015 and 2013-2016, respectively, and that, as stated above, in January 2015, she received 862,475 euros (equivalent to the value of shares of Telefónica S.A. that corresponded for her participationparticipated in this Plan) in settlement of her participation in the aforementioned plan.
cycle.
The second plan, called as well “Performance & Investment Plan“ (“PIP”), approved at the General Shareholders’ Meetingcycle of May 30, 2014 whose first phase began in 2014 and will end in October 2017, second phase will beginthis Plan started in 2015 and will end in October 2018,2018.
With regard to the third cycle of this Plan (2016-2019), the Board of Directors of the Company, following a favorable report from the Appointments, Remuneration and third phase will begin 2016Good Governance Committee, resolved not to execute or implement it, after having decided that it was not sufficiently in line with the Telefónica Group's strategic plan, taking into account the circumstances and will end in October 2019.macroeconomic environment.
ItThe number of theoretical shares assigned (without co-investment) is hereby stated thatdefined below, as well as the maximum number of shares assigned andin the maximum possible numberevent of shares to be received bycompliance with the Directors of Telefónica for discharging executive duties in each phase, if the co-investment"co-investment" requirement established in the second Plan and of maximum compliance of the maximum target TSR establishedobjective fixed for each phase are met, are as follows:the second cycle of the Plan.
SECOND PIP- First
PIP - Second phase / 2014-2017
| Directors | Theoretical shares assigned | Maximum number of shares* |
| Mr. César Alierta Izuel | 324,000 | 506,250 |
| | | Directors | | Theoretical shares allocated (without co-investment) | Maximum number of shares (*) |
| Mr. José María Álvarez-Pallete López | 192,000 | 300,000 | 192,000 | 300,000 |
| Mr. Santiago Fernández Valbuena | 104,000 | 162,500 | |
| Mr. Ángel Vilá Boix | | 120,000 | 187,500 |
| Mr. César Alierta Izuel | | 324,000 | 506,250 |
*(*) Maximum possible number of shares to be received ifin case of meeting the co-investment requirement and maximum targetcompletion of TSR are met.target.
Mr. César Alierta Izuel ceased his position as Director on May 4, 2017.
In addition,any case, it is clarified that no share has been delivered to reinforcethe Executive Board Members under the second cycle of the PIP and that the previous box only reflects the number of potentially deliverable shares in different scenarios, without supposing in any way that they will effectively be delivered in whole or in part.
In effect, the number of Telefónica’ s statusnica, S.A. shares that, always within the maximum established, could be object of delivery, when applicable, is conditioned to the Participants and is determined depending on the Total Shareholder Return ("TSR") of the Telefónica, S.A. share during the duration period of the cycle (3 years), with relation to the TSRs experienced by certain companies belonging to the telecommunications sector, weighted according to their relevance for Telefónica, S.A., that for the purposes of the Plan will constitute a comparison group (hereinafter, the "Comparison Group"). The companies included in the Comparison Group are listed below: America Movil, BT Group, Deutsche Telekom, Orange, Telecom Italia, Vodafone Group, Proximus, Royal KPN, Millicom, Oi, Swisscom, Telenor, TeliaSonera, and Tim Participaçoes.
The achievement scale approved by the Board is the following: in the event that the performance of the TSR of the Telefónica, S.A. share is located in, at least, the median of the Comparison Group, the number of shares to be delivered will be 30% of the maximum. For the case of said performance located in the third quartile of the Comparison Group, the number of shares to be delivered will be 100% of the maximum. Those cases that are located between the median and the third quartile will be calculated by linear interpolation. In the event that the TSR performance of the Telefónica, S.A. share is located in the ninth decile or above, the percentage to be delivered will be greater than 100%, up to a maximum of 125%, being calculated by linear interpolation between said third quartile and the ninth decile.
2. The second plan is the incentive plan for the purchase of Telefónica, S.A. shares. (2015-2017) directed to all the employees of the Group at the international scale (including leadership, as a globalwell as the Executive Board Members) called "Overall Incentive Plan for the Purchasing of Shares for Employees" ("GESP"), whose third edition was approved by the General Shareholder's Meeting of the Company held on May 30, 2014.
This Plan was aimed at strengthening the character of the overall employer withof Telefónica, creating a common remunerationpayment culture throughout the Company, to encourage all Group employees to take an equity interest, and to motivate employees and boost their loyalty, atpromoting participation in the Company’s General Shareholders’ Meetingcapital of May 18, 2011, shareholders approved a Telefónica, S.A. share incentive purchase plan (2012-2014), the "Global Employee Share Plan" ("GESP") for alltotality of the employees of the Group, worldwide (including executives and Executives Directors).
fostering motivation and loyalty.
Under this plan,Plan, employees that meet the qualifying requirements arewere offered the possibility of acquiringoption to acquire Telefónica, S.A. shares forduring a maximum twelve month period of up to 12 months (the acquisition period), with thisthe company assuming the obligation of giving participantsundertaking to deliver a certain number of free shares freeto participants, subject to certain requirements. Each employee was limited to buying a maximum of charge. The maximum sum each employee can assign1,800 euros in shares, subject to this plan is 1,200 euros, while thea minimum isof 300 euros. Employees who remain atIf the employee remained part of the Telefónica Group and retain theirheld onto the shares for an additionalone year afterfollowing the acquisition period (the consolidation period) will be, they were entitled to receive one free share perfor each share they acquired and retained until the end ofthroughout the consolidation period.
The Executive Directors thatBoard Members, Mr. José María Álvarez-Pallete López and Mr. Ángel Vilá Boix, and then Executive Board Member, Mr. César Alierta Izuel, decided to take partparticipate in this Plan (2012-2014) contributing2015-2017 with the maximum (i.e. 100contribution (that is, 150 euros a month, over 12monthly for twelve months), hadhaving each acquired a total of 626357 shares (including(among which included those that they received for free, shares received underin accordance with that established in the general terms and conditions of thethis Plan).
It should be notedAdditionally, it is worth noting that the external DirectorsBoard Members of the Company do not receive and didhave not receivereceived during 2017 any payment in 2014 any compensation in the formterms of pensions or life insurance, nor do they participate in the share-based payment plans linked to Telefónica’sregarding the price value of the share price (except as(with the exception of that indicated for Ms. Castillo and Mr. LinaresAlierta in the above tables)previous boxes).
In addition,Likewise, the Company does not grant and didhas not grantgranted, in 20142017, any advances, loans or credits toin favor of the Directors, or to its top executives, thusBoard Members, nor in favor of their Senior Management, complying with the requirementsdemands of the U.S.A. Sarbanes-Oxley Act whichpublished in the United States, and that is applicable to Telefónica as a company listed company in that market.
F-107Compensation of the Senior Management of the Company.
The Management that in 2017 included the Senior executives’ compensation
ManagementMeanwhile, the Executives considered as Senior Executives1(1) of the Company, in 2014, excluding those that are also membersform an integral part of the Board of Directors, have received a total amount of 10,525,9817,566,822 euros in 2014.2017.
In addition,Regarding long-term savings systems, the contributions bymade on behalf of the Telefónica Group in 2014 with respectduring 2017 to the BenefitsSocial Welfare Plan for Senior Executives described in Notethe note on “Revenue"Income and Expenses” for these Executives amountedexpenses" in regard to 1,240,757 euros. Contributionthose Managers amount to 874,796 euros; the contributions corresponding to the Pension Plan amountedamount to 163,06524,058 euros; and the contributions to Unit Linked Excess Insurance Pension Plan amount to 83,089 euros and compensation
Likewise, the amounts relative to the payment in kind (including(among which includes, the quotes for life insurance and other types of insurance, premiums such usas general medical insurance and dental insurance)and vehicle coverage), have been 94,637 euros.
Moreover, and with regard to 122,689 euros.payment plans based on shares, during 2017 the following two long-term variable payment plans existed:
Also, regarding the first “Performance and1. The one named "Performance & Investment Plan” (“PIP”Plan" ("PIP") composed of three phases (2011-2014; 2012-2015; 2013-2016)cycles (2014-2017; 2015-2018; 2016-2019), approved atby the General Shareholders’Shareholder's Meeting held on May 30, 2014. The first cycle of May 18, 2011, it is hereby statedthis Plan started in 2014 and concluded in October of 2017. In accordance with that regarding the first phase of the Plan (2011-2014), theestablished in its general terms forconditions, the delivery of shares weredid not met. Therefore,happen in the first cycle of the Plan (2014-2017), therefore no shares wereshare was delivered to the Executives.Managers that participated in this cycle.
The number of theoretical shares assigned (without co-investment) at the beginning of the phasesecond cycle (2015-2018) to the Executives consideredgroup of the senior executives in the Senior ExecutivesManagement of the Company inand the maximum number of shares assigned2 is 197,650 and 307,063, respectively.
In any case, it is clarified that no share has been delivered to the Executive Board Members under the first or second phase (2012-2015) is 294,136 sharescycle of the Second PIP and 322,520 shares inthat the third phase (2013-2016).
Regarding the second “Performance and Investment Plan” (“PIP”) composed of three phases (2014-2017; 2015-2018; 2016-2019) approved at the General Shareholders’ Meeting of May 30, 2014,previous box only reflects the number of potentially deliverable shares assigned at the beginning of the phasein different scenarios, without supposing in any way that they will effectively be delivered in whole or in part.
With regard to the Executives considered Senior Executivesthird cycle of this Plan (2016-2019), the Board of Directors of the Company, following a favorable report from the Appointments, Remuneration and Good Governance Committee, resolved not to execute or implement it, after having decided that it was not sufficiently in line with the first phase (2014-2017)Telefónica Group's strategic plan, taking into account the circumstances and macroeconomic environment.
2. The second Plan is 356,624 shares.the ""Overall Incentive Plan for the Purchasing of Shares for Employees" ("GESP") (2015-2017), whose third edition was approved by the General Shareholder's Meeting of the Company held on May 30, 2014.
Finally, regarding the “Global Employee Share Plan” (“GESP”) (2012-2014), the Executives taking part and contributingThe Managers that have decided to participate in it with the maximum (i.e. 100contribution (that is, 150 euros a month, over 12monthly for twelve months), have acquired a total of 6771,429 shares (including(among which included those that they received for free, shares received underin accordance with that established in the general terms and conditions of thesaid Plan).
|
| (1) |
| For these purposes, Senior Executives are understood to be individuals who perform senior management functions reporting directly to the management bodies, or their executive committees or CEOs. Additionally, and for the purposes of annual remuneration, the person in charge of the internal audit is included. |
It is hereby stated1Senior Management being understood, for these purposes, those persons that Mr. Matthew Key ceasedimplement, de facto or de jure, senior management duties reporting directly to be partthe Board of the Senior ExecutivesDirectors or Executive Committees or Managing Directors of the Company, on February 26, 2014, having perceivedincluding in January 2015 (dateany case the supervisor of his departure fromInternal Auditing.
2Maximum number possible of shares to be received in the Group), in accordance withevent of fulfilling the conditions established, in that day, in his contract, an amount of 15,150,969 euros as a resultco-investment requirement and maximum compliance of the termination in the performance of executive functions in the Telefónica Group.TSR objective.
Appendix III: Debentures and bonds
The detail and key features of outstanding debentures and bonds at December 31, 20142017 are as follows (in millions of euros):
| Total Telefónica and its instrumental companies |
| | | | | | Maturity (nominal) |
| Debentures and bonds | | Currency | | % Interest rate | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Total |
| ABN 15Y BOND | | EUR | | 1,0225 x GBSW10Y | 50 | − | − | − | − | − | 50 |
| Exchangeable Bond | | EUR | | 6.000% | − | − | 750 | − | − | − | 750 |
| Telefónica, S.A. | | | | | 50 | − | 750 | − | − | − | 800 |
| T. EUROPE BV SEP_00 BOND GLOBAL D | | USD | | 8.250% | − | − | − | − | − | 1,030 | 1,030 |
| TEBV FEB_03 EMTN FIXED TRANCHE B | | EUR | | 5.875% | − | − | − | − | − | 500 | 500 |
| Telefónica Europe, B.V. | | | | | − | − | − | − | − | 1,530 | 1,530 |
| EMTN O2 EUR | | EUR | | 4.375% | − | 1,750 | − | − | − | − | 1,750 |
| EMTN O2 GBP | | GBP | | 5.375% | − | − | − | 963 | − | − | 963 |
| EMTN O2 GBP | | GBP | | 5.375% | − | − | − | − | − | 642 | 642 |
| TELEF EMISIONES JUNE 06 TRANCHE C | | USD | | 6.421% | − | 1,030 | − | − | − | − | 1,030 |
| TELEF EMISIONES JUNE 06 TRANCHE D | | USD | | 7.045% | − | − | − | − | − | 1,647 | 1,647 |
| TELEF EMISIONES JUNE 14 | | USD | | USDL3M+0,65% | − | − | 412 | − | − | − | 412 |
| TELEF EMISIONES JANUARY 07 A | | EUR | | 1 x EURIBOR6M + 0,83000% | − | − | − | − | − | 55 | 55 |
| TELEF EMISIONES JANUARY 07 B | | EUR | | 1 x EURIBOR3M + 0,70000% | − | − | − | 24 | − | − | 24 |
| TELEF EMISIONES MARCH 2014 | | EUR | | 1 x EURIBOR3M + 0,650000% | − | 200 | − | − | − | − | 200 |
| TELEF EMISIONES APRIL 2014 | | EUR | | 1 x EURIBOR3M + 0,75000% | − | − | 200 | − | − | − | 200 |
| TELEF EMISIONES JULY C 07 | | USD | | 6.221% | − | − | 577 | − | − | − | 577 |
| TELEF EMISIONES MAY 2014 | | EUR | | 2.242% | − | − | − | − | − | 1,250 | 1,250 |
| TELEF EMISIONES APRIL 2016 | | EUR | | 5.496% | − | 1,000 | − | − | − | − | 1,000 |
| TELEF EMISIONES JUNE 2015 | | EUR | | 1 x EURIBOR3M + 1,825% | 400 | − | − | − | − | − | 400 |
| TELEF EMISIONES APRIL 3, 2016 | | EUR | | 5.496% | − | 500 | − | − | − | − | 500 |
| TELEF EMISIONES JULY 6, 2015 | | USD | | 4.949% | 1,030 | − | − | − | − | − | 1,030 |
| TELEF EMISIONES JULY 15, 2019 | | USD | | 5.877% | − | − | − | − | 824 | − | 824 |
| TELEF EMISIONES NOVEMBER 11, 2019 | | EUR | | 4.693% | − | − | − | − | 1,750 | − | 1,750 |
| EMTN GBP 12/09/2022 650 GBP | | GBP | | 5.289% | − | − | − | − | − | 835 | 835 |
| TELEF EMISIONES JUNE 2014 | | EUR | | 1 x EURIBOR3M +0,75% | − | − | 100 | − | − | − | 100 |
| TELE EMISIONES MARCH 10 | | EUR | | 3.406% | 993 | − | − | − | − | − | 993 |
| TELEF EMISIONES APRIL 2, 2010 | | USD | | 3.729% | 741 | − | − | − | − | − | 741 |
| TELEF EMISIONES APRIL 3, 2010 | | USD | | 5.134% | − | − | − | − | − | 1,153 | 1,153 |
| TELEF EMISIONES SEPTEMBER 10 | | EUR | | 3.661% | − | − | 1,000 | − | − | − | 1,000 |
| EMTN GBP 10/08/2029 400 GBP | | GBP | | 5.445% | − | − | − | − | − | 514 | 514 |
| TELEF EMISIONES FEBRUARY 2011 | | EUR | | 4.750% | − | − | 1,200 | − | − | − | 1,200 |
| TELEF EMISIONES FEBRUARY 2011 | | USD | | 3.992% | − | 1,030 | − | − | − | − | 1,030 |
|
| | | | | | | | | | | | | | | | | |
| Total Telefónica and its instrumental companies |
| | | |
| Maturity (nominal) |
| Debentures and bonds | Currency | % Interest rate |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
|
| T. EUROPE BV SEP_00 BOND GLOBAL D | USD | 8.250 | % | — |
| — |
| — |
| — |
| — |
| 1,042 |
| 1,042 |
|
| TEBV FEB_03 EMTN FIXED TRANCHE B | EUR | 5.875 | % | — |
| — |
| — |
| — |
| — |
| 500 |
| 500 |
|
| Telefónica Europe, B.V. | | | — |
| — |
| — |
| — |
| — |
| 1,542 |
| 1,542 |
|
| EMTN O2 GBP | GBP | 5.375 | % | 845 |
| — |
| — |
| — |
| — |
| — |
| 845 |
|
| EMTN O2 GBP | GBP | 5.375 | % | — |
| — |
| — |
| — |
| — |
| 563 |
| 563 |
|
| TELEF EMISIONES JUNE 06 TRANCHE D | USD | 7.045 | % | — |
| — |
| — |
| — |
| — |
| 1,667 |
| 1,667 |
|
| TELEF EMISIONES JANUARY 07 A | EUR | 1 x EURIBOR6M + 0.83000% |
| — |
| — |
| — |
| 55 |
| — |
| — |
| 55 |
|
| TELEF EMISIONES JANUARY 07 B | EUR | 1 x EURIBOR3M + 0.70000% |
| 24 |
| — |
| — |
| — |
| — |
| — |
| 24 |
|
| TELEF EMISIONES MAY 2014 | EUR | 2.242 | % | — |
| — |
| — |
| — |
| 1,250 |
| — |
| 1,250 |
|
| TELEF EMISIONES JULY 15, 2019 | USD | 5.877 | % | — |
| 834 |
| — |
| — |
| — |
| — |
| 834 |
|
| TELEF EMISIONES NOVEMBER 11, 2019 | EUR | 4.693 | % | — |
| 1,750 |
| — |
| — |
| — |
| — |
| 1,750 |
|
| EMTN GBP 12/09/2022 650 GBP | GBP | 5.289 | % | — |
| — |
| — |
| — |
| 732 |
| — |
| 732 |
|
| TELE EMISIONES APRIL 3 2010 | USD | 5.134 | % | — |
| — |
| 1,168 |
| — |
| — |
| — |
| 1,168 |
|
| EMTN GBP 10/08/2029 400 GBP | GBP | 5.445 | % | — |
| — |
| — |
| — |
| — |
| 451 |
| 451 |
|
| TELEF EMISIONES FEBRUARY 2011 | USD | 5.462 | % | — |
| — |
| — |
| 1,251 |
| — |
| — |
| 1,251 |
|
| TELEF. EMISIONES FEBRUARY 2012 | EUR | 4.797 | % | 1,500 |
| — |
| — |
| — |
| — |
| — |
| 1,500 |
|
| TELEF. EMISIONES FEBRUARY 2012 | GBP | 5.597 | % | — |
| — |
| 788 |
| — |
| — |
| — |
| 788 |
|
| TELEF. EMISIONES JUNE 2013 | JPY | 4.250 | % | 74 |
| — |
| — |
| — |
| — |
| — |
| 74 |
|
| TELEF. EMISIONES OCTOBER 2012 | EUR | 4.710 | % | — |
| — |
| 1,200 |
| — |
| — |
| — |
| 1,200 |
|
| TELEF. EMISIONES DECEMBER 2012 | CHF | 2.718 | % | 213 |
| — |
| — |
| — |
| — |
| — |
| 213 |
|
| TELEF. EMISIONES DECEMBER 2012 | CHF | 3.450 | % | — |
| — |
| — |
| — |
| 128 |
| — |
| 128 |
|
| TELEF EMISIONES JANUARY 2013 | EUR | 3.987 | % | — |
| — |
| — |
| — |
| — |
| 1,500 |
| 1,500 |
|
F-109 |
| | | | | | | | | | | | | | | | | |
| | | |
| Maturity (nominal) |
| Debentures and bonds | Currency | % Interest rate |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
|
| TELEF. EMISIONES MARCH 2013 | EUR | 3.961 | % | — |
| — |
| — |
| 1,000 |
| — |
| — |
| 1,000 |
|
| TELEF EMISIONES APRIL 2013 | USD | 3.192 | % | 1,042 |
| — |
| — |
| — |
| — |
| — |
| 1,042 |
|
| TELEF EMISIONES APRIL 2013 | USD | 4.570 | % | — |
| — |
| — |
| — |
| — |
| 625 |
| 625 |
|
| TELEF. EMISIONES MAY 2013 | EUR | 2.736 | % | — |
| 750 |
| — |
| — |
| — |
| — |
| 750 |
|
| TELEF. EMISIONES OCTOBER 2014 | EUR | 2.932 | % | — |
| — |
| — |
| — |
| — |
| 800 |
| 800 |
|
| TELEF. EMISIONES OCTOBER 2013 | CHF | 2.595 | % | — |
| — |
| 192 |
| — |
| — |
| — |
| 192 |
|
| TELEF EMISIONES JULY 2015 | EUR | 1 x EURIBOR6M +0.83% |
| — |
| — |
| — |
| — |
| 67 |
| — |
| 67 |
|
| TELEF. EMISIONES SEPTEMBER 2015 | EUR | 1.477 | % | — |
| — |
| — |
| 1,000 |
| — |
| — |
| 1,000 |
|
| TELEF EMISIONES APRIL 2016 | EUR | 0.750 | % | — |
| — |
| — |
| — |
| 1,400 |
| — |
| 1,400 |
|
| TELEF EMISIONES APRIL 2016 | EUR | 1.460 | % | — |
| — |
| — |
| — |
| — |
| 1,350 |
| 1,350 |
|
| TELEF. EMISIONES OCTOBER 2016 | EUR | 0.318 | % | — |
| — |
| 1,250 |
| — |
| — |
| — |
| 1,250 |
|
| TELEF. EMISIONES OCTOBER 2016 | EUR | 1.930 | % | — |
| — |
| — |
| — |
| — |
| 750 |
| 750 |
|
| TELEF. EMISIONES DECEMBER 2016 | EUR | 4.000 | % | — |
| — |
| — |
| — |
| — |
| 150 |
| 150 |
|
| TELEF. EMISIONES JANUARY 2017 | EUR | 1 x EURIBOR3M +0.40% |
| — |
| 150 |
| — |
| — |
| — |
| — |
| 150 |
|
| TELEF. EMISIONES JANUARY 2017 | EUR | 1.528 | % | — |
| — |
| — |
| — |
| — |
| 1,250 |
| 1,250 |
|
| TELEF. EMISIONES JANUARY 2017 | EUR | 2.318 | % | — |
| — |
| — |
| — |
| — |
| 500 |
| 500 |
|
| TELEF. EMISIONES MARCH 2017 | USD | 4.103 | % | — |
| — |
| — |
| — |
| — |
| 1,251 |
| 1,251 |
|
| TELEF. EMISIONES MARCH 2017 | USD | 5.213 | % | — |
| — |
| — |
| — |
| — |
| 1,668 |
| 1,668 |
|
| TELEF. EMISIONES MARCH 2017 | EUR | 2.318 | % | — |
| — |
| — |
| — |
| — |
| 200 |
| 200 |
|
| TELEF. EMISIONES APRIL 2017 | USD | 4.900 | % | — |
| — |
| — |
| — |
| — |
| 167 |
| 167 |
|
| TELEF. EMISIONES APRIL 2017 | USD | 5.213 | % | — |
| — |
| — |
| — |
| — |
| 417 |
| 417 |
|
| TELEF. EMISIONES SEPTEMBER 2017 | EUR | 1.715 | % | — |
| — |
| — |
| — |
| — |
| 1,250 |
| 1,250 |
|
| Telefónica Emisiones, S.A.U. | | | 3,698 |
| 3,484 |
| 4,598 |
| 3,306 |
| 3,577 |
| 14,559 |
| 33,222 |
|
| Exchangeable Bond MARCH 2016 (*) | EUR | — |
| — |
| — |
| — |
| 600 |
| — |
| — |
| 600 |
|
| Telefónica Participaciones | | — |
| — |
| — |
| — |
| 600 |
| — |
| — |
| 600 |
|
| Total Telefónica, S.A. and its instrumental companies | | | 3,698 |
| 3,484 |
| 4,598 |
| 3,906 |
| 3,577 |
| 16,101 |
| 35,364 |
|
| (*) Issue of non-dilutive cash-settled equity-linked bonds referenced to Telefónica share price, with a nominal amount of 600 million euros, issue price of 101.25% and maturing in March 2021. |
|
| | | | | | | | | | | | | | | | | |
| Foreign operators | |
| | | |
| Maturity
| |
| Debentures and bonds | Currency | % Interest rate |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
|
| Bond Q | CLP | 5.750 | % | — |
| 64 |
| — |
| — |
| — |
| — |
| 64 |
|
| Bond T | CLP | 4.900 | % | — |
| — |
| 13 |
| 26 |
| — |
| 26 |
| 65 |
|
| 144A Bond | USD | 3.875 | % | — |
| — |
| — |
| — |
| 417 |
| — |
| 417 |
|
| Telefónica Chile, S.A. | | | — |
| 64 |
| 13 |
| 26 |
| 417 |
| 26 |
| 546 |
|
| Bond F | UF | 3.600 | % | — |
| — |
| — |
| — |
| — |
| 109 |
| 109 |
|
| Bond G | UF | 2.200 | % | — |
| — |
| 73 |
| — |
| — |
| — |
| 73 |
|
| Bond I | UF | 1.950 | % | — |
| — |
| 73 |
| — |
| — |
| — |
| 73 |
|
| Bond K | CLP | 4.900 | % | — |
| — |
| — |
| 128 |
| — |
| — |
| 128 |
|
| TELEF EMISIONES FEBRUARY 2011 | | USD | | 5.462% | − | − | − | − | − | 1,235 | 1,235 |
| TELEF EMISIONES MARCH 2011 | | EUR | | 4.750% | − | − | 100 | − | − | − | 100 |
| TELEF EMISIONES NOVEMBER 2011 | | EUR | | 4.967% | − | 802 | − | − | − | − | 802 |
| TELEF EMISIONES NOVEMBER 2011 | | JPY | | 2.829% | − | 48 | − | − | − | − | 48 |
| TELEF. EMISIONES FEBRUARY 2012 | | EUR | | 4.750% | − | − | 120 | − | − | − | 120 |
| TELEF. EMISIONES FEBRUARY 2012 | | EUR | | 4.797% | − | − | − | 1,500 | − | − | 1,500 |
| TELEF. EMISIONES FEBRUARY 2012 | | GBP | | 5.597% | − | − | − | − | − | 899 | 899 |
| TELEF. EMISIONES MARCH 2012 | | CZK | | 3.934% | − | − | 45 | − | − | − | 45 |
| TELEF. EMISIONES JUNE 2013 | | JPY | | 4.250% | − | − | − | 69 | − | − | 69 |
| TELEF. EMISIONES SEPTEMBER 2012 | | EUR | | 5.811% | − | − | 1,000 | − | − | − | 1,000 |
| TELEF. EMISIONES OCTOBER 2012 | | EUR | | 4.710% | − | − | − | − | − | 1,200 | 1,200 |
| TELEF. EMISIONES DECEMBER 2012 | | CHF | | 2.718% | − | − | − | 208 | − | − | 208 |
| TELEF. EMISIONES DECEMBER 2012 | | CHF | | 3.450% | − | − | − | − | − | 125 | 125 |
| TELEF EMISIONES JANUARY 2013 | | EUR | | 3.987% | − | − | − | − | − | 1,500 | 1,500 |
| TELEF. EMISIONES MARCH 2013 | | EUR | | 3.961% | − | − | − | − | − | 1,000 | 1,000 |
| TELEF EMISIONES APRIL 2013 | | USD | | 3.192% | − | − | − | 1,030 | − | − | 1,030 |
| TELEF EMISIONES APRIL 2013 | | USD | | 4.570% | − | − | − | − | − | 618 | 618 |
| TELEF. EMISIONES MAY 2013 | | EUR | | 2.736% | − | − | − | − | 750 | − | 750 |
| TELEF. EMISIONES OCT 2014 | | EUR | | 2.932% | − | − | − | − | − | 800 | 800 |
| TELEF. EMISIONES OCT 2013 | | CHF | | 2.595% | − | − | − | − | − | 187 | 187 |
| Telefónica Emisiones, S.A.U. | | | | | 3,164 | 6,360 | 4,754 | 3,794 | 3,324 | 13,660 | 35,056 |
| Exchangeable Bond | | EUR | | 4.900% | 73 | 72 | 71 | − | − | − | 216 |
| Telefónica Participaciones | | | | | 73 | 72 | 71 | − | − | − | 216 |
| Total Telefónica, S.A. and its instrumental companies | | | | | 3,287 | 6,432 | 5,575 | 3,794 | 3,324 | 15,190 | 37,602 |
| | | | | | | | | | | | |
| Foreign operators |
| | | | | | Maturity (nominal) |
| Debentures and bonds | | Currency | | % Interest rate | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Total |
| Bond F | | UF | | 6.000% | 2 | 1 | − | − | − | − | 3 |
| Bond Q | | CLP | | 5.750% | − | − | − | − | 64 | − | 64 |
| USD Bond | | USD | | 3.875% | − | − | − | − | − | 412 | 412 |
| Telefónica Chile, S.A. | | | | | 2 | 1 | − | − | 64 | 412 | 479 |
| Bond C | | CLP | | 6.300% | − | 90 | − | − | − | − | 90 |
| Bond D | | UF | | 3.600% | − | 67 | − | − | − | − | 67 |
| Bond F | | UF | | 3.600% | − | − | − | − | − | 100 | 100 |
| USD Bond | | USD | | 2.875% | 247 | − | − | − | − | − | 247 |
| Telefónica Móviles Chile, S.A. | | | | | 247 | 157 | − | − | − | 100 | 504 |
| T. Finanzas Mex 0710 FIX | | MXN | | 8.070% | − | − | − | − | − | 112 | 112 |
| Telefónica Finanzas México, S.A. | | | | | − | − | − | − | − | 112 | 112 |
| Bond T. Peru 5th Program (31th Series A) | | N. SOL | | 7.500% | − | 6 | − | − | − | − | 6 |
| Bond T. Peru 4th Program (45th Series A) | | USD | | 6.688% | − | 18 | − | − | − | − | 18 |
| Senior Notes T. Perú | | N. SOL | | 8.000% | 70 | 35 | − | − | − | − | 105 |
| Bond T. Peru 5th Program (33rd Series A) | | N. SOL | | 6.813% | − | − | 17 | − | − | − | 17 |
| Bond T. Peru 5th Program (29th Series A) | | N. SOL | | 6.188% | − | 16 | − | − | − | − | 16 |
| Bond T. Peru 4th Program (19th Series A) | | N. SOL | | VAC + 3.6250% | − | − | − | − | − | 21 | 21 |
| Bond T. Peru 4th Program (36th Series A) | | N. SOL | | VAC + 3.6875% | − | − | 52 | − | − | − | 52 |
| Bond T. Peru 4th Program (12th Series A) | | N. SOL | | VAC + 3.6875% | − | − | − | − | 21 | − | 21 |
| Bond T. Peru 4th Program (36th Series B) | | N. SOL | | VAC + 3.3750% | − | − | − | 17 | − | − | 17 |
| Bond T. Peru 4th Program (19th Series B) | | N. SOL | | VAC + 2.8750% | − | − | − | − | − | 16 | 16 |
| Bond T. Peru 4th Program (37th Series A) | | N. SOL | | VAC + 3.1250% | − | − | − | − | − | 16 | 16 |
| Bond T. Peru 4th Program (19th Series C) | | N. SOL | | VAC + 3.1875% | − | − | − | − | − | 7 | 7 |
| Bond T. Peru 5th Program (22nd Series Aa) | | N. SOL | | VAC + 3.5000% | − | − | 8 | − | − | − | 8 |
| Bond T. Peru 5th Program (22nd Series Ab) | | N. SOL | | VAC + 3.5000% | − | − | − | − | 4 | − | 4 |
| Bond T. Peru 5th Program (22nd Series Ac) | | N. SOL | | VAC + 3.5000% | − | − | − | − | − | 8 | 8 |
| Bond T.M.Peru 2nd Program (11h Series A) | | N. SOL | | 7.750% | − | − | 19 | − | − | − | 19 |
| Bond T.M.Peru 2nd Program (9th Series A) | | N. SOL | | 6.813% | − | 17 | − | − | − | − | 17 |
| Bond T.M.Peru 2nd Program (9th Series B) | | N. SOL | | 6.375% | − | 14 | − | − | − | − | 14 |
| Bond T.M.Peru 2nd Program (11th Series B) | | N. SOL | | 7.375% | − | − | − | 17 | − | − | 17 |
| Bond T.M.Peru 2nd Program (27th Series A) | | N. SOL | | 5.530% | − | − | − | − | 14 | − | 14 |
| Telefónica del Perú, S.A. | | | | | 70 | 106 | 96 | 34 | 39 | 68 | 413 |
| Nonconvertible bonds | | BRL | | 1.06 x CDI | 198 | − | − | − | − | − | 198 |
| Nonconvertible bonds | | BRL | | 1,0 XCDI + 0.75% | − | − | 620 | − | − | − | 620 |
| Nonconvertible bonds | | BRL | | 1,0 XCDI + 0.68% | − | − | − | 403 | − | − | 403 |
| | | | | | |
| Maturity | |
| Debentures and bonds | | Currency | % Interest rate |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
|
| Telefónica Móviles Chile, S.A. | | | | — |
| — |
| 146 |
| 128 |
| — |
| 109 |
| 383 |
|
| T. Finanzas Mex 0710 FIX | | MXN | 8.070 | % | — |
| — |
| 83 |
| — |
| — |
| — |
| 83 |
|
| Telefónica Finanzas México, S.A. | | | | — |
| — |
| 83 |
| — |
| — |
| — |
| 83 |
|
| Bond T. Peru 4th Program (19th Serie A) | | N. SOL | VAC + 3.6250% |
| — |
| — |
| — |
| — |
| — |
| 22 |
| 22 |
|
| Bond T. Peru 4th Program (12th Serie A) | | N. SOL | VAC + 3.6875% |
| — |
| 21 |
| — |
| — |
| — |
| — |
| 21 |
|
| Bond T. Peru 4th Program (36th Serie B) | | N. SOL | VAC + 3.3750% |
| 17 |
| — |
| — |
| — |
| — |
| — |
| 17 |
|
| Bond T. Peru 4th Program (19th Serie B) | | N. SOL | VAC + 2.8750% |
| — |
| — |
| — |
| — |
| — |
| 17 |
| 17 |
|
| Bond T. Peru 4th Program (37th Serie A) | | N. SOL | VAC + 3.1250% |
| — |
| — |
| — |
| — |
| — |
| 16 |
| 16 |
|
| Bond T. Peru 4th Program (19th Serie C) | | N. SOL | VAC + 3.1875% |
| — |
| — |
| — |
| — |
| — |
| 7 |
| 7 |
|
| Bond T. Peru 5th Program (22nd Serie Ab) | | N. SOL | VAC + 3.5000% |
| — |
| 4 |
| — |
| — |
| — |
| — |
| 4 |
|
| Bond T. Peru 5th Program (22nd Serie Ac) | | N. SOL | VAC + 3.5000% |
| — |
| — |
| — |
| 8 |
| — |
| — |
| 8 |
|
| Bond T. Peru 6th Program (11th Serie A) | | N. SOL | 6.656 | % | — |
| — |
| — |
| — |
| — |
| 67 |
| 67 |
|
| Bond T. Peru 6th Program (11th Serie B) | | N. SOL | 6.190 | % | — |
| — |
| — |
| — |
| — |
| 31 |
| 31 |
|
| Bond T. Peru 6th Program (12th Serie A) | | N. SOL | 5.060 | % | — |
| — |
| 28 |
| — |
| — |
| — |
| 28 |
|
| Bond T. Peru 6th Program (13th Serie A) | | N. SOL | 5.500 | % | — |
| — |
| — |
| — |
| 36 |
| — |
| 36 |
|
| Bond T. Peru 6th Program (14th Serie A) | | N. SOL | 5.340 | % | — |
| — |
| — |
| — |
| 26 |
| — |
| 26 |
|
| Bond T. Peru 6th Program (15th Serie A) | | N. SOL | 5.470 | % | — |
| — |
| — |
| — |
| — |
| 34 |
| 34 |
|
| Bond TM Peru 2nd Program (11th Serie B) | | N. SOL | 7.375 | % | 15 |
| — |
| — |
| — |
| — |
| — |
| 15 |
|
| Bond TM Peru 2nd Program (27th Serie A) | | N. SOL | 5.531 | % | — |
| 13 |
| — |
| — |
| — |
| — |
| 13 |
|
| Telefónica del Perú, S.A. | | | | 32 |
| 38 |
| 28 |
| 8 |
| 62 |
| 194 |
| 362 |
|
| Nonconvertible bonds | | BRL | | IPCA + 4% | − | 10 | − | 10 | BRL | 1.0 XCDI + 0.68% |
| 328 |
| — |
| — |
| — |
| — |
| — |
| 328 |
|
| Convertible bonds (Telemig) I | | BRL | | IPCA + 0.5% | − | 1 | − | 2 | 3 | |
| Convertible bonds (Telemig) II | | BRL | | IPCA + 0.5% | − | 2 | 6 | − | 8 | |
| Convertible bonds (Telemig) III | | BRL | | IPCA + 0.5% | − | 3 | − | 10 | 13 | |
| Telefónica Brasil | | | | | 198 | − | 620 | 409 | 16 | 12 | 1,255 | |
| Nonconvertible bonds | | BRL | 1.0825 XCDI |
| — |
| — |
| — |
| 252 |
| 252 |
| — |
| 504 |
|
| Nonconvertible bonds | | BRL | 1.0 XCDI + 0.24% |
| — |
| — |
| 252 |
| — |
| — |
| — |
| 252 |
|
| Nonconvertible bonds | | BRL | 1 XIPXA +4 |
| — |
| 10 |
| — |
| — |
| — |
| — |
| 10 |
|
| Nonconvertible bonds ( Telemig) I | | BRL | IPCA + 0.5% |
| 1 |
| 1 |
| 1 |
| 1 |
| — |
| — |
| 4 |
|
| Nonconvertible bonds ( Telemig) II | | BRL | IPCA + 0.5% |
| 2 |
| 2 |
| 2 |
| 2 |
| — |
| — |
| 8 |
|
| Nonconvertible bonds ( Telemig) III | | BRL | IPCA + 0.5% |
| 3 |
| 3 |
| 3 |
| 3 |
| — |
| — |
| 12 |
|
| Telefônica Brasil, S.A. | | | | 334 |
| 16 |
| 258 |
| 258 |
| 252 |
| — |
| 1,118 |
|
| BOND R144-A | | USD | | 5.375% | − | 618 | USD | 5.375 | % | — |
| — |
| — |
| — |
| 625 |
| — |
| 625 |
|
| Colombia Telecomunicaciones, S.A, ESP | | | | | − | 618 | | | — |
| — |
| — |
| — |
| 625 |
| — |
| 625 |
|
| Bond | | EUR | | 1.875% | − | 600 | − | 600 | EUR | 1.875 | % | 600 |
| — |
| — |
| — |
| — |
| — |
| 600 |
|
| Bond | | EUR | | 2.375% | − | 500 | EUR | 2.375 | % | — |
| — |
| — |
| 500 |
| — |
| — |
| 500 |
|
| O2 Telefónica Deutschland Finanzierungs, GmbH | | | | | − | 600 | − | 500 | 1,100 | | |
| 600 |
| — |
| — |
| 500 |
| — |
| — |
| 1,100 |
|
| Total Outstanding Debentures and Bonds Foreign operators | | | | | 517 | 264 | 716 | 1,043 | 119 | 1,822 | 4,481 | | |
| 966 |
| 118 |
| 528 |
| 920 |
| 1,356 |
| 329 |
| 4,217 |
|
| Total Outstanding Debentures and Bonds | | | | | 3,804 | 6,696 | 6,291 | 4,837 | 3,443 | 17,012 | 42,083 | | |
| 4,664 |
| 3,602 |
| 5,126 |
| 4,826 |
| 4,933 |
| 16,430 |
| 39,581 |
|
| | | | | | | |
The main debentures and bonds issued by the Group in 20142017 are as follows:
| | | | | | | | |
| Item | | Date | | Maturity Date | Currency | Euros (1) | Currency of issuance | Coupon |
| Telefónica Emisiones, S.A.U. |
| EMTN Bonds | | 03/26/14 | | 03/26/16 | 200 | 200 | EUR | Euribor 3M + 0.65% |
| | | 04/10/14 | | 04/10/17 | 200 | 200 | EUR | Euribor 3M + 0.75% |
| | | 05/27/14 | | 05/27/22 | 1,250 | 1,250 | EUR | 2.242% |
| | | 06/04/14 | | 04/10/17(2) | 100 | 100 | EUR | Euribor 3M + 0.75% |
| | | 10/17/14 | | 10/17/29 | 800 | 800 | EUR | 2.932% |
| SHELF Bonds | | 06/23/14 | | 06/23/17 | 500 | 412 | USD | Libor 3M + 0.65% |
| Telefónica, S.A. |
| Bond mandatory exchangeable into Telecom Italia ordinary shares (see Note 21b) | | 07/24/14 | | 07/24/17 | 750 | 750 | EUR | 6.00% |
| O2 Telefónica Deutschland Finanzierungs, GmbH |
| Bonds | | 02/10/14 | | 02/10/21 | 500 | 500 | EUR | 2.375% |
(1) Exchange rate as at December 31, 2014. (2) Retap bond of the 200 million euros issuance dated on 04/10/14. |
| |
F-112 |
| | | | | | | | | |
| | | | Nominal (millions) | |
|
| Item | Date | Maturity Date | Currency |
| Euros |
| Currency of issuance | Coupon |
|
| Telefónica Emisiones, S.A.U. | | | | | | |
| EMTN Bond | 01/17/2017 | 01/17/2025 | 1,250 |
| 1,250 |
| EUR | 1.528 | % |
| EMTN Bond | 01/17/2017 | 10/17/2028 | 500 |
| 500 |
| EUR | 2.318 | % |
| EMTN Bond | 01/25/2017 | 01/25/2019 | 150 |
| 150 |
| EUR | EURIBOR 3M + 0.40% |
|
| SHELF Bond | 03/08/2017 | 03/08/2027 | 1,500 |
| 1,251 |
| USD | 4.103 | % |
SHELF Bond
| 03/08/2017 | 03/08/2047 | 2,000 |
| 1,667 |
| USD | 5.213 | % |
| EMTN Bond (Retap) | 03/17/2017 | 10/17/2028 | 200 |
| 200 |
| EUR | 2.318 | % |
| EMTN Bond | 04/18/2017 | 04/18/2037 | 200 |
| 167 |
| USD | 4.900 | % |
| SHELF Bond (Retap) | 04/28/2017 | 03/08/2047 | 500 |
| 417 |
| USD | 5.213 | % |
| EMTN Bond | 09/12/2017 | 01/12/2028 | 1,250 |
| 1,250 |
| EUR | 1.715 | % |
| Telefónica Brasil, S.A. | | | | | | |
| Debentures | 02/08/2017 | 02/08/2022 | 2,000 |
| 504 |
| BRL | 108.25% CDI |
|
| Debentures | 11/27/2017 | 11/27/2020 | 1,000 |
| 252 |
| BRL | 100% CDI + 0.24% |
|
Appendix IV: Financial instruments
The detail of the type of financial instruments arranged by the Group (notional amount) by currency and interest rates at December 31, 20142017 is as follows:
| | | | | Book value | | Fair value |
| Millions of Euros | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Notional | Underlying debt | Associated derivatives | TOTAL | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Notional |
| Underlying debt |
| Associated derivatives |
| TOTAL |
|
| EURO | (3,278) | 7,537 | 8,201 | 3,863 | 3,405 | 11,527 | 31,255 | 20,971 | 11,568 | 32,539 | |
| Euro | | (227 | ) | 6,238 |
| 6,055 |
| 7,062 |
| 3,382 |
| 16,845 |
| 39,355 |
| 25,568 |
| 14,590 |
| 40,158 |
|
| Floating rate | (5,229) | (381) | 3,478 | 24 | 840 | 2,970 | 1,702 | 3,545 | (1,777) | 1,768 | 2,861 |
| 1,542 |
| 157 |
| 3,519 |
| 508 |
| 3,443 |
| 12,030 |
| 2,474 |
| 9,666 |
| 12,140 |
|
| Spread | (0.42)% | 10.57% | 0.74% | 0.96% | 0.93% | 1.2% | − | (0.20 | %) | 0.15 | % | (1.92 | %) | (0.10 | %) | 0.17 | % | 0.18 | % | (0.02 | %) | — |
| — |
| — |
|
| Fixed rate | 1,951 | 7,468 | 4,723 | 3,039 | 2,565 | 8,557 | 28,303 | 16,176 | 13,345 | 29,521 | (3,088 | ) | 4,696 |
| 5,898 |
| 3,543 |
| 2,874 |
| 13,402 |
| 27,325 |
| 23,094 |
| 4,924 |
| 28,018 |
|
| Interest rate | 3.44% | 2.58% | 5.09% | 4.93% | 4.40% | 4.06% | 4% | − | (2.09 | %) | 2.18 | % | 3.28 | % | 2.02 | % | 1.62 | % | 1.95 | % | 2.71 | % | — |
| — |
| — |
|
| Rate cap | − | 450 | − | 800 | − | 1,250 | − | 1,250 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| OTHER EUROPEAN CURRENCIES | | |
| Other european currencies | | |
| Instruments in CZK | (172) | 269 | (43) | (46) | − | 1 | 9 | (249) | 268 | 19 | (67 | ) | — |
| — |
| — |
| — |
| — |
| (67 | ) | — |
| (67 | ) | (67 | ) |
| Floating rate | 148 | 229 | 144 | − | 1 | 522 | − | 523 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | (320) | 40 | (187) | (46) | − | (513) | (249) | (255) | (504) | (67 | ) | — |
| — |
| — |
| — |
| — |
| (67 | ) | — |
| (67 | ) | (67 | ) |
| Interest rate | (1.36)% | 29.05% | (3.55)% | (5.54)% | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Rate cap | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in GBP | (642) | 519 | 128 | 963 | − | 2,147 | 3,115 | 4,246 | (1,177) | 3,069 | 2,324 |
| (567 | ) | (394 | ) | — |
| 733 |
| 1,014 |
| 3,110 |
| 3,372 |
| (236 | ) | 3,136 |
|
| Floating rate | (36) | (158) | 199 | 674 | 32 | 1,451 | 2,162 | 37 | 2,138 | 2,175 | 456 |
| (479 | ) | (439 | ) | 79 |
| 442 |
| 451 |
| 510 |
| 6 |
| 506 |
| 512 |
|
| Spread | − | (3.02)% | − | 0.22% | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | (606) | 677 | (71) | 289 | (32) | 568 | 825 | 4,081 | (3,315) | 766 | 1,868 |
| (88 | ) | 45 |
| (79 | ) | 178 |
| 563 |
| 2,487 |
| 3,253 |
| (742 | ) | 2,511 |
|
| Interest rate | 2.45% | 0.43% | 4.95% | (2.28)% | 14.37% | 12.53% | 17.72% | − | 2.28 | % | 4.03 | % | 65.20 | % | 0.03 | % | 5.12 | % | 5.38 | % | 4.33 | % | — |
| — |
| — |
|
| Rate cap | − | 128 | − | 128 | — |
| — |
| — |
| — |
| 113 |
| — |
| 113 |
| 113 |
| — |
| 113 |
|
| Instruments in CHF | − | 609 | (609) | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 583 |
| (584 | ) | (1 | ) |
| Floating rate | − | (6) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (2 | ) | (2 | ) |
| Spread | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | − | 609 | (603) | 6 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 583 |
| (582 | ) | 1 |
|
| Interest rate | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Rate cap | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| AMERICA | | |
| America | | |
| Instruments in USD | (446) | (1,597) | (653) | (132) | 435 | 3,520 | 1,127 | 19,030 | (17,783) | 1,247 | (1,915 | ) | 286 |
| 229 |
| (1,659 | ) | 614 |
| 2,525 |
| 80 |
| 17,812 |
| (17,515 | ) | 297 |
|
| Floating rate | (283) | (1,380) | (679) | (167) | 435 | 2,509 | 435 | 1,977 | (1,646) | 331 | (559 | ) | 242 |
| 228 |
| (1,659 | ) | 630 |
| 1,834 |
| 716 |
| 659 |
| 55 |
| 714 |
|
| Spread | (7.31)% | (0.26)% | (0.67)% | (0.24)% | 0.22% | 0.21% | 8.11% | − | (0.27 | %) | 0.29 | % | 0.99 | % | (0.07 | %) | 0.01 | % | — |
| 0.78 | % | — |
| — |
| — |
|
| Fixed rate | (163) | (228) | 15 | 35 | − | 1,010 | 669 | 17,030 | (16,137) | 893 | (1,356 | ) | 44 |
| 1 |
| — |
| (16 | ) | 691 |
| (636 | ) | 17,153 |
| (17,570 | ) | (417 | ) |
| Interest rate | (25.60)% | (10.28)% | 5.36% | 18.14% | − | 10.65% | 16.28% | − | (1.27 | %) | 43.21 | % | 1,747.03 | % | — |
| (186.47 | %) | 11.24 | % | (25.26 | %) | — |
| — |
| — |
|
| Rate cap | − | 11 | − | 1 | 23 | − | 23 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in UYU | (18) | − | (18) | 12 | (5) | 7 | 16 |
| — |
| — |
| — |
| — |
| — |
| 16 |
| (5 | ) | 19 |
| 14 |
|
| Floating rate | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | (18) | − | (18) | 12 | (5) | 7 | 16 |
| — |
| — |
| — |
| — |
| — |
| 16 |
| (5 | ) | 19 |
| 14 |
|
| Interest rate | − | (0.67 | %) | — |
| — |
| — |
| — |
| — |
| (0.67 | %) | — |
| — |
| — |
|
| Rate cap | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in ARS | (188) | 3 | − | 2 | 1 | (179) | (174) | − | (174) | (159 | ) | 24 |
| — |
| — |
| — |
| (14 | ) | (149 | ) | (141 | ) | — |
| (141 | ) |
| Floating rate | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | − | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | (188) | 3 | − | 2 | 1 | (179) | (174) | − | (174) | (159 | ) | 24 |
| — |
| — |
| — |
| (14 | ) | (149 | ) | (141 | ) | — |
| (141 | ) |
F-113 |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Fair value |
| Millions of Euros | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Notional |
| Underlying debt |
| Associated derivatives |
| TOTAL |
|
| Interest rate | 5.09 | % | 16.22 | % | — |
| — |
| — |
| 16.27 | % | 4.35 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in BRL | 317 |
| 346 |
| 373 |
| 333 |
| 253 |
| 73 |
| 1,695 |
| 818 |
| 881 |
| 1,699 |
|
| Floating rate | (690 | ) | 126 |
| 357 |
| 319 |
| 245 |
| (120 | ) | 237 |
| 239 |
| 4 |
| 243 |
|
| Spread | (1.06 | %) | 2.82 | % | 1.07 | % | 0.36 | % | 0.47 | % | (0.08 | %) | 7.20 | % | — |
| — |
| — |
|
| Fixed rate | 1,007 |
| 220 |
| 16 |
| 14 |
| 8 |
| 193 |
| 1,458 |
| 579 |
| 877 |
| 1,456 |
|
| Interest rate | 5.36 | % | 7.35 | % | 5.42 | % | 5.53 | % | 5.04 | % | 1.89 | % | 5.20 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in CLP | (25 | ) | 105 |
| 149 |
| 288 |
| 326 |
| 108 |
| 951 |
| (341 | ) | 1,297 |
| 956 |
|
| Floating rate | (94 | ) | 64 |
| (21 | ) | 3 |
| 329 |
| 97 |
| 378 |
| — |
| 381 |
| 381 |
|
| Spread | — |
| 1.12 | % | (0.40 | %) | 26.86 | % | (0.80 | %) | 1.54 | % | 0.14 | % | — |
| — |
| — |
|
| Fixed rate | 69 |
| 41 |
| 170 |
| 285 |
| (3 | ) | 11 |
| 573 |
| (341 | ) | 916 |
| 575 |
|
| Interest rate | (1.64 | %) | 3.08 | % | 4.80 | % | 4.13 | % | 4.90 | % | 7.02 | % | 3.61 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in UFC | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 254 |
| (267 | ) | (13 | ) |
| Floating rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 254 |
| (267 | ) | (13 | ) |
| Interest rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in PEN | 175 |
| 31 |
| 70 |
| — |
| 62 |
| 133 |
| 471 |
| 241 |
| 226 |
| 467 |
|
| Floating rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | 175 |
| 31 |
| 70 |
| — |
| 62 |
| 133 |
| 471 |
| 241 |
| 226 |
| 467 |
|
| Interest rate | 4.26 | % | 5.28 | % | 5.10 | % | — |
| 5.43 | % | 6.24 | % | 5.16 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in VAC | 17 |
| 25 |
| — |
| 8 |
| — |
| 61 |
| 111 |
| 112 |
| — |
| 112 |
|
| Floating rate | 17 |
| 25 |
| — |
| 8 |
| — |
| 61 |
| 111 |
| 112 |
| — |
| 112 |
|
| Spread | 3.38 | % | 3.66 | % | — |
| 3.50 | % | — |
| 3.24 | % | 3.37 | % | — |
| — |
| — |
|
| Fixed rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Interest rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in COP | 799 |
| 117 |
| 16 |
| 62 |
| 70 |
| 129 |
| 1,193 |
| 246 |
| 952 |
| 1,198 |
|
| Floating rate | 80 |
| 15 |
| 5 |
| 41 |
| 36 |
| 97 |
| 274 |
| 269 |
| 9 |
| 278 |
|
| Spread | 0.41 | % | 2.89 | % | 9.33 | % | 4.27 | % | 5.25 | % | 3.82 | % | 3.12 | % | — |
| — |
| — |
|
| Fixed rate | 719 |
| 102 |
| 11 |
| 21 |
| 34 |
| 32 |
| 919 |
| (23 | ) | 943 |
| 920 |
|
| Interest rate | 6.46 | % | 10.63 | % | 5.35 | % | 5.32 | % | 5.31 | % | 5.25 | % | 6.80 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in VEB | (2 | ) | 1 |
| — |
| — |
| — |
| — |
| (1 | ) | (3 | ) | — |
| (3 | ) |
| Floating rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | (2 | ) | 1 |
| — |
| — |
| — |
| — |
| (1 | ) | (3 | ) | — |
| (3 | ) |
| Interest rate | 0.03 | % | 16.63 | % | — |
| — |
| — |
| — |
| (10.69 | %) | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in MXN | 68 |
| 40 |
| 117 |
| 37 |
| 43 |
| 287 |
| 592 |
| 427 |
| 177 |
| 604 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Fair value |
| Millions of Euros | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Notional |
| Underlying debt |
| Associated derivatives |
| TOTAL |
|
| Floating rate | (8 | ) | 7 |
| 8 |
| 10 |
| 12 |
| 89 |
| 118 |
| 119 |
| — |
| 119 |
|
| Spread | (12.36 | )% | 6.01 | % | 6.08 | % | 5.78 | % | 6.14 | % | 5.26 | % | 6.61 | % | — |
| — |
| — |
|
| Fixed rate | 76 |
| 33 |
| 109 |
| 27 |
| 31 |
| 198 |
| 474 |
| 308 |
| 177 |
| 485 |
|
| Interest rate | 21.09 | % | 7.11 | % | 7.72 | % | 6.67 | % | 6.68 | % | 7.23 | % | 9.49 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in GTQ | 1 |
| — |
| 18 |
| — |
| — |
| — |
| 19 |
| 19 |
| — |
| 19 |
|
| Floating rate | (8 | ) | — |
| — |
| — |
| — |
| — |
| (8 | ) | (8 | ) | — |
| (8 | ) |
| Spread | 0.01 | % | — |
| — |
| — |
| — |
| — |
| 0.01 | % | — |
| — |
| — |
|
| Fixed rate | 9 |
| — |
| 18 |
| — |
| — |
| — |
| 27 |
| 27 |
| — |
| 27 |
|
| Interest rate | 4.04 | % | — |
| 4.00 | % | — |
| — |
| — |
| 4.01 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Instruments in NIO | (7 | ) | — |
| — |
| — |
| — |
| 6 |
| (1 | ) | (1 | ) | — |
| (1 | ) |
| Floating rate | (7 | ) | — |
| — |
| — |
| — |
| — |
| (7 | ) | (7 | ) | — |
| (7 | ) |
| Spread | 0.01 | % | — |
| — |
| — |
| — |
| — |
| 0.01 | % | — |
| — |
| — |
|
| Fixed rate | — |
| — |
| — |
| — |
| — |
| 6 |
| 6 |
| 6 |
| — |
| 6 |
|
| Interest rate | — |
| — |
| — |
| — |
| — |
| 7.46 | % | 7.46 | % | — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Asia | | | | | | | | | | |
| Instruments in JPY | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 70 |
| (77 | ) | (7 | ) |
| Floating rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 70 |
| (77 | ) | (7 | ) |
| Interest rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Rate cap | — |
| — |
| — |
| — |
| — |
| — |
| — |
| | | |
| TOTAL | | | | | | | 47,375 |
| 49,031 |
| (505 | ) | 48,526 |
|
| Floating rate | | | | | | | 14,359 |
| 3,863 |
| 10,619 |
| 14,482 |
|
| Fixed rate | | | | | | | 32,903 |
| 45,055 |
| (11,223 | ) | 33,832 |
|
| Rate cap | | | | | | | 113 |
| 113 |
| — |
| 113 |
|
| Currency Options and Others (*) | | | | | | | — |
| — |
| 99 |
| 99 |
|
| Interest rate | 14.84% | 9.90% | 9.90% | − | 9.00% | − | 15% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in BRL | 781 | 291 | 935 | 581 | 95 | 136 | 2,819 | 589 | 2,174 | 2,763 |
| Floating rate | (930) | 91 | 827 | 541 | 69 | 19 | 617 | (166) | 363 | 197 |
| Spread | − | − | − | − | − | − | − | − | − | − |
| Fixed rate | 1,711 | 200 | 108 | 40 | 26 | 117 | 2,202 | 755 | 1,811 | 2,566 |
| Interest rate | − | − | − | − | − | − | − | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in CLP | 281 | 266 | 65 | − | 64 | 420 | 1,096 | (88) | 1,149 | 1,061 |
| Floating rate | 150 | 172 | 65 | (87) | 64 | 420 | 784 | 191 | 614 | 805 |
| Spread | 1.56% | 2.20% | − | − | 1.12% | (0.29)% | 0.72% | − | − | − |
| Fixed rate | 131 | 94 | − | 87 | − | − | 312 | (279) | 535 | 256 |
| Interest rate | 4.32% | 5.00% | − | 5.05% | − | 0.00% | 4.73% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in UFC | 2 | (3) | − | − | − | − | (1) | 179 | (193) | (14) |
| Floating rate | − | − | − | − | − | − | − | − | − | − |
| Spread | − | − | − | − | − | − | − | − | − | − |
| Fixed rate | 2 | (3) | − | − | − | − | (1) | 179 | (193) | (14) |
| Interest rate | 6.00% | 6.07% | − | − | − | − | 6.22% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in PEN | 227 | 127 | 84 | 23 | 14 | 2 | 477 | 162 | 327 | 489 |
| Floating rate | − | − | − | − | − | − | − | − | − | − |
| Spread | − | − | − | − | − | − | − | − | − | − |
| Fixed rate | 227 | 127 | 84 | 23 | 14 | 2 | 477 | 162 | 327 | 489 |
| Interest rate | 6.75% | 7.29% | 7.44% | 7.16% | 5.57% | 4.00% | 6.99% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in VAC | − | − | 60 | 17 | 25 | 67 | 169 | 169 | − | 169 |
| Floating rate | − | − | 60 | 17 | 25 | 67 | 169 | 169 | − | 169 |
| Spread | − | − | 3.66% | 3.38% | 3.66% | 3.27% | 3.47% | − | − | − |
| Fixed rate | − | − | − | − | − | − | − | − | − | − |
| Interest rate | − | − | − | − | − | − | − | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in COP | 618 | 249 | 451 | 159 | 139 | 1,241 | 2,857 | 1,740 | 1,105 | 2,845 |
| Floating rate | 64 | 127 | 141 | 152 | 136 | 1,241 | 1,861 | 1,858 | 8 | 1,866 |
| Spread | 5.16% | 4.52% | 4.51% | 4.69% | 5.08% | 7.25% | 6.42% | − | − | − |
| Fixed rate | 554 | 122 | 310 | 7 | 3 | − | 996 | (118) | 1,097 | 979 |
| Interest rate | 5.47% | 7.09% | 4.33% | 6.11% | 5.30% | − | 5.32% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in VEB | (366) | (10) | (1) | (9) | − | − | (386) | (389) | − | (389) |
| Floating rate | − | − | − | − | − | − | − | − | − | − |
| Spread | − | − | − | − | − | − | − | − | − | − |
| Fixed rate | (366) | (10) | (1) | (9) | − | − | (386) | (389) | − | (389) |
| Interest rate | 11.55% | 6.75% | 15.95% | 17.91% | − | − | 11.57% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in UDI | 6 | (43) | (42) | (36) | (30) | 161 | 16 | 925 | (751) | 174 |
| Floating rate | 6 | (43) | (42) | (36) | (30) | 161 | 16 | 925 | (751) | 174 |
| Spread | 58.30% | (2.17)% | (2.44)% | (3.61)% | (5.36)% | 22.34% | 275% | − | − | − |
| Fixed rate | − | − | − | − | − | − | − | − | − | − |
| Interest rate | − | − | − | − | − | − | − | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in MXN | 532 | 55 | 55 | 55 | 55 | 633 | 1,385 | (86) | 1,382 | 1,296 |
| Floating rate | (11) | − | − | − | − | − | (11) | (12) | − | (12) |
| Spread | (0.18)% | − | − | − | − | − | (0.17)% | − | − | − |
| Fixed rate | 543 | 55 | 55 | 55 | 55 | 633 | 1,396 | (74) | 1,382 | 1,308 |
| Interest rate | 3.07% | 3.70% | 3.70% | 3.70% | 3.70% | 4.23% | 3.70% | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in GTQ | 3 | − | − | − | − | 1 | 4 | 5 | − | 5 |
| Floating rate | (3) | − | − | − | − | − | (3) | (2) | − | (2) |
| Spread | 0.01% | − | − | − | − | − | 0.01% | − | − | − |
| Fixed rate | 6 | − | − | − | − | 1 | 7 | 7 | − | 7 |
| Interest rate | 6.75% | − | − | − | − | − | − | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| Instruments in NIO | (9) | − | − | − | − | − | (9) | (6) | − | (6) |
| Floating rate | (9) | − | − | − | − | − | (9) | (6) | − | (6) |
| Spread | 0.01% | − | − | − | − | − | 0.01% | − | − | − |
| Fixed rate | − | − | − | − | − | − | − | − | − | − |
| Interest rate | − | − | − | − | − | − | − | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| ASIA | | | | | | | | | | |
| Instruments in JPY | (2) | − | − | − | − | − | (2) | 122 | (135) | (13) |
| Floating rate | − | − | − | − | − | − | − | − | (1) | (1) |
| Spread | − | − | − | − | − | − | − | − | − | − |
| Fixed rate | (2) | − | − | − | − | − | (2) | 122 | (134) | (12) |
| Interest rate | − | − | − | − | − | − | − | − | − | − |
| Rate cap | − | − | − | − | − | − | − | − | − | − |
| TOTAL | | | | | | | 43,734 | 47,767 | (2,680) | 45,087 |
| Floating rate | | | | | | | 8,245 | 8,516 | (535) | 7,981 |
| Fixed rate | | | | | | | 34,088 | 37,850 | (2,145) | 35,705 |
| Rate cap | | | | | | | 1,401 | 1,401 | − | 1,401 |
| Currency Options and Others (*) | | | | | | | − | − | 34 | 34 |
(*) Amounts included in fixed rate. |
The table below is an extract of the previous table that shows the sensitivity to interest rates originated by our position on interest rate swaps categorized into instruments entered into for trading purposes and instruments entered into for purposes other than trading at December 31, 2014:2017:
| | Interest rate swaps | | Millions of euros | Maturity | | Maturity | |
| Trading purposes | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Total | Fair value | |
| Non trading purposes | | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
| Fair value |
|
| EUR | | (422) | | (134 | ) |
| Fixed to fixed | − | 3 | |
| Fixed to fix | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 5 |
|
| Receiving leg | (20) | − | (40) | (25) | − | (85) | (117) | (190 | ) | (5 | ) | — |
| (100 | ) | (75 | ) | — |
| (370 | ) | (282 | ) |
| Average interest rate | − | |
| Average Interest Rate | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | 20 | − | 40 | 25 | − | 85 | 120 | 190 |
| 5 |
| — |
| 100 |
| 75 |
| — |
| 370 |
| 287 |
|
| Average spread | 1.63% | − | 0.84% | 0.85% | − | 1.03% | − | |
| Average Interest Rate | | 0.52 | % | 0.85 | % | — |
| 1.18 | % | 0.55 | % | — |
| — |
| — |
|
| Fixed to floating | − | (33) | − | (33) | (1,428) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,010 | ) |
| Receiving leg | (4,285) | (7,455) | (7,383) | (5,307) | (4,736) | (9,833) | (38,999) | (13,447) | (8,097 | ) | (5,861 | ) | (9,145 | ) | (7,282 | ) | (4,018 | ) | (6,262 | ) | (40,665 | ) | (22,668 | ) |
| Average interest rate | 0.79% | 0.26% | 1.05% | 1.06% | 2.35% | 1.20% | − | |
| Average Interest Rate | | 1.04 | % | 0.99 | % | 1.39 | % | 1.69 | % | 1.04 | % | 1.27 | % | 1.26 | % | — |
|
| Paying leg | 4,285 | 7,455 | 7,350 | 5,307 | 4,736 | 9,833 | 38,966 | 12,019 | 8,097 |
| 5,861 |
| 9,145 |
| 7,282 |
| 4,018 |
| 6,262 |
| 40,665 |
| 21,658 |
|
| Average spread | 0.34% | 1.37% | 0.35% | 0.65% | 0.90% | − | 0.57% | − | |
| Average Spread | | 0.39 | % | 0.66 | % | 0.36 | % | 0.51 | % | 1.01 | % | — |
| 0.44 | % | — |
|
| Floating to fixed | − | 1,004 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 871 |
|
| Receiving leg | (8,457) | (5,935) | (2,950) | (1,305) | (144) | (7,299) | (26,090) | (16,846) | (5,868 | ) | (3,359 | ) | (4,985 | ) | (3,280 | ) | (359 | ) | (4,544 | ) | (22,395 | ) | (17,773 | ) |
| Average interest rate | 2.27% | 1.34% | − | 1.04% | − | |
| Average Spread | | 1.70 | % | 0.20 | % | — |
| 0.02 | % | — |
| — |
| 0.48 | % | — |
|
| Paying leg | 8,457 | 5,935 | 2,950 | 1,305 | 144 | 7,299 | 26,090 | 17,850 | 5,868 |
| 3,359 |
| 4,985 |
| 3,280 |
| 359 |
| 4,544 |
| 22,395 |
| 18,644 |
|
| Average spread | 0.19% | 0.96% | 1.68% | 2.41% | 1.33% | 2.09% | 1.18% | − | |
| Floating to floating | − | (1) | |
| Average Interest Rate | | 0.22 | % | 0.91 | % | 2.45 | % | 2.06 | % | 1.30 | % | 0.95 | % | 1.25 | % | — |
|
| USD | | | (3 | ) |
| Fixed to floating | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (6 | ) |
| Receiving leg | (50) | − | (50) | (51) | (639 | ) | (283 | ) | (283 | ) | (283 | ) | (534 | ) | (142 | ) | (2,164 | ) | (755 | ) |
| Average spread | − | |
| Average Interest Rate | | 1.45 | % | 1.40 | % | 1.52 | % | 1.61 | % | 1.73 | % | 3.47 | % | 1.68 | % | — |
|
| Paying leg | 50 | − | 50 | 639 |
| 283 |
| 283 |
| 283 |
| 534 |
| 142 |
| 2,164 |
| 749 |
|
| Average interest rate | − | |
| USD | | 43 | |
| Fixed to fixed | − | (25) | |
| Receiving leg | (427) | (452) | (853) | (475) | (280) | (387) | (2,874) | (1,498) | |
| Average interest rate | 1.13% | 0.89% | 1.54% | 1.56% | 1.40% | 2.23% | 1.46% | − | |
| Paying leg | 427 | 452 | 853 | 475 | 280 | 387 | 2,874 | 1,473 | |
| Average spread | 0.21% | 0.51% | 0.39% | 0.82% | 1.52% | − | 0.51% | − | |
| Average Spread | | 0.62 | % | 1.52 | % | 1.61 | % | 1.68 | % | 0.92 | % | — |
| 1.04 | % | — |
|
| Floating to fixed | − | 68 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3 |
|
| Receiving leg | (705) | (21) | (915) | (369) | − | (387) | (2,397) | (415 | ) | — |
| — |
| — |
| (250 | ) | (142 | ) | (807 | ) | (808 | ) |
| Average interest rate | − | |
| Average Spread | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | 705 | 21 | 915 | 369 | − | 387 | 2,397 | 2,465 | 415 |
| — |
| — |
| — |
| 250 |
| 142 |
| 807 |
| 811 |
|
| Average spread | 0.62% | 1.07% | 2.94% | 3.04% | − | 2.14% | 2.13% | − | |
| Average Interest Rate | | 2.87 | % | — |
| — |
| — |
| 1.93 | % | 2.52 | % | — |
| — |
|
| GBP | | (13) | | (50 | ) |
| Fixed to floating | − | (35) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (76 | ) |
| Receiving leg | (51) | (398) | (212) | (449) | (32) | (322) | (1,464) | (1,501) | (676 | ) | (28 | ) | (23 | ) | (248 | ) | (524 | ) | — |
| (1,499 | ) | (1,575 | ) |
| Average interest rate | 1.46% | 1.38% | 1.52% | 1.79% | 2.25% | 2.28% | 1.75% | − | |
| Average Interest Rate | | 1.63 | % | 2.25 | % | 2.36 | % | 1.76 | % | 3.27 | % | — |
| — |
| — |
|
| Paying leg | 51 | 398 | 212 | 449 | 32 | 322 | 1,464 | 1,466 | 676 |
| 28 |
| 23 |
| 248 |
| 524 |
| — |
| 1,499 |
| 1,499 |
|
| Average spread | − | |
| Average Spread | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Floating to fixed | − | 22 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 26 |
|
| Receiving leg | (122) | (556) | (141) | (96) | − | (283) | (1,198) | (1,200) | (789 | ) | — |
| (68 | ) | (169 | ) | (192 | ) | — |
| (1,218 | ) | (1,219 | ) |
| Average spread | − | |
| Average Spread | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | 122 | 556 | 141 | 96 | − | 283 | 1,198 | 1,222 | 789 |
| — |
| 68 |
| 169 |
| 192 |
| — |
| 1,218 |
| 1,245 |
|
| Average interest rate | 0.93% | 0.99% | 1.08% | 2.07% | − | 2.50% | 1.44% | − | |
| CZK | | (2) | |
| Average Interest Rate | | 1.38 | % | — |
| 0.73 | % | 2.56 | % | 1.84 | % | — |
| — |
| — |
|
| Fixed to floating | − | − | − | − | − | − | − | (3) |
| Receiving leg | − | − | (144) | − | − | − | (144) | (377) |
| Average interest rate | − | − | 0.72% | − | − | − | 0.72% | − |
| Paying leg | − | − | 144 | − | − | − | 144 | 374 |
| Average spread | − | − | − | − | − | − | − | − |
| Floating to fixed | − | − | − | − | − | − | − | 1 |
| Receiving leg | − | − | (45) | − | − | − | (45) | (45) |
| Average spread | − | − | − | − | − | − | − | − |
| Paying leg | − | − | 45 | − | − | − | 45 | 46 |
| Average interest rate | − | − | 1.25% | − | − | − | 1.25% | − |
| Interest rate swaps |
| Millions of euros | Maturity | |
| Non trading purposes | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Total | Fair value |
| EUR | | | | | | | | 1,287 |
| Fixed to floating | − | − | − | − | − | − | − | (961) |
| Receiving leg | (1,000) | (3,088) | (2,420) | (2,600) | (1,900) | (4,450) | (15,458) | (16,420) |
| Average interest rate | 2.33% | 2.81% | 1.95% | 1.36% | 2.58% | 1.41% | 1.97% | − |
| Paying leg | 1,000 | 3,088 | 2,420 | 2,600 | 1,900 | 4,450 | 15,458 | 15,459 |
| Average spread | − | − | − | − | − | − | − | − |
| Floating to fixed | − | − | − | − | − | − | − | 2,248 |
| Receiving leg | (7,502) | (3,920) | (2,882) | (3,520) | (3,709) | (8,652) | (30,185) | (24,789) |
| Average interest rate | 0.33% | − | − | 0.12% | 0.45% | − | 0.15% | − |
| Paying leg | 7,502 | 3,920 | 2,882 | 3,520 | 3,709 | 8,652 | 30,185 | 27,037 |
| Average spread | 2.27% | 2.54% | 2.35% | 2.31% | 2.51% | 2.74% | 2.48% | − |
| USD | | | | | | | | (1,361) |
| Fixed to floating | − | − | − | − | − | − | − | (1,364) |
| Receiving leg | (2,616) | (5,687) | (829) | (1,282) | (1,046) | (6,216) | (17,676) | (14,735) |
| Average interest rate | 2.51% | 3.16% | 4.62% | 1.13% | 3.52% | 3.53% | 3.14% | − |
| Paying leg | 2,616 | 5,687 | 829 | 1,282 | 1,046 | 6,216 | 17,676 | 13,371 |
| Average spread | 0.42% | 1.64% | − | − | − | − | 0.59% | − |
| Floating to fixed | − | − | − | − | − | − | − | 3 |
| Receiving leg | (30) | (31) | − | − | − | − | (61) | (61) |
| Average interest rate | − | − | − | − | − | − | − | − |
| Paying leg | 30 | 31 | − | − | − | − | 61 | 64 |
| Average spread | 4.34% | 4.34% | − | − | − | − | 4.34% | − |
| MXN | | | | | | | | (10) |
| Fixed to floating | − | − | − | − | − | − | − | (20) |
| Receiving leg | − | − | − | − | − | (112) | (112) | (135) |
| Average interest rate | − | − | − | − | − | 8.07% | 8.07% | − |
| Paying leg | − | − | − | − | − | 112 | 112 | 115 |
| Average spread | − | − | − | − | − | 0.61% | 0.61% | − |
| Floating to fixed | − | − | − | − | − | − | − | 10 |
| Receiving leg | − | − | − | − | − | (112) | (112) | (115) |
| Average interest rate | − | − | − | − | − | 0.61% | 0.61% | − |
| Paying leg | − | − | − | − | − | 112 | 112 | 125 |
| Average spread | − | − | − | − | − | 6.62% | 6.62% | − |
| GBP | | | | | | | | (244) |
| Fixed to floating | − | − | − | − | − | − | − | (289) |
| Receiving leg | − | − | − | (963) | − | (2,440) | (3,403) | (3,695) |
| Average interest rate | − | − | − | 1.42% | − | 2.95% | 2.52% | − |
| Paying leg | − | − | − | 963 | − | 2,440 | 3,403 | 3,406 |
| Average spread | − | − | − | − | − | − | − | − |
| Floating to fixed | − | − | − | − | − | − | − | 45 |
| Receiving leg | − | (519) | − | (642) | − | − | (1,161) | (1,163) |
| Average spread | − | − | − | − | − | − | − | − |
| Paying leg | − | 519 | − | 642 | − | − | 1,161 | 1,208 |
| Average interest rate | − | 4.96% | − | 1.48% | − | − | 3.04% | − |
| JPY | | | | | | | | (3) |
| Fixed to floating | − | − | − | − | − | − | − | (3) |
| Receiving leg | − | (48) | − | (69) | − | − | (117) | (120) |
F-118 |
| | | | | | | | | | | | | | | | |
| Interest rate swaps |
| Millions of euros | Maturity | |
| Trading purposes | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
| Fair value |
|
| EUR | | | | | | | | 424 |
|
| Fixed to fixed | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
|
| Receiving leg | — |
| (20 | ) | — |
| — |
| — |
| — |
| (20 | ) | (37 | ) |
| Average Interest Rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | — |
| 20 |
| — |
| — |
| — |
| — |
| 20 |
| 38 |
|
| Average Spread | — |
| 0.85 | % | — |
| — |
| — |
| — |
| — |
| — |
|
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (88 | ) |
| Receiving leg | (200 | ) | — |
| — |
| (500 | ) | — |
| (1,100 | ) | (1,800 | ) | (1,881 | ) |
| Average Interest Rate | 0.93 | % | — |
| — |
| 1.25 | % | — |
| 1.24 | % | — |
| — |
|
| Paying leg | 200 |
| — |
| — |
| 500 |
| — |
| 1,100 |
| 1,800 |
| 1,793 |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Floating to fixed | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 511 |
|
| Receiving leg | (2,166 | ) | (1,371 | ) | (4,097 | ) | (1,102 | ) | (192 | ) | (5,270 | ) | (14,198 | ) | (10,610 | ) |
| Average Spread | 0.43 | % | 1.25 | % | 0.05 | % | 0.03 | % | — |
| — |
| 0.20 | % | — |
|
| Paying leg | 2,166 |
| 1,371 |
| 4,097 |
| 1,102 |
| 192 |
| 5,270 |
| 14,198 |
| 11,121 |
|
| Average Interest Rate | 1.70 | % | 1.07 | % | 2.57 | % | 1.92 | % | 0.12 | % | 1.22 | % | 1.70 | % | — |
|
| USD | | | | | | | | (918 | ) |
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (918 | ) |
| Receiving leg | (1,371 | ) | (1,132 | ) | (1,779 | ) | (1,509 | ) | (1,235 | ) | (6,359 | ) | (13,385 | ) | (13,993 | ) |
| Average Interest Rate | 1.19 | % | 3.45 | % | 3.02 | % | 3.44 | % | 1.83 | % | 3.21 | % | 2.90 | % | — |
|
| Paying leg | 1,371 |
| 1,132 |
| 1,779 |
| 1,509 |
| 1,235 |
| 6,359 |
| 13,385 |
| 13,075 |
|
| Average Spread | — |
| — |
| 0.22 | % | — |
| — |
| — |
| 0.03 | % | — |
|
| Floating to fixed | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receiving leg | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Average Interest Rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| MXN | | | | | | | | (4 | ) |
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
|
| Receiving leg | — |
| — |
| (127 | ) | — |
| — |
| — |
| (127 | ) | (129 | ) |
| Average Interest Rate | — |
| — |
| 7.90 | % | — |
| — |
| — |
| — |
| — |
|
| Paying leg | — |
| — |
| 127 |
| — |
| — |
| — |
| 127 |
| 130 |
|
| Average Spread | — |
| — |
| 0.41 | % | — |
| — |
| — |
| — |
| — |
|
| Floating to fixed | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (5 | ) |
| Receiving leg | — |
| — |
| (127 | ) | — |
| — |
| — |
| (127 | ) | (129 | ) |
| Average Spread | — |
| — |
| 0.41 | % | — |
| — |
| — |
| — |
| — |
|
| Paying leg | — |
| — |
| 127 |
| — |
| — |
| — |
| 127 |
| 124 |
|
| Average Interest Rate | — |
| — |
| 6.67 | % | — |
| — |
| — |
| — |
| — |
|
| GBP | | | | | | | | (216 | ) |
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (216 | ) |
| Receiving leg | (563 | ) | — |
| (789 | ) | — |
| (563 | ) | (451 | ) | (2,366 | ) | (2,578 | ) |
| Average Interest Rate | 1.43 | % | — |
| 1.87 | % | — |
| 3.51 | % | 3.42 | % | — |
| — |
|
| Paying leg | 563 |
| — |
| 789 |
| — |
| 563 |
| 451 |
| 2,366 |
| 2,362 |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Floating to fixed | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receiving leg | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Average Interest Rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
|
| | | | | | | | | | | | | | | | |
| Millions of euros | Maturity | |
| Trading purposes | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
| Fair value |
|
| JPY | | | | | | | | — |
|
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receiving leg | (74 | ) | — |
| — |
| — |
| — |
| — |
| (74 | ) | (74 | ) |
| Average Interest Rate | 0.32 | % | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
|
| | | | | | | | | | | | | | | | |
| Paying leg | 74 |
| — |
| — |
| — |
| — |
| — |
| 74 |
| 74 |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| CLP | | | | | | | | — |
|
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (3 | ) |
| Receiving leg | — |
| (64 | ) | (7 | ) | (3 | ) | (3 | ) | (3 | ) | (80 | ) | (86 | ) |
| Average Interest Rate | — |
| 5.75 | % | 4.90 | % | 4.90 | % | 4.90 | % | 4.90 | % | 0.40 | % | — |
|
| Paying leg | — |
| 64 |
| 7 |
| 3 |
| 3 |
| 3 |
| 80 |
| 83 |
|
| Average Spread | — |
| 1.12 | % | 1.27 | % | 1.27 | % | 1.27 | % | 1.27 | % | 0.10 | % | — |
|
| Floating to fixed | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3 |
|
| Receiving leg | (87 | ) | — |
| (27 | ) | (134 | ) | — |
| — |
| (248 | ) | (247 | ) |
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | 87 |
| — |
| 27 |
| 134 |
| — |
| — |
| 248 |
| 250 |
|
| Average Interest Rate | 5.05 | % | — |
| 3.31 | % | 3.26 | % | — |
| — |
| — |
| — |
|
| CHF | | | | | | | | (17 | ) |
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (17 | ) |
| Receiving leg | (214 | ) | — |
| (192 | ) | — |
| (128 | ) | — |
| (534 | ) | (549 | ) |
| Average Interest Rate | 0.28 | % | — |
| 0.95 | % | — |
| 0.75 | % | — |
| — |
| — |
|
| Paying leg | 214 |
| — |
| 192 |
| — |
| 128 |
| — |
| 534 |
| 532 |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| BRL | | | | | | | | (7 | ) |
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receiving leg | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Average Interest Rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Average Spread | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Floating to fixed | (2 | ) | (1 | ) | — |
| — |
| — |
| — |
| (3 | ) | (7 | ) |
| Receiving leg | (72 | ) | (38 | ) | — |
| — |
| — |
| — |
| (110 | ) | (110 | ) |
| Average Spread | 2.00 | % | 1.55 | % | — |
| — |
| — |
| — |
| 1.85 | % | — |
|
| Paying leg | 70 |
| 37 |
| — |
| — |
| — |
| — |
| 107 |
| 103 |
|
| Average Interest Rate | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| COP | | | | | | | | (1 | ) |
| Fixed to floating | — |
| — |
| — |
| — |
| — |
| — |
| 2 |
| 1 |
|
| Receiving leg | (4 | ) | (8 | ) | (8 | ) | (8 | ) | (4 | ) | — |
| (32 | ) | (36 | ) |
| Average Interest Rate | 7.25 | % | 7.25 | % | 7.25 | % | 7.25 | % | 7.25 | % | — |
| — |
| — |
|
| Paying leg | 4 |
| 8 |
| 8 |
| 8 |
| 4 |
| — |
| 34 |
| 37 |
|
| Average Spread | 2.80 | % | 2.80 | % | 2.80 | % | 2.80 | % | 2.80 | % | — |
| — |
| — |
|
| Floating to fixed | — |
| — |
| — |
| — |
| 3 |
| (3 | ) | 1 |
| (2 | ) |
| Receiving leg | (70 | ) | — |
| (10 | ) | (21 | ) | (31 | ) | (35 | ) | (167 | ) | (29 | ) |
Average Spread
| 5.25 | % | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Paying leg | 70 |
| — |
| 10 |
| 21 |
| 34 |
| 32 |
| 168 |
| 27 |
|
Average Interest Rate
| — |
| — |
| 5.25 | % | 5.27 | % | 5.29 | % | 5.25 | % | — |
| — |
|
| Average interest rate | − | 2.82% | − | 0.32% | − | − | 1.35% | − |
| Paying leg | − | 48 | − | 69 | − | − | 117 | 117 |
| Average spread | − | − | − | − | − | − | − | − |
| CLP | | | | | | | | 2 |
| Fixed to floating | − | − | − | − | − | − | − | (5) |
| Receiving leg | − | (156) | − | − | (64) | − | (220) | (236) |
| Average interest rate | − | 6.51% | − | − | 5.75% | − | 6.29% | − |
| Paying leg | − | 156 | − | − | 64 | − | 220 | 231 |
| Average spread | − | 1.66% | − | − | 1.12% | − | 1.50% | − |
| Floating to fixed | − | − | − | − | − | − | − | 7 |
| Receiving leg | (41) | (90) | − | (87) | 1 | − | (217) | (218) |
| Average interest rate | − | − | − | − | − | − | − | − |
| Paying leg | 41 | 90 | − | 87 | (1) | − | 217 | 225 |
| Average spread | 5.24% | 4.82% | − | 5.05% | − | − | 5.02% | − |
| CHF | | | | | | | | (16) |
| Fixed to floating | − | − | − | − | − | − | − | (16) |
| Receiving leg | − | − | − | (208) | − | (312) | (520) | (536) |
| Average interest rate | − | − | − | 0.28% | − | 0.87% | 0.63% | − |
| Paying leg | − | − | − | 208 | − | 312 | 520 | 520 |
| Average spread | − | − | − | − | − | − | − | − |
| CZK | | | | | | | | (3) |
| Fixed to floating | − | − | − | − | − | − | − | (5) |
| Receiving leg | − | (229) | (189) | − | − | − | (418) | (424) |
| Average interest rate | − | 0.54% | 0.93% | − | − | − | 0.72% | − |
| Paying leg | − | 229 | 189 | − | − | − | 418 | 419 |
| Average spread | − | − | − | − | − | − | − | − |
| Floating to fixed | − | − | − | − | − | − | − | 2 |
| Receiving leg | − | − | (45) | − | − | − | (45) | (45) |
| Average interest rate | − | − | − | − | − | − | − | − |
| Paying leg | − | − | 45 | − | − | − | 45 | 47 |
| Average spread | − | − | 1.25% | − | − | − | 1.25% | − |
| BRL | | | | | | | | 24 |
| Fixed to floating | − | − | − | − | − | − | − | 24 |
| Receiving leg | (79) | (77) | (77) | (77) | (45) | (1) | (356) | (349) |
| Average interest rate | 9.95% | 9.95% | 9.95% | 9.95% | 9.94% | − | 9.92% | − |
| Paying leg | 79 | 77 | 77 | 77 | 45 | 1 | 356 | 373 |
| Average spread | − | − | − | − | − | − | − | − |
| COP | | | | | | | | 1 |
| Fixed to floating | − | − | − | − | − | − | − | 1 |
| Receiving leg | − | (2) | (10) | (10) | (10) | (10) | (42) | (46) |
| Average interest rate | − | 7.21% | 7.91% | 7.91% | 7.91% | 8.04% | 7.91% | − |
| Paying leg | − | 2 | 10 | 10 | 10 | 10 | 42 | 47 |
| Average spread | − | 3.33% | 3.41% | 3.38% | 3.38% | 3.35% | 3.38% | − |
| | | | | | | | | |
Foreign exchange and interest rate options, by maturity, are as follows:
| Currency options | Maturities |
| Millions of euros | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years |
| Currency Puts (EURUSD, USDEUR) | | | | | | |
| Notional amount of options bought | 99 | − | 1,616 | 155 | − | − |
| Strike | 1.54 | − | 1.36 | 1.57 | − | − |
| Notional amount of options sold | − | − | 1,545 | − | − | − |
| Strike | − | − | 1.27 | − | − | − |
| Interest rate options | Maturities |
| Millions of euros | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years |
| Collars | | | | | | |
| Notional amount of options bought | − | 473 | − | 800 | − | 963 |
| Strike Cap | − | 4.30 | − | 4.35 | − | 4.92 |
| Strike Floor | − | 3.00 | − | 3.05 | − | 4.15 |
| Caps | | | | | | |
| Notional amount of options bought | − | − | − | − | − | − |
| Strike | − | − | − | − | − | − |
| Notional amount of options sold | − | 23 | − | − | − | 963 |
| Strike | − | 5.75 | − | − | − | 5.53 |
| Floors | | | | | | |
| Notional amount of options bought | − | − | − | − | − | 963 |
| Strike | − | − | − | − | − | 1.17 |
| Notional amount of options sold | − | − | − | − | − | − |
| Strike | − | − | − | − | − | − |
| | | | | | | |
F-120 |
| | | | | | | | | | | | |
| Currency options | Maturities |
| Millions of euros | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
|
| Currency Puts (EURUSD, USDEUR) | |
| |
| |
| |
| |
| |
|
| Notional amount of options bought | 120 |
| — |
| — |
| — |
| — |
| — |
|
| Strike | 1.57 |
| — |
| — |
| — |
| — |
| — |
|
| Notional amount of options sold | 120 |
| — |
| — |
| — |
| — |
| — |
|
| Strike | 1.57 |
| — |
| — |
| — |
| — |
| — |
|
|
| | | | | | | | | | | | |
| Interest rate options | Maturities |
| Millions of euros | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
|
| Collars | |
| |
| |
| |
| |
| |
|
| Notional amount of options bought | 800 |
| — |
| — |
| — |
| 845 |
| — |
|
| Strike Cap | 4.35 |
| — |
| — |
| — |
| 4.92 |
| — |
|
| Strike Floor | 3.05 |
| — |
| — |
| — |
| 4.15 |
| — |
|
| Caps | | | | | | |
| Notional amount of options bought | — |
| — |
| — |
| — |
| — |
| — |
|
| Strike | — |
| — |
| — |
| — |
| — |
| — |
|
| Notional amount of options sold | — |
| — |
| — |
| — |
| 845 |
| — |
|
| Strike | — |
| — |
| — |
| — |
| 5.53 |
| — |
|
| Floors | | | | | | |
| Notional amount of options bought | — |
| — |
| — |
| — |
| 845 |
| — |
|
| Strike | — |
| — |
| — |
| — |
| 1.17 |
| — |
|
| Notional amount of options sold | — |
| — |
| — |
| — |
| — |
| — |
|
| Strike | — |
| — |
| — |
| — |
| — |
| — |
|
Cash flows receivable or payable on derivative financial instruments to be settled via the swap of nominals, categorized by currency of collection/payment, along with contractual maturities are as follows:
| Millions of euros | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Total |
| Currency swaps | | | | | | | |
| Receive | ARS | − | − | − | − | − | − | − |
| Pay | ARS | − | − | − | − | − | − | − |
| Receive | BRL | 20 | − | − | − | − | − | 20 |
| Pay | BRL | (4,179) | (148) | (72) | (25) | (15) | − | (4,439) |
| Receive | CLP | 199 | 105 | 65 | − | − | 421 | 790 |
| Pay | CLP | (450) | (215) | (130) | − | − | (841) | (1,636) |
| Receive | COP | − | − | − | − | − | − | − |
| Pay | COP | (11) | (11) | (309) | (5) | (3) | − | (339) |
| Receive | CZK | − | − | − | − | − | − | − |
| Pay | CZK | (148) | (352) | − | − | − | − | (500) |
| Receive | EUR | 4,623 | 1,238 | 60 | − | − | − | 5,921 |
| Pay | EUR | (2,132) | (3,776) | (1,140) | (1,518) | (598) | (4,449) | (13,613) |
| Receive | GBP | − | − | − | − | − | 899 | 899 |
| Pay | GBP | − | (519) | − | − | − | − | (519) |
| Receive | JPY | 2 | 48 | − | 69 | − | 103 | 222 |
| Pay | JPY | − | − | − | − | − | − | − |
| Receive | MAD | − | − | − | − | − | − | − |
| Pay | MAD | − | − | − | − | − | − | − |
| Receive | MXN | − | − | − | − | − | − | − |
| Pay | MXN | (55) | (55) | (55) | (55) | (55) | (519) | (794) |
| Receive | PEN | − | − | − | − | − | − | − |
| Pay | PEN | (15) | (34) | (15) | (6) | (1) | − | (71) |
| Receive | UFC | − | 138 | − | − | − | 201 | 339 |
| Pay | UFC | − | (67) | − | − | − | (100) | (167) |
| Receive | USD | 3,255 | 4,164 | 1,826 | 1,356 | 699 | 4,385 | 15,685 |
| Pay | USD | (679) | (152) | (80) | − | − | (412) | (1,323) |
| Receive | UDI | 63 | 63 | 63 | 63 | 63 | 604 | 919 |
| Pay | UDI | − | − | − | − | − | − | − |
| Receive | CHF | − | − | − | 208 | − | 312 | 520 |
| Pay | CHF | − | − | − | − | − | − | − |
| TOTAL | | 493 | 427 | 213 | 87 | 90 | 604 | 1,914 |
| | | | | | | | | |
| | | Millions of euros | Millions of euros | 2015 | 2016 | 2017 | 2018 | 2019 | Subsequent years | Total | | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
|
| Forwards | | |
| Currency swaps | | | |
| |
| |
| |
| |
| |
| |
|
| Receive | | ARS | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | | ARS | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | | BRL | 66 |
| — |
| — |
| — |
| — |
| — |
| 66 |
|
| Pay | | BRL | (140 | ) | (79 | ) | — |
| — |
| — |
| — |
| (219 | ) |
| Receive | | CLP | — |
| — |
| — |
| — |
| 326 |
| 94 |
| 420 |
|
| Pay | | CLP | — |
| — |
| (136 | ) | (134 | ) | (652 | ) | (188 | ) | (1,110 | ) |
| Receive | ARS | − | COP | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | ARS | (6) | − | (6) | COP | (42 | ) | (2 | ) | — |
| — |
| — |
| — |
| (44 | ) |
| Receive | BRL | 2,888 | − | 2,888 | CZK | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | BRL | (404) | − | (404) | CZK | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | CLP | 146 | − | 146 | EUR | 80 |
| 74 |
| — |
| — |
| — |
| 64 |
| 218 |
|
| Pay | CLP | (383) | − | (383) | EUR | (2,119 | ) | (1,583 | ) | (3,019 | ) | (3,104 | ) | (313 | ) | (4,952 | ) | (15,090 | ) |
| Receive | COP | 219 | 96 | − | 315 | GBP | — |
| 563 |
| 1,239 |
| — |
| — |
| — |
| 1,802 |
|
| Pay | COP | (741) | (207) | − | (948) | GBP | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | CZK | 265 | − | 265 | JPY | 74 |
| — |
| — |
| — |
| — |
| — |
| 74 |
|
| Pay | CZK | (24) | − | (24) | JPY | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | EUR | 5,469 | − | 5,469 | MAD | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | EUR | (7,037) | − | (7,037) | MAD | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | GBP | 2,194 | − | 2,194 | MXN | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | GBP | (1,682) | − | (1,682) | MXN | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | MXN | 23 | − | 23 | PEN | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | MXN | (713) | − | (713) | PEN | (6 | ) | (1 | ) | — |
| — |
| — |
| — |
| (7 | ) |
| Receive | PEN | 36 | − | 36 | UFC | — |
| — |
| 145 |
| — |
| — |
| 218 |
| 363 |
|
| Pay | PEN | (303) | (1) | − | (304) | UFC | — |
| — |
| — |
| — |
| — |
| (109 | ) | (109 | ) |
| Receive | UFC | − | USD | 1,963 |
| 1,027 |
| 1,612 |
| 3,302 |
| 1,026 |
| 4,525 |
| 13,455 |
|
| Pay | UFC | − | USD | (47 | ) | — |
| — |
| — |
| (417 | ) | — |
| (464 | ) |
| Receive | USD | 3,598 | 217 | − | 3,815 | UDI | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | USD | (3,443) | (108) | − | (3,551) | UDI | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | UYU | 12 | − | 12 | CHF | 214 |
| — |
| 192 |
| — |
| — |
| — |
| 406 |
|
| Pay | UYU | − | CHF | — |
| — |
| — |
| — |
| 128 |
| — |
| 128 |
|
| TOTAL | | 114 | (3) | − | 111 | | 43 |
| (1 | ) | 33 |
| 64 |
| 98 |
| (348 | ) | (111 | ) |
| | | | |
F-122 |
| | | | | | | | | | | | | | | |
| Millions of euros | 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Subsequent years |
| Total |
|
| Forwards | |
| |
| |
| |
| |
| |
| |
|
| Receive | ARS | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | ARS | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | BRL | 8 |
| — |
| — |
| — |
| — |
| — |
| 8 |
|
| Pay | BRL | (748 | ) | — |
| — |
| — |
| — |
| — |
| (748 | ) |
| Receive | CLP | 1 |
| — |
| — |
| — |
| — |
| — |
| 1 |
|
| Pay | CLP | (569 | ) | — |
| — |
| — |
| — |
| — |
| (569 | ) |
| Receive | COP | 3 |
| — |
| — |
| — |
| — |
| — |
| 3 |
|
| Pay | COP | (818 | ) | — |
| — |
| — |
| — |
| — |
| (818 | ) |
| Receive | CZK | 67 |
| — |
| — |
| — |
| — |
| — |
| 67 |
|
| Pay | CZK | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | EUR | 5,533 |
| — |
| — |
| — |
| — |
| — |
| 5,533 |
|
| Pay | EUR | (2,131 | ) | — |
| — |
| — |
| — |
| — |
| (2,131 | ) |
| Receive | GBP | 1,022 |
| — |
| — |
| — |
| — |
| — |
| 1,022 |
|
| Pay | GBP | (3,084 | ) | — |
| — |
| — |
| — |
| — |
| (3,084 | ) |
| Receive | MXN | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | MXN | (352 | ) | — |
| — |
| — |
| — |
| — |
| (352 | ) |
| Receive | PEN | 25 |
| — |
| — |
| — |
| — |
| — |
| 25 |
|
| Pay | PEN | (245 | ) | — |
| — |
| — |
| — |
| — |
| (245 | ) |
| Receive | UFC | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | UFC | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Receive | USD | 2,610 |
| — |
| — |
| — |
| — |
| — |
| 2,610 |
|
| Pay | USD | (1,338 | ) | — |
| — |
| — |
| — |
| — |
| (1,338 | ) |
| Receive | UYU | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Pay | UYU | (19 | ) | — |
| — |
| — |
| — |
| — |
| (19 | ) |
| TOTAL | | (35 | ) | — |
| — |
| — |
| — |
| — |
| (35 | ) |
Appendix V: Interest-bearing debt
The main financing transactions at December 31, 20142017 and 20132016 and their nominal amounts are as follows:
| | | | Outstanding principal balance | | |
| | | | (millions of euros) | | |
| Descriptive name summary | Contractual limit amount (millions) | Currency | 12/31/14 | 12/31/13 | Arrangement date | Maturity date |
| Telefónica, S.A | | | | | | |
| Syndicated loan (7) (*) | 700 | EUR | 700 | 700 | 04/21/2006 | 04/21/2017 |
| Syndicated loan Tranche A2 (1) | - | EUR | - | 2,000 | 07/28/2010 | 07/28/2014 |
| Syndicated loan Tranche A3 (2) | 328 | EUR | 328 | 2,000 | 07/28/2010 | 07/28/2016 |
| Syndicated loan Tranche D2 (4) | - | EUR | - | 923 | 03/02/2012 | 12/14/2015 |
| Bilateral loan on supplies (*) | 905 | USD | 571 | 336 | 02/22/2013 | 01/31/2023 |
| Syndicated loan Tranche B (3) | 3,000 | EUR | - | - | 02/18/2014 | 02/18/2019 |
| Bilateral loan | 2,000 | EUR | 2,000 | - | 06/26/2014 | 06/26/2017 |
| Telefónica Finanzas, S.A. | | | | | | |
| EIB – Mobile financing | 375 | EUR | 375 | 375 | 12/03/2007 | 01/30/2015 |
| Telefónica Europe, B.V. | | | | | | |
| Bilateral loan on supplies (*) | 375 | USD | 309 | 272 | 01/05/2012 | 01/31/2022 |
| Syndicated loan Tranche D1 (5) | - | EUR | - | 801 | 03/02/2012 | 12/14/2015 |
| Bilateral loan on supplies (6) (*) | 844 | USD | 695 | 612 | 08/28/2012 | 06/24/2023 |
| Telefónica Brasil, S.A. | | | | | | |
| BNDES C3 Bilateral loan (*) | 1,972 | BRL | 612 | 638 | 10/14/2011 | 07/15/2019 |
|
| | | | | | | | | |
| | |
| | Outstanding principal balance | | |
| | |
| | (millions of euros) | | |
| Descriptive name summary | Current limit (millions) |
| Currency | 12/31/2017 |
| 12/31/2016 |
| Arrangement date | Maturity date |
| Telefónica, S.A | |
| | |
| |
| | |
| Structured Financing (*) | 153 |
| USD | 128 |
| 190 |
| 05/03/2011 | 07/30/2021 |
| Structured Financing (*) | 551 |
| USD | 460 |
| 635 |
| 02/22/2013 | 01/31/2023 |
| Structured Financing (*) | 446 |
| USD | 371 |
| 505 |
| 08/01/2013 | 10/31/2023 |
| Bilateral (1) | 1,500 |
| EUR | 1,500 |
| 1,500 |
| 06/26/2014 | 06/26/2019 |
| Syndicated facility | 2,500 |
| EUR | — |
| 550 |
| 02/19/2015 | 02/19/2022 |
| Bilateral (2) | — |
| EUR | — |
| 200 |
| 06/30/2015 | 12/29/2017 |
| Structured Financing (*) | 679 |
| USD | 566 |
| 324 |
| 12/11/2015 | 03/11/2026 |
| Structured Financing (*) | 469 |
| EUR | 423 |
| 240 |
| 12/11/2015 | 03/11/2026 |
| Bilateral loan (3) | — |
| EUR | — |
| 100 |
| 02/23/2016 | 02/23/2017 |
| Bilateral loan | 100 |
| EUR | 100 |
| 100 |
| 02/23/2016 | 02/23/2021 |
| Loan | 300 |
| EUR | 300 |
| 300 |
| 03/08/2016 | 03/08/2021 |
| Bilateral loan (4) | 150 |
| EUR | 150 |
| 300 |
| 10/24/2016 | 03/19/2019 |
| Credit | 380 |
| EUR | 292 |
| — |
| 12/27/2002 | 12/27/2020 |
| Credit | 200 |
| EUR | 167 |
| — |
| 03/27/2013 | 03/14/2020 |
| Telefónica Germany GmbH & Co. OHG |
|
|
|
|
|
|
|
|
|
| Syndicated facility (5) | 750 |
| EUR | — |
| 50 |
| 03/22/2016 | 03/22/2022 |
| EIB Financing | — |
| EUR | 450 |
| 250 |
| 06/13/2016 | 06/13/2025 |
| Telefónica Europe, B.V. |
|
|
|
|
|
|
|
|
|
| Structured Financing (*) | 750 |
| EUR | 750 |
| — |
| 11/28/2016 | 11/28/2024 |
(1) 1,400 million euros under Tranche A2 were refinanced with forward start facilities (Tranche A2A and A2B) dated 02/22/2013 (available from 07/28/2014). During 2014: i) 1,400 million euros were canceled of the forward start facilities (Tranche A2A and A2B); ii) a repayment for 713 million euros of the Tranche A2 was made at maturity; and iii) an early repayment for 1,287 million euros of Tranche A2 was made.
(2) During 2014 an early repayment was made for 1,672 million euros of the syndicated loan (Tranche A3).
(3) On 02/18/14 a syndicated credit revolving facility for 3,000 million euros was signed, entering into effect on 02/25/14, canceling the syndicated credit facility dated on 07/28/10 scheduled to mature originally on 07/28/15.
(4) On 02/07/14 an early repayment was made for 923 million euros of the syndicated loan (Tranche D2).
(5) On 02/07/14 an early repayment was made for 801 million euros of the syndicated loan (Tranche D1).
(6) On 08/28/14 356 million US dollars were canceled (approximately 293 million euros) of the limit available of its bilateral loan on supplies.
(7) 350 million euros are scheduled to mature on 04/21/15.
(*) Facility with amortization schedule.
|
(1) On January 17, 2017 an amendment was made to the bilateral loan, with an outstanding amount of 1,500 million euros, split into two tranches with a new amortization schedule: tranche A for 500 million euros maturing on June 26, 2017 and tranche B for 1,000 million euros maturing on June 26, 2019. Later, on February 17, 2017 a new amendment was signed extending the maturity of the tranche A for 500 million euros up to June 26, 2019.(2) On December 29, 2017 an early repayment was made for the 200 million euros bilateral loan originally scheduled to mature in 2020.
(3) On February 23, 2017 an early cancellation was made for the bilateral loan originally scheduled to mature in 2019.
(4) On December 19, 2017 an early repayment was made for 150 million euros of the 300 million euros bilateral loan originally scheduled to mature in 2019.
(5) On February 17, 2017 a twelve-month extension was signed for the 750 million euros syndicated facility originally scheduled to mature in 2021.
(*) Facility with amortization schedule, showing in the column "Current limit" the undrawn amount.
Appendix VI: Main companies comprising the Telefónica Group
The table below lists the main companies comprising the Telefónica Group at December 31, 2014 and the main investments consolidated using the equity method.
Included for each company are the company name, corporate purpose, country, functional currency, share capital (in millions of functional currency units), the Telefónica Group’s effective shareholding and the company or companies through which the Group holds a stake.
Parent Company:
Telefónica, S.A.
| Name and corporate purpose | | Country | Currency | Capital | %Telefónica Group | | Holding Company |
| Telefónica Spain | | | | | | | |
Telefónica de España, S.A.U. Telecommunications service provider | | Spain | EUR | 1,024 | 100% | | Telefónica, S.A. |
Telefónica Móviles España, S.A.U. Wireless communications services provider | | Spain | EUR | 423 | 100% | | Telefónica, S.A. |
Acens Technologies, S.L. Holding housing and telecommunications solutions Service provider | | Spain | EUR | 23 | 100% | | Telefónica de España, S.A.U. |
| Teleinformática y Comunicaciones, S.A.U. (Telyco) | | | | | | | |
Promotion, marketing and distribution of telephone and telematic equipment and services | | Spain | EUR | 8 | 100% | | Telefónica de España, S.A.U. |
| Telefónica Soluciones de Informática y Com. de España, S.A.U. | | | | | | | |
| Telecommunications systems, networks and infrastructure engineering | | Spain | EUR | 2 | 100% | | Telefónica de España, S.A.U. |
Iberbanda, S.A. Broadband telecommunications operator | | Spain | EUR | 2 | 100% | | Telefónica de España, S.A.U. |
Telefónica Telecomunicaciones Públicas, S.A.U. Installation of public telephones | | Spain | EUR | 1 | 100% | | Telefónica de España, S.A.U. |
Telefónica Soluciones de Outsourcing, S.A. Promotion and networks management | | Spain | EUR | 1 | 100% | | Telefónica Soluc. De Informática y Com. de España, S.A.U. |
Telefónica Servicios Integrales de Distribución, S.A.U. Logistic service provider | | Spain | EUR | 2 | 100% | | Telefónica de España, S.A.U. |
Tuenti Technologies, S.L. Telecommunications service provider | | Spain | EUR | - | 100% | | Telefónica Móviles España, S.A.U. |
| Telefónica United Kingdom | | | | | | | |
| Telefónica UK Ltd. | | | | | | | O2 Networks Ltd. (80.00%) |
| Wireless communications | | UK | GBP | 10 | 100% | | O2 Cedar Ltd. (20.00%) |
Giffgaff Ltd. Wireless communications services provider | | UK | GBP | - | 100% | | Telefónica UK Ltd. |
O2 Networks Ltd. Holding company | | UK | GBP | 10 | 100% | | O2 Holding Ltd. |
Cornerstone Telecomunications Network sharing | | UK | GBP | - | 50.00% | | O2 Cedar Ltd. |
| Telefónica Germany | | | | | | | |
Telefónica Deutschland Holding, A.G. Holding company | | Germany | EUR | 2,975 | 62.37% | | Telefónica Germany Holdings Limited |
Name and corporate purpose | | Country | Currency | Capital | %Telefónica
Group
| | Holding Company |
Telefónica Germany GmbH & Co. OHG Wireless communications services operator | | Germany | EUR | 51 | 62.37% | | Telefónica Deutschland Holding, A.G.(62.36%) Telefónica Germany Management GmbH (0.01%) |
E-Plus Mobilfunk GmbH &Co. KG, GmbG Operadora de servicios de comunicaciones móviles | | Germany | EUR | 1 | 62.37% | | Telefónica Germany GmbH & Co. OHG |
| Telefónica Brazil | | | | | | | |
| | | | | | | | Telefónica Internacional, S.A.U. (29.43%) |
| | | | | | | | Telefónica, S.A. (24.74%) |
Telefónica Brasil, S.A. Wireline telephony operator | | Brazil | BRL | 37,798 | 73.96% | | Sao Paulo Telecomunicaçoes Participaçoes, Ltda. (19.73%) Telefónica Chile, S.A. (0.06%) |
| Telefónica Hispanoamérica | | | | | | | |
Compañía Internacional de Telecomunicaciones, S.A. Holding company | | Argentina | ARS | 562 | 100% | | Telefónica Holding de Argentina, S.A. (47.22%) Telefónica Móviles Argentina Holding, S.A. (42.77%) Telefónica International Holding, B.V. (10.01%) |
| | | | | | | | Compañía Internacional de Telecomunicaciones, S.A. (51.49%) |
| | | | | | | | Telefónica Móviles Argentina, S.A. (29.56%) |
| | | | | | | | Telefónica Internacional, S.A. (16.20%) |
| | | | | | | | Telefónica, S.A. (1.80%) |
Telefónica de Argentina, S.A. Telecommunications service provider | | Argentina | ARS | 624 | 100% | | Telefónica International Holding, B.V. (0.95%) |
Telefónica Móviles Argentina Holding, S.A. Holding company | | Argentina | ARS | 1,198 | 100% | | Telefónica, S.A. (75%) Telefónica Internacional, S.A.U. (25%) |
| | | | | | | | Latin America Cellular Holdings, B.V. (97.04%) |
Telefónica Venezolana, C.A. Wireless communications operator | | Venezuela | VEF | 4,515 | 100% | | Comtel Comunicaciones Telefónica, S.A. (2.87%) Telefónica, S.A. (0.09%) |
Telefónica Móviles Chile, S.A. Wireless communications services operator | | Chile | CLP | 589,403 | 99.99% | | Inversiones Telefónica Móviles Holding Limitada |
| Telefónica Chile, S.A. | | | | | | | |
| Local and international long distance telephony services provider | | Chile | CLP | 578,078 | 97.90% | | Inversiones Telefónica Móviles Holding Limitada |
| Telefónica del Perú, S.A.A. | | | | | | | Telefónica Latinoamérica Holding, S.L. (50.22%) |
| Local, domestic and international long distance telephone service provider | | Peru | PEN | 2,954 | 98.57% | | Latin American Cellular Holdings, S.L. (48.35%) |
| Colombia Telecomunicaciones, S.A. ESP | | | | | | | Telefónica Internacional, S.A.U. (32.54%) Olympic, Ltda. (18.95%) |
| Communications services operator | | Colombia | COP | 1,454,871 | 70% | | Telefónica, S.A. (18.51%) |
Telefónica Móviles México, S.A. de C.V. Holding company | | Mexico | MXN | 72,425 | 100% | | Telefónica, S.A. |
Pegaso Comunicaciones y Sistemas, S.A. de C.V. Wireless telephone and communications services | | Mexico | MXN | 28,686 | 100% | | Telefónica Móviles México, S.A. de C.V. |
Telefónica Móviles del Uruguay, S.A. Wireless communications and services operator | | Uruguay | UYU | 1,107 | 100% | | Telefónica Latinoamérica Holding, S.L. |
Name and corporate purpose | | Country | Currency | Capital | %Telefónica
Group
| | Holding Company |
Telefónica Móviles Panamá, S.A. Wireless telephony services | | Panama | USD | 45 | 60% | | Telefónica Centroamérica Inversiones S.L. |
Telefónica Móviles El Salvador, S.A. de C.V. Provision of wireless and international long distance communications services | | El Salvador | USD | 187 | 60% | | TES Holding, S.A. de C.V. |
Telefónica Móviles Guatemala, S.A. Wireless, wireline and radio paging communications services provider | | Guatemala | GTQ | 2,701 | 60% | | TCG Holdings, S.A. (39.59%) Guatemala Cellular Holdings, B.V. (20.41%) |
Telefonía Celular de Nicaragua, S.A. Wireless telephony services | | Nicaragua | NIO | 247 | 60% | | Telefónica Centroamérica Inversiones S.L. |
Otecel, S.A. Wireless communications services provider | | Ecuador | USD | 183 | 100% | | Ecuador Cellular Holdings, B.V. |
Telefónica de Costa Rica TC, S.A. Wireless communications | | Costa Rica | CRC | 183,407 | 100% | | Telefónica, S.A. |
Telefónica Holding Atticus, B.V. Holding company | | Netherlands | EUR | - | 100% | | Telefónica Internacional, S.A.U. |
| Other Companies | | | | | | | |
Telefónica Europe plc Holding company | | UK | GBP | 9 | 100% | | Telefónica, S.A. |
MmO2 plc Holding company | | UK | GBP | 20 | 99.99% | | Telefónica Europe plc |
O2 Holding Ltd Holding company | | UK | GBP | 12 | 100% | | MmO2 plc |
O2 International Holdings Ltd. Holding company | | UK | GBP | - | 100% | | O2 Holding Ltd. |
Telefónica Germany Holdings Ltd. Holding company | | UK | EUR | - | 100% | | O2 Europe Ltd. |
O2 (Europe) Ltd. Holding company | | UK | EUR | 1,239 | 100% | | Telefónica, S.A. |
Telefónica Internacional, S.A.U. Telco Investment abroad | | Spain | EUR | 2,839 | 100% | | Telefónica, S.A. |
Telefónica International Holding, B.V. Holding company | | Netherlands | EUR | - | 100% | | Telefónica Internacional, S.A.U. |
| | | | | | | | Telefónica, S.A. (94.96%) |
Telefónica Latinoamérica Holding, S.L. Holding company | | Spain | EUR | 198 | 100% | | Telefónica Internacional, S.A.U. (5.04%) |
| | | | | | | | Telefónica, S.A. (50.00%) |
Telefónica América, S.A. Holding Company | | Spain | EUR | - | 100% | | Telefónica Internacional, S.A.U. (50.00%) |
Latin American Cellular Holdings, S.L. Holding Company | | Spain | EUR | - | 100% | | Telefónica Latinoamérica Holding, S.L. |
Telefónica Datacorp, S.A.U Holding Company | | Spain | EUR | 700 | 100% | | Telefónica, S.A. |
| | | | | | | | Telefónica, S.A. (92.51%) |
Telefónica International Wholesale Services, S.L. International services provider | | Spain | EUR | 230 | 100% | | Telefónica Datacorp, S.A.U. (7.49%) |
Telefónica International Wholesale Services America, S.A.U. Provision of high bandwidth communications services | | Uruguay | USD | 591 | 100% | | Telefónica, S.A. (74.36%) Telefónica International Wholesale Services, S.L. (25.64%) |
| Telefónica International Wholesale Services USA, Inc. | | | | | | | |
| Provision of high bandwidth communications services | | US | USD | 58 | 100% | | T. International Wholesale Services America, S.A. |
Telefónica Digital España, S.L.
Developer Telco Services Holding Company
| | Spain | EUR | 13 | 100% | | Telefónica Digital Holdings,
S.L.
|
Name and corporate purpose | | Country | Currency | Capital | %Telefónica
Group
| | Holding Company |
Wayra Investigación y Desarrollo, S.L | | | | | | | |
| Talent identification and development in ICT. | | Spain | EUR | 2 | 100% | | Telefónica Digital Holdings, S.L. |
Telefónica Digital Inc. IP telephony platform | | US | USD | - | 100% | | Telefónica Europe plc |
Wayra Chile Tecnología e Innovación Limitada Technological innovation based business project development | | Chile | CLP | 20,976 | 100% | | Wayra Investigacion y Desarrollo, S.L. |
Wayra Brasil Aceleradora de Projetos Ltda. Technological innovation based business project development | | Brazil | BRL | 18 | 100% | | Wayra Investigación y Desarrollo S.A.U. |
WY Telecom, S.A. de C.V. Talent identification and development in ICT | | Mexico | MXN | 71 | 100% | | Wayra Investigacion y Desarrollo, S.L. |
Wayra Argentina, S.A. Talent identification and development in ICT | | Argentina | ARS | 30 | 100% | | Telefónica Móviles Argentina, S.A. (90%) Telefónica Móviles Argentina Holding, B.V. (10%) |
Wayra Colombia, S.A.S. Technological innovation based business project development | | Colombia | COP | 800 | 100% | | Wayra Investigacion y Desarrollo, S.L. |
Proyecto Wayra, C.A. Commercial, industrial and mercantile activities | | Venezuela | VEF | 28 | 100% | | Telefónica Venezolana, C.A. |
Wayra Perú Aceleradora de Proyectos, S.A.C. Technological innovation based business project development | | Peru | PEN | 11 | 100% | | Wayra Investigacion y Desarrollo, S.L. |
Wayra UK Ltd. Technological innovation based business project development | | UK | GBP | 7 | 100% | | Wayra Investigacion y Desarrollo, S.L. |
Wayra Ireland Ltd. Technological innovation based business project development | | Ireland | EUR | 4 | 100% | | Wayra Investigacion y Desarrollo, S.L. |
Terra Networks Brasil, S.A. ISP, portal and real-time financial information services | | Brazil | BRL | 1,046 | 100% | | Sao PauloTelecomunicaçoes Participaçoes, Ltda. |
Terra Networks México, S.A. de C.V. ISP, portal and real-time financial information services | | Mexico | MXN | 305 | 99.99% | | Terra Networks Mexico Holding, S.A. de C.V. |
Terra Networks Perú, S.A. ISP and portal | | Peru | PEN | 10 | 99.99% | | Telefónica Internacional, S.A.U. |
Terra Networks Argentina, S.A. ISP and portal | | Argentina | ARS | 7 | 100% | | Telefónica Internacional, S.A.U. |
Axonix Ltd. Digital and mobile advertising | | UK | USD | - | 30% | | Telefónica Digital Ltd. |
Eyeos, S.L. Cloud Computing | | Spain | EUR | - | 100% | | Telefónica Digital España, S.L. |
Telfisa Global, B.V. Integrated cash management, consulting and financial support for Group companies | | Netherlands | EUR | - | 100% | | Telefónica, S.A. |
Telefónica Global Activities Holding, B.V. Holding Company | | Netherlands | EUR | - | 100% | | Telfisa Global, B.V. |
Telefónica Global Services, GmbH Purchasing services | | Germany | EUR | - | 100% | | Group 3G UMTS Holding GmbH, B.V. |
Telefónica Global Roaming, GmbH Optimization of network traffic | | Germany | EUR | - | 100% | | Telefónica Global Services, GmbH |
Group 3G UMTS Holding, GmbH Holding Company | | Germany | EUR | 250 | 100% | | Telefónica Global Activities Holdings, B.V. |
Telefónica Compras Electrónicas, S.L. Development and provision of information society services | | Spain | EUR | - | 100% | | Telefónica Global Services, GmbH |
Telefónica de Contenidos, S.A.U. Organization and operation of multimedia service-related business | | Spain | EUR | 226 | 100% | | Telefónica, S.A. |
Name and corporate purpose | | Country | Currency | Capital | %Telefónica
Group
| | Holding Company |
Telefónica Studios, S.L. Audiovisual Productions | | Spain | EUR | - | 100% | | Telefónica de Contenidos, S.A.U. |
Televisión Federal S.A.- TELEFE Provision and operation TV and radio broadcasting-services | | Argentina | ARS | 135 | 100% | | Atlántida Comunicaciones, S.A. (79.02%) Enfisur, S.A. (20.98%) |
| | | | | | | | Telefónica Media Argentina, S.A. (95.39%) |
Atlántida Comunicaciones, S.A. Participation in public media | | Argentina | ARS | 33 | 100% | | Telefónica Holding de Argentina, S.A. (4.61%) |
Telefónica Servicios Audiovisuales, S.A.U. Provision of all type of audiovisual telecommunications services | | Spain | EUR | 6 | 100% | | Telefónica de Contenidos, S.A.U. |
Telefónica On The Spot Services, S.A.U. Provision of telemarketing services | | Spain | EUR | - | 100% | | Telefónica de Contenidos, S.A.U. |
Telefónica Broadcast Services, S.L.U. DSNG-based transmission and operation services | | Spain | EUR | - | 100% | | Telefónica Servicios Audiovisuales, S.A.U. |
Telefónica Learning Services, S.L. Vertical e learning portal | | Spain | EUR | 1 | 100% | | Telefónica Digital España, S.L. |
Compañía Inversiones y Teleservicios, S.A.U. Holding company | | Spain | EUR | 24 | 100% | | Telefónica, S.A. |
Vocem 2013 Teleservicios, S.A. Call center services | | Venezuela | VEF | 188 | 100% | | Compañía Inversiones y Teleservicios, S.A.U. |
Telfin Ireland Ltd. Intragroup financing | | Ireland | EUR | - | 100% | | Telefónica, S.A. |
Telefónica Ingeniería de Seguridad, S.A.U. Security services and systems | | Spain | EUR | 12 | 100% | | Telefónica, S.A. |
| Telefónica Engenharia de Segurança do Brasil Ltda. | | | | | | | Telefónica Ingeniería de |
| Security services and systems | | Brazil | BRL | 88 | 99.99% | | Seguridad, S.A. |
Telefónica Capital, S.A.U. Finance company | | Spain | EUR | 7 | 100% | | Telefónica, S.A. |
Lotca Servicios Integrales, S.L. Aircraft ownership and operation | | Spain | EUR | 17 | 100% | | Telefónica, S.A. |
Fonditel Pensiones, Entidad Gestora de Fondos de Pensiones, S.A. Administration of pension funds | | Spain | EUR | 16 | 70.00% | | Telefónica Capital, S.A. |
| Fonditel Gestión, Soc. Gestora de Instituciones de Inversión Colectiva, S.A. | | | | | | | |
| Administration and representation of collective investment schemes | | Spain | EUR | 2 | 100% | | Telefónica Capital, S.A. |
| Telefónica Investigación y Desarrollo, S.A.U. | | | | | | | |
| Telecommunications research activities and projects | | Spain | EUR | 6 | 100% | | Telefónica, S.A. |
Media Networks Latin America S.A.C. Telecommunications research activities and projects | | Peru | PEN | 111 | 100% | | Telefónica Internacional, S.A. |
| Media Networks México Soluciones Digitales S.A. | | | | | | | |
| Telecommunications research activities and projects | | Mexico | MXN | 3 | 100% | | Media Networks Latin America S.A.C. |
Telefónica Luxembourg Holding, S.à.r.L. Holding company | | Luxembourg | EUR | 3 | 100% | | Telefónica, S.A. |
| Casiopea Reaseguradora, S.A. | | | | | | | Telefónica Luxembourg |
| Reinsurance | | Luxembourg | EUR | 4 | 100% | | Holding, S.à.r.L. |
Telefónica Insurance, S.A. Direct insurance transactions | | Luxembourg | EUR | 8 | 100% | | Telefónica Luxembourg Holding, S.à.r.L. |
Name and corporate purpose | | Country | Currency | Capital | %Telefónica
Group
| | Holding Company |
Seguros de Vida y Pensiones Antares, S.A. Life insurance, pensions and health insurance | | Spain | EUR | 51 | 100% | | Telefónica, S.A. |
| Telefónica Finanzas, S.A.U. (TELFISA) | | | | | | | |
| Integrated cash management, consulting and financial support for Group companies | | Spain | EUR | 3 | 100% | | Telefónica, S.A. |
Pléyade Peninsular, Correduría de Seguros y Reaseguros del Grupo Telefónica, S.A. Distribution, promotion or preparation of insurance contracts | | Spain | EUR | - | 100% | | Telefónica Finanzas, S.A.U. (TELFISA) (83.33%) Telefónica, S.A. (16.67%) |
| Fisatel Mexico, S.A. de C.V. | | | | | | | |
| Integrated cash mangement, consulting and financial support for Group companies | | Mexico | MXN | 3,505 | 100% | | Telefónica, S.A. |
| Telefónica Europe, B.V. | | | | | | | |
| Fund raising in capital markets | | Netherlands | EUR | - | 100% | | Telefónica, S.A. |
Telefónica Emisiones, S.A.U. Financial debt instrument issuer | | Spain | EUR | - | 100% | | Telefónica, S.A. |
Telefónica Global Technology, S.A.U. Global management and operation of IT systems | | Spain | EUR | 16 | 100% | | Telefónica, S.A. |
Aliança Atlântica Holding, B.V. Holding company | | Netherlands | EUR | 40 | 100% | | Telefónica, S.A.(50%) Telefónica Brasil, S.A. (50%) |
Telefónica Gestión de Servicios Compartidos España, S.A. Management and administrative services rendered | | Spain | EUR | 8 | 100% | | Telefónica, S.A. |
| Telefónica Gestión de Servicios Compartidos Argentina, S.A. | | | | | | | Telefónica Gestión de Servicios Compartidos |
| Management and administrative services rendered | | Argentina | ARS | - | 99.99% | | España, S.A. (95%) Telefónica, S.A. (4.99%) |
| Telefónica Gestión de Servicios Compartidos de Chile, S.A. | | | | | | | |
| Management and administrative services rendered | | Chile | CLP | 1,019 | 99.99% | | Telefónica Chile, S.A. |
Telefónica Gestión de Servicios Compartidos Perú, S.A.C. Management and administrative services rendered | | Peru | PEN | 1 | 100% | | T. Gestión de Servicios Compartidos España, S.A. (99.48%) Telefónica del Perú, S.A.A.(0.52%) |
Telefónica Transportes e Logística Ltda. Logistics services rendered | | Brazil | BRL | 26 | 99.99% | | Telefónica Gestión de Servicios Compartidos España, S.A. |
Telefónica Serviços Empresariais do BRASIL, Ltda. Management and administrative services rendered | | Brazil | BRL | 12 | 99.99% | | Telefónica Gestión de Servicios Compartidos España, S.A. |
Telefónica Gestión de Servicios Compartidos México, S.A. de C.V. Management and administrative services rendered | | Mexico | MXN | 50 | 100% | | Telefónica Gestión de Servicios Compartidos España, S.A. |
TGestiona Logística, S.A.C Logistics | | Peru | PEN | 15 | 100% | | Telefónica Gestión de Servicios Compartidos España, S.A. (99.48%) Telefónica del Perú, S.A.A. (0.51%) T.Gestión Serv. Comp.Perú(0.01%) |
Telefónica Gestión Integral de Edificios y Servicios S.L.
Management and administrative services rendered
| | Spain | EUR | - | 100% | | Telefónica Gestión de Servicios Compartidos España, S.A. |
Tempotel, Empresa de Trabajo Temporal, S.A.
Temporary employment agency
| | Spain | EUR | - | 100% | | Telefónica Gestión de Servicios Compartidos España, S.A. |
Companies held for sale | | | | | | | |
| | | | | | | |
Yourfone, GmbH
Services Provider
| | Germany | EUR | - | 62.37% | | E-Plus Mobilfunk
GmbH &Co. KG
|
Companies accounted for using the equity method | | | | | | | |
Tesco Mobile Ltd.
Wireless telephony services
| | UK | GBP | - | 50.00% | | O2 Communication Ltd. |
Name and corporate purpose | | Country | Currency | Capital | %Telefónica
Group
| | Holding Company |
| Telefónica Factoring España, S.A. | | | | | | | |
| Factoring services provider | | Spain | EUR | 5 | 50.00% | | Telefónica, S.A. |
| | | | | | | | Telefónica, S.A. (40.00%) |
Telefónica Factoring Do Brasil, Ltd. Factoring services provider | | Brazil | BRL | 5 | 50.00% | | Telefónica Factoring España, S.A. (10%) |
Telefónica Factoring Mexico, S.A. de C.V. SOFOM ENR Factoring services provider | | Mexico | MXN | 33 | 50.00% | | Telefónica, S.A. (40.5%) Telefónica Factoring España, S.A. (9.5%) |
Telefónica Factoring Perú, S.A.C. Factoring services provider | | Peru | PEN | 6 | 50.00% | | Telefónica Factoring España, S.A. (9.5%) |
Telefónica Factoring Colombia, S.A. Factoring services provider | | Colombia | COP | 4,000 | 50.00% | | Telefónica, S.A. (40.5%) Telefónica Factoring España, S.A. (9.50%) |
| DTS Distribuidora de Televisión Digital, S.A. | | | | | | | |
| Broacasting satellite TV signal transmission and linkage services | | Spain | EUR | 126 | 44.00% | | Telefónica de Contenidos, S.A.U. |
Telefónica Consumer Finance, Establecimiento Financiero de Crédito, S.A. Specialised credit institution | | Spain | EUR | 5 | 50% | | Telefónica, S.A. |
Healthcomunity, S.L. Internet supplier of medical goods and services | | Spain | EUR | - | 49% | | Telefónica Digital España, S.L. |
Appendix VII: Key regulatory issues and concessions and licenses held by the Telefónica Group
Regulations
As a digital telecommunications operator, the Telefónica Group is subject to sector-specific telecommunications regulations, general competition law and a variety of other regulations, including privacy and security, which can have a direct and material effect on the Group’s business areas. The extent to which regulations apply to the Telefónica Group depends largely on the nature of ourits activities in a particular country, with traditional fixed telephony services and fixed broadband usually subject to stricter regulations.
In order to provide services and operate its networks and to use spectrum, the Telefónica Group must obtain general authorizations, concessions and/or licenses from the pertinent authorities in each country in which the Group operates (hereinafter referred to as the national regulatory authority,authorities or NRAs). The Group is also required to obtain radio frequency licenses for its mobile operations.
In thisThis section it is describeddescribes the legislative framework and the recent legislative key developments in the most relevant countries and regions in which the Group has significant interests. Many of the legislative changes and the adoption of regulatory measures by sectorialsector-specific regulators which are described in this section are in the approval process of being adopted and, therefore, have not yet concluded.
Electronic Communication Regulation in the European Union
TheOn September 14, 2016 the European Union’s legalCommission (EC) proposed a new framework for electronic communications services was developed with(the European Electronic Communication Code), which will overhaul the aimexisting one, in order to take into account changes in markets, trends and technologies; all of promoting competition and improvingwhich have significantly changed since 2009 when the harmonized functioning of the European market for electronic communications networks and services. The European Union’s legal framework was last modifiedamended. The EC proposal is currently under a legislative process in 2009,the Parliament (EP), the Council and the EC that is expected to conclude with the adoption of the Code in responsethe second quarter of 2018.
Its provisions include measures to marketstimulate investment on very high capacity network (VHCN), new rules on spectrum (to improve investment certainty, coordination and technologicalharmonization within Europe) and changes into regulation on services, introducing more level playing field between telecom operators and new over-the-top-players (OTTs), as well as a to modernize Universal Service. However, the industry.
Rules promulgated pursuantlegislative work underway risks to worsen the European Union’s Legal framework define user’s rightsEC proposal, watering down pro-investment measures and focusadding revenue-depressing measures on accesstop (e.g.: regulation of intra-EU calls). Once approved, the Code will have to networks, interconnection, privacy, data security, and protection and preservation of universal access, among other things. Recent EU measures have supplemented the EU framework with regulations focused on relevant markets international roaming, spectrum, next generation fixed networks and call termination rates for fixed and mobile networks.
be transposed into national legislations.
In each EU Member State a national regulatory authority, or NRAs,NRA is responsible for enforcing national telecommunications laws incorporating the EU framework. NRAs are subject to the supervision of the European Commission, which formally and informally influences their decisions in order to ensure harmonized application of the EU framework throughout the European Union. In particular, the European Commission has identified certain markets (relevant markets) that are susceptible of ex-ante regulation. These markets have to be analyzed by NRAs in order to see whether there are participants with significant market power (SMP). In these instances, NRAs are instructed to impose at least one obligation relating to price control, transparency, non-discrimination, accounting separation or access obligations on market participants with SMP. Companies may challenge the decisions of their national regulatory authoritiesNRAs before their domestic courts. Such legal proceedings may lead to a decision by the European Court of Justice or ECJ, which is the ultimate authority on the correct application of EU legislation.
EU competition law
The European Union’s competition rules have the force of law in all EU Member States and are, therefore applicable to the Telefónica Group’s operations in those countries.
The Treaty for the functioning of Romethe EU (TFEU) prohibits "concerted practices"“concerted practices” and all agreements between entities that may affect trade between Member States and which restrict, or are intended to restrict, competition within the internal market. The TreatyTFEU also prohibits any abuse of a dominant competitive position within the common market of the EU, or any substantial part of it, that may affect trade between Member States.
The EU Merger Regulation requires that all mergers, acquisitions and joint ventures involving participants meeting certain turnover thresholds be submitted to the EU CommissionEC for review, rather than to the national competition authorities. Under the amended EU Merger Regulation, market concentrations will be prohibited if they significantly impede effective competition in the EU common market. The European Commission and the office of the European Competition Commissioner areEC is granted the authority to apply the EU competition framework.
Similar competition rules are set forth in each EU Member State, with the corresponding national competition authorities overseeing compliance with these regulations. All the European countries in which the Telefónica Group operates and referred to below are Member States of the European Union.
Recent developments
Currently, the regulatory debate in the European Union is basically focused on the completion of the European Digital Single Market with a special attention on the harmonization of regulatory conditions across the EU, in particular about spectrum, the roll-out of ultra-high speed networks, the elimination of intra-EU roaming charges and net neutrality. All issues particularly important for the development of the Telecom Single Market (TSM) Package and the new European digitalDigital Single Market (DSM) Strategy.
Telecom Single Market
EU Regulation 2015/2120 of the EP and of the Council of November 25, 2015, lays down measures basically concerning open internet access (Net Neutrality) and roaming on public mobile communications networks within the Union.
Roaming: Since June 15, 2017, operators have not been allowed to charge roaming users within the EU additional fees to their domestic prices for roaming calls, SMS and data services. However, in some circumstances, operators may still apply consumption limits and additional surcharge under a "fair use policy" or additional surcharges under the sustainability exemption. The regulation also limits any surcharge applied for receiving regulated roaming calls to the weighted average of maximum mobile termination rates across the European Union. On December 13, 2017, the fees were set at 0.0091€ per minute. The implementation of these measures could lead to an increase in both wholesale and retail traffic, the final impact of which may be assessed over the coming months, once the different traffic flows have stabilized.
Additionally, in June 2017, wholesale roaming caps were approved by the EP and the maximum wholesale caps, applicable since June 15, 2017 have been set at the following limits:
0.01€/SMS;
0.032€/minute;
data services marketsglide path: 7.7€/GB (June – December 2017); 6€/GB (2018); 4.5€/GB (2019); 3.5€/GB (2020); 3€/GB (2021) and 2.5€/GB (2022).
Net Neutrality: Under the principle of network neutrality applicable to Internet access services area, network operators are not permitted to establish technical or commercial restrictions regarding the terminals that can be connected or the services, or applications and contents that can be accessed or distributed through the Internet by the end user. It also refers to the non-discriminatory behavior (e.g. non-anticompetitive) to be adopted by operators regarding the different types of Internet traffic circulating through their networks.
On August 30, 2016, the European Regulatory Authority ("BEREC") issued non-binding guidelines to the NRAs to monitor the application of the so-called "net neutrality and roaming Regulation" (EU Regulation 2015/2120). This guidance may directly impact Internet access service commercial practices (for example, some zero rating offers) and it may limit network management practices and increase transparency requirements on the Internet access services.
Digital Single Market
During 2016 and 2017 the EC issued many initiatives within the policy known as Digital Single Market which was adopted on May 6, 2015.
Among the most relevant initiatives we can find the following:
Package of measures to boost the Connectivity in the Single Digital Market - towards the European Gigabit Society.
Network and Information Society.Security:
This effort was started by the European Commission’s September 2013 adoption Directive 2016/1148 of the “Connected Continent” RegulationEP and of the Council of July 6, 2016 concerning measures for a high common level of security of network and information systems across the Union entered into force on August 9, 2016. Member States have 21 months to transpose this Directive into their national laws and 6 additional months to identify operators of essential services (traditional critical infrastructures). According to the Directive, the providers of essential facilities are obliged to take appropriate security measures and report incidents to the national authorities.
On May 25, 2016 the EC launched a proposal package, which covers the above-mentioned issues and is under discussion. The outcome of this process is still uncertain.
Of special importance tofor a revised Directive on the provision of digitalaudiovisual media services. The proposal includes some specific obligations for video sharing platforms related with minor’s access to harmful content and those to protect citizens from hate speech and violence. Regarding the promotion of European productions, the rules have increased the minimum levels reserved to certain contents so that video-sharing platforms must reserve at least 20% of European productions to on-demand services. Moreover, Member States may impose financial contributions (direct investments or levies allocated to national funds) to on-demand services this package covers Net Neutrality focusing mainlyestablished in a different Member State but targeting national audiences.
On June 14, 2017, EU Regulation 2017/1128 of the EP and of the Council on the prohibitioncross-border portability of blocking, throttlingonline content services was adopted. It will enter into force on July 20, 2018 and non-discrimination of Internet traffic (except for a number of justified objective reasons), as well as on the transparency of retail broadband offers. The intention isseeks to ensure that userssubscribers to online content services provided in their Member States of residence are well informed about the traffic management practices of operators, so they can take this information into accountable to access these services and use them when they chooseare temporarily in other Member State which is not their fixed or mobile broadband offer. AgainMember State of residence.
The Geo-Blocking Regulation proposed by the outcome of this discussion is open.
Also,EC in May 2016 as part of this effort, the Digital Single Market tries to limit geographically-based restrictions which undermine online shopping and cross-border sales. In November 2017, the three European CommissionInstitutions agreed on a Proposal for a Regulation to end unjustified geoblocking, a proposal which has to be confirmed by the plenaries of the EP and the Council of the EU. The final text has reached an agreement on some of the controversial points; in particular, copyright protected non-audiovisual content ended up being left out of the scope of the Regulation. This outcome is a positive result for rights holders and for pay TV services industries. The Regulation will enter into force nine months after its publication and two years thereafter the text will be revised by the EC to evaluate whether or not copyright protected content will be included under the scope.
Copyright Package: The EC presented a legislative package proposal in September 2016. Regarding the Cable and Satellite Proposal Regulation the proposal contains two main rules:
to allow broadcasters that offer across borders online services that are ancillary to their broadcasting (catch up and simulcasting) to do so by clearing rights only in the Member State where they have their principal establishment (so-called “country of origin principle/ COP); and
to extend the mandatory collective management of cable retransmission rights to other closed networks (as opposed to the open Internet), such as IPTV. All right holders, with the exception of broadcasters, would only exercise their retransmission rights through the mandatory collective administration regimen.
The EP and the Council have adopted their respective positions on the proposed Regulation and will start trilogue discussions (between the EC, the EP and the Council) early 2018. The Regulation could be adopted by June 2018.
Regarding the Copyright Directive proposal, the main issues addressed therein are a further capacity of choice and access to online content and cross-border access. The proposal extends the scope of application of some exceptions and limitations in 2013,the fields of education, text and data mining for scientific research, cultural heritage and to improve a sustainable and a better balanced contractual relationship between authors and industries. It also requires certain online content platforms to take certain technological measures (including content recognition technologies) in favor of certain online intermediaries in order to prevent access to copyright infringing content.
In relation with Data Protection & Privacy, the new Recommendation intended to create a more favorable environmentGeneral Data Protection Regulation (GDPR) of April 27, 2016, will be directly applicable in all member States in Europe from May 25, 2018. The GDPR introduces administrative fines of up to 4% of an undertaking’s annual global turnover for fiber investment. This Recommendation provides more pricing flexibilitybreaching the new data protection rules.
On January 10, 2017, the EC put forward its proposal for fiber at wholesale (by departing froma Regulation on ePrivacy, which will replace the cost-orientation pricing), atcurrent Directive 2002/58/EC on privacy in the expenseelectronic communications sector and will complement the GDPR. The EC proposal also introduces administrative fines of stricter measures on the replicabilityup to 4% of fiber based access services. In addition, the Commissionan undertaking’s annual global turnover. The future ePrivacy Regulation is now bound to ensure copper price stability (around 9 euros on average for ULL on real terms).
Additionally, EU legislator approved in 2014 a regulation that includes measures to reduce the cost of NGA roll-outs including sharing of ducts from utilities and smother permitting processes. These proposals have to be approved by the EU legislator in 2015.
Also, during 2013, the European Union adopted its cyber security strategy, comprising a number of measures, among which is a new proposed Directive on Network and Information Security. The intention is to guarantee a reliable and trusted Information Society across the EU, where Internet providers are also subject to security requirements. This Directive isnot expected to be finally adopted inbefore end-2018.
On the EU during 2015. Again at this stage,other hand, the outcomeEC adopted a decision on Privacy Shield on July 12, 2016, which considers that there is largely uncertain.
In January 2012, the European Commission proposed to replace Directive 95/46/EC on thean adequate level of protection of personal data transferred from the EU to US self-certified companies complying with
the Privacy Shield principles. The Privacy Shield has been challenged before the EU´s General Court by a General Data Protection Regulationcivil-society groups, but the admission of their appeals is still pending. After consulting with industry agents, NGOs and data protection national authorities, the EC completed on October 18, 2017 its first annual review on the performance of the Privacy Shield. The EC considers that would applythe Privacy Shield continues to those providers who processesensure an adequate level of data protection for personal data of European citizens. The draft Regulationcitizens being transferred to Privacy Shield-compliant companies in the US. Telefónica USA, Inc. has been approved byself-certified itself as Privacy Shield compliant.
Regarding spectrum, on December 14, 2016, the Committeethree European institutions reached an agreement on Civil Liberties, Justice and Home Affairshow to coordinate the use of the European Parliament (LIBE) in October 2013, prior700 MHz band facilitating the introduction of 5G as of 2020. The 700 MHz band should be assigned to a vote in the European Parliament. The approval of that Regulation will have an impact on Telefónica’s privacy obligations related to its activities as a telecommunications operator and as a provider of digital services. The Regulation aims to provide European citizens with a high level of protection of their privacy, and it will affect the ability and methods to process and use the personal data of its customers. The outcome of this debate is currently uncertain.
The European Union is also discussing a future Directive for Payment Services that might have influence on the type of financial obligations that could affect to services provided by companies such as Telefónica, in the area of premium rate services or mobile wallets.
In June 2012, the Commission approved the International Roaming Regulation (Roaming III), which replaces previous Roaming regulations (Roaming I and II). This Roaming III Regulation contains, for the first time, structural measures to impulse competition in the market for international roaming, so that, from July 1, 2014, customers could, if they wish, sign a roaming agreement with another operator apart from their domestic mobile services without changing the phone
number, terminal or SIM card to change countries. The proposal also would entitle mobile operators toand made available for wireless broadband use other operators’ networksby June 30, 2020, at the latest, in otherall EU Member states. Duly justified exceptions on grounds defined in Decision 2017/899/CE are allowed until June 30, 2022. Member States at regulated wholesale prices, thereby encouraging more operatorsare expected to compete on the roaming market. To cover the period until such structural measures are fully effectiveadopt and competition pushes prices down, the proposal gradually reduces the limits of retail and wholesale pricesmake public their national plans for voice, text (SMS) and data. The price cuts have been implementedreleasing this band by operators on July 1, 2014.
Wholesale prices | July 1, 2014 |
Data (€cent/MB) | 5 |
Voice (€cent/min) | 5 |
SMS (€cent/text) | 2 |
Retail prices | July 1, 2014 |
Data (€cent/MB) | 20 |
Voice - calls made (€cent/min) | 19 |
Voice - calls received (€cent/min) | 5 |
SMS (€cent/text) | 6 |
This regulation may, however, change again depending on the outcome of the Legislative process related to the Digital Single Market package. The EU Parliament has proposed that roaming prices are around home prices (“Roam like at home” proposal).
On February 14, 2012 the European Parliament and the Council adopted Decision 243/2012/EU which settles a multiannual program policy spectrum for the following four years. The Radio Spectrum Policy Program, amongst others, will identify 1200MHz spectrum for wireless data traffic, explore new approaches in spectrum licensing, identify long term spectrum needs and finally will look for additional harmonized bands for mobile broadband.
Finally, in its Digital Agenda, the EU has set some objectives for broadband development: of the speed up toJune 30, Mbps for all European citizens by 2020 and 50% of European households connected to 100Mbps by 2020.
2018.
Spain
General regulatory framework
The legal framework for the regulation of the telecommunications sector in Spain is governed by the General Telecommunications Law (9/2014) of May 9. The bill reducesmain modifications of this Law compared to the previous one were the reduction of administrative burdens to boost networks deployments, as well as the adoption of complementary measures for boosting investment in telecommunications sector.
The Market and Competition National Commission, or CNMC, created by the Law 3/2013, assumed in 2013 its role as telecommunications and audiovisual service regulator in Spain. This new organism is also the competition authority in Spain and the national regulatory authority for transport, postal services and energy.
Licenses
The main licenses and concessions to use spectrumheld by Telefonica in Spain are shown in the tablelisted at the end of this Annex.
Appendix VI under the title “Main concessions and licenses held by the Telefónica Group”.
Market analysis
Following,The obligations imposed by the national regulator in the most relevant markets -inin which Telefónica is deemed to have SMPSignificant Market Power (SMP) are detailed.
detailed below.
Fixed markets
RetailWholesale fixed access to the fixed-location public telephone network, retail market for calls in a fixed location and retail market for rental lines
In this market, the National regulatory authority had made a third round of market analysis, applying a final resolution dated on December 13, 2012, concluding that Telefónica de España is an SMP in retail access to fixed-location public telephone network services, for clients with an identification number not associated to a specific business plan, such as a
reference market which can be regulated ex ante. As an operator with SMP, Telefónica de España is subject to certain specific obligations and restrictions.
Wholesale fixed call origination market
In December 2008,On January 17, 2017, the National regulatory authority concludedCNMC approved the definition and the analysis of the market for access and call origination on fixed networks. Considering that Telefónica de España is an operator with SMP in this market and requested thathas SPM, the CNMC imposed specific obligations to Telefónica de España offerregarding the provision of origination services, preselection and wholesale access service to assist other operators in offering IP telephony servicesthe telephone line on a cost-oriented production, and provide informationregarding the implementation of migration to Next Generation Networks.
an accounting system. Telefónica was imposed, among others, the obligation of no discrimination, transparency and separation of accounts.
Fixed call termination market on individual networks
In October 2014, the CNMC carried out a market analysis in terminated fixed networks, and concluded that every single provider, including Telefónica de España, are dominants in terminating fixed networks and, as a consequence, are obliged to provide the terminating service applying cost-orientation and non-discrimination obligations to the rest of operators, according to a purely incremental costs model. Subsequently, the CNMC reduces the terminating fixed network tariff by 85%, on average. Noticeably, this decision implied the overcome of interconnection asymmetry (terminating fixed networks prices of alternative operators to Telefónica previously were 30% higher than the prices of Telefónica). Finally inIn fixed call termination market on IP networks, Telefónica de España is required to submit an “Interconnection Reference Offer” (OIR)(IRO).
Mobile market
Mobile voicenetwork call termination
In May 2012, the ANR adopted a measure establishingCNMC established the wholesale price at 0.0109 €/minute as from July 2013. TheIn July 2017, the NRA initiated the proceeding for the market analysis through a public consultation. Afterwards, in November 2017, the CNMC has not yet approvedsubmitted to the EC its proposal on new mobile termination rates (MTRs) for all mobile operators, set at 0.0064 €/min as from January 2020 (0.0070 €/min as between its entering into force and December 31, 2018 and at 0.0066 €/min during the year 2019), which entails a new analysis on wholesaledecrease of 40% in comparison with the current levels. A final decision was adopted in January 2018 setting the rate at 0.0067 €/min during the year 2019.
Mobile Virtual Network Operators
In April 2017, the CNMC adopted a Decision considering that the access services and origination in public mobile telephone networks market mobile voice call termination.
is a competitive market and abolishing the current obligations applicable to Mobile Virtual Network Operators(MVNOs).
Wholesale (physical) to network infrastructure access
In January 2009, the National regulatory authority concluded that Telefónica de España is an operator with SMP in the and wholesale (physical) network infrastructures access market, and imposed the following obligations: access to full and shared unbundled access to copper loops, sub-loops and ducts, cost oriented tariffs and accounting separation, transparency and non-discrimination obligations including an Unbundling Reference Offer and a Ducts Reference Offer. In December 2014, CNMC has conducted a public consultation exercise and propose a new action plan based on market analysis, with a view to proposing the maintenance previous agreements and obligations, imposing on Telefónica de España the obligation on virtual unbundled access to fiber adopting pricing rules that makes possible the economic replicability of its retails offerings, strengthening local access networks. This proposal may be modified, in the final decision, which is expected for the last quarter of 2015.
Wholesale prices for local loop unbundling were increased from 8.32 to 8.60 €/month by the National regulatory authority, in July 2013.
Wholesale broadband access
In January 2009,February 2016, the CNMC concluded that Telefónica de Españadopted a has significant market power inResolution which established the wholesale broadband access market and is therefore required to provide other operators with wholesale broadband access services up toelimination of the 30 Mbps in copperlimit and fiber infrastructures. The NRA also required Telefónica de España to publish a wholesale broadband access reference offer, provide cost-oriented rates and accounting separation, to avoid discrimination in network access and to report broadband retail changes in services prior to offering them in the market.
On November 16, 2010, the National regulatory authority approved a new wholesale broadband offer (known as the new broadband Ethernet service or NEBA) which will allow alternative operators to provide retail services more independently from Telefónica retail offers up to 30Mbps.
In May 2013, the National regulatory authority proposed a reduction in wholesale broadband prices, although the European Commission considered the proposal incompatible with European law, dueincorporation of geographical segmentation to the methodology used to determine the prices. Taking into account the European Commission’s comments, the CNMC has adopted a decision on January 30, 2014, reducing the prices 18%.
In December 2014, CNMC has carried out a consultation about a new proposal of market analysis that eliminates the 30Mbps limit and incorporates the need of applying different regulation on a geographical basis for the residential clients segment,customers, so that Telefónica will no longer beis not obliged to offer wholesale broadband services access (bitstream) in thatthe most competitive areas of greater competition.(66 cities). In thatthis sense, Telefónica de España will beis only obliged to offer its wholesalebroadband access services (bitstream) for the residential segment in no-competitivenon-competitive areas. In this case, theThe price of fiber wholesale service offered over the telephone copper network would have cost-oriented prices, unlike the fiber network service offered, whichaccess services is subject only to the fulfilmentcalculated under a model of economic replicability criterion.
of Telefónica's retail offerings in the residential and business segments. The price of access services to the copper network is cost oriented. For the business segment, the consultation proposes to obligeResolution requires Telefónica de España to offer its wholesale broadband access services both on the copper and fiber network, throughout the national territory. It is anticipated that this Resolution will last for at least four years. Its implementation is expected to result in a moderate increase of the current regulatory obligations of Telefónica in Spain, due to the mandatory granting of access to other operators to its fiber network, and due to certain aspects relating specifically to the business segment (high quality bitstream service for business customers with national coverage). This Resolution has been appealed by Telefónica de España.
This proposal mayOn January 18, 2017, the CNMC adopted a Resolution which approved the reference offer of the new wholesale unbundled virtual access service to Telefónica's new broadband Ethernet service (local NEBA). NEBA services are expected to allow alternative operators more flexibility to structure their retail offers over Telefónica´s fiber network. On December 29, 2017, a draft measure on the economic replicability methodology to be modified,used to assess the maximum wholesale access price which Telefónica could charge to other operators for accessing the optical fiber network in regulated areas (NEBA Local and NEBA services), was notified to the EC establishing a maximum wholesale access price of 16.38 €/month. The final decision which is expected forwithin the lastcurrent first quarter of 2015.2018.
In June 2017, CNMC launched a public consultation on the methodology to analyze if Telefónica´s business offers can be replicated by other operators. The final decision is not expected before mid-2018.
Universal service obligations
According to the General Telecommunications Law, Universal service is set of defined services whose aims are to ensure that all Spanish citizens have access to certain basic telecommunications services, regardless of their geographic location, with a minimum quality level and at accessible prices.
Telefónica de España washas been designated the operator responsible for the provision of the connection to the public electronic communications network for a three-year maximum period (January 1, 2017 - December 31, 2019), with the possibility of establishing broadband data connection with a descending speed no less than 1Mbit per second, and the provision of the public telephone service available from a fixed location andlocation. In addition, Telefónica de España was also designated the operator responsible for the preparation and delivery of public telephone directories to the telephone subscribers. Telefónicasubscribers for one-year period (January 1 - December 31, 2017), Telefonica Telecomunicaciones Públicas, S.A.U. washas been designated as the operator responsible for the provision of a sufficient supply of public payphones.
payphones for one-year period (January 1 - December 31, 2017). In both, cases, there have been an extension for the provision of directories and pay phones and their provision will remain in force within the scope of Universal Service until December 31, 2018, by Telefónica de España S.A.U.
Contribution to RTVE funding mechanism
In August 2009, the Radio and Television Corporation Finance Law “((Ley de Financiación de la Corporación de Radio y Television Española)”ola) was approved establishing that: (i) telecommunication operators which operate nationwide or at least in more than one region, have to makepay a fixed annual provisioncontribution of 0.9% of the invoiced operating income of the year (excluding the revenues of the wholesale reference market), and (ii) on the other hand, the concessionaire companies and providers of TV services which operate nationwide or at least in more than one region should makehave to pay an annual fixed contribution fixedto the RTVE funding as follows: (a) 3% on the gross revenue of the year for open concessionaire companies or TV services providers, and (b) 1.5% on the gross revenue of the year for concessionaire companies to provide Pay TV services.
In Spain, self-settlementContributions made to the funding of the contributions made has beenRTVE were appealed by Telefónica España and Telefónica Móviles España. The proceedings are currently on hold waiting for the ruling on (i) a as well as,prejudicial question submitted by the Royal Decree 1004/2010, which approves the Regulation developing the abovementioned law.
In the European level there were two ongoing processes with regards to this issue. In July 2013, the EC withdrew its appeal before the LuxembourgNational High Court shortly after it ruled on similar tax legislation in France, where the Luxembourg Court ruled that the tax imposed by France on telecommunications companies was compatible with European regulation. With this decision, the tax measure will remain unchanged unless the Spanish Supreme Court understands the contrary.
Besides this, the European Commission initiated a state aid investigation and concluded that such funding mechanism did not constitute illegal state aid. Against this decision, Telefónica de España and Telefónica Móviles España, filed an appeal before the European Court of Justice. By judgment issued on July 11, 2014, the European Court has entirely rejected the appeals which Telefónica filed against the decision of the European Commission. Telefónica has not appealed to the Court of Justice of the EU.European Union, and (ii) also on an unconstitutionality question submitted to the
Collaboration agreementsSpanish Constitutional Court regarding compliance of the underlying law with the European legislation and the Spanish Constitution.
Acquisition of Distribuidor Oficial de Televisión, S.A. (DTS)
In July 2013,The Resolution the CNMC of April 22, 2015 authorized the acquisition of the exclusive control of DTS (Distribuidor Oficial de Televisión, S.A.) by Telefónica de EspañContenidos, S.A.U. As a signed an agreementresult of such authorization, the new entity assumed a set of commitments for a five-year period, which briefly are: i) the obligation to make available a wholesale offer of channels with Vodafone España S.A.U and France Telecom S.A.U forpremium content, that allows the usereplicability of fiber infrastructure in buildings. This agreement, together with the agreement signed with Jazz Telecom S.A.U in 2012, aimed the deployment of fiber networks in Spain. Once, an operator has reached a concrete building would be able to use the infrastructures deployed previously by other operators.
Under CNMC Resolution of June 18, 2014, Infrastructure Sharing Agreement between Telefónica de Españretail Pay TV offer; ii) the prohibition of including a Vodafone Españperiod of permanence clause in contracts for Pay TV packages; iii) the prohibition of attract DTS customers for a period of two months; iv) the obligation to keep at least three international routes uncongested with three Internet Connectivity Providers; and France Telecom shall havev) the same prices structure that was agreed before between Telefónica de España and Jazz Telecom, solving in this manner the dispute between Vodafone España and France Telecom.prohibition of formalizing exclusive contracts exceeding three years with content providers.
United Kingdom
Germany
General regulatory framework
The European Union legislative framework was implemented in Germany at the end of June 2004, by the approval of Telecommunications Act (Telekommunikationsgesetz). Following the adaptation of the 2009 EU Telecom Package, the Telecom Act has been repeatedly amended over the last years. The national regulatory authority responsible for regulation of electronic communication networks and services is the Bundesnetzagentur, or BNetzA. At the end of July 2016, the Act for better information exchange when combating international terrorism entered into force. This act inter alia amends article 111 TKG, which rules which customer data need to be collected and stored prior to access activation.
The main licenses and concessions held by Telefónica in Germany are listed at the end of this Appendix VI under the title “Main concessions and licenses held by the Telefónica Group”.
Spectrum
In Germany, regarding its process to provide new frequencies for the further development of digital infrastructures the regulatory agency for electricity, gas, telecommunications, post and railway (BNetzA) published a paper on the key elements in June 2017 and, at the same time, initiated a procedure for determining the frequency demand for nationwide assignments in the 2 GHz and the 3.6 GHz bands (3.6 GHz is the official wording of BNetza when referring to 3.4-3.8 GHz). Among other things, for the 2 GHz band, BNetzA proposed the joint award of the frequencies expiring at the end of 2020 and 2025 and indicated that, following the merger of Telefónica Deutschland and E-Plus, it does not intend to withdraw any rights of use allocated to Telefónica Deutschland before their expiration (2020 and 2025, respectively). For the 3.6 GHz band, regional assignments for a part of the frequencies are provided for in the paper, as well as mutual co-usage rights between national and regional assignments. Additionally, it also foresees a demand-based supply with 5G. The procedures to auction both bands could begin in 2018 or 2019. The Telefónica Deutschland Group submitted its request for frequencies by the imposed deadline of September 30, 2017 and commented on the key elements. The final determination of the frequency demand and the first draft decisions in this regard are expected in the first quarter of 2018. For frequencies above 24 GHz, BNetzA intends to initially develop an application process in the frequency band of 26 GHz.
The transparency regulation promulgated by BNetzA enters into force
The legal regulation with measures to increase transparency in telephone and internet services in the mobile and fixed-line segments, which was issued by BNetzA to strengthen consumers´ rights, largely entered into force on June 1, 2017. The remaining provisions came into force on December 1, 2017. Among other things, the regulation includes provisions on cost control, the review and documentation of contractually agreed data transfer rates, and the provision of information on contract content to customers prior to conclusion.
Market reviews
Mobile termination rates (MTR)
The MTR of 0.0166 €/minute expired end of November 2016. By means of a decision dated March 6, 2017, BNetzA approved the final mobile termination rates (MTR), which had been provisionally approved on November 30, 2016. From December 1, 2016, the rates of 0.011 €/minute were validated. The rates dropped to 0.0107 €/minute on December 1, 2017 and, as of December 1, 2018, the rates will further drop to 0.0095 €/minute. These rates were symmetrically
approved for all mobile operators. They are effective until November 30, 2019. The rates were approved on the basis of pure Long Run Incremental Costs (LRIC), which is the new cost model for the calculation of MTRs.
Fixed termination rates (FTR)
The FTR of 0.0024 €/minute expired at the end of December 2016. For the period thereafter, BNetzA provisionally approved rates of 0.0010 €/minute in its decision dated January 25, 2017 and confirmed them in its decision dated October 20, 2017. The rates are symmetrical for all regulated fixed network operators for the period from January 1, 2017 to December 31, 2018. The rates for Telekom Deutschland were finally approved in July 2017 and the rates for all other fixed network operators, including the Telefónica Deutschland Group, were set based on a comparison with those rates of Telekom Deutschland.
BNetzA initiates consultation and market studies on fibre optic infrastructures
On March 14, 2017, BNetzA initiated a consultation process entitled “Issues in rate regulation for FttH/B-based wholesale products with a view to the development of fibre optic infrastructures capable of high performance”. The study investigates how the accelerated development of fibre optic networks can be supported by regulations. The consultation deals with the rate-related aspects of regulation. The future regulation could result in a departure from the current cost-based regulation. Any changes to the current regulatory standard are expected by the end of 2018 at the earliest. In a parallel process, BNetzA initiated a market study on the requirements for regulation and the existence of SMP relating to the so-called 3a markets (wholesale local access provided at a fixed location) and 3b markets (wholesale central access provided at a fixed location for mass-market products). The key aspect of this study is whether FttH/B-based wholesale products will continue to be assigned to the nationwide connection market in which copper-based connections and cable-based connections can also be found. This study is a pre-requisite for any rate regulation. Initial decisions will be adopted in the second quarter of 2018 at the earliest.
Introduction of a regulated wholesale product “Super Vectoring” by Telekom Deutschland
Telekom Deutschland AG (Telekom) has announced that it expects to expand its product offering as part of the regulated wholesale service “Bitstream Access” through “Super Vectoring” connections from August 2018. This would significantly increase the potential bandwidth of very-high-bit-rate digital subscriber line (VDSL) connections compared with today. Telekom is required to offer competitive prices on the wholesale service market; however, it is not yet known what these prices are. The Telefónica Deutschland Group expects to improve its competitive position in the fixed line market as a result of this product.
United Kingdom
General legislative framework
The EU Regulatory Framework was implemented in the United Kingdom by the Communications Act in 2003. The Act designates the Office of Communications or Ofcom, as the NRA responsible for the regulation of electronic communications networks and services. The Office of Communications, or Ofcom, is designated as the NRA responsible for the regulation of electronic communications networks and services.
The main licenses and concessions held by Telefonica in the United Kingdom are listed at the end of this Appendix VI under the title “Main concessions and licenses held by the Telefónica Group”.
Market reviews
Wholesale price regulation
Following a market review, mobile termination rates for all mobile providers, including the four national mobile communications operators (Vodafone, Telefónica United Kingdom, EE and H3G) are subject to controls based on the pure long-run incremental cost (pure LRIC) approach. The present mobile wholesale termination rate is 0.845ppm.0.495 ppm. Ofcom proposesis proposing to reduce that to 0.545ppm fromthose rates by 10% over a three-year period commencing on April 1, 2015.2018.
Spectrum
Licenses
The main licensesTelefónica United Kingdom has an obligation in its 800 MHz spectrum license to provide indoor coverage to 98% of the United Kingdom population (and 95% of the populations of each of England, Wales, Scotland and concessionsNorthern Ireland) and an obligation in its 900/1800 MHz spectrum license to use spectrum are shown inprovide voice and text services to 90% of the table atUK landmass, both by the end of this Annex. Following a direction from the Government, Ofcom has also proposed2017, to raise the annual license fee for the use of spectrum in the 900MHz and 1800 MHz bands, from the current level of 15.6 million pounds per annum, to 65.8 million pounds per annum. Finally, the UK Government announced recently an agreement with the UK mobile operators, includingbe maintained, thereafter. Telefónica United Kingdom under whichcontinues to invest in its infrastructure improvement program, upgrading its 2G and 3G Networks and continued roll-out of its 4G Network. Telefónica United Kingdom is in the mobile operators would accept a 90% geographic coverage obligation for voice and text services. Givenprocess of providing information to the agreement, Ofcom has agreed to consider the impact of the geographic coverage obligation on its valuation of annual fees for 900 and 1800 MHz spectrum. This is expected to delay Ofcom’s decision by between four and seven months.
Germany
General regulatory framework
The European Union legislative framework was implemented in Germany at the end of June 2004, by the approval of Telecommunications Act (Telekommunikationsgesetz). The nationalUK's regulatory authority, responsibleOfcom, to demonstrate its compliance with the obligations mentioned above.
In a decision dated July 11, 2017, Ofcom proposed to auction 2.3 GHz spectrum (which is available for regulation"immediate use") and 3.4 GHz spectrum (which may be used for 5G services), subject to two competition measures. These measures set forth two separate spectrum caps: a spectrum cap of electronic communication networks255 MHz of immediately usable spectrum and services isan overall cap of 340 MHz. That decision was appealed by both BT/EE and H3G. Both appeals were rejected in a ruling dated December 20, 2017. H3G tried to appeal the Bundesnetzagentur, or BNetzA. Followingdecision to the adaptationCourt of the 2009 EU Telecom Package, the Telecom ActAppeal and a hearing took place on February 13, 2018. The appeal was repeatedly amendedrefused and the last modifications entered into force in August 2013. Transition periods existed for some of them. Worth mentioning are the rules, concerning the free-of-charge-waiting-loop and some of the rules concerning the change of the provider.
Acquisition of E-Plus
On August 29, 2014, the European Commision granted the final authorization for the acquisition of E-Plus. In the course of the merger clearance process, Telefónica Deutschland agreed to a set of remedies which fully address the European Commission’s competition concerns. In this regard, Telefónica committed to sell upfront 20 percent of its mobile network capacity via Bitstream Access to an MVNO and give the opportunity to acquire up to 10 percent additional network capacity. Accordingly, Telefónica Deutschland signed a corresponding contract with Drillisch. Furthermore, to enable a potential entry into the German market, Telefónica offers to make available to one party a package of 2.1 and 2.6. GHz frequencies, mobile sites, national roaming and a passive site sharing. This package is offered to any third party which has declared a respective interest until the end of 2014 and to Drillisch Group up to 2019 (see below). In addition, existing contracts with wholesale partners will be extended until 2025 and the transition to a different guest network operator will be facilitated.
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex.
On January 29, 2015, the BNetzA published respective final decisions on the spectrum allocation proceedings and onlitigation ended. Therefore, the auction conditions ofcan now proceed without delay. Telefónica United Kingdom expects the bands 700 MHz and 1500 MHz. The auction will also include the spectrum correspondingbidding to GSM licenses – the entire 900 MHz band and most of the 1800 MHz band (that will expire at the end of 2016). Interested bidders may submit applications bystart in March 6, 2015. The auction (Simultaneous Multi-Round Auction) will take place in the second quarter of 2015.
On July 4, 2014, BNetzA adopted a decision concerning the frequency aspects of the Telefónica Deutschland Holding AG merger with E-Plus Mobilfunk GmbHCo KG (“E-Plus”). BNetzA has obliged Telefónica Deutschland (the surviving entity after the merger takes place) to anticipate the termination of the rights of use of the spectrum in the 900 / 1800 MHz bands by December 31, 2015, (instead of December 31, 2016), if Telefónica Deutschland does not reacquire these frequencies at the abovementioned auction proceeding. Both Telefónica Deutschland and E-Plus have legally challenged this BNetzA decision on August 4, 2014. The German regulator also announced that, once the auction of spectrum above mentioned is over, it will perform a frequency distribution analysis, and determine whether any additional action is needed, particularly in the area of the 2GHz spectrum band granted to Telefónica Deutschland.
In addition, and within the framework of the conditions imposed by the European Commission in connection with the merger, the surviving entity of the merger is obliged to offer up to 2x10 MHz in the 2600 MHz as well as the up to 2x10 MHz in the 2100 MHz spectrum band to one potential new mobile network operator. This offer is open to any potential new mobile network operator that had declared a respective interest by December 31, 2014, and to the operator with whom Telefónica Deutschland has signed the network access agreement (Drillisch Group).
Market reviews
Mobile termination rates (MTR)
Since 2006, Telefónica Deutschland has subsequently challenged decisions adopted by BNetzA on mobile termination rates. Some appeals are pending at the Constitutional Court.
BNetzA bases some of its calculations on benchmarks, others in its new internally-developed cost model, while the latest have been based on a hypothetical bottom-up cost model developed by an external consultant (WIK) on behalf of BNetzA. In all these decisions, BNetzA has based its calculations on an approach which takes account of common costs, disregarding the “Pure LRIC” approach which is recommended by the EU Commission and which does not take account of such common costs.
The EU Commissionhas therefore repeatedly requested that the German regulator to withdraw or amend its MTR decisions. There is therefore a risk that the EU Commission will initiate infringement proceedings against Germany, and rates may be further reduced.
On September 3, 2014, BNetzA adopted its latest proposal to reduce MTR. The new prices will gradually decrease to 0.0172 euro/minute from December 1, 2014, and in a second step, from 0.0172 euro/minute to 0.0166 euro/minute from December 1, 2015 until the end of November 2016. The proposal has been notified to the EU Commission and is currently subject to a “Phase II” in-depth investigation.
Fixed termination rates (FTR)
On August 13, 2013 BNetzA issued the final resolution on Telekom’s fixed termination rates (FTRs), applicable from December 2012 to November 2013. Local FTRs were reduced by approximately 20%. At the end of November 2013 BNetzA issued a regulatory order for all alternative fixed network operators (ANOs) including Telefónica Deutschland. In addition to the obligations of the former regulatory order, the ANOs have to file a proposal for their local FTRs and BNetzA has to approve such FTRs. The local FTR will be set at the same level as the Telekom FTR. BNetzA issued a
preliminary approval for Telefónica Deutschland´s FTR at the end of February 2014. Telefónica Deutschland’s rates were approved for the time period from November 20, 2013 until November 30, 2014.
Also in these decisions, BNetzA has based its calculations on an approach which takes account of common costs, disregarding the “Pure LRIC” approach which is recommended by the EU Commission and which does not take account of such common costs. In its latest proposal to further reduce FTR, BNetzA has preliminary set Telekom FTR at 0.0024 euro/minute from December 1, 2014 until November 30, 2016. The proposal has been notified to the EU Commission and is currently subject to a “Phase II” in-depth investigation.
Relevant cooperation agreements
Since July 2012, Deutsche Telekom offers a wholesale bitstream access model (“VDSL contingent model”), which in April 2014 has been developed further to include newly built VDSL and vectoring accesses. In this sense, Deutsche Telekom and Telefónica Deutschland signed a contract regarding the model on December 6, 2012. In addition, Telefónica Deutschland and Deutsche Telekom entered into a final and binding agreement on December 20, 2013 with regard to fixed-line broadband services. Such agreement foresees the transition from Telefónica Deutschland’s "ADSL" infrastructure to the advanced network infrastructure of Deutsche Telekom (the so-called "next generation access platform" or NGA platform) which will enable Telefónica Deutschland to offer its customers high-speed internet products with data transfer rates of up to 100Mbit/s. The completion of the transition to Deutsche Telekom’s NGA platform is expected for 2019.
On November 5, 2014, the Federal Cartel Office adopted a decision where concluded that there were no grounds for action. In the proceeding for the regulatory clearance of the cooperation the Federal Network Agency (Bundesnetzagentur) published a draft decision on December 17, 2013 by which the proceeding shall be terminated without any remedies. The draft decision was publicly consulted in Germany and notified to the European Commission. The European Commission responded on March 13, 2014 and did not express serious doubts. The Federal Network Agency published thereafter its final decision on March 18, 2014 and confirmed its draft judgment from December 2013. With the final decision of the Federal Network Agency, the cooperation came into effect on March 18, 2014.
2018.
Brazil
General legislative framework
The delivery of telecommunications services in Brazil is subject to regulation under the regulatory framework provided in the General Telecommunications Law enacted in July 1997. The National Agency for Telecommunications (Agê(Agência Nacional de Telecomunicações or ANATEL), is the principal regulatory authority for the Brazilian telecommunications sector.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex.
In Brazil, concessions are awarded for providing services under the public system, while authorizations are granted for providing private system services. The only service provided under both systems is the Commuted Fixed Telephony Service (CFTS). All other services are provided under the private system.
In the state of São Paulo, Telefónica Brazil provides local and national long-distance Commuted Fixed Telephony Service (CFTS) under the public regime, through a Concession agreement. The current concession agreement, dated from December 22, 2005, was renewed on January 1, 2006, and will be valid until December 31, 2025. On December 15, 2010, ANATEL released a public consultation proposing the amendment of clause 3.2 of the concession agreement. It resulted in the approval of Resolution No. 559 published on December 27, 2010, that establishes new revisions for the concession agreement on May 2, 2011, December 31, 2015, and December 31, 2020. This provision allows ANATEL to update the renewed Concession agreement with respect to network expansion, modernization and quality of service targets in response to changes in technology, competition in the marketplace and domestic and international economic conditions.The assets assigned to the provision of the services described in the public concession agreement are considered reversible assets.
On June 30, 2011, the company reviewed its concession agreement and entered into new contracts for local and long distance services, with new conditions imposed on the company, amongst them, to change the basis of calculation of the biannual concession fees. Every two years, during the agreement’s new 20-year period, fixed line concession companies will have to pay a renewal fee which will correspond to 2% of the revenue of the previous year. The first payment of this biennial fee occurred on April 30, 2007, based on 2006 revenue, the second payment occurred on April 30, 2009, based on 2008 revenue, the third payment occurred on April 30, 2011, based on 2009 revenue and the fourth payment occurred on April 30, 2013, based on 2012 revenue. The next payment is scheduled for 2015 based on 2014 revenue.
Brazilian Government also published Decree No. 7512 related to the General Plan for the Universalization (PGMU III). It sets new targets for Telefone de Uso Público (public pay phones) density in rural and poor areas and goals related to popular fixed line service (AICE). There were two Public Consultations undergoing, the Public Consultation No. 26 aimed to revise the fixed line concession agreement and Public Consultation No. 25 aimed to revise the General Universalization Commitment Plan, which were launched by ANATEL on June 27, 2014. Definitive rules regarding this issue will be published in 2015.
In the remaining states of Brazil, Vivo Telefónica Brazil provides local, and long-distance and international CFTS service, personal mobile service, and broadband multimedia communication services (which includes the provision of fixed broadband connections) and Pay TV services, all under the private regime.
Radiofrequencies authorizations, for its turn, are granted for a limited period of time (maximum of 15 years, renewable once). The most important radiofrequencies authorizations held by Telefónica are those associated with the exploitation of mobile services and are described in the licenses section.
In 2012, Telefónica was awarded a block of the 2500 MHz “X” band (20+20 MHz), including the 450 MHz band in certain states. As part of the spectrum auction, Telefónica Brazil had to compensate the former licensees of this bandwidth, who used it for multichannel multipoint distribution services. The other operators also obtaining spectrum must, in turn, compensate Telefónica Brazil. Part of these compensation requirements is being legally contested.
In 2014, ANATEL auctioned Radiofrequencies licenses in the 700MHz frequency and Vivo acquired the license to use one of the bands. According to the bidding notice, the winning parties are required to incorporate an independent entity that will manage the refarming of the 700MHz (currently, the band occupied by the free-to-air analog broadcasters). Such entity will have the financial resources to provide equipment and support for the broadcasters and the final users (which, subject to certain conditions, will be entitled to receive Digital TV receivers). Federal regulation establishes a timeline to implement such refarming which is scheduled to be concluded by December 2018.
In relation to the acquisition of GVT as described in Note 21 of these Consolidated Financial Statements, according to Brazilian law, the transaction must be approved by Brazilian regulators ANATEL and CADE. On December 22, 2014, ANATEL approved the transaction and imposed certain obligations to Telefónica Brasil. The approval of the transaction implies, among other things, that Telefónica Brazil may retain GVT’s infrastructure. Such obligations include (1) the maintenance of current GVT services and plans within the same geographic scope in which GVT operates today, requiring, in addition, that the successor company expand its operations to at least ten new municipalities within three years beginning on January 26, 2015; and (2) the waiver of the FSTS license held by GVT within 18 months of ANATEL’s decisions, because regulations establish that the same economic group cannot hold more than one FSTS license in the same geographic area.
Telefónica understands that the obligations imposed do not compromise the terms of the GVT acquisition or its value.
Interconnection, tariffs and prices
Interconnection among public networks is mandatory in Brazil. Parties can freely negotiate the terms and conditions about technical points, economic discounts and rights/obligations, of the interconnection agreements. For Interconnection rates for fixed network operator identified as operator with Significant Market Power (Res. 588/2012) the rate is homologated by ANATEL; the rates for the use of mobile operators networks (Res. 438/2006), may be agreed between the parties. However, if the parties fail to reach a consensus, particularly regarding charges to fixed operators (Res. 576/2011) ANATEL imposes the rates to be used. In general, operators shall maintain public offers of interconnection conditions.
On November 8, 2012, ANATEL published the General Plan of Competition Goals (PGMC), which, in general, provides ex-ante obligations for telecommunications providers that identify SMP operators in the various relevant markets identified as critical for the development of competition in the telecommunications industry. The ex-ante obligations include
measures of price transparency and market conditions and specific rules for composition of conflicts between agents, such as: (i) mandatory submission and approval of offerings of reference in the wholesale market and warranty service requests from other players that correspond to 20% of the physical network of the SMP companies, (ii) transparency measures as the creation of a Data Base and Wholesale Supervisor Entity, (iii) specifically for providers acting in the mobile termination market (interconnection): full billing between undertakings with SMP, and Bill & Keep decreasing between SMP and non-SMP (80/20% between 2013 and 2014, 60/40% in 2015 and full billing from 2016). The Telefónica Group, including VIVO, has been identified as an operator with SPM in the following markets: (i) fixed network infrastructure access for data transmission in copper pairs or coaxial cables at speeds up to 10 Mbps in the region of São Paulo, (ii) wholesale fixed network infrastructure to transport local and long distance transmission at speeds up to 34 Mbps in the region of São Paulo, (iii) passive towers, ducts and trenches infrastructure throughout Brazil; (iv) call termination on mobile network in Brazil, and (v) national roaming market throughout Brazil.
The PGMC established that the mobile termination rates (VU-M) shall observe the following scheme: the reference VU-M value applicable to a provider belonging to a Group declared with SMP within the mobile termination market shall be based on the model of incremental costs. Such model of incremental costs shall be implemented from February 24, 2016. Previously, the reference VU-M value applicable to such providers shall be as follows:
| · | From February 24, 2014: up to 75% of the VU-M value in force on December 31, 2013. |
| · | From February 24, 2015: up to 50% of the VU-M value in force on December 31, 2013. |
In this regard, ANATEL published its ACT 7272 and 7310, in August 2014 establishing the new VU-M values for 2014 and 2015 applicable to providers with SMP. These are the values applicable to VIVO (in Brazilian reais):
Pursuant to applicable laws, reductions of VU-M must be reflected in VC1 (retail price paid by users for local fixed-mobile calls) and VC2 and VC3 (retail price paid by users for national long distance fixed-mobile calls). Accordingly and as a consequence of the new V-UM in Act 7272 and 7310, on February 24, 2014, ANATEL published its Act 1742 establishing the new VCs for 2014: approximately 0.07388 Brazilian reais less than the previous VC1s in Region III (as Telefónica only offers local fix telephony services in that region); and approximately 0.10901 Brazilian reais less than the previous VC2 and VC3. The amounts of the VC here mentioned are net of tax.
In December 2013, ANATEL issued Resolution No. 629 which establishes terms and conditions to execute Conduct Adjustment Terms (Termo de Ajustamento de Condutas) aimed at suspending administrative proceedings in course, if license holders assume certain obligations to fully comply with regulations and provide compensations and awards to users.
On March 7, 2014, ANATEL issued the Resolution No. 632 which approved the Regulation of Users Rights of Telecommunications Services, which improves transparency in consumer relations and expands the rights of those who use fixed and mobile telephony, broadband and Pay-TV. This Resolution No. 632 has among other novelties, simplified the cancellation of a telecommunications service, granted more transparency on the services offered and simplified the way to contest the invoices.
The deadline to submit comments to ANATEL’s Public Consultation No. 47/2014 aimed to modify the General Plan of Competition Targets – PGMC, approved by the Resolution No. 600, of November 8, 2012, ended last January 2, 2015. The Proposal for amendment of Art.42 of Appendix I of the PGMC is aimed to maintenance of the bill and keep system.
Competition law
Brazilian competition regulation is based on Law No. 12529 of November 30, 2011. The Administrative Council for Economic Defense, or CADE, is the agency in charge of enforcing the competition rules.
The new antitrust law establishes a pre-merger notification regime for concentration transactions, with new turnover thresholds (one participant with gross revenue of BLR750 million in Brazil and other participant with gross revenue of BRL75 million in Brazil) and maximum time length for merger review procedure (240 days, extendable to 330 days).
On October 18, 2016, CADE issued the Resolution No 17, which changed the rules concerning the mandatory notification of the so called ‘associative agreements’. The new regulation tends to reduce notifications of associative agreements that do not raise antitrust concerns.
The main licenses and concessions held by Telefónica in Brazil are listed at the end of this Appendix VI under the title “Main concessions and licenses held by the Telefónica Group”.
Licenses
In Brazil, concessions are awarded for providing services under the public regime, while authorizations are granted for providing private regime services. The only service currently provided under both regimes is the Fixed Switched Telephony Service (STFC). All other services are provided under the private system only.
In the state of São Paulo, Telefônica Brazil provides local and national long-distance fixed switched telephony services (STFC) under the so-called public regime, through a concession agreement which is expected to remain in force until 2025. In accordance with current regulations, Telefônica Brazil informed the Brazilian regulatory authority (Agencia Nacional de Telecomunicações or ANATEL) that the net value of assets assigned to the provision of STFC (which include, among others, switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment) was estimated to total 8,763 million Brazilian reais as of December 31, 2017 (approximately 2,209 million euros under the exchange rate applicable on such date). Under current regulations, Telefonica must update this information by April 30, 2018 by sending the list and value of the reversible assets held as of December 31, 2017. In principle, the assets assigned to the provision of STFC were considered reversible assets, and thus, supposed to be reverted to the Federal Union at the end of the concession agreement.
In this sense, a bill amending the regulatory framework in Brazil is in process, establishing, among other things, that such assets would no longer be reversible under a new license regime in exchange for significant broadband investment commitments. The bill has been approved at both legislative houses, but it has been challenged before the Federal Supreme Court due an alleged procedure misstep. Outcome of this lawsuit is uncertain, although the Senate's board may overcome it sending the bill for voting in the Plenary (such action depends on political environment which is also unclear). In the event that the bill is finally approved, ANATEL would be entitled to adopt the relevant administrative decisions for the amendment of the respective licenses with the consequent amendment of the future obligations imposed on STFC providers.
In addition, a proposal of the General Plan for Universalization of Fixed Switched Telephony Services was approved by ANATEL in 2016. However, the final version has not been executed yet because the amendment to the concession agreement has not been finalized yet.
In the remaining states of Brazil, Telefônica Brazil provides local, and long-distance and international STFC service, personal mobile service, and broadband multimedia communication services (which includes the provision of fixed broadband connections) and Pay TV services, all under the private regime.
Radiofrequencies authorizations, for its turn, are granted for a limited period of time (maximum of 20 years, renewable once). The most important radiofrequencies authorizations held by Telefônica Brazil are those associated with the exploitation of mobile services and are described in the licenses section.
In 2014, ANATEL auctioned radiofrequencies licenses in the 700MHz frequency and Telefônica Brazil acquired the license to use one of the bands. According to the bidding notice, the successful bidders were required to incorporate an independent entity to manage the whole reframing process of the 700MHz (currently, the band occupied by the free-to-air analog broadcasters). Successful bidders should also provide such entity with the financial and operational resources to provide equipment and support for the broadcasters and the final users (which, subject to certain conditions, will be entitled to receive Digital TV receivers). Federal regulation establishes a timeline to implement such reframing which is scheduled to be concluded by December 2018.
Interconnection, tariffs and prices
Interconnection among public networks is mandatory in Brazil. Generally, parties can freely negotiate the terms and conditions about technical points, economic discounts and rights/obligations, of the interconnection agreements. Interconnection rates for fixed network operators identified as operators with SMP (Resolution No. 588/2012) are defined by ANATEL; the interconnection rates for the use of mobile operators networks (Resolution No. 438/2006), may be agreed between the parties. However, if the parties fail to reach a consensus, particularly regarding charges to fixed operators (Resolution No. 576/2011), ANATEL imposes the rates to be used. The mobile termination market is based on the model of incremental costs and, pursuant to applicable laws, reductions of VU-M must be reflected in VC1 (retail price paid by users for local fixed-mobile calls) and VC2 and VC3 (retail price paid by users for national long distance fixed-mobile calls).
The Telefónica Group, including VIVO, has been identified as an operator with SMP in the following markets: (i) fixed network infrastructure access for data transmission in copper pairs or coaxial cables at speeds up to 10 Mbps in the region of São Paulo; (ii) wholesale fixed network infrastructure to transport local and long distance transmission at speeds up to 34 Mbps in the region of São Paulo; (iii) passive towers, ducts and trenches infrastructure throughout Brazil; (iv) call termination on mobile network in Brazil; and (v) national roaming market throughout Brazil.
Operators without SMP are entitled to charge fixed termination fees up to 20% higher than the highest fee adopted by fixed operators with SMP in the same region (despite the fact that there is a pending administrative proceeding before ANATEL challenging such disposition). Operators without SMP are entitled to charge mobile termination fees (VU-M) up to 20% higher than the highest VU-M adopted by mobile operators with SMP in the same region.
Further, ANATEL’s Resolution No. 10,649 of October 29, 2014February 12, 2015, changed article 42 of the Appendix I of the General Plan of Competition Goals (PGMC), and established a decreasing “bill and keep” between SMP and the non-SMP operators: 50/50% between 2018 and 2019 and “full billing” in 2019 when the definitive cost-oriented-model fees shall be in force. Such Resolution has been challenged in courts without a definitive outcome. Accordingly, the VU-M values (in force asBrazilian reáis) for 2017 applicable to Telefônica Brazil were the following: i) Region I: 0.04928; ii) Region 2: 0.05387; and iii) Region 3: 0.06816.
On December 5, 2016, ANATEL issued a public consultation for the revision of January 4), established some additional interpretation about the filling triggers providedPGMC, which may address changes in the Lawrelevant markets regulated by the PGMC and in what regards verticalVIVO’s identification as an operator with SMP in the regulated markets. The mentioned public consultation was available for comments until March 22, 2017 and horizontal “partnerships agreements” subjectANATEL is expected to antitrust clearance.
deliberate on the new regulations during 2018.
Mexico
General regulatory framework
In Mexico, the provision of all telecommunication services is governed by the Constitution and the Federal Telecommunication and Broadcasting Law was(LFTy R), published on July 14, 2014, and came into force 30 naturaldays of its publication.among others.
The Constitution was amended in June 2013 on telecommunications matters; the Federal Telecommunications Institute (IFT) is created as an autonomous bodythe authority responsible for the regulation, promotion and supervision of the use, development and exploitation of radio spectrum, networks and the provision of broadcasting services and telecommunications. By virtuetelecommunications, as well as the antitrust authority for broadcasting and telecommunications sectors. Furthermore, on August 26, 2015, a special division on Telecommunications affairs was established by the Consumers
Affair Authority to monitor, coordinate, control, substantiate and resolve conciliation, arbitration and infringements, review, modification and grant the use of the Constitution amendment, theadhesion contracts in terms of Federal Communication Institute will be in charge of regulating the dominant operators or with SMP.Consumer Act.
The IFT, as the Mexican national authority in communications and broadcasting sector, is the organ responsible for regulating those operators which have SMPsectors, declared in communications and broadcasting markets, after the abovementioned constitutional amendments. As a result of the above mentioned constitutional reforms, IFT has declared2014 the “América Móvil Group” a preponderant operator in the telecommunications market, imposing it specific measures with asymmetric obligations in order to avoid damaging competition and asfree market participation. Within these measures are the imposition of a resultregulated framework interconnection agreement and a set of that, it introduced, among other, special regulationsreference offers for: leasing of dedicated links, access and shared use of passive infrastructure in fixed and mobile networks, MVNOs, roaming and local loop unbundling. In this sense, on November 17, 2016, Telefónica México and América Móvil Group signed an agreement in order for America Móvil to provide the wholesale service of national roaming in the areas where Telefónica México currently has no coverage. This was done in light of the specific measures with asymmetric interconnection rates.
Licenses
Derived from a corporate restructuring carried out in Mexico, authorizedobligations imposed by the IFT to the Preponderant Economic Agent.
The Federal Institute for Telecommunications, datedLaw of Economic Competition published on December 19, 2013 Baja Celular Mexicana, S.A. de C.V.; Celular de Telefonía, S.A. de C.V.; Telefónica Celular del Norte, S.A. de C.V.May 23, 2014, its regulations and Movitel del Noroeste, S.A. de C.V. have ceded in favor of Pegaso PCS, S.A. de C.V. (Pegaso PCS) the rights and obligationsRegulatory Provisions of the concession titles.
Likewise,Federal Law of Economic Competition for telecommunications and broadcasting published by the IFT on January 31, 201412, 2015, constitute the merger between Pegaso Comunicaciones y Sistemas, S.A. de C.V.applicable regulatory framework by the IFT in terms of economic competition for the broadcasting and Pegaso PCS was formalized, surviving the latter. Once the merger takes effect, Pegaso PCS will acquire the ownership of the rights and obligations of the concession titles of Pegasus Communications and Sistemas.telecommunications sectors.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex. Additionally, other concessions are held in México. Two of those licenses are hold, in order to install, operate and explore two public communication networks, being
Pegaso PCS, the concessionaire (July 28, 2010, and July 23, 2008).
The Secretary of Communications and Transports (SCT) also granted the followingS.A. de C.V. (Pegaso PCS) has multiple licenses to Grupo de Telecomunicaciones Mexicanas (which is invested by Telefónica) (GTM): concessionsuse a public telecommunications network and to install, operateuse spectrum for the provision of mobile and explore afixed local service nationwide, long distance and public communication network, localtelephony.
On March 7, 2017, Pegaso PCS entered into an agreement whereby Servicios de Acceso Inalámbricos, S.A. de C.V. (SAI) assigned to Pegaso PCS all rights and international (July 6, 2003); Modification theobligations derived from its concession to provide fixed and public telephone services throughout the country (March 28, 2006); concession in orderfrequency band of 1900 MHz, with a total bandwidth of 30 MHz, to provide DTHmobile and fixed wireless services (January 19, 2011) andin the rights for transmissionRegion 8 (conformed by the States of communication by signals associated with satellites;Guerrero, Oaxaca, Puebla, Tlaxcala y Veracruz). Currently, such concession is in Ka Band (August 6, 2012); and, finally, a concession in order to exploit broadcasting and reception rights, by signal associated with two foreign satellites -WILDBLUE 1 and ANIK F2- (August 6, 2012).
term renovation.
Prices and tariffs
Tariffs charged to customers are not regulated. They are set by mobile operating companies and must be registered with the IFT, in order to be enforced. Since January 1, 2015, no charge can be made for national long distance services.
Interconnection
Mexican telecommunications regulations obligate all telecommunications network concessionairesOn November 9, 2017, the IFT published the MTRs applicable to execute interconnection agreements. However, should the parties fail to agree, IFT must fix the unresolved issues, including tariffs.
Throughout 2011, the extinct COFETEL issued several resolutions as a result of different interconnection disputes submitted by several operators. In such resolutions, COFETEL determined a mobile termination charge (“MTC”)solve any conflicts regarding MTR during 2018. Such MTRs were set, for Telefónica México, as well as for other mobile operators, leading to a 61 % cut to previous rates. Telefónica México has appealed on an administrative basis such resolutions from COFETEL, and such appeals are still pending to be resolved. Recently, IFT determined the mobile termination rates for 2012 and Telefónica México filed an injunction against this rate. Once these trials have been concluded, the rates applied may be further reduced retroactively, IFT has not approved yet the termination rates for 2013, 2014 and 2015 for Telefónica Mexico. Moreover, the declaration of the Preponderant Economic Agent (Radiomóvil Dipsa, S.A. de CV- Telcel) at 0.028562 Pesos per minute, while for the non-preponderant ones they were set at 0.112799 Pesos per minute. These rates were calculated using the same method that was used in 2017 but adjusting the variables in the telecoms market is expected to lead to asymmetric regulatory measures. Thus, in August 2014, the Preponderant was obligated not to charge for terminating calls on its network, i.e. it was imposed the rate of $ 0.00 for the termination service. On December 29, 2014, the IFT published the rates that will be used to resolve interconnection disputes between concessionaires. On the other hand, with regard to the Preponderant economic agent, the IFT published rates relating to origination and transit services.
cost model.
The Company’s competitive position may benefit to a greater or lesser extent depending on the scope of these measures. Furthermore, onOn June 21, 2012, CIADIthe Secretary-General of the International Centre for Settlement of Investment Disputes (ICSID) declared admissible the international arbitration presentedfiled by Telefónica, S.A. against Mexican United States. Telefónica, S.A. formulated theirfiled a lawsuit memorial, on September 20, 2013, by virtue of which claim forclaiming damages incurred as a consequence of the resolutions, issued byseveral decisions of different Mexican regulatory and administrative bodies of mobile termination rates.in interconnections disputes regarding MTRs. Mexican United States answeredreplied on February 28, 2014. On June 26, 2014, Telefónica filed its response and on October 17, 2014 Mexico filed its rejoined (dúplica).
Considering that, on the one hand, Mexico had substantially modified its Constitution regarding telecommunications in June 2013, approving a Federal Telecommunications Law in August 2014 and that, on the other hand, Telefónica México, under this new regulatory framework, was reaching voluntary agreements with other operators to resolve interconnection disputes from previous years, Telefónica, S.A. and the Mexican state entered into negotiations for a joint and friendly withdrawal from international arbitration. This led to the suspension of the procedure on March 18, 2016. In January 2018, a joint dismissal was presented by both parties before the arbitration tribunal, requesting the tribunal to finalize the arbitration. Such finalization will be agreed in the following weeks.
Foreign ownership/restrictions on transfer of ownership
Since the amendments to the Constitution published in June 2013 foreign investment (FDI) up to one hundred percent in telecommunications is allowed.
Competition law
The new Federal Law of Economic Competition was published in the Official Gazette on May 23, 2014. The IFT must issue the “Regulatory Provisions of the Federal Law of Economic Competition for telecommunications and broadcasting.
Venezuela
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex. The band spectrum in 2500-2690 MHz and 1710-2170 MHz, for LTE (Long Term Evolution) mobile services was awarded. The expiration of this license will take place on December 15, 2029, and on November 28, 2022, respectively. The respective bandwidth spectrum concession contracts were signed, one for band AWS 10+10 MHz, and the other for two bands in the 2600 MHz bandwidth. It is worth mentioning that not only did Telefónica obtain the permission to use the 4G spectrum, but it also got an expiration date extension of the general habilitation from 2025 to 2029.
Prices and rates
In accordance with the last reform of the Organic Law of Telecommunications (2011), the system for fixing the prices for telecommunication services remains the same, consisting of simply notifying them to CONATEL, except for fees for basic telephony services (local, national and international long distance) and those for services provided under universal obligations that are established by the government. However, the regulatory entity may, considering CONATEL’s opinion,
fix the prices for any telecommunication services for “public interest reasons”. The amendment does not define the term "public interest reasons".
In the framework of the Enabling Act in force in Venezuela until November 2014, in January 2014 an Organic Law on Fair Prices was published, limiting to natural and legal persons of public and private law, nationals or foreigners, who develop economic activities in Venezuela, the profit margin of the sales prices of goods and services set to a maximum of 30% of its operating costs. This Fair Prices Act was amended on November 19, 2014, unchanged, however, the ends referred to above.
CONATEL published an Administrative Order under which values are set for the Determination of Interconnection Fees for use of Mobile Telephony Services. The objective of this regulation is to establish a reference for values and a criteria to determine interconnection fees in mobile phone use on the basis of a model of long run incremental costs with breakdown of the network elements by CONATEL, who should intervene setting such fees solely in those cases where there are conflicts between operators relating to such fees, and consensus is not reached within the period specified in the interconnection legislation. Mobile termination rates in relation to national operator have been reduced approximately 6% compared to the previous rates.
Likewise, on August 6, 2014, a new providence was published, with which new standards for the provision of services for international long distance telephony and fees applicable for delivering calls to networks fixed and mobile telephony in Venezuela were set. With this regulation, they aim to establish the fees that an operator providing the international long distance services should pay for calls originating in a foreign network and delivered on networks, either fixed or mobile, in Venezuela when the subscriber originating the call is not directly served on his network.
Competition law
The Antimonopoly Law Decree published on November 18,2014, reformed the "Law for the Promotion and Protection of Free Competition” of 1992, now including principles of Justice and Democratization as well as the promotion and protection of public enterprises, associative forms of state and communal, as provided in the “Plan de la Patria” (plan of the country). Some changes to highlight are the modification of the basis for calculating penalties which now must be calculated on the value of the annual gross income of the offender.
Chile
General regulatory framework
The General Telecommunications Law No. 18168 of 1982, as amended, establishes the legal framework for the provision of telecommunications services in Chile. The main regulatory authority in Chile is theSUBTEL (the Under-Secretary of Telecommunications, or SUBTEL.
An emergency alert system was enabled for mobile networks (2G, 3G) to inform the population in cases of disaster. The system using 4G technology will be implemented in March 2014.
Telecommunications). On February 13, 2014, the new Regulation on Telecommunications Services which will comewas published and came into force on June 14, 2014, except certain specific obligations that must be met by the service providers prior to that date, was published. This Regulation replaces the existing to date and regulateregulating a number of new services as Internet, Pay TV, etc.
In May 2014, law No. 20750 that allowsallowing the introduction of DTT was published in the Official Journal. The main provisionsIt set an extensible deadline of 5 years for the blackout analog; it setsanalog. It also set forth that the concessions of free-to-air broadcasting could be nationwide, regional, local and with European coverage; itcoverage. It also setsset forth the enteringmandatory application of “Granted Retransmission” when thetwo requirements ofare met: (i) digital coverage for theat least 85% of the total population in the service area and (ii) the “must carry” of, at less 4four regional channels (whenever(as long as it is technologically feasible and the service area remains equal)unaltered) is fulfilled. FootballIt also established that football matches of Chile National Soccer Team willChilean national soccer team would be broadcastbroadcasted by free-to-air channels.
On July 26, 2014,April 15, 2015, SUBTEL published in the Official Journal the call for a public consultation referred to the Digital Broadcasting TV Plan. They present
The principal regulation concerning competition in Chile is Decree No. 211 of 1973, whose current text was established in Law Decree No. 1 of 2005 (Ministerio of Economía, Fomento y Reconstrucción). The Competition Court deals with infringements of competition law. This Law Nº 20.945 was published on August 30, 2016. The law increases the decree that approvesadministrative fines up to 30% of the plan was forwardedsales relating to the “Contraloría General de la República” for its discussion. Different organizations that grouped cable and TV operators have appealed againstproduct line or services associated with the “Contraloría General de la República”.
Moreover,infringement during the Congress of Chile approved a draft project that forbids contracts granting exclusivityperiod in which the use of pipelines and internals installations needed foralleged infringement took place, or up to the provision of telecommunications facilities for the buildings and condominiums. Additionally, the project regulates the usedouble of the facilities that connect witheconomic profit reached by the internal network and provide access for buildings.
infringement.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex.
Additionally, Telefónica Chile has been granted licenses of public local phone services, and Voice Over Internet Protocol services. Telefónica Empresas Chile has a license for providing TV Services. Telefónica Larga Distancia holdsservices, concessions of long distance and concessions and to install and operateexploit the national fiber optic network.
In November 2013, TMCH initiated the partial commercialization of 4G services,network and in March 2014 the total of the commercialization will have to be implemented.mobile satellite. 2.6 GHz concession obliges TMCHestablished an obligation for Telefonica Móviles Chile to provide a wholesale service to Mobile Virtual Operators,MVNOs, for what the latter had to published a completely Facilities Offer (including prices), available in non-discriminatory terms.
In March 2014, itSeptember 2015, Decree No. 71/2015 of the Ministry of Transport and Telecommunications was published in the Official Journal, the Exempt Resolution No. 758/2014 of the Department of Telecommunications, which assignsgranted to TMCHTelefonica Móviles Chile a service concession for transmitting data on the 713-748 MHz and 768-803 MHz frequency bands. TMCH has awarded aA frequency block of frequencies at athe national level of 2x10 MHz was also awarded to the company through a bidding procedure, with an approximated cost of 5,780,000 U.S. dollars. In addition ofauction procedure. The deadline to start providing the data transmission service, additional obligations are set, like provide wholesale services contained in the commercial project expired on September 14, 2017, and for locations, routes and compulsory schools (remunerations) expired on March 14, 2017. Due to OMV, provide national roaming wholesalecauses of force majeure, certain areas and mandatory routes were authorized to start services provide data transmission wholesale service, provide services to determined routes, locationson October 30, 2017. Both the commercial project and municipal and supported schools.
the considerations received were accepted by the regulator within the committed deadlines.
Prices and tariffs
Public Telecommunication Services Pricestelecommunication services prices and prices for Intermediate Telecommunication Servicesintermediate telecommunication services are freely established by operators, unless there is an express resolution by Chile´s Competition Court on existing conditions in the market that confirmsconfirming that there is not enough for granting a free prices regime. In January, 2009, by No. 2 Report, Chile´s Competition Court (from this moment onwards the TDLC), decreed free tariffs for the “Fixed Phone Service”, “Local Measured Service”, “Charges for Connection Service” and “Public Telephony Service”. Nevertheless, it did not change, for all fixed phone companies, the currently prices of local loop services, and minor provisions for phone services, including: closure of the line and line restoration, release of access for national long-distance service, international services, complementary services, detailed SLM service and free visit and diagnosis, between others. Furthermore, tariff regulation remained at the same terms for unbundled network services for all fixed service companies.
competition. Additionally, maximum prices for interconnection services (access charges for network use, mainly) are subject to tariff regulation for all operators, being set by stipulated procedures.
Under national Telecommunication Law, the structure, level and indexing of maximum tariffs that can be charged are set by a Supreme Decree issued by Transports, Economy, Development and Tourism Ministry (hereinafter, “The Ministries”). The Ministries set maximum tariffs under efficient operator model basis.
Maximum tariffs for telephony services are set every five years by the Ministry of Transport and Telecommunications and the Ministry of Economy.
Interconnection
Interconnection is obligatory for all license holders with the same type of public telecommunications services and between telephony public services and intermediate services that provide long distance services. The same requirement applies to holders of those intermediate service licenses, who are required to interconnect their networks to the local telephone network.
A “calling party pays” tariff structure was implemented on February 23, 1999. Under this tariff structure, local telephone companies pay mobile telephone companies an access charge for calls placed from fixed networks to mobile networks. Local telephone companies may pass this interconnection charge on to their customers. Every five years, SUBTEL sets the applicable tariffs for services provided through the interconnected networks.
TheA Tariff Decree regarding fixed termination rate was adopted for the period 2014-2019 for mobile telephony networks was approved by the Ministriesperiod. The new tariff came into force on January 16,May 8, 2014, and is enforceable since January 25, 2014. The new prices implyit applied a reduction of 76.4% as regards the previous ones.
The Tariff Decree that will be implemented during the next five year period 2014-2019, was adopted by SUBTEL on May 5, 2014, and will enter into force, involving a retroactive effect, from May 8, 2014. New tariffs imply a preliminary reduction of 37% from the previous. Nowadays,one demanded the previous period. Regarding the mobile network, a Tariff Decree is under review by “Contraloríhas been approved for the 2014-2019 period. Such Tariff Decree came into force on January 25, 2014, and it implied a General de la Republica”.reduction of 76.4% from the previous tariffs.
Competition law
The principal regulation concerning competition in Chile is Decree No. 211As of 1973, whose current text was established in Law Decree Nº 1 of 2005 (Ministry of Economía, Fomento y Reconstrucción). The Competition Tribunal deals with infringements of competition law.
Through General Instruction No. 2 (“IG2”)the end of December 18, 2012, the Competition Tribunal imposed that mobile phone companies cannot commercialize plans with2017, a different pricenew tariff setting process began for the on-net and off-net calls, as of the effective date of the mobile Tariff Decree over access charges (on January 25, 2014). In addition, fixed and mobile service packages with discounts are authorized as of the in-service date of the LTE concession (on March 28, 2014).
The TuVes Company, which provides Pay TV services, brought an appeal against IG2 before the Supreme Court, which issued a judgment on December 17, 2013 by virtue of which fixed-mobile convergent offers with a multiservice discount cannot be commercialized permanently. This affected our commercial offer focused on convergent products (Fusion and others), and as a result, possible commercial and operational solutions are being analyzed.
five-year period 2019-2023.
Argentina
General regulatory framework
The basic legal framework for the provision of telecommunications services in Argentina is set forth in the National Telecommunications Law (No. 19798) of 1972 and in the specific regulations governing each type of telecommunications service, which has been modified by Law “Argentina Digital” No. 27078. This new legal framework,27078 issued on January 7, 2015. This legal framework declared of public interest the development and regulation of information technology, communications and its associated resources (TIC´s). Thus, this law became the specific regulatory regime for the free market, including rules on interconnection, universal service and radio spectrum, and setting out the principles of network neutrality and giving to the technological, informational and communicational companies the possibility of providing broadcasting services (except satellite infrastructure), and setting a single license system.
Additionally, the Government approved the Decree No. 267/2015, (the new telecommunications law 'Argentina Digital') entered into forcepublished in the Official Gazette on January 7, 2015, and will regulate information and communication technology (ICT) as Public interest services, replaces4, 2016, which amended the previous telecoms law of 1972, creates a new NRA, sets net neutrality provisions and allows telecommunications licensees to provide (non-satellite) broadcasting services (previously banned by the Media Law), and set a new license system.
The following regulatory authorities oversee the Argentine telecommunications industry:
| · | SECOM (Secretariat of Communications of the Nation) is the decentralized organism responsible for establishing national policies for Telecommunication development with the objective of democratizing access to information, communications and new technologies throughout the national territory, thus bridging the digital divide. |
| · | CNC (National Communications Commission) is a decentralized organism that operates in the field of the Secretariat of Communications of the Federal Planning Ministry, Public Investment and Services, whose role and functions are regulation, control, oversight, and verification of those aspects concerned to the provision of communication services, postal services, and the use of spectrum. |
Additionally, Argentina Digital Act also prescribescreating the future creationNational Communication Agency (ENACOM), which is the continuation of a new organism as the Authority of Application for ICTs, the Federal Authority for ICTs and Communications, whose functions are regulation, control, oversight and verification in ICTs. When this authority comes into operation, it will be(Autoridad Federal de Tecnologías de la Información y las Comunicaciones). Additionally, the continuation of SECOM and CNC.
On October 21, 2003, LawDecree No. 25790 came into force, extending the term for the renegotiation of concession or licensing agreements with public utilities until December 31, 2004,1340/2016, which was subsequently extended until December 31, 2015. As an investor in Argentina throughpublished on January 2, 2017 instructed the Ente Nacional de Comunicaciones to issue new regulations during 2017 which would ensure the allocation of new frequency bands for provision of wireless or fixed wireless services and would enable the reassignment of frequencies previously granted to other providers. Furthermore, it confirmed the authorization to Telefónica de Argentina we commenced arbitration proceedings againstand Telefónica Móviles Argentina to provide broadcasting services by subscription from January 1, 2018 in the Republiccities of ArgentinaBuenos Aires, Córdoba y Rosario, while a mechanism is established for the rest of the country based on the Reciprocal Protectionprotection of Investments Treaty between Spainsmall and Argentinamedium-size providers and cooperatives. Finally, some standards were set forth in the law for damages suffered by us becausethe establishment of the measures adoptedInterconnection Regulation, such as the asymmetric rates regime and the automatic roaming service.
Furthermore, “Law on Defense of Competition” No. 25156 prohibits any acts or behaviors contrary to such law. The enforcement authority is assisted by the Argentine government in connection withNational Commission for the renegotiationDefense of certain concession and licensing agreements. On August 21, 2009, the parties requested the Tribunal, in accordance with Rule
43 of the ICSID Arbitration Rules, declare a resolution of the termination of the proceedings. The agreement of the parties envisages the possibility of a new request for arbitration under the ICSID Convention being submittedCompetition created by Telefónica.
Law No. 22262.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex.
Additionally, Telefónica de Argentina has licenses for an indefinite period of time;time for the provision of communications services; local telephone services; long-distance national and international, telex, international communication and data transfer services; national and international value-added services, and other telecommunication services provided by the different license agreements concludedentered into with the National State, and administrative acts concludedentered into with the National State.
Telefónica Móviles Argentina holds licenses for providing mobile telecommunication services, local telephone services, long distance national and international, telex international, national and international data transfers, value-added services, and other telecommunications services provided by the different license agreements concluded with the National State, and administrative acts concluded with the National State.
FromSince the promulgation of the “Argentina Digital” new legal framework NºNo. 27078, the licenses system has becomebecame a license-only system, without prejudice to the corresponding inscription of each service in the terms that the Authority of Application determines, and will havehas national scope. For this purpose, the legal framework prescribes a period of grace that grant the old license given to,contained transitional provisions under which licenses outstanding at the momenttime of the promulgation of that Act that were called “Single Telecommunication Service License” willwould be considered by the effects ofunder the new regime as “Single Argentina Digital License” with the same content, scope and effects.
Otherwise, Argentina Digital Act No. 27078 ruled that the telecommunication licensees may require a license to provide subscription television services, except those provided through a satellite link. Nevertheless, from the promulgation of the Decree No. 267/2015, amending the aforementioned Act, some telecommunication licensees, including Telefónica de Argentina S.A. and Telefónica Móviles Argentina S.A., may provide broadcasting services by subscription since January 1, 2018 in certain areas and will be able to progressively extend to others.
Prices and tariffs
Additionally, the “Argentina Digital” legal framework establishestablishes that providers of telephoneTIC´s services may freely set rates and/or prices for their service which shall be reasonable and fair, covering all the operation costs and a consequent reasonable profit margin. It also brings toallows the Authority of Application the possibilityenforcement authority to regulate the tariffs and prices of essential public services and those the sameother services that such authority determines. However, until the Secretary of Communications determines that there is effective competition for telecommunications services, or until the secondary legislation is adopted, or until the new regime is duly regulated and the enforcement authority so provides, the “dominant” providers in the relevant areas (which include Telefónica de Argentina) must respect the maximum tariffs established in the general tariff structure.
Interconnection
Also, the guidelines set forth in article 26 of Decree No. 1185/90 continue in effect for operators with significant market power. These guidelines establish information obligations with which operators must comply with respect to tariffs and which flow toward both clients and the national regulator. This Decree also establishes the powers the regulator has to revise or revoke such tariffs.
On the other hand, on October 15, 2012, came into force the resolution SC 45/2012 of the SecretaryThe National Entity of Communications which provides that the mobile phone companies should only bill to its clients the minutes since the call to be serviced by the receiver or his message box. Furthermore, in December 2013 the Secretary of Communication throughout its Resolution No. 26/13 have modified the pricing system for all the mobile communication from minutes units to second units and also prescribes information duty around any change of commercial condition or price increase, 60 days in advance.
Tariffs charged to customers for mobile services are currently not regulated in Argentina.
Interconnection
The rules for national interconnection set forth that interconnection agreements are to be freely negotiated between the relevant service providers, on a non-discriminatory basis. Notwithstanding that, with the new legal framework, the new Authority of Application that will be created in the future,(ENACOM) has the power to control prices and tariffs, and also to set them in order to the general costs or other compensation mechanism.
Competition law
“Law on Defense of Competition” No. 25156 prohibits any acts or behaviors contrary to the law. The enforcement authority will be assisted by the National Commission for the Defense of Competition created by Law No. 22262.
Colombia
General regulatory framework
In Colombia, telecommunications are a public service subject to state regulation and oversight. Law 1341/09 (“Technologies(Technologies of Information and Communications Law”)Law) reformed the legal framework, establishing the general regime for information and communication technologies. Under this law, providers of network and telecommunications services in Colombia must register with the Information and Communication Technologies Minister. In addition, operators must obtain a concession from the National Television Authority (previously a Commission) in order to provide television services. The Colombian telecommunications regulator is the Comisión de Regulación de Comunicaciones or CRC.CRC, and the authority in charge of the spectrum is the Agencia Nacional del Espectro or ANE.
The Colombian competition law is included in Law No. 155/59, Decree No. 2153/92 and Law No. 1340/09 on restrictive trade practices. The Superintendent of Industry and Commerce is the Colombian competition authority.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex.
Additionally, Colombia Telecomunicaciones subjected itself toS.A. ESP (ColTel) adopted on November 8, 2011 the General Entitled Regimegeneral entitled regime of approval that is set outestablished in law No. 1341 2009, on November 8, 2011, which allows Colombia TelecomunicacionesColTel to continue providing the network and communications services, like added-value services, carrier national services and mobile services, amongst others.In relation to mobile services, the company availed itself of the general authorization regime on November 28, 2013, finishing mobile concession contracts and consequently obtaining the renewal of the permission to use 40 MHz of spectrum in the 850 MHz and 1900 MHz band until March 28, 2024. In addition, the companyColTel holds a concession in order to provide satellite TV (DBS) or Direct Home TV (DTH)., which was renewed on February 22, 2017.
Regarding the licenses for the provisionThe Ministry of mobile voice services awarded in 1994,Information Technologies and their amendment agreements, by virtue of which allow the usage of spectrum over 850 MHz (25 MHz) and 1900 MHz (15 MHZ) bands, given for a 10 years period and extended in 2004 for another equal period, the company decided to opt to the general habilitation regime, modifying registry before the ITC Ministry and requesting the renewal of the permits for the use of spectrum according to the article 68 of law No. 1341 of 2009, and the Decree No. 2044 of 2013, in which it has been determined the requirements and formalities in order to be able to obtain the renewal and some criteria for establish the renewal conditions. Resolution No.Communications (ITC) issued resolution 597 ofon March 27, 2014 set the conditions the usage of spectrum over to renew850 and MHz/1900 MHz renewal.
Regardingband licenses for ten additional years. Under the reversionscope of assetssuch resolution, ColTel (67.5% of which is owned, directly and indirectly, by Telefónica and 32.5% of which is owned by the Company andgovernment of the Colombian Government had been acting withinNation) renewed its license to exploit such radioelectric spectrum to provide telecommunication services.
The concession agreements from 1994, which were renewed in 2004 and under which the contractual relationship, inmobile telephone services were provided until November 28, 2013, contained a reversion clause for the understanding that such reversion only applies to the scarce resource that was assigned (the spectrum), on the basis of with the legal framework issued by the national Congress, integrated by lawsunderlying assets. Law 422 of 1998 and Law 1341 of 2009.
Notwithstanding,2009 clarified that upon expiration of a concession agreement for telecommunication services, only the spectrum reverts to the State. That was the understanding under which all the operators, including the authorities, were operating between 1998 and 2013. In 2013, however, when analyzing an appeal on the constitutionality of said laws, the Constitutional Court declared possibleconfirmed the constitutionality of the laws but clarified that it could not be concluded that those laws modified with retroactive effect the reversion clause of the concession agreements of 1994. On February 16, 2016, the ITC started an arbitration proceeding in accordance with the terms of the relevant concession agreement of 1994, in order to clarify the validity and scope of such reversion clause. On July 1, 2016, the co-defendant concession holders (including ColTel) filed a response to the claim prompted by the ITC. The arbitration award was rendered on July 25, 2017 and was not favorable for the co-defendants.
The arbitration tribunal ordered ColTel to pay 1,651,012 million Colombian Pesos, after finding on August 4, 2017 that an arithmetic error led to a minor amendment decreasing the amount contained in the original award from July 25, 2017. On August 29, 2017, the shareholders' meeting of ColTel approved a capital increase in a conditional way article 4total amount of 1,651,012 million Colombian pesos, 470 million euros at the exchange rate as of such date, to pay the amount imposed by the arbitration award. The Telefónica Group and the Colombian government subscribed the capital increase pro rata to their respective shareholding in ColTel. Telefónica's decision to participate in the capital increase does not
constitute, and should not be understood as, an acceptance of the No. 422 /1998 Lawarbitration award. Telefónica reserves all of its legal rights and article 68the exercise by Telefónica or ColTel of No. 1341/2009 Law, relatedany applicable legal action, national or international. Both ColTel and Telefónica have started legal actions. On August 18, 2017, ColTel filed an appeal to challenge the arbitration award at Colombia's highest court of administrative litigation (Consejo de Estado). In addition, on December 18, 2017, ColTel also filed a constitutional action “acción de tutela” seeking to protect its constitutional rights jeopardized by the arbitration award. On the other hand, pursuant to the reversionrelevant bilateral treaty, Telefónica notified Colombia of assets by Sentence C-555its intention to file an International Centre for Settlement of 2013, to interpret that concessional contracts subscribed before the entry into force of these legislation, shall respect “the reversion” clause 33 concluded “atInvestment Disputes (ICSID) claim after the expiration of the concession term,90-day notice period. After the elements and assets directly affected by it will become National property, without imposing any compensation obligation”.
Constitutional Court Ruling C-555 was issued inexpiration of such deadline, on February 2014. According to Court´s Opinion, in case of application, reversion includes wireless telecommunications spectrum band, as well as other assets and network related1, 2018, Telefónica submitted the arbitration request to the rendering of the service as laid down in sections 14 and 15 of Decree No. 1900 of 1990; or, if such reversion is not possible, its economic equivalence.
Upon termination of the Agreements, and during the liquidation of the respective contracts, the Court decision leaves to the parties the understanding of the contractual conditions for the application of the reversion that will take place in May 2015.
In the 4G auction process, the Company obtained 30 MHz of spectrum in the 1710 to 1755 MHz band and 2110 to 2115 MHz band, resource that was assigned by the Resolution No. 2625 (2013), confirmed by Resolution No. 4142 on October 25, 2013, for a 10 years period.
ICSID.
Interconnection
Mobile and fixed operators in Colombia have the right to interconnect to other operators’ networks. Before the intervention of regulatory authorities, operators must attempt direct negotiations. Interconnection must assure compliance with the
objectives of non-discriminatory treatment, transparency, prices based on costs plus a reasonable profit and promotion of competitioncompetition.
In February 2017, the Comisión de Regulación de Comunicaciones (CRC) published resolution 5108 establishing, starting in 2017, symmetric reductions of 11.4 COP per minute and 4.3 million COP per monthly capacity to the termination rates are regulated by CRC Resolutions No. 1763for established operators and 3136 of 2011, No. 3534 of 2012 and No. 4660 of 2014, and in particular resolutions No. 4002 and 4050 of 2012, that apply to dominant operator. Additionally, CRC Resolution No. 3101 of 2011 adopted a unique interconnection regime, which promotes competition and guarantees access to networks and networks elements to other providers of telecommunications, content and apps.
In 2011, the Regulator issued a progressive reduction on mobile termination charges from April 2012 to 2015 and in 2012; the regulator imposed the use of asymmetric mobile termination rates to COMCEL the dominant operator. In 2014, the CRC issued a new glide path for the mobile termination rates by Resolution No. 4660 of 2014.
Value/year/ COP$ | 2014 | 2015 | 2016 | 2017 |
| Charge per minute | 56.87 | 32.88 | 19.01 | 10.99 |
| % Reduction | - | 41.7% | 42.2% | 42.2% |
| Capacity Charge | 24,194,897.29 | 13,575,005.96 | 7,616,514.53 | 4,273,389.92 |
| % Reduction | - | 43.4% | 43.9% | 43.9% |
During 2013, the Constitutional Court Ruling issued national roaming price regulation, extending the application of the objective value set for mobile termination rates to this service24.58 COP per minute and imposing a value of 25.63 Colombian pesos9.8 million COP per Mbyte for 2013, 19.36 Colombian pesos for 2014 and 13.09 Colombian pesos for 2015. The Resolution No. 4660 of 2014 established a different valuemonthly capacity for new entrant operators which obtained spectrum IMTin a five-year period. The CRC also adopted measures to promote the entry of MVNOs, including the regulation of prices for first time: Roamingthe access to the mobile networks. In addition, the conditions for voice 12.55 Colombian pesos andnational roaming for SMS 2.24 Colombian pesos.have been amended.
|
| | |
| Value/year/ COP$ | 2018 |
|
| Charge per minute | 10.99 |
|
| % Reduction | 42.2 | % |
| Capacity Charge | 4,273,389.92 |
|
| % Reduction | 43.9 | % |
Prices and tariffs
The Technologies of Information and Communications Law provides for a free pricing system for communication service,services, unless there are market failures or quality problems. The regulation issued previously remained and applies to pricesFrom 2016 retail tariffs for calls from fixedfix to mobile (ceiling) that depends on changes in ratescalls are no longer regulated except for TIGO (one of mobile access, being the reason why during 2014 it was 124.87 Colombian pesos. In Resolutions No. 4002 and 4050 of 2012, the dominant operator was obliged to remove the differential charge in “on net” and “off net” calls, and for this reason the terms and conditions for adjusting the offer to consumers were dictated.
Regulation in quality and users’ protection
During 2013 the Commission established rules to protect users in matters such as international roaming services, and ordered providers to automatically compensate users, as of January 2014,commercial names under which Colombia Movil operates) which still holds concession for the blocking, suspension or disconnectionprovision of fixed services. For mobilepersonal communication services the Commission ordered the automatic compensation (via minutes) for dropped calls. During 2014, the Commission established the removal of minimum stay terms for mobile services, and the selling of terminals and services by separated agreements from the first of July. In October 2014, rules regarding duration terms were modified in order to make the users’ right of termination the contract effective; also mobile subscription agreements were simplified, according to a model.
In terms of quality, the obligations to facilitate monitoring and controls are highlighted, which were imposed in Resolution No. 597 of 2014. This Resolution also allows the renewal of the permission to use the band spectrum on 850 and 1900 MHz (40 MHz), since it must ensure access to Systems Management, the storage of information and system´s updating. Likewise, the ICT Ministry established that, at the failure of the quality indicators and failure to service over an hour, the presentation of an improvement plan will be expected and then if failure to comply it, it can be ordered the restriction on marketing the service to the department or geographical area to which it belongs the affected locality.
(PCS´s).
Television services
The Company paysColombian national TV authority (Autoridad Nacional de Televisión or ANTV) published the National Television Authority a periodic considerationpayment regime applicable to subscription television operators for the license obtainedproviding their services, which has been in 2007 to offer television services, initially set as 10% of the gross revenues of the company for television services, reduced to 7% in 2010. Since 2012, it isforce since November 1, 2017. This regime sets forth variable tariffs based on aincome or fixed value of 1,874.32 Colombian pesostariffs per user updated yearly to(whichever is higher), based on the consumer gross price index (IPC)population of each municipality and aiming at reducing the numbercurrent level of registered users.fees.
The Colombian Competition Law is incorporated in the Law No. 155/59, Decree No. 2153/92 and Law No. 1340/09 on Restrictive Trade Practices. The Superintendent of Industry and Commerce is the Colombian competition authority.
|
| | | | | |
| Fee | Population | 2017-2018 | 2019-> |
| Variable tariffs | >100,000 | 1.0% | $ 340 | 0.8% | $ 272 |
| <100,000 | 0.4% | $ 88 | 0.3% | $ 66 |
| Compensation | >100,000 | 4.9% | $ 1,666 | 4.3% | $ 1,462 |
| <100,000 | 1.0% | $ 220 | 0.5% | $ 110 |
| | |
| Fixed tariffs | $11,462,644 |
Peru
General regulatory framework
The provision of telecommunications services in Peru is governed by the Telecommunications Law and related regulations.
In July 2012, the Peruvian Congress approved the Law of Promotion of the Broad Band and Construction of the National Fiber Optic Backbone, Law No. 29904. This Law declares of public necessity:declared both (i) the construction of thea National Fiber Optic Backbone which will be entitledavailable to the government to make possible the connectivity by the broad band, and; ii)band; and (ii) the access and use of the infrastructure associated with the public services of energy and hydrocarbon to facilitate the display of the telecommunication network for the provision of the broad band.band of public necessity. In addition, Law No. 29904 impliesimplied that operators of electric, transport and hydrocarbon infrastructure projects willwould have to install fiber optic that willwould be entitledavailable to the Stategovernment and will be given in concession to other telecommunication operators. Also, establishesthis law established that a percentage of the capacity of the National Fiber Optic Backbone willwould be reserved forto the Governmentgovernment to satisfy its necessities. Additionally, this Law incorporated the obligation of the internet services providers to comply with the Net Neutrality regulations. In this sense, the NRA, the Organismo Supervisor de las Telecomunicaciones (OSIPTEL), adopted regulations aimed at providing clear guidelines on the implementation of the net neutrality regime adopted in Peru in 2012 that are in force since January 1, 2017.
In November 2013, secondary legislation for developing Law No. 2990430083 was approved. On December 23,approved in September 2013, “Consorcio TV Azteca – Tendai” was awarded withwhich seeks to strengthen competition in the National Fiber Optic Backbone project.public mobile market service by introducing MVNOs and mobile rural infrastructure operators (MRIO). Regulations developing the Act were published in August 2015.
The general competition framework in Peru is based on the Legislative Decree No. 1034. This Law it is applied, in the telecommunication sector, by OSIPTEL.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex.
Additionally, Telefónica del Perú, S.A.A. provides nationwide fixed electronic communications services in the whole country, pursuant to two concession agreements issued by the Transports and Communications Ministry on May 16, 1994. Both agreements will be in force duringhad a 20 years and will be partially renewedterm, subject to partial renewals for additional periods of 5five years up to a maximum of 20 years. To date, three partial renewals have been approved and, thereunderconsequently, the concession agreements have guaranteed its forcebeen extended until November 27, 2027. In December 2013, Telefónica del Perú, S.A.A. submitted to the Transport and Communications Ministry an application to renew its concessions to provide nationwide fixed telecommunications services for five years more. The aforementionedadditional years. This proceeding is still pending. Additionally, Telefónica del Perú, S.A.A. has five mobile services concessions. This concession where before entitled to Telefónica Móviles, S.A., company absorbed by Telefónica del Perú, S.A.A. Three of them (two are intended to provide mobile service in Lima and Callao and the other for the rest of the country) were renewed in March 2013 for an additional 18 years and 10 months. The last mobile concession was awarded to Telefónica in October 2013.
Although the cable distribution broadcasting service concessions have expired, they are still valid while the renew proceedings are still pending.
were renewed in May 2016 until March 2032 and 2033, respectively.
Prices and tariffs
Tariffs for fixed telephony services must be approved by OSIPTEL (National Regulatory Authority) and in accordance with a price cap formula based on a productivity factor. Rates charged by mobile providers to their customers have been subject to a free tariff regime supervised by OSIPTEL. Tariffs must be reported to OSIPTEL prior to implementation.
On October 17, 2013,May 19, 2016, OSIPTEL fixed in 0.0025 per second 0.1478 per minuteadjusted the tariff maximum rate applicable to local calls made from Telefónica del Perú S.A.A.’s fixed telephones to mobile networks for personal and trunked communications.in PEN 0.0017 per second without IGV. This new rate is in force since October 30, 2013.
May 21, 2016.
Interconnection
Mobile service providers are required, upon request,OSIPTEL started in November 2016 the process to interconnect with other concession holders. According toamend the principlesmaximum MTRs. On January 28, 2018, OSIPTEL published the caps on interconnection rates for MTRs. The approved rate is the same for all networks and entails a decrease of neutrality and non-discrimination contemplated in63% (USD 0.00661 per minute rated at the Telecommunications Law, the conditions agreed upon in any interconnection agreementsecond). The new fees established by OSIPTEL will apply to third parties in the event that those conditions are more beneficial than terms and conditions agreed upon separately. In Peru, the previously applicable MTR was reduced by 31.43% in October 2013.
The general competition framework in Peru is based on the Legislative Decree No. 1034. This Law it is applied, in the telecommunication sector, by OSIPTEL. Law No. 30083 was approved in September 2013, which seeks to strengthen competition in the public mobile market service by introducing mobile virtual network operators (MVNOs) and mobile rural infrastructure operators (MRIO). Mobile network operators must allow MVNOs access (when requested) to their elements and network services for a fee and should provide – through the MRIO network, upon request - public mobile services in rural areas as long as they do not own infrastructure deployed at these locations. Mobile network operators may have no legal or economic ties with MVNO accessing their network. Therefore, in principle, no Telefónica Group company could operate as a MVNO within its own network. Mobile network operators must offer MVNOs their wholesale services on terms no less favorable or discriminatory. The publication of the regulation of this Law is pending.
Ecuador
General legislative framework
On December 17, 2014 the National Assembly approved the new Telecommunications Act. The mentioned law was referred to the Executive for the Veto, and was sanctioned in February 2015. Finally, on February 18, 2015, the referred Telecommunication Act was published in the Official Journal and came into force on the same day.
The National Secretary of Telecommunications and the National Counsel of Telecommunications are the authorities enabled with respect to the regulations, and the Superintendence of Telecommunications with respect to the controladoption of the application of such regulation. Nonetheless, when the new Organic Law of Telecommunications comes into force, there will be a single regulatory and control body: the Agency for the Regulation and Control of Telecommunications.
Licenses
The main licenses and concessions to use spectrum are shown in the table at the end of this Annex. In addition, on February 18, 2015, Telefónica Ecuador reached an agreement with the Ecuadorian government to purchase 2x25 MHz of spectrum in 1900 MHz band.
Otecel has a concession for providing fixed and mobile carrier services that expires in 2017, and can be renewed for an additional period of 15 years. The different licenses for providing added-value mobile services and Internet access services expire in 2021. Nowadays, this license has been renewed until June 2, 2021, and may be extended for 10 years more. When the concession for mobile services expires, the renewal of the enabling title or the concession of a new one are subject to a negotiation with the Government. Otherwise, assets assigned to the mobile services provision will revert to the State in exchange for a fee.
Prices and rates
The retail prices of voice services and Short Message Service (SMS) are regulated through established tariff ceilings that are incorporated in the Concession Agreement. The wholesale prices are not regulated; however, at the end of 2014 CONATEL (National Council of Telecommunications) issued the Rules of Procedure of Mobile Virtual Network Operators, and the Rules of Procedure of National Automatic Roaming which allow the intervention of the regulator in setting wholesale prices for MVNOs and the National Automatic Roaming, but this discretion has not been implemented yet.
Interconnection
There is free negotiation between the parties, but if there is not agreement, the SENATEL (National Secretary of Telecommunications) is able to issue a rule of interconnection, and set interconnection charges. This action has been happening. Likewise, it is important to mention that at this time there is the asymmetric interconnection charges for operators Advanced Field Service.
Competition Law
The Antitrust Law was issued in 2011, which sets regulations about the prohibited practices of abuse of market power, collusive and unfair competition, procedures for investigating such practices, and the respective penalties. The Superintendence of Control of Market Power is the control authority, for this reason it can investigate and punish the prohibited practices. Also, it has been established a Regulation Board that has certain regulatory powers.
Main concessions and licenses held by the Telefónica Group
Below it is included aThe following tables list ofthe concessions and licenses as at December 31, 2017 to use spectrum for mobile services and selected other applications in each country.
|
| | | | | | | | |
| EUROPE | Frequency | Bandwidth (MHz) |
| | Year of Exp. Date | |
| Spain | 800 |
| MHz
| 20 |
| | 2031 | |
| | 900 |
| MHz
| 29.6 |
| | 2030 | |
| | 1,800 |
| MHz
| 40 |
| | 2030 | |
| | 1,900 |
| MHz (TDD)
| 5 |
| | 2020 | (1) |
| | 2,100 |
| MHz
| 29.6 |
| | 2020 | (1) |
| | 2,600 |
| MHz | 40 |
| | 2030 | |
| 2,600 |
| MHz
| 20 |
| (2) | 2030 | |
| 3.5 |
| GHz
| 40 |
| | 2020 | (1) |
| United Kingdom | 800 |
| MHz
| 20 |
| | Indefinite | (3) |
| | 900 |
| MHz
| 34.8 |
| | Indefinite | |
| | 1,800 |
| MHz
| 11.6 |
| | Indefinite | |
| | 1,900 |
| MHz (TDD)
| 5 |
| | Indefinite | |
| | 2,100 |
| MHz | 20 |
| | Indefinite | |
| Germany | 700 |
| MHz | 20 |
| | 2033 | |
| | 800 |
| MHz | 20 |
| | 2025 | |
| | 900 |
| MHz
| 20 |
| | 2033 | |
| | 1,800 |
| MHz
| 20 |
| | 2033 | |
| | 1,800 |
| MHz
| 20 |
| | 2025 | |
| | 1,900 |
| MHz (TDD)
| 5 |
| | 2025 | |
| | 1,900 |
| MHz (TDD) | 5 |
| | 2020 | |
| | 2,000 |
| MHz (TDD) | 14.2 |
| | 2025 | |
| | 2,100 |
| MHz | 39.6 |
| | 2020 | |
| | 2,100 |
| MHz
| 29.7 |
| | 2025 | |
| | 2,600 |
| MHz | 60 |
| | 2025 | |
| | 2,600 |
| MHz (TDD) | 20 |
| | 2025 | |
| | 3.5 |
| GHz | 42 |
| | 2021 | |
(1) Expected extension until April 18, 2030.
(2) Regional licenses in Madrid and Melilla.
(3) Initial term of 20 years.
|
| | | | | | | | | | |
| BRAZIL | Frequency | Bandwidth (MHz) | | Year of Exp. Date | |
|
Brazil (10) | 450 |
| MHz
| 14 |
| | 2027 | (1 | ) |
| | 700 |
| MHz
| 20 |
| | 2029 | |
| | 850 |
| MHz
| 25 |
| (2 | ) | 2020-2028 | (3 | ) |
| | 900 |
| MHz
| 5 |
| (4 | ) | 2020-2023 | (5 | ) |
| | 1,800 |
| MHz | 20 |
| (6 | ) | 2020-2023 | (5 | ) |
| | 1,900 |
| MHz | 10 |
| (7 | ) | 2022 | |
| | 2,100 |
| MHz | 20-30 |
| (11 | ) | 2023 | |
| | 2,500 |
| MHz
| 40 |
| (8 | ) | 2027-2031 | (9) |
|
(1) SP State (towns with CN 13 to 19), MG and North East (AL, CE, PB, PE, PI, RN e SE).
(2) Except regions 2', 4', 6', 7' and 10.
(3) Regional licenses: expiration and renewal dates are dependent on the region. The license in Rio de Janeiro is due to expire in 2020.
(4) Only in regions 3, 4, 4', 5, 6, 7, 8 and 9. Not in regions 1, 2, 2', 5', 6', 7' and 10.
(5) Regional licenses: expiration and renewal dates are dependent on the region. The license in MG Interior is the first to reach its renewal date in 2020.
(6) 20 MHz is the most common bandwidth, but it is higher in some regions (up to 50 MHz).
(7) Only in region 10. The licenses can be disabled and migrated to 2100 MHz frequency (3G technology). This depends on Anatel’s approval.
(8) 40 MHz is the most common bandwidth, but it is 60 MHz in some regions.
(9) Band X will expire in 2027 and Band P will expire in 2031.
(10) Telefónica Brazil uses high frequency spectrum in all regions of Brazil; the same will apply with low frequency spectrum once the 700 MHz frequency is usable. Until then, the operator uses spectrum in low frequencies spectrum in all regions of Brazil except in region 10 (Northeast of Brazil). Regional codes are included in Annex 1.
(11) 30MHz in regions where the bandwidth from 1900 MHz frequency has been migrated to 2100 MHz frequency.
| EUROPE | Frequency | Bandwidth (MHz) | Year of Exp. Date | | Technology (6)(7) |
| Spain | 800 MHz | 20 | | 2031 | (1) | 4G |
| | 900 MHz | 29.6 | (2) | 2030 | | 2G/3G |
| | 1800 MHz | 40 | | 2030 | | 2G/4G |
| | 2.1 GHz | 29.6 | | 2020 | (3) | 3G |
| | 1900 MHz (TDD) | 5 | | | t.b.d. |
| | 2.6 GHz | 40 | | 2030 | | 4G |
| UK | 800 MHz | 20 | | Indefinite | (4) | 4G |
| | 900 MHz | 34.8 | | Indefinite | | 2G/3G |
| | 1800 MHz | 11.6 | | Indefinite | | 2G |
| | 1900 MHz (TDD) | 5 | | Indefinite | | t.b.d. |
| | 2.1 GHz | 20 | | Indefinite | | 3G |
| Germany | 800 MHz | 20 | | 2025 | | 4G |
| | 900 MHz | 20 | | 2016 | (5) | 2G |
| | 1800 MHz | 69.6 | | 2016 | (5) | 2G/4G |
| | 1800 MHz | 20 | | 2025 | | 2G/4G |
| | 1900 MHz (TDD) | 5 | | 2025 | | t.b.d. |
| | 1900 MHz (TDD) | 5 | | 2020 | | t.b.d. |
| | 2000 MHz (TDD) | 14.2 | | 2025 | | t.b.d. |
| | 2.1 GHz | 39.6 | | 2020 | | 3G |
| | 2.1 GHz | 30 | | 2025 | | 3G |
| | 2.6 GHz | 60 | | 2025 | | 4G |
| | 2.6 GHz (TDD) | 20 | | 2025 | | t.b.d |
(1) Digital Dividend availability has been postponed to April 1, 2015; license has been extended to April 24, 2031 (from December 31, 2030).
(2) 2x14.8 MHz from February 4, 2015, 2x13.8 MHz until then.
|
(3) Expected extension until April 18, 2030. |
(4) Initial term 20 years.
(5) On July 4, 2014, the German regulator decided that the new merged entity (resulting from the acquisition of E-Plus by Telefónica Deutschland) is obliged to return spectrum holdings (900 MHz/1800 MHz) by December 31, 2015 before the legal expiration date (December 31, 2016), if Telefónica Deutschland does not reacquire the frequencies during the 2015 auction.
(6) In Europe, technology neutrality (allowing spectrum usage with any technology) is applicable to all spectrum bands in accordance with European Regulation. However, in Germany and Spain, licenses granted before 2010 (which have not been renewed yet) were associated to a concrete technology deployment; therefore a request must be made to the national regulator before implementing technology neutrality, who would carry out a review on market impact.
(7) t.b.d (to be defined) is indicated when the technology is not defined yet.
|
|
|
| | | | | | | | |
| HISPANOAMÉRICA | Frequency | Bandwidth (MHz) | Year of Exp. Date | |
| Argentina | 700 |
| MHz | 20 |
| 2032 | (1 | ) |
| | 850 |
| MHz (AMBA) | 30 |
| Indefinite | |
| | 850 |
| MHz (Sur) | 25 |
| Indefinite | |
| | 1,900 |
| MHz (AMBA)
| 20 |
| Indefinite | |
| | 1,900 |
| MHz (Norte) | 50 |
| Indefinite | |
| | 1,900 |
| MHz (Sur)
| 25 |
| Indefinite | |
| | 1,700 |
| MHz/2100 MHz | 20 |
| 2032 | (1 | ) |
| | 3.5 |
| GHz | 50 |
| Indefinite | (2 | ) |
| Chile | 700 |
| MHz | 20 |
| 2045 | |
| | 850 |
| MHz | 25 |
| Indefinite | |
| | 1,900 |
| MHz | 30 |
| 2032/2033 | (3 | ) |
| | 2,600 |
| MHz | 40 |
| 2043 | |
| | 2,600 |
| MHz | 12 |
| 2038 | (4 | ) |
| | 3.5 |
| GHz | 50 |
| 2037 | (5 | ) |
| Colombia | 850 |
| MHz | 25 |
| 2024 | |
| | 1,700 |
| MHz/2100 MHz | 30 |
| 2023 | |
| | 1,900 |
| MHz | 15 |
| 2024 | |
| | 1,900 |
| MHz | 15 |
| 2021 | |
| Ecuador | 850 |
| MHz | 25 |
| 2023 | |
| | 1,900 |
| MHz | 60 |
| 2023 | |
Mexico(6) | 850 |
| MHz (Reg. 1, 2, 3, 4) | 20 |
| 2025 | |
| | 850 |
| MHz (Monterrey y alrededores) | 1.92 |
| 2025 | |
| | 1,900 |
| MHz (Reg. 1) | 40 |
| 2018/2030 | (7 | ) |
| | 1,900 |
| MHz (Reg. 2) | 50 |
| 2018/2030 | (8 | ) |
| | 1,900 |
| MHz (Reg. 3 and 7) | 60 |
| 2018/2025/2030 | (9 | ) |
| | 1,900 |
| MHz (Reg. 4) | 50 |
| 2018/2030 | (10 | ) |
| | 1,900 |
| MHz (Reg. 5)
| 50 |
| 2018/2025/2030 | (11 | ) |
| | 1,900 |
| MHz (Reg. 6) | 60 |
| 2018/2030 | (12 | ) |
| | 1,900 |
| MHz (Reg.8 - Guerrero, Oaxaca, Puebla,Tiaxcala and Veracruz) | 30 |
| 2018 |
|
| | 1,900 |
| MHz (Reg. 9 – México D.F.) | 70 |
| 2018/2025/2030 | (14 | ) |
| Peru | 450 |
| MHz | 10 |
| 2028 | (15 | ) |
| | 700 |
| MHz | 30 |
| 2036 | |
| | 850 |
| MHz | 25 |
| 2030 | (16 | ) |
| | 900 |
| MHz (Lima y Callao) | 10 |
| 2028 | |
| | 900 |
| MHz (Resto de provincias) | 16 |
| 2028 | (17 | ) |
| | 1,700 |
| MHz/2100 MHz | 40 |
| 2033 | |
| | 1,900 |
| MHz (Lima y Callao) | 25 |
| 2030 | |
| | 1,900 |
| MHz (Resto de provincias) | 25 |
| 2018 | |
| | 3.5 |
| GHz | 50 |
| 2027 | (15 | ) |
| Uruguay | 700 |
| MHz | 30 |
| 2037 | |
| | 850 |
| MHz | 25 |
| 2024 | |
| | 1,900 |
| MHz | 20 |
| 2022/2024 | (18 | ) |
| | 1,900 |
| MHz | 40 |
| 2033 | |
| Venezuela | 850 |
| MHz | 25 |
| 2022 | |
| | 1,900 |
| MHz | 50 |
| 2022 | |
| | 1,700 |
| MHz/2100 MHz | 20 |
| 2022 | |
| | 2,600 |
| MHz | 40 |
| 2029 | |
| | 3.5 |
| GHz | 50 |
| 2026 | (15 | ) |
| Costa Rica | 850 |
| MHz | 10.6 |
| 2026 | |
| | 1,800 |
| MHz | 30 |
| 2026 | |
| | 1,800 |
| MHz | 20 |
| 2032 | |
| | 2,100 |
| MHz
| 20 |
| 2026 | |
| | 2,100 |
| MHz
| 20 |
| 2032 | |
| El Salvador | 850 |
| MHz | 25 |
| 2018 | |
| | 1,900 |
| MHz | 30 |
| 2021 | |
| Guatemala | 1,900 |
| MHz | 80 |
| 2034 | |
| BRAZIL | Frequency | Bandwidth (MHz) | Year of Exp. Date | | Technology (11)(12) |
Brazil (10) | 450 MHz | 14 | | 2027 | (1) | t.b.d. |
| | 700 MHz | 20 | | 2029 | | 4G |
| | 850 MHz | 25 | (2) | 2020-2028 | (3) | 2G/3G |
| | 900 MHz | 5 | (4) | 2023 | (5) | 2G |
| | 1800 MHz | 20 | (6) | 2023 | (7) | 2G/4G |
| | 1900 MHz | 10 | (8) | 2022 | | 2G |
| | 2.1 GHz | 30 | (9) | 2023 | | 3G |
| | 2.5 GHz | 40 | | 2027 | | 4G |
(1) SP State (towns with CN 13 to 19), MG and North East (AL, CE, PB, PE, PI, RN e SE). |
(2) Except regions 2', 4', 6', 7' and 10.
(3) Regional licenses: expiration and renewal dates are dependent on the region. RJ was renewed in 2005 with expiration in 2020.
|
(4) Only in regions 3, 4, 4', 5, 6, 7, 8 and 9. Not in regions 1, 2, 2', 5', 6', 7' and 10. |
(5) MG Interior (4') expiration date 2020. Rest of them will expire in 2023. |
(6) 2x10 is the most common bandwidth, but could be higher in some regions (up to 50 MHz). |
(7) Expiration date of 2023, except for MG Interior (4') which is 2020. |
(8) Only in regions 2', 6', 7' and 10. These frequencies must be aligned within 2100 MHz band (3G) before December 2015. |
(9) Until now, regions 2', 6', 7', and 10 have 2x10 MHz. Band alignment of 1900 MHz (Band L) within 2100 MHz will result on 2x15 MHz in all regions. |
(10) Telefónica Brazil owns high frequency spectrum in all the regions of Brazil; the same will happen with low frequency spectrum, once the 700 MHz frequency is operative. Until then, the operator holds spectrum in low frequencies spectrum in all regions of Brazil except in region 10 (Northeast of Brazil). Regional codes are included in Annex 1. |
(11) In Brazil, technology neutrality is applicable to all Telefónica spectrum holdings.
(12) t.b.d (to be defined) is indicated when the technology is not defined yet.
|
F-152 |
| | | | | | | | |
| HISPANOAMÉRICA (Cont.) | Frequency | Bandwidth (MHz) | Year of Exp. Date | |
| Nicaragua | 700 |
| MHz | 40 |
| 2023 | |
| | 850 |
| MHz | 25 |
| 2023 | |
| | 1,900 |
| MHz | 60 |
| 2023 | |
| | 1,700 |
| MHz/2100 MHz | 40 |
| 2023 | |
| Panama | 700 |
| MHz | 20 |
| 2036 | |
| | 850 |
| MHz | 25 |
| 2036 | (19 | ) |
| | 1,900 |
| MHz | 20 |
| 2036 | (19 | ) |
(1) The date will be confirmed when the 700 MHz band is released.(2) Only in 37 locations. Restricted to Fixed applications.
(4) Only in Metropolitan Region.
(5) Only in Aysén and Punta Arenas.
(6) Two different communication licenses, one expires in 2018, the other expires in 2030. Regional codes are included in Annex 2.
(7) 30 MHz expires in 2018; 10 MHz in 2030.
(8) 30 MHz expires in 2018; 20 MHz in 2030.
(9) 10 MHz expires in 2018; 20 MHz expires in 2025; 30 MHz expires in 2030.
(10) 40 MHz expires in 2018; 10 MHz in 2030.
(11) 10 MHz expires in 2018; 20 MHz expires in 2025; 20 MHz expires in 2030.
(12) 30 MHz expires in 2018; 30 MHz expires in 2030.
(13) 10 MHz expires in 2018; 20 MHz expires in 2025.
(14) 30 MHz expires in 2018; 10 MHz expires in 2025; 30 MHz expires in 2030.
(15) Restricted to Fixed applications.
(16) Provinces of Contents
(17) Used in rural areas.
| HISPANOAMÉRICA | Frequency | Bandwidth (MHz) | Year of Exp. Date | | Technology (14)(15) |
| Argentina | 850 MHz (AMBA) | 30 | | Indefinite | | 2G/3G |
| | 850 MHz (South) | 25 | | Indefinite | | 2G/3G |
| | 1900 MHz (AMBA) | 20 | | Indefinite | | 2G |
| | 1900 MHz (North) | 50 | | Indefinite | | 2G/3G |
| | 1900 MHz (South) | 25 | | Indefinite | | 2G/3G |
| | 1700 MHz/2100 MHz | 20 | | 2029 | (1) | 4G |
| Chile | 850 MHz | 25 | | Indefinite | | 2G/3G |
| | 1900 MHz | 30 | | 2032/2033 | (2) | 2G/3G |
| | 2.6 GHz | 40 | | 2043 | | 4G |
| Colombia | 850 MHz | 25 | | 2024 | | 2G/3G |
| | 1700 MHz/2100 MHz | 30 | | 2023 | | 4G |
| | 1900 MHz | 15 | | 2024 | | 2G/3G |
| | 1900 MHz | 15 | | 2021 | | 2G/3G |
| Ecuador | 850 MHz | 25 | | 2023 | | 2G/3G |
| | 1900 MHz | 60 | | 2023 | (3) | 2G/3G/4G |
Mexico(4) | 850 MHz (Reg. 1, 2, 3, 4) | 20 | | 2025 | | 3G |
| | 850 MHz (Monterrey and surrounding area) | 1.92 | | 2025 | | 3G |
| | 1900 MHz (Reg. 1, 2 y 4) | 40 | | 2018/2030 | (5) | 2G/4G |
| | 1900 MHz (Reg. 3, 5, y7) | 50 | | 2018/2025/2030 | (6) | 2G/3G/4G |
| | 1900 MHz (Reg. 6) | 50 | | 2018/2030 | (7) | 2G/3G/4G |
| | 1900 MHz (Mexico city) | 60 | | 2018/2030 | (8) | 2G/3G/4G |
| | 1900 MHz (Reg. 8) | 30 | | 2018/2025 | | 2G/3G/4G |
| | 1700 MHz/2100 MHz (Reg. 2, 3, 4, 6, 7, 9) | 10 | | 2030 | (9) | 4G |
| Peru | 450 MHz | 10 | | 2028 | | 2G |
| | 850 MHz | 25 | | 2030 | (10) | 2G/3G |
| | 900 MHz (Lima & Callao) | 10 | | 2028 | (11) | t.b.d. |
| | 900 MHz (Rest of provinces) | 16 | | 2018 | (11) | t.b.d. |
| | 1700 MHz/2100 MHz | 40 | | 2033 | | 4G |
| | 1900 MHz (Lima & Callao) | 25 | | 2028 | | 2G/3G |
| | 1900 MHz (Rest of provinces) | 25 | | 2018 | | 2G |
| Uruguay | 850 MHz | 25 | | 2024 | | 2G/3G |
| | 1900 MHz | 20 | | 2022/2024 | (12) | 2G/3G |
| | 1900 MHz | 40 | | 2033 | | 3G/4G |
| Venezuela | 850 MHz | 25 | | 2022 | | 2G/3G |
| | 1900 MHz | 50 | | 2022 | | 2G/3G |
| | 1700 MHz/2100 MHz | 20 | | 2029 | | 4G |
| | 2600 MHz | 40 | | 2029 | | 4G |
| Costa Rica | 850 MHz | 10.6 | | 2026 | | 3G |
| | 1800 MHz | 30 | | 2026 | | 2G/4G |
| | 2.1 GHz | 20 | | 2026 | | 3G |
| El Salvador | 850 MHz | 25 | | 2018 | | 2G/3G |
| | 1900 MHz | 30 | | 2021 | | 2G/3G |
| Guatemala | 1900 MHz | 80 | | 2034 | | 2G/3G/4G |
| Nicaragua | 700 MHz | 40 | | 2023 | | 4G |
| | 850 MHz | 25 | | 2023 | | 2G/3G |
| | 1900 MHz | 60 | | 2023 | | 2G/3G |
| | 1700 MHz/2100 MHz | 40 | | 2023 | | 4G |
| Panama | 700 MHz | 20 | | 2036 | | 4G |
| | 850 MHz | 25 | | 2036 | (13) | 2G/3G |
| | 1900 MHz | 20 | | 2036 | (13) | 2G/3G |
(1) License will expire 15 years after the date it was granted (December 2, 2014). During the auction process additional 700 MHz (bandwidth 20 MHz) was obtained. TMA is waiting for the formal license. |
(2) 2x10 MHz will expire in November 2032 (Band D [1885-1890 y 1965-1970] and band E [1865-1870 y 1945-1950]); rest (2x5) in April 2033 (band F [1890-1895 y 1970-1975]). |
(3) On February 18, 2015 obtained 2x25 MHz.(19) Renewal agreement reached in February 2014.
Telefónica seeks to use its spectrum in the most efficient way, implementing LTE and LTE-Advanced where possible. (4)Two different licenses, one expires in 2018, the other expires in 2030.
|
(5) 2x15 MHz expires in 2018; 2x5 MHz in 2030.
(6) 2x5 MHz expires in 2018; 2x10 MHz expires in 2025; 2x10 MHz expires in 2030.
(7) 2x15 MHz expires in 2018; 2x10 MHz expires in 2030.
(8) 2x15 MHz expires in 2018; 2x15 MHz expires in 2030.
(9) 2x5 MHz expires in 2018; 2x10 MHz expires in 2025.
|
(10) Provinces of Lima and Callao: expiration date of March 2030; rest of provinces in December 2030. |
(11) Freq. 900 MHz not yet ready for use. |
(12) 2x5 MHz expires in 2022; 2x5 MHz in 2024. |
(13) Renewal agreement reached in February 2014 |
(14) In Telefónica Hispanoamérica, technology neutrality is applicable to all Telefónica spectrum holdings.
(15) t.b.d (to be defined) is indicated when the technology is not defined yet.
|
Besides the spectrum assets included in the above table,tables, Telefónica owns other assets of spectrum used for other services. Specifically, Telefónica has spectrumservices in the 3.5 GHz band in the following countries: Germany, Spain, Argentina, Chile and Peru.higher frequency ranges (above 6 GHz), including access transport.
ANNEX 1
|
| |
| BRAZIL'S SPECTRUM PORTFOLIO: MEANING OF THE STATES, REGIONS AND SECTORS ACRONYMS |
| Acronym | State |
| AC | Acre |
| AL | Alagoas |
| AP | Amapá |
| AM | Amazonas |
| BA | Bahia |
| CE | Ceara |
| DF | Distrito Federal |
| ES | Espírito Santo |
| GO | Goiás |
| MA | Maranhão |
| MT | Mato Grosso |
| MS | Mato Grosso do Sul |
| MG | Minas Gerais |
| PA | Pará |
| PB | Paraíba |
| PR | Paraná |
| PE | Pernambuco |
| PI | Piauí |
| RJ | Rio de Janeiro |
| RN | Rio Grande do Norte |
| RS | Rio Grande do Sul |
| RO | Rondônia |
| RR | Roraima |
| SC | Santa Catarina |
| SP | São Paulo |
| SE | Sergipe |
| TO | Tocantins |
| |
|
| |
| Regions | States & towns included in the regions |
| 1 | SP (Cityl)(City) |
| 2 | SP (Interior) |
| 2' | SP - towns of sector 33 of the GPLG |
| 3 | RJ y ES |
| 4 | MG |
| 4' | MG - towns of sector 3 of the GPLG |
| 5 | PR y SC |
| 5' | PR - towns of sector 20 of the GPLG |
| 6 | RS |
| 6' | RS - towns of sector 30 of the GPLG |
| 7 | AC, DF, GO, MS, MT, RO y TO |
| 7' | GO - towns of sector 25 of the GPLG |
| 8 | AM, AP, MA, PA y RR |
| 9 | BA y SE |
| 10 | AL, CE, PB, PE, PI y RN |
|
| |
| Sectors | GPLG - general plan of the licenses granted (geographic areas that correspond to the sectors) |
| 1 | RJ |
| 2 | MG - except towns included in sector 3 |
| 3 | MG - towns of Araporã, Araújo, Campina Verde, Campo Florido, Campos Altos, Canálopis, Capinópolis, Carmo do Paranaíba, Carneirinhos, Centralina, Comendador Gomes, Conceição das Alagoas, Córrego Danta, Cruzeiro da Fortaleza, Delta, Frutal, Gurinhatã, Ibiraci, Igaratinga, Iguatama, Indianópolis, Ipiaçú, Itapagipe, Ituiutaba, Iturama, Lagamar, Lagoa Formosa, Lagoa Grande, Limeira D'Oeste, Luz, Maravilhas, Moema, Monte Alegre de Minas, Monte Santo de Minas, Nova Ponte, Nova Serrana, Papagaios, Pará de Minas, Patos de Minas, Pedrinópolis, Pequi, Perdigão, Pirajuba, Pitangui, Planura, Prata, Presidente Olegário, Rio Paranaíba, Santa Juliana, Santa Vitória, São Francisco de Sales, São José da Varginha, Tupaciguara, Uberaba, Uberlândia, União de Minas & Vazante |
| 4 | ES |
| 5 | BA |
| 6 | SE |
| 7 | AL |
| 8 | PE |
| 9 | PB |
| 10 | RN |
| 11 | CE |
| 12 | PI |
| 13 | MA |
| 14 | PA |
| 15 | AP |
| 16 | AM |
| 17 | RR |
| 18 | SC |
| 19 | PR –except towns included of sector 20 |
| 20 | PR – towns of Londrina and Tamarana |
| 21 | MS – except the town integrantingintegrating of sector 22 |
| 22 | MS – town of Paranaíba |
| 23 | MT |
| 24 | TO y GO – except towns included in sector 25 |
| 25 | GO – towns of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão |
| 26 | DF |
| 27 | RO |
| 28 | AC |
| 29 | RS |
| 30 | RS – towns of Pelotas, Capão do Leão, Morro Redondo and Turuçu |
| 31 | SP – except the towns included in sector 33 |
| 33 | SP – towns of Altinópolis, Aramina, Batatais, Brodosqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra |
ANNEX 2 |
| |
Mexico spectrum portofolio: meaning of the region numbers
|
| Region 1 | Baja California: Baja California, Baja California Sur, Sonora (San Luis Río Colorado). |
| Region 2 | Sinaloa, Sonora (excluding San Luis Río Colorado). |
| Region 3 | Chihuahua, Durango, Coahuila de Zaragoza (Torreón, San Pedro, Matamoros, Francisco I. Madero, Viesca). |
| Region 4 | Nuevo León, Tamaulipas, Coahuila de Zaragoza (excluding municipaltiesmunicipalities of the North Region). |
| Region 5 | Chiapas, Tabasco, Yucatán, Quintana Roo, Campeche. |
| Region 6 | Jalisco (excluding municipaltiesmunicipalities of the Central Region), Michoacán de Ocampo, Nayarit, Colima. |
Region 7 | Guanajuato, San Luis Potosí, Zacatecas, Querétaro de Arteaga, Aguascalientes, Jalisco (Lagos de Moreno, Encarnación de Díaz, Teocaltiche, Ojuelos de Jalisco, Colotlán, Villa Hidalgo, Mezquitic, Huejuquilla el Alto, Huejúcar, Villa Guerrero, Bolaños, Santa María de los Ángeles). |
| Region 8 | Veracruz-Llave, Puebla, Oaxaca, Guerrero, Tlaxcala. |
| Region 9 | State of México, Distrito Federal, Hidalgo, Morelos. |
