TELEFONICA EUROPE B.V. (Rotterdam) ANNUAL REPORT December 31, 2008

TELEFONICA EUROPE B.V. (Rotterdam) ANNUAL REPORT December 31, 2008 TELEFONICA EUROPE B.V. (Rotterdam) Table of contents Page - Managing Directors...
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TELEFONICA EUROPE B.V. (Rotterdam) ANNUAL REPORT December 31, 2008

TELEFONICA EUROPE B.V. (Rotterdam)

Table of contents

Page -

Managing Directors

2

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Managing Directors' Report

3

-

Financial Statements Balance Sheet Statement of Income and Expenses Notes to the Financial Statements

5 6 7

-

Other information

20

1

TELEFÓNICA EUROPE B.V. (Rotterdam)

Managing Directors:

M. Escrig Meliá

C.D. Maroto Sobrado

/S/

/S/

M.C. van der Sluijs-Plantz

A. Aleix Argüelles

/S/

/S/

2

TELEFONICA EUROPE B.V. (Rotterdam)

Managing Director’s Report The management herewith submits the Financial Statements of Telefonica Europe B.V. ("the Company") for the financial year ended December 31, 2008. Result During the period under review, the Company recorded a profit of EUR 1,981 thousand (2007: EUR 2,496 thousand), which is set out in detail in the attached Income and Expenses Statement. We have recorded a reduction of outstanding amounts of the Syndicated Facility (originally for GBP 18,500 million). The total syndicated facility outstanding amount as per 31 December 2008 is EUR 2,783,681 thousand and GBP 1,352,171 thousand, which in total is equivalent to EUR 4,203,283 thousand. As mentioned in our prior annual report tranches A and C were totally repaid during 2007. The outstanding amount for tranche B, maturing on December 14, 2009 is fully drawn by an amount of EUR 1,113,231 thousand (equivalent to GBP 1,050,000 thousands). Tranche D, continues to be fully drawn, although during this year we have changed currency of part of the outstanding loans of this tranche from GBP to EUR. In summary the outstanding amounts under tranche D at year end are: (i) GBP 1,205,000 thousands and (ii) EUR 948,897 thousands (both amounts equivalent to GBP 2,100,000 thousands). Utilization of the GBP 2,100 million revolving credit facility (Tranche E) has been reduced through out the year 2008. The utilized amount at December 31, 2007 was EUR 1,491,418 thousand (equivalent to, as per calculating the facility utilized and available amounts, GBP 1,084,410 thousand). At December 31, 2008 two loans were outstanding under this facility which drawn amounts were EUR 721,552 thousand and GBP 147,171 thousand (equivalent to GPB 827,739 thousand). Therefore the total drawdown amount has been reduced during 2008 with GBP 256,671 thousand in GBP terms. A new Credit Facility for USD 50 million was signed, with related Company Casiopea. At December 31, 2008 the drawdown amount was USD 15 million. We also borrowed additional EUR 64 million from existing Credit Facility signed with Casiopea, from which EUR 25 million was repaid in December. In spite of significant liquidity reduction in money markets during the last quarter of the year, the Company has been very active in the Euro Commercial Paper Market issuing a total of 76 ECP, with a notional amount of EUR 4,095,600 thousand (notional amounts) during 2008, figure wildly larger than that issued in 2007 ( EUR 2,451,000 thousand). The outstanding balance at year end is EUR 840,247 thousand (discounted amount plus interest accrued). The Financial Margin has been reduced, from EUR 4,579 thousand in 2007 to EUR 3,734 thousand in 2008, mainly due to the reductions of borrowed volumes in average terms, reductions of utilizations in the syndicated facility and depreciation of the British Pound against EUR, during 2008. This decrease in financial margin has been partially offset by a reduction on net operational expenses by EUR 319 thousand. This reduction it is been mainly due to a decrease of security, accounting and legal advisors fees.

3

TELEFONICA EUROPE B.V. (Rotterdam)

Subsequent events On January, 2009 the Company has repaid USD 15 million and EUR 65 million reducing significantly the drawdown amount under the Credit Facilities signed together with Casiopea RE SA. Form January 1, 2009 until the date of this report the Company has issued 12 ECP for a total notional amount of 549 million.

Future developments

In 2009, the Company will continue to seek and prospect for new markets and sources of finance for Telefonica Group, in order to extend its investor base, subject always to market conditions.

Amsterdam, February 19, 2009

/S/

M. Escrig Meliá

/S/

M.C. van der Sluijs-Plantz

/S/

C.D. Maroto Sobrado

/S/

A. Aleix Argüelles

4

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam) BALANCE SHEET December 31, 2008 (before appropriation of the result) ASSETS 12/31/08 FIXED ASSETS: Tangible fixed assets Financial fixed assets

(1)

17 10,101,016

12/31/07

7 12,598,230 10,101,033

CURRENT ASSETS: Loans receivable Interest receivable VAT reclaimable Corporate income tax Other current assets Cash at bank

(2)

(3)

2,087,453 161,814 10 816 792 4,867

12,598,237

1,002,143 158,254 307 94 6,250 2,255,752

1,167,048

12,356,785

13,765,285

SHAREHOLDER'S EQUITY AND LIABILITIES SHAREHOLDERS' EQUITY: Issued share capital Retained earnings Result for the period

LONG TERM LIABILITIES: Bonds and loans

(4) 46 4,700 1,981

(5)

CURRENT LIABILITIES: Short term loans (6) Interest payable Value added tax Other debts and accrued liabilities

Rotterdam, February 19, 2009

46 4,723 2,496 6,727

7,265

10,101,019

12,598,267

2,087,432 160,970 5 632

1,002,078 157,433 5 237 2,249,039

1,159,753

12,356,785

13,765,285

5

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam) STATEMENT OF INCOME AND EXPENSES for the year ended December 31, 2008

FINANCIAL INCOME AND EXPENSES: Net financial result OPERATIONAL INCOME AND EXPENSES: Personnel expenses Administrative expenses Result from ordinary activities before taxation Taxation Result after taxation

Rotterdam, February 19, 2009

(7)

01/01/08 12/31/08

01/01/07 12/31/07

3,734

4,579

(216) (749)

(8)

(234) (1,050)

2,769 (788)

3,295 (799)

1,981

2,496

6

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

General Telefonica Europe B.V. ("the Company"), having its statutory seat in Rotterdam and registered office in Amsterdam, the Netherlands, is engaged in holding and financing activities for the related companies. The main office of the company is located in Amsterdam, the Netherlands. The Company is a wholly-owned subsidiary of Telefónica S.A., located in Madrid, Spain. Direct or indirect subsidiaries of Telefónica S.A. are referred to as related companies. The Company was incorporated on October 31, 1996. The authorized share capital of the Company consists of 100 shares with a par value of EUR 460 each (EUR 46,000). On December 31, 2008 and 2007, the issued capital of the Company consists of 100 shares, which have been fully paid and which represent a total paid up capital in the amount of EUR 46,000. These financial statements are prepared in accordance with Title 9, Book 2, of the Dutch Civil Code. Furthermore, the financial statements of the Company are not consolidated with those of its subsidiary, as a result of the Article 408 exemption. The financial statements of the Company and its subsidiary are included in the consolidated financial statements of Telefónica, S.A., which will be filed with the Chamber of Commerce in Amsterdam.

Changes in accounting policy: New accounting standard Financial Instruments RJ 290 In the financial year 2008 the measurement of the Long term receivables from related companies under financial fixed assets and the Bonds and loans under Long term liabilities has changed. In previous years these accounts were measured at face value. The prepaid commissions, fees and loan discounts were amortised on a straight line basis over the period up to the maturity of the issue. The deferred arrangement fees were amortised over the period of the underlying transaction. As of January 1, 2008 the Long term receivables and the Bonds and loans are measured at amortised cost, using the effective interest rate method, following the requirements of RJ 290 Financial Instruments. RJ 290 has become effective as of the financial year 2008, resulting in this change in accounting policy. The change in accounting policy has been applied retrospectively.

Rotterdam, February 19, 2009

7

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

For comparability purposes the comparative figures for 2007 have been restated accordingly. The net effect of the changes mentioned above on the result after taxation for the financial year 2007 and equity is as follows (expressed in thousands of euro): Result after taxation as included in the financial statements 2007

2,519

Gross adjustment result due to the change in accounting policy

(23)

Tax effect due to the change in accounting policy

0

Result after applying the change in accounting policy

2,496

Equity as included in the financial statements 2007

7,302

Gross adjustment equity due to the change in accounting policy

(37)

-

2007 retained earnings 2007 adjustment:

(14)

-

2007 result adjustment:

(23)

Tax effect due to the change in accounting policy Equity after applying the change in accounting policy

Rotterdam, February 19, 2009

0 7,265

8

TELEFONICA EUROPE B.V. (Rotterdam)

Euro Medium Term Note Debt Programme

In 1996, the Company entered into a USD 1,500 million EMTN Debt Issuance Programme, arranged by Morgan Stanley & Co. International Limited, irrevocably guaranteed by Telefónica S.A. Under the Programme, the company may from time to time issue instruments in different currencies up to a maximum aggregate principal amount of USD 1,500 million. The total maximum aggregate principal amount was increased in 1998 to USD 2,000 million. In 2000, the total maximum aggregate principal amount was increased to EUR 8,000 million and finally, in July 2003, the maximum aggregate principal amount was increased again to EUR 10,000 million. The proceeds of the notes issued are lent on to the parent company or to other related companies within the group of the parent company (Telefónica S.A.).

As at December 31, 2008, the EMTN Debt Issuance Programme includes:

Euro Notes due 2033 Euro Notes due 2013

EUR EUR

500,000,000 1,500,000,000

The Notes are listed on the London Stock Exchange. The Company has not been active under this programme since 2003.

Global bond

On September 21, 2000, Telefonica Europe B.V. issued Notes with an application to be listed on the Luxembourg Stock Exchange (guaranteed as to the payment of principal and interest by Telefónica S.A.) for the amounts of USD 1,250,000,000 7.35% due and repaid in 2005, USD 2,500,000,000 7.75% due 2010 and USD 1,250,000,000 8.25% due 2030. These bonds are irrevocably guaranteed by the parent company.

Euro Commercial Paper Programme

On June 29, 2000, the Company entered into a Euro Commercial Paper Programme with a maximum aggregate principal amount of EUR 2,000,000,000 or its equivalent in alternative currencies. The programme was updated in May 2005. The first Commercial Paper issue took place in February 2001 and such Programme is currently active. The discounted notional amount outstanding as at December 31, 2008 is EUR 837,583 thousands (in balance sheet the ECP issues are stated at their discounted notional amounts plus accrued interest). The Euro Commercial Paper issues are unconditionally and irrevocably guaranteed by the parent company.

Rotterdam, February 19, 2009

9

TELEFONICA EUROPE B.V. (Rotterdam)

Samurai JPY Bonds The Company had to file with the Minister of Finance of Japan, the 4th and final amendment to SRS (Securities Registration Statement, as amended 4 times), on July 11th, 2007, and finally issued the notes on July 19th, 2007. The notes hereby issued are not listed on any stock exchange. The Company issued 2 tranches of JPY 15,000 million each, being the main conditions: (i) Floating Rate Note bearing variable interest of JPY Libor 6 months + a margin of 0.40%, and maturing on July 19th, 2012, and (ii) A fixed rate Bond with a semi-annual coupon of 2.11% per year, also maturing on July 19th, 2012.

JPY Dual Currency Loan The Company borrowed a total of JPY 15,000 million in 3 loans from a Japanese investor with maturity on July 2037. Under this agreement interests are payable in USD.

Facility agreement with Fortis Bank Fortis Bank granted a facility to the company, to undertake derivative transactions up to a maximum notional amount of EUR 3 million and/or a maximum set-off liability of EUR 300,000. There were no amounts outstanding under this facility as at December 31, 2008.

Intercompany loans The Company received EUR 2,000,000,000, through an intercompany Promissory Note issued on December 30, 2002, from its subsidiary Telefonica Finance USA LLC, with maturity date 10 years after the issue date.

Intercompany credit facilities On April 10, 2003, the Company entered into a short-term credit facility agreement of EUR 100 million, the limit was subsequently increased. The lender is Casiopea RE S.A., an insurance company belonging to the same group of companies as Telefonica Europe B.V. The drawn amount as at December 31, 2008 was EUR 125,000,000. Additionally, on July 1, 2008 the Company entered on a new credit facility agreement of USD 50 Million with Casiopea RE S.A. As at December 31, 2008 the amount borrowed under this facility is USD 15 million.

Rotterdam, February 19, 2009

10

TELEFONICA EUROPE B.V. (Rotterdam)

Multicurrency Syndicated Facility

The Company signed on October 31, 2005 a multicurrency Facility Agreement with Citibank Global Markets Ltd., Goldman Sachs International and Royal Bank of Scotland Plc, as Underwriters, and Guaranteed by Telefónica S.A. with a total amount of GBP 18,500 million. The purpose of the Facility was to finance the acquisition of O2 directly or indirectly. The Facility is divided in 2 Facilities with different maturities: (i) Facility A with maturity of October 31, 2006, but extendable at the option of the Company for up to an additional period of 18 months and (ii) Facility B with Maturity on October 31, 2008.

The Facility was syndicated among other Banks in 2 stages: (i) Sub-Underwriters Syndication, stage that was successfully finished on December 14, 2005 and (ii) General Syndication which was finalized on February 17, 2006. The initial limit of the facility was reduced on December 14, 2005 from GBP 18,500 million to GBP 18,000 million, and subsequently the limit amount of the Facility was reduced to GBP 14,325 million on February 3, 2006. Furthermore the limit of the Facility was reduced to GBP 14,175 million on February 16, 2006.

As of April 28, 2006 the Company amortized, and cancelled an amount of EUR 758 million corresponding to Facility A. Subsequently, as of June 30, 2006 the Company amortized EUR 3,700 million of Facility B.

As of December 14th, 2006 the Syndicated Facility Agreement was amended in order to include 3 more tranches, increase maturities of all tranches and revise the margin to be paid. (more detail in Note 5).

The total outstanding amount as at December 31, 2008 under this Syndicated Facility amounted to GBP 1,352 million equivalent to EUR 1,419 million and EUR 2,784 million in EUR 4,203 million in equivalent Euro terms at year end, of which EUR 1,113 million corresponds to Tranche B (short term) maturing on December 2009.

Investments of the company

Substantially all the proceeds from the principal amounts obtained or borrowed by the company under its financing activities have been lent on to the parent company or to companies belonging to the same group of companies as Telefónica S.A.

Cash flow statement

No cash flow statement is presented in these financial statements as the ultimate parent company provides all the capital of the company and the financial statements of the ultimate parent company, containing a cash flow statement, are available at the company's office in the Netherlands.

Rotterdam, February 19, 2009

11

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam) Accounting policies in respect of the valuation of assets and liabilities General These financial statements have been prepared in accordance with the Dutch generally accepted accounting principles and guidelines. The accounting principles of the company are summarized below. These accounting principles have all been applied consistently throughout the year and the preceding year. Assets and liabilities are stated at face value, unless indicated otherwise. In 2008 limited reclassifications were made due to the implementation of the new accounting policy for financial instruments. The comparative figures were adjusted in a similar manner. Foreign currencies Assets and liabilities, denominated in foreign currencies are translated into the reporting currency at exchange rates prevailing at the Balance Sheet date. Any resulting exchange differences are recorded in the Statement of Income and Expenses.

Revenues and expenses in the year under review, which are denominated in foreign currencies, are translated into the reporting currency at exchange rates in effect on the transaction date. Tangible fixed assets Tangible fixed assets are stated at their historical cost less accumulated depreciation. Depreciation is provided over the expected useful live of the related asset under the straight-line method. The estimated useful lives are: Furniture and office equipment: 3 to 5 years Financial fixed assets Investments in participating interest are stated at acquisition cost or, in case of a permanent impairment of the value, at lower equity value as determined on the basis of the financial statements of the participating interest. Long term receivables from related companies Long term receivables from related companies are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the loans are derecognized or impaired, as well as through the amortisation process. Bonds and loans Bonds and loans are carried at amortised cost using the effective interest rate method. Gains and losses are recognized in the income statement when the liabilities are derecognised as well as through the amortisation process.

Rotterdam, February 19, 2009

12

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

Accounting policies in respect of result determination Result Profits on transactions are recognized in the year they are realized. Losses are recognized when foreseen. Other operating expenses Expenses are based on the historical cost convention and attributed to the financial year to which they pertain. Taxation Taxation is calculated on the reported pre-tax result, at the prevailing tax rates, taking account of any losses carried forward from previous financial years and tax-exempt items and non-deductible expenses and using tax facilities.

Temporary differences between taxation on the result as shown in the Statement of Income and Expense and the taxation on the fiscal result are added or deducted from the provision for deferred taxation.

Rotterdam, February 19, 2009

13

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

(1)

Financial fixed assets Long term receivables from related companies

12/31/08

12/31/07

10,101,016

12,598,230

The movement in the financial fixed assets is as follows: 2008 Balance January 1 Effect of change in accounting policy Restated balance January 1 Deferred income reclassification New loans Repayments and fx fluctuation Reclassification to short term Balance December 31

Rotterdam, February 19, 2009

12,598,230 11,210 (1,396,996) (1,111,428) 10,101,016

2007 17,238,213 (31,271) 17,206,942 (28,112) 271,707 (4,852,307) 12,598,230

14

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

Long term receivables from related companies The Long Term Receivables from related companies represent loans to the shareholder and are comprised as follows:

12/31/08

12/31/07

USD 2,500,000,000, 7.78125%, maturity September 15, 2010

1,793,341

1,693,475

EUR 2,000,000,000 3m Euribor + 0.63425%, maturity December 30, 2012

2,000,000

2,000,000

USD 1,250,000,000, 8.28125%, maturity September 15, 2030

890,780

841,828

EUR 500,000,000, 5.90625%, maturity February 14, 2033

491,519

491,316

1,494,816

1,493,593

EUR 1,113,231,552, Euribor + 0.23658%, maturity December 14, 2009

-

1,332,179

GBP 105,000,000, Libor + 0.25908%, maturity December 14, 2009

-

142,726

GBP 147,178,429, Libor + 0.29658%, maturity December 14, 2013

153,121

-

EUR 1,500,000,000, 5.15625%, maturity February 14, 2013

EUR 948,897,371 Euribor + 0.28658%, maturity December 14, 2012

945,794

GBP 1,205,000,000, Libor + 0.296580%, maturity December 14, 2012

1,260,915

2,852,090

EUR 721,551,885, Euribor +0.28658%, maturity December 14, 2013

715,124

1,479,316

JPY 15,000,000,000, 2.135%, maturity July 19, 2012

118,600

90,642

JPY 15,000,000,000, Libor + 0.425%, maturity July 19, 2012

118,599

90,636

JPY 5,000,000,000/USD 42,640,287, 4.7741% on USD basis, maturity July 27, 2037

39,469

30,143

JPY 5,000,000,000/USD 42,640,287, 4.7741% on USD basis, maturity July 27, 2037

39,469

30,143

JPY 5,000,000,000/USD 42,640,287, 4.7741% on USD basis, maturity July 27, 2037

39,469

30,143

10,101,016

12,598,230

-

In 2002, the company started a subsidiary (Telefonica Finance USA LLC) which has issued Preferred Capital Securities to third parties, which possess no voting rights, for a notional amount of EUR 2,000,000,000 on December 30, 2002. The subsidiary has lent on these funds to Telefonica Europe B.V.

Rotterdam, February 19, 2009

15

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam) The valuation of the funds from the Syndicated Loan Facility that were lent on to the shareholder includes a fee income. The fee income is deferred and amortised to the profit and loss account over the period of the underlying transactions, instead of at amortised cost, using the IRR method. The difference however is not significant.

(2) Loans receivable The loans receivable are comprised as follows: 12/31/08

12/31/07

Short Term Loans to Telefónica S.A. (Agreement May 26, 2005)

840,247

916,143

EUR Credit Facility Euribor + 0.07159%

125,000

86,000

10,778

-

EUR 1,113,232 Euribor + 0.23658% (Agreement January, 2007)

1,111,428

-

Total loans receivable

2,087,453

1,002,143

USD Credit Facility15,000 Libor + 0.07159%

(3) Cash at bank The current account balances at December 31, 2008 are at free disposal of the Company, subject to any other legal or contractual obligation that the Company may have. The Cash at Bank is comprised as follows:

Current account balances

12/31/08

12/31/07

4,867

6,250

1

(4) Shareholders' equity The movements in the Shareholder's Equity are comprised as follows: Issued share Retained capital earnings

Result for the period

Total

Balance as at January 1, 2007 Allocation of result Effect of change in accounting policy Result for the period Dividend payment

46 -

4,737 3,973 (14) (3,973)

3,973 (3,973) 2,496 -

8,756 (14) 2,496 (3,973)

Balance as at December 31, 2007

46

4,723

2,496

7,265

-

2,496 (2,519)

(2,496) 1,981 -

1,981 (2,519)

46

4,700

1,981

6,727

Allocation of result Result for the period Dividend payment Balance as at December 31, 2008

Rotterdam, February 19, 2009

16

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

(5)

Bonds and loans Bonds and Loans are comprised as follows:

12/31/08 Global USD 2,500,000,000, 7.75%, maturity 15/09/20101 Loan EUR 2,000,000,000, 3m Euribor + 0.603%, maturity December 30, 2012 Global USD 1,250,000,000, 8.25%, maturity September 15, 2030 EMTN EUR 500,000,000, 5.8750%, maturity February 14, 2033 EMTN EUR 1,500,000,000, 5.125%, maturity February 14, 2033 Multicurrency Syndicated Facility, Tranche B, EUR 1,113,231,552, Euribor + 0.2125%, maturity December 14, 2009 Multicurrency Syndicated Facility, Tranche B, GBP 105,000,000, Libor + 0.235%, maturity December 14, 2009 Multicurrency Syndicated Facility, Tranche E, GBP 147,178,429, Libor +0,2725%, maturity December 14, 2013 Multicurrency Syndicated Facility, Tranche D, EUR948,897,371, Libor + 0.2625%, maturity December 14, 2012 Multicurrency Syndicated Facility, Tranche D, GBP 1,205,000,000, Libor + 0.2725%, maturity December 14, 2012 Multicurrency Syndicated Facility, Tranche E, EUR 721,551,885, Euribor + 0.2625%, maturity December 14, 2013 JPY 'Samurai' Bond JPY 15,000,000,000, 2,11%, maturity July 19, 2012 JPY 'Samurai' Bond JPY 15,000,000,000, Libor + 0.40%, maturity July 19, 2012 JPY/USD Dual Currency Loan A JPY 5,000,000,000/USD 42,640,287, 4.75% on USD basis, maturity July 27, 2037 JPY/USD Dual Currency Loan B JPY 5,000,000,000/USD 42,640,287, 4.75% on USD basis, maturity July 27, 2037 JPY/USD Dual Currency Loan C JPY 5,000,000,000/USD 42,640,287, 4.75% on USD basis, maturity July 27, 2037

12/31/07

1,793,342

1,693,478

2,000,000

2,000,000

890,783

841,863

491,513

491,309

1,494,821

1,493,599

-

1,332,179

-

142,726

153,121

-

945,794

-

1,260,915

2,852,090

715,124

1,479,316

118,600

90,642

118,599

90,636

39,469

30,143

39,469

30,143

39,469

30,143

10,101,019

12,598,267

The valuation of the Syndicated Loan Facility includes the issuance costs, discounts, fees and commissions paid in connection with the offering of the Syndicated Loan Facility. Such costs are amortised on a straight line basis over the period up to the maturity date of the loans, instead of at amortised cost, using the IRR method. The difference however is not significant.

Rotterdam, February 19, 2009

17

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam) The movement in long term liabilities is as follows:

2008 12,598,267 11,210 (1,397,030) (1,111,428) 10,101,019

2007 17,238,213 (31,257) 17,206,956 (28,112) 271,708 (4,852,285)

12/31/08

12/31/07

1,111,428 125,000 840,226 10,778 2,087,432

86,000 916,078 1,002,078

01/01/0812/31/08

01/01/0712/31/07

3,734

4,579

The Net Financial Result is comprised as follows:

01/01/0812/31/08

01/01/0712/31/07

Interest income Interest expense Currency exchange result

731,429 (727,676) (19) 3,734

930,671 (925,913) (179) 4,579

Balance January 1 Effect of change in accounting policy Restated balance January 1 Prepaid expenses reclassification New loans Repayments and currency exchange fluctuation Reclassification to short term Balance December 31

-

12,598,267

(6) Short term loans

Multicurrency Syndicated Facility, Tranche B, EUR 1,113,232 Euribor + 0.23658%, maturity 14/12/2009 EUR 200,000 Credit Facility, Euribor + 0.04% 2,000,000 ST European Commercial Paper Program SD 15,000 Credit Facility, Libor + 0.04% Balance December 31 (7) Net financial result The Net Financial Result is comprised as follows:

Net financial result

Rotterdam, February 19, 2009

18

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam)

(8) Taxation The Taxation is comprised as follows: 01/01/0812/31/08

01/01/0712/31/07

Corporate income tax 2008 Corporate income tax 2007 Corporate income tax other years

773 -

839

15

(40)

Total

788

799

The company is subject to Dutch taxation and tax calculations are made in accordance with an Advance Pricing Agreement signed with the Tax Authorities, which has entered into effect as of January 1, 2005, as amended in February 2006. Other notes Average number of employees: During the period under review the Company employed on average 3 persons (2007: 2). Auditor’s fees An amount of EUR 24 has been charged related to auditor’s fees.

Amsterdam, February 19, 2009

/S/

M. Escrig Meliá

/S/

M.C. van der Sluijs-Plantz

Rotterdam, February 19, 2009

/S/

C.D. Maroto Sobrado

/S/

A. Aleix Argüelles

19

(Expressed in Thousands of Euro) TELEFONICA EUROPE B.V. (Rotterdam) OTHER INFORMATION December 31, 2008 Auditor’s report The auditor’s report is set out on the next page. Statutory provision regarding appropriation of Result In accordance with Article 14 of the Articles of Association, profit shall be at the disposal of the Annual General Meeting of Shareholders. Profit distribution can only be made to the extent that Shareholder's Equity exceeds the issued and paid-up share capital and legal reserves. Appropriation of Result The net income together with the retained earnings is at the disposal of the General Meeting of Shareholders.

Rotterdam, February 19, 2009

20

Telefonica Europe, B.V. RESPONSIBILITY STATEMENT FOR THE ANNUAL FINANCIAL REPORT

The members of the Telefonica Europe, B.V. Board of Directors hereby declare that, to the best of their knowledge, the financial statements for the year ended December 31, 2008, approved at the meeting held on February 24th, 2009 and prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of Telefonica Europe B.V., and the management report includes a fair review of the development and performance of the business and the position of Telefonica Europe B.V. and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that Telefonica Europe B.V. faces.

Amsterdam, April 30th, 2009

/S/

/S/

C.D.Maroto Sobrado Director

M. Escrig Melia Director

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A. Aleix Argüelles Director

M.C. van der Sluijs-Plantz Director