make certain acquisitions, mergers and consolidations.
As of December 31, 2018, we were in full compliance with our financial covenants under our financial instruments.
If we are unable to incur additional debt, we may be unable to invest in our business and make necessary or advisable capital expenditures, which could reduce future net operating revenue and adversely affect our cash flows and profitability. In addition,
Under the RJ Plan, until February 5, 2023, we are required to apply an amount equivalent to 100% of the net revenue from our sale of assets in excess of US$200 million to investments in our activities. Beginning on February 5, 2024, we are required to allocate to the repayment of debt instruments representing recoveries under the RJ Plan on an annual basis an amount equivalent to 70% of the amount by which (1) our cash and cash equivalents and financial investments at the end of each fiscal year exceeds (2) the greater of (a) 25% of our operating expenses and capital expenses for that fiscal year, and (b) R$5,000 million, subject to adjustment in the event that we conclude any capital increases. The cash required to service our indebtedness reducesmake these repayments will reduce the amount available to us to make capital expenditures. If we are unable
The RJ Plan permits us to generate operating cash flows, we may not be ableseek to continue servicing our debt.
Furthermore, some of our debt instruments include financial covenants that require Oi or Telemarraise up to maintain certain specified financial ratios. Prior to December 31, 2015, we executed temporary modifications of each of our debt instruments that contain covenants requiring Oi to maintain specified levels of consolidated debt to consolidated EBITDA (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures), pursuant to which Oi was required to maintain a consolidated net debt to consolidated EBITDA ratio, determined based on our financial statements prepared in accordance with Brazilian GAAP, of no more than 6.0 to 1.0 as of December 31, 2015. Most of these temporary modifications continue to require Oi to maintain a consolidated net debt to consolidated EBITDA ratio of no more than 6.0 to 1.0 for each of the fiscal quarters of 2016. Upon the expiration of these temporary modifications, the consolidated debt to EBITDA ratio that Oi is required to maintain under each of these debt instruments will be reduced to their pre-existing levels, the most restrictive of which will require that Oi maintain a consolidated debt to EBITDA ratio of less than 4.0 to 1.0. Under each of these debt instruments, the creditor has the right to accelerate the debt if, at the end of any applicable period we are not in compliance with the defined financial covenants ratios. We have repaid the principal amount outstanding under Oi’s 5th and 9th issuances of debenturesR$2.5 billion in the aggregate amount ofcapital markets and seek to borrow up to R$23 million.
Our debt2 billion under new export credit facilities, with BNDES contained a number of financial covenants (including ratios with respect to shareholders equity to total assets and consolidated debt to EBITDA) that were measured on a semi-annual basis on June 30 and December 31. Under these debt facilities, noncompliance with two or more of these covenants in one semi-annual period would automatically trigger the right of BNDES to retain proceeds (in an amount equivalent to three times our next amortization payment under each debt facility with BNDES) from receivables otherwise payable to us in reserve accounts pledged for the benefit of BNDES until such time as the breach is cured.
On June 30, 2015, we were not in compliance with the covenants in each of our debt facilities with BNDES that require Oi to maintain a shareholder’s equity to EBITDA ratio of at least 0.25 to 1 and a consolidated debt to EBITDA ratio of less than 4.0 to 1. As a result, BNDES, had the right to retain proceeds from receivables in reserve accounts pledged for the benefit of BNDES, as described above. In November, 2015, we and BNDES amended the terms of each of our debt facilities with BNDES. As a result of these amendments, (1) the consolidated debt to consolidated EBITDA ratio, determined based on our financial statements prepared in accordance with Brazilian GAAP, that Oi was required to maintain was increased to 6.0 to 1.0 for the December 31, 2015 measurement date, (2) the measurement period under each of these debt facilities was reduced to quarterly periods, and (3) BNDES has the right to accelerate the debt under each of these debt facilities, at the end of any applicable period, we are not in compliance with two or more of the financial covenants contained in these debt facilities.
We were in compliance with each of the financial covenants applicable the debt instruments to which Oi and its subsidiaries are a party as of December 31, 2015 (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures). We are seeking waivers from those creditors for which these temporary modifications do not cover all measurement periods to and including the periods ending on December 31, 2016. We cannot provide investors with any assurance that these waivers will be obtained. In the event that we are unable to obtain waivers of the anticipated breaches of these covenants in these debt instruments, or identify and implement financial and strategic alternatives to optimize our liquidity and debt profile, we may be unable to meet our obligations under these debt instruments in the event that the creditors under these debt instruments seek to enforce their available remedies.
Under the Trust Deed governing each of the Bonds issued by PTIF (other than the PTIF 6.25% Notes due 2016), or the PTIF Bonds, we were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch Chamber of Commerce no later than January 31, 2016. On April 29, 2016, Citicorp Trustee Company Limited, the trustee under this Trust Deed, or the PTIF Trustee, delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the PTIF Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee could declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the rights of the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested to do so by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
The instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and the occurrence of an event of default under one of these instruments, could trigger an event of default under other indebtedness or enable the creditors under other indebtedness to accelerate that indebtedness or those obligations. Were a substantial amount of our outstanding indebtedness to be accelerated, we may not have sufficient funds to repay such debt when due.
If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to renegotiate or refinance our indebtedness or seek additional equity capital. In this circumstance, we may be unable to obtain financing on satisfactory terms, or at all.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
For more information regarding the debt instruments of our company and our indebtedness as of December 31, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
This debt may be denominated inOur independent registered public accounting firm has indicated thatreais or in foreign currencies. Accordingly, we may incur interest expenses and foreign exchange gains and losses in connection with this new debt. A significant increase in any of these interest rates could adversely affect our financial condition raises substantial doubtexpenses and negatively affect our overall financial performance.
If the Brazilian Confirmation Order is overturned or modified, the RJ Debtors may be declared bankrupt under Brazilian law and liquidated.
On June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors. On December 19 and 20, 2017, the GCM was held to consider approval of the most recently filed judicial reorganization plan. The GCM concluded on December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan presented at the GCM as negotiated during the course of the GCM. On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date. For more information with respect to the RJ Proceedings, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings.”
The Brazilian Confirmation Order, according to its terms, is currently binding on all parties, although it is subject to pending appeals with no suspensive effect attributed to it. By operation of the RJ Plan and the Brazilian Confirmation Order, provided that the Brazilian Confirmation Order is not overturned or altered as a result of the pending appeals filed against it by certain creditors, the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of such claims are entitled only to receive the recoveries set forth in the RJ Plan in exchange for their claims in accordance with the terms and conditions of the RJ Plan. As of the date of this annual report, there are several appeals of the Brazilian Confirmation Order pending.
If the Brazilian Confirmation Order is overturned or modified and, as a result, the RJ Debtors are declared bankrupt, which under Brazilian law is generally followed by a liquidation of the debtors’ assets, the rights and guarantees of the creditors recognized by the RJ Court will be restored under the original terms as if the RJ Plan had never been approved, net of amounts validly received pursuant to the RJ Plan, in accordance with Brazilian Bankruptcy Law. A modification of the Brazilian Confirmation Order may lead to a breach of the RJ Plan by the debtors. In case of breach of the RJ Plan by the RJ Debtors, creditors will be entitled to (1) approve a modification to the RJ Plan at a meeting of creditors complying with the quorum requirements established in the Brazilian Bankruptcy Law, or (2) seek to have the RJ Debtors adjudicated as bankrupt by the RJ Court.
We have identified a material weakness in our internal control over financial reporting which has materially adversely affected our ability to continuetimely and accurately report our results of operations and financial condition. This material weaknesses may not have been fully remediated as a going concern.of the filing date of this annual report and we cannot assure you that other material weaknesses will not be identified in the future.
Under the supervision and with the participation of our chief executive officer and our chief financial officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on the criteria established in “Internal Control —Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our operating cash flows andmanagement concluded that as of December 31, 2018, our internal control over financial reporting was not effective because a material weakness existed. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the impact such operating cash flows have had on our liquidity, in combination with the level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt instruments in 2016, our independent registered public accounting firm has included an emphasis paragraph related to the substantial doubt with respect to our ability to continue as a going concern in their report on ourannual consolidated financial statements forwill not be prevented or detected on a timely basis. For more information about this material weakness, see “Item 15. Controls and Procedures.”
Although we have implemented and continue to implement measures designed to remediate this material weakness and, in the year ended December 31, 2015. However,short term, to mitigate the potential adverse effects of this material weakness, our assessment of the impact of these measures has not been completed as of the filing date of this annual report and we cannot assure you that these measures are adequate. Moreover, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future.
As a result, we must continue our remediation activities and must also continue to improve our operational, information technology, and financial systems, infrastructure, procedures, and controls, as well as continue to expand, train, retain, and manage our employee base. Any failure to do so, or any difficulties we encounter during implementation, could result in additional material weaknesses or in material misstatements in our financial statements. These misstatements could result in a future restatement of our financial statements, have been prepared assuming we will continuecould cause us to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to continue as a going concern, we may seek the protection of the courts through ajudicially supervised reorganization (recuperação judicial) proceeding in Brazil or liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated financial statements. The reaction of investors and others to the inclusion of a going concern statement by our auditors, our operating cash flows and questions regarding our potential inability to continue as a going concern may cause others to choose not to deal with us due to concerns about our abilityfail to meet our contractualreporting obligations, and mayor could cause investors to lose confidence in our reported financial information, which could materially adversely affect our share price and our ability to continue to execute our business, plans, raise new capital and/or make our scheduled debt payments on a timely basis or at all.
Because our cash flows from operating activities are negative, and are expected to continue to be negative through 2016, we will likely need to meet our obligations and fund our working capital with cash on hand and proceeds from existing amounts available under our financing facilities.
Our cash flows from operations were negative in 2015, and based on our current plans, we expect our cash flows from operating activities to remain negative through 2016. Our current projections are based on a number of key assumptions relating to, among other things, attainment of traffic volume targets, customer base, launching of
bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile. If any of our assumptions are not borne out or are otherwise not correct, our cash flows from operations could be significantly lower than expected. As a result, our cash flows from operating activities could continue to be negative and our capital expenditures and debt service obligations could exceed our cash flows from operations beyond 2016 and for an extended period of time. There can be no assurance that we will succeed in executing on our plans or that we will generate positive cash flows from operations or cash flows from operations sufficient to cover our capital expenditures and debt service obligations in the future.
We plan to maintain a significant level of capital expenditures in order to continue to pursue our business plans. Additionally, based on our current level of debt, we are obligated to make payments of cash interest and principal in the aggregate amount of R$15,282 million during 2016. In addition, we need to pay cash taxes and fund our working capital.
Because of the combined impact of our recent and projected results of operations, our non-investment grade credit rating, the inclusion of the going concern statement in the report of our independent registered public accounting firm, restrictions in our current debt and/or general conditions in the financial and credit markets, our access to the capital markets is likely to be limited or nonexistent. As a result, we will need to meet our obligations and fund our working capital with cash on hand and proceeds from existing amounts available under our financing facilities. We may not be able to meet our obligations or other means for any significant period of time, and as a result, if we are unable to successfully restructure our debt on terms satisfactory to our company, we may not be able to execute our business plan or meet our obligations. If we become unable to meet our obligations, we may seek the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil.
Any downgrade in the ratings of our company or our debt securities would likely result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity.
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard & Poor’s, Moody’s Investors Service, or Moody’s, and Fitch, Inc., or Fitch, maintain ratings of our company and our debt securities. Currently, Standard & Poor’s, Moody’s and Fitch maintain ratings of our company on a local and a global basis. On a global basis, Standard & Poor’s maintains a foreign currency rating for our company of “CCC-,” Moody’s maintains a foreign currency rating for our company of “Caa1,” and Fitch maintains a foreign currency rating for our company of “CCC.” Our export credit facility guaranteed by Exportkreditnämnden, or EKN, contained a requirement that we prepay all outstanding amounts in the event that our credit rating was downgraded below Ba2 by Moody’s or BB by Fitch. As a result of the actions by these rating agencies, we were required to prepay the outstanding principal amount under this export credit agreement of R$202 million in April 2016. Any decision by these agencies to downgrade the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and the inclusion of financial covenants in the instruments governing new indebtedness, and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us.
We rely on strategic suppliers of equipment, materials and services necessary for our operations and expansion. If these suppliers fail to provide equipment, materials or services to us on a timely basis, we could experience disruptions, which could have an adverse effect on our revenues and results of operations.
We rely on a few strategic suppliers of equipment, materials and services, including Nokia Solutions and Networks do Brasil Telecomunicações Ltda., or Nokia Solutions, Huawei do Brasil Telecomunicações Ltda., or Huawei, Ericsson Telecomunicações S.A., or Ericsson, and A.R.M. Engenharia Ltda., or A.R.M. Engenharia, to provide us with equipment, materials and services that we need in order to expand and to operate our business in Brazil. There are a limited number of suppliers with the capability of providing the mobile network equipment and fixed-line network platforms that our operations and expansion plans require or the services that we require to maintain our extensive and geographically widespread networks. In addition, because the supply of mobile network equipment and fixed-line network platforms requires detailed supply planning and this equipment is technologically complex, it would be difficult for our company to replace the suppliers of this equipment. Suppliers of cables that we need to extend and maintain our networks may suffer capacity constraints or difficulties in obtaining the raw materials required to manufacture these cables. As a result, we are exposed to risks associated with these suppliers,
including restrictions of production capacity for equipment and materials, availability of equipment and materials, delays in delivery of equipment, materials or services, and price increases. If these suppliers or vendors fail to provide equipment, materials or service to us on a timely basis or otherwise in compliance with the terms of our contracts with these suppliers, we could experience disruptions or declines in the quality of our services, which could have an adverse effect on our revenuescondition and results of operations and we might be unablemay generate negative market reactions, potentially leading to satisfya decline in the requirements contained in our concession and authorization agreements.
As a resultprice of our financial condition, suppliers of the equipment, materials and services necessary for our operations and expansion may require further assurances from us in order to continue doing business with us.Common Shares, Preferred Shares or ADSs.
We believe that our suppliers may take our financial condition, particularly to the extent that it is perceived to impact our ability to continue to make timely payments to them, into account when deciding whether to continue or begin providing equipment and services to us. During 2015, our operating cash flows have been negatively affected by a number of factors. If suppliers or potential suppliers who are aware of our deteriorating financial situation become concerned that we will be unable to continue to perform under our agreements or make timely payments, they may require advance payments, financial guarantees or other assurances before they provide equipment, materials or services to us or may refuse to provide equipment, materials or services to us at all. If suppliers were to do so, our ability to expand and maintain our networks or operate our business may be impaired, which could have an adverse effect on our financial condition or results of operations.
We are subject to numerous legal and administrative proceedings, which could adversely affect our business, results of operations and financial condition.
We are subject to numerous legal and administrative proceedings. It is difficult to quantify the potential impact of these legal and administrative proceedings. We classify our risk of loss from legal and administrative proceedings as “probable,” “possible” or “remote.” We make provisions for probable losses but do not make provisions for possible and remote losses.
As of December 31, 2015,2018, we had provisioned R$4,4355,039 million for probable losses relating to various tax, labor and civil legal and administrative proceedings against us. As of December 31, 2015,2018, we had claims against us of R$24,04827,586 million in tax proceedings, R$780771 million in labor proceedings and R$1,2381,723 million in civil proceedings with a risk of loss classified as “possible” for which we had made no provisions.
We are not required to disclose or record provisions for proceedings in which our management judges the risk of loss to be remote. However, the amounts involved in certain of the proceedings in which we believe our risk of loss is remote could be substantial. Consequently, our losses could be significantly higher than the amounts for which we have recorded provisions.
If we are subject to unfavorable decisions in any legal or administrative proceedings and the losses in those proceedings significantly exceed the amount for which we have provisioned or involve proceedings for which we have made no provision, our results of operations and financial condition may be materially adversely affected. Even for the amounts recorded as provisions for probable losses, a judgment against us would have an effect on our cash flow if we are required to pay those amounts. Unfavorable decisions in these legal proceedings may, therefore, reduce our liquidity and adversely affect our business, financial condition and results of operations. For a more detailed description of these proceedings, see “Item 8. Financial Information—Legal Proceedings.”
The minority shareholder of Africatel has asserted that our acquisition of PT Portugal triggered its right to require us to purchase its shares of Africatel under the Africatel shareholders’ agreement. If we are required to purchase this interest in Africatel, it will divert resources that could otherwise be deployed to reduce indebtedness or make investments under our business plan. If any such purchase is funded through our incurrence of additional debt, there would be a material adverse effect on our consolidated leverage.
We indirectly own 75% of the share capital of Africatel. Samba Luxco S.à.r.l., an affiliate of Helios Investors L.P., or Samba Luxco, owns the remaining 25%. Africatel holds all of our interests in telecommunications companies in sub-Saharan Africa, including our interests in Unitel, Cabo Verde Telecom, S.A. in Cape Verde, Mobile Telecommunications Limited in Namibia, and CST Companhia Santomense de Telecomunicações S.A.R.L. in São Tomé and Príncipe, among others. Pharol, our subsidiaries Africatel GmbH & Co. KG, or Africatel GmbH, and PT Ventures SGPS S.A., or PT Ventures, and Samba Luxco are parties to a shareholders’
agreement, which we refer to as the Africatel shareholders’ agreement.
On September 16, 2014, our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, received a letter from Samba Luxco in which Samba Luxco claimed that Oi’s acquisition of PT Portugal was deemed a change of control of Pharol under the Africatel shareholders’ agreement, and that this change of control entitled Samba Luxco to exercise a put right under the Africatel shareholders’ agreement at the fair market equity value of Samba Luxco’s Africatel shares. In the letter, Samba Luxco purported to exercise the alleged put right and thereby require Africatel GmbH to acquire its shares in Africatel.
On September 26, 2014, Africatel GmbH responded to Samba Luxco stating that there had not been any action or event that would trigger the right to exercise the put option under the Africatel’s shareholders’ agreement and that Africatel GmbH intended to challenge Samba Luxco’s purported exercise of the put option. On the same date, we issued a Material Fact disclosing Samba Luxco’s purported exercise of the put option, our understanding that the exercise of the put option is not applicable, and that our board of directors had authorized our management to take the necessary actions to sell our interest in Africatel.
On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbH to enforce its purported put right or, in the alternative, certain other rights and claims allegedly arising out of Oi’s acquisition of PT Portugal. Africatel GmbH presented its answer to Samba Luxco’s request for arbitration on December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and the proceedings are ongoing. Africatel GmbH intends to continue to vigorously defend these proceedings.
If we were to acquire the interest of Samba Luxco in Africatel as a result of the exercise of Samba Luxco’s purported put right under the Africatel shareholders’ agreement, our acquisition of this interest would reduce the resources that would be available to us to reduce our outstanding indebtedness or pursue other investment opportunities. If any such purchase were to be funded through our incurrence of additional debt, the consolidated leverage of our company could increase materially, which could have a material adverse effect on our financial condition and results of operations.
We have indemnification obligations with respect to the PT Exchange and the PT Portugal Disposition that could materially adversely affect our financial position.
In the exchange agreement, or the PT Exchange Agreement, that we entered into with Pharol under which we transferred defaulted commercial paper of Rio Forte Investments S.A., or Rio Forte, to Pharol in exchange for the delivery to our company of common sharesCommon Shares and preferred shares of our companyPreferred Shares as described under “Item 4. Information on the Company—Our Recent History7. Major Shareholders and Development—Rio Forte Defaults and Related Party Transactions—Major Shareholders—PT Exchange,Option Agreement,” we agreed to indemnify Pharol against any loss arising from (1) Pharol’s contingent or absolute tax or anti-trust obligations in relation to the assets contributed to our company in the Oi Capital Increase described under “Item 5. Operatingcapital increase in connection with which we acquired PT Portugal from Pharol in May 2014 and Financial Review and Prospects—Overview—Oi Capital Increase and Acquisition of PT Portugal,” and from(2) Pharol’s management activities, with reference to acts or triggering events occurring on or prior to May 5, 2014, excluding any losses incurred by Pharol as a result of the financial investments in the Rio Forte commercial paper and the acquisition of the Rio Forte commercial paper from Oi under the PT Exchange Agreement.
In the PTP Share Purchase Agreement under which we sold PT Portugal in the PT Portugal Disposition, we agreed to indemnify Altice Portugal for breaches of our representations and warranties under the PTP Share Purchase Agreement, subject to certain customary procedural and financial limitations. There can be no assurance that we will not be subject to significant claims under these indemnification provisions and if we are subject to such
claims under these indemnification provisions, we could be required to pay significant amounts, which would have an adverse effect on our financial condition.
We are subject to potential liabilities relatingcredit risks with respect to our third-party service providers, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to potential liabilities relating to our third-party service providers in Brazil. Such potential liabilities may involve claims by employees of third-party service providers in Brazil directly against us as if we were the direct employer of such employees, as well as claims against us for secondary liability for, among other things, occupational hazards, wage parity or overtime pay, in the event that such third-party service providers fail to meet their obligations to their employees. We have not recorded any provisions for such claims, and significant judgments against us could have a material adverse effect on our business, financial condition and results of operations.
We are subject to delinquencies of our accounts receivables.customers. If we are unable to limit payment delinquencies by our customers, or if delinquent payments by our customers increase, our financial condition and results of operations could be adversely affected.
Our business significantly depends on our customers’ ability to pay their bills and comply with their obligations to us. During 2015,2018, we recorded provisions for doubtful accounts in the amount of R$7211,070 million, or 2.6%4.9% of our net operating revenue, primarily due to subscribers’ delinquencies. As of December 31, 2015,2018, our provision for doubtful accounts was R$5611,870 million.
ANATEL regulations preventallow us from implementingto implement certain policies that could have the effect of reducing delinquency of our customers in Brazil,to reduce customer defaults, such as service restrictions or limitations on the types of services provided based on a subscriber’s credit record. If we are unable to successfully implement policies to limit delinquencies of our Brazilian subscribers or otherwise select our customers based on their credit records, persistent subscriber delinquencies and bad debt will continue to adversely affect our operating and financial results.
In addition, if the Brazilian economy declines due to, among other factors, a reduction in the level of economic activity, an increase in inflation or an increase in domestic interest rates, a greater portion of our customers may not be able to pay their bills on a timely basis, which would increase our provision for doubtful accounts and adversely affect our financial condition and results of operations.
We are dependent on key personnel and the ability to hire and retain additional personnel.
We believe that our success will depend on the continued services of our senior management team and other key personnel. Our management team is comprised of highly qualified professionals, with extensive experience in the telecommunications industry. The loss of the services of any of our senior management team or other key employees could adversely affect our business, financial condition and results of operations. We also depend on the ability of our senior management and key personnel to work effectively as a team.
Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing personnel. Competition for such personnel is intense, and we cannot guarantee that we will successfully attract, assimilate or retain a sufficient number of qualified personnel. Failure to retain and attract the necessary technical, managerial, sales and marketing and administrative personnel could adversely affect our business, financial condition and results of operations.
Certain members of our management are subject to administrative proceedings in Brazil, which could lead to their removal from office.
In December 2018, we became aware that the Enforcement Office (Superintendência de Processos Sancionadores) and the Office of the Chief Counselor (Procuradoria Federal Especializada) of the CVM issued Reports in Punitive Administrative Proceedings proposing liability for certain persons, including Eurico de Jesus Teles Neto, our chief executive officer, and José Mauro Mettrau Carneiro da Cunha, a member of our board of directors, and other of our former directors, executive officers and former or current shareholders, for alleged violations of the Brazilian Corporate Law in connection with facts related to the corporate reorganization between Oi and Pharol, which was announced in October 2013, and our subsequent capital increase, in which Pharol increased its holdings in our share capital, which was completed in May 2014.
If any such persons are found liable in these Punitive Administrative Proceedings, they will be subject to a penalty, which may vary from a warning to disqualification from acting as a member of the board of directors or board of executive officers of any publicly-held company in Brazil for a period of up to 20 years. We cannot predict when these Punitive Administrative Proceedings will be concluded.
The loss of the services of any of our senior management team could adversely affect our business, financial condition and results of operations.
We could be adversely affected by violations of anti-corruption laws and regulations.
We are required to comply with Brazilian anti-corruption laws and regulations, including Brazilian Law No. 12,846/2013, or the Brazilian Anti-Corruption Law, as well as anti-corruption laws and regulations in other jurisdictions, including the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA.
The Brazilian Anti-Corruption Law, the FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-corruption law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity bynon-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-corruption laws. We operate, through our businesses, in countries that are recognized as having governmental and commercial corruption. We cannot assure you that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees, the employees of any of our businesses, or third party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners (either as a result of express prohibitions or to avoid the appearance of impropriety), injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or other restrictions which could disrupt our business and have a material adverse effect on our business, financial condition, results of operations or liquidity.
Risks Relating to Our Operations
We face significant competition in the Brazilian market and increasing competition from other services, which may adversely affect our results of operations.
We face increasing competition throughout Brazil from other telecommunications service providers in each of our core service businesses. In our Residential Services business, we compete with other fixed-line voice service providers, primarily Claro S.A., a subsidiary of América Móvil S.A.B. de C.V., or Claro, and Telefônica Brasil S.A., a subsidiary of Telefónica S.A., or Telefônica Brasil. In addition to Claro and Telefônica Brasil, our Residential Services business competes for broadband subscribers with a myriad smaller local and regional broadband services providers. Finally, our Residential Services business competes forPay-TV broadband subscribers with Claro and SKY Brasil Serviços Ltda., or SKY, and Telefônica Brasil. In our Personal Mobility Services business, we compete with Telefônica Brasil, Claro, and TIM Participações S.A., a subsidiary of Telecom Italia S.p.A., or TIM. In our B2B Services business, we compete with all of these competitors for small- andmedium-sized enterprise, or SME, and corporate subscribers (including governmental entities) for our fixed-line and mobile services.
Our primary competitors, Telefônica Brasil, TIM and Claro are each controlled by multinational companies that may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis and on more favorable terms, than our company.
As a result of competition from mobile services, we expect (1) the number of our fixed lines in service to continue to decline as some of our customers eliminate their fixed-line services in favor of mobile services, and (2) the use of existing fixed lines for making voice calls to decline, as customers replace fixed-line calls in favor of calls on mobile phones as a result of the emergence of“all-net” plans, which allow a customer to make calls to any fixed-line or mobile device of any operator for a flat monthly fee. The reduction in the number of our fixed lines in service has negatively affected and is likely to continue to negatively affect our net operating revenue and margins.
The primary drivers of competition in the broadband industry are stability and quality of the service, speed and price, with discounts typically offered in the form of bundled services. Claro and Telefônica Brasil each offer broadband services at higher speeds than ours and both offer integrated voice, broadband andPay-TV services, typically as bundles, to the residential services market through a single network infrastructure. In addition, an increasing number of small local and regional providers are competing in the broadband space offering fiber to the home (FTTH) at competitive prices. Future offerings by our competitors that are aggressively priced or that offer additional services could have an adverse effect on our net operating revenue and our results of operations.
We offerPay-TV services throughout the regions in which we provide residential services. Future changes in satellite technology may result in one of our competitors utilizing new satellites for DTH services that have higher capacities or better quality of service, which could adversely affect our net operating revenue and may adversely affect our results of operations. In addition, as is happening mature markets, the growth of OTT services in Brazil may further diminish the attractiveness of DTH services, which provide less user interaction. We and each of our principal competitors in the mobile telecommunications market offer UMTS (Universal Mobile Telecommunications System), or 3G, and our LTE (Long Term Evolution), or 4G, mobile telecommunications network technology. The cost of maintaining our revenue share in this market may increase and in the future we may incur higher advertising and other costs as we attempt to maintain or expand our market presence. As mobile interconnection, or MTR, tariffs have declined in recent years, a trend towards SIM card consolidation has developed, reversing the trend of customers using multiple SIM cards to participate inon-net calling plans offered by multiple service providers; this trend has resulted, and may continue to result in, a decline in the size of our customer base. Acquiring each additional personal mobility customer entails costs, including sales commissions and marketing costs. Recovering these costs depends on our ability to retain such customers. Therefore, high rates of customer churn could have a material adverse effect on the profitability of our Personal Mobility Services business. During the year ended December 31, 2018, the average monthly churn rate of our Personal Mobility Services business, representing the number of subscribers whose service was disconnected during each month, whether voluntarily or involuntarily, divided by the number of subscribers at the beginning of such month, was 4.0% per month. Our inability to compete effectively to maintain and increase our market share in this market could adversely affect our net operating revenue and profitability.
Our mobile subscribers are demanding higher quality and more data availability, which require higher investments in development, modernization, expansion and continuous improvement in service quality and customers’ experience. As discussed above, some of our competitors may have greater access to cheaper capital and the ability to invest in new technologies, including 4.5G.
As a result of the increased availability of 4G mobile network technology, there has been an increase in the use ofover-the-top, or OTT, services in Brazil, including instant internet messaging and Voice over Internet Protocol, or VoIP, services on smartphone applications such as Facebook Messenger and WhatsApp. OTT applications are often free of charge, other than for data usage, accessible by smartphones, tablets and computers and allow their users to have access to potentially unlimited messaging and voice services over the Internet, bypassing more expensive traditional voice and messaging services such astwo-way short (or text) message services known as SMS, which have historically been, but are no longer a source of significant revenues. With the growing use of smartphones in Brazil, an increasing number of customers are using OTT application services as a substitute for traditional voice or SMS communications. As a result of this scenario, we see the migration of traffic from voice to data and consequently the introduction of offers from almost all competitors of unlimited voice plans in their portfolio, accelerating the process of commoditization of voice service. These trends could have an adverse effect on the average revenue per unit, or ARPU, generated by our mobile customer base and our profitability.
We may be unable to implement our plans to expand and enhance our existing networks in Brazil in a timely manner or without unanticipated costs, which could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected.
Our business as a telecommunications services provider depends on our ability to maintain and expand our telecommunications services network. Our ability to achieve our strategic objectives depends in large part on the successful, timely and cost-effective implementation of our plans to expand and enhance our networks in Brazil. We believe that our expected growth will require, among other things:
continuous development of our operational and administrative systems;
efficiently allocating our capital;
increasing marketing activities;
improving our understanding of customer wants and needs;
continuous attention to service quality; and
attracting, training and retaining qualified management, technical, customer relations, and sales personnel.
We believe that these requirements will place significant demand on our managerial, operational and financial resources. Factors that could affect our implementation of our growth strategy include:
our ability to generate cash flow or to obtain future financing necessary to implement our projects;
delays in the delivery of telecommunications equipment by our vendors;
the failure of the telecommunications equipment supplied by our vendors to comply with the expected capabilities;
the failure to obtain licenses necessary for our projects; and
delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner.
Although we believe that our cost estimates and implementation schedule are reasonable, we cannot assure you that the actual costs or time required to complete the implementation of these projects will not substantially exceed our current estimates. Any significant cost overrun or delay could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected. Failure to manage successfully our expected growth could reduce the quality of our services, with adverse effects on our business, financial condition and results of operations.
We make investments based on demand forecasts that may become inaccurate due to economic volatility and may result in revenues that lower than expected.
We make certain investments, such as the procurement of materials and the development of our network infrastructure, based on our forecasts of the amount of demand that customers will have for our services at a later date. However, any major changes in the Brazilian economic scenario may affect this demand and therefore our forecasts may turn out to be inaccurate. For example, economic crises may restrict credit to the population, and uncertainties relating to employment may result in a delay in the decision to acquire new products or services (such as broadband orPay-TV). As a result, it is possible that we may make larger investments based on demand forecasts than were necessary given actual demand at the relevant time, which may directly affect our cash flow.
Furthermore, improvements in economic conditions may have the opposite effect. For example, an increase in demand not accompanied by our investment in improved infrastructure may result in a possible loss of opportunity to increase our revenue or result in the degradation of the quality of our services.
We rely on strategic suppliers of equipment, materials and certain services necessary for our operations and expansion. If these suppliers fail to provide equipment, materials or services to us on a timely basis, we could experience disruptions, which could have an adverse effect on our revenues and results of operations.
We are in processes of vendor consolidation by using only on a few strategic and most representative technology suppliers around the world to provide us with equipment and materials that we need in order to expand and to operate our business in Brazil. In addition, we rely on a third-party provider of network maintenance services in certain regions were we operate. There are a limited number of suppliers with the capability of providing the mobile network equipment and fixed-line network platforms that our operations and expansion plans require or the services that we require to maintain our networks. In addition, because the supply of mobile network equipment and fixed-line network platforms requires detailed supply planning and this equipment is technologically complex, it would be difficult for our company to replace the suppliers of this equipment. Suppliers of cables that we need to extend and maintain our networks may suffer capacity constraints or difficulties in obtaining the raw materials required to manufacture these cables. As a result, we are exposed to risks associated with these suppliers, including restrictions of production capacity for equipment and materials, availability of equipment and materials, delays in delivery of equipment, materials or services, and price increases. If these suppliers or vendors fail to provide equipment, materials or services to us on a timely basis or otherwise in compliance with the terms of our contracts with these suppliers, we could experience disruptions or declines in the quality of our services, which could have an adverse effect on our revenues and results of operations, and we might be unable to satisfy the requirements contained in our concession and authorization agreements.
Certain key inputs are subject to risks related to importation, and we acquire other key inputs from a limited number of domestic suppliers, which may further limit our ability to acquire such inputs in a timely and cost effective manner.
The high growth in data markets in general and broadband in particular may result in a limited supply of equipment essential for the provision of such services, such as data transmission equipment and modems. The restrictions on the number of manufacturers imposed by the Brazilian government for certain inputs, mainly data transmission equipment and modems, and the geographical locations ofnon-Brazilian manufacturers of these inputs, pose certain risks, including:
vulnerability to currency fluctuations in cases where inputs are imported and paid for with U.S. dollars, Euros or other foreign currencies;
difficulties in managing inventory due to an inability to accurately forecast the domestic availability of certain inputs; and
the imposition of customs or other duties on key inputs that are imported.
If any of these risks materialize, they may result in our inability to provide services to our customers in a timely manner or may affect the prices of our services, which may have an adverse effect on our business, financial condition and results of operations.
We may be unable to respond to the trend towards consolidation in the Brazilian telecommunications market.
The Brazilian telecommunications market has been subject to consolidation. Mergers and acquisitions may change market dynamics, create competitive pressures and force small competitors to find partners, and may require us to adjust our operations, marketing strategies, and product portfolio. For example, in March 2015, Telefónica S.A. acquired from Vivendi S.A., all of the shares of GVT Participações S.A., the controlling shareholder of Global Village Telecom S.A. This acquisition increased Telefónica’s share of the Brazilian telecommunications market, and we believe such trend is likely to continue in the industry as participants continue to pursue economies of scale. The entry of a new market participant with significant financial resources or potential changes in strategy by existing telecommunications service providers can change the competitive environment in the Brazilian market. We may be unable to keep pace with these changes, which could affect our ability to compete effectively and have a material adverse effect on our business, financial condition and results of operations.
Additional joint ventures, mergers and acquisitions among telecommunications service providers are possible in the future. If such consolidation occurs, it may result in increased competition within our market. We may be unable to adequately respond to pricing pressures resulting from consolidation in our market, adversely affecting our business, financial condition and results of operations. We may also consider engaging in merger or acquisition activity in response to changes in the competitive environment, which could divert resources away from other aspects of our business.
Our commitment to meet the obligations of our Brazilian employees’ pension plans, managed by Fundação Sistel de Seguridade Social and Fundação Atlântico de Seguridade Social may be higher than what is currently anticipated, and therefore, we may be required to make additional contributions of resources to these pension plans or to record liabilities or expenses that are higher than currently recorded.
As sponsors of certain private employee pension plans in Brazil, which are managed by Fundação Sistel de Seguridade Social, or Sistel, and Fundação Atlântico de Seguridade Social, or FATL, our subsidiaries cover the actuarial deficits of these pension benefit plans, which provide guaranteed benefits to our retirees in Brazil and guaranteed future benefits to our current Brazilian employees at the time of their retirement. As of December 31, 2015,2018, our Brazilian pension benefit plans had an aggregate deficit of R$544579 million. Our commitment to meet these deficit obligations may be higher than we currently anticipate, and we may be required to make additional contributions or record liabilities or expenses that are higher than we currently record, which may adversely affect our financial results. If the life expectancy of the beneficiaries should exceed the life expectancies included in the actuarial models, the level of our contributions to these plans could increase. If the managers of these plans should suffer losses on the investments of the assets of these plans, we would be required to make additional contributions to these plans in order for these plans to be able to provide the agreed benefits. Any increase in the level of our contributions to these plans as a result of an increase in life expectancy or a decline in investment returns could have a material adverse effect on our financial condition or results of operations. For a more detailed description of our Brazilian pension plans, see “Item 6. Directors, Senior Management and Employees—Employees—Employee Benefits—Pension Benefit Plans.”
Risks Relating to Our Brazilian Operations
Our Residential Services business faces competition from mobile services and other fixed-line service providers, which may adversely affect our revenues and margins.
Our Residential Services business, which provides local and long-distance fixed-line voice, fixed-line data, or broadband, and subscription television, or Pay-TV, services to our residential customers, as well as bundles of these services together with mobile services, faces competition from:
Based on information available from ANATEL, from December 31, 2012 to December 31, 2015, the number of fixed lines in service (including the number fixed lines provided to our SME and Corporate Services customers) in our service areas (all of Brazil other than the state of São Paulo) declined from 27.7 million to 27.2 million. As of December 31, 2015, based on information available from ANATEL, (1) we had a market share of 56.4% of the total fixed lines in service in Region I of Brazil and a market share of 52.9% of the total fixed lines in service in Region II of Brazil (in each case, including the fixed lines provided to our SME and Corporate Services customers); (2) Embratel had a market share of 25.3% of the total fixed lines in service in Region I and a market share of 18.4% of the total fixed lines in service in Region II; and (3) GVT had a market share of 9.9% of the total fixed lines in service in Region I and a market share of 23.4% of the total fixed lines in service in Region II.
As a result of competition from mobile services, we expect (1) the number of our fixed lines in service to experience a slow decline, as some of our customers eliminate their fixed-line services in favor of mobile services, and (2) the use of existing fixed lines for making voice calls to decline, as customers replace fixed-line calls in favor of calls on mobile phones as a result of the emergence of “all-net” plans, which allow a customer to make calls to any fixed-line or mobile device of any operator for a flat monthly fee. The rate at which the number of fixed lines in service in our service areas, a large majority of which are used by our residential customers, may decline depends on many factors beyond our control, such as economic, social, technological and other developments in Brazil. Because we derive a significant portion of our net operating revenue from our Residential Services business, the reduction in the number of our fixed lines in service has negatively affected and is likely to continue to negatively affect our net operating revenue and margins.
Our broadband services in Brazil face strong competition from Embratel and Telefônica Brasil, which have market shares of 32.5% and 28.7% for broadband services in Brazil, respectively, according to data from ANATEL. As of January 2016, we had a market share of 25.1% for broadband services in Brazil, according to data from ANATEL. Embratel provides local fixed-line services to residential customers through Net’s cable network in the portions of Regions I and II where Net provides cable television service. Telefônica Brasil provides local fixed-line services through its own network and through its subsidiary GVT’s network. The primary drivers of competition in the broadband industry are speed and price, with discounts typically offered in the form of bundled services. Net and Telefônica Brasil each offer broadband services at higher speeds than ours and both offer integrated voice, broadband and subscription television services, typically as bundles, to the residential services market through a
single network infrastructure. Future offerings by our competitors that are aggressively priced or that offer additional services could have an adverse effect on our net operating revenue and our results of operations.
The primary providers of Pay-TV services in the regions in which we provide residential services are, SKY, which provides direct-to-home, or DTH, service, and América Móvil, which provides DTH service through Embratel under the “Claro TV” brand and Pay-TV services using coaxial cable through Net. We offer DTH services throughout the regions in which we provide residential services. Future changes in satellite technology may result in one of our competitors utilizing new satellites for DTH services that have higher capacities or better quality of service, which could adversely affect our net operating revenue and may adversely affect our results of operations.
Our primary competitors for residential services, Embratel and Telefônica Brasil, are each controlled by multinational companies that may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis and on more favorable terms, than our company. In addition, we compete in our service areas with smaller companies that have been authorized by ANATEL to provide local fixed-line services. Increased competition from these small, regional companies may require us to increase our marketing expenses and our capital expenditures, which would lead to a decrease in our profitability. For a detailed description of our competition in the residential services market in Brazil, see “Item 4: Information on the Company—Competition—Residential Services.”
Our Personal Mobility Services business faces strong competition from fixed-line service providers other mobile services providers and internet data providers, which may adversely affect our revenues and margins.
The mobile services market in Brazil is extremely competitive. Our Personal Mobility Services business, which provides post-paid and pre-paid mobile voice services and post-paid and pre-paid mobile data communications services, faces competition from large competitors such as (1) TIM Participações S.A., or TIM, (2) Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” and (3) Claro S.A., a subsidiary of América Móvil, or Claro. As of December 31, 2015, based on information regarding the total number of subscribers as of that date available from ANATEL, we had a market share of 18.6% of the total number of mobile subscribers (including subscribers in our SME and Corporate Services), ranking behind Telefônica Brasil with 28.4%, TIM with 25.7% and Claro with 25.6%. Telefônica Brasil, TIM and Claro are each controlled by multinational companies that may have more significant financial and marketing resources, and greater abilities to access capital on a timely basis and on more favorable terms, than our company.
Our ability to generate revenues from our Personal Mobility Services business depends on our ability to continue to maintain or increase the ARPU generated by our customer base, retain or increase the size of our customer base, improve the perception of the quality of our services and encourage the migration of our customers to our 3G and 4G networks through our offers of attractive data packages that take advantage of the structural shift from voice to data usage. The recent trend towards SIM card consolidation, reversing the trend of customers using multiple SIM cards to participate in on-net calling plans and the demand for more aggressive data packages in the pre-paid market may result in a decline in the size of our customer base. The increased use of instant internet messaging and Voice over Internet Protocol, or VoiP, services on smartphone applications such as WhatsApp may result in a migration from voice to data services, which could have an adverse effect on the size and profitability of our customer base. Acquiring each additional personal mobility customer entails costs, including sales commissions and marketing costs. Recovering these costs depends on our ability to retain such customers. Therefore, high rates of customer churn could have a material adverse effect on the profitability of our Personal Mobility Services business. During the year ended December 31, 2015, the average customer churn rate in our Personal Mobility Services business, representing the number of subscribers whose service was disconnected during each month, whether voluntarily or involuntarily, divided by the number of subscribers at the beginning of such month, was 12.4%.
We have experienced increased pressure to reduce our mobile rates in response to pricing competition. This pricing competition often takes the form of special promotional packages, which may include, among other things, mobile handset subsidies and traffic usage promotions. We no longer offer handset subsidies for new customers, and competing with the service plans and promotions offered by our competitors may cause an increase in our marketing expenses and customer-acquisition costs, which has adversely affected our result of operations during some periods in the past and could continue to adversely affect our results of operations. Our inability to compete effectively with these packages could result in our loss of market share and adversely affect our net operating revenue and
profitability. For a detailed description of our competition in the personal mobility services market in Brazil, see “Item 4: Information on the Company—Competition—Personal Mobility Services.”
Our SME and Corporate Services business faces strong competition from other mobile, fixed-line and information technology services providers, which may adversely affect our revenues and margins.
Our SME and Corporate Services business provides a la carte and bundled fixed-line voice and data services, mobile voice and data services and information technology services to our small- and medium-sized enterprise, or SME, and corporate customers, as well as interconnection, network usage and traffic transportation services to other telecommunications providers. The competition risks relating to the fixed-line and mobile services we provide to our SME and corporate customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers, respectively.
The Brazilian recession has had a significant negative effect on our operating revenue and margins as SMEs generally, including our customers, have reduced the size of their businesses and in some cases ceased operations, and a number of our Corporate customers have reduced their telecommunications spending as part of their overall cost-cutting efforts. Because we derive a significant portion of our net operating revenue from our SME and Corporate Services business, the loss of a significant number of SME or corporate customers would adversely affect our net operating revenue and may adversely affect our results of operations. For a detailed description of our competition in the business and corporate market in Brazil, see “Item 4: Information on the Company—Operations in Brazil—Competition—SME and Corporate Services.”
Our long-distance services in Brazil face significant competition, which may adversely affect our revenues.
In Brazil, unlike in the United States and elsewhere, a caller chooses its preferred long-distance carrier for each long-distance call, whether originated from a fixed-line telephone or a mobile handset, by dialing such carrier’s long-distance carrier selection code (Código de Seleção de Prestadora). The long-distance services market in Brazil has become less competitive as a result of ongoing reductions in the interconnection rates, as mandated by ANATEL. The proliferation of all-net service plans, particularly for mobile services, offers unlimited long-distance calls and data combination plans that have reduced the relevance of long-distance services for mobile services. As a result, competition for long-distance services in Brazil is limited to fixed-line voice services. We compete with Telefônica Brasil, which is the incumbent fixed-line service provider in the State of São Paulo. Competition in the Brazilian fixed-line long-distance market may require us to increase our marketing expenses and/or provide services at lower rates than those we currently expect to charge for such services. Competition in the Brazilian fixed-line long-distance market has had and could continue to have a material adverse effect on our revenues and margins.
The Brazilian telecommunications industry is highly regulated. Changes in laws and regulations may adversely impact our business.
The Brazilian telecommunications industry is highly regulated by ANATEL. ANATEL regulates, among other things, rates, quality of service and universal service goals, as well as competition among telecommunications service providers. Changes in laws and regulations, grants of new concessions, authorizations or licenses or the imposition of additional universal service obligations, among other factors, may adversely affect our business, financial condition and results of operations. For example, in July 2014 ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line and mobile networks would be reduced over a period of years until they were set at rates based on a long-run incremental cost methodology. As a result, the mobile interconnection rates for Regions I, II and III declined by 25% each in February 2014, 33.3% each in February 2015 and 40.0%, 35.2% and 27.6%, respectively, in February 2016, with additional cuts approved through 2019. In addition, ANATEL approved cuts for most of our fixed interconnection rates ranging from 9.1% and 20.0% in February 2016, with additional cuts approved through 2019. These regulations will have adverse effects on our revenues, although as a result of reductions in our costs and expenses for these services that we acquire from other telecommunications providers, we cannot predict with certainty the effects that these regulations will have on our results of operations.
We cannot predict whether ANATEL, the Brazilian Ministry of Communications (Ministério das Comunicações) or the Brazilian government will adopt other telecommunications sector policies in the future or the consequences of such policies on our business or the business of our competitors.
Our local fixed-line and domestic long-distance concession agreements in Brazil are subject to periodic modifications by ANATEL and we cannot assure you that the modifications to these concession agreements will not have adverse effects on our company.
We provide fixed-line telecommunications services in our Brazilian service areas pursuant to concession agreements with the Brazilian government. These concession agreements expire on December 31, 2025, and may be amended by the parties every five years prior to the expiration date. In connection with each five-year amendment, ANATEL has the right, following public consultations, to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions.
Our obligations under our concession agreements may be subject to revision in connection with each future amendment. On June 27, 2014, ANATEL opened a public comment period for the revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the reviewRJ Proceedings, certain of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.
We cannot assure you that any future amendments to our concession agreements, including the amendments now expected to be made in 2016, will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we generate from our Brazilian fixed-line businesses. If the amendments to our Brazilian concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected.
Our local fixed-line and domestic long-distance concession agreements expire on December 31, 2025 and we cannot assure you that our bids for new concessions upon the expiration of our existing concessions will be successful or that the pending expiration of these concessions will not have adverse effects on our ability to finance our operations.
Our concession agreements will expire on December 31, 2025. We expect the Brazilian government to offer new concessions in competitive auctions prior to the expiration of our existing concession agreements. We may participate in such auctions, but our existing fixed-line and domestic long-distance concession agreements will not entitle us to preferential treatment in these auctions. If we do not secure concessions for our existing service areas in any future auctions, or if such concessions are on less favorable terms than our current concessions, our business, financial condition and results of operations would be materially adversely affected. In addition, based on the current scheduled expiration of our concession agreements and the uncertainty that term of these concessions will be extended, investors may be unwilling to make investments in our company on terms that are attractive to our
company, or at all. Our inability to raise capital in the equity or debt markets on favorable terms, or at all, could have a materially adverse effect on our business, financial condition and results of operations.
Our local fixed-line and domestic long-distance concession agreements in Brazil, as well as our authorizations to provide personal mobile services in Brazil, contain certain obligations, and our failure to comply with these obligations may result in various fines and penalties being imposed on us by ANATEL.
Our local fixed-line and domestic long-distance concession agreements in Brazil contain terms reflecting the General Plan on Universal Service Goals (Plano Geral de Metas de Universalização), the General Plan on Quality Goals (Plano Geral de Metas de Qualidade) and other regulations adopted by ANATEL, the terms of which could affect our financial condition and results of operations. Our local fixed-line concession agreements in Brazil also require us to meet certain network expansion, quality of service and modernization obligations in each of the Brazilian states in our service areas. In the event of noncompliance with ANATEL targets in any one of these states, ANATEL can establish a deadline for achieving the targeted level of such service, impose penalties and, in extreme situations, terminate the applicable concession agreement for noncompliance with our quality and universal service obligations. See “Item 4: Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services.”
On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries or comply with our serviceunfunded obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of the commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality Goals and the General Plan on Universal Service Goals, among others.post-retirement plans were novated. As of December 31, 2015,2018, we had recorded provisions inR$575 million on our balance sheet as “liability for pension benefits,” net of provision for unfunded status on our balance sheet, represented by the amount of R$1,149 million in connection with fines sought to be imposed by ANATEL, including fines which we are contesting through judicial proceedings. Incommitment under the event that we are unsuccessful in obtaining final approvalterms of the inclusionRJ Plan related to the financial obligations agreement, entered into by Oi and FATL intended for the payment of the R$5 billion of finesmathematical provision without coverage by the plan’s assets. For more information, see “Item 6. Directors, Senior Management and claims we have proposedEmployees—Employees—Employee Benefits—Pension Benefit Plans—Fundação Atlântico de Seguridade Social—TCSPREV Plan” and note 23 to beour consolidated financial statements included in the Terms of Adjustment of Conduct (“Termos de Ajuste de Conduta”) program, or the TAC program, we could be required to constitute an additional provision of the portion of these fines and claims for which we have not previously established a provision. Additional fines from ANATEL, the establishment of an additional provision or fines in excess of the provisioned amount could adversely impact our financial condition and results of operations. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry” and “Item 8. Financial Information—Legal Proceedings—Civil Claims Relating to Oi S.A. and Our Brazilian Operations—Administrative Proceedings.”
In addition, our authorizations to provide personal mobile services contain certain obligations requiring us to meet network scope and quality of service targets. If we fail to meet these obligations, we may be fined by ANATEL until we are in full compliance with our obligations and, in extreme circumstances, our authorizations could be revoked by ANATEL. For example, on July 23, 2012, ANATEL temporarily suspended our ability to accept new customers for our mobile services in the States of Amazonas, Amapá, Mato Grosso do Sul, Roraima and Rio Grande do Sul due to ANATEL’s perception of our failure to meet capital investment and quality of service commitments in those states. This suspension lasted for approximately two weeks until we were able to propose new quality of service goals to ANATEL. See “Item 4. Information on the Company—Regulation of the Brazilian Telecommunications Industry—Regulation of Mobile Services—Obligations of Personal Mobile Services Providers.”
We may be unable to implement our plans to expand and enhance our existing networks in Brazil in a timely manner or without unanticipated costs, which could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected.
Our ability to achieve our strategic objectives depends in large part on the successful, timely and cost-effective implementation of our plans to expand and enhance our networks in Brazil. Factors that could affect this implementation include:annual report.
Although we believe that our cost estimates and implementation schedule are reasonable, we cannot assure you that the actual costs or time required to complete the implementation of these projects will not substantially exceed our current estimates. Any significant cost overrun or delay could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected.
Risks Relating to Our African and Asian Operations
We may be unable to dispose of our interest in Africatel for a consideration that exceeds its carrying value in our financial statements or at all. Any impairment of the fair market value at which we record our indirect investment in Unitel in our financial statements would have a material adverse effect on our financial condition and results of operations.
On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel, representing 75% of the share capital of Africatel. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel as held-for sale, although we do not record Africatel as discontinued operations in our income statement due to the immateriality of the effects of Africatel on our results of operations. We have engaged a financial advisor to assist us with marketing and selling our interest in Africatel.
As of December 31, 2015,2018, we recorded assets held for sale of R$4,923 million in our consolidated financial statements, as assets held for sale R$7,686 millionmainly relating to our interest in Africatel and TPT,Unitel, including R$2,0422,567 million of accrued dividends owed to our company by Unitel and R$3,4361,760 million representing the fair market value of Africatel’s 25% interest in Unitel, and recorded as liabilities directly associated with assets held for sale of R$745527 million, mainly relating to our interest in AfricatelUnitel. The fair value of Africatel’s 25% interest in Unitel is estimated based on the internal valuation made, including cash flows forecasts for a five-year period, the choice of a growth rate to extrapolate the cash flows projections, and TPT. We are currently engageddefinition of appropriate discount rates and foreign exchange rates. In addition to the financial and business assumptions referred to above, we also take into consideration the fair value measurement of cash investments, qualitative assumptions, including the impacts of developments in negotiations withour litigation against Unitel and the other Unitel shareholders, including the recently concluded international arbitration, and the opinion of the legal counsel on the outcome of this litigation.
For many years, the other shareholders of Unitel have breached several provisions of the Unitel shareholders’ agreement. Although PT Ventures is entitled to appoint three of the five members of Unitel’s board of directors, the other shareholders of Unitel failed to vote for nominees to Unitel’s board of directors nominated by PT Ventures. Although PT Ventures is entitled to appoint Unitel’s managing director, subject to the approval of the holders of 75% of Unitel’s shares, the other shareholders of Unitel failed to appoint PT Ventures’ nominee as Unitel’s managing director.
In October 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel before the International Chamber of Commerce as a result of the violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions entitling PT Ventures to nominate the majority of the members of the board of directors of Unitel and its managing director. On February 20, 2019, the arbitral tribunal issued a final award finding that repeated breaches of the Unitel shareholders’ agreement by the other shareholders of Unitel resulted in a significant decrease of value of PT Ventures’ stake in Unitel and ordered the other shareholders of Unitel to seek alternatives forpay PT Ventures US$339.4 million, corresponding to the realizationloss of value of PT Ventures’ stake in Unitel, plus interest at12-month US dollar LIBOR +2%, compounded annually from the date of the valueaward.
On March 19, 2019, Unitel held a general shareholders meeting during which a new board of our investmentdirectors was elected, including, among its five members, two members nominated by PT Ventures, including one member who will also serve as the managing director of Unitel. We cannot assure you that PT Ventures will be successful in Unitel.its efforts to enforce the award of the arbitral tribunal or that the other shareholders of Unitel will not breach the provisions of the Unitel shareholders’ agreement in the future.
We may not be able to sell our interest in Africatel for consideration that exceeds the book value of our interest in Africatel, or at all. The book value of our indirect investment in Unitel is subjected to testing for impairment when events or changes in circumstances indicate that the value of our indirect investment in Unitel may be lower than the fair market value at which we carry this investment. For the year ended December 31, 2015,2018, we recorded aimpairment charges of R$408491 million loss as a result of our review of the fair value of our investment in Unitel.Unitel and R$187 million related to impairment dividends. Any further impairment of our indirect investment in Unitel may result in a material adverse effect on our financial condition and operating results.results of operations.
We cannot assure you as to when PT Ventures will realize the accounts receivable recorded with respect to the declared and unpaid dividends owed to PT Ventures by Unitel or when PT Ventures will receive dividends that may have been declared with respect to 2014 or that may be declared with respect to succeeding fiscal years.by Unitel in the future.
Since November 2012, PT Ventures has not received any payments for outstanding amounts owed to it by Unitel with respect to dividends declared by Unitel for theseveral fiscal years ended December 31, 2012 and 2011, and the extraordinary dividends declared by Unitel in November 2010 based on its 2005 results of operations and free reserves held in 2006 through 2009.years. Based on the dividends declared by Unitel for those fiscal years, PT Ventures is entitled to receive the total amounts of US$187.5 million (R$732.2 million) with respect to fiscal year 2013, US$190.0 million (R$742.0 million) with respect to fiscal year 2012, US$190.0 million (R$742.0 million) with respect to fiscal year 2011, and US$157.5 million (R$615.0 million) with respect to the dividends declared in
2010. As of the date of this annual report,which PT Ventures has onlynot received US$63.7 million (R$248.7 million) of its share of the dividends declared by Unitel in 2010, and has not received any amount in respect of dividends declared by Unitel with respect to fiscal years 2011, 2012 or 2013.
On March 25, 2014, Unitel issued a statement claiming that PT Ventures is not listed on the shareholders’ register of Unitel, and that the board of directors of Unitel had notified Pharol about the existence of an irregularity, which purportedly resulted in Unitel being unable to distribute dividends to PT Ventures until the resolution of this irregularity. On June 3, 2014, the Angolan National Foreign Investment Agency endorsed the updating of PT Ventures’ name (formerly Portugal Telecom Internacional, SGPS, S.A.) in its Foreign Investment Certificate, confirming the current corporate name of the PT Ventures and thus remedying the irregularity alleged by Unitel’s board of directors.
At a general meeting of the shareholders of Unitel held on May 13, 2015, the other shareholders discussed the financial statements as well as the payment, of dividends with respect to fiscal year 2014. The other Unitel shareholders did not permit PT Ventures to attend and participate in this shareholders’ meeting alleging that they did not acknowledge PT Ventures as a Unitel shareholder. As a result, PT Ventures has filed a suit against Unitel with an Angolan court seeking to nullify and cancel all actions purportedly taken by the May 13, 2015 shareholders’ meeting. PT Ventures has received a draft of the minutes of this meeting but has not received the final version. The draft minutes indicate that Unitel declared dividends in theestimated recoverable amount of US$490.0662 million (R$1,913.52,567 million), as of which PT Ventures’ share amounts to US$122.5 million (R$478.4 million). Because we have not received fully executed minutes of this meeting, and because we are seeking to annul the actions taken by this meeting, we have not recorded our share of these dividends in our financial statements.December 31, 2018.
On several occasions, PT Ventures has requested an explanation from Unitel about its failure to pay to PT Ventures its share of the declared dividends. As of the date of this annual report, PT Ventures has not received a satisfactory explanation regarding this failure to pay, nor has PT Ventures received reliable indications as to the expected timing of the payment of the accrued dividends. As a result, on October 20, 2015, PT Ventures has filed a suit against Unitel with an Angolan courtin the Provincial Courts of Luanda seeking to collect its sharepayment of outstanding dividends declared in 2010 as well as the dividends declared by Unitel in 2010,for the fiscal years 2011 2012 andthrough 2013, together with interest thereon. PT Ventures has also filed a claim against the other Unitel shareholders in its arbitration proceeding against the other shareholders of Unitel before the International Chamber of Commerce for the payment of the outstanding dividends.
As a resultpart of our institutionits February 20, 2019 final award, the arbitral tribunal found that the other shareholders of this suit,Unitel failed, after November 2012, to ensure that PT Ventures received the same amount of dividends in 2015 we recognized a provision with respectforeign currency as the othernon-Angolan shareholder of Unitel and ordered the other shareholders of Unitel to pay PT Ventures the amount of US$307 million, corresponding to the resulting damages, plus simple interest on this amount accruing from the dates on which PT Ventures should have received those dividends, at a 7% annual rate. In addition, the arbitral award recognized PT Ventures’ entitlement to the payment from Unitel for all of the owed and unpaid dividends, reduced by the amount, if any, that PT Ventures collects from the other Unitel shareholders in the enforcement of US$132.2 million (R$516.2 million).the award.
We cannot assure you that wePT Ventures will be successful in thisits pending suit in the Angolan courts or in its efforts to enforce the award of the arbitral tribunal, as to the timing of the payment of the accrued dividends to our company, or whether we will be able to receive dividends that have been declared with respect to fiscal year 2013 or may have been declared with respect to fiscal year 2014 or that may be declared by Unitel in the future. Our inability to receive these dividends could have a material adverse impact on the fair value of our investment in Unitel, our financial position and our results of operations.
The other shareholders of Unitel have claimed that they believe that Pharol’s sale of a minority interest in Africatel to our company did not comply with the Unitel shareholders’ agreement.
The Unitel shareholders’ agreement provides a right of first refusal to the other shareholders of Unitel if any shareholder desires to transfer any or all of its shares of Unitel, other than transfers to certain affiliated companies. This agreement also provides that if any shareholder breaches a material obligation under the Unitel shareholders’ agreement, the other shareholders will have a right to purchase the breaching shareholder’s stake in Unitel at its net asset value.
On March 14, 2016, the other shareholders of Unitel initiated an arbitration proceeding against PT Ventures, claiming that Pharol’s sale of a minority interest in Africatel to our company did not comply with the Unitel shareholders’ agreement. The other shareholders of Unitel had previously made the same claim as a counterclaim in the arbitration started by PT Ventures on October 13, 2015, but then withdrew that counterclaim. PT Ventures disputes the other shareholders’ interpretation of the relevant provisions of the Unitel shareholders’ agreement, and we believe that the relevant provisions of the Unitel shareholders’ agreement apply only to a transfer of Unitel shares by PT Ventures itself.
PT Ventures is seeking to consolidate this arbitration proceeding with the separate arbitration proceeding brought by PT Ventures against the other shareholders of Unitel. We intend to defend against the allegation by
Unitel’s other shareholders vigorously. If a binding decision by the arbitral tribunal were rendered ruling in favor of the interpretation of the Unitel shareholders’ agreement proposed by the other Unitel shareholder, PT Ventures could be required to sell its interest in Unitel for a value significantly lower than the amount that we record in our financial statements with respect to our indirect investment in Unitel. The sale of PT Ventures’ interest in Unitel in these circumstances could have a material adverse impact on our financial condition and results of operations.
The other shareholders of Unitel have prevented PT Ventures from exercising its rights to appoint the chief executive officer and a majority of the board of directors of Unitel.
Under the Unitel shareholders’ agreement, PT Ventures is entitled to appoint three of the five members of Unitel’s board of directors and its chief executive officer. Under the Unitel shareholders’ agreement, the appointment of the chief executive officer of Unitel is subject to the approval of the holders of 75% of Unitel’s shares. However, the other shareholders of Unitel have failed to vote to elect the directors nominated by PT Ventures at Unitel’s shareholders’ meetings, and as a result, PT Ventures’ representation on Unitel’s board of directors was reduced to a single director in June 2006, and the chief executive officer of Unitel has not been PT Ventures’ appointee since June 2006.
On July 22, 2014, the only member of Unitel’s board of directors that had been appointed by PT Ventures resigned from his position, and the other shareholders of Unitel have not permitted PT Ventures to appoint a replacement. In November 2014, the other shareholders of Unitel stated to PT Ventures that its rights as a shareholder of Unitel had been purportedly suspended in October 2012, although these other shareholders have not indicated any legal basis for this alleged suspension. At a general shareholders meeting of Unitel held on December 15, 2014, an election of members of the board of directors of Unitel was held. At this meeting, Unitel’s other shareholders claimed that PT Ventures was not entitled to vote as a result of the alleged suspension of its rights as a shareholder of Unitel in October 2012, and they refused to elect the member nominated by PT Ventures to Unitel’s board of directors. As of the date of this annual report, no nominee of PT Ventures serves on the Unitel board of directors.
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions entitling PT Ventures to nominate the majority of the members of the board of directors of Unitel and its chief executive officer. Vidatel Ltd., one of the other shareholders, presented its answer to PT Ventures’ request for arbitration on January 8, 2016. The arbitral tribunal was constituted on April 14, 2016 and the proceedings are ongoing.
Unitel has granted loans to a related party and entered into a management contract with a third-party without the approval of PT Ventures.
Under the Unitel shareholders’ agreement, the shareholders of Unitel and their affiliates are not permitted to enter into any contracts with Unitel unless the contracts are approved by a resolution of Unitel’s board of directors adopted by at least four members of its board of directors. As a result of the inability of PT Ventures to appoint members of the Unitel board of directors, PT Ventures is unable to effectively exercise its implied veto right over related party transactions of Unitel.
Between May and October 2012, Unitel made disbursements to Unitel International Holdings B.V. of €178.9 million (R$760.4 million) and US$35.0 million (R$136.7 million) under a “Facility Agreement” entered into between Unitel and Unitel International Holdings B.V., or Unitel Holdings. Unitel Holdings is controlled by Mrs. Isabel dos Santos, an indirect shareholder of Unitel and a member of the board of directors of Unitel. PT Ventures abstained when the consolidated financial statements of Unitel that included these transactions were approved by the other Unitel shareholders at a shareholders meeting.
In addition, Unitel has recognized the payment of a management fee of US$155.7 million (R$608.0 million) payable to a third-party in its individual financial statements for the year ended December 31, 2013 prepared in accordance with Angolan GAAP.
In September and November 2015, PT Ventures commenced litigation in the British Virgin Island and the Netherlands against Unitel Holdings and other entities concerning the related party transactions with Unitel.
Despite requests, PT Ventures has been unable to obtain documents and other information concerning transactions between Unitel and Unitel International Holdings B.V., including any transactions that Unitel may have entered into in addition to those described above from 2012 and 2013. We have evidence that Unitel made additional loans to related parties in 2013 that were not approved in accordance with the terms of the Unitel shareholders’ agreement. We have not been able to obtain information with regard to the existence of similar transactions conducted in 2014 and 2015.
We cannot assure you that we will be able to prevent Unitel from taking actions that should require the approval of the members of the Unitel board of directors nominated by PT Ventures, including approving related party transactions with the other shareholders of Unitel that we believe are detrimental to the financial condition and results of operations of Unitel. The use of the resources of Unitel in this manner could have a material adverse impact on the financial position and results of operations of Unitel and therefore the value of our investment in Unitel.
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other shareholders of Unitel as a result of the violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement, including the provisions that would have entitled PT Ventures to veto these related party transactions.
The other shareholders of Unitel have attempted to dilute our indirect ownership of Unitel through a capital increase in which we could be technically unable to participate, and have called shareholders’ meetings at which they have indicated the desire to unilaterally amend the by-laws of Unitel and the Unitel shareholders’ agreement.
At a general shareholders meeting of Unitel held on December 15, 2014, the other shareholders of Unitel voted to increase Unitel’s share capital and alter the nominal value of its shares. The details of this capital increase are obscure to us as they were not included in the prior notice for this meeting nor were they discussed in detail during this meeting. Additional details of this capital increase have been included in draft minutes of this meeting provided to PT Ventures and it appears that, although PT Ventures has determined to subscribe to itspro rata share of this capital increase to avoid dilution of its interest in Unitel, payment of the subscription price may be proposed under conditions that would not permit PT Ventures to obtain the necessary foreign exchange approvals prior to the date on which payment would be due. PT Ventures has filed a suit in Angolan court to annul the approval of the Unitel capital increase at this shareholders’ meeting.
The agenda of this general shareholders meeting of Unitel included amendments to Unitel’s by-laws and purported amendments to Unitel shareholders’ agreement, in addition to other matters that may have been raised at the shareholders’ meeting itself, which included investments by Unitel in Zimbabwe and a study in order to implement a corporate reorganization of Unitel. We have not been provided of the details of the proposed by-law amendments nor of any purported amendments to the Unitel shareholders’ agreement. The December 15, 2014 meeting was suspended without any action taken on these items. PT Ventures has filed a suit in Angolan court to annul all resolutions taken during this general shareholders meeting, including the approval of investments by Unitel in Zimbabwe and a study in order to implement a corporate reorganization of Unitel.
We cannot assess the impact to Unitel or our company of the matters considered at the December 15, 2014 general shareholders’ meeting of Unitel or the proposed amendments to Unitel’s by-laws and purported amendments to the Unitel shareholders’ agreement as we have not been provided with sufficient details to appropriately analyze these matters. We note that there appears to be no legal authority for the other shareholders of Unitel to amend the Unitel shareholders’ agreement through actions taken at a general meeting of shareholders, as this agreement is an agreement among the parties thereto. Should the other shareholders approve actions detrimental to Unitel or our investment in Unitel, these actions could have a material adverse impact on the financial position and results of operations of Unitel and therefore the value of our investment in Unitel.
Unitel’s concession to operate in Angola has expired and has not yet been renewed.
Unitel’s concession to provide mobile telecommunications services in Angola expired in April 2012. We cannot provide you with any assurances regarding the terms under which the Angolan National Institute of Telecommunications (Instituto Angolano das Comunicações), or INACOM, would grant a renewal of this concession, if at all. A failure of Unitel to obtain a renewal of this concession could have a material adverse effect on the ability of Unitel to continue to provide mobile telecommunications services in Angola, which would have a material adverse effect on Unitel’s financial position and results of operations and the value of our investment in Unitel.
Adverse political, economic and legal conditions in the African and Asian countries in which we have acquired investments may hinder our ability to receive dividends from our African and Asian subsidiaries and investments.
The governments of many of the African and Asian countries in which we have investments have historically exercised, and continue to exercise, significant influence over their respective economies and legal systems. Countries in which we have investments may enact legal or regulatory measures that restrict the ability of our subsidiaries and investees to make dividend payments to us. Similarly, adverse political or economic conditions in these countries may hinder our ability to receive dividends from our subsidiaries and investees. Historically, Pharol has received dividends from the African and Asian subsidiaries and investees that we have acquired, however, a limitation on our ability to receive a material portion of those dividends could adversely affect our cash flows and liquidity.
In addition, our investments in these regions are exposed to political and economic risks that include, but are not limited to, exchange rate and interest rate fluctuations, inflation and restrictive economic policies and regulatory risks that include, but are not limited to, the process for the renewal of licenses and the evolution of regulated retail and wholesale tariffs. In addition, our ventures in African and Asian markets face risks associated with increasing competition, including due to the entrance of new competitors and the rapid development of new technologies.
The development of partnerships in these markets raises risks related to the ability of the partners to jointly operate the assets. Any inability of our company and our partners to operate these assets may have a negative impact on our strategy and all of these risks may have material effects on our results of operations.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement,influence, as well as Brazilian political and economic conditions, could adversely impact our business, results of operations and financial condition.condition and on the market prices of our common shares, preferred shares and ADSs.
We areOi is a Brazilian corporation, and a majoritysubstantially all of our operations and customers are located in Brazil. Accordingly, our financial condition and results of operations are substantially dependent on Brazil’s economy. The Brazilian federal government frequently intervenes inexercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and implement macroeconomic policies have often involved, increasesamong other measures, changes in interest rates, changes in tax policies, wage and price controls, foreign exchange controls, currency devaluations, blocking access to bank accounts, imposing capital controls and limits on imports, among other things.imports. We do not have any control over, and are unable to predict, which measures or policies the Brazilian government may adopt in the future. Our business, results of operations and financial condition and the market price of our common shares, preferred shares and ADSs may be adversely affected by changes in government policies or regulations, or by otherespecially those related to the telecommunications sector, such as changes in rates and competitive conditions, as well as general economic factors, such as:including:
the rate of growth of the Brazilian economy;
economic, political or social instability;
fluctuating exchange rates;
inflation;
interest rates;rates and monetary policies;
reductions in salaries or income levels and unemployment rates;
liquidity of domestic capital and lending markets;
energy policy;
exchange controls and restrictions on remittances abroad;
changes to the regulatory framework governing our industry;
fiscal policies and changes in tax laws;
labor and social security policies, laws and regulations; and
other political, diplomatic, social and economic developments in or affecting Brazil, including with respect to alleged unethical or illegal conduct of certain figures in the Brazilian government and legislators, which are currently under investigation.Brazil.
Uncertainty over whether possiblethe Brazilian federal government will implement changes into the policies, regulations or rulesstandards affecting these or other factors in the future may affect economic performance and contribute to economic uncertaintiesuncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers.issuers, which may have an adverse effect on us and the trading price of our common shares, preferred shares and ADSs.
The ongoing economic uncertainty and political instability in Brazil may adversely affect the Brazilian economy, our business, and the market price of our common shares, preferred shares and ADSs.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation known as “Lava Jato,” have negatively impacted the Brazilian economy and political environment.
In recent years, there has been significant political turmoil in connection with the impeachment of President Dilma Rousseff (who was removed from office in August 2016) and investigations of her successor, President Michel Temer (who left office on January 1, 2019) as part of the ongoing “Lava Jato” investigations. President Jair Bolsonaro was elected in presidential elections that were held in Brazil in October 2018. The President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and, consequently, affect the operations and financial performance of businesses such as our company. We can offer no assurancescannot predict which policies President Bolsonaro, who assumed office on January 1, 2019, may adopt or change during his mandate or the effect that theany such policies that may be implemented bymight have on our business and on the Brazilian federaleconomy. Any such new policies or state governments will not adversely affectchanges to current policies may have a material adverse effect on our business, results of operations and financial condition.
In addition, protests, strikes and corruption scandals have led to a fallFurthermore, Brazil’s federal budget has been in confidence and a political crisis. For example, Brazilian markets have been experiencing heightened volatilitydeficit since 2014. Similarly, the governments of Brazil’s constituent states are also facing fiscal concerns due to the uncertainties derived from the ongoing “Lava Jato” investigation, which is being conducted by the Office of the Brazilian Federal Prosecutor,their high debt burdens, declining revenues and its impact on the Brazilian economy and political environment. Members of the Brazilian federal government and of the legislative branch, as well as senior officers of certain Brazilian private and state-owned companies, have faced allegations of political corruption. These government officials and senior officers allegedly accepted bribes by means of kickbacks on contracts granted by major state-owned companies to several infrastructure, oil and gas and construction companies. The profits of these kickbacks allegedly financed the political campaigns of the main political parties in Brazil that were unaccounted for or not publicly disclosed, as well as served to personally enrich the recipients of the bribery scheme. As a result of the ongoing “Lava Jato” investigation, a number of senior politicians, including congressman and officers of the major state-owned companies in Brazil resigned or have been arrested. The potential outcome of the “Lava Jato” investigation is uncertain, but it has already adversely affected the Brazilian markets and trading prices of securities issued by Brazilian issuers. We cannot predict whether the “Lava Jato” investigation will lead to further political and economic instability or whether new allegations against government officials or other companies in Brazil will arise in the future.
Furthermore, on December 2, 2015,inflexible expenditures. While the Brazilian Congress opened impeachment proceedings against Brazilian President Dilma Rousseff for allegedly breaking federal budget laws during her re-election campaign in 2014. On May 12, 2016,has approved a ceiling on government spending that will limit primary public expenditure growth to the Brazilian Congress voted to suspend President Rousseff from officeprior year’s inflation for a period of upat least 10 years, local and foreign investors believe that fiscal reforms, and in particular a reform of Brazil’s pension system, will be critical for Brazil to 180 days during which timecomply with the spending limit. As of the date of this annual report, discussions in the Brazilian Senate will conduct an impeachment trial. Vice-President Michel Temer will serve as acting President of Brazil during this period. We cannot predict the outcome of President Rousseff’s impeachment trial or its effect onCongress relating to such reforms remain ongoing. Diminished confidence in the Brazilian economy. Moreover, there is strong popular pressuregovernment’s budgetary condition and several legalfiscal stance could result in downgrades of Brazil’s sovereign debt by credit rating agencies, negatively impact Brazil’s economy, lead to depreciation of thereal and administrative proceedings for the revocation of the mandate or resignation of the Head of the Brazilian House of Representatives, which have led to further uncertainties. The political crisis prompted by these investigationsincreases in inflation and proceedings could worsen the economic conditions in Brazil andinterest rates, thus adversely affectaffecting our business, results of operations and financial condition.
DepreciationUncertainty about the Brazilian government’s implementation of changes in policies or regulations that affect such implementation may contribute to economic instability in Brazil and increase thereal volatility of securities issued abroad by Brazilian companies, including our securities. Any of the above factors may create additional political uncertainty, adversely affect the Brazilian economy, our business, financial condition, results of operations and the market price of our common shares, preferred shares and ADSs.
Fluctuations in exchange rates may lead to substantial losses on our liabilities denominated in or indexedlinked to foreign currencies.
DuringSince 1999, exchange rates for the four decades prior to 1999,real have been set by the Brazilian Central Bank periodically devalued the Brazilian currency. Throughout this period, the Brazilian government implemented various economic plans and used various exchange rate policies, including sudden devaluations (such as daily and monthly adjustments)market, i.e., exchange controls, dual exchange rate markets and a floating exchange rate system. Since 1999,Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rates have been set byrate between the market.real, the U.S. dollar and other currencies. The exchange rate between the U.S. dollar and the Brazilianreal and the U.S. dollar has varied significantlyexperienced significant fluctuations in recent years. For example, thereal/U.S. dollar exchange rate increased from R$1.9554 per U.S. dollar on December 31, 2000 to R$3.5333 on December 31, 2002. Therealappreciated against the U.S. dollar by 4.3% during 2010, and has depreciated by 8.9% against the U.S. dollar during 2012, by 14.6% during 2013, by 13.4% during 2014 and by 47.1% during 2015. In 2016, thereal appreciated 16.5% against the U.S. dollar and in 2017, thereal depreciated 1.5%, followed by another depreciation of 17.1% in 2018.
addition, therealappreciated against the Euro by 10.4% during 2010, and has depreciated by 10.7% against the Euro during 2012, by 19.7% during 2013, was substantially unchanged during 2014 and depreciated by 31.7% in 2015.
A significant amount of our financial liabilities are denominated in or indexed to foreign currencies, primarily U.S. dollars and Euros. As of December 31, 2015,2018, R$47,37217,873 million, or 58.8%, of our total consolidated financial indebtednessloans and financings was denominated in currencies other than thereal., excluding the fair value adjustment to our loans and financings, and R$8,827 million, or 53.7%, of our total consolidated loans and financings was denominated in currencies other than thereal, after giving effect to the fair value adjustment to our loans and financing. When thereal depreciates against foreign currencies, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated New Notes and Euro-denominated long-term debt and foreign currency loans,export credit facilities, and we incur gains on our monetary assets denominated in or indexed to foreign currencies, as the liabilities and assets are translated intoreais. On the other hand, when the real depreciates against foreign currencies, we incur gains on the balance of our fair value adjustment as a consequence of the gross debt balance. If significant depreciation of thereal were to occur when the value of such liabilities significantly exceeds the value of such assets, including any financial instruments entered into for hedging purposes, we could incur significant losses, even if the value of those assets and liabilities has not changed in their original currency. In addition, a significant depreciation in thereal could adversely affect our ability to meet certain of our payment obligations. A failure to meet certain of our payment obligations could trigger a default under certain financial covenants in our debt instruments, which could have a material adverse effect on our business and results of operations. Historically, we have maintained currency swaps and non-deliverable forwards to manage our exposure to most of our foreign currency debt. During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we have not rolled over our non-deliverable forwards and have selectively settled several of our long-term currency swaps. As a result, our exposure to foreign currency fluctuations has increased substantially. If we are able to restructure our indebtedness in a manner satisfactory to our company, we expect the increased exposure to foreign currency fluctuations to be temporary. In the event that these expectations are not met, the effects of foreign currency fluctuations on our debt instruments could have a material adverse effect on our financial condition and results of operations.
A portion of our capital expenditures and operating leases require us to acquire assets or use third-party assets at prices denominated in or linked to foreign currencies, some of which are financed by liabilities denominated in foreign currencies, principally the U.S. dollar and the Euro.dollar. We generally do not hedge exposures relating to our capital expenditures or operating expenses against risks related to movements of thereal against foreign currencies. To the extent that the value of thereal decreases relative to the U.S. dollar, or the Euro, it becomes more costly for us to purchase these assets or services, which could adversely affect our business and financial performance. Despite the 17.1% devaluation of thereal in 2018, the slow recovery of the Brazilian economy contributed to maintain inflation at controlled standards and allow the Brazilian Central Bank to reduce the SELIC rate (the Brazilian Central Bank’s overnight right) by 0.50%, ending the year at 6.5%.
Appreciation of thereal against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as to a dampening of export-driven growth. Any such appreciation could reduce the competitiveness of Brazilian exports and adversely affect net sales and cash flows from exports. Depreciation of thereal relative to the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products, and requiring recessionarywhich may result in the adoption of deflationary government policies, including tighter monetary policy. On the other hand, appreciationpolicies. The sharp depreciation of thereal againstin relation to the U.S. dollar may leadgenerate inflation and governmental measures to a deteriorationfight possible inflationary outbreaks, including the increase in interest rates, which reduces the purchasing power of consumers and raises the country’s current accountcost in the credit market. Any such macroeconomic effects could adversely affect our net operating revenues and balance of payments, as well as to a dampening of export-driven growth.our overall financial performance.
If Brazil experiences substantial inflation in the future, our margins and our ability to access foreign financial markets may be reduced. GovernmentInflation and government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market and our business and results of operations.
In the past, Brazil has in the past, experienced extremely high rates of inflation, with annual rates of inflation reaching as high as 2,708% in 1993 and 1,093% in 1994.inflation. Inflation, and some of the Brazilian government’s measures taken in an attemptpolicies adopted to curb inflationinflationary pressures and uncertainties regarding possible future governmental intervention have had and are expected to continue to have significant negative effects on the Brazilian economy.
Since the introduction of thereal in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. However, actions taken in an effort to control inflation, coupled with speculation about possible future governmental actions,economy generally, and have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. More recently, Brazil’s rates of inflation, as measured by the General Market Price Index — Internal Availability (Índice Geral de Preços — Disponibilidade Interna), or IGP-DI, published by Fundação Getúlio Vargas, or FGV, were 5.0% in 2011, 8.1% in 2012, 5.5% in 2013, 3.8% in 2014 and 10.7% in 2015. capital markets.
According to the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Ampliado), or IPCA, published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the Brazilian consumer price inflation rates were 6.5% in 2011, 5.8% in 2012, 5.9% in 2013, 6.4% in 2014, and 10.7% in 2015.2015, 6.3% in 2016, 2.9% in 2017 and 3.7% in 2018. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our common shares, preferred shares and ADSs.
Currently, fixed broadband and mobile service providers use the General Market Price Index — Internal Availability (Índice Geral de Preços — Disponibilidade Interna), orIGP-DI, to adjust their prices. TheIGP-DI is an inflation index developed by the Fundação Getúlio Vargas, or FGV, a private organization. TheIGP-DI index was 3.8% in 2014, 10.7% in 2015, 7.2% in 2016, (0.42)% in 2017 and 7.1% in 2018.
Since 2006, rates for fixed-line services have been indexed to the telecommunication services index (Índice de Serviços de Telecomunicações), or IST, adjusted by a productivity factor, which is defined by ANATEL Resolution 507/2008. The IST is an index composed of other domestic price indexes (including the IPCA, theIGP-DI and the General Market Price Index (Índice Geral de Preços ao Mercado), orIGP-M, published by FGV, among others) that is intended to reflect the telecommunications industry’s operating costs. As a result, this index serves to reduce potential discrepancies between our industry’s revenue and costs, and thus reduce the apparent adverse effects of inflation on our operations. The productivity factor, pursuant to which ANATEL is authorized to adjust fee rates, is calculated based on a compensation index established by ANATEL to incentivize operational efficiency and to share related gains in earnings from fixed line services with customers through fee rate adjustments. The IST is calculated based on a12-month period average. This may cause increases in our revenues above or below our costs (including salaries), with potentially adverse impacts on our profitability.
If Brazil experiences substantial inflation in the future, our costs may increase and our operating and net margins may decrease. Although ANATEL regulations provide for annual price increases for most of our services in Brazil, such increases are linked to inflation indices, discounted by increases in our productivity. During periods of rapid increases in inflation, the price increases for our services may not be sufficient to cover our additional costs and we may be adversely affected by the lag in time between the incurrence of increased costs and the receipt of revenues resulting from the annual price increases. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy.
Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance.
Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. As of December 31, 2015,2018, we had, among other consolidated debt obligations, excluding the fair value adjustment to our loans and financings, R$8,95012,256 million of loans and financings that were subject to the London Interbank Offered Rate, or LIBOR,variable interest rates, including R$6,3618,640 million of loans and financings and debentures that were subject to the Interbank Certificate of Deposit (Certificado(Certificado de Depósito Interbancário)rio), or CDI, rate, an interbank rate, and R$3,1513,616 million of loans and financings that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term interest rate. As of December 31, 2018, we had, among other consolidated debt obligations, after giving effect to the fair value adjustment to our loans and financing, R$7,566 million of loans and financings that were subject to variable interest rates, including R$3,950 million of loans and financings and debentures that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, a long-term interestCDI rate, and R$1,5153,616 million of loans and financings that were subject to the IPCA.TJLP rate.
The TJLP includes an inflation factor and is determined quarterly by the National Monetary Council (Conselho Monetário Nacional). In particular, the TJLP and the CDI rate have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. For example, the CDI increased from 6.90% per annum as of December 31, 2012 to 9.77% per annum as of December 31, 2013, increased to 11.57% per annum as of December 31, 2014 and increased to 14.13% per annum as of December 31, 2015. A significant increase in any2015, and decreased to 13.63% per annum as of these interest rates, particularly the CDI rate, could adversely affect our financial expensesDecember 31, 2016, 6.89% per annum as of December 31, 2017 and negatively affect our overall financial performance.6.40% per annum as of December 31, 2018.
The market value of securities issued by Brazilian companies is influenced by the perception of risk in Brazil and other countries, which may have a negative effect on the trading price of our common shares, preferred sharesCommon Shares, Preferred Shares and ADSs and may restrict our access to international capital markets.
Economic and market conditions in other countries and regions, including the United States, the European Union and emerging market countries, may affect to varying degrees the market value of securities of Brazilian issuers. Although economic conditions in these countries and regions may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers, the availability of credit in Brazil and the amount of foreign investment in Brazil. Crises in the European Union, the United States and emerging market countries have at times resulted in significant outflows of funds from Brazil and may diminish investor interest in securities of Brazilian issuers, including our company. This could materially and adversely affect the market price of our securities, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
Restrictions on the movement of capital out of Brazil may impair our ability to service certain debt obligations.
Brazilian law provides that whenever there exists, or there is a serious risk of, a material imbalance in Brazil’s balance of payments, the Brazilian government may impose restrictions for a limited period of time on the remittance to foreign investors of the proceeds of their investments in Brazil as well as on the conversion of therealinto foreign currencies. The Brazilian government imposed such a restriction on remittances for approximately six months in 1989 and early 1990. The Brazilian government may in the future restrict companies from paying amounts denominated in foreign currency or require that any such payment be made inreais. Many factors could affect the likelihood of the Brazilian government imposing such exchange control restrictions, including the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, and political constraints to which Brazil may be subject. There can be no certainty that the Brazilian government will not take such measures in the future.
A more restrictive policy could increase the cost of servicing, and thereby reduce our ability to pay, our foreign currency-denominated debt obligations and other liabilities. As of December 31, 2015, our foreign-currency denominated debt was R$47,372 million and represented 78.4% of our consolidated indebtedness. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our common shares, preferred shares and ADSs.
In addition, a more restrictive policy could hinder or prevent the Brazilian custodian of the common shares and preferred shares underlying our ADSs or holders who have exchanged our ADSs for the underlying common shares or preferred shares from converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our common shares and preferred shares will hold thereais that it cannot convert for the account of holders of our ADSs who have not been paid. Neither the custodian nor The Bank of New York Mellon, as depositary of our ADS programs, which we refer to as the depositary, will be required to invest thereais or be liable for any interest.
Risks Relating to Ourthe Common Shares, Preferred Shares and ADSs
Holders of our common shares, preferred sharesCommon Shares, Preferred Shares or ADSs may not receive any dividends or interest on shareholders’ equity.
According to our Oi’sby-laws and the Brazilian CorporationCorporate Law, weOi must generally pay ourits shareholders at least 25% of ourOi’s consolidated annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted underin accordance with the Brazilian GAAP.Corporate Law. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under the Brazilian GAAPCorporate Law and Oi’sby-laws and may not be available to be paid as dividends or interest on shareholders’ equity. Holders of our common sharesCommon Shares or Common ADSs may not receive any dividends or interest on shareholders’ equity in any given year due to the dividend preference of our preferred shares.Preferred Shares. Additionally, the Brazilian CorporationCorporate Law allows a publicly traded company like oursOi to suspend the mandatory distribution of dividends in any particular year if ourOi’s board of directors informs ourOi’s shareholders at the ordinary general shareholders’ meeting that such distributions would be inadvisable in view of ourOi’s financial condition or cash availability. Holdersavailability and subject to approval of our preferred sharesthe general shareholders’ meeting. In addition, the members of Oi’s fiscal council must issue an opinion with respect to the suspension of the mandatory distribution of dividends and Oi’s board of directors must submit to the CVM the justification for such suspension.
Moreover, under the RJ Plan, Oi and the other RJ Debtors are prohibited from declaring or Preferred ADSs may not receive anypaying dividends, or interest on shareholders’ equity or other forms of return on capital or making any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Judicial Ratification of the RJ Plan. After the sixth anniversary of the date of the Judicial Ratification of the RJ Plan, Oi and the other RJ Debtors will be permitted to declare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) if Oi meets a certain financial ratio, as described under “Item 8. Financial Information—Dividends and Dividend Policy.” There shall not be any restriction to the distribution of dividends under the RJ Plan after the full payment of the Financial Credits (as defined in any given year if our boardthe RJ Plan). The restrictions of directors makes such a determination or if our operations failthe payment of dividends and other distributions described in this paragraph are subject to generate net income.certain exceptions, as described under “Item 8. Financial Information—Dividends and Dividend Policy.”
Our preferred shares and Preferred ADSs have limited voting rights and are not entitled to vote to approve corporate transactions, including mergers or consolidationsHolders of our company with other companies, or the declaration of dividends.
Under the Brazilian Corporation Law and our by-laws, holders of our preferred shares and, consequently, our Preferred ADSs are not entitled to attend shareholders’ meetings and may only vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights ofthrough the holders of preferred shares, such as modifying basic terms of our preferred shares or creating a new class of preferred shares with superior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her respective alternate to our board of directors and our fiscal council. Holders of our preferred shares and Preferred ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies, or the declaration of dividends. See “Item 10. Additional Information—Description of Our Company’s By-laws—Voting Rights.”
Holders of our ADSs may find it difficult to exercise their voting rights at our shareholders’ meetings.depositary.
Under Brazilian law, only shareholders registered as such in ourOi’s corporate books may attend ourOi’s shareholders’ meetings. All common sharesCommon Shares and preferred sharesPreferred Shares underlying our ADSs are registered in the name of the depositary. ADS holdersConsequently, a holder of ADSs is not entitled to attend Oi’s shareholders’ meetings. Holders of ADSs may exercise the voting rights with respect to our common sharesCommon Shares and the limited voting rights with respect to our preferred sharesPreferred Shares represented by our ADSs only in accordance with the applicable deposit agreementsagreement relating to ourthe ADSs. There are practical limitations upon the ability of the ADS holders of ADSs to exercise their voting rights due to the additional steps involved in communicating with ADS holders.holders of ADSs. For example, we areOi is required to publish a notice of ourOi’s shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our common sharesCommon Shares or preferred sharesPreferred Shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the ADSs maywill receive notice of a shareholders’ meeting by mail from the depositary if we notifyfollowing Oi’s notification to the depositary of the shareholders’
meeting and Oi’s request that the depositary to inform ADS holders of ADSs of the shareholders’ meeting. To exercise their voting rights, ADS holders of ADSs must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders of ADSs than for holders of our common sharesCommon Shares or preferred shares.Preferred Shares. If the depositary fails to receive timely voting instructions for all or part of our ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
In the circumstances in whichWe cannot assure you that holders of our ADSs have voting rights, they may notwill receive the voting materials in time to ensure that such holders can instruct the depositary to vote our common sharesCommon Shares or preferred sharesPreferred Shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of our ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of our ADSs may not be able to exercise voting rights, and they will have no recourse if the common sharesCommon Shares or preferred sharesPreferred Shares underlying their ADSs are not voted as requested.
Holders of our common shares, preferred sharesCommon Shares, Preferred Shares or ADSs in the United States may not be entitled to the sameparticipate in future preemptive rights as Brazilian shareholders have, pursuant to Brazilian legislation, in the subscriptionofferings of shares resulting from capital increases made by us.Common Shares or Preferred Shares.
Under Brazilian law, if weOi offers to issue new shares in exchange for cash or assets as part of a capital increase, subject to certain exceptions, weOi generally must grant ourits shareholders preemptive rights at the timeright to purchase a sufficient number of the subscription ofoffered shares corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholdingownership percentage. WeRights to purchase shares in these circumstances are known as preemptive rights. Oi may not legally be permitted to allow holders of our common shares, preferred sharesCommon Shares, Preferred Shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless either (1) we fileOi files a registration statement for an offering of shares resulting from the capital increase with the U.S. Securities and Exchange Commission, or SEC, or (2) thewith respect to that offering of shares, resulting from theas Oi did for its most recent capital increase, or (2) that offering of shares qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, weOi will evaluate the costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other factors that we considerOi considers important in determining whether to file such a registration statement. WeOi is not obligated to file a registration statement in connection with any future capital increase, and Oi cannot assure the holders of our common shares, preferred sharesCommon Shares, Preferred Shares or ADSs in the United States that weit will file a registration statement with the SEC to allow them to participate in any of our capital increases.a preemptive rights offering. As a result, the equity interest of such holders in our companyOi may be diluted.
If holders of our ADSs exchange them for common sharesCommon Shares or preferred shares,Preferred Shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.
The Brazilian custodian for the common shares and preferred shares underlying our ADSs must obtainhas obtained an electronic registration number with the Brazilian Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Brazilian Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the common shares or preferred shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of our ADSs decide to exchange them for the underlying common shares or preferred shares, they will be required to appoint a Brazilian financial institution to act as their legal representative who shall be responsible, among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank, as provided in CMN Resolution No. 4,373. Investors will only be entitled to rely on the custodian’s certificate of registration with the Brazilian Central Bank for five business days after the date of the exchange. Thereafter, they will be unableable to remit U.S. dollars abroad unless they obtain aif the relevant new electronic certificate of foreign capital registration in connection with the common shares or preferred shares whichis previously obtained. If such Investors fail to obtain or update the relevant certificates of registration, it may result in additional expenses and may cause delays in receiving distributions. See “Item 10. Additional Information—Exchange Controls.”
Also, if holders of our ADSs that exchange our ADSs for our common sharesCommon Shares or preferred shares do not qualify under the foreign investment regulations,Preferred Shares, generally they will generallymay be subject to a less favorable tax treatment of dividends and distribution on and the proceeds from any sale of, our common shares or preferred shares. See “Item 10. Additional information—Exchange Controls” and “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
Holders of our ADSs may face difficulties in protecting their interests because, as a Brazilian company, we are subject to different corporate rules and regulations and our shareholders may have fewer and less well-defined rights.
Holders of our ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and the Brazilian Corporation Law.
Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of our ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our common shares or preferred shares under the Brazilian Corporation Law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares, preferred shares and ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than those of a public company in the United States or in certain other countries.
Brazilian bankruptcy laws may be less favorable to you than bankruptcy and insolvency laws in other jurisdictions.
If we are unable to pay our indebtedness, then we may become subject to bankruptcy proceedings in Brazil. The bankruptcy laws of Brazil currently in effect are significantly different from, and may be less favorable to creditors than, those of certain other jurisdictions. Any judgment obtained against us in Brazilian courts in respect of any payment obligations under our debt instruments normally would be expressed in thereal equivalent of the U.S. dollar amount of such sum at the exchange rate in effect (1) on the date of actual payment, (2) on the date on which such judgment is rendered, or (3) on the date on which collection or enforcement proceedings are started against us. Consequently, in the event of our bankruptcy, all of our debt obligations that are denominated in foreign currency, will be converted intoreais at the prevailing exchange rate on the date of declaration of our bankruptcy by the court.
We are exempt from some of the corporate governance requirements of the New York Stock Exchange.
We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as we remain a foreign private issuer, we will be exempt from, and you will not be provided with the benefits of, some of the corporate governance requirements of The New York Stock Exchange, or the NYSE. We are permitted to follow practice in Brazil in lieu of the provisions of the NYSE’s corporate governance rules, except that:
The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. AlthoughRule 10A-3 under the Exchange Act generally requires that a listed company have an audit committee of
its board of directors composed solely of independent directors, as a foreign private issuer, we are relying on a general exemption from this requirement that is available to us as a result of the features of Brazilian law applicable to our fiscal council. In addition, we are not required to, among other things:
We intend to rely on some or all of these exemptions. As a result, you will not be provided with the benefits of certain corporate governance requirements of the NYSE.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar antibribery laws outside of the United States.
The U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate, through our businesses, in countries that are recognized as having governmental and commercial corruption. We cannot assure you that our internal control policies and procedures will protect us from reckless or criminal acts committed by our employees, the employees of any of our businesses, or third party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners (either as a result of express prohibitions or to avoid the appearance of impropriety), injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or other restrictions which could disrupt our business and have a material adverse effect on our business, financial condition, results of operations or liquidity.
Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We areOi is organized under the laws of Brazil, and all of the members of ourOi’s board of directors, ourOi’s executive officers and ourOi’s independent registered public accountants reside or are based in Brazil. The vast majority of ourOi’s assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of our ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other personsany judgments obtained in the United States or other jurisdictions outside Brazil.Brazil against Oi or these other persons. In addition, because substantially all of ourOi’s assets and all of ourOi’s directors and executive officers reside outside the United States, any judgment obtained in the United States against usOi or any of ourOi’s directors or executive officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our board ofOi, Oi’s directors or executive officers than would shareholders of a U.S. corporation.
Holders of Common Shares and Preferred Shares will be subject to, and holders of ADSs could be subject to, Brazilian income tax laws may have an adverse impact on the taxes applicable to the dispositioncapital gains from sales of our common shares, preferred shares andCommon Shares, Preferred Shares or ADSs.
According to Article 26 of Brazilian Law No. 10,833, enacted on December 29, 10,833/2003, if a nonresident ofholder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or aNon-Brazilian Holder, disposes of assets located in Brazil, the transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to another nonresident.Non-Brazilian Holder. Accordingly, on the disposition of common shares or preferred shares, which are considered assets located in Brazil, theNon-Brazilian Holder will be subject to income tax on the gains assessed, following the rules described under ““Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Taxation of Gains,” regardless of whether the transactions are conducted in Brazil or abroad and with a Brazilian resident or not. A disposition of our ADSs, between nonresidents, however, involves the disposal of anon-Brazilian asset, andwhich in principle is currentlyshould not be subject to taxation in Brazil. Nevertheless, in the event that the concept of “disposition of assets”“assets located in Brazil” is interpreted to include the disposition between nonresidents of assets located outside Brazil,our ADSs, this tax law could result in the imposition of withholding taxes inon the event of a disposition of our ADSs made by nonresidents of Brazil.Non-Brazilian Holders. Due to the fact that, as of the date of this annual report, Article 26 of Brazilian Law No. 10,833/2003 has no judicial guidance as to its application to ADSs, we are unable to predict whether anwhich interpretation applying such tax laws to dispositions of our ADSs between nonresidents couldwould ultimately prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.Considerations —Taxation of Gains.”
We believe we wereOi was a passive foreign investment company for our taxable year ended December 31, 2015,2018, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our American depository sharesCommon Shares, Preferred Shares or ordinary shares.ADSs.
WeOi will be classified as a passive foreign investment company, or PFIC, in any taxable year if either: (1) 50% or more of the fair market value of our gross assets (determined on the basis of a quarterly average) for the taxable year produce passive income or are held for the production of passive income, or (2) 75% or more of our gross income for the taxable year is passive income. As a publicly traded foreign corporation, we intendOi intends for this purpose to treat the aggregate fair market value of our gross assets as being equal to the aggregate value of our outstanding stock plus the total amount of our liabilities (“market capitalization”) and to treat the excess of the fair market value of our assets over their book value as a nonpassive asset to the extent attributable to our nonpassive income. Based on the market price of our common sharesthe Common Shares and preferred sharesthe Preferred Shares and the composition of our assets, we believe we wereOi was a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2015.2018. Furthermore, unless the value of our common sharesthe Common Shares and preferred sharesthe Preferred Shares increases and/or we invest a substantial amount of our cash and other passive assets in assets that produce active income, there is a significant risk weOi will be a PFIC for our taxable year ending December 31, 2016.2019. The application of the PFIC rules is subject to uncertainty in several respects, and we must make a separate determination after the close of each taxable year as to whether we wereOi was a PFIC for such year. Because we believe we wereOi was a PFIC for our taxable year ended December 31, 2015,2018, certain adverse U.S. federal income tax consequences could apply to a U.S. investor who holds our common shares, preferred sharesCommon Shares or Preferred Shares or ADSs with respect to any “excess distribution” received from usOi and any gain from a sale or other disposition of our common shares, preferred sharesCommon Shares or Preferred Shares or ADSs, and U.S. investors also may be subject to additional reporting obligations with respect to our common shares, preferred sharesCommon Shares or Preferred Shares or ADSs. We do not intend to provide the information necessary for thea U.S. investor to make a qualified electing fund election with respect to our common shares, preferred sharesthe Common Shares or Preferred Shares or ADSs. See “Item 10. Additional Information—Taxation – U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”
The relative volatility and illiquidityIf a United States person is treated as owning at least 10% of Oi’s shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the Brazilian securities marketsvalue or voting power of Oi’s shares, such person may adversely affect holdersbe treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). If United States shareholders own (or are treated as owning) more than 50% of the value or voting power of Oi’s shares, Oi would (and ournon-U.S. subsidiaries could) be treated as controlled foreign corporations. In addition, if our group includes one or more U.S. subsidiaries, certain of ournon-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether we are treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangiblelow-taxed income” and investments in U.S. property by controlled foreign corporations, regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of ournon-U.S. subsidiaries are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. Certain of our shareholders may be United States shareholders. The determination of controlled foreign corporation status is complex and includes attribution rules, the application of which is not entirely certain. A United States investor should consult its advisors regarding the potential application of these rules to an investment in Oi’s common shares, preferred shares or ADSs.
Trading onover-the-counter markets may be volatile and ADSs.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The BM&FBOVESPA,sporadic, which is the principal Brazilian stock exchange, had a market capitalization of R$1.9 trillion (US$490 billion) as of December 31, 2015 and an average daily trading volume of R$6.8 billion (US$2.1 billion) for 2015. In comparison, aggregate market capitalization of the companies (including U.S. and non-U.S. companies) listed on the NYSE was US$17.8 trillion as of December 31, 2015 and the NYSE recorded an average daily trading volume of US$64.0 billion for 2015. There is also significantly greater concentration in the Brazilian securities markets. The ten largest companies in terms of market capitalization represented approximately 51% of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2015. The ten most widely traded stocks in terms of trading volume accounted for approximately 44% of all shares traded on the BM&FBOVESPA in 2015. These market characteristics may substantially limit the ability of holders of our ADSs to sell the preferred shares underlying our ADSs at a price and at a time when they wish to do so and, as a result, could negatively impactdepress the market price of our ADSs themselves.
The imposition of IOF taxes may indirectly influence the pricePreferred ADS and volatility of our common shares, preferred shares andmake it difficult for holders to resell Oi’s Preferred ADSs.
Brazilian law imposesOn June 21, 2016, the TaxPreferred ADSs were delisted from the NYSE. On June 23, 2016, the OTC Markets Group, Inc. began publishing quotations for the Preferred ADS in the “pink sheets” under the trading symbol OIBRQ. Trading in stock quoted on Foreign Exchange Transactions,over the counter markets is often thin, volatile, and characterized by wide fluctuations in trading prices due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of the Preferred ADSs for reasons unrelated to operating performance. Moreover, the over the counter markets are not a stock exchange, and trading of securities on the over the counter markets is often more sporadic than the trading of securities listed on other stock exchanges such as the NYSE, the NASDAQ Stock Market or the IOF/Exchange Tax, on the conversionAmerican Stock Exchange. Accordingly, holders ofreais into foreign currency and on the conversion of foreign currency intoreais. Brazilian law also imposes the Tax on Transactions Involving Bonds and Securities, or the IOF/Securities Tax, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange. Preferred ADSs may have difficulty reselling such securities.
In October 2009, the Brazilian government imposed the IOF/Exchange Tax at a rate of 2.0% in connection with inflows of funds related to investments carried out by non-Brazilian investors in the Brazilian financial and capital markets with the objective of slowing the pace of speculative inflows of foreign capital into the Brazilian market and the appreciation of thereal against the U.S. dollar. The rate of the IOF/Exchange Tax generally applicable to foreign investments in the Brazilian financial and capital markets was later increased to 6.0%. In December 2011, the rate of the IOF/Exchange Tax applicable to several types of investments was reduced back to zero percent. As of the date of this annual report, all investments in the Brazilian financial and capital markets are subject to the IOF/Exchange Tax rate of zero percent.
In November 2009, the Brazilian government also established that the rate of the IOF/Securities Tax would apply to the transfer of shares with the specific purpose of enabling the issuance of ADSs. In December 2013, the rate of the IOF/Securities Tax applicable to transactions involving the issuance of ADSs was reduced to zero percent.
The imposition of these taxes may discourage foreign investment in shares of Brazilian companies, including our company, due to higher transaction costs, and may negatively impact the price and volatility of our ADSs and common shares on the NYSE and the BM&FBOVESPA.
| ITEM 4. | INFORMATION ON THE COMPANY |
Overview
We are one of the principal integrated telecommunications service providers in Brazil with approximately 70.057.1 million revenue generating units, or RGUs, as of December 31, 2015.2018. We operate throughout Brazil and offer a range of integrated telecommunications services that include fixed-lineResidential Services, Personal Mobility Services and mobile telecommunication services, network usage (interconnection), data transmission services (including broadband access services), Pay-TV (including as part of double-play, triple-play and quadruple-play packages), internet services and other telecommunications services for residential customers, small, medium and large companies and governmental agencies. We own approximately 363,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our mobile network covers areas in which approximately 88.7% of the Brazilian population lives and works. According to ANATEL, as of December 31, 2015, we had an 18.6% market share of the Brazilian mobile telecommunications market and, as of December 31, 2015, we had a 34.7% market share of the Brazilian fixed-line market. As part of our convergence strategy, we offer more than one million Wi-Fi hotspots in public places, such as airports and shopping malls.B2B Services.
Our traditional Residential Services business in Brazil includes (1) local and long-distance fixed-line voice services, and public telephones, in accordance with the concessions granted to us by ANATEL, (2) broadband services (3) andPay-TV services and (4) network usage services (interconnection).provided to residential customers in our fixed-line concession service areas, comprising the entire territory of Brazil other than the State of São Paulo. We are the largest fixed-line telecommunications companiescompany in Brazil in terms of total number of lines in service as of December 31, 2015. We are the principal fixed-line telecommunications services provider in our service areas, comprising the entire territory of Brazil other than the State of São Paulo,2018 based on our 14.911.8 million fixed lines in service as of December 31, 2015,2018, with a market share of 55.0%51.1% of the total fixed lines in service in our service areas as of December 31, 2015.
that date. We own the largest fiber optic network in Brazil, with more than 360,000 kilometers of installed fiber optic cable, distributed throughout Brazil. We focus on increasing the revenue generated by this customer base by aggressively promoting convergent services (double-play, triple-play and quadruple-play packages) including our mobile, broadband andPay-TV services. We offer a variety of high-speed broadband services in our fixed-line service areas, including services offered by our subsidiaries BrT Serviços de Internet S.A., or BrTI, and Brasil Telecom Comunicação Multimídia Ltda. Our broadband services primarily utilize Asymmetric Digital Subscriber Line, or ADSL, technology.services. As of December 31, 2015,2018, we had 5.84.9 million ADSL subscribers, representing 62%59.0% of our residential fixed lines in serviceline customers as of that date.
We offerPay-TV services under ourOi TV brand. We deliverPay-TV services throughout our residential service areas using DTH satellite technology. As of December 31, 2018, we had 1.6 million residentialPay-TV subscribers, representing 19.2% of our residential fixed line customers as of that date.
Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil, as well asBrazil. Our mobile network covers areas in which approximately 94.0% of the Brazilian population lives and works. In addition, we provide network usage services (interconnection). services. Based on our 48.137.7 million mobile subscribers as of December 31, 2015,2018, we believe that we are onehad a 16.4% market share of the principalBrazilian mobile telecommunications service providers in Brazil. Based on information available from ANATEL,market as of December 31, 2015 our market share was 18.6% of the total number of mobile subscribers in Brazil.that date.
Our SME and CorporateB2B Services business provideprovides voice, broadband,Pay-TV, data transmission and dataother telecommunications services to our SMEsmall and corporate customersmedium sized enterprises, or SMEs, corporation and governmental agencies throughout Brazil.
As a result of our acquisition in May 2014 of all of the operating assets then held by Pharol, except interests held directly or indirectly in TmarPart We also provide wholesale interconnection, network usage (interconnection) services and our company, and subsequenttraffic transportation services to our sale in June 2015 of PT Portugal, we hold significant interests inother telecommunications companies in Angola, Cape Verde, Namibia, São Tomé and Principe in Africa and Timor Leste in Asia. Our interests in telecommunications companies in Africa are held through Africatel, in which we own a 75% interest. Our interests in telecommunications companies in Timor Leste are held through TPT, in which we own a 76.14% interest. On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel, representing 75% of the share capital of Africatel. In addition, on June 17, 2015, our board of directors authorized our management to take the necessary measures to market our shares in TPT, representing 76.14% of the share capital of TPT. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel and TPT as held-for sale, although we do not record Africatel or TPT as discontinued operations in our income statement due to the immateriality of the effects of Africatel and TPT on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when a sale of these assets may be completed.providers.
Our principal executive office is located at Rua Humberto de Campos No. 425, 6 1/2th8th floor–Leblon,22430-190 Rio de Janeiro, RJ, Brazil, and our telephone number at this address is(55-21) 3131-2918.
Our Recent History and Development
Adoption of Transformation PlanOur Judicial Reorganization Proceedings
FollowingIn June 2016, after considering the change inchallenges arising from our senior management in 2014, we developed a plan to pursue business growth through innovative solutions that focus on enhancing our customers’ experience rather than merely selling our services, which we refer to as the Transformation Plan. The Transformation Plan emphasizes interdepartmental collaborationeconomic and the development of integrated solutions that we believe will result in a cost-efficient, sustainable business with a focus on client satisfaction. The initiatives of the Transformation Plan are grouped under four pillars: Digitalization, Convergence, Data and Cost Control all aiming to provide the customer with a better experience. Digitalization refers to the process of making certain of our services available electronically, either through applications for smartphones or on our website enhancing the relationship with our customers. Convergence refers to offerings of combined services, such as the bundled offerings that we launched during 2015, including the following plan portfolios:Oi Totalin the Residential business;Oi Mais andOi Livre in the Personal Mobility Services business; andOi Mais Empresasin the SME and Corporate Services business. Offering all products under one package provides better customer satisfaction and higher loyalty and margins, essential to any capital intensive and competitive market. Data refers to the growing customer demand for larger data packages with unrestricted use. Cost Control refers to various measures we are undertaking to reduce our costs and expenses and maximize the efficiency and sustainability of our operations. The solutions we developedfinancial situation in connection with the Transformation Plan were based on a comprehensive studymaturity schedule of our customers’ telecommunications needs, withfinancial debts, the threats to our cash flows represented by imminent attachments or freezing of assets in judicial lawsuits, and the urgent need to adopt measures that protect our company, we concluded that filing of a viewrequest for judicial reorganization (recuperação judicial) in Brazil would be the most appropriate course of action (1) to improvepreserve the waycontinuity of our offering of quality services to our customers, communicate.within the rules and commitments undertaken with ANATEL, (2) to preserve the value of our company, (3) to maintain the continuity of our operations and corporate activities in an organized manner that protects the interests of our company, customers, shareholders and other stakeholders, and (4) to protect our cash and cash equivalents.
InOn June 20, 2016, Oi, together with the other RJ Debtors, filed a joint voluntary petition for judicial reorganization pursuant to the Brazilian Bankruptcy Law with the RJ Court, pursuant to an urgent measure approved by our board of directors. Following a protracted period of negotiation with various creditor constituencies, on December 2014, we created a department tasked12, 2017, the RJ Debtors filed the RJ Plan with monitoringthe RJ Court.
Approval of RJ Plan at GCM and supportingConfirmation of Judicial Reorganization Plan by RJ Court
On December 19 and 20, 2017, the executionGCM to consider approving the RJ Plan was held following the confirmation that the required quorum of creditors of each of classes I, II, III, and IV was in attendance. As part of the TransformationRJ Plan, which we refer to asnegotiated the Transformation Project Department. The Transformation Project Department consiststerms of a team of employees from various departments, was initially led by a chief transformation project officer, who oversaw the process and reported directly to our chief executive officer. During 2015,Commitment Agreement with members of the Transformation Project Department team met with senior management on a weekly basisAd Hoc Group, the IBC and certain other unaffiliated bondholders under which such bondholders agreed to discuss progress onbackstop the more than 300 initiatives developed pursuantRights Offer, subject to the Transformationterms and conditions of the Commitment Agreement. The GCM concluded on December 20, 2017 following the approval of the RJ Plan by a significant majority of creditors of each class present at the GCM, reflecting amendments to the RJ Plan presented at the GCM as negotiated during the course of the GCM.
On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its terms, but modifying certain provisions of the RJ Plan. In late 2015, we created a strategy and new business department, which we refer to asThe Brazilian Confirmation Order was published in the Strategy and New Business Department, which supplementedOfficial Gazette of the Transformation Project Department’s role with respect to initiatives related to new business, human resources, communications, marketing and digitalization. InState of Rio de Janeiro on February 2016,5, 2018, the Strategy and New Business Department took over the chief transformation project officer’s role of overseeing the Transformation Project Department.Brazilian Confirmation Date.
The Transformation Plan was divided into two key phases, each of which can be summarized by four key goals. The first phase focusedBrazilian Confirmation Order, according to its terms, is currently binding on short-term solutions designed to enable our company to remain competitive in a challenging macroeconomic environment. The four key goalsall parties. By operation of the first phase of the TransformationRJ Plan are: (1) cost savings, (2) working capital improvements, (3) customer profitability improvements, and (4) optimization of our organizational structure. First phase initiatives included reductions in operating expenses, optimization of capital expenditures, reductions in working capital costs, changes in marketing strategies and pricing models and reductions in head-count related costs, such as overtime pay and travel expenses. We implemented several first phase initiatives during the first quarter of 2015, including the renegotiation of 69% of the number of contracts slated for renegotiation, the reduction of the number of vehicles in our fleet by 13% and the reductionBrazilian Confirmation Order the unsecured claims against the RJ Debtors have been novated and discharged under Brazilian law and holders of headcount-related expenses by 37%, as compared tosuch claims have received the fourth quarter of 2014.
The second phase consists of end-to-end initiatives designed to integrate our departments and enable our company to provide integrated service to our customers. The four key goals of the second phase of the Transformation Plan are: (1) process and organizational efficiency, (2) commercial and operational productivity, (3) cross-departmental improvement and (4) enhanced customer experience. Second phase initiatives combine elements of each of the pillars of the Transformation Plan to seek to deliver integrated solutions to our customers. An example of a second phase initiative was the transformation of our call center operations, which was accomplished by revising our customer complaint procedures and creating a specialized team of specially trained call center professional to handle all downgrade requests. This initiative involved changes to and collaboration among multiple departments within our company. We began implementing second phase initiativesrecoveries set forth in the second quarter of 2015 and will continue to do so. As of December 31, 2015, approximately 87% of the initiatives we developed pursuant to the TransformationRJ Plan had been implemented. The remaining initiatives, many of which are more complex and require more time to become fully operational, are in the process of being implemented. We believe that the
Transformation Plan initiatives were the most significant factors that led to increases in our revenues per RGU in 2015, the decline in operating expenses per RGU and a 17% reduction in customer complaint calls in 2015, in each case as compared to 2014.
Outsourcing of Mobile Handset and Tablet Inventory and Distribution Management
In September 2015, we entered into an agreement with Allied S.A., or Allied, a technology equipment distributor in Brazil, pursuant to which Allied has agreed to manage the purchase, distribution and sale of mobile handsets and tablets exclusively to our sales channels. We remain responsible for the strategic management of the supply chain, the relationship with our sales channels and the choice of our handset portfolio. We entered into this agreement with Allied as part of our effort to further accelerate sales and the migration of our mobile customer base to 3G and 4G smartphones, improve logistics efficiencies associated with the supply of mobile handsets and tablets to our sales channels, reduce logistics and warehousing costs and reduce the working capital used in carrying handset and tablet inventories.
Rio Forte Defaults and PT Exchange
Prior to the Oi capital increase, Pharol’s then wholly-owned subsidies PTIF and PT Portugal subscribed to an aggregate of €897 million principal amount of commercial paper of Rio Forte Investments S.A., or Rio Forte, that matured in July 2014. As a result of our acquisition of PT Portugal as part of the Oi capital increase, we became the creditor under this commercial paper.
On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On July 22, 2014, Rio Forte filed a petition for controlled management with the courts of Luxembourg after concluding that it was not in a position to fulfill the obligations resulting from certain debts that had matured in July 2014. Rio Forte’s request was rejected on October 17, 2014. The Luxembourg Commercial Court denied Rio Forte’s request for controlled management on October 17, 2014 and declared Rio Forte bankrupt on December 8, 2014.
On September 8, 2014, we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the Exchange Agreement, or the PT Exchange Agreement, and a stock option agreement, or the PT Option Agreement. On the same date, we, Pharol and TmarPart executed a terms of commitment agreement, which we refer to as the Terms of Commitment Agreement. For more information regarding the PT Option Agreement and the Terms of Commitment Agreement, see “Item 7. Major Shareholders and Related Party Transactions— Related Party Transactions.”
On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to PTIF. On March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned to PTIF.
Under the PT Exchange Agreement, we agreed to transfer the defaulted Rio Forte commercial paper to Pharol and Pharol agreed to deliver to us an aggregate of 47,434,872 of our common shares and 94,869,744 of our preferred shares, representing 16.9% of our outstanding share capital, including 17.1% of our outstanding voting capital prior to giving effect to the PT Exchange.
On March 30, 2015, the transactions contemplated by the PT Exchange Agreement were completed through the transfer of Rio Forte commercial paper in the aggregate amount of €897 million to Pharol in exchange for 47,434,872 of our common sharestheir claims in accordance with the terms and 94,869,744 of our preferred shares.
Sale of PT Portugal
On June 2, 2015, we sold allconditions of the share capitalRJ Plan.
As of PT Portugalthe deadline to Altice Portugal for a purchase price equal tofile interlocutory appeals, 27 interlocutory appeals had been filed against the enterprise value of PT Portugal of €6,900 million,Brazilian Confirmation Order. Although subject to adjustments based onthese pending interlocutory appeals, the financial debt, cashBrazilian Confirmation Order has not been stayed, fully or partially, and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 milliontherefore remains in the event that the consolidated revenues of PT Portugalfull force and effect, according to its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.
In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash.terms. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company, and as of the date of this annual report, have usedthe term to file an additional R$5,350 millionappeal against the Brazilian Confirmation Order has ended for all parties. Following the resolution of these net cash proceedsinterlocutory appeals, including eventual appeals to the Brazilian Superior and Supreme Courts, the Brazilian Confirmation Order will become final and binding on all parties under Brazilian law.
Recognition Proceedings in the United States
On June 22, 2016, the U.S. Bankruptcy Court entered an order granting the provisional relief requested by the Chapter 15 Debtors in their cases that were filed on June 21, 2016 under Chapter 15 of the United States Bankruptcy Code. On July 21, 2016, the U.S. Bankruptcy Court held a hearing with respect to the Chapter 15 Debtors petition for recognition of the RJ Proceedings as a main foreign proceedings with regard to each of the Chapter 15 Debtors and did not receive any objections to such petition. On July 22, 2016, the U.S. Bankruptcy Court granted the U.S. Recognition Order.
On April 17, 2018, the foreign representative for the prepaymentChapter 15 Debtors filed a motion with the U.S. Bankruptcy Court seeking an order of that court granting, among other things, full force and repayment of indebtedness of our company. We expecteffect to use the remainderRJ Plan and the Brazilian Confirmation Order in the United States. On June 14, 2018, the U.S. Bankruptcy Court granted the requested order. As a result, the claims with respect to the Defaulted Bonds that were governed by New York law have been novated and discharged under New York law and the holders of these net cash proceedsDefaulted Bonds were entitled only to receive the recovery set forth in the RJ Plan in exchange for the repayment of indebtedness of our company.claims represented by these Defaulted Bonds.
In anticipationFor more information regarding the proceedings in the United States relating to the RJ Proceedings, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Financial Restructuring—Recognition Proceedings in the United States.”
Recognition of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to Oi. RJ Plan in the United Kingdom
On June 23, 2016, the High Court of Justice of England and Wales granted the U.K. Recognition Orders.
As a result of the completionhomologation of the PTPTIF Composition Plan described below under “—Restructuring of Our Dutch Finance Subsidiaries” on June 20, 2018, the PTIF Composition Plan is automatically recognized by each EU member state of the, including the UK, under the European Insolvency Regulation (2015/848). As a result, the claims against PTIF with respect to the Defaulted Bonds that were governed by English law have been novated and discharged as a matter of English law and the holders of these Defaulted Bonds are entitled only to receive the recovery set forth in the RJ Plan in exchange for the claims represented by these Defaulted Bonds.
For more information regarding the proceedings in the United Kingdom relating to the RJ Proceedings, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Financial Restructuring—Recognition Proceedings in the United Kingdom.”
Restructuring of Dutch Finance Subsidiaries
Although the RJ Proceedings have been recognized in the United States, England and Wales and Portugal, Disposition, the indebtednesslaws of The Netherlands do not provide for the recognition of the RJ Proceedings. Two of the RJ Debtors, Oi Coop and PTIF, are organized under the laws of The Netherlands. As a result, a group of holders of some of the Defaulted Bonds issued by Oi Coop and PTIF brought proceedings against these RJ Debtors in The Netherlands.
On April 10, 2018, PTIF deposited a draft of the PTIF Composition Plan with the Dutch District Court and Oi Coop deposited a draft of the Oi Coop Composition Plan with the Dutch District Court. The PTIF Composition Plan and the Oi Coop Composition Plan each provide for the restructuring of the claims against PTIF and Oi Coop on substantially the same terms and conditions as the RJ Plan.
On May 17, 2018, meetings of each series of bonds issued by PTIF were held at which the bondholders voted in favor of extraordinary resolutions providing for: (1) the release Oi’s guarantee for each of the relevant series of Defaulted Bonds, (2) the authorization of the trustee of each outstanding series of Defaulted Bonds issued by PTIF to act as a sole creditor of such Defaulted Bonds, submit a claim on behalf of the holders of such Defaulted Bonds to the PTIF Trustee in relation to the PTIF bankruptcy and vote in favor of the PTIF Composition Plan, and (3) authorize the trustee of each outstanding series of Defaulted Bonds issued by PTIF to request the PTIF Trustee in respect of its vote on behalf of PTIF, to vote in favor of the Oi Coop Composition Plan.
On June 1, 2018, at a meeting of the creditors of PTIF in the Netherlands, the creditors of PTIF approved the PTIF Composition Plan and directed the PTIF Trustee to vote PTIF’s claims in Oi Coop in favor of the Oi Coop Composition Plan. Also on June 1, 2018, at a meeting of the creditors of Oi Coop, the creditors of Oi Coop approved the Oi Coop Composition Plan.
On June 11, 2018, the Dutch District Court confirmed the PTIF Composition Plan and the Oi Coop Composition Plan at a homologation hearing. The homologation was subject to an eight day appeal period, which expired on June 19, 2018. As of that date, no appeals had previously been filed. As a result, the PTIF Composition Plan and the Oi Coop Composition Plan are effective as a matter of Dutch law, the bankruptcies of PTIF and Oi Coop have terminated and the PTIF Composition Plan and the Oi Coop Composition Plan have full force and effect in each member state of the European Union.
Recognition Orders in Portugal
On November 14, 2016, Oi and Telemar requested the Third Lisbon Commercial Court, or the Portuguese Court, to recognize the RJ Proceedings in relation to Oi and Telemar in Portugal under the Portuguese Insolvency and Corporate Recovery Code. On July 11, 2017, Oi Mobile requested the Portuguese Court to recognize the RJ Proceedings in relation to Oi Mobile in Portugal under the Portuguese Insolvency and Corporate Recovery Code. The Portuguese Court granted recognition of the RJ Proceedings in Portugal in relation to Oi and Telemar on March 1, 2017 and Oi Mobile on August 4, 2017.
On May 9, 2018, Oi, Telemar and Oi Mobile, along with Copart 4 and Copart 5, filed a request for recognition of the RJ Plan in Portugal with respect to these entities. On August 1, 2018, the Portuguese Court rejected this decision on the grounds that the RJ Plan was still subject to appeal in Brazil. Oi appealed this decision, and on October 26, 2018, the Lisbon Court of Appeal reversed the decision of the Portuguese Court, recognized in Portugal the decision rendered by the RJ Court on January 8, 2018 and published on February 5, 2018, which confirmed the RJ Plan, and ordered the publication of the Brazilian decision in Portugal.
Implementation of the Financial Settlement of the Judicial Reorganization Plan
Settlement of Class I Claims
As a result of the commencement of the RJ Proceedings on June 20, 2016, (1) all outstanding labor claims against the RJ Debtors as of that date and (2) our obligations to fund certain of our post-retirement defined benefit plans as of that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the contingencies for labor claims recognized by the RJ Court was R$899 million, and the aggregate amount of our unfunded obligations under our post-retirement defined benefit plans recognized by the RJ Court was R$560 million, all of which related to claims of FATL. For more information regarding these labor contingencies, see notes 19 and 29 to our audited consolidated financial statements. For more information regarding our unfunded obligations under our post-retirement defined benefit plans, see note 23 to our audited consolidated financial statements.
Under the RJ Plan, labor claims were classified as liabilities associatedClass I claims. Under the RJ Plan, generally all labor claims were paid in five equal monthly installments, beginning on August 5, 2018, thesix-month anniversary of the Brazilian Confirmation Date. Labor claims not yet adjudicated will be paid in five equal monthly installments, beginning six months after a final,non-appealable ruling of the relevant court hearing a labor claim.
Labor claims for which a judicial deposit was posted by any of the RJ Debtors was paid through the immediate disbursement of the amount deposited in court and, in the event that the related judicial deposit was lower than the labor claim recognized by the RJ Court, the judicial deposit was used to pay part of the labor claim and the outstanding balance of the labor claim was paid in five equal monthly installments, beginning on August 5, 2018, thesix-month anniversary of the Brazilian Confirmation Date. In the event that the related judicial deposit was greater than the amount of the labor claim recognized by the RJ Court, the RJ Debtors were entitled to withdraw the difference from the judicial deposit.
Labor claims for which no judicial deposit was posted by any of the RJ Debtors will be paid through judicial deposits that have been attached to the court records of the related case.
Under the RJ Plan, our obligations to fund our post-retirement defined benefit plans were classified as Class I claims. Claims due to FATL are payable in six annual, equal installments, beginning on February 5, 2023, the fifth anniversary of the Brazilian Confirmation Date and the amount due bears interest at the rate of the National Consumer Price Index (INPC) plus 5.5% per annum from February 5, 2018. Interest will be capitalized to increase the principal balance of these claims on an annual basis until February 5, 2018, and will be paid annually in cash thereafter through the final maturity.
Settlement of Class II Claims
Under the RJ Plan, the claim of BNDES under our credit facilities with assets held for saleBNDES was classified as a Class II claim. As of December 31, 2017, the aggregate amount of the claims recognized by the RJ Court under our credit facilities with BNDES was R$3,326 million. Under the RJ Plan, BNDES is entitled to receive payment of 100% of the principal amount of its recognized claims in our consolidated financial statements, was reclassified as indebtednessreais, adjusted by the interest/inflation adjustment rate. The principal amount of our company. In addition,these claims will be paid in connection with108 monthly installments beginning in March 2024, in the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.
In addition, PT Portugal transferred to Oi allamount of 0.33% of the outstanding share capitalprincipal for the first 60 monthly installments, 1.67% of PT Participações, which holdsthe outstanding principal for the next 47 monthly installments and the remainder at maturity on February 15, 2033. The principal amount of these claims will accrue interest at the TJLP rate plus 2.946372%per annum from February 5, 2018. Interest will be capitalized to increase the principal balance under these claims on an annual basis until February 5, 2022, and will be paid monthly in cash thereafter through the final maturity.
Settlement of Class III Claims – Defaulted Bonds
Under the RJ Plan, the claims of holders of the Defaulted Bonds were classified as Class III claims. As of December 31, 2017, the aggregate amount of the claims recognized by the RJ Court of holders of our directDefaulted Bonds was R$32,314 million. Under the RJ Plan, each holder of Defaulted Bonds was entitled to receive the Qualified Recovery (as described below), theNon-Qualified Recovery (as described below) or the Default Recovery (as described under “—Settlement of Class III and indirect interestsClass IV Claims – Default Recovery”) in Africatelrespect of the claims evidenced by the Defaulted Bonds such holder beneficially held. We refer to the amount of these claims as Bondholder Credits.
Under the RJ Plan, holders of Defaulted Bonds were entitled to make an election with respect to the form of the recovery that they were entitled to receive based on whether such holder had individualized its claim before the RJ Court and TPT, which provides telecommunications, multimediathe aggregate amount of Bondholder Credits (consisting of the U.S. dollar equivalent of the principal amount of such Defaulted Bonds and IT services in Timor Leste.the accrued interest until June 20, 2016, the date of the commencement of the RJ Proceedings) represented by such holder’s Defaulted Bonds. Holders that had individualized their claims were entitled to elect (1) the Qualified Recovery if the aggregate amount of their Bondholder Credits was US$750,000 or more, or (2) theNon-Qualified Recovery if the aggregate amount of their Bondholder Credits was less than US$750,000. Holders that had not individualized their claims or did not elect the Qualified Recovery orNon-Qualified Recovery were entitled to the Default Recovery. The period to make these elections commenced on February 6, 2018 and expired on March 8, 2018.
IssuanceQualified Recovery
Under the RJ Plan, the Qualified Recovery consisted of €600 Million of 5.625%New Notes, due 2021 and Tender fornewly issued Common ADSs, Common ADSs previously held by PTIF and ADWs to subscribe to newly issued Common ADSs in amounts determined based on the amount of Bondholder Credits evidenced by the Defaulted Bonds of each series of Defaulted Bonds held by a holder.
Under Brazilian law, prior to issuing the Common Shares underlying the newly issued Common ADSs or the Warrants underlying the newly issued ADWs to holders of Defaulted Bonds, Oi Noteswas required to conduct a preemptive offer of those Common Shares and Warrants to all holders of its Common Shares and Preferred Shares. Holders of Common ADSs and Preferred ADSs were not entitled to participate in that preemptive offer.
InHolders of preemptive rights were entitled to subscribe to Common Shares and the associated Warrants during a subscription period commencing on June 2015, our wholly-owned subsidiary Oi Brasil Holdings Coöperatief U.A., issued15, 2018 and sold 5.625% notes due 2021ending on July 16, 2018 at a subscription price of R$7.00 per Common Share. Holders of Common Shares and Preferred Shares subscribed for 68,263 Common Shares and 5,197 Warrants in the preemptive offer. The cash proceeds of the preemptive offer were required to be made available to holders of Defaulted Bonds in lieu of the subscribed Common Shares and Warrants.
Under the RJ Plan, the Qualified Recovery with respect to each US$1,000 of Bondholder Credits consisted of approximately:
US$195.61 aggregate principal amount of €600 million. We used €321.54 millionNew Notes;
38.57 Common ADSs representing 192.83 Common Shares;
2.75 ADWs; and
US$0.01 in cash.
The New Notes are senior unsecured obligations of Oi denominated in U.S. dollars that mature in July 2025, with the principal amount to be paid in full at maturity. The New Notes are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop, and PTIF. The New Notes accrue interest from the Brazilian Confirmation Date. Interest on the New Notes will accrue:
from the Brazilian Confirmation Date until February 2019, which is the first interest payment date, until August 2021, the applicable rate will be defined at the sole discretion of Oi to be either (i) a fixed rate of 10.0% per annum payable in cash on a semi-annual basis, or (ii) a fixed rate of 12.0% per annum, of which 8.0% shall be payable in cash and 4.0% shall be payable by either increasing the principal amount of the proceedsoutstanding New Notes or by issuingpaid-in-kind notes, at the sole discretion of Oi, in each case, on a semi-annual basis; and
thereafter, at a fixed rate of 10.0% per annum payable in cash on a semi-annual basis.
Each ADW represented five Warrants. Each Warrant entitled its holder to subscribe for one Common Share at an exercise price of the equivalent inreais of US$0.01 per Common Share. Each ADW was exercisable only for Common ADSs. Each ADW and each Warrant became exercisable, subject to the terms and conditions thereof, for a period of 92 days commencing on October 3, 2018.
Non-Qualified Recovery
Under the RJ Plan, theNon-Qualified Recovery with respect to each US$1,000 of Bondholder Credits consisted of a participation interest in a principal amount of US$500 under a credit agreement that was entered into between Oi as borrower, the other RJ Debtors as guarantors, and an administrative agent, which we refer to as theNon-Qualified Credit Agreement.
Obligations under theNon-Qualified Credit Agreement are senior unsecured obligations of Oi. Obligations under theNon-Qualified Credit Agreement are guaranteed, jointly and severally, by each Telemar, Oi Mobile, Oi Coop, and PTIF. Principal under theNon-Qualified Credit Agreement will be paid in 12 semi-annual installments beginning in August 2024 in the amount of 4% of the outstanding principal for the first six semi-annual installments, 12.66% of the outstanding principal for the next five semi-annual installments and the remainder at maturity on February 15, 2030. TheNon-Qualified Credit Agreement will accrue interest at the rate of 6% per annum from February 5, 2018. Interest will be capitalized to increase the principal balance under theNon-Qualified Credit Agreement on an annual basis until February 2023, and will be paid together with principal beginning in August 2024.
Settlement Procedures
Following the entry of the order of the U.S. Bankruptcy Court granting full force and effect to the RJ Plan, we commenced settlement procedures in order to permit holders of Defaulted Bonds that had validly elected to receive the Qualified Recovery and theNon-Qualified Recovery to surrender their Defaulted Bonds and receive these notesrecoveries. The settlement of the Qualified Recovery and theNon-Qualified Recovery took place on July 27, 2018. In connection with the settlement of the Qualified Recovery, we issued (1) US$1,653.6 million principal amount of New Notes, (2) 302,846,268 new Common ADSs (representing 1,514,231,340 newly issued Common Shares), (3) 23,250,281 Common ADSs previously held by PTIF (representing 116,251,405 Common Shares), and (4) 23,295,054 ADWs representing the right to repurchase €56.92 millionsubscribe for 23,295,054 newly issued Common ADSs (representing 116,475,270 Common Shares). In connection with the settlement of theNon-Qualified Recovery, holders of Defaulted Bonds received participation interests in theNon-Qualified Credit Agreement in an aggregate amount of US$79.6 million.
Settlement of Class III Claims – Export Credit Agreements
Under the RJ Plan, the claims of lenders under our export credit facility agreements were classified as Class III claims. As of December 31, 2017, the aggregate amount of the claims recognized by the RJ Court of lenders under our export credit facility agreements was R$5,460 million.
Under the RJ Plan, each of the lenders under these export credit facility agreements will receive payment of the amount of their recognized claims under the terms of four new export credit facilities that we entered into with these lenders during June and July 2018. Telemar is the borrower under three facility agreements dated June 21, 2018, July 17, 2018 and July 26, 2018, and Oi and Oi Mobile have guaranteed Telemar’s obligations thereunder. Oi is the borrower under one facility agreement dated July 17, 2018, and Oi Mobile and Telemar have guaranteed Oi’s obligations thereunder.
Under these new export credit facilities, the principal amount of the loans will be paid in U.S. dollars in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13 semi-annual installments and the remainder at maturity on February 25, 2035. The outstanding principal amount under these new export credit facilities will accrue interest at the rate of 1.75% per annum from February 5, 2018. Interest will be capitalized to increase the outstanding principal on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity.
Settlement of Class III Claims – Debentures
Under the RJ Plan, the claims of holders of our debentures were classified as Class III claims. As of December 31, 2017, the aggregate amount of the claims recognized by the RJ Court of holders of our debentures was R$4,119 million.
Under the RJ Plan, each holder of beneficial interests in our debentures received new debentures, in the form of either the 12th issuance of simple, unsecured,non-convertible debentures of Oi or the 6th issuance, simple, unsecured,non-convertible debentures of Telemar, both denominated inreais in an aggregate principal amount equal to the principal of PTIF’s 5.625% Notes due 2016, €115.88 million aggregatethe recognized claims surrendered by the holders of beneficial interests in our debentures. These new debentures were issued on February 5, 2018 and subscribed on July 30, 2018. Oi’s obligations under the 12th issuance of simple, unsecured,non-convertible debentures are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF. Telemar’s obligations under 6th issuance, simple, unsecured,non-convertible debentures are guaranteed, jointly and severally, by each of Oi, Telemar, Oi Mobile, Oi Coop and PTIF.
The principal amount of PTIF’s 4.375% Notes due 2017the new debentures will be paid inreais in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next 13 semi-annual installments and €148.74 million aggregatethe remainder at maturity on February 25, 2035. The principal amount of Oi’s 5.125% Notes duethese debentures will accrue interest at the rate of 80% of the CDI rate from February 5, 2018. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity.
Settlement of Class III Claims – Unsecured Lines of Credit and Real Estate Securitization Transactions
Under the RJ Plan, the claims (1) of the lender under our unsecured line of credit, and (2) under our obligations to make the payments under leases of certain property by Oi and Telemar from Copart 4 and Copart 5 that had been assigned to support CRIs backed by these receivables, were classified as Class III claims. As of December 31, 2017, the aggregate amount of the claims recognized by the RJ Court of the lender under our unsecured line of credit was R$2,525 million, and the claims recognized by the RJ Court under the CRIs was R$1,519 million.
Under the RJ Plan, the lender under our unsecured line of credit and each of the creditors under the CRIs will receive payment from Oi of 100% of the amount of its recognized claims, which will be paid inreais in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the principal amount for the first 10 semi-annual installments, 5.7% of the principal amount for the next 13 semi-annual installments and the remainder at maturity on February 25, 2035. The principal amount will accrue interest at the rate of 80% of the CDI rate from February 5, 2018. Interest will be capitalized to increase the principal amount on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. These obligations of Oi are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF.
Settlement of Class III Claims – ANATEL
As a result of the commencement of the RJ Proceedings on June 20, 2016, all outstandingnon-tax claims of ANATEL against the RJ Debtors as of that we had offereddate became subject to purchasecompromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the contingencies for claims of ANATEL recognized by the RJ Court was R$9,334 million. For more information regarding these claims, see note 29 to our audited consolidated financial statements.
Under the RJ Plan, claims of ANATEL were classified as Class III claims. Under the RJ Plan, liquidated claims of ANATEL outstanding as of June 20, 2016 have been novated and in calculating the recovery of ANATEL under these claims the amounts of all accrued interest included in these claims was reduced by 50% and the amounts of all late charges included in these claims was reduced by 25%. The remaining amount of these claims will be settled in 240 monthly installments, beginning on June 30, 2018, in the amount of 0.160% of the outstanding claims for the first 60 monthly installments, 0.330% of the outstanding claims for the next 60 monthly installments, 0.500% of the outstanding claims for the next 60 monthly installments, 0.660% of the outstanding claims for the next 59 monthly installments, and the remainder at maturity on June 30, 2038. Beginning on July 31, 2018, the amounts of each monthly installment have been be adjusted by the SELIC variation. Payments of monthly installments will be made through the application of judicial deposits related to these claims until the balance of these judicial deposits has been exhausted and thereafter will be payable in cash inreais.
Under the RJ Plan,non-liquidated claims of ANATEL outstanding as of June 20, 2016 have been novated and ANATEL is entitled to the Default Recovery with respect to these claims.
In the event that a legal rule is adopted in Brazil that regulates an alternative manner for the settlement of the claims of ANATEL outstanding as of June 20, 2016, the RJ Debtors may adopt the new regime, observing the terms and conditions set forth in Oi’sby-laws.
Notwithstanding the above, ANATEL has challenged the treatment of its outstanding claims for fines, interest and penalties in the RJ Proceedings. For more information, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Financial Restructuring—ANATEL Proceedings.”
Settlement of Class III and Class IV Claims – Trade Creditors
As a result of the commencement of the RJ Proceedings on June 20, 2016, all outstanding trade payables of the RJ Debtors as of that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the claims of our trade creditors recognized by the RJ Court was R$2,139 million.
Under the RJ Plan, the claims of our trade creditors were classified as Class III or Class IV claims. Under the RJ Plan, each of these trade creditors were entitled to make an election of the form of their recovery during an election period that commenced on February 6, 2018 and ended on February 26, 2018.
Trade creditors that, under the RJ Plan, continued to supply goods and/or services to the RJ Debtors without any unreasonable change in the terms and conditions and that did not have anyon-going litigation against any of the RJ Debtors, other than litigation related to the RJ Proceedings, were deemed to be “Strategic Supplier Creditors” under the RJ Plan. Strategic Supplier Creditors with claims of R$150,000 or less (or the equivalent in other currencies), other than claims arising from loans or other funding provided to Oi Coop, were entitled to elect to receive 100% of their claims in cash within 20 business days after the end of the election period. Strategic Supplier Creditors with claims of more than R$150,000 (or the equivalent in other currencies), other than claims arising from loans or other funding provided to Oi Coop, were entitled to elect to receive R$150,000 (or the equivalent in other currencies) in cash within 20 business days after the end of the election period and 90% of their remaining claims in cash in four equal annual installments, plus interest on the amount of their claims at the rate of TR plus 0.5% per annum for claims denominated inreais, and at the rate of 0.5% per annum for claims denominated in U.S. dollars or euros.
Trade creditors that were not deemed to be “Strategic Supplier Creditors” under the RJ Plan were entitled to elect to:
receive the entire amount of their claim in cash in a contemporaneous tender offer. We usedsingle installment if the remaining net proceedsaggregate amount of their claims was less than or equal to R$1,000;
receive R$1,000 in cash in a single installment with respect to the entire amount of their claim if the aggregate amount of their claims was more than R$1,000; or
| • | receive the entire amount of their claim under terms similar to (1) those described under “—Settlement of Class III Claims – Unsecured Lines of Credit and Real Estate Securitization Transactions—Unsecured Lines of Credit” if their claims were denominated inreais, or (2) those described under “—Settlement of Class III Claims – Export Credit Agreements” if their claims were denominated in a currency other thanreais. |
Trade creditors that did not elect one of these recovery options are entitled to the Default Recovery.
Settlement of Class III and Class IV Claims – Civil Contingencies
As a result of the issuancecommencement of the RJ Proceedings on June 20, 2016, all outstanding unsecured civil claims against the RJ Debtors as of that date became subject to compromise under our RJ Proceedings. As of December 31, 2017, the aggregate amount of the contingencies for civil claims (other than claims of ANATEL and other regulatory agencies) recognized by the RJ Court was R$2,929 million. For more information regarding these civil contingencies, see note 29 to our audited consolidated financial statements.
Under the RJ Plan, unsecured civil claims against the RJ Debtors were classified as Class III and IV claims. Under the RJ Plan, if judicial deposits have been made with respect to adjudicated civil claims, holders of these notes to repay or prepay other indebtedness of our company.
Alternative Share Structure and Corporate Ownership Simplification
On March 31, 2015,civil claims that expressly agreed with the shareholders of TmarPart acting at a pre-meeting (reunião prévia)amounts of the shareholderscivil claims acknowledged by the RJ Debtors, including those recognized by the RJ Court, and waived the right to offer, propose, or proceed with credit actions, qualifications, divergences, objections, or any other measure (including appeals) which aim at increasing the amounts of TmarParttheir civil claims, were paid, subject to the reduction of the amount of any civil claim classified as a Class III claim as described below, through the application of judicial deposits related to these civil claims until the balance of the relevant judicial deposits was exhausted. Any amount of a civil claim remaining unpaid after the application of the related judicial deposit entitled the holder to the Default Recovery with respect to the balance of that civil claim. In the event that the related judicial deposit was greater than the amount that the holder of a civil claim was entitled to withdraw, the RJ Debtors were be entitled to withdraw the difference from the judicial deposit.
The amount of the claim of a holder of civil claims (other than claims of ANATEL and other regulatory agencies) that have been classified as Class III claims were reduced based on the amount of such civil claims as follows:
Civil claims of more than R$1,000 and equal to or less than R$5,000 were reduced by 15%;
Civil claims of more than R$5,000 and equal to or less than R$10,000 were reduced by 20%;
Civil claims of more than R$10,000 and equal to or less than R$150,000 were reduced by 30%; and
Civil claims of more than R$150,000 were reduced by 50%.
Under the RJ Plan, if judicial deposits have been made with respect to unadjudicated civil claims, following adjudication of their claims, the holders of these civil claims that expressly agree with the amounts of the civil claims acknowledged by the RJ Debtors, including those recognized by the RJ Court, and waive the right to offer, propose, or proceed with credit actions, qualifications, divergences, objections, or any other measure (including appeals) which aim at increasing the amounts of their civil claims, will be paid, subject to the reduction of the amount of any civil claim classified as a Class III claim as described above, through the application of judicial deposits related to these civil claims until the balance of the relevant judicial deposits has been exhausted. Any amount of a civil claim remaining unpaid after the application of the related judicial deposit will entitle the holder to the Default Recovery with respect to the balance of that civil claim. In the event that the related judicial deposit is greater than the amount that the holder of a civil claim is entitled to withdraw, the RJ Debtors will be entitled to withdraw the difference from the judicial deposit.
Settlement of Class III and Class IV Claims – Default Recovery
Under the RJ Plan, (1) unanimously approvedcreditors that were entitled to make recovery elections as described above and failed to make such elections or elected the adoptionDefault Recovery, (2) ANATEL, with respect to some of its claims as described above, and (3) holders of civil claims (other than claims of ANATEL and other regulatory agencies) in amounts that exceed the related judicial deposit will be entitled to the Default Recovery with respect some or all of their claims.
Under the RJ Plan, the Default Recovery will consist of an alternative share structure, after analyzing optionsunsecured right to receive payment of 100% of the amount of a recognized claims payable in five equal annual installments, commencing on the 20th anniversary of the Brazilian Confirmation Date for creditors resident in Brazil or the 20th anniversary of the date on which the RJ Plan is recognized in the jurisdiction in which the creditor is resident for creditors not resident in Brazil. If the recognized claim was derived from an obligation denominated inreais, the payments will be made inreais and taking into consideration the obstaclesclaim will bear interest at the TR rate with all accrued interest payable at final maturity. If the recognized claim was derived from an obligation denominated in U.S. dollars or euros, the payments will be made in U.S. dollars or euros, respectively, and the claim will not bear interest.
Under the RJ Plan, Oi has the option of, at any time, to settle all amount payable under the Default Recovery prior to their maturities by means of the payment of 15% of the aggregate amount of the related claims plus capitalized interest to the completiondate of the previously announced mergerexercise of sharesthis option.
Implementation of Oi and TmarPart, and (2) authorizedManagement Changes Required by the managements of TmarPart and OiJudicial Reorganization Plan
Pursuant to begin taking the applicable steps to implementRJ Plan, as from the alternative share structure. The alternative share structure was intended to achieve manydate of the primary purposesapproval of the merger of shares of Oi and TmarPart, including the adoption by our company of the best corporate governance practices required by BM&FBovespa’sNovo Mercado segment and the elimination of the control of Oi through the various shareholders’ agreements governing Oi, while maintaining the goal of implementing a transaction that would result in the listing of the shares of OiRJ Plan on theNovo Mercado.
The implementation of the alternative share structure consisted of the corporate ownership simplification transactions (described below), the adoption of new by-laws of our company,December 20, 2017 until the election of a new board of directors in accordance with the RJ Plan, Oi had a transitional board of directors composed of nine members set forth in the RJ Plan, each of whom served without an alternate member.
However, the RJ Court suspended the voting rights of certain shareholders and ordered the removal of the members of the Oi’s board of directors indicated by them until the occurrence of the capital increase provided for in the RJ Plan. As a result, as of March 7, 2018, three members of the transitional board of directors were removed from their positions.
Pursuant to the RJ Plan, Oi was required to engage a human resources consultant to assist with the selection of an operating officer. This process was concluded on March 21, 2018 with the election by Oi’s board of directors of José Claudio Moreira Gonçalves to serve on Oi’s board of executive officers as Oi’s Chief Operating Officer. In addition, on that date, Oi’s board of directors elected Bernardo Kos Winik to Oi’s board of executive officers and the newly created position of Chief Commercial Officer.
Pursuant to the RJ Plan, Oi also engaged a human resources consultant to assist with the selection of the nominees for its new board of directors. On September 17, 2018, the general shareholders’ meeting of Oi ratified the election of the members of the new board of directors indicated by Oi’s management in accordance with the RJ Plan. The effectiveness of the installation of the members of the new board of directors was conditioned on the prior approval of ANATEL, which ANATEL conditionally granted on September 13, 2018 and confirmed on September 19, 2018.
Exercise of Warrants and ADWs
On October 26, 2018, our company,board of directors confirmed the issuance of 112,598,610 Common Shares and the delivery of such Common Shares to holders of its Warrants that exercised their Warrants on or prior to October 24, 2018, including Warrants represented by 22,135,429 ADWs that were exercised on or prior to October 18, 2018.
On December 5, 2018, our board of directors confirmed the issuance of 3,314,745 Common Shares and the delivery of such Common Shares to holders of its Warrants that exercised their Warrants from October 25, 2018 through December 3, 2018, including Warrants represented by 662,949 ADWs that were exercised from October 19, 2018 through November 27, 2018.
On January 4, 2019, our board of directors confirmed the issuance of 275,985 Common Shares and the delivery of such Common Shares to holders of its Warrants that exercised their Warrants from December 4, 2018 through January 2, 2019, including Warrants represented by 55,197 ADWs that were exercised from November 28, 2018 through December 26, 2018.
All Warrants that were not exercised on or prior to January 2, 2019, including all ADWs that were not exercised on or prior to December 26, 2018, have been cancelled.
Preemptive Offering and Closing Under Commitment Agreement
As contemplated by Section 6 of the RJ Plan, on November 13, 2018, we commenced a voluntary share exchange throughpreemptive offering of Common Shares that was registered with the SEC under the Securities Act under which holders of our preferred shares were entitled to exchange their preferred shares for our common shares.
On September 1, 2015, weCommon Shares and severalPreferred Shares, including the ADS Depositary and The Bank of our direct and indirect shareholders undertook the following transactions, which we refer to collectivelyNew York Mellon, as the corporate ownership simplification transactions:
In connection with these transactions, all of the shareholders’ agreements to which we were an intervening party and through which the direct and indirect shareholders of TmarPart had rights to influence our management and operations were terminated. In the merger of TmarPart with and into Oi, the net assets of TmarPart, in the amount of R$122.4 million were merged into the shareholders’ equity of Oi and as a result of the merger, TmarPart ceased to exist. The merger of TmarPart with and into Oi also resulted in the transfer to the shareholders’ equity of Oi of goodwill derived from the acquisition of equity interest recorded by Bratel Brasil, AG Telecom, LF Tel, and TmarPart, in accordance with applicable Brazilian law. In the merger of TmarPart with and into Oi, shareholders of TmarPart received the same number of shares of Oi as were held by TmarPart immediately prior to the merger of TmarPart with and into Oi in proportion to their holdings in TmarPart. No withdrawal rights for the holders of shares of Oi were available in connection with the merger of TmarPart with and into Oi.
At an extraordinary shareholders meeting of our company held on September 1, 2015, our shareholders (1) adopted amended by-laws for our company that were intended to increase the corporate governance standards applicable to our company as well as to limit the voting rights of holders of a large concentration of common shares, and (2) elected a new board of directors with terms of office until the shareholders’ meeting that approves our financial statements for the year ending December 31, 2017. For more information about our amended by-laws, see “Item 10. Additional Information— Description of Our Company’s By-laws.” For more information about the members of our board of directors, see “Item 6. Directors, Senior Management and Employees—Board of Directors.”
On October 8, 2015, we completed a voluntary share exchange under which we had offered (1) the holders of our preferred shares (including preferred shares represented by the Preferred ADSs), the opportunity to convert their preferred shares into our common shares at a ratio of 0.9211 common shares for each preferred share, plus cash in lieu of any fractional share, and (2) the holdersdepositary of the Preferred ADSs the opportunityADS program, received 1.333630 transferable rights for each Common Share or Preferred Share held as of November 19, 2018. Each subscription right entitled its holder to exchange their Preferred ADSs forsubscribe to one Common ADSsShare at a ratiosubscription price of 0.9211R$1.24 per Common ADSsShare. In addition, each holder of a subscription right was entitled to request the subscription for each Preferred ADS, plus cash in lieuadditional Common Shares, up to the total of any fractional3,225,806,451 Common ADS. Holders of 314,250,655 of our outstanding preferred shares tendered their shares for conversion or exchange of the related ADSs. Each of Pharol and Caravelas participatedShares that were offered in the voluntary share exchange and surrendered allpreemptive offering less the total number of its preferred shares for conversion. As a result of the voluntary share exchange, 314,250,655 of our outstanding preferred shares were cancelled and in exchangeinitial Common Shares.
The subscription rights expired on January 4, 2019. On January 16, 2019, we issued 289,456,2781,530,457,356 Common Shares to holders of our common shares.
Acquisition of Telemont
In October 2015, we acquired the operations in Rio de Janeiro of Telemont Engenharia de Telecomunicações S.A., or Telemont. Wesubscription rights that had entered into a services agreement with Telemont in January 2012 for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the State of Rio de Janeiro.
Exclusivity Agreement with LetterOne
In October 2015, we entered into an exclusivity agreement with LetterOne Technology (UK) LLP, or LetterOne,exercised those subscription rights with respect to the negotiationinitial Common Shares, including the depositaries under the deposit agreements relating to our ADSs. On January 21, 2019, we issued 91,080,933 Common Shares to holders of subscription rights that had requested subscriptions for excess Common Shares, including the depositaries under the deposit agreements relating to our ADSs. The proceeds of these subscriptions was R$2,011 million.
On January 25, 2019, we issued 1,604,268,162 Common Shares, representing the total number of Common Shares that were offered in the preemptive offering less the total number of initial Common Shares and excess Common Shares, to the Backstop Investors in a potential transactionprivate placement under the terms of the RJ Plan and the Commitment Agreement for the specific purposeaggregate amount of allowing a consolidation inR$1,989 million. In addition, under the Brazilian telecommunications industry involving a potential business combination with TIM. As partterms of the potential transaction, LetterOne proposedRJ Plan and the Commitment Agreement, on that date we issued 272,148,705 Common Shares in a private placement to make a capital contribution of upthe Backstop Investors and paid US$13 million to US$4.0 billion in our company, contingent on the completion ofBackstop Investors as compensation for their commitments under the consolidation transaction. On February 25, 2016, we were notified by LetterOne that it had been informed by TIM that the latter was no longer interested in proceeding with the negotiations of a business combination with our companyCommitment Agreement.
Agreements for Network Equipment and that without TIM’s involvement, LetterOne could not proceed with transaction as previously planned.
Engagement of PJT PartnersServices
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad
hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Acquisition of A.R.M.
We had entered into a services agreement with A.R.M. Engenharia in October 2012 for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará, Amapá, Rio Grande do Sul, Paraná and Santa Catarina.
In April and May 2016, we acquired A.R.M. Engenharia’s operations in the States of Rio Grande do Sul, Santa Catarina and Paraná, and we are managing those operations. Also in May 2016,July 20, 2018, we entered into an agreement with Huawei do Brasil Telecomunicações Ltda. and certain of its affiliates, or Huawei, under which we agreed to make the shareholdersnecessary efforts to sign, within 90 days from the date of A.R.M. Engenhariathe agreement, the contracts to acquire equipment and services from Huawei to support the totalitymodernization of our network technologies. We expect that the projects supported by this agreement will result in the expansion of our mobile telephone coverage and our fiber optic broadband capacity. These projects are designed to modernize and consolidate our mobile network technologies, permitting our gradual use of our 2G and 3G frequencies to provide 4.5G services in all municipalities currently served by our mobile network and prepare our network for the implementation of 5G technology and Internet of Things (IoT) solutions. Under this agreement, we expect to acquire equipment and services from Huawei over the next five years.
Pharol Settlement Agreement
On January 8, 2019, Oi, Bratel and Pharol entered into a settlement agreement, or the Pharol Settlement Agreement, which provides, among other things, for the termination of all existing litigation involving Oi, Bratel and Pharol in Brazil and abroad. As a result of the Pharol Settlement Agreement, Oi, Bratel and Pharol filed motions requesting the suspension of all pending proceedings, suits and appeals in Brazil and Portugal involving Oi, Bratel and Pharol for 60 days or until the RJ Court confirms the Pharol Settlement Agreement, whichever occurs first.
Under the Pharol Settlement Agreement Oi is required to: (1) pay Bratel an amount in U.S. dollars corresponding to €25 million, which under the Pharol Settlement Agreement should be used by Pharol for the subscription of 85,721,774 common shares issued by Oi in the Cash Capital Increase; and (2) upon confirmation of the Pharol Settlement Agreement by the RJ Court, (i) transfer to Bratel 32,000,000 common shares and 1,800,000 preferred shares of Oi held in treasury, (ii) pay Pharol the annual fees related to certain obligations assumed by Oi with respect to proceedings of Pharol in Portugal, and (iii) in case of a sale of at least 50% of the shares issuedof Unitel indirectly held by ARM Engenharia. The completionOi, deposit into an escrow account an amount necessary to guarantee the payment of any potential liabilities of Pharol in tax proceedings whose chance of loss is assessed as possible or probable.
Under the Pharol Settlement Agreement, on February 8, 2019, the member designated by Oi was elected to Pharol’s Board of Directors.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a decision published in the Official Gazette of the transactionState of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019. Since that date, in accordance with the Pharol Settlement Agreement, Oi has paid Bratel an amount in U.S. dollars corresponding to €25 million and transferred to Bratel 32,000,000 common shares and 1,800,000 preferred shares of Oi held in treasury.
Unitel Arbitration
On October 13, 2015, PT Ventures initiated an arbitration proceeding against the other Unitel shareholders as a result of the violation by those shareholders of a variety of provisions of the Unitel shareholders’ agreement and Angolan law, including the provisions entitling PT Ventures to nominate the majority of the members of the board of directors of Unitel, including its managing director, and the fact that the other Unitel shareholders caused Unitel not to pay dividends owed to PT Ventures, entered into self-interested transactions, and withheld information and clarifications on such payment and transactions.
On March 14, 2016, the other shareholders of Unitel initiated an arbitration proceeding against PT Ventures, claiming that Pharol’s sale of a minority interest in Africatel to our company in May 2014 constituted a breach of the Unitel shareholders’ agreement. PT Ventures disputed this interpretation of the relevant provisions of the Unitel shareholders’ agreement arguing that the relevant provisions of the Unitel shareholders’ agreement apply only to a transfer of Unitel shares by PT Ventures itself.
The arbitral tribunal was constituted on April 14, 2016. On May 19, 2016, the arbitration proceeding against PT Ventures initiated by the other Unitel shareholders was consolidated with the arbitration initiated by PT Ventures. The arbitral tribunal issued its final award on February 20, 2019.
In the final award, the arbitral tribunal decided that the other Unitel shareholders had repeatedly breached the shareholders’ agreement, and that these breaches had resulted in a significant decrease of value of PT Ventures’ stake in Unitel. The arbitral tribunal ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of US$339.4 million corresponding to the loss of value of PT Ventures’ stake in Unitel, plus interest from February 20, 2019 at12-month U.S. dollar LIBOR +2%, compounded annually. The arbitral tribunal also ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of US$307 million corresponding to the damages arising from the other Unitel’s shareholders’ failure to ensure that PT Ventures received the same amount of dividends in foreign currency as the other Unitel foreign shareholder. This amount is subject to customaryinterest at an annual rate of 7%, starting at various dates in 2013. In addition, the arbitral tribunal ordered the respondents to pay a substantial portion of PT Ventures’ legal fees and costs and the administrative and arbitrators’ fees and expenses, in the aggregate net amount of approximately US$13 million. The arbitral tribunal also entirely dismissed the counterclaim and agreed with PT Ventures that the conditions precedent, includingfor exercising the completionright of financialfirst refusal to acquire PT Ventures’ 25% shareholding in Unitel had not been triggered. For more information, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”
Merger of Copart 4 with and legal due diligenceinto Telemar and approval bymerger of Copart 5 with and into Oi
In January 2019, Copart 4 was merged with and into Telemar and in March 2019, Copart 5 was merged with and into Oi.
Repurchases of Preferred Shares over the Administrative CouncilB3
During February 2019, we repurchased a total of 1,800,000 Preferred Shares over the B3 at prices ranging between R$1.42 and R$1.44 per Preferred Share, for Economic Defense.an aggregate purchase price of R$2.6 million.
Corporate Structure
The following chart presents our corporate structure and principal operating subsidiaries as of May 13, 2016.April 23, 2019. For a complete list of our subsidiaries, see Exhibit 8.01 to this annual report.
Operations in Brazil
Our concessions and authorizations from the Brazilian government allow us to provide:
| (1) | Oi directly and indirectly owns 100% of equity stock of Serede Serviços de Rede S.A., as follows: 81.61% is held directly by Telemar, 17.51% is held directly by Oi and 0.88% is held directly by Oi Mobile. |
| (2) | Oi indirectly holds 100% of the equity stock of Brasil Telecom Comunicaçāo Multimedia Ltda., as follows: 99.99% is held directly by Oi Mobile and 0.01% is held directly by Telemar. |
| (3) | Oi indirectly holds 86% of the equity stock of Africatel Holdings B.V., through its wholly-owned subsidiary Africatel GmbH & Co KG. Samba Luxco S.à r.l. holds the remaining 14% of the equity stock of Africatel Holdings B.V. |
| (4) | Oi indirectly holds 100% of the equity stock of Paggo Acquirer Gestão de Meios de Pagamentos Ltda., as follows: 99.99% is held directly by Paggo Empreendimentos S.A. and 0.01% is held directly by Oi Mobile. |
In addition, we have authorizations to provide fixed-line local telecommunications services in Region III.
Region I consists of 16 Brazilian states located in the northeastern and part of the northern and southeastern regions. Region I covers an area of approximately 5.4 million square kilometers, which represents approximately 64% of the country’s total land area and accounted for 40.3% of Brazil’s GDP in 2011. The population of Region I was 105.3 million as of 2011, which represented 54.7% of the total population of Brazil as of that date. In 2011, per capita income in Region I was approximately R$15,869, varying from R$7,836 in the State of Piauí to R$28,696 in the State of Rio de Janeiro.
Region II consists of the Federal District and nine Brazilian states located in the western, central and southern regions. Region II covers an area of approximately 2.9 million square kilometers, which represents approximately 33.5% of the country’s total land area and accounted for approximately 27.1% of Brazil’s GDP in 2011. The population of Region II was 45.5 million as of 2011, which represented 23.7% of the total population of Brazil as of that date. In 2011, per capita income in Region II was approximately R$24,668, varying from R$11,782 in the State of Acre to R$63,020 in the Federal District.
Region III consists of the State of São Paulo. Region III covers an area of approximately 248,000 square kilometers, which represents approximately 2.9% of the country’s total land area and accounted for approximately 32.6% of Brazil’s GDP in 2011. The population of Region III was 41.6 million as of 2011, which represented 21.6% of the total population of Brazil as of that date. In 2011, per capita income in Region III was approximately R$32,449.
The following table sets forth key economic data, compiled by IBGE, for the Federal District and each of the Brazilian states.
State | Population (in millions) (2011) | Population per Square Kilometer (2011) | % of GDP (2011) | GDP per Capita (in reais) (2011) | ||||||||||||
Region I: | ||||||||||||||||
Rio de Janeiro | 16.1 | 368.7 | 11.2 | 28,696 | ||||||||||||
Minas Gerais | 19.7 | 33.6 | 9.3 | 19,573 | ||||||||||||
Bahia | 14.1 | 25.0 | 3.9 | 11,340 | ||||||||||||
Pernambuco | 8.9 | 90.2 | 2.5 | 11,776 | ||||||||||||
Espírito Santo | 3.5 | 77.0 | 2.4 | 27,542 | ||||||||||||
Pará | 7.7 | 6.2 | 2.1 | 11,494 | ||||||||||||
Ceará | 8.5 | 57.3 | 2.1 | 10,314 | ||||||||||||
Amazonas | 3.5 | 2.3 | 1.6 | 18,244 | ||||||||||||
Maranhão | 6.6 | 20.0 | 1.3 | 7,853 | ||||||||||||
Rio Grande do Norte | 3.2 | 60.6 | 0.9 | 11,287 | ||||||||||||
Paraíba | 3.8 | 67.2 | 0.9 | 9,349 | ||||||||||||
Alagoas | 3.1 | 113.2 | 0.7 | 9,079 | ||||||||||||
Sergipe | 2.1 | 95.4 | 0.6 | 12,536 | ||||||||||||
Piauí | 3.1 | 12.5 | 0.6 | 7,836 | ||||||||||||
Amapá | 0.7 | 4.8 | 0.2 | 13,105 | ||||||||||||
Roraima | 0.5 | 2.1 | 0.2 | 15,105 | ||||||||||||
|
|
|
| |||||||||||||
Subtotal | 105.3 | 40.3 | ||||||||||||||
Region II: | ||||||||||||||||
Rio Grande do Sul | 10.7 | 38.1 | 6.4 | 24,563 | ||||||||||||
Paraná | 10.5 | 52.7 | 5.8 | 22,770 | ||||||||||||
State Santa Catarina Goiás Mato Grosso Federal District Mato Grosso do Sul Rondônia Tocantins Acre Subtotal Region III (State of São Paulo) Total Population
(in millions)
(2011) Population
per
Square
Kilometer
(2011) % of GDP
(2011) GDP per
Capita
(in reais)
(2011) 6.3 66.3 4.1 26,761 6.1 17.9 2.7 18,299 3.1 3.4 1.7 23,218 2.6 448.3 4.0 63,020 2.5 6.9 1.2 19,875 1.6 6.6 0.7 17,659 1.4 5.0 0.4 12,891 0.7 4.5 0.2 11,782 45.5 27.1 41.6 167.5 32.6 32,449 192.4 100.0
Source: IBGE.
Set forth below is a map of Brazil showing the areas in Region I, Region II and Region III.
Our business, financial condition, results of operations and prospects depend in part on the performance of the Brazilian economy. See “Item 3. Key Information—Risk Factors — Risks Relating to Brazil.”
Our Services
We provide a varietythe following services:
| • | Residential Services throughout Brazil (other than in the State of São Paulo) consisting of local and long-distance fixed-line voice services, broadband services andPay-TV services under ourOi TV brand, primarily through direct to home (DTH) (a satellite technology) which we offer throughout Brazil. |
Personal Mobility Services throughout Brazil consisting of mobile voice and data telecommunications services as well as value-added services;
B2B Services throughout Brazil consisting of our fixed-line and mobile voice and data telecommunications services, broadband services andPay-TV services, which are marketed and delivered to the residential market, the personal mobility marketSME, corporate and the SMEgovernmental customers, as well as interconnection services, wholesale network usage services and traffic transportation services, which are primarily marketed and delivered to corporate markets throughout Brazil.customers (including other telecommunications providers).
Residential Services
Our primary services to the residential market are fixed-line voice, broadband and Pay-TV services. We offer theseour residential services on an a la carte basis and as bundles, including bundles with other services including our mobile voice services and our mobile data communications services.services, as well as on an a la carte basis. In the Residential Services business, we view the household, rather than an individual, as our customer, and our offerings–offerings, particularly our bundled offerings–offerings, are designed to meet the needs of the household as a whole.
We identified cost savings and customer profitability initiatives as two of the pillars of the first phase of the Transformation Plan, which phase was largely implemented in 2015. As a result, we decreased our commercial efforts throughout the year in order to reduce sales expenses and capital expenditures. In late 2015, however,we increased commercial efforts by launching several plans aimed at reducing costs and offering more comprehensive services to our customers at higher prices. These higher-value offerings increased our ARPU in the residential services business even as our customer base decreased.
Also in 2015, our Residential Services business launched a series of initiatives aimed at increasing convergence among our product offerings, one of the key pillars of the Transformation Plan. As a result, offerings of our bundled services took on increasing importance, as they provide a better and more integrated experience for our customers while also increasing our ARPU.
Bundled Services
Our bundled services offerings adopted as part of the Transformation Plan have focused on increasing our profitability by providing a more comprehensive mix of higher-value services to our customers. In 2015, we focused our efforts on upselling and cross-selling our services to existing customers, enhancing existing customer loyalty and attracting new customers by offering higher-value services such as the bundled services in the “Oi Total” and “Oi Conta Total” portfolios. We believe that these measures, together with oursimplified plan offeringsin the Residential Services business, resulted in an ARPU increase for each of our residential services (fixed-line voice, broadband and Pay-TV services) in 2015.
In addition, we believe bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone services. Certain bundles offer incentives such as free installation of fixed-line and broadband services, free modem and Wi-Fi and access to certain smartphone applications for up to three months free of charge. We believe that a bundle that contains more services can be more appealing to a customer than, for example, standalone broadband services at faster speeds. Both Embratel and Telefônica Brasil offer broadband services at higher speeds than us. However, neither company has a quadruple-play bundle, such asOi Total Completo, that combines fixed-line voice, broadband, Pay-TV and mobile services. By developing unique, multi-product bundles with joint installation, integrated billing and unified customer service, we set ourselves apart from other service providers. We believe that being at the forefront of multi-product offerings allows us to remain competitive, maintain our customers’ loyalty and provide higher-value services.
Oi Total
In 2015, we launchedOi Total, a residential services bundle designed to increase our market penetration and profitability by attracting new customers and offering a higher number of servicers per user. EachOi Total plan includes fixed-line voice and broadband services with speeds of up to 35 Mbps through VDSL. CertainOi Totalplans also include Pay-TV and/or mobile services.Oi Total Completo, for example, is our quadruple-play package
that includes fixed-line voice, broadband, Pay-TV, as well as mobile services. The integrated processes (including single billing, joint installation and unified customer service) ofOi Total have also allowed us to generate greater operational efficiencies, thereby reducing our operating costs. By December 2015,Oi Total had been launched in 13 Brazilian states (Espírito Santo, Goiás, Mato Grosso do Sul, Mato Grosso, Acre, Amazonas, Rondônia, Roraima, Tocantins, Rio Grande do Norte, Sergipe, Santa Catarina and Ceará) and the Federal District. As of December 31, 2015, 75.6% of our fixed-line customers subscribed to one of the plans in ourOi Total portfolio. In March 2016, we launchedOi Total in the remaining Brazilian states where we offer fixed-line services.
Our Oi Totalportfolio reinforces our convergence strategy, which is one of the pillars of the Transformation Plan.Oi Total embodies the multi-product concept, bringing a unique, complete and convenient experience for our customers by offering a single sale, joint installation, integrated billing in a single bill, and unified customer service. The mobile voice services offered byOi Total include the all-net model for voice and robust data packages also offered byOi Livre andOi Mais, in addition to offering extensive movie, TV and internet content that is available for streaming anytime, anywhere throughOi Play, our content platform that is free of charge for all of our customers. Since its launch in September 2015,Oi Playhas shown potential for growth and future revenue generation.
Oi Conta Total
In addition to the launch ofOi Total, we continued to offer our legacyOi Conta Total portfolio in 2015.Oi Conta Total is a triple-play plan that provides fixed-line and mobile voice services, broadband services, mobile data and unlimited text messages to subscribers of any provider. In addition,Oi Conta Totalprovides unlimited long-distance calls to our fixed-line and mobile subscribers (except for the low-cost version of this plan,Conta Total Light). On December 31, 2015, 11% of our fixed-line customers subscribed to one of the plans in theOi Conta Total portfolio.
OurOi Conta Total plan permits subscribers to make unlimited local calls to any of our fixed-line or mobile customers and includes an allowance of minutes selected by the customer for use to make long-distance calls and local calls to customers of other service providers. Subscribers also elect the speed of their fixed-line broadband service, which is available under this plan at speeds ranging from 2 Mbps to 15 Mbps. Subscribers to this plan are entitled to access our Oi Wi-Fi hotspots, and subscribers who elect speeds of 5 Mbps or greater are provided with a complimentary wireless router. Subscribers can elect add-on features for this plan, including mobile data plans, unlimited text messages to subscribers of any provider and unlimited long-distance calls to our fixed line or mobile customers.
As part of our emphasis on offering bundled services that increase profitability and build customer loyalty, in 2015 we also offered ourOi Conta Total Smartphone plan, which has the same structure asOi Conta Totalbut included ourOi Smartphone data plan and unlimited text messages. Subscribers to this plan receive a smartphone, mini-modem or tablet at a subsidized price and are able to access our network of Oi Wi-Fi hotspots.
In March 2016, we discontinued offeringOi Conta Total as an independent portfolio and moved these offerings under the umbrella ofOi Totalunder the brand nameOi Total Conectado.
Pay-TV and Broadband Bundles
Subscribers to our internet protocal Pay-TV, IP TV, service may subscribe to ourOi TV Mais HD package, together with a broadband subscription at 100 Mbps, or ourOi TV Mega HD package, together with a broadband subscription at 200 Mbps. Subscriptions to our IP TV packages are only available in areas in which we have deployed our fiber-to-the-home, or FTTH, network.
In addition to our service bundles, we have a la carte offerings for fixed-line voice, broadband, and Pay-TV services as described below.
Fixed-Line Voice Services
As of December 31, 2015, we had 14.4 million local fixed-line customers in our fixed-line service areas (including customers of our SME and Corporate Services). Local fixed-line services include installation, monthly subscription, metered services, collect calls and supplemental local services. Metered services include local calls that originate and terminate within a single local area and calls between separate local areas within specified metropolitan regions, which under ANATEL regulations, are chargedwe refer to as local calls. ANATEL recently changed the geographic classification of local areas and currently has divided our fixed-line service areas into approximately 4,400 local areas.
Calls within Brazil that are not classified as local calls are classified as domestic long-distance calls. We provide domestic and international long-distance services for calls originating from fixed-line devices in our fixed-line service areas.
Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute (Plano Básico de Minutos) and the Mandatory Alternative Service Plan (Plano Alternativo de Serviços de Oferta Obrigatória), each ofto which includes installation charges, monthly subscription charges, and charges for local minutes. As of December 31, 2015, 13.6%a small percentage of our fixed-lineresidential customers subscribedsubscribe. A large majority of our residential customers subscribe to the Basic Plan per Minute or the Mandatory Alternative Service Plan.
Calls within Brazil that are not classified as local calls are classified as domestic long-distance calls. We provide domestic long-distance services for calls originating from fixed-line devices in Region I and Region II through our network facilities in São Paulo, Rio de Janeiro and Belo Horizonte and through interconnection agreements with other telecommunications providers, both fixed-line and mobile, that permit us to interconnect directly with their networks. We provide international long-distance services originating from fixed-line devices in our fixed-line service areas through agreements to interconnect our network with thoseone of the main telecommunications service providers worldwide.
In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we offer a variety of alternative fixed-line plans that we offer, which are designed to meet our customers’ usage profiles. As of December 31, 2015, 86.4% of our fixed-line customers subscribed to alternative plans,profiles, including our bundled services plans. We continually monitor customer usage profiles and preferences and periodically revise our alternative fixed-line plans and promotions in order to better service the needs of our residential customers.
OurOi Fixo portfolio of fixed-line, voice-only plans provides a range of options, including unlimited on-net or all-net calls from fixed-line to fixed-line (depending on the plan), as well as on-net and off-net calls to mobile devices at pre-established rates.
We own and operate public telephones throughout our fixed-line service regions. As of December 31, 2015, we had approximately 651,000 public telephones in service, all of which are operated by pre-paid cards.
Broadband Services
We provideoffer fixed broadband services through xDSL technologies and fiber (FTTH –fiber-to-the-home), with speeds ranging from 1 megabit per second, or Mbps, to 200 Mbps. We offer broadband services to our residential customers inas mostly part of bundled plans with our traditional fixed-line service areas. As of December 31, 2015, we offered broadband services in 4,699 municipalities and had 5.7 million broadband customers in our fixed-line service areas (including customers of our SME and Corporate Services). We offer ADSL services through ADSL modems installed using our customers’ conventional lines, which permit customers to use the telephone line simultaneously with the internet.services. Customers pay a fixed monthly subscription fee, irrespective of their actual connection time to the internet.
As of December 31, 2018, our network we covered 85.3% of the municipalities in our fixed-line service areas, reaching a total of more than 5.2 million fixed broadband customers, and our national fiber network reached approximately 1.2 million homes through FTTH. As of December 31, 2018, we offered FTTH in 32 municipalities, an increase of 22 municipalities as compared to December 31, 2017. We offercontinue to strategically invest in our broadband a la carte subscriptionsnetwork in areas that we believe have the greatest potential for sales and growth.
As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise our broadband plans and promotions in order to customers that do not subscribe tobetter service the needs of our bundled services plans at speeds ranging from 2 Mbps to 35 Mbps. To attractresidential customers, to this service, we offer new subscribers complementary anti-virus software and backup services, as well as a free wireless router with subscriptions at speeds of 5 Mbps or more.
We periodically offer promotions designed to encourage our existing broadband customers to migrate to plans offering higher speeds and to attract new customers to our broadband services. In some cases, we encourage our customers to migrate to higher broadband plans by providing broadband at faster speeds for the same prices as existing plans. This improvement of service without an increase in cost furthers our goals of improving the perception of quality of our services, enhancing the customer experience and enhancing customer loyalty.
We continue to strategically invest in areas where we see the greatest potential for sales and growth. Our two primary competitors in broadband services, Embratel and Telefônica Brasil, both offer broadband at higher speeds
than our offerings. As a result, in 2015 we devoted a substantial portion of our capital expenditures in investments to our network to increase the available broadband speeds that we are able to offer in order to attract new customers and enhance the loyalty of our existing customer base, which was a significant factor in the increase in our ARPU from broadband services during 2015.
In September 2015, we launched high-speed VDSL broadband service with offers ranging from 15 to 35 Mbps. We expect to be able to offer even greater speeds as we continue to invest in our broadband network infrastructure.
Pay-TV Services
We offer deliverPay-TV services under ourOi TV brand. We deliver Pay-TV services throughout our fixed-line service areas using our DTH satellite network. In December 2012 and January 2013, we began to offer IP TVWe also deliverPay-TV services through our FTTHfiber optic network (internet protocolPay-TV, or IPTV) in Rio de Janeiro and Belo Horizonte, respectively. Asall of December 31, 2015,the cities where we had approximately 1.2 million subscribershave deployed FTTH.
We offerPay-TV services to our Pay-TV services. Asresidential customers as part of December 31, 2015, approximately 11.5% of householdsbundled plans with our residentialtraditional fixed-line services subscribed toOi TV.
or on an a la carte basis. We offer threeseveral packages ofPay-TV services: (1) Oi TV Start HD with 118 channels including 20 high-definition, or HD, channels, (2) Oi TV Mix HD with 158 channels, including 43 HD channels,at different price points and (3) Oi TV Total HD with 183 channels, including 53 HD channels. Subscribersoffer subscribers to each of these packages have the option to customize the package through the purchase of additional channels featuring films offered by HBO/MAXCinemax and Telecine and sports offered by Futebol. Although these packages are available
As with our traditional fixed-line services, we continually monitor customer usage profiles and preferences and periodically revise ourPay-TV plans and promotions in order to better service the needs of our residential customers and to attract new customers to ourPay-TV services.
Bundled Services
As an integrated telecommunications service provider, we focus a significant part of our marketing efforts on promoting our bundled services offerings, including through offers of free installation of fixed-line and broadband services, free modem andWi-Fi and access to certain smartphone applications free of charge. Our bundled services offerings for residential customers have focused on increasing our profitability by providing a more comprehensive mix of higher-value services to our customers. Our market research has shown that bundled offerings build customer loyalty and serve to reduce churn rates as compared to standalone services. In addition, we believe that by developing unique, multi-product bundles with joint installation, integrated billing and unified customer service, we set ourselves apart from other service providers.
We offer a variety of bundled services, including ourOi Total portfolio, consisting of:
| • | Oi Total Solução Completa, our quadruple-play bundle that combines fixed-line voice, broadband data,Pay-TV and mobile voice and data services; |
| • | Oi Total Conectado, ourtriple-pay bundle that combines fixed-line voice, broadband data and mobile voice and data services; |
| • | Oi Total Residencial, our residential bundle that combines fixed-line voice, broadband data andPay-TV; |
| • | Oi Total TV + Fixo, a bundle that combines fixed-line voice andPay-TV; and |
| • | Oi Total Play, a bundle that combines fixed-line voice, broadband access and OTT content (Oi Play). |
Customers who subscribe to bundles receive price discounts and double the data allowance that we offer on an a la carte purchase,basis.
In addition toOi Total, we promote theseoffer bundles for residential customers that subscribe to our IPTV service that include broadband subscriptions at speeds of up to 200 Mbps. Subscriptions to our IPTV packages and approximately 65% ofare only available in areas in which we have deployed our subscribers for these packages purchase them as part of a bundle withFTTH network. Outside our broadband and/orFTTH network, we offerPay-TV services throughout our fixed-line voice services.service areas using our DTH satellite network.
Personal Mobility Services
Our Personal Mobility Services business is comprised ofofferspre-paid and post-paid and pre-paid mobile voice services and post-paid and pre-paid mobile data communications services. As of December 31, 2015, we had an aggregate of approximately 45.9 million subscribersplans:Oi Livre plans for our mobile services, including subscribers to our bundled plans. As of December 31, 2015, 85.2% of our personal mobility voice customers subscribed to thepre-paid plans and 14.8% subscribed to post-paid plans.
As part of our efforts under the Transformation Plan to increase profitability and enhance our customers’ experience, in 2015 we launched three new portfolios of mobile services plans: market;Oi Mais plans for the post-paid market,Oi Livre for the pre-paid marketmarket; andOi Mais Controle as a hybrid solution. All ofAlthough we no longer offer new subscriptions for voice-only mobile services, we continue to provide services to customers that have subscribed to these plans provide simpler options, data allowances without usage restrictions, and (with the exceptionOi Mais Controle Básico, the basicOi Mais Controleplan) all-net minutes. The introduction of these new offerings is part of our convergence strategy as these plans combine voice and data packages across our entire portfolio. This combination of voice and data packages encourages our customers to maintain voice services as part of their packages, which reduces that rate of decline of our customer base for fixed-line voice services. In addition, sincelegacy plans. Since our 3G and 4G networks offer greater capacity to meet the growing demand for data, we intend to accelerateare focused on accelerating the migration of users from 2G to 3G and from 3G to 4G by encouraging sales of 3G/4G smartphones and by including more data allowances in our new mobile offers. We believe these measures will enhance our customers’ experience and provide a better perception of the quality of our services.
Mobile Voice and Data ServicesPre-Paid Plans
Post-Paid Services
Post-paid customers pay a monthly subscription fee and are billed on a monthly basis for services provided during the previous month. Post-paid plans include voice mail, caller ID, conference calling, call forwarding, calls on hold and special services. We believe that our new offerings in the post-paid market enable us to improve revenues and market share by offering a mix of services to the post-paid market at more attractive prices.
In November 2015, we launched theOi Mais portfolio for the post-paid market.Oi Mais plans offer a substantial increase in the size of data packages with no usage restrictions, all-net minutes to call customers of any operator anywhere in Brazil and a reduced one-time tariff for calls made to customers of any operator in Brazil in excess of the monthly plan allowance. We believe the introduction of all-net plans will eliminate the community effect among voice customers using such plans. Moreover, we believe our new data packages, which contain more data and no usage restrictions, will allow us to satisfy the growing demand from our customers for increased and unrestricted data usage.
Oi Mais plans range from R$79.90 per month to R$149.90 per month. They provide between 250 minutes and 3,000 minutes of calls and offer between 3 GB and 10 GB of 4G data to be used freely (including on social networking sites). AllOi Mais plans offer access to Oi Wi-Fi and unlimited text messaging to customers of any operator.
We continue to offerOi Conta Conectado 50, our traditional portfolio of plans, which provides an unlimited on-net mobile plan for local and long distance voice services and an all-net plan for fixed-line services. TheOi Conta Conectado 50plan also provides a limited off-net voice package for mobile calls to customers of other operators and 500 MB of data. In December 2015, we stopped offering new subscriptions to the low-cost planOi Conta 100, which offered voice only (no data) to our customers. As of December 31, 2015,Oi Conta Conectado represented 84% of our total post-paid base.
Pre-Paid Services
Pre-paid customers activate their cellular numbers through the purchase and installation of a SIM card in their mobile handsets. We offerpre-paid voice and data bundles through ourOi Livre portfolio. OurOi Livre portfolio includes a range ofall-net voice minutes for calls within Brazil (including unlimited minutes through theOi Livre Ilimitado plans) and data allowances (ranging from 500 MB to 7.6 GB of 4G mobile data) for flat fees. Customers choose the amount of time they have to use their voice and data allowances, ranging from one to 30 days. Using theMinha Oi application on their smartphones, customers can freely switch between their data and voice allowances depending on their individual needs using apre-determined exchange rate. Ourpre-paid customers are able to add credits to their accounts throughpoint-of-sale machines, ATMs, Apple and Android applications installed on their mobile devices such asMinha Oi andRecarga Oi using a credit card, our toll-free number or the purchase ofpre-paid cards at a variety of prices. These credits are valid for a fixed period of time following activation and can be extended when additional credits are purchased.
After conductingPost-Paid Plans
Customers of our post-paid plans are billed on a comprehensive ten-month studymonthly basis for contracted services used during the previous month, in addition to surplus usage and special services contracted and used and monthly subscription fees. OurOi Maisportfoliooffers between 7 GB and 50 GB of the telecommunications consumption habits in Brazil, in November 2015 we launched ourOi Livre portfolio for the pre-paid market, which includes significant increases in4G mobile data allowanceswith no usage restrictions, unlimited text messages and a flat fee for all-net calls (with the exception ofOi Livre Por Dia, our per-day pre-paidunlimited minutes to call fixed-line and mobile plan) to customers of any operator in Brazil. This initiative changes the mobile service market in Brazil, disrupting the original pre-paid model in which customers acquired SIM cards from different operators and used the respective SIM card for on-net calls with that particular operator in an effort to avoid paying high rates for off-net calls.
The launch ofOi Livre was a strategic move given the recent reductions in interconnection tariffs in Brazil. It also follows a global trend and adopts a model widely used in developed markets such as the United States and Europe. In addition we believe the increase into mobile voice and mobile data communications services, our post-paid plans provide voice mail, caller ID and other services, including access to ourOi Playplatform andWi-Fi access points.
We offer a variety of post-paid mobile internet plans (i.e., data only plans) that provide data allowances satisfies the growing customer demandfrom 3 GB to 50 GB for largersmartphones and from 2 GB to 10 GB for tablets and laptop computers and provide data packages that allow accesstransmission at speeds of 1 Mbps (3G network) or 5 Mbps (4G network). Our post-paid mobile internet plans for smartphones are available to the great varietyourOi Mais customers who wish to purchase additional data and to customers of applications availableour legacy post-paid stand-alone voice plans who wish to add mobile data services to their smartphones. Our post-paid mobile internet plans for smartphones.
Oi Livre allows flexibility totablets and laptop computers are sold on a stand-alone basis or, in some cases, as part of our pre-paid consumers by offering monthly, weekly, daily and per-minute plans. Our monthly plan has a 300 minute allowance for calls to all Brazilian landlines and mobile subscribers, plus a 1GB data package and 500 text messages for R$40 per month. Our weekly plan includes a 75 minute allowance for calls to all Brazilian landlines and mobile subscribers, plus a 400MB data package and 300 text messages for R$10 per week. We also offer a weekly plan for those who still value unlimited on-net calls, which includes a 250MB data package and 300 text messages for R$8 per week. Our daily plan has unbundled voice and data packages, each of which is available for less than R$1 per day. Finally, we offer a per minute plan with 60 MB daily for data usage and text messages, and calls to any landline or mobile subscriber in Brazil for R$0.30 per minute. Our monthly and weekly plans have a higher ARPU relativeplans. Subscribers to our otherpost-paid mobile internet plans for smartphones, tablets and they help uslaptop computers also receive free access to achieve the objectives set forth in the Transformation Plan. Since its launch,Oi Livre has acquired 6.2 million customers and, asour network of December31, 2015,Oi Livre represented 15.9% of our total pre-paid base.
Under our pre-paid voice plans, our customers may exchange the credits they purchase for additional services, such as:
In keeping with the Transformation Plan’s focus on cost control and increasing profitability, throughout 2015 we disconnected inactive users of our pre-paid plans, which reduced FISTEL taxes, which are calculated based on the number of our active subscribers, resulting in an increase in the profitability of our customer base. We intend to continue to disconnect inactive users periodically.Wi-Fi hotspots.
Hybrid ServicesPlans
TheOur hybrid voice services market presentsplans present strategic value for our company because it combinesthey combine the advantages ofpre-paid offerings, such as the absence of bad debt and a favorable impact on working capital, with advantages of post-paid offerings, such as a heavier consumption profile.profile and higher ARPUs. We improve our revenues and market share through the offer of hybrid plans by consolidating customer recharges in our hybrid plans’ SIM cards and by improving the mix of offerings to the post-paid market.
In November 2015, we launchedWe offer theOi Mais Controle portfolio of plans for customers who wish to combine the cost savings of our post-paid plans with the self-imposed limits of ourpre-paid plans.Oi Mais Controle subscribers have similar benefits as theOi Mais customers, such as data packages with no usage restrictions, unlimited text messaging and (withunlimitedall-net voice minutes for calls within Brazil, combined with the exceptionability of theOi Mais Controle BásicoLivreplan) all-net minutes customers to call customers of any operator anywhere in Brazil. We believe these new data packages, which contain morefreely switch between their data and no usage restrictions, will allow us to satisfyvoice allowances depending on their individual needs using apre-determined exchange rate using the growing demand from our customers for increased and unrestricted data usage.
TheOi Mais Controle plans range from R$34.90 per month to R$54.90 per month. They offer between 1GB and 2GB of data to be used freely (including on social networking sites), between 250 and 500 all-net minutes (with the exception of theOi Mais Controle Básico plan), and unlimited text messaging to customers of any operator (with the exception of theOi Mais Controle Básico plan). If customers require additional credits under theOi Mais Controle plans, they can be purchased through point of sale machines in retail stores, ATMs or mobile applications such asMinha Oi andRecarga Oi.
TheOi Mais Controle Básico plan allows customers to make unlimited local and long-distance calls to our mobile and fixed-line subscribers (on-net calls) and offers 1GB of data. Customers can also purchase credits that can be used for calls to customers of other providers (off-net calls) and other add-on services.
Until November 2015, we offered hybrid plans under the brand nameOi Controle, which lack bad debt risk and have a favorable impactapplication on working capital.Oi Controle allows customers to make unlimited local and long-distance calls to our mobile and fixed-line subscribers (on-net calls) and purchase credits that can be used for calls to customers of other providers (off-net calls) and other add-on services.Oi Controle is composed of five plans. One of the plans,Oi Controle Voz, offers a credit of R$10.90 for customer use on a pay-as-you go plan in addition to the above benefits. The other four plans include mobile data, unlimited text messages to our mobile customers, limited voice and text message plans to customers of other operators and access to our Wi-Fi hotspots. In keeping with the Transformation Plan’s focus on cost control and profitability of the customer base, in the second half of 2015 we disconnected all inactive users of our hybridOi Controleplan, which reduced certain unnecessary costs. As of December 31, 2015,Oi Controlerepresented 41% of our total post-paid base.their smartphones.
Mobile Data Only Services
We offer post-paid and pre-paid mobile data communications services to customers who seek to access the internet through our network using mobile devices, including smartphones or tablets and laptop computers with the aid of a mini-modem. As with our post-paid voice plans, our post-paid mobile internet customers pay a monthly subscription fee and are billed on a monthly basis for services provided during the previous month. We also offer internet access for a daily fee to customers who do not subscribe to a monthly plan. In December 2014, we began the practice of blocking access to data services for pre-paid customers who exceeded their data allowances. For post-paid data packages, we continue to throttle the speed of service for customers who exceed their data allowances.
Post-Paid Services
We offer a variety of post-paid mobile data communications plans that provide data allowances from 300 MB to 10 GB for smartphones and from 300 MB to 10 GB for tablets and laptop computers and provide data transmission at speeds of 1 Mbps (3G network) or 5 Mbps (4G network). In addition to data traffic, our post-paid mobile internet plans for use with mobile devices include allowances for text messages. Our post-paid mobile internet plans for smartphones are available to ourOi Conta andOi Mais customers. Our post-paid mobile internet plans for tablets and laptop computers are sold on a stand-alone basis or, in some cases, through ourOi Conta Total voice and data bundle. Subscribers to our post-paid mobile internet plans for smartphones, tablets and laptop computers also receive free access to our network of Wi-Fi hotspots. In addition to these post-paid plans, subscribers can purchase anti-virus software and backup data storage services.
Pre-Paid Services
We offer two pre-paid mobile data communications plans: through mobile devices and through the purchase and installation of a SIM card in a mini-modem or tablet. Our pre-paid customers are able to add credits to their accounts through the purchase of pre-paid credits at prices that vary based on the data allowance purchased (from 5MB to 1GB) and duration (daily, weekly and monthly).
Value-Added Services
TheIn 2018, we continued to accelerate our digital transformation process, which included restructuring our value-added services under the following categories: (1) films and series; (2) education; (3) health; (4) written media; and (5) utilities. Within each category, we provide include voice, texthighlight the following value-added services:
Films and data applications, including voicemail, caller ID, and other services, such as personalization (video downloads, games, ring tones and wallpaper), text messaging subscription services (horoscope, soccer teams and love match), chat, mobile television, location-based services and applications (mobile banking, mobile search, email and instant messaging). Applications such as the ones described below contributed an increase in revenues from value-added services during 2015.Series
Oi Apps Club: A subscription-based marketplace for highly rated Android apps, Oi Apps Club provides customers unlimited access to download apps, charged to the customer’s Oi bill rather than a credit card.
| • | Premium streaming services including HBO GO, FOX +, Telecine Play, Watch ESPN, Discovery Kids On andColeção Oi. |
Education
Oi Conselheiros: In this service, renowned and famous professionals in different areas of expertise known as “Oi’s Ambassadors” endorse exclusive content covering travel, fashion, cooking, celebrities and music, among others.
| • | Busuu: a language learning application offering 11 languages and a social network for users; |
Oi Para Aprender: Oi’s mobile learning platform, which
| • | Oi Para Aprender:a learning platform that provides a variety of courses and tips regarding languages, entrance examinations, job assessments, how to develop a home office business and software lessons, among others; and |
| • | Oi Melhore sua Renda: a service that focuses on education and supplemental income generation and provides a variety of courses, including photography, party decoration, carpentry and crafts. |
Health
| • | BT FIT: an automated personal trainer service that provides a variety of courses and exercises and creates personalized training program for the user; and |
| • | Saúde UP, a service that offers health content, as well as discounts in a wide network of pharmacies, medical exams and medical consultations, as well as a nurse on call. |
Written Media
| • | Oi Revistas: a service that provides online and downloadable access to hundreds of magazines from renowned publishers such as Globo, Abril, Editora Três and others; and |
| • | Oi Jornais: a service that provides online and downloadable access to various newspapers, as well as real time news notifications. |
Utilities
| • | Oi Apps Club:a subscription-based marketplace for highly rated Android apps, Oi Apps Club provides customers unlimited access to download apps, charged to the customer’s Oi bill rather than a credit card; |
| • | Oi Games Pro: a multiplatform gaming experience that offers unlimited games on mobile phones as well as a new computer game per month; |
| • | Truecaller: a caller ID service with the ability to block undesired calls; and |
| • | Oi Segurança: a service that offers a variety of functionality, such as antivirus, backup, device locator and parental controls, among others. |
Our value-added services are developed by third-party application or content providers and offered to our customers. On average, these providers receive 35% of the net revenues generated by the services they develop and or provide to our customers.
SME and CorporateB2B Services
In the SME and corporate services marketour B2B Services business, we serve SME, corporate and corporate customers.governmental customers and other telecommunications providers. We offer a variety of services to theseour SME, corporate and governmental customers, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. For our corporate customers, we also offer information technology services, such as network management and security, Smartoffice,Storage, Smartcloud, anti-distributed denial of service andmachine-to-machine products, which enable communication between a product and its control center or database (such as a car and its GPS navigation system), in order to expand our revenue sources from corporate customers beyond voice services, increase customer loyalty and ensure greater revenue predictability.
The implementation We also provide specialized wholesale services, consisting of the Transformation Plan throughout 2015, coupled with the declining macroeconomic conditions in Brazil, has prompted certain changes in our portfoliosdata network services and recent offerings. SMEs are more vulnerable to economic instability than our more established corporate customers, so there has been a reduction in our SME customer base as a result of SMEs going out of business. Our corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activityfacilities, interconnection, national and tightening their budgets for telecommunications productsinternational voice traffic transit, A2P SMS termination and services.
In addition, in a move to better align our products with the needs of our consumers, and to increase customer satisfaction, we have taken a “back-to-basics” approach to product and service offerings and, as a result, developed simpler, more predictable flat-rate plans that enable the customer to better understand, project and plan for upcoming expenses. Furthermore, our sales focus has shifted to upgrading existing contracts, which has not required us to make any additional investments.roaming.
Services for SMEs
We offer SME services similar to those offered to our residential and personal mobility customers, including fixed-line and mobile voice services, and fixed-line and mobile broadband services. We also recently launched FTTH plans for SMEs in December 2015.SMEs. In addition, we offer SMEs:
advanced voice services, primarily 0800 (toll free) services, as well as voice portals where customers can participate in real-time chats and other interactive voice services;
dedicated internet connectivity and data network services; and
value-added services, such as help desk support that provides assistance for technical support issues, web services with hosting,e-mail tools and website builder and security applications.
In general, our sales team works with our SME customer to determine that customer’s telecommunications needs and negotiates a package of services and pricing structure that is best suited to its needs. In December 2015, we launchedOi Mais Empresas for SMEs.Oi Mais Empresasprovides 4G voice and mobile data and fixed-line (voice and broadband) services for a flat fee. This simplified portfolio is easier to understand, purchase and use, fostering a better relationship with the SME. The flat rate model eliminates billing issues and disputes and reduces the risk of default by the SME. Concurrently, as part of our digitalization efforts set forth in the Transformation Plan, we launched theOi Mais Empresas app, a fully digital customer channel through a smartphone application that can be downloaded at no cost at Apple Store or Google Play. TheOi Mais Empresas app provides exclusive service to SMEs, enabling them to acquire services, upgrade their contract plan and make requests and track the status of those requests, such as repairs and bill copies, among others, all using a smartphone. We made the same improvements and enabled the same functionalities as theOi Mais Empresas app on our website, enabling our customers to perform the same functions from a computer. The creation of theOi Mais Empresas app and website improvements, changed the way our customers communicate and reinforced our commitment to simplify our product portfolios and better understand our customers’ needs.
We continue to service our SME customers with a variety of legacy mobile plans, including ourOi Equipe Flat plan for groups of employees, ourOi Empresa Especial plan for individual users in an SME and ourOi Controle
plan which, similarly to our residential fixed-line plan, is designed to permit an SME to control usage of mobile minutes.
Services for Corporate Customers
We offer corporate customers all of the services offered to our SME customers. In addition, we provide a variety of customized, high-speed data transmission services through various technologies and means of access to corporate customers. Our principal data transmission services for Corporatecorporate customers are:
we act as the internet service provider for our Corporate customers, connecting their networks to the internet;
| • | Dedicated Line Services (Serviços de Linhas Dedicadas), or SLD, under which we lease dedicated lines to corporate customers for use in private networks that link different corporate websites; and |
IP services which consist of dedicated internet connection, as well as Virtual Private Network, or VPN, services that enable our customers to connect their private intranet and extranet networks to deliver videoconferencing, video/image transmission and multimedia applications.
We provide these services at data transmission speeds of 2 Mbps to 10100 Gbps.
We also offer information technology infrastructure services to our corporate customers, seeking to offer themend-to-end solutions through which we are able to provide and manage their connectivity and information technology needs. For example, we offerOi SmartCloud, a suite of data processing and data storage services that we perform through our five cyber data centers located in Brasília, São Paulo, Curitiba and Porto Alegre. In addition, through these data centers, we provide hosting, collocation and IT outsourcing services, permitting our customers to outsource their IT infrastructures to us or to use these centers to provide backup for their IT systems.
We also offer the following four major service groups throughOi SmartCloud, which operate through our five cyber data centers:
collaborative solutions, a hosting and sharing platform that provides employees with access to company documents;
business applications, anin-memory computing platform for large amounts of data;
| • | Oi GestãoMobilidade, a mobile device management service focused on providing logistics and security solutions relating to mobile devices; |
Security services, a centralized, anti-spam filtering solution for corporate email.email; and
Telepresence as a Service (TPaaS), a video-conferencing service that allows collaboration among people at remote locations.
We also offer various services based on IT applications:
fleet management services, which provide a management system for fleet monitoring and location targeting, economies of scale for fuel costs, driver profile analysis and kilometer control for maintenance;
| • | Interação Web, a digital marketing service, which allows us to implement on the website of our B2B Services customers an intelligent interaction with their digital users in real time. |
workforce management, which provides a system with web and mobile applications to monitor and control the workforce in the field and optimize routes and control logistics activities; and
digital content management (corporate TV platform and queue management), which provides a digital signage platform with queue management solutions, creating a powerful marketing tool for companies that have interactions with customers at points of sale.
OurOi Smart Office service provides a system to control daily work and productivity of employees working remotely, including through the use of biometrics. The platform offers a connection between the home environment and the corporate network, providing unified communication options including chat, voice, video, conferencing and document sharing along with corporate applications for cloud computing.
In response to the reduced demand for traditional telecommunications services due to the challenging macroeconomic environment in Brazil, we have focused our new offerings in 2015 on information technology infrastructure services. As of December 31, 2015, approximately 15% of our corporate customers had contracted for at least one information technology service. In 2015, our revenues from information technology offerings increased as compared to 2014.
In order to provide complete solutions to our corporate clients, we have entered into service agreements for the joint supply of international data services with a number of important international data services providers. These commercial relationships with international data services providers are part of our strategy of offering telecommunications services packages to our customers.
Wholesale Services for Other Telecommunications Providers
We offer specialized services to other telecommunications providers, primarily consisting of interconnection to our networks, network usage charges for the use of portions of our long-distance network, traffic transportation through our physical infrastructure, and RAN sharing agreements.
Interconnection and Network Usage Charges
All telecommunications services providers in Brazil are required, if technically feasible, to make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another telecommunications services provider. Interconnection permits a call originated on the network of a requesting local fixed-line, mobile or long-distance service provider’s network to be terminated on the local fixed-line or mobile services network of the other provider.
We are authorizedthe largest wholesale service provider in Brazil. We are responsible for providing services over the local access network and over the long distance network. More than 4,000 service providers use our network to chargedeliver services ranging from telephony, broadband and television for the usehome, to high-speed data connections for businesses of our local fixed-lineall sizes.
Our portfolio includes specialized services, consisting of data network on a per-minute basis for (1) all calls terminated on our local fixed-line networks in Regions Iservices and II that originate on the networks of other mobilefacilities, interconnection, national and long-distance service providers,international voice traffic transit, A2P SMS termination and (2) all long-distance calls originated on our local fixed-line networks in Regions Iroaming.
Data Network Services and II that are carried by other long-distance service providers.
Conversely, other local fixed-line service providers charge us interconnection fees (1) to terminate calls on their local fixed-line networks that are originated on our mobile or long-distance networks, and (2) for long-distance calls originated on their local fixed-line networks that are carried by our long-distance network.
In addition, we charge network usage fees to long-distance service providers and operators of trunking services that connect switching stations to our local fixed-line networks. We are authorized to charge for the use of our long-distance network on a per-minute basis for all calls that travel through a portion of our long-distance networks for which the caller has not selected us as the long-distance provider. Conversely, other long-distance service providers charge us interconnection fees on a per-minute basis for all calls that travel through a portion of their long-distance networks for which the caller has selected us as the long-distance provider.
We are authorized to charge for the use of our mobile network on a per-minute basis for all calls terminated on our mobile network that originate on the networks of other local fixed-line, mobile and long-distance service providers. Conversely, other mobile services providers charge us interconnection fees to terminate calls on their mobile networks that are originated on our local fixed-line, mobile or long-distance networks. The amounts that we charge and owe for these interconnections with respect to SMEs have reduced dramatically, however, as a result of the recent reductions in interconnection tariffs mandated by ANATEL. The pricing for services to our corporate customers are not immediately affected by the ANATEL reductions. Rather, these rate reductions are only reflected in the negotiation and pricing of new contracts.
TransportationFacilities
We provide Industrial Exploitationservices referred to as industrial exploration of Dedicated Linesdedicated line (Exploração Industrial de Linha Dedicada), or EILD, pursuant to our concession agreement. The EILD consists of leased lines and clear channel protocols for the provision of services underto third parties.
In addition, we are able to offer a complete portfolio of wholesale products, including IP, Ethernet and MPLS. All of these products are used to meet the demands of other network operators and regional internet providers. The circuits are requested with different service level agreements, and we are required to provide the facilities with contingency routes, sites and equipment to improve the service against points of failure.
Interconnection
As part of our wholesale services, we provide interconnection services to users of other network providers. The interconnection is a link between compatible telecommunications networks which permits that a fixed or mobile service user of one network can adequately communicate with the users of a network from another provider. All providers of telecommunication services (fixed or mobile) are required to provide interconnection upon request to any other telecommunication collective service provider. The interconnection agreements are negotiated according to the General Rules on Interconnection (Regulamento Geral de Interconexão), established by ANATEL.
Voice Traffic Transit
We offer national and international voice traffic transit that meet all our customers’ expectations and satisfy the dynamic needs of the telecommunications market. Direct interconnections with the major national and international telecommunication carriers, as well as most small carriers, ensure high-quality voice traffic transit in Brazil.
A2P SMS termination
The A2P SMS refers to a short message communication between a business solution and a mobile subscriber. Our A2P SMS solution offers direct connectivity with Oi mobile subscribers and high quality delivery for enterprises and other transactional A2P traffic.
Roaming
We provide GSM roaming in Brazil to national and international mobile operators. Our roaming agreements enables mobile users to automatically make and receive voice calls, send and receive SMS as well as access internet service while traveling outside the geographical coverage area of their own home network by using our mobile network.
Marketing and Distribution
We focus our marketing efforts on the upscaling of existing clients while strengthening the “Oi” brand through our convergent services offerings and promotion of ourMinha Oi smartphone application, which allows ourpre-paid customers to freely switch between their data and voice allowances. We also engage in digital marketing and multiple customer relationship management (CRM) marketing programs to support our B2B Services business.
In 2018, we lease trunk linesincreased our investment in advertising, with a focus on digital advertising with the aim to drive traffic to our digital channels. In addition to digital advertising, we employed traditional advertising strategies, such as television (free and cable), billboards, exterior signage and radio, to increase our advertising coverage, and leveraged our owned media, such as telemarketing, text messaging and other points of contact, to upscale our current base. We also developed a branded content strategy, combining sponsorships of sporting events and individual athletes, as well as cultural events, to increase brand awareness and promote our portfolio as a telecommunications provider capable of meeting all of the telecommunications needs of our customers. In 2019, we expect to continue to increase our investment in advertising in line with the advertising strategies described above.
Distribution Channels
We distribute our services through channels focused on three separate sectors of the telecommunications services providers, primarily mobile services providers, which use these trunk lines to link their radio base stations to their switching centers.
Long-distance and mobile services providers may avoid paying long-distance network usage charges to us by establishing an interconnection to our local fixed-line networks. In order to retain thesemarket: (1) residential customers, including customers of our long-distance services, we offer a long-distance usage service, called national transportation, under which we provide discounts to our long-distance network usage fees based on the volume of traffic and geographic distribution of calls generated by a long-distance or mobile services provider.to whom we sell bundled plans; (2) personal mobility customers that purchase our mobile services independently of our bundled plans; and (3) business and corporate customers.
Residential Services
Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband services andOi TV, and post-paid mobile services. As of December 31, 2018, the principal distribution channels that we used for sales to residential customers were:
| • | our own network of stores, which included 135 “Oi” branded stores; |
| • | 573 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout Brazil; |
approximately 6,730 stores located throughout our service areas that primarily sell telecommunications products and services and have entered into exclusivity agreements with us;
our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of 1,877 sales representatives that answer more than 559 thousand calls per month. This channel provides us with the ability to proactively reach new customers, thereby increasing our client base and revenues, and also receives calls prompted by our offers made in numerous types of media;
our “teleagents” channel, which consists of 682 local sales agents that operate in specific regions and complement our telemarketers;
door-to-door sales calls made by our sales force of 2,373 salespeople trained to sell our services throughout Brazil in places where customers generally are not reachable by telemarketing; and
oure-commerce sites through which customers may purchase a variety of our services.
Personal Mobility Services
Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers andpre-paid customers, including mobile broadband customers. As of December 31, 2018, the principal distribution channels that we used for sales of ourpre-paid personal mobility services were:
571 stores that are part of large national chains which sell our post-paid andpre-paid personal mobility services and SIM cards;
approximately 15 multibrand distributors that distribute our SIM cards andpre-paid mobile cards to approximately 265,000 pharmacies, supermarkets, newsstands and similar outlets;
our telemarketing sales channel has of 1,137 sales representatives that answer more than 620 thousand calls per month selling our post-paid personal mobility services; and
our website, through which ourpre-paid customers may recharge their SIM cards.
B2B Services
We also offer international telecommunications service providershave established separate distribution channels to serve SME and corporate customers. As of December 31, 2018, the optionprincipal distribution channels that we use to terminate their Brazilian inbound trafficmarket our services to SMEs were:
| • | “Oi” exclusive agents withdoor-to-door sales consultants that are dedicated to understanding and addressing the communications needs of our existing and prospective SME customers; |
our telemarketing sales channel, which consists of two agents that use sales representatives that are specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as representatives in our call center and representatives at call centers under contract with us to receive calls from existing and prospective SME customers to sell services to new customers and promote higher-value and additional services to existing customers. In addition, our telemarketing channel utilizes customer retention representatives; and
| • | our website and theOi Mais Empresas application. |
We market our entire range of services to corporate customers through our network, as an alternativeown direct sales force which meets with current and prospective corporate customers to Embrateldiscuss the business needs of these enterprises and TIM. We charge international telecommunicationsdesign solutions intended to address their communications needs. Our client service providers a per-minute rate, basedmodel focuses on whether a call terminates on a fixed-line or mobile telephonepost-sale service and the locationwe regularly discuss service needs and improvements through calls and meetings with our customers. As of the local areaDecember 31, 2018, our corporate sales team, excluding post-sale service personnel, was composed of approximately 365 employees operating in which the call terminates.11 regional offices.
Rates, Billing and Collection
Rates
Our rates for certain services, including basic local fixed-line services,and domestic long-distance services, mobile services,plans, interconnection, EILD and SLD services, are generally subject to regulation by ANATEL Under our current authorizations, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. The rates for other telecommunications services, such as broadband services, IP services and frame relay services are market oriented but may still be subject to certain exceptions relating toANATEL regulation. Furthermore, the rates we charge under alternative fixed-linefor DTH and mobile plans that weIP TV services are authorizednot subject to offerANATEL regulation.
For more information about the regulations applicable to our customers. For information on ANATEL regulation of our rates, see “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry.”
ManyBilling and Collection
Residential Services
We send each of our Residential Services customers a monthly bill covering all the services provided during the prior monthly period. Customers are grouped in billing cycles based on the date their bills are issued. Each bill separately itemizes service packages, local calls, long-distance calls, calls terminating on a mobile network, toll-free services and other services such as call waiting, voicemail and call forwarding. Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus aone-time late charge of 2% of the amount outstanding. We have agreements with several banks for the receipt and processing of payments from our Residential Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our Residential Services customers as agents for these banks. As of December 31, 2018, 17.2% of all accounts receivable due from our Residential Services customers in Brazil were outstanding for more than 30 days and 12.1% were outstanding for more than 90 days.
We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for the use of our network.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due tonon-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.
Personal Mobility Services
We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus aone-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. As of December 31, 2018, 17.7% of all accounts receivable due from our Personal Mobility Services customers in Brazil were outstanding for more than 30 days and 15.7% were outstanding for more than 90 days.
ANATEL regulations permit us to restrict outgoing calls made and text messages sent by a post-paid Personal Mobility Services customer 15 days after we send the customer a past due notice, restrict incoming calls and text messages received by a post-paid Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is imposed, and cancel services to a post-paid Personal Mobility Services customer after 30 days after the restriction on incoming calls is imposed. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due tonon-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid.
Customers of ourpre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer´s accounts and are free ofbad-debt risk.
Competition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers.
Residential Services
We are the leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL, as of December 31, 2018, we had a market share of 51.1% of the total fixed lines in service in our service areas (including the number fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services in our service areas are Claro and Telefônica Brasil.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services.
In addition, we face competition from providers of cable television services, particularly Claro and Telefônica Brasil, which provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers through their cable network in in municipalities in our service areas that have the highest concentration of purchasing power.
Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in our fixed-line service areas, expanding its fiber optic network in high-income residential areas and increasing its services tolow- andmedium-size businesses.
The decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers for fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as our company, they have established networks in the regions in which they operate and often have a market share of approximately 15% of broadband customers.
The primary providers of subscription television services in the regions in which we provide Residential Services are SKY, which provides DTH services, and Claro, which provides DTH service under the “Claro TV” brand andPay-TV services using coaxial cable under the “Net” brand.
Personal Mobility Services
The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile telecommunications services. We compete primarily with Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” TIM and Claro, each of which provides services throughout Brazil. As of December 31, 2018, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 16.5% of the total number of mobile subscribers in Brazil.
We believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype.
B2B Services
The competitive landscape which we face relating to the fixed-line and mobile services we provide to our B2B customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers.
In recent years, there has been a shift among corporate and SME services providers toward value-added services. With the exception of theOi Mais Empresas app and web service, our value-added products and services for the SME segment are substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate customers are Claro, Telefônica Brasil and TIM, as well as smaller niche companies.
Technology
Our Brazilian networks are comprised of physical and logical infrastructures through which we provide fully-integrated services, whether fixed-line or mobile, voice, data or image, thereby optimizing available resources. We monitor our networks remotely from our centralized national network operations center in Rio de Janeiro. Network operating and configuration platforms, located at the network operations center, perform failure monitoring, database and configuration management, security management and performance analysis for each network.
Access Networks
Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment andWi-Fi hotspots. Our fixed-line networks are fully digitalized.
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes (MSANs), or Subscriber Line Access Multiplexer (DSLAMs), to our aggregation and transportation networks. The analog voice signals are split from the data signals which are transmitted using ADSL or VDSL technology. We are engaged in a long-term program to update our DSLAM equipment as demand for data services increases. As of each of September 30, 2018 and December 31, 2017, approximately 93% of our fixed-line network was operating with support ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in approximately 4,700 municipalities.
ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency bands are available for data transmission. Our network supports ADSL2+ and VDSL2, or very-high-bitrate digital subscriber line, technologies. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider range of services than ADSL. VDSL2 is a DSL technology providing faster data transmission, using technologies such as vectoring and bonding it is possible to reach higher throughput up to 600 Mbps (downstream and upstream), permitting us to support applications such as HD Video, VoIP and broadband internet access, over a single connection.
We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber to the home, or FTTH, networks based on gigabit passive optical network, or GPON, technology to support our FTTH triple play services. The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers. Our GPON FTTH network currently reaches more than 1.5 million homes, and we expect to reach more than 500 thousand customers connected by the end of 2019.
Mobile devices access our GSM (Global System for Mobile Communications), or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G mobile networks on frequencies of 1800 MHz/2600 MHz. Our 2G access points use General Packet Radio Service, or GPRS, which allows speeds in the range of 115 kilobytes per second (kbps), and Enhanced Data Rates for Global Evolution, or EDGE, which allows speeds in the range of 230 kbps, to send and receive data signals. Our 3G access points use High Speed Packet Access, or HSPA, which allows speeds in the range of 14.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 and 4x4 Multiple Input Multiple Output, depending on the site configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and Carrier Aggregation configuration sites), to send and receive data signals. Although currently the majority of voice signals are sent and received through our 2G and 3G access points are routed to our aggregation networks, we are initiating VoLTE (Voice over LTE) that will enable 4G routes voice signal over 4G access points, allowing offering new type of services based on IMS (IP Multimedia Subsystem) platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
In addition to these mobile access networks, we also operateWi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. Since 2012, we have provided outdoor urban wireless networks, including in the neighborhoods of Copacabana and Ipanema in the city of Rio de Janeiro. As of September 30, 2018 and December 31, 2017, ourWi-Fi network consisted of more than 1.6 million and 1.5 million hotspots, respectively, with broadband access compatible with more than 1.6 and 1.5 million access points, respectively, provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.
Aggregation Networks
Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. For a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using SDH protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks. Our Metro Ethernet networks are fully-integrated management systems and provide:
ethernet data services from 4 Mbps up to 1 Gbps forpoint-to-point and multipoint dedicated access;
ethernet access services from 4 Mbps up to 1 Gbps for IP access and MPLS/VPN access;
aggregation network services for ADSL2+ and VDSL2 platforms;
aggregation network services for GPON platforms; and
Dense Wavelength Division Multiplex, or DWDM, systems for services above 1Gbps to prevent overbooking our Metro Ethernet network.
In the past,we used ATM protocol to transport digital signals through our access network fromnon-residential customers that require dedicated bandwidth to our switching stations. In response to changing customer needs, we converted elements of our network that use ATM and SDH protocols, that permit us to offer dedicated bandwidth to our customers, to MPLS protocol, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We now useMPLS-TP capable devices that have been designed to interface with our existing Metro Ethernet Network to increase the bandwidth of our networks to support our 4G network data traffic and replace our legacy SDH networks.
Transportation Networks
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities, connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can operate with up to 80 channels at 10, 100 and 200 Gbps. Our optical network is complemented by microwave links to reach smaller cities and towns.
In 2015, we completed the implementation of a new Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links, that connect 11 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. In the first half of 2018, we completed the extension of the OTN/DWDM network, with 100 Gbps links, to an additional seven state capitals and spread over an additional 18,000 km of optical cables. Between 2019 and 2021, we expect to further extend our OTN/DWDM network, with 100 Gbps links, to reach 26 state capitals and spread over 65,400 km of optical cables.
We employ automatic traffic protection to improve the reliability of our network and increase its traffic capacity. The network is fully supervised and operated by management systems that allow rapid response to customer service requests and reduce the recovery time in case of failure.
We operate an internet backbone network and a fullyIP-routed network, which provides a backbone for all internet dedicated services and VPN offerings through access routers, for customer aggregation, configured as single edge routers (i.e., offering various types of services aggregation over a single box), allowing us to reduce capital and operation expenses. Our internet backbone connects to the public internet via national peerings links and international links that we maintain in the United States.
Our transportation network is directly interconnected to the national and international long-distance networks of all long-distance service providers operating in Regions I, II and III and all mobile services providers in Regions I, II and III.
IPTV Network
Through our FTTH network, we offered IPTV services in 27 cities over10 states as of December 31, 2018. For subscribers of ourOi TV services, through our DTH or FTTH networks, we also offer OTT services, which provide customers with access to different content on different devices (mobile phones, tablets and computers).
Property, Plant and Equipment
As of December 31, 2018, the net book value of our property, plant and equipment was R$28,469 million. As of December 31, 2018, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups, represented 50.0%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, represented 25.5%; (3) work in progress represented 11.8%; (4) buildings represented 5.9%; (5) automatic switching equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 4.1%; and (6) other fixed assets represented 2.7%.
All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession agreements are considered “reversible assets,” which means that, should our fixed-line concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 13 to our consolidated financial statements included in this annual report.
Transmission and Other Equipment
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities, connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can operate with up to 80 channels at 10, 100 and 200 Gbps. We have implemented an Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links that connect 18 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte, which spreads over approximately 48,000 km of optical cables. Our optical network is complemented by microwave links to reach smaller cities and towns.
Infrastructure
Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment andWi-Fi hotspots. Our fixed-line networks are fully digitalized.
Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. For a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using SDH protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks.
Automatic switching equipment
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes, or MSANs, to our aggregation networks, or are rerouted to our aggregation networks through Digital Subscriber Line Access Multiplexer, or DSLAM, equipment which split the voice signal from the digital signal which is transmitted using ADSL or VDSL technology. As of December 31, 2018, approximately 93% of our fixed- line network supported ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in approximately 4,700 municipalities.
Voice and data signals sent and received through our 2G, 3G and 4G access points are routed to our aggregation networks. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
As of December 31, 2018:
our 4G mobile access networks consisted of 9,613 active radio base stations covering 902 municipalities, or 74% of the urban population of Brazil;
our 3G mobile access networks consisted of 10,202 active radio base stations covering 1,644 municipalities, or 82% of the urban population of Brazil; and
our 2G mobile access networks consisted of 13,804 active radio base stations covering 3,446 municipalities, or 93% of the urban population of Brazil.
In addition to our mobile access networks, we also operateWi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. As of December 31, 2018, ourWi-Fi network consisted of more than two million hotspots, with broadband access compatible with more than two million access points provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.
Buildings
In addition to our headquarters building and our centralized national network operations center in Rio de Janeiro, we own 7,965 buildings that are used to house switching equipment or to house regional and local sales and operations centers. Of these buildings, 7,767 are “reversible assets” under our fixed-line concession agreements.
Capital Expenditures and Work in Progress
During the year ended December 31, 2018, we modernized our core network, with a focus on infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us to do more with less. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile networks, to keep up with the growing demand, In addition, our performance on ANATEL’s network quality metrics improved.
The following table sets forth our capital expenditures for the periods indicated.
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (in millions ofreais) | ||||||||||||
Data transmission equipment | R$ | 1,993 | R$ | 1,846 | R$ | 1,377 | ||||||
Installation services and devices | 539 | 644 | 489 | |||||||||
Mobile network and systems | 820 | 602 | 707 | |||||||||
Voice transmission | 731 | 726 | 713 | |||||||||
Information technology services | 720 | 729 | 536 | |||||||||
Telecommunication services infrastructure | 500 | 496 | 468 | |||||||||
Buildings, improvements and furniture | 70 | 80 | 69 | |||||||||
Network management system equipment | 171 | 94 | 124 | |||||||||
Backbone transmission | 304 | 237 | 196 | |||||||||
Internet services equipment | — | 1 | 7 | |||||||||
Other | 229 | 174 | 73 | |||||||||
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Total capital expenditures | R$ | 6,077 | R$ | 5,629 | R$ | 4,759 | ||||||
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Our principal capital expenditures relate to a variety of projects designed to expand and upgrade our transmission networks, our broadband access networks (fixed and mobile), our service platforms (data, video and voice), our information technology systems and our telecommunications services infrastructure.
Data Transmission Equipment Programs
We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based on gigabit passive optical network (GPON). The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers.
In our access networks, we have been engaged in a program of deployingfiber-to-the-home, or FTTH, technology to support our “triple play” services, using a GPON network engineered to support IPTV, high speed internet (currently speeds up to 200 Mbps), and VoIP services.
We have acquired and installed data communications equipment to convert elements of our networks that used ATM and Synchronous Digital Hierarchy, or SDH, protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We also deployed an optical switching layer based on optical transport network technology in order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading.
We have been implementing a new broadband data communications network architecture, which we refer to as the Single Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and corporate customer links in a single platform, which eliminates the need for individual management of each type of access network, expedites the resolution of networks problems and minimizes maintenance and operation costs.
In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoption of the single edge concept, which means using one single router to join our commercial, mobile and residential functions that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and operational expenditures.
Mobile Services Network Programs
4G Network
We offer 4G services using LTE network technology and have been deploying our 4G network since 2012. In compliance with our obligations under our LTE authorizations, in 2016, we extended our LTE network to cities with over 100,000 inhabitants, adding 284 new cities to our LTE network, and in 2017, we extended our LTE network to cities with less than 100,000 inhabitants, adding 813 cities to our LTE network.
In 2018, we began deploying 4.5G services by using Carrier Aggregation with 1800 MHz spectrum refarming and MIMO 4x4 in 27 municipalities in the first phase of the project. It has allowed us to offer best user experience and aligning our network to main operators in Brazil.
3G Network
We have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of our mobile network. We have deployed new radio base stations and transceivers to improve our 3G coverage and quality in areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in Brazil to which we have not historically provided 3G service.
Voice Transmission Network Programs
We are engaged in a program of investing in new equipment for our switching stations to support next-generation networks which we believe will permit us to offer new value-added services to our fixed-line customers. We believe that our investment in next-generation networks will:
assist us in meeting the increased demand for long distance traffic, both domestic and international, through the use of VoIP;
permit us to offer differentiated services, such voice over broadband; and
significantly promotefixed-to-mobile convergence.
As part of this program, we have deployed an IP Multimedia Subsystem, or IMS, core that will facilitate our convergent voice and broadband offerings. The IMS core not only provides control for the VoIP resource but also integrated access control and authentication for all services, significantly improving automation and speed for customer provisioning.
We have also undertaken a program of removing and replacing smaller switching stations and integrating these operations with other switching stations to promote efficiency in our operations.
Information Technology Services Programs
We are investing in the expansion of supply of our cloud computing services in data centers, particularly in the State of São Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions.
Telecommunications Services Infrastructure Programs
We are investing in several structural projects in order to improve and modernize our business support systems, or BSS, and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best practices, our main projects are unified customer relationship management; network provisioning services; order management; consolidation of network inventory; network planning, project and construction; network fault management; performance management; customer experience management; API management and digital self-care, among others.
One of the primary projects connected to the OSS is related to assurance and quality. In January 2017 we completed the transition from a network centric monitoring system to a customer focused approach and thereby our network operations have migrated from network operations centers to service operations centers which provide more efficient and customer-based support.
In December 2016, we completed a project to improve fulfillment by speeding up service creation and provisioning, reducing costly human intervention and increasing overall customer quality of experience through automation of the fulfillment processes.
Intellectual Property
We hold several material intellectual property assets, including patents and trademarks registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, mobile and broadband services.
Operating Agreements
Fixed-Line and Mobile Tower Leases
We have entered into three operating lease agreements with owners of communications towers and rooftop antennae to lease space to install equipment related to the delivery of our personal mobility services on an aggregate of approximately 4,850 communications towers and rooftop antennae. We have also entered into three operating lease agreements with owners of fixed-line communications towers to lease space to install equipment related to the delivery of our fixed-line services on an aggregate of approximately 6,400 fixed-line communications towers.
The monthly payments under two of our operating lease agreements for space on communications towers and rooftop antennae reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of 6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. The monthly payments under the remainder of the operating lease agreements reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA.
The operating lease agreements for space on communications towers and rooftop antennae have15-year terms expiring between December 2027 and June 2019 and are automatically renewable for successiveone-year periods. The operating lease agreements for space on fixed-line communications towers have20-year terms expiring between April 2033 and July 2033 and are renewable for additional20-year terms.
Infrastructure Sharing Agreements
4G Network
We currently are party to two Radio Access Network, or RAN, sharing agreements with other operators. RAN sharing enables operators to share the same physical network, thus reducing the deployment costs in proportion to each operator’s respective coverage requirements while maintaining all of the characteristics of an individual network with respect to our customers. RAN sharing makes use of 3GPP standard features, permitting full technical support. As a result, RAN sharing agreements allow us to reduce operating expenses and capital expenditures.
In November 2012, we entered into a memorandum of understanding with TIM under which we agreed to the joint use of elements of our 4G network under a RAN sharing model pursuant to which we have invested in (and provided TIM with access to) infrastructure in certain cities, while TIM has invested in (and provided us with access to) infrastructure in other cities. In late 2013, we and TIM extended this memorandum of understanding to additional cities and revised certain obligations of each party under the memorandum of understanding, which we refer to as the 2013 RAN Sharing Agreement. The 2013 RAN Sharing Agreement has a term of 15 years. Under the 2013 RAN Sharing Agreement, we offer 4G technology to over 80% of urban areas in all Brazilian capital cities and cities with over 500,000 inhabitants. In 2015, we expanded the 2013 RAN Sharing Agreement with TIM to cities with over 200,000 inhabitants, 133 municipalities covered by 4G technology, and we began a RAN sharing arrangement with Telefônica Brasil. In 2016, we expanded to cities with over 100,000 inhabitants, reaching 284 cities with 4G coverage. In 2017, we expanded to cities with less than 100,000 inhabitants, reaching 813 cities with 4G coverage. In 2018, we and TIM amended the 2013 RAN Sharing Agreement to update the technology covered by the agreement to permit infrastructure sharing in the 1800 MHz spectrum technology.
In June 2015, we entered into a memorandum of understanding under which we agreed to the joint use of elements of the 4G network under a RAN sharing model pursuant to which Oi, TIM, and Telefônica Brasil agreed to invest proportionally (50% Telefônica Brasil, 25% Oi and 25% TIM) in sites in certain cities based on each operators’ respective coverage obligations, which we refer to as the 2015 RAN Sharing Agreement. The 2015 RAN Sharing Agreement has a term of 12 years. In early 2016, ANATEL required the inclusion of additional clauses in the agreement allowing an additional operator to be added. This agreement covered 31 cities in 2015, 171 cities in 2016 and 427 cities in 2017.
Satellite Network and Leases
Residential Services
We have deployed a range of satellite-based services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Belém, Rio de Janeiro, Porto Velho, Boa Vista, Macapá, Santarém, and Marabá. Our fiber optic backbone connects all these hub stations. The integration of the land-based segment of our satellite network allows us to provide fixed-line and mobile voice service to our subscribers in any location in our fixed-line service areas.
As of December 31, 2018, we leased transponders from our affiliate Hispamar with:
98.3 MHz of capacity on the Amazonas 3 satellite in Ku band and 540 MHz of capacity on the Amazonas 2 satellite in Ku band to provide voice and data services to approximately 3,000 localities; and
754 MHz of capacity on the Amazonas 3 satellite in C band and 432 MHz of capacity on the Amazonas 2 satellite in C band to provide voice and data services to approximately 390 municipalities.
DTH Network
We provide our DTH services through satellite uplinks that receive, encode and transmit the television signals to satellite transponders (1) located in Lurin, Peru that we lease from a subsidiary of Telefónica S.A., and (2) through our own facilities in Barra da Tijuca near Rio de Janeiro.
As of December 31, 2018, we leased transponders to provide DTH services from:
Telefónica S.A with 216 MHz of capacity on the Amazonas 3 satellite in Ku band and 36 MHz of capacity on the Amazonas 2 satellite in Ku band; and
SES New Skies with 1.5 GHz of capacity on theSES-6 satellite in Ku band.
Network Maintenance
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for our internal plant and equipment maintenance.
Insourced Network Maintenance
In May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A.
We have entered into arms’-length services agreements with our wholly-owned subsidiary Serede to perform our external plant and equipment maintenance, installation and network servicing in the States of São Paulo, Rio de Janeiro, Rio Grande do Sul, Santa Catarina, Paraná, Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá.
In January 2012, we entered into a services agreement with Serede for installation, operation, and corrective and preventive maintenance in connection with our external plants and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in certain parts of the State of Rio de Janeiro. Over the years, we have amended this agreement to expand its scope to the entirety of the State of Rio de Janeiro (following our acquisition of Telemont’s operations in Rio de Janeiro), as well as the States of São Paulo, Rio Grande do Sul, Santa Catarina and Paraná (following our acquisition of A.R.M Engenharia in June 2016). The total estimated payments under this contract, which expires in January 2022, are approximately R$10.0 billion.
In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. In July 2016, we entered into a services agreement with Rede Conecta for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá. The total estimated payments under this contract, which expires in June 2021, are approximately R$3.2 billion.
Outsourced Network Maintenance
In October 2012, we entered into five-year services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total payments under this contract, which expired in October 2017, amounted to R$3.7 billion.
In October 2017, we entered into new services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total estimated payments under this contract, which expires in October 2022, are approximately R$4.2 billion.
Research and Development
We conduct independent innovation, research and development in areas of telecommunications services but historically we have not independently developed new telecommunications technologies. We depend primarily on suppliers of telecommunications equipment for the development of new technology. Our investments in innovation, research and development totaled R$17 million in 2018, R$16 million in 2017 and R$20 million in 2016.
Joint Venture, Associated Companies and AssetsHeld-For-Sale
Joint Venture
We own 19.04% of the share capital of Hispamar Satélite S.A., or Hispamar, aSpanish-Brazilian enterprise created in November 1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the Amazonas 2 and Amazonas 3 satellites. In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar.
In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. This satellite provides both C and Ku band transponders andon-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite.
In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. This satellite provides both C and Ku band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, which operates and leases all of the transponder’s space segment on this satellite.
Associated Company
We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to our company and is engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo.
AssetsHeld-for-Sale
Our board of directors has authorized our management to take the necessary measures to market our shares in Africatel and TPT—Telecomunicações Públicas de Timor, S.A., or TPT. As a result, we record the assets and liabilities of Africatel and TPT asheld-for sale, although we do not record Africatel or TPT as discontinued operations in our income statement due to the immateriality of the effects of Africatel and TPT on our results of operations.
Africatel
Africatel Holdings B.V., or Africatel, was formed in May 2006 and indirectly holds our equity interests in Unitel, Cabo Verde Telecom, S.A., or CVTelecom, and CST – Companhia Santomense de Telecomunicações S.A.R.L., or CST, Directel—Listas Telefónicas Internacionais, Lda., or Directel. We own 86% of the share capital of Africatel.
Unitel
Africatel indirectly owns 25% of the share capital of Unitel, a mobile service provider in Angola. Following our acquisition of PT Portugal in 2014, which resulted in our acquisition of our interest in Africatel, we brought suits against Unitel in the courts of Angola and instituted arbitral proceedings against the other shareholders of Unitel in the International Court of Arbitration of the International Chamber of Commerce based on our inability to collect dividends owed to us by Unitel and breaches of the Unitel shareholders’ agreement. For more information about these proceedings, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”
CVTelecom
Africatel indirectly owns 40% of the share capital of CVTelecom, a provider of fixed-line and mobile services in the Cabo Verde Islands, that was established in 1995 and provides fixed-line and mobile telecommunications services under the terms of a25-year license granted in 1996.
Following our acquisition of PT Portugal in 2014, which resulted in our acquisition of our interest in Africatel, we instituted arbitral proceedings against the Republic of Cape Verde in the International Court of Arbitration of the International Chamber of Commerce, disputing its interpretation of the shareholders’ agreement governing CVTelecom which the Republic of Cape Verde terminate this shareholders’ agreement. In March 2015, we also commenced an arbitration proceeding against the Republic of Cabo Verde before the International Centre for Settlement of Investment Disputes, or ICSID, due to the violation of CVTelecom’s exclusivity rights under the concession agreement by the Republic of Cabo Verde.
CST
Africatel indirectly owns 51% of the share capital of CST, a provider of fixed and mobile services in São Tomé and Principe, that was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a20-year license granted in 2007.
Directel
Africatel indirectly owns 100% of the share capital of Directel, a Portuguese entity with subsidiaries in Angola, Cabo Verde, Mozambique, and Kenya, which publish telephone directories and operate related data bases in those countries.
TPT
We own 76.14% of the share capital of TPT, a Portuguese holding company that owns 54.01% of the share capital of Timor Telecom, S.A., or Timor Telecom, which provides telecommunications, multimedia and IT services in Timor Leste in Asia. Our wholly-owned subsidiary PT Participações also holds 3.05% of the share capital of Timor Telecom.
Regulation of the Brazilian Telecommunications Industry
Overview
Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation under the Brazilian General Telecommunications Law (Lei Geral das Telecomunicações), or the General Telecommunications Law, and a comprehensive regulatory framework for the provision of telecommunications services promulgated by ANATEL. We provide fixed-line, domestic and international long-distance, mobile telecommunications, data transmission andPay-TV services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in designated geographic areas, as well as set forth certain obligations with which we must comply.
ANATEL is an administratively independent and financially autonomous regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and ANATEL Regulation (Regulamento da Agência Nacional de Telecomunicações). ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is required to report on its activities to the Brazilian Ministry of Communication, and has authority to propose and to issue regulations that are legally binding on telecommunications service providers. ANATEL also has the authority to grant concessions and licenses for all telecommunications services, other than broadcasting services. In addition, ANATEL is authorized to direct and control the provision of services, the shareholding structure of service providers, to apply penalties and to declare the expiration of the concession and authorizations and the return of assets from the concessionaire to the government authority upon termination of the concession. Any regulation or action proposed by ANATEL is subject to a per-minute basis. Forperiod of public comment, which may include public hearings, and ANATEL’s decisions may be challenged administratively before the agency itself or through the Brazilian judicial system.
The current regulatory framework for the Brazilian telecommunications industry was adopted in 1998. Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime (as discussed below) or an authorization under the private regime (as discussed below). A concession is granted for a fixed period of time following a public auction and is generally renewable only once. An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain obligations with which the service providers must comply and require equal treatment of customers by the service providers.
The three principal providers of fixed-line telecommunications services in Brazil, Telefônica Brasil, Claro and our company, provide these services weunder the public regime. In addition, CTBC and Sercomtel, which are secondary local fixed-line telecommunications service providers, operate under the public regime. All of the other providers of fixed-line telecommunications services and all providers of personal mobile services and data transmission services in Brazil operate under the private regime.
Public Regime
Overview
Providers of public regime services are subject to more obligations and restrictions than providers of private regime services. Under Brazilian law, providers of public regime services are subject to certain requirements with respect to services such as network expansion and network modernization. Under their concession agreements, public regime service providers are required to comply with the provisions of the General Plan of Universal Service Goals (Plano Geral de Metas de Universalização), or PGMU, which was most recently updated in December 2018. For more information about the PGMU and our obligations thereunder, see “—General Plan of Universal Service Goals (PGMU).”
In addition, public regime service providers as well as private regime service providers, are required to comply with the provisions of the General Plan of Quality Goals (Plano Geral de Metas de Qualidade), or PGMQ, which was adopted by ANATEL in June 2013, and the General Plan on Competition Targets (Plano Geral de Metas de Competição), or PGMC, which was adopted by ANATEL in November 2012 and updated in July 2018. For more information about the PGMQ and the PGMC see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
The rates that public regime service providers may charge for callscustomers are subject to ANATEL supervision. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in the concession agreements and was designed based on a price cap model. For more information, see “Our Services—Fixed-Line Telephone Services—Rate Regulation.”
Concessions are granted for a fixed period of use. The charge unit is a tenthtime and are generally renewable only once.ANATEL may terminate the concession of any public regime service provider upon the occurrence of certain events described below under “—Termination of a minute (six seconds)Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications.
General Plan of Universal Service Goals (PGMU)
The PGMU sets forth the principal network expansion and modernization obligations of the public regime providers. The PGMU was approved by Decree No. 9,619 and became effective on December 21, 2018, the date when it was published in the Official Gazette.
Public regime providers are subject to network expansion requirements under the PGMU, which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the PGMU or in our concession agreements may result in fines and penalties of up to R$50 million, as well as potential revocation of our concessions.
The PGMU requires the following, among other things:
local fixed-line service providers to provide individual access to fixed-line voice services to economically disadvantaged segments of the Brazilian population within their service areas, through programs to be established and regulated by ANATEL;
local fixed-line service providers to install public telephones on demand in locations with more than 100 inhabitants;
local fixed-line service providers to install fixed lines in locations with more than 300 inhabitants (1) in regions where there is no fixed line installed, within 120 days of a request and (2) in regions where fixed lines are already installed, within 7 days of a request for 90% of requests and in up to 25 days of a request for the remaining 10% of requests; and
local fixed-line service providers to gradually provide voice access in the wireless local loop technology with capacity for 4G services in 1,400 locations (of which 1,155 apply to Oi), and rounding is permittedaccording to the next succeeding tenthfollowing schedule: 10% of such locations by December 31, 2019; 25% by December 31, 2020; 45% by December 31, 2021; 70% by December 31, 2022; and 100% by December 31, 2023.
Similarly to the 2008 amendments to the PGMU that eliminated the requirements to provide public telephone centers (postos de serviço telefônico) in exchange building backhaul, the 2018 PGMU eliminated the requirements to provide multifacility service centers (postos de serviço multifacilidade), which are public centers located in rural areas that offers various telecommunications services, including voice, access to the internet and digital transmission of text and images, and to install and maintain public telephones within a fixed-line service concession, in exchange for other obligations to be defined.
The value of the obligations currently imposed by the PGMU and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, is subject to discussion between the parties, with ANATEL having the ability to make the final valuation.
Termination of a minute. ThereConcession
ANATEL may terminate the concession of any public regime service provider upon the occurrence of any of the following:
an extraordinary situation jeopardizing the public interest, in which case the Brazilian government is authorized to start rendering the services set forth under the concession in lieu of the concessionaire, subject to congressional authorization and payment of adequate indemnification to the owner of the terminated concession;
termination by the provider (through an agreement with ANATEL or pursuant to legal proceedings) as a minimum charge periodconsequence of 30 secondsan act or omission of the Brazilian government that makes the rendering of the services excessively burdensome to the provider;
annulment of the concession due to a contractual term, which is deemed by subsequent law to be illegal;
material failure to comply with the provider’s universalization targets;
failure to meet insurance requirements set forth in the concession agreement;
asplit-up,spin-off, amalgamation, merger, capital reduction or transfer of the provider’s control without ANATEL’s authorization;
the transfer of the concession without ANATEL’s authorization;
the dissolution or bankruptcy of the provider; or
an extraordinary situation in which Brazilian government intervention, although legally permissible, is not undertaken, as such intervention would prove to be inconvenient, unnecessary or would result in an unfair benefit to the provider.
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services.
Service Restrictions
Public regime service providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with other public regime providers, including:
a prohibition on members of the same economic group holding more than two licenses for every call. the provision of telecommunications services in the public regime, which would include holding more than 20% of the voting shares of or controlling (as such term is defined under ANATEL’s regulations) more than two providers of public regime telecommunications services; and
a restriction, as set forth in the PGO, on mergers between providers of public regime telecommunications services.
In September 2011, Law No. 12,485 became effective, which creates a new legal framework for subscription television services in Brazil, and determines, among other provisions to:
allow fixed-line telephone concessionaires, such as us, to enter the cable television market in Brazil;
remove existing restrictions on foreign capital investments in cable television providers;
limit the total and voting capital held by broadcast concessionaires and authorized providers, and in television programmers and producers, with headquarters in Brazil to 30%; and
prohibit telecommunications service providers with collective interests from acquiring rights to disseminate images of events of national interest and from hiring domestic artistic talent.
Private Regime
Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations and applicable regulation.
For example, private regime service providers are required to comply with the provisions of the PGMQ and the PGMC. For more information about the PGMQ and the PGMC, see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
Our Services
Fixed-Line Telephone Services
Regulatory Overview
We provide the majority of our fixed-line telephone services (Serviço Telefônico Fixo Comutado—STFC) in accordance with concession agreements under the public regime. For more information about the regulations applicable to public regime telephone service providers, see “—Public Regime.”
Our Concessions and Authorizations
The following table sets forth certain details of our concessions and authorizations to provide local, domestic long-distance and international long-distanced fixed-line telephone services:
Geographic Scope | Type of Service | Termination Date | Regime | |||
| Region I of the PGO – States of Rio De Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraiba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amapá, Amazonas e Roraima, except Sector 3 of Region I of the PGO(1) | Local / Domestic Long-Distance | December 31, 2025 | Concession | |||
| Region I of the PGO – Sector 3(1) | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| Region II of the PGO – States of Santa Catarina, Paraná, Mato Grosso, Mato Grosso do Sul, Goiás, Tocantins, Distrito Federal, Rondônia, Acre and Rio Grande Do Sul, cxcept for Sectors 20, 22 and 25(2) | Local / Domestic Long-Distance | December 31, 2025 | Concession | |||
| Region II of the PGO – Sectors 20, 22 and 25(2) | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| Region III of the PGO – São Paulo | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| National | International Long Distance | Indeterminate | Authorization |
| (1) | Sector 3 of Region II of the PGO corresponds to 57 municipalities in the State of Minas Gerais. |
| (2) | Sectors 20, 22 and 25 of Region II of the PGO correspond to the following municipalities: Londrina, Paraná; Tamarana, Paraná; Paranaíba, Mato Grosso do Sul; Buriti Alegre, Goiás; Cachoeira Dourada, Goiás; Inaciolândia, Goiás; Itumbiara, Goiás; Paranaiguara, Goiás; and São Simão, Goiás. |
Each of our concession agreements:
sets forth the parameters that govern adjustments to our rates;
requires us to comply with the network expansion obligations set forth in the PGMU;
requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of our local fixed-line and domestic long-distance services (excluding taxes and social contributions) during the immediately preceding year;
In addition, each of our concession and authorization agreements:
sets forth the conditions under which ANATEL may access information from us;
requires us to fixed-line calls during off-peak hours, charges applycomply with certain quality of service obligations as well as the quality of service obligations set forth in the PGMQ;
requires us to pay fines for anynon-compliance with the regulatory rules including systemic service interruptions.
In addition, the PGMU requires us to provide transmission lines connecting our fiber-optic internet backbones to municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these concession agreements, we are obligated to set up backhaul in 3,188 municipalities in Regions I and II. The facilities that we constructed to meet these obligations are considered to be property that is part of our concessions and will therefore revert to the Brazilian government on January 1, 2026. For more information about the PGMU, see “—Public Regime—General Plan of Universal Service Goals (PGMU).”
On June 27, 2014, ANATEL opened a per-call basis, regardlesspublic comment period for the durationrevision of the call.terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. Throughout 2015, ANATEL, the Brazilian Ministry of Communication and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Brazilian Ministry of Communication created a working group to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In April 2016, the Brazilian Ministry of Communication issued an ordinance addressing guidelines for the establishment of a new regulatory framework for telecommunications, which were expected to be implemented by ANATEL through the conclusion of the concession amendments. In line with the provisions of PLC 79, these guidelines provided for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the terms of concessions, which in our case are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. The implementation of these guidelines, however, depends on the passage of PLC 79 to provide the necessary legal authority and framework. As a result of the Brazilian Congress’s failure to date to pass PLC 79, the review of our concession agreements, which was scheduled to occur by June 2017, has not yet taken place, and further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal.
Fixed-Line RatesIn connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the PGO, in line with the provisions of PLC 79, which include the ability of companies operating under a concession in the public regime to convert their concessions into authorizations to operate in the private regime and thereby eliminate a number of substantial obligations currently imposed by the concession regime, in exchange for the assumption of obligations to make additional investments in their networks, primarily related to the expansion of broadband services or through the payment of fees to ANATEL. The value of the obligations currently imposed by the concession agreement and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, would be subject to discussion between the parties, with ANATEL having the ability to make the final valuation. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the PGO.
We cannot assure you that any future amendments to our concession agreements or the PGO will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we generate from our Brazilian fixed-line businesses. If the amendments to our Brazilian concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected.
Rate Regulation
Under their concession agreements, public regime service providers are required to offer basic local fixed-line plans to users. Rates for the basic long-distance services plan originated and terminated on fixed lines vary in accordance with certain criteria. The concession agreements establish aprice-cap mechanism for annual rate adjustments for basic service plans and basic domestic long-distance plans based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index.
Factor X is equal to (1) 50% of the increase in the productivity rate of public regime providers, plus (2) 75% of a factor calculated by ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow an annual adjustment in excess of the IST.
A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment.
A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST.
Marketing and Distribution
We focus our marketing efforts on the upscaling of existing clients while strengthening the “Local RatesOi” brand through our convergent services offerings and promotion of ourMinha Oi smartphone application, which allows ourpre-paid customers to freely switch between their data and voice allowances. We also engage in digital marketing and multiple customer relationship management (CRM) marketing programs to support our B2B Services business.
In 2018, we increased our investment in advertising, with a focus on digital advertising with the aim to drive traffic to our digital channels. In addition to digital advertising, we employed traditional advertising strategies, such as television (free and cable), billboards, exterior signage and radio, to increase our advertising coverage, and leveraged our owned media, such as telemarketing, text messaging and other points of contact, to upscale our current base. We also developed a branded content strategy, combining sponsorships of sporting events and individual athletes, as well as cultural events, to increase brand awareness and promote our portfolio as a telecommunications provider capable of meeting all of the telecommunications needs of our customers. In 2019, we expect to continue to increase our investment in advertising in line with the advertising strategies described above.
Distribution Channels
We distribute our services through channels focused on three separate sectors of the telecommunications services market: (1) residential customers, including customers of our mobile services to whom we sell bundled plans; (2) personal mobility customers that purchase our mobile services independently of our bundled plans; and (3) business and corporate customers.
Residential Services
Our revenues from localdistribution channels for residential customers are focused on sales of fixed-line services, consist mainly of monthly subscription charges, charges for local callsincluding voice, broadband services and charges for the activation of lines for new subscribers or subscribers that have changed addresses. Monthly subscription charges are based on the plan to which the customer subscribesOi TV, and whether the customer is a residential, commercial or trunk line customer.
Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute and the Mandatory Alternative Service Plan, each of which includes installation charges, monthly subscription charges, and charges for local minutes. The monthly subscription fees under the Basic Plan per Minute and the Mandatory Alternative Service Plan vary in accordance with the subscribers’ profiles, as defined in the applicable ANATEL regulations.post-paid mobile services. As of December 31, 2015, 13.6%2018, the principal distribution channels that we used for sales to residential customers were:
| • | our own network of stores, which included 135 “Oi” branded stores; |
| • | 573 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout Brazil; |
approximately 6,730 stores located throughout our service areas that primarily sell telecommunications products and services and have entered into exclusivity agreements with us;
our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of 1,877 sales representatives that answer more than 559 thousand calls per month. This channel provides us with the ability to proactively reach new customers, thereby increasing our client base and revenues, and also receives calls prompted by our offers made in numerous types of media;
our “teleagents” channel, which consists of 682 local sales agents that operate in specific regions and complement our telemarketers;
door-to-door sales calls made by our sales force of 2,373 salespeople trained to sell our services throughout Brazil in places where customers generally are not reachable by telemarketing; and
oure-commerce sites through which customers may purchase a variety of our services.
Personal Mobility Services
Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers andpre-paid customers, including mobile broadband customers. As of December 31, 2018, the principal distribution channels that we used for sales of ourpre-paid personal mobility services were:
571 stores that are part of large national chains which sell our post-paid andpre-paid personal mobility services and SIM cards;
approximately 15 multibrand distributors that distribute our SIM cards andpre-paid mobile cards to approximately 265,000 pharmacies, supermarkets, newsstands and similar outlets;
our telemarketing sales channel has of 1,137 sales representatives that answer more than 620 thousand calls per month selling our post-paid personal mobility services; and
our website, through which ourpre-paid customers may recharge their SIM cards.
B2B Services
We have established separate distribution channels to serve SME and corporate customers. As of December 31, 2018, the principal distribution channels that we use to market our services to SMEs were:
| • | “Oi” exclusive agents withdoor-to-door sales consultants that are dedicated to understanding and addressing the communications needs of our existing and prospective SME customers; |
our telemarketing sales channel, which consists of two agents that use sales representatives that are specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as representatives in our call center and representatives at call centers under contract with us to receive calls from existing and prospective SME customers to sell services to new customers and promote higher-value and additional services to existing customers. In addition, our telemarketing channel utilizes customer retention representatives; and
| • | our website and theOi Mais Empresas application. |
We market our entire range of services to corporate customers through our own direct sales force which meets with current and prospective corporate customers to discuss the business needs of these enterprises and design solutions intended to address their communications needs. Our client service model focuses on post-sale service and we regularly discuss service needs and improvements through calls and meetings with our customers. As of December 31, 2018, our corporate sales team, excluding post-sale service personnel, was composed of approximately 365 employees operating in 11 regional offices.
Rates, Billing and Collection
Rates
Our rates for certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD services, are generally subject to regulation by ANATEL Under our current authorizations, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. The rates for other telecommunications services, such as broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation. Furthermore, the rates for DTH and IP TV services are not subject to ANATEL regulation.
For more information about the regulations applicable to our rates, see “—Regulation of the Brazilian Telecommunications Industry.”
Billing and Collection
Residential Services
We send each of our Residential Services customers subscribeda monthly bill covering all the services provided during the prior monthly period. Customers are grouped in billing cycles based on the date their bills are issued. Each bill separately itemizes service packages, local calls, long-distance calls, calls terminating on a mobile network, toll-free services and other services such as call waiting, voicemail and call forwarding. Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus aone-time late charge of 2% of the amount outstanding. We have agreements with several banks for the receipt and processing of payments from our Residential Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our Residential Services customers as agents for these banks. As of December 31, 2018, 17.2% of all accounts receivable due from our Residential Services customers in Brazil were outstanding for more than 30 days and 12.1% were outstanding for more than 90 days.
We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the Basic Planrelevant provider after deducting any access fees due for the use of our network.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer 15 days after we send the customer a past due notice, restrict incoming calls received by a Residential Services customer 30 days after the restriction on outgoing calls is imposed, and disconnect a Residential Services customer after 30 days after the restriction on incoming calls is imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due tonon-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.
Personal Mobility Services
We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per Minutemonth plus aone-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. As of December 31, 2018, 17.7% of all accounts receivable due from our Personal Mobility Services customers in Brazil were outstanding for more than 30 days and 15.7% were outstanding for more than 90 days.
ANATEL regulations permit us to restrict outgoing calls made and text messages sent by a post-paid Personal Mobility Services customer 15 days after we send the customer a past due notice, restrict incoming calls and text messages received by a post-paid Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is imposed, and cancel services to a post-paid Personal Mobility Services customer after 30 days after the restriction on incoming calls is imposed. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due tonon-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid.
Customers of ourpre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer´s accounts and are free ofbad-debt risk.
Competition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers.
Residential Services
We are the leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL, as of December 31, 2018, we had a market share of 51.1% of the total fixed lines in service in our service areas (including the number fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services in our service areas are Claro and Telefônica Brasil.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services.
In addition, we face competition from providers of cable television services, particularly Claro and Telefônica Brasil, which provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers through their cable network in in municipalities in our service areas that have the highest concentration of purchasing power.
Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in our fixed-line service areas, expanding its fiber optic network in high-income residential areas and increasing its services tolow- andmedium-size businesses.
The decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers for fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as our company, they have established networks in the regions in which they operate and often have a market share of approximately 15% of broadband customers.
The primary providers of subscription television services in the regions in which we provide Residential Services are SKY, which provides DTH services, and Claro, which provides DTH service under the “Claro TV” brand andPay-TV services using coaxial cable under the “Net” brand.
Personal Mobility Services
The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile telecommunications services. We compete primarily with Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” TIM and Claro, each of which provides services throughout Brazil. As of December 31, 2018, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 16.5% of the total number of mobile subscribers in Brazil.
We believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype.
B2B Services
The competitive landscape which we face relating to the Mandatory Alternativefixed-line and mobile services we provide to our B2B customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers.
In recent years, there has been a shift among corporate and SME services providers toward value-added services. With the exception of theOi Mais Empresas app and web service, our value-added products and services for the SME segment are substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate customers are Claro, Telefônica Brasil and TIM, as well as smaller niche companies.
Technology
Our Brazilian networks are comprised of physical and logical infrastructures through which we provide fully-integrated services, whether fixed-line or mobile, voice, data or image, thereby optimizing available resources. We monitor our networks remotely from our centralized national network operations center in Rio de Janeiro. Network operating and configuration platforms, located at the network operations center, perform failure monitoring, database and configuration management, security management and performance analysis for each network.
Access Networks
Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment andWi-Fi hotspots. Our fixed-line networks are fully digitalized.
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes (MSANs), or Subscriber Line Access Multiplexer (DSLAMs), to our aggregation and transportation networks. The analog voice signals are split from the data signals which are transmitted using ADSL or VDSL technology. We are engaged in a long-term program to update our DSLAM equipment as demand for data services increases. As of each of September 30, 2018 and December 31, 2017, approximately 93% of our fixed-line network was operating with support ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in approximately 4,700 municipalities.
ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency bands are available for data transmission. Our network supports ADSL2+ and VDSL2, or very-high-bitrate digital subscriber line, technologies. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider range of services than ADSL. VDSL2 is a DSL technology providing faster data transmission, using technologies such as vectoring and bonding it is possible to reach higher throughput up to 600 Mbps (downstream and upstream), permitting us to support applications such as HD Video, VoIP and broadband internet access, over a single connection.
We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber to the home, or FTTH, networks based on gigabit passive optical network, or GPON, technology to support our FTTH triple play services. The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers. Our GPON FTTH network currently reaches more than 1.5 million homes, and we expect to reach more than 500 thousand customers connected by the end of 2019.
Mobile devices access our GSM (Global System for Mobile Communications), or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G mobile networks on frequencies of 1800 MHz/2600 MHz. Our 2G access points use General Packet Radio Service, Plan.or GPRS, which allows speeds in the range of 115 kilobytes per second (kbps), and Enhanced Data Rates for Global Evolution, or EDGE, which allows speeds in the range of 230 kbps, to send and receive data signals. Our 3G access points use High Speed Packet Access, or HSPA, which allows speeds in the range of 14.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 and 4x4 Multiple Input Multiple Output, depending on the site configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and Carrier Aggregation configuration sites), to send and receive data signals. Although currently the majority of voice signals are sent and received through our 2G and 3G access points are routed to our aggregation networks, we are initiating VoLTE (Voice over LTE) that will enable 4G routes voice signal over 4G access points, allowing offering new type of services based on IMS (IP Multimedia Subsystem) platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
In addition to these mobile access networks, we also operateWi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. Since 2012, we have provided outdoor urban wireless networks, including in the Basic Plan per Minuteneighborhoods of Copacabana and Ipanema in the Mandatory Alternative Service Plan,city of Rio de Janeiro. As of September 30, 2018 and December 31, 2017, ourWi-Fi network consisted of more than 1.6 million and 1.5 million hotspots, respectively, with broadband access compatible with more than 1.6 and 1.5 million access points, respectively, provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.
Aggregation Networks
Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. For a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using SDH protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks. Our Metro Ethernet networks are permittedfully-integrated management systems and provide:
ethernet data services from 4 Mbps up to 1 Gbps forpoint-to-point and multipoint dedicated access;
ethernet access services from 4 Mbps up to 1 Gbps for IP access and MPLS/VPN access;
aggregation network services for ADSL2+ and VDSL2 platforms;
aggregation network services for GPON platforms; and
Dense Wavelength Division Multiplex, or DWDM, systems for services above 1Gbps to prevent overbooking our Metro Ethernet network.
In the past,we used ATM protocol to transport digital signals through our access network fromnon-residential customers that require dedicated bandwidth to our switching stations. In response to changing customer needs, we converted elements of our network that use ATM and SDH protocols, that permit us to offer non-discriminatory alternative plansdedicated bandwidth to our customers, to MPLS protocol, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We now useMPLS-TP capable devices that have been designed to interface with our existing Metro Ethernet Network to increase the bandwidth of our networks to support our 4G network data traffic and replace our legacy SDH networks.
Transportation Networks
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities, connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can operate with up to 80 channels at 10, 100 and 200 Gbps. Our optical network is complemented by microwave links to reach smaller cities and towns.
In 2015, we completed the implementation of a new Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links, that connect 11 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. In the first half of 2018, we completed the extension of the OTN/DWDM network, with 100 Gbps links, to an additional seven state capitals and spread over an additional 18,000 km of optical cables. Between 2019 and 2021, we expect to further extend our OTN/DWDM network, with 100 Gbps links, to reach 26 state capitals and spread over 65,400 km of optical cables.
We employ automatic traffic protection to improve the reliability of our network and increase its traffic capacity. The network is fully supervised and operated by management systems that allow rapid response to customer service requests and reduce the recovery time in case of failure.
We operate an internet backbone network and a fullyIP-routed network, which provides a backbone for all internet dedicated services and VPN offerings through access routers, for customer aggregation, configured as single edge routers (i.e., offering various types of services aggregation over a single box), allowing us to reduce capital and operation expenses. Our internet backbone connects to the basic service plans. The rates for applicable services under these plans (e.g., monthly subscription ratespublic internet via national peerings links and charges for local and long-distance calls) must be submitted for ANATEL approval priorinternational links that we maintain in the United States.
Our transportation network is directly interconnected to the offeringnational and international long-distance networks of those plansall long-distance service providers operating in Regions I, II and III and all mobile services providers in Regions I, II and III.
IPTV Network
Through our FTTH network, we offered IPTV services in 27 cities over10 states as of December 31, 2018. For subscribers of ourOi TV services, through our DTH or FTTH networks, we also offer OTT services, which provide customers with access to our customers. In general, ANATEL does not raise objections to the terms of these plans. different content on different devices (mobile phones, tablets and computers).
Property, Plant and Equipment
As of December 31, 2015, 86.4%2018, the net book value of our property, plant and equipment was R$28,469 million. As of December 31, 2018, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups, represented 50.0%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, represented 25.5%; (3) work in progress represented 11.8%; (4) buildings represented 5.9%; (5) automatic switching equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 4.1%; and (6) other fixed assets represented 2.7%.
All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession agreements are considered “reversible assets,” which means that, should our fixed-line concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 13 to our consolidated financial statements included in this annual report.
Transmission and Other Equipment
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities, connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can operate with up to 80 channels at 10, 100 and 200 Gbps. We have implemented an Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links that connect 18 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte, which spreads over approximately 48,000 km of optical cables. Our optical network is complemented by microwave links to reach smaller cities and towns.
Infrastructure
Our Brazilian access networks connect our customers subscribed to alternative plans.our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment andWi-Fi hotspots. Our fixed-line networks are fully digitalized.
On an annual basis, ANATEL increasesVoice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. For a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using SDH protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks.
Automatic switching equipment
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes, or decreasesMSANs, to our aggregation networks, or are rerouted to our aggregation networks through Digital Subscriber Line Access Multiplexer, or DSLAM, equipment which split the maximum rates thatvoice signal from the digital signal which is transmitted using ADSL or VDSL technology. As of December 31, 2018, approximately 93% of our fixed- line network supported ADSL2+ or VDSL2 and we are permitted to charge for our basic service plans. ANATEL increased the rates that we may charge by an average of 0.55% as of February 8,provided ADSL or VDSL2 services in approximately 4,700 municipalities.
2013, decreasedVoice and data signals sent and received through our 2G, 3G and 4G access points are routed to our aggregation networks. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
As of December 31, 2018:
our 4G mobile access networks consisted of 9,613 active radio base stations covering 902 municipalities, or 74% of the rates that we may charge by an averageurban population of 0.10% asBrazil;
our 3G mobile access networks consisted of April 18, 2014,10,202 active radio base stations covering 1,644 municipalities, or 82% of the urban population of Brazil; and increased
our 2G mobile access networks consisted of 13,804 active radio base stations covering 3,446 municipalities, or 93% of the rates that we may charge by an averageurban population of 3.6% as of June 13, 2015. Brazil.
In addition we are authorized to adjust the rates applicable to our alternative plans annually by nomobile access networks, we also operateWi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. As of December 31, 2018, ourWi-Fi network consisted of more than two million hotspots, with broadband access compatible with more than two million access points provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.
Buildings
In addition to our headquarters building and our centralized national network operations center in Rio de Janeiro, we own 7,965 buildings that are used to house switching equipment or to house regional and local sales and operations centers. Of these buildings, 7,767 are “reversible assets” under our fixed-line concession agreements.
Capital Expenditures and Work in Progress
During the rateyear ended December 31, 2018, we modernized our core network, with a focus on infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us to do more with less. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile networks, to keep up with the growing demand, In addition, our performance on ANATEL’s network quality metrics improved.
The following table sets forth our capital expenditures for the periods indicated.
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (in millions ofreais) | ||||||||||||
Data transmission equipment | R$ | 1,993 | R$ | 1,846 | R$ | 1,377 | ||||||
Installation services and devices | 539 | 644 | 489 | |||||||||
Mobile network and systems | 820 | 602 | 707 | |||||||||
Voice transmission | 731 | 726 | 713 | |||||||||
Information technology services | 720 | 729 | 536 | |||||||||
Telecommunication services infrastructure | 500 | 496 | 468 | |||||||||
Buildings, improvements and furniture | 70 | 80 | 69 | |||||||||
Network management system equipment | 171 | 94 | 124 | |||||||||
Backbone transmission | 304 | 237 | 196 | |||||||||
Internet services equipment | — | 1 | 7 | |||||||||
Other | 229 | 174 | 73 | |||||||||
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Total capital expenditures | R$ | 6,077 | R$ | 5,629 | R$ | 4,759 | ||||||
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Our principal capital expenditures relate to a variety of inflation, as measured by the IST. Discounts from the rates set in basicprojects designed to expand and upgrade our transmission networks, our broadband access networks (fixed and mobile), our service plansplatforms (data, video and alternative service plans may be granted to customers without ANATEL approval.voice), our information technology systems and our telecommunications services infrastructure.
Local Fixed Line-to-Mobile Rates (VC-1) and Mobile Long Distance Rates (VC-2 and VC-3)Data Transmission Equipment Programs
When oneWe are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based on gigabit passive optical network (GPON). The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers makesand up to 1 Gbps to commercial customers.
In our access networks, we have been engaged in a callprogram of deployingfiber-to-the-home, or FTTH, technology to support our “triple play” services, using a mobile subscriberGPON network engineered to support IPTV, high speed internet (currently speeds up to 200 Mbps), and VoIP services.
We have acquired and installed data communications equipment to convert elements of our companynetworks that used ATM and Synchronous Digital Hierarchy, or anotherSDH, protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We also deployed an optical switching layer based on optical transport network technology in order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading.
We have been implementing a new broadband data communications network architecture, which we refer to as the Single Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and corporate customer links in a single platform, which eliminates the need for individual management of each type of access network, expedites the resolution of networks problems and minimizes maintenance and operation costs.
In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoption of the single edge concept, which means using one single router to join our commercial, mobile and residential functions that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and operational expenditures.
Mobile Services Network Programs
4G Network
We offer 4G services provider that terminatesusing LTE network technology and have been deploying our 4G network since 2012. In compliance with our obligations under our LTE authorizations, in 2016, we extended our LTE network to cities with over 100,000 inhabitants, adding 284 new cities to our LTE network, and in 2017, we extended our LTE network to cities with less than 100,000 inhabitants, adding 813 cities to our LTE network.
In 2018, we began deploying 4.5G services by using Carrier Aggregation with 1800 MHz spectrum refarming and MIMO 4x4 in 27 municipalities in the first phase of the project. It has allowed us to offer best user experience and aligning our network to main operators in Brazil.
3G Network
We have undertaken a project to upgrade a portion of our mobile registration areanetworks to enable us to increase the capacity of our mobile network. We have deployed new radio base stations and transceivers to improve our 3G coverage and quality in areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in Brazil to which the call was originated, we chargehave not historically provided 3G service.
Voice Transmission Network Programs
We are engaged in a program of investing in new equipment for our switching stations to support next-generation networks which we believe will permit us to offer new value-added services to our fixed-line customer per-minute chargescustomers. We believe that our investment in next-generation networks will:
assist us in meeting the increased demand for the duration of the call based on rates designated by ANATEL as VC-1 rates. In turn, we pay the mobile services provider a per-minute charge based on rates designated by ANATEL as VU-M rates forlong distance traffic, both domestic and international, through the use of its mobile networkVoIP;
permit us to offer differentiated services, such voice over broadband; and
significantly promotefixed-to-mobile convergence.
As part of this program, we have deployed an IP Multimedia Subsystem, or IMS, core that will facilitate our convergent voice and broadband offerings. The IMS core not only provides control for the VoIP resource but also integrated access control and authentication for all services, significantly improving automation and speed for customer provisioning.
We have also undertaken a program of removing and replacing smaller switching stations and integrating these operations with other switching stations to promote efficiency in completingour operations.
Information Technology Services Programs
We are investing in the call. Rates for long-distance calls that originate or terminate on mobile telephones are based on whether the call is an intrasectorial long-distance call, which is charged at rates designated by ANATEL as VC-2 rates, or an intersectorial long-distance call, which is charged at rates designated by ANATEL as VC-3 rates. If the caller selects oneexpansion of supply of our carrier selection codes forcloud computing services in data centers, particularly in the call, we receiveState of São Paulo, in order to support the revenuesgrowing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions.
Telecommunications Services Infrastructure Programs
We are investing in several structural projects in order to improve and modernize our business support systems, or BSS, and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the callTelemanagement Forum frameworks and must pay interconnection feesbest practices, our main projects are unified customer relationship management; network provisioning services; order management; consolidation of network inventory; network planning, project and construction; network fault management; performance management; customer experience management; API management and digital self-care, among others.
One of the primary projects connected to the OSS is related to assurance and quality. In January 2017 we completed the transition from a network centric monitoring system to a customer focused approach and thereby our network operations have migrated from network operations centers to service providers that operate the networks onoperations centers which the call originatesprovide more efficient and terminates. VC-1, VC-2customer-based support.
In December 2016, we completed a project to improve fulfillment by speeding up service creation and VC-3 rates, collectively, the “VC Rates” vary depending on the timeprovisioning, reducing costly human intervention and increasing overall customer quality of experience through automation of the dayfulfillment processes.
Intellectual Property
We hold several material intellectual property assets, including patents and daytrademarks registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, mobile and broadband services.
Operating Agreements
Fixed-Line and Mobile Tower Leases
We have entered into three operating lease agreements with owners of communications towers and rooftop antennae to lease space to install equipment related to the delivery of our personal mobility services on an aggregate of approximately 4,850 communications towers and rooftop antennae. We have also entered into three operating lease agreements with owners of fixed-line communications towers to lease space to install equipment related to the delivery of our fixed-line services on an aggregate of approximately 6,400 fixed-line communications towers.
The monthly payments under two of our operating lease agreements for space on communications towers and rooftop antennae reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the week,lease by the greater of 6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. The monthly payments under the remainder of the operating lease agreements reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA.
The operating lease agreements for space on communications towers and rooftop antennae have15-year terms expiring between December 2027 and June 2019 and are appliedautomatically renewable for successiveone-year periods. The operating lease agreements for space on fixed-line communications towers have20-year terms expiring between April 2033 and July 2033 and are renewable for additional20-year terms.
Infrastructure Sharing Agreements
4G Network
We currently are party to two Radio Access Network, or RAN, sharing agreements with other operators. RAN sharing enables operators to share the same physical network, thus reducing the deployment costs in proportion to each operator’s respective coverage requirements while maintaining all of the characteristics of an individual network with respect to our customers. RAN sharing makes use of 3GPP standard features, permitting full technical support. As a per-minute basis.
On an annual basis, ANATEL may increase or decrease the maximum VC Rates that we are permitted to charge. In February 2012, ANATEL orderedresult, RAN sharing agreements allow us to reduce operating expenses and capital expenditures.
In November 2012, we entered into a memorandum of understanding with TIM under which we agreed to the joint use of elements of our VC Rates4G network under a RAN sharing model pursuant to which we have invested in (and provided TIM with access to) infrastructure in certain cities, while TIM has invested in (and provided us with access to) infrastructure in other cities. In late 2013, we and TIM extended this memorandum of understanding to additional cities and revised certain obligations of each party under the memorandum of understanding, which we refer to as the 2013 RAN Sharing Agreement. The 2013 RAN Sharing Agreement has a term of 15 years. Under the 2013 RAN Sharing Agreement, we offer 4G technology to over 80% of urban areas in all Brazilian capital cities and cities with over 500,000 inhabitants. In 2015, we expanded the 2013 RAN Sharing Agreement with TIM to cities with over 200,000 inhabitants, 133 municipalities covered by approximately 10%, although4G technology, and we are appealingbegan a RAN sharing arrangement with Telefônica Brasil. In 2016, we expanded to cities with over 100,000 inhabitants, reaching 284 cities with 4G coverage. In 2017, we expanded to cities with less than 100,000 inhabitants, reaching 813 cities with 4G coverage. In 2018, we and TIM amended the timing2013 RAN Sharing Agreement to update the technology covered by the agreement to permit infrastructure sharing in the 1800 MHz spectrum technology.
In June 2015, we entered into a memorandum of understanding under which we agreed to the joint use of elements of the application4G network under a RAN sharing model pursuant to which Oi, TIM, and Telefônica Brasil agreed to invest proportionally (50% Telefônica Brasil, 25% Oi and 25% TIM) in sites in certain cities based on each operators’ respective coverage obligations, which we refer to as the 2015 RAN Sharing Agreement. The 2015 RAN Sharing Agreement has a term of this rate decrease12 years. In early 2016, ANATEL required the inclusion of additional clauses in the agreement allowing an additional operator to our company as our VC Rates was increasedbe added. This agreement covered 31 cities in Region I by 1.54%2015, 171 cities in accordance2016 and 427 cities in 2017.
Satellite Network and Leases
Residential Services
We have deployed a range of satellite-based services to comply with our application for this increasepublic service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. The satellite network comprises satellite earth stations located in February 2012.
ANATEL has changed our VC-1 ratesless-populated rural areas, as follows:
ANATEL has changed our VC-2 and VC-3 rates as follows:
As a resultMarabá. Our fiber optic backbone connects all these hub stations. The integration of the substantial reductions in VC Rates over the past several years, and in keeping withland-based segment of our strategy of simplifying our portfoliossatellite network allows us to enhance the customer experience, in 2015 we launched severalprovide fixed-line and mobile plansvoice service to our subscribers in any location in our fixed-line service areas.
As of December 31, 2018, we leased transponders from our affiliate Hispamar with:
98.3 MHz of capacity on the Amazonas 3 satellite in Ku band and 540 MHz of capacity on the Amazonas 2 satellite in Ku band to provide voice and data services to approximately 3,000 localities; and
754 MHz of capacity on the Amazonas 3 satellite in C band and 432 MHz of capacity on the Amazonas 2 satellite in C band to provide voice and data services to approximately 390 municipalities.
DTH Network
We provide our DTH services through satellite uplinks that allow all-net callsreceive, encode and transmit the television signals to satellite transponders (1) located in Lurin, Peru that we lease from a subsidiary of Telefónica S.A., and (2) through our own facilities in Barra da Tijuca near Rio de Janeiro.
As of December 31, 2018, we leased transponders to provide DTH services from:
Telefónica S.A with 216 MHz of capacity on the Amazonas 3 satellite in Ku band and 36 MHz of capacity on the Amazonas 2 satellite in Ku band; and
SES New Skies with 1.5 GHz of capacity on theSES-6 satellite in Ku band.
Network Maintenance
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede, as well as one third-party service provider, Telemont. We employ our own team of technicians for a flat fee. All-net plans eliminate the effect of VC Rate reductions on our customers’ telephone billsinternal plant and simplify the billing process.
Fixed Line-to-Fixed-Line Long Distance RatesInsourced Network Maintenance
IfIn May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A.
We have entered into arms’-length services agreements with our wholly-owned subsidiary Serede to perform our external plant and equipment maintenance, installation and network servicing in the States of São Paulo, Rio de Janeiro, Rio Grande do Sul, Santa Catarina, Paraná, Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá.
In January 2012, we entered into a caller selects oneservices agreement with Serede for installation, operation, and corrective and preventive maintenance in connection with our external plants and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in certain parts of our carrier selection codes for a long-distance call that originates and terminates on fixed-line telephones,the State of Rio de Janeiro. Over the years, we receive the revenues from the call and must pay interconnection feeshave amended this agreement to expand its scope to the service providers that operate the networks on which the call originates and terminates. Rates for these long-distance calls are based on the physical distance separating callers (which are categorized by four distance ranges), timeentirety of the day and dayState of the week, and are applied on a per-minute basis for the durationRio de Janeiro (following our acquisition of the call. Rates on these calls are applied on a per-minute basis.
On an annual basis, ANATEL increases or decreases the maximum domestic fixed line-to-fixed line long-distance rates that we are permitted to charge. ANATEL increased the rates that our company and Telemar may charge by an average of 0.55% as of February 8, 2013, 0.65% as of April 18, 2014, and 3.6% as of June 13, 2015. Discounts from the domestic fixed line-to-fixed line long-distance rates approved by ANATEL may be granted to customers without ANATEL approval.
Mobile Rates
Mobile telecommunications serviceTelemont’s operations in Brazil, unlike in the United States, is offered on a “calling-party-pays” basis under which a mobile subscriber pays only for calls that he or she originates (in addition to roaming charges paid on calls made or received outside the subscriber’s home registration area). A mobile subscriber receiving a collect call is also required to pay mobile usage charges.
Our revenues from mobile services consist mainly of charges for local and long-distance calls paid by our pre-paid and post-paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his or her home registration area, we are permitted to charge that customer the applicable roaming rate. We offer basic service plans (post-paid and pre-paid)Rio de Janeiro), as well as non-discriminatory alternativesthe States of São Paulo, Rio Grande do Sul, Santa Catarina and Paraná (following our acquisition of A.R.M Engenharia in June 2016). The total estimated payments under this contract, which expires in January 2022, are approximately R$10.0 billion.
In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. In July 2016, we entered into a services agreement with Rede Conecta for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá. The total estimated payments under this contract, which expires in June 2021, are approximately R$3.2 billion.
Outsourced Network Maintenance
In October 2012, we entered into five-year services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total payments under this contract, which expired in October 2017, amounted to R$3.7 billion.
In October 2017, we entered into new services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total estimated payments under this contract, which expires in October 2022, are approximately R$4.2 billion.
Research and Development
We conduct independent innovation, research and development in areas of telecommunications services but historically we have not independently developed new telecommunications technologies. We depend primarily on suppliers of telecommunications equipment for the development of new technology. Our investments in innovation, research and development totaled R$17 million in 2018, R$16 million in 2017 and R$20 million in 2016.
Joint Venture, Associated Companies and AssetsHeld-For-Sale
Joint Venture
We own 19.04% of the share capital of Hispamar Satélite S.A., or Hispamar, aSpanish-Brazilian enterprise created in November 1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the Amazonas 2 and Amazonas 3 satellites. In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar.
In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. This satellite provides both C and Ku band transponders andon-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite.
In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. This satellite provides both C and Ku band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, which operates and leases all of the transponder’s space segment on this satellite.
Associated Company
We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to our company and is engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo.
AssetsHeld-for-Sale
Our board of directors has authorized our management to take the necessary measures to market our shares in Africatel and TPT—Telecomunicações Públicas de Timor, S.A., or TPT. As a result, we record the assets and liabilities of Africatel and TPT asheld-for sale, although we do not record Africatel or TPT as discontinued operations in our income statement due to the basicimmateriality of the effects of Africatel and TPT on our results of operations.
Africatel
Africatel Holdings B.V., or Africatel, was formed in May 2006 and indirectly holds our equity interests in Unitel, Cabo Verde Telecom, S.A., or CVTelecom, and CST – Companhia Santomense de Telecomunicações S.A.R.L., or CST, Directel—Listas Telefónicas Internacionais, Lda., or Directel. We own 86% of the share capital of Africatel.
Unitel
Africatel indirectly owns 25% of the share capital of Unitel, a mobile service plans. Asprovider in Angola. Following our acquisition of December 31, 2015, fewer than 1%PT Portugal in 2014, which resulted in our acquisition of our interest in Africatel, we brought suits against Unitel in the courts of Angola and instituted arbitral proceedings against the other shareholders of Unitel in the International Court of Arbitration of the International Chamber of Commerce based on our inability to collect dividends owed to us by Unitel and breaches of the Unitel shareholders’ agreement. For more information about these proceedings, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”
CVTelecom
Africatel indirectly owns 40% of the share capital of CVTelecom, a provider of fixed-line and mobile customers subscribed toservices in the Cabo Verde Islands, that was established in 1995 and provides fixed-line and mobile telecommunications services under the terms of a25-year license granted in 1996.
Following our basic plans (post-paid or pre-paid); substantially allacquisition of PT Portugal in 2014, which resulted in our acquisition of our post-paid and pre-paid customers subscribed to non-discriminatory alternative plansinterest in Africatel, we instituted arbitral proceedings against the Republic of Cape Verde in the International Court of Arbitration of the International Chamber of Commerce, disputing its interpretation of the shareholders’ agreement governing CVTelecom which the Republic of Cape Verde terminate this shareholders’ agreement. In March 2015, we also commenced an arbitration proceeding against the Republic of Cabo Verde before the International Centre for Settlement of Investment Disputes, or ICSID, due to the basic service plans.violation of CVTelecom’s exclusivity rights under the concession agreement by the Republic of Cabo Verde.
Although subscribers of a plan cannot be forced to migrate to new plans, existing plans may be discontinued as long as all subscribersCST
Africatel indirectly owns 51% of the discontinued plan receiveshare capital of CST, a notice toprovider of fixed and mobile services in São Tomé and Principe, that effectwas established in 1989 and are allowed to migrate to new plans within six monthsprovides fixed-line and mobile telecommunications services under the terms of such notice.a20-year license granted in 2007.
Directel
Africatel indirectly owns 100% of the share capital of Directel, a Portuguese entity with subsidiaries in Angola, Cabo Verde, Mozambique, and Kenya, which publish telephone directories and operate related data bases in those countries.
TPT
We own 76.14% of the share capital of TPT, a Portuguese holding company that owns 54.01% of the share capital of Timor Telecom, S.A., or Timor Telecom, which provides telecommunications, multimedia and IT services in Timor Leste in Asia. Our wholly-owned subsidiary PT Participações also holds 3.05% of the share capital of Timor Telecom.
Regulation of the Brazilian Telecommunications Industry
Overview
Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation under the Brazilian General Telecommunications Law (Lei Geral das Telecomunicações), or the General Telecommunications Law, and a comprehensive regulatory framework for the provision of telecommunications services promulgated by ANATEL. We provide fixed-line, domestic and international long-distance, mobile telecommunications, data transmission andPay-TV services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in designated geographic areas, as well as set forth certain obligations with which we must comply.
ANATEL is an administratively independent and financially autonomous regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and ANATEL Regulation (Regulamento da Agência Nacional de Telecomunicações). ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is required to report on its activities to the Brazilian Ministry of Communication, and has authority to propose and to issue regulations that are legally binding on telecommunications service providers. ANATEL also has the authority to grant concessions and licenses for all mobile calls made by our pre-paid customers,telecommunications services, other than broadcasting services. In addition, ANATEL is authorized to direct and for mobile calls made by our post-paid customers in excesscontrol the provision of their allocated monthly numberservices, the shareholding structure of minutes, on a per-minute basis.
Rates under our mobile plans may be adjusted annually by no more than the rate of inflation, as measured by the IGP-DI. These rate adjustments occur on the anniversary dates of the approval of the specific plans. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval. The rate of inflation as measured by the IGP-DI was 5.5% in 2013, 3.8% in 2014, and 10.7% in 2015.
Network Usage (Interconnection) Rates
Fixed-Line Networks
Our revenues from the use of our local fixed-line networks consist primarily of payments on a per-minute basis, which are charged at rates designated by ANATEL as TU-RL rates, from:
Fixed-line service providers are not permitted to charge othermust comply and require equal treatment of customers by the service providers.
The three principal providers of fixed-line service providers for local fixed-line calls originating on their local fixed-line networkstelecommunications services in Brazil, Telefônica Brasil, Claro and terminating onour company, provide these services under the other provider’s local fixed-line networks. TU-RL rates vary depending on the time of the daypublic regime. In addition, CTBC and day of the week, and are applied on a per-minute basis.
Our revenues from the use of our long-distance networks consist primarily of payments on a per-minute basis,Sercomtel, which are charged at rates designated by ANATEL as TU-RIU rates, from other long-distance carriers that use a portion of our long-distance networks to complete calls initiated by callers that have not selected us as the long-distance provider. TU-RIU rates for intrasectorial calls are designated by ANATEL as TU-RIU1 rates, and TU-RIU rates for intersectorial calls are designated by ANATEL as TU-RIU2 rates.
TU-RIU rates vary depending on the time of the day and day of the week, and are applied on a per-minute basis. Since January 1, 2013, the TU-RIU rates of Oi and Telemar have been equal to 20% of their respective domestic fixed line-to-fixed line long-distance rates for such calls.
In July 2014, ANATEL approved a rule for the definition of maximum fixed reference rates, including TU-RL and TU-RIU, for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, TU-RL and TU-RIU reference rates will decline from 2016 through 2019 when TU-RL and TU-RIU reference rates reflecting the long-run incremental cost methodology will apply.
Mobile Networks
Our revenues from the use of our mobile networks consist primarily of payments on a per-minute basis from (1)secondary local fixed-line, long-distance and mobile services providers to complete calls terminating on our mobile networks, and (2) long-distance service providers for the transfer to their networks of calls originating on our mobile networks.
The terms and conditions of interconnection to our mobile networks, including the rates charged to terminate calls on these mobile networks, which are designated by ANATEL as VU-M rates, commercial conditions and technical issues, may be freely negotiated between us and other mobile and fixed-line telecommunications service providers, operate under the public regime. All of the other providers of fixed-line telecommunications services and all providers of personal mobile services and data transmission services in Brazil operate under the private regime.
Public Regime
Overview
Providers of public regime services are subject to compliancemore obligations and restrictions than providers of private regime services. Under Brazilian law, providers of public regime services are subject to certain requirements with regulations establishedrespect to services such as network expansion and network modernization. Under their concession agreements, public regime service providers are required to comply with the provisions of the General Plan of Universal Service Goals (Plano Geral de Metas de Universalização), or PGMU, which was most recently updated in December 2018. For more information about the PGMU and our obligations thereunder, see “—General Plan of Universal Service Goals (PGMU).”
In addition, public regime service providers as well as private regime service providers, are required to comply with the provisions of the General Plan of Quality Goals (Plano Geral de Metas de Qualidade), or PGMQ, which was adopted by ANATEL relating to traffic capacityin June 2013, and interconnection infrastructure that must be made available to requesting providers, among other things. We must offer the same VU-M rates to all requesting service providers on a nondiscriminatory basis. We apply VU-M charges on a per-minute basis.
Under ANATEL regulations, in December 2013 ANATEL established the maximum VU-M rate of R$0.33 per minute that is applicable in the event that providers could not agree upon the VU-M applicable in their interconnection agreements. Under the General Plan on Competition Targets (Plano Geral de Metas de Competição), in February 2014 the VU-M rateor PGMC, which was reduced to 75% of the maximum VU-M rate establishedadopted by ANATEL in November 2012 and updated in July 2018. For more information about the PGMQ and the PGMC see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
The rates that public regime service providers may charge customers are subject to ANATEL supervision. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in the concession agreements and was designed based on a price cap model. For more information, see “Our Services—Fixed-Line Telephone Services—Rate Regulation.”
Concessions are granted for a fixed period of time and are generally renewable only once.ANATEL may terminate the concession of any public regime service provider upon the occurrence of certain events described below under “—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications.
General Plan of Universal Service Goals (PGMU)
The PGMU sets forth the principal network expansion and modernization obligations of the public regime providers. The PGMU was approved by Decree No. 9,619 and became effective on December 2013,21, 2018, the date when it was published in the Official Gazette.
Public regime providers are subject to network expansion requirements under the PGMU, which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the PGMU or in our concession agreements may result in fines and penalties of up to R$50 million, as well as potential revocation of our concessions.
The PGMU requires the following, among other things:
local fixed-line service providers to provide individual access to fixed-line voice services to economically disadvantaged segments of the Brazilian population within their service areas, through programs to be established and regulated by ANATEL;
local fixed-line service providers to install public telephones on demand in locations with more than 100 inhabitants;
local fixed-line service providers to install fixed lines in locations with more than 300 inhabitants (1) in regions where there is no fixed line installed, within 120 days of a request and (2) in regions where fixed lines are already installed, within 7 days of a request for 90% of requests and in Februaryup to 25 days of a request for the remaining 10% of requests; and
local fixed-line service providers to gradually provide voice access in the wireless local loop technology with capacity for 4G services in 1,400 locations (of which 1,155 apply to Oi), according to the following schedule: 10% of such locations by December 31, 2019; 25% by December 31, 2020; 45% by December 31, 2021; 70% by December 31, 2022; and 100% by December 31, 2023.
Similarly to the 2008 amendments to the PGMU that eliminated the requirements to provide public telephone centers (postos de serviço telefônico) in exchange building backhaul, the 2018 PGMU eliminated the requirements to provide multifacility service centers (postos de serviço multifacilidade), which are public centers located in rural areas that offers various telecommunications services, including voice, access to the internet and digital transmission of text and images, and to install and maintain public telephones within a fixed-line service concession, in exchange for other obligations to be defined.
The value of the obligations currently imposed by the PGMU and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, is subject to discussion between the parties, with ANATEL having the ability to make the final valuation.
Termination of a Concession
ANATEL may terminate the concession of any public regime service provider upon the occurrence of any of the following:
an extraordinary situation jeopardizing the public interest, in which case the Brazilian government is authorized to start rendering the services set forth under the concession in lieu of the concessionaire, subject to congressional authorization and payment of adequate indemnification to the owner of the terminated concession;
termination by the provider (through an agreement with ANATEL or pursuant to legal proceedings) as a consequence of an act or omission of the Brazilian government that makes the rendering of the services excessively burdensome to the provider;
annulment of the concession due to a contractual term, which is deemed by subsequent law to be illegal;
material failure to comply with the provider’s universalization targets;
failure to meet insurance requirements set forth in the concession agreement;
asplit-up,spin-off, amalgamation, merger, capital reduction or transfer of the provider’s control without ANATEL’s authorization;
the transfer of the concession without ANATEL’s authorization;
the dissolution or bankruptcy of the provider; or
an extraordinary situation in which Brazilian government intervention, although legally permissible, is not undertaken, as such intervention would prove to be inconvenient, unnecessary or would result in an unfair benefit to the provider.
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services.
Service Restrictions
Public regime service providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with other public regime providers, including:
a prohibition on members of the same economic group holding more than two licenses for the provision of telecommunications services in the public regime, which would include holding more than 20% of the voting shares of or controlling (as such term is defined under ANATEL’s regulations) more than two providers of public regime telecommunications services; and
a restriction, as set forth in the PGO, on mergers between providers of public regime telecommunications services.
In September 2011, Law No. 12,485 became effective, which creates a new legal framework for subscription television services in Brazil, and determines, among other provisions to:
allow fixed-line telephone concessionaires, such as us, to enter the cable television market in Brazil;
remove existing restrictions on foreign capital investments in cable television providers;
limit the total and voting capital held by broadcast concessionaires and authorized providers, and in television programmers and producers, with headquarters in Brazil to 30%; and
prohibit telecommunications service providers with collective interests from acquiring rights to disseminate images of events of national interest and from hiring domestic artistic talent.
Private Regime
Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations and applicable regulation.
For example, private regime service providers are required to comply with the provisions of the PGMQ and the PGMC. For more information about the PGMQ and the PGMC, see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
Our Services
Fixed-Line Telephone Services
Regulatory Overview
We provide the majority of our fixed-line telephone services (Serviço Telefônico Fixo Comutado—STFC) in accordance with concession agreements under the public regime. For more information about the regulations applicable to public regime telephone service providers, see “—Public Regime.”
Our Concessions and Authorizations
The following table sets forth certain details of our concessions and authorizations to provide local, domestic long-distance and international long-distanced fixed-line telephone services:
Geographic Scope | Type of Service | Termination Date | Regime | |||
| Region I of the PGO – States of Rio De Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraiba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amapá, Amazonas e Roraima, except Sector 3 of Region I of the PGO(1) | Local / Domestic Long-Distance | December 31, 2025 | Concession | |||
| Region I of the PGO – Sector 3(1) | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| Region II of the PGO – States of Santa Catarina, Paraná, Mato Grosso, Mato Grosso do Sul, Goiás, Tocantins, Distrito Federal, Rondônia, Acre and Rio Grande Do Sul, cxcept for Sectors 20, 22 and 25(2) | Local / Domestic Long-Distance | December 31, 2025 | Concession | |||
| Region II of the PGO – Sectors 20, 22 and 25(2) | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| Region III of the PGO – São Paulo | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| National | International Long Distance | Indeterminate | Authorization |
| (1) | Sector 3 of Region II of the PGO corresponds to 57 municipalities in the State of Minas Gerais. |
| (2) | Sectors 20, 22 and 25 of Region II of the PGO correspond to the following municipalities: Londrina, Paraná; Tamarana, Paraná; Paranaíba, Mato Grosso do Sul; Buriti Alegre, Goiás; Cachoeira Dourada, Goiás; Inaciolândia, Goiás; Itumbiara, Goiás; Paranaiguara, Goiás; and São Simão, Goiás. |
Each of our concession agreements:
sets forth the parameters that govern adjustments to our rates;
requires us to comply with the network expansion obligations set forth in the PGMU;
requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of our local fixed-line and domestic long-distance services (excluding taxes and social contributions) during the immediately preceding year;
In addition, each of our concession and authorization agreements:
sets forth the conditions under which ANATEL may access information from us;
requires us to comply with certain quality of service obligations as well as the quality of service obligations set forth in the PGMQ;
requires us to pay fines for anynon-compliance with the regulatory rules including systemic service interruptions.
In addition, the PGMU requires us to provide transmission lines connecting our fiber-optic internet backbones to municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these concession agreements, we are obligated to set up backhaul in 3,188 municipalities in Regions I and II. The facilities that we constructed to meet these obligations are considered to be property that is part of our concessions and will therefore revert to the Brazilian government on January 1, 2026. For more information about the PGMU, see “—Public Regime—General Plan of Universal Service Goals (PGMU).”
On June 27, 2014, ANATEL opened a public comment period for the revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. Throughout 2015, ANATEL, the Brazilian Ministry of Communication and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the VU-MBrazilian Ministry of Communication created a working group to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In April 2016, the Brazilian Ministry of Communication issued an ordinance addressing guidelines for the establishment of a new regulatory framework for telecommunications, which were expected to be implemented by ANATEL through the conclusion of the concession amendments. In line with the provisions of PLC 79, these guidelines provided for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the terms of concessions, which in our case are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. The implementation of these guidelines, however, depends on the passage of PLC 79 to provide the necessary legal authority and framework. As a result of the Brazilian Congress’s failure to date to pass PLC 79, the review of our concession agreements, which was scheduled to occur by June 2017, has not yet taken place, and further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal.
In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the PGO, in line with the provisions of PLC 79, which include the ability of companies operating under a concession in the public regime to convert their concessions into authorizations to operate in the private regime and thereby eliminate a number of substantial obligations currently imposed by the concession regime, in exchange for the assumption of obligations to make additional investments in their networks, primarily related to the expansion of broadband services or through the payment of fees to ANATEL. The value of the obligations currently imposed by the concession agreement and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, would be subject to discussion between the parties, with ANATEL having the ability to make the final valuation. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the PGO.
We cannot assure you that any future amendments to our concession agreements or the PGO will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we generate from our Brazilian fixed-line businesses. If the amendments to our Brazilian concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected.
Rate Regulation
Under their concession agreements, public regime service providers are required to offer basic local fixed-line plans to users. Rates for the basic long-distance services plan originated and terminated on fixed lines vary in accordance with certain criteria. The concession agreements establish aprice-cap mechanism for annual rate was reducedadjustments for basic service plans and basic domestic long-distance plans based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index.
Factor X is equal to (1) 50% of the maximum VU-Mincrease in the productivity rate establishedof public regime providers, plus (2) 75% of a factor calculated by ANATEL in December 2013. In July 2014, ANATEL approved a rulethat is designed to reflect cost optimization targets for the definitiontelecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow an annual adjustment in excess of maximum VU-M referencethe IST.
A provider may increase rates for entities with significant market power, suchindividual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as our company, based on a long-run incremental cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost methodology will apply.
Data Transmission Rates
Broadband services, IP services and frame relay services are deemed to be value-added services under ANATEL regulations and, therefore, the rates and prices for theseother services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not subjectexceed the permitted annual rate adjustment.
A provider may also offer alternative plans in addition to regulation and are market-driven. We offer broadband services subscriptions at prices that vary depending on the download speeds availablebasic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the purchased subscription.
A significant portion of our revenues from commercial data transmission services are generated by monthly charges for EILD and SLD services, which are based on contractual arrangements for the use of part of our networks. Under ANATEL regulations, because we are deemed to have significant market power in the fixed-line
services business, we are required to make publicly available the forms of agreements that we use for EILD and SLD services, including the applicable rates, and are only permitted to offer these services under these forms of agreements. ANATEL publishes reference rates for these services and if one of our customers objects to the rates that we charge for these services, that customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.
In May 2014, ANATEL approved a standard for setting maximum values for EILD services based on a long-run incremental cost methodology. In July 2014, ANATEL published reference rates for EILD services that contain a single reference table which willalternative plans may be valid from 2016 until 2020. Under ANATEL regulations, EILD reference rates will decline from 2016 through 2020 when EILD reference rates reflecting the long-run incremental cost methodology will apply. In addition, under the General Plan of Competition Targets, companies with significant market, such as our company, are required to present a public offer every six months including standard commercial conditions, which is subject to approval by ANATEL.
Our revenue from IP services isadjusted annually based on the number of data ports to which the customer is granted access. Our revenue from frame relay services consists mainly of charges for access to the data transmission network and metered service charges based on the amount of data transmitted. Such services are offered as pay-per-use or volume-based packages. Our revenue from cyber data center services is generally based on contractual arrangements that are tailored to the specific services provided.IST.
DTH and IP TV Services Rates
DTH and IP TV services are deemed to be conditional access services under the private regime, which Oi provides pursuant to authorizations. As a result, the rates and prices for these services are not subject to regulation and are market-driven. We offer DTH and IP TV subscriptions at prices that vary depending on the content of the subscription package. We offer basic subscription packages for ourOi TV services, as well as a variety of premium packages which allow subscribers to tailor the content that they receive to their individual tastes.
Marketing and Distribution
During 2015, we incurred R$406 million in marketing expenses in our Brazilian operations. On a company-wide basis, weWe focus our marketing efforts on the upscaling of existing clients while strengthening the “Oi” brand reinforcing the imagethrough our convergent services offerings and promotion of the convergence of the integrated company.ourMinha Oi smartphone application, which allows ourpre-paid customers to freely switch between their data and voice allowances. We also engage in digital marketing and multiple customer relationship management (CRM) marketing programs to support our ResidentialB2B Services business.
In 2018, we increased our Personal Mobility Servicesinvestment in advertising, with a focus on digital advertising with the aim to drive traffic to our digital channels. In addition to digital advertising, we employed traditional advertising strategies, such as television (free and our SME and Corporate Services.
We advertise through a diverse array of media outlets as part of our strategy to reach all types and classes of customers and potential customers. We use television, radio,cable), billboards, exterior signage telemarketing, direct mail and internetradio, to increase our advertising to marketcoverage, and leveraged our fixed-line, mobile, long-distance, broadband and subscription television services. We use our branded assets in advertising campaigns,owned media, such as the “Orelhão Mágico” Christmas campaign, in which children are abletelemarketing, text messaging and other points of contact, to place calls to Santa Claus fromupscale our telephone booths.current base. We sponsoralso developed a branded content strategy, combining sponsorships of sporting events and individual athletes, as well as cultural events, such as fashion shows and popular music concerts. The goal of our marketing initiatives is to increase brand awareness ofand promote our companyportfolio as a convergenttelecommunications provider capable of meeting all of the telecommunications needs of our customers and expand the use of our distribution channelscustomers. In 2019, we expect to continue to increase net operating revenue.
Our principal marketing expenditures to support our Residential Services were designed to:
advertising strategies described above.
Our principal marketing expenditures to support our Personal Mobility Services were designed to:
In 2015, our SME and Corporate Services business did not engage in any marketing initiatives for its products and services. Instead, our ongoing marketing efforts in our SME and Corporate Services business include:
Distribution Channels
We distribute our services through channels focused on three separate sectors of the telecommunications services market: (1) residential customers, including customers of our mobile services to whom we sell bundled plans; (2) personal mobility customers that purchase our mobile services independently of our bundled plans; and (3) business and corporate customers.
Residential Services
Our distribution channels for residential customers are focused on sales of fixed-line services, including voice, broadband services andOi TV, and post-paid mobile services. As part of the restructuring of our distribution channels, we have begun to provide more extensive training to our employees and the employees of third-party sales agents and have revised our commission structures to incentivize selective sales of bundled and higher-value plans and services that generate higher ARPU and reduce customer churn rates. As of December 31, 2015,2018, the principal distribution channels that we used for sales to residential customers were:
| • | our own network of stores, which included |
| • | 573 “Oi” franchised service stores and kiosks located in the largest shopping malls and other high density areas throughout |
approximately 2706,730 stores located throughout our service areas that primarily sell telecommunications products and services and have entered into exclusivity agreements with us.us;
our telemarketing sales channel, which is operated by our call center and other third-party agents and consists of approximately 1,6501,877 sales representatives that answer more than 1.2 million559 thousand calls per month. This channel provides us with the ability to pro-activelyproactively reach new customers, thereby increasing our client base and revenues, and also receives calls prompted by our offers made in numerous types of media.media;
our “teleagents” channel, which consists of approximately 300682 local sales agents that operate in specific regions and complement our telemarketers.telemarketers;
oure-commerce sites through which customers may purchase a variety of our services.
Personal Mobility Services
Our distribution channels for personal mobility customers are focused on sales of mobile services to post-paid customers andpre-paid customers, including mobile broadband customers. As part of the restructuring of our distribution channels, our distribution channels for our post-paid personal mobility services have converged with our distribution channels for residential services. As of December 31, 2015,2018, the principal distribution channels that we used for sales of ourpre-paid personal mobility services were:
571 stores that are part of large national chains which sell our post-paid andpre-paid personal mobility services and SIM cards and pre-paid mobile cards;
approximately 2315 multibrand distributors that distribute our SIM cards andpre-paid mobile cards to approximately 179,000265,000 pharmacies, supermarkets, newsstands and similar outlets; and
our telemarketing sales channel has of 1,137 sales representatives that answer more than 620 thousand calls per month selling our post-paid personal mobility services; and
our website, through which ourpre-paid customers may recharge their SIM cards.
SME and CorporateB2B Services
We have established separate distribution channels to serve smallSME and medium-sized enterprise, or SMEs, and large enterprises, or corporate customers. We market a variety of services to SMEs, including our core fixed-line, broadband and mobile services, as well as our value-added services, advanced voice services and commercial data transmission services. We have five regional offices from which approximately 100 employees supervise our marketing efforts to SMEs and our third-party sales force serving this sector. We also have begun to provide more extensive training to our employees and the employees of third-party sales agents. As of December 31, 2015,2018, the principal distribution channels that we use to market our services to SMEs were:
| • | “Oi” exclusive agents with |
our telemarketing sales channel, which consists of threetwo agents that use approximately 350 sales representatives that are specifically trained to discuss the business needs of our prospective SME customers to make sales calls, as well as representatives in our call center and representatives at call centers under contract with us to receive calls from existing and prospective SME customers to sell services to new customers and promote higher-value and additional services to existing customers. In addition, our telemarketing channel utilizes approximately 300 customer retention representatives.representatives; and
| • | our website and theOi Mais Empresas application. |
We market our entire range of services to corporate customers through our own direct sales force which meets with current and prospective corporate customers to discuss the business needs of these enterprises and design solutions intended to address their communications needs. Our client service model focuses on post-sale service and we regularly discuss service needs and improvements through calls and meetings with our customers. As of December 31, 2015,2018, our corporate sales team, includingexcluding post-sale service personnel, was composed of approximately 1,250365 employees operating in six11 regional offices.
Rates, Billing and Collection
Rates
Our rates for certain services, including basic local fixed-line and domestic long-distance plans, interconnection, EILD and SLD services, are generally subject to regulation by ANATEL Under our current authorizations, we are allowed to set prices for our mobile service plans, provided that such amounts do not exceed a specified inflation adjusted cap. The rates for other telecommunications services, such as broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation. Furthermore, the rates for DTH and IP TV services are not subject to ANATEL regulation.
For more information about the regulations applicable to our rates, see “—Regulation of the Brazilian Telecommunications Industry.”
Billing and Collection
Residential Services
We send each of our Residential Services customers a monthly bill covering all the services provided during the prior monthly period. Customers are grouped in billing cycles based on the date their bills are issued. Each bill separately itemizes service packages, local calls, long-distance calls, calls terminating on a mobile network, toll-free services and other services such as call waiting, voicemail and call forwarding. Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus aone-time late charge of 2% of the amount outstanding. We have agreements with several
banks for the receipt and processing of payments from our Residential Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our Residential Services customers as agents for these banks. As of December 31, 2018, 17.2% of all accounts receivable due from our Residential Services customers in Brazil were outstanding for more than 30 days and 12.1% were outstanding for more than 90 days.
We are required to include in our monthly Residential Services bills charges incurred by our customers for long-distance services provided by other long-distance service providers upon the request of these providers. We have billing agreements with each long-distance telecommunications service provider that interconnects with our networks under which we bill our customers for any long-distance calls originated on our network that are carried by another long-distance service provider and transfer the balance to the relevant provider after deducting any access fees due for the use of our network.
Payments of Residential Services bills are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus a one-time late charge of 2% of the amount outstanding.
ANATEL regulations permit us to restrict outgoing calls made by a Residential Services customer when15 days after we send the customer’s account is more than 31 dayscustomer a past due notice, restrict incoming calls received by a Residential Services customer when30 days after the customer’s accountrestriction on outgoing calls is more than 61 days past due,imposed, and disconnect a Residential Services customer whenafter 30 days after the customer’s accountrestriction on incoming calls is more than 91 days past due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction.imposed. The disconnection process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before the Residential Services customer may be ultimately disconnected due tonon-payment. Notices range from voice messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays.
Personal Mobility Services
We bill our post-paid Personal Mobility Services customers on a monthly basis and itemize charges in the same manner as we bill our Residential Services customers. In addition, the monthly bills also provide details regarding minutes used and roaming charges. Payments are due within an average of 15 days after the billing date. We charge late-payment interest at a rate of 1% per month plus aone-time late charge of 2% of the amount outstanding. As with our Residential Services business, we have agreements with several banks for the receipt and processing of payments from our post-paid Personal Mobility Services customers. A variety of businesses, such as lottery houses, drugstores and grocery stores, accept payments from our post-paid Personal Mobility Services customers as agents for these banks. As of December 31, 2018, 17.7% of all accounts receivable due from our Personal Mobility Services customers in Brazil were outstanding for more than 30 days and 15.7% were outstanding for more than 90 days.
ANATEL regulations permit us to partially suspend services to a post-paid Personal Mobility Services customer when the customer’s account is more than 15 days past due, restrict all incoming calls received and outgoing calls made and text messages sent by a post-paid Personal Mobility Services customer when15 days after we send the customer’s accountcustomer a past due notice, restrict incoming calls and text messages received by a post-paid Personal Mobility Services customer 30 days after the restriction on outgoing calls and text messages is more than 45 days past due,imposed, and cancel services to a post-paid Personal Mobility Services customer whenafter 30 days after the customer’s accountrestriction on incoming calls is more than 90 days past due, provided in each case that 15-days’ prior notice has been given to that customer prior to the imposition of each restriction.imposed. The cancellation process thus comprises several stages, including customer notification regarding the referral of their delinquency to credit bureaus, before services to the post-paid Personal Mobility Services customer may be ultimately cancelled due tonon-payment. Notices range from text messages to active calls for negotiation with the customer. Our collection system enables us to access delinquent subscribers’ accounts according to their payment profile. This profile takes into consideration, among other things, the length of subscription, the outstanding balance of the account and the longest payment delays. We have also implemented an information tool to assist with account management that is designed to warn subscribers of high outstanding amounts due and unpaid.
Customers of ourpre-paid Personal Mobility Services can only use a paid service if they have enough active credits in their accounts to do so. In order to acquire credits, customers must recharge their SIM cards in one of our many points of sales. Services are charged directly from the customer´s accounts and are free ofbad-debt risk.
NetworkCompetition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and Facilitiesservice convergence, market consolidation and combined service offerings by service providers.
Residential Services
We are the leading provider of residential services in our fixed-line service areas. Based on information available from ANATEL, as of December 31, 2018, we had a market share of 51.1% of the total fixed lines in service in our service areas (including the number fixed lines provided to our B2B Services customers). Our principal competitors for fixed-line services in our service areas are Claro and Telefônica Brasil.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services.
In addition, we face competition from providers of cable television services, particularly Claro and Telefônica Brasil, which provide local fixed-line services and broadband services (in many areas at higher speeds than our offerings) to residential customers through their cable network in in municipalities in our service areas that have the highest concentration of purchasing power.
Telefônica Brasil has been increasing its competitive activities through traditional fixed-line networks in our fixed-line service areas, expanding its fiber optic network in high-income residential areas and increasing its services tolow- andmedium-size businesses.
The decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers for fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as our company, they have established networks in the regions in which they operate and often have a market share of approximately 15% of broadband customers.
The primary providers of subscription television services in the regions in which we provide Residential Services are SKY, which provides DTH services, and Claro, which provides DTH service under the “Claro TV” brand andPay-TV services using coaxial cable under the “Net” brand.
Personal Mobility Services
The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile telecommunications services. We compete primarily with Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” TIM and Claro, each of which provides services throughout Brazil. As of December 31, 2018, based on information available from ANATEL (which includes B2B Services subscribers), we had a market share of 16.5% of the total number of mobile subscribers in Brazil.
We believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype.
B2B Services
The competitive landscape which we face relating to the fixed-line and mobile services we provide to our B2B customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers.
In recent years, there has been a shift among corporate and SME services providers toward value-added services. With the exception of theOi Mais Empresas app and web service, our value-added products and services for the SME segment are substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate customers are Claro, Telefônica Brasil and TIM, as well as smaller niche companies.
Technology
Our Brazilian networks are comprised of physical and logical infrastructures through which we provide fully-integrated services, whether fixed-line or mobile, voice, data or image, thereby optimizing available resources. We monitor our networks remotely from our centralized national network operations center in Rio de Janeiro. Network operating and configuration platforms, located at the network operations center, perform failure monitoring, database and configuration management, security management and performance analysis for each network.
Access Networks
Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment andWi-Fi hotspots. Our fixed-line networks are fully digitalized.
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes (MSANs), or MSANs, to our aggregation networks, or are rerouted to our aggregation networks through Digital Subscriber Line Access Multiplexer or DSLAM, equipment which(DSLAMs), to our aggregation and transportation networks. The analog voice signals are split the voice signal from the digital signaldata signals which isare transmitted using ADSL or VDSL technology. We are engaged in a long-term program to update our MSAN equipment to DSLAM equipment as demand for data services increases. As of each of September 30, 2018 and December 31, 2015,2017, approximately 90%93% of our fixed-line network had been updated towas operating with support ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in 4,476approximately 4,700 municipalities.
ADSL technology allows high-speed transmission of voice and data signals on a single copper wire pair for access to the network. Since voice transmission through telephone lines uses only one of many available frequency bands, the remaining frequency bands are available for data transmission. Our network supports ADSL2+ and VDSL2, or very-high-bitrate digital subscriber line, technologies. ADSL2+ is a data communications technology that allows data transmission at speeds of up to 24 Mbps downstream and 1 Mbps upstream, which is much faster than data transmission through conventional ADSL. ADSL2+ permits us to offer a wider range of services than ADSL, including IP TV.ADSL. VDSL2 is a DSL technology providing faster data transmission, using technologies such as vectoring and bonding it is possible to reach higher throughput up to 100600 Mbps (downstream and upstream), permitting us to support high bandwidth applications such as HDTV,HD Video, VoIP and broadband internet access, over a single connection.
We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber to the home, or FTTH, networks based on gigabit passive optical network, or GPON, technology to support VDSL2 service and facilitate our offering of ourOi TV service.FTTH triple play services. The implementation of this technology permits us to provide broadband with speeds up to 100200 Mbps to residential customers and up to 1 Gbps to commercial customers.
For our non-residential Our GPON FTTH network currently reaches more than 1.5 million homes, and we expect to reach more than 500 thousand customers we have a fully integrated and managed network providing access for networks based on internet protocol, or IP, and Asynchronous Transfer Mode, or ATM, protocol over legacy copper wire through which are able to provide:
The following table sets forth selected information about our fixed-line networks asend of the dates and for the periods indicated.2019.
| As of and For Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
Installed access lines (in millions) | 27.5 | 28.0 | 28.3 | |||||||||
Access lines in service (in millions) | 14.9 | 16.3 | 17.7 | |||||||||
Public telephones in service (in thousands) | 651.7 | 653.3 | 655.6 | |||||||||
Broadband access lines in service (in millions) | 5.9 | 6.1 | 6.1 | |||||||||
Mobile devices access our GSM (Global System for Mobile Communications), or 2G, mobile networks on frequencies of 900 MHz/1800 MHz, our 3G mobile networks on frequencies of 2100 MHz and our 4G mobile networks on frequencies of 25001800 MHz/2600 MHz. Our 2G access points use General Packet Radio Service, or GPRS, which allows speeds in the range of 115 kilobytes per second (Kbps)(kbps), and Enhanced Data Rates for Global Evolution, or EDGE, which allows speeds in the range of 230 Kbps,kbps, to send and receive data signals. Our 3G access points use high speed packet access,High Speed Packet Access, or HSPA, which allows speeds in the range of 14.2 Mbps, to send and receive data signals. Our 4G access points use 10+10 MHz and 2x2 and 4x4 Multiple Input Multiple Output, depending on the site configuration, which allows speeds in the range of 75 Mbps (2x2 MIMO configuration sites) and 300 Mbps (4x4 MIMO and Carrier Aggregation configuration sites), to send and receive data signals. Voice and dataAlthough currently the majority of voice signals are sent and received through our 2G and 3G access points are routed to our aggregation networks.networks, we are initiating VoLTE (Voice over LTE) that will enable 4G routes voice signal over 4G access points, allowing offering new type of services based on IMS (IP Multimedia Subsystem) platform. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
As of December 31, 2015, our 2G mobile access networks, consisting of 13,777 active radio base stations, covered 3,386 municipalities, or 93% of the urban population of Brazil. We have GPRS coverage in 100% of the localities covered and EDGE coverage in all state capitals.
As of December 31, 2015, our 3G mobile access networks, consisting of 9,265 active radio base stations, covered 1,288 municipalities, or 79% of the urban population of Brazil. We have HSPA coverage in all state capitals.
As of December 31, 2015, our 4G access networks, consisting of 5,213 active radio base stations, covered 133 municipalities, or 51% of the urban population of Brazil.
In addition to these mobile access networks, we also operateWi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. Since 2012, we have provided outdoor urban wireless networks, including in the neighborhoods of Copacabana and Ipanema in the city of Rio de Janeiro. As of September 30, 2018 and December 31, 2015,2017, ourWi-Fi network consisted of over twomore than 1.6 million and 1.5 million hotspots, respectively, with broadband access compatible with over twomore than 1.6 and 1.5 million access points, respectively, provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.
Aggregation Networks
Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. WeFor a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using Synchronous Digital Hierarchy, or SDH protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks. We are currently deploying Metro Ethernet networks in additional cities to serve rising customer demand. Our Metro Ethernet networks are fully-integrated management systems and provide:
ethernet data services from 4 Mbps up to 1 Gbps forpoint-to-point and multipoint dedicated access;
ethernet access services from 4 Mbps up to 1 Gbps for IP access and MPLS/VPN access;
aggregation network services for GPON platforms; and
Dense Wavelength Division Multiplex, or DWDM, systems for services above 1Gbps to prevent overbooking our Metro Ethernet network.
Historically, In the past,we have used ATM protocol to transport digital signals through our access network fromnon-residential customers that require dedicated bandwidth to our switching stations. Our ATM networks have a fully-integrated management system and provide:
In response to changing customer needs, we converted elements of our network that use ATM and SDH protocols, that permit us to offer dedicated bandwidth to our customers, to MPLS protocol, which supports IP and permits the creation of VPNs through our MetroEthernet networks.
We have begun tonow useMPLS-TP capable devices that have been designed to interface with our existing Metro Ethernet Network to increase the bandwidth of our networks to support our 4G network data traffic and replace our legacy SDH networks.
Transportation Networks
We have a nationwide long-distance backbone, consisting of an optical fiber network that connectscovers more than 2,259 municipalities, connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity Dense Wavelength Division Multiplex, or DWDM systems that can operate with up to 80 channels at 10, 100 and 40200 Gbps. Our optical network is complemented by microwave links to reach smaller cities and towns.
In 2015, we completed the implementation of a new Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links, that connect 11 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte. This new OTN/DWDM network spreads over approximately 30,000 km of optical cables. OurIn the first half of 2018, we completed the extension of the OTN/DWDM network, with 100 Gbps links, to an additional seven state capitals and spread over an additional 18,000 km of optical cables. Between 2019 and 2021, we expect to further extend our OTN/DWDM network, is complemented by microwavewith 100 Gbps links, to reach smaller cities26 state capitals and towns.
Mostspread over 65,400 km of the large urban areas of our fixed-line service areas are also connected by our fiber optic cable networks. Our transmission infrastructure connects our digital switches to four international gateway switches: two in Rio de Janeiro, one in Curitiba and one in Brasília.optical cables.
We employ automatic traffic protection to improve the reliability of our network and increase its traffic capacity. The network is fully supervised and operated by management systems that allow rapid response to customer service requests and reduce the recovery time in case of failures.failure.
We operate an internet backbone network and a fullyIP-routed network, which provides a backbone for all internet dedicated services and VPN offerings.offerings through access routers, for customer aggregation, configured as single edge routers (i.e., offering various types of services aggregation over a single box), allowing us to reduce capital and operation expenses. Our internet backbone connects to the public internet via national peerings links and international links that we maintain abroad.
We have implemented an address control and name resolution system for our IP networks within the objective of optimizing resources and improving the availability of internet access services.United States.
Our transportation network is directly interconnected to the national and international long-distance networks of all long-distance service providers operating in Regions I, II and III and all mobile services providers in Regions I, II and III.
SatelliteIPTV Network
We have deployed an expanded range of satellite-basedThrough our FTTH network, we offered IPTV services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. Asin 27 cities over10 states as of December 31, 2015, our satellite network covered approximately 5,165 localities in 26 states and the Federal District and provided voice and data services.
In 2000, we began the implementation of the land-based segment2018. For subscribers of our respective satellite networks in order to extend transmission to remote areas in the states of Acre, Paraná, Rondônia, Rio Grande do Sul, Santa Catarina, Pará, Amazonas, Amapá and Roraima, as well as to other areas with limited access to telecommunications services due to geographical conditions, such as Mato Grosso, Mato Grosso do Sul, Goiás and Tocantins. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Boa Vista, Macapá, Belém, Santarém, Marabá, Rio de Janeiro and Porto Velho. These satellite networks use digital technology and began operating in August 2000. The fiber optic and satellite backbones are interconnected in Brasília, Belém, Manaus, Rio de Janeiro and Porto Velho. The integration of the land-based segment of our satellite network allows us to provide fixed-line and mobile voice service to our subscribers in any location in our fixed-line service areas.
Hispamar Satellite S.A., or Hispamar, a Spanish-Brazilian consortium created in November 1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company operates the Amazonas 2 and Amazonas 3 satellites, which were manufactured by Astrium (EADS Space Company). In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar.
In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. The Amazonas 2 satellite was manufactured by Astrium and launched into geostationary orbit of 61 degrees West. This satellite provides both C and KU band transponders and on-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite.
The Amazonas 3 satellite was launched and commenced commercial operations in early 2013. The Amazonas 3 satellite was manufactured by Space Systems/Loral and launched into geostationary orbit of 61 degrees West. This satellite provides both C and KU band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, a subsidiary of Hispasat, which operates and leases the transponder’s entire space segment on this satellite.
We lease transponders from:
As part of our goal to maximize investments and allocate resources to certain strategic developments, in 2015 we focused on the expansion of our backbone infrastructure. We now service more areas through our fixed line infrastructure, which reduced the number of satellites needed to comply with our public service obligations. As a result, we terminated leases and operations for the following satellites:
DTH NetworkOi TV
We historically provide our DTH services through a satellite uplink located in Lurin, Peru which receives, encodes and transmits the television signals to satellite transponders. We lease these facilities and license the related technology from a subsidiary of Telefónica. We lease transponders for the delivery of these television signals to our subscribers from Telefónica. We have leased 216 Mhz of capacity in the KU band on the Amazonas 3 satellite and 36 Mhz of capacity in the KU band on the Amazonas 2 satellite to provide DTH services.
In December 2013, we started providing DTH services, through our own head-end located in Rio de Janeiro, Alvorada - Barra da Tijuca, which receives, encodes and transmits television signals for satellite transponders. We lease transponders for the delivery of these television signals to our subscribers from SES New Skies. We have leased 1.5 GHz of capacity in the KU-band, on the SES-6 satellite to provide DTH services throughout Brazil.
Our customers lease satellite dishes and set-top boxes from us as part of their subscriptions to ourOi TV services.
IP TV Network
We offer IP TV services in the cities of Rio de Janeiro and Belo Horizonte through ouror FTTH network. For customers who have the IP TV service,networks, we also offer OTT services, which provide customers with access to different content on different devices (mobile phones, tablets and computers).
Property, Plant and Equipment
As of December 31, 2018, the net book value of our property, plant and equipment was R$28,469 million. As of December 31, 2018, of the net book value of our property, plant and equipment, (1) transmission and other equipment, primarily data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups, represented 50.0%; (2) infrastructure, primarily consisting of metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, represented 25.5%; (3) work in progress represented 11.8%; (4) buildings represented 5.9%; (5) automatic switching equipment, consisting of trunking and switching stations (including local, tandem and transit telephone exchanges), represented 4.1%; and (6) other fixed assets represented 2.7%.
All Brazilian property, plant and equipment that are essential in providing the services described in our fixed-line concession agreements are considered “reversible assets,” which means that, should our fixed-line concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 13 to our consolidated financial statements included in this annual report.
Transmission and Other Equipment
We have a nationwide long-distance backbone, consisting of an optical fiber network that covers more than 2,259 municipalities, connecting the Federal District and all state capitals in Brazil. This fiber network supports high capacity DWDM systems that can operate with up to 80 channels at 10, 100 and 200 Gbps. We have implemented an Optical Transport Network/DWDM, or OTN/DWDM network, with 100 Gbps links that connect 18 state capitals, including São Paulo, Rio de Janeiro, Brasília and Belo Horizonte, which spreads over approximately 48,000 km of optical cables. Our optical network is complemented by microwave links to reach smaller cities and towns.
Infrastructure
Our Brazilian access networks connect our customers to our signal aggregation and transportation networks. We have a large number of network access points, including twisted copper pair wires to residences and commercial buildings, fiber optic lines to residences and commercial buildings, wireless transmission equipment andWi-Fi hotspots. Our fixed-line networks are fully digitalized.
Voice and data signals sent through our access network are routed through our aggregation networks to digital switches which connect voice calls and route digital signals to their destinations. Portions of our aggregation network use conventional copper trunk lines to connect our access network to our switches and transportation networks. For a small portion of our aggregation network, we still use ATM protocol to permit high speed transmission of these signals. Other portions of our aggregation network use fiber optic cable to connect our access network to our switches and transportation networks using SDH protocol. In large metropolitan areas where the density of access point results in increased demand, we have deployed Metro Ethernet networks.
Automatic switching equipment
Voice and data signals that originate through fixed-line access points are routed through Multi-service Access Nodes, or MSANs, to our aggregation networks, or are rerouted to our aggregation networks through Digital Subscriber Line Access Multiplexer, or DSLAM, equipment which split the voice signal from the digital signal which is transmitted using ADSL or VDSL technology. As of December 31, 2018, approximately 93% of our fixed- line network supported ADSL2+ or VDSL2 and we provided ADSL or VDSL2 services in approximately 4,700 municipalities.
Voice and data signals sent and received through our 2G, 3G and 4G access points are routed to our aggregation networks. Our mobile networks have unique data core and are fully integrated with our fixed-line data networks.
As of December 31, 2018:
our 4G mobile access networks consisted of 9,613 active radio base stations covering 902 municipalities, or 74% of the urban population of Brazil;
our 3G mobile access networks consisted of 10,202 active radio base stations covering 1,644 municipalities, or 82% of the urban population of Brazil; and
our 2G mobile access networks consisted of 13,804 active radio base stations covering 3,446 municipalities, or 93% of the urban population of Brazil.
In addition to our mobile access networks, we also operateWi-Fi hotspots in indoor public and commercial areas such as coffee shops, airports and shopping centers. As of December 31, 2018, ourWi-Fi network consisted of more than two million hotspots, with broadband access compatible with more than two million access points provided by Fon Wireless Ltd., or Fon, which allows our customers to access Fon lines worldwide.
Buildings
In addition to our headquarters building and our centralized national network operations center in Rio de Janeiro, we own 7,965 buildings that are used to house switching equipment or to house regional and local sales and operations centers. Of these buildings, 7,767 are “reversible assets” under our fixed-line concession agreements.
Capital Expenditures and Work in Progress
During the year ended December 31, 2018, we modernized our core network, with a focus on infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us to do more with less. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile networks, to keep up with the growing demand, In addition, our performance on ANATEL’s network quality metrics improved.
The following table sets forth our capital expenditures for the periods indicated.
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (in millions ofreais) | ||||||||||||
Data transmission equipment | R$ | 1,993 | R$ | 1,846 | R$ | 1,377 | ||||||
Installation services and devices | 539 | 644 | 489 | |||||||||
Mobile network and systems | 820 | 602 | 707 | |||||||||
Voice transmission | 731 | 726 | 713 | |||||||||
Information technology services | 720 | 729 | 536 | |||||||||
Telecommunication services infrastructure | 500 | 496 | 468 | |||||||||
Buildings, improvements and furniture | 70 | 80 | 69 | |||||||||
Network management system equipment | 171 | 94 | 124 | |||||||||
Backbone transmission | 304 | 237 | 196 | |||||||||
Internet services equipment | — | 1 | 7 | |||||||||
Other | 229 | 174 | 73 | |||||||||
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Total capital expenditures | R$ | 6,077 | R$ | 5,629 | R$ | 4,759 | ||||||
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Our principal capital expenditures relate to a variety of projects designed to expand and upgrade our transmission networks, our broadband access networks (fixed and mobile), our service platforms (data, video and voice), our information technology systems and our telecommunications services infrastructure.
Data Transmission Equipment Programs
We are engaged in a long-term program to upgrade portions of our fixed-line access networks with optical fiber networks based on gigabit passive optical network (GPON). The implementation of this technology permits us to provide broadband with speeds up to 200 Mbps to residential customers and up to 1 Gbps to commercial customers.
In our access networks, we have been engaged in a program of deployingfiber-to-the-home, or FTTH, technology to support our “triple play” services, using a GPON network engineered to support IPTV, high speed internet (currently speeds up to 200 Mbps), and VoIP services.
We have acquired and installed data communications equipment to convert elements of our networks that used ATM and Synchronous Digital Hierarchy, or SDH, protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We also deployed an optical switching layer based on optical transport network technology in order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading.
We have been implementing a new broadband data communications network architecture, which we refer to as the Single Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and corporate customer links in a single platform, which eliminates the need for individual management of each type of access network, expedites the resolution of networks problems and minimizes maintenance and operation costs.
In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoption of the single edge concept, which means using one single router to join our commercial, mobile and residential functions that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and operational expenditures.
Mobile Services Network Programs
4G Network
We offer 4G services using LTE network technology and have been deploying our 4G network since 2012. In compliance with our obligations under our LTE authorizations, in 2016, we extended our LTE network to cities with over 100,000 inhabitants, adding 284 new cities to our LTE network, and in 2017, we extended our LTE network to cities with less than 100,000 inhabitants, adding 813 cities to our LTE network.
In 2018, we began deploying 4.5G services by using Carrier Aggregation with 1800 MHz spectrum refarming and MIMO 4x4 in 27 municipalities in the first phase of the project. It has allowed us to offer best user experience and aligning our network to main operators in Brazil.
3G Network
We have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of our mobile network. We have deployed new radio base stations and transceivers to improve our 3G coverage and quality in areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in Brazil to which we have not historically provided 3G service.
Voice Transmission Network Programs
We are engaged in a program of investing in new equipment for our switching stations to support next-generation networks which we believe will permit us to offer new value-added services to our fixed-line customers. We believe that our investment in next-generation networks will:
assist us in meeting the increased demand for long distance traffic, both domestic and international, through the use of VoIP;
permit us to offer differentiated services, such voice over broadband; and
significantly promotefixed-to-mobile convergence.
As part of this program, we have deployed an IP Multimedia Subsystem, or IMS, core that will facilitate our convergent voice and broadband offerings. The IMS core not only provides control for the VoIP resource but also integrated access control and authentication for all services, significantly improving automation and speed for customer provisioning.
We have also undertaken a program of removing and replacing smaller switching stations and integrating these operations with other switching stations to promote efficiency in our operations.
Information Technology Services Programs
We are investing in the expansion of supply of our cloud computing services in data centers, particularly in the State of São Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions.
Telecommunications Services Infrastructure Programs
We are investing in several structural projects in order to improve and modernize our business support systems, or BSS, and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best practices, our main projects are unified customer relationship management; network provisioning services; order management; consolidation of network inventory; network planning, project and construction; network fault management; performance management; customer experience management; API management and digital self-care, among others.
One of the primary projects connected to the OSS is related to assurance and quality. In January 2017 we completed the transition from a network centric monitoring system to a customer focused approach and thereby our network operations have migrated from network operations centers to service operations centers which provide more efficient and customer-based support.
In December 2016, we completed a project to improve fulfillment by speeding up service creation and provisioning, reducing costly human intervention and increasing overall customer quality of experience through automation of the fulfillment processes.
Intellectual Property
We hold several material intellectual property assets, including patents and trademarks registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. Our main trademark used in Brazil, “Oi,” is registered with the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, mobile and broadband services.
Operating Agreements
Fixed-Line and Mobile Tower Leases
In December 2012, weWe have entered into anthree operating lease agreementagreements with Sumbeowners of communications towers and rooftop antennae to lease space to install equipment related to the delivery of our equipmentpersonal mobility services on 1,200an aggregate of approximately 4,850 communications towers and rooftop antennae of Sumbe. The monthly payments under thisantennae. We have also entered into three operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variationagreements with owners of IPCA. This operating lease has a 15-year term and is automatically renewable for successive 12-month periods unless any party to the agreement provides 60-day prior written notice terminating such renewal.
In April 2013, we entered into an operating lease agreement with São Paulo Cinco Locação de Torres Ltda.fixed-line communications towers to lease space to install equipment related to the delivery of our equipmentfixed-line services on 2,113an aggregate of approximately 6,400 fixed-line communications towers of São Paulo Cinco Locação de Torres Ltda. towers.
The monthly payments under thistwo of our operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 20-year term that commenced upon completion of the assignment of the right to leaseagreements for space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.
In April 2013, we entered into an operating lease agreement with BR Towers SPE 3 S.A. to lease space to install our equipment on 2,113 fixed-line communications towers of with BR Towers SPE 3 S.A. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 20-year term that commenced upon completion of the assignment of the right to lease space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.
In July 2013, we entered into an operating lease agreement with SBA Torres Brasil Ltda. to lease space to install our equipment on 2,113 fixed-line communications towers of São Paulo Cinco Locação de Torres Ltda. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually by the positive variation of IPCA. This operating lease has a 20-year term that commenced upon
completion of the assignment of the right to lease space and install equipment on the fixed-line communication towers, and is renewable for another 20 years.
In December 2013, we entered into an operating lease agreement with Caryopoceae to lease space to install our equipment on 2,007 communications towers and rooftop antennae of Caryopoceae. The monthly payments under this operating lease agreement reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of 6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. This operating lease has a 15-year term and is automatically renewable for successive 60-month periods unless any party to the agreement provides 60-day prior written notice terminating such renewal.
In June 2014, we entered into an operating lease agreement with Tupã Torres to lease space to install our equipment on 1,641 communications towers and rooftop antennae of Tupã Torres. The monthly payments under thisthe remainder of the operating lease agreementagreements reflect a base rental amount specified in the agreement, adjusted annually during the first seven years of the lease by the greater of 6.5% or the positive variation of IPCA, and adjusted annually thereafter by the positive variation of IPCA. This
The operating lease has a 15-year termagreements for space on communications towers and isrooftop antennae have15-year terms expiring between December 2027 and June 2019 and are automatically renewable for successive 60-month periods unless any party to the agreement provides 60-day prior written notice terminating such renewal.one-year periods. The operating lease agreements for space on fixed-line communications towers have20-year terms expiring between April 2033 and July 2033 and are renewable for additional20-year terms.
Infrastructure Sharing Agreements
2G and 3G Networks
In April 2014, we and TIM entered into a memorandum of understanding under which we agreed to the joint construction, implementation and reciprocal assignment of elements of our respective 2G and 3G network infrastructure.
4G Network
We currently are party to two Radio Access Network, or RAN, sharing agreements with other operators. RAN sharing enables operators to share the same physical network, each using its own frequency spectrum resources, thus reducing the deployment costs in proportion to each operator’s respective coverage requirements while maintaining all of the characteristics of an individual network with respect to our customers. RAN sharing makes use of 3GPP standard features, permitting full technical support. As a result, RAN sharing agreements allow us to reduce operating expenses and capital expenditures, a key priority of the Transformation Plan.expenditures.
In November 2012, we entered into a memorandum of understanding with TIM under which we agreed to the joint use of elements of our 4G network under a RAN sharing model pursuant to which we have invested in (and provided TIM with access to) infrastructure in certain cities, while TIM has invested in (and provided us with access to) infrastructure in other cities. In late 2013, we and TIM extended this memorandum of understanding to additional cities and revised certain obligations of each party under the memorandum of understanding, which we refer to as the 2013 RAN Sharing Agreement. The 2013 RAN Sharing Agreement has a term of 15 years. Under the 2013 RAN Sharing Agreement, we offer 4G technology to over 80% of urban areas in all Brazilian capital cities and cities with over 500,000 inhabitants. In 2015, we expanded the 2013 RAN Sharing ArrangementAgreement with TIM to cities with over 200,000 inhabitants, approximately 133 municipalities covered by 4G technology, and we began a RAN sharing arrangement with VivoTelefônica Brasil. In 2016, we expanded to cities with over 100,000 inhabitants, reaching 284 cities with 4G coverage. In 2017, we expanded to cities with less than 100,000 inhabitants, reaching 813 cities with 4G coverage. In 2018, we and TIM amended the 2013 RAN Sharing Agreement to update the technology covered by the agreement to permit infrastructure sharing in five municipalities, which we expect to expand during 2016 and succeeding years.the 1800 MHz spectrum technology.
In June 2015, we entered into a memorandum of understanding under which we agreed to the joint use of elements of the 4G network under a RAN sharing model pursuant to which Oi, TIM, and VivoTelefônica Brasil agreed to invest proportionally (50% Vivo,Telefônica Brasil, 25% Oi and 25% TIM) in sites in certain cities based on each operators’ respective coverage obligations, which we refer to as the 2015 RAN Sharing Agreement. The 2015 RAN Sharing Agreement has a term of 12 years. In early 2016, ANATEL required the inclusion of additional clauses in the agreement allowing an additional operator to be added. This agreement covers 32covered 31 cities in 2015, 150171 cities in 2016 and 525427 cities in 2017.
Satellite Network and Leases
Residential Services
We have deployed a range of satellite-based services to comply with our public service obligations to the rural and remote areas of Brazil, including the Amazon rainforest region. These satellite services include internet access and access to corporate data applications. The satellite network comprises satellite earth stations located in less-populated rural areas, as well as hub stations in the cities of Brasília, Manaus, Belém, Rio de Janeiro, Porto Velho, Boa Vista, Macapá, Santarém, and Marabá. Our fiber optic backbone connects all these hub stations. The integration of the land-based segment of our satellite network allows us to provide fixed-line and mobile voice service to our subscribers in any location in our fixed-line service areas.
As of December 31, 2018, we leased transponders from our affiliate Hispamar with:
98.3 MHz of capacity on the Amazonas 3 satellite in Ku band and 540 MHz of capacity on the Amazonas 2 satellite in Ku band to provide voice and data services to approximately 3,000 localities; and
754 MHz of capacity on the Amazonas 3 satellite in C band and 432 MHz of capacity on the Amazonas 2 satellite in C band to provide voice and data services to approximately 390 municipalities.
DTH Network
We provide our DTH services through satellite uplinks that receive, encode and transmit the television signals to satellite transponders (1) located in Lurin, Peru that we lease from a subsidiary of Telefónica S.A., and (2) through our own facilities in Barra da Tijuca near Rio de Janeiro.
As of December 31, 2018, we leased transponders to provide DTH services from:
Telefónica S.A with 216 MHz of capacity on the Amazonas 3 satellite in Ku band and 36 MHz of capacity on the Amazonas 2 satellite in Ku band; and
SES New Skies with 1.5 GHz of capacity on theSES-6 satellite in Ku band.
Network Maintenance
Our external plant and equipment maintenance, installation and network servicing are performed by our wholly-owned subsidiary Serede, as well as one third-party service providers.provider, Telemont. We employ our own team of technicians for the maintenance of our internal plant and equipment.equipment maintenance.
Insourced Network Maintenance
In May 2013 and June 2013, we insourced our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Networks do Brasil Telecomunicações Ltda. and Alcatel-Lucent Brasil S.A.
We have entered into arms’-length services agreements with our wholly-owned subsidiary Serede to perform our external plant and equipment maintenance, installation and network servicing in the States of São Paulo, Rio de Janeiro, Rio Grande do Sul, Santa Catarina, Paraná, Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá.
In January 2012, we entered into a services agreement with Serede for installation, operation, and corrective and preventive maintenance in connection with our external plants and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in certain parts of the State of Rio de Janeiro. Over the years, we have amended this agreement to expand its scope to the entirety of the State of Rio de Janeiro (following our acquisition of Telemont’s operations in Rio de Janeiro), as well as the States of São Paulo, Rio Grande do Sul, Santa Catarina and Paraná (following our acquisition of A.R.M Engenharia in June 2016). The total estimated payments under this contract, which expires in January 2022, are approximately R$10.0 billion.
In June 2016, we acquired 100% of the capital stock of A.R.M. Engenharia and changed its corporate name to Rede Conecta – Serviços de Rede S.A. In November 2018, Rede Conecta merged into Serede. In July 2016, we entered into a services agreement with Rede Conecta for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará and Amapá. The total estimated payments under this contract, which expires in June 2021, are approximately R$3.2 billion.
Outsourced Network Maintenance
In October 2012, we entered into five-year services agreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the StateStates of Rio de Janeiro. Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total payments under this contract, which expired in October 2017, amounted to R$3.7 billion.
In October 2012,2017, we entered into anew services agreementagreements with Telemont for installation, operation, and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Minas Gerais, Espírito Santo, Mato Grosso, Mato Grosso do Sul, Tocantins, Acre, Rondônia and Goiás and the Federal District. The total estimated payments during the five-year terms of these contracts are expected to be R$6.6 billion. In October 2015, we acquired all of the operations of Telemont related to our installation, operation, and corrective and preventive maintenance services in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the State of Rio de Janeiro.
In October 2012, we entered into a services agreement with A.R.M. Engenharia for installation, operation and corrective and preventive maintenance in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Maranhão, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe, Bahia, Amazonas, Roraima, Pará, Amapá, Paraná and Santa Catarina. The total estimated payments under this contract, which expires in October 2022, are R$6.3 billion during the five-year term of this contract. In April and May 2016, we acquired A.R.M. Engenharia’s operations in the States of Rio Grande do Sul, Santa Catarina and Paraná, and we are managing those operations. Also in May 2016, we entered into an agreement with the shareholders of A.R.M. Engenharia to acquire the totality of the shares issued by ARM Engenharia. The completion of the transaction is subject to customary conditions precedent, including the completion of financial and legal due diligence and approval by the Administrative Council for Economic Defense.
In May 2013 and June 2013, we internalized our installation, operations, and corrective and preventive maintenance services in connection with our fixed-line telecommunications services, mobile telecommunications services, data transmission services (including broadband access services), satellite services, buildings, access ways and towers. These services had previously been provided by Nokia Solutions and Alcatel-Lucent Brasil S.A.
Through our wholly-owned subsidiary, Serede, we perform installation, operation, and corrective and preventive maintenance services in connection with our external plant and associated equipment, public telephones, and fiber optic and data communication networks (including broadband access services) in the States of Rio de Janeiro and Rio Grande do Sul.
Competition
The Brazilian telecommunications industry is highly competitive. The competitive environment is significantly affected by key trends, including technological and service convergence, market consolidation and combined service offerings by service providers. See “Item 5. Operating and Financial Review and Prospects—Principal Factors Affecting Our Financial Condition and Results of Operations—Effects of Competition on the Rates that We Realize and the Discounts We Record.”
Residential Services
We are the leading provider of residential services in Regions I and II of Brazil with 14.9 million fixed lines in service (including the number fixed lines provided to our SME and Corporate Services customers) as of December 31, 2015. Based on information available from ANATEL, as of December 31, 2015, we had a market share of 56.4% of the total fixed lines in service in Region I (including the number fixed lines provided to our SME and Corporate Services customers) and a market share of 52.9% of the total fixed lines in service in Region II (including the number fixed lines provided to our SME and Corporate Services customers). Our principal competitors for fixed-
line services are (1) Embratel, which had a market share of 25.3% of the total fixed lines in service in Region I and a market share of 18.4% of the total fixed lines in service in Region II as of December 31, 2015, based on information available from ANATEL, and (2) GVT, which had a market share of 9.9% of the total fixed lines in service in Region I and a market share of 23.4% of the total fixed lines in service in Region II as of December 31, 2015, based on information available from ANATEL.
We face competition from other telecommunications services providers, particularly from mobile telecommunications services providers, which has led to traffic migration from fixed-line traffic to mobile traffic and the substitution of mobile services in place of fixed-line services, encouraged by the prevalence of all-net packages and offers of aggressively-priced packages from some mobile telecommunications service providers. The decrease in interconnection rates has discouraged the construction of new fixed-line networks. In addition, the decrease in interconnection rates has led to decreases in market prices for telecommunications services by enabling telecommunications service providers that use the local fixed-line networks of incumbent fixed-line providers, such as our company, to offer lower prices to their customers. We and other companies have combatted this trend by offering subscriptions with unlimited calling privileges at the same or similar prices to mitigate the pricing pressure. Finally, our competitors have begun competing in the consumer market with bundles or services targeted to the needs of lower income customers.
Mobile
We expect to continue to face competition from mobile services providers, which represent the main source of competition in our Residential Services business. As of December 31, 2015, there were 129.3 million mobile subscribers (including our mobile customers) in Region I, an 8.9% decrease over December 31, 2014, and there were 64.0 million mobile subscribers (including our mobile customers) in Region II, a 9.6% decrease over December 31, 2014, based on information available from ANATEL. In addition, due to the proliferation of all-net service plans, particularly for mobile services, which offer unlimited long-distance calls and data combination plans, we believe that we may be vulnerable to traffic migration as customers with both fixed-line and mobile telephones use their mobile devices to make calls to other mobile subscribers.
Fixed Line
Embratel provides local fixed-line services to residential customers through the cable network owned by its subsidiary Net in the portions of Regions I and II where Net provides cable television service. As a result, Net is able to offer cable television, broadband and telephone services as a bundle at a very competitive price. We also expect competition from Embratel to increase in certain cities in our service areas where the volume of demand is attractive.
We also compete in the State of São Paulo with Telefônica Brasil, which is the incumbent fixed-line service provider in the State of São Paulo. Telefônica Brasil has been increasing its competitive activities in Regions I and II, expanding its fiber optic network in high-income residential areas and increasing its services to low- and medium-size businesses. We expect competition from Telefônica Brasil to increase in certain cities in our service areas where the volume of demand is attractive.
Competition from long-distance fixed-line service providers has decreased as a result of recent reductions in interconnections tariffs. The proliferation of all-net plans by fixed-line and mobile services providers that include free minutes for calls to subscribers of any operator have and may continue to adversely impact our revenues from fixed-line long-distance calls if our fixed-line customers choose to migrate to mobile services for long-distance communications and/or cancel their fixed-line services. Moreover, new technologies that serve as alternatives to traditional long-distance telephone calls, such as VoIP and instant internet messaging, have captured part of Brazil’s long-distance traffic.
Broadband
Cable television providers that offer broadband services, particularly Net and Telefônica Brasil, represent our principal competition in the broadband market. Both Embratel and Telefônica Brasil offer broadband services at
higher speeds than our offerings, and they offer integrated packages, consisting of subscription television, broadband and voice telephone services to cable television subscribers who, in general, have more purchasing power than other consumers. Net and Telefônica Brasil offer strong competition for fixed broadband services in municipalities that have the highest concentration of purchasing power.
In addition, we compete in our service areas with smaller companies that have been authorized by ANATEL to provide fixed-line services, such as voice and broadband. Although regional broadband service providers do not have the same national footprint as national operators, they have established networks in the regions in which they operate and often have a market share of 20-30% of broadband customers.
Pay-TV
In Brazil, the high quality programming of television broadcasters has resulted in aggregate ratings for these broadcasters of approximately 60% of viewers and has limited the perceived value of subscription television. As a result, the subscription television market in Brazil has a low penetration compared to developed countries and even to other South American countries such as Argentina, Chile and Mexico. Penetration rates by subscription television have grown from approximately 8% of Brazilian households in 2005 to approximately 32% in 2015. According to information available from ANATEL, the Brazilian subscription television market decreased by 2.1% to 19.1 million subscribers as of December 31, 2015 from 19.5 million subscribers as of December 31, 2014.R$4.2 billion.
The primary providers of subscription television services in the regions in which we provide Residential Services are SKY, which provides DTH services, and América Móvil, which provides DTH service through Embratel under the “Claro TV” brand and provides subscription television services using coaxial cable through Net. We offer DTH subscription television services throughout the regions in which we provide Residential Services.
We deliverOi TV through our fiber optic network using an internet protocol, or IP TV, in the cities of Rio de Janeiro and Belo Horizonte, respectively.
Personal Mobility Services
The mobile telecommunications services market in Brazil is characterized by intense competition among providers of mobile telecommunications services. We compete primarily with Telefônica Brasil, which markets its mobile services under the brand name “Vivo,” TIM and Claro, each of which provides services throughout Brazil.
As of December 31, 2015, based on information available from ANATEL (which includes SME and Corporate Services subscribers), we had a market share of 18.6% of the total number of mobile subscribers in Brazil, ranking behind Telefônica Brasil with 28.4%, TIM with 25.7% and Claro with 25.6%. As of December 31, 2015, based on information available from ANATEL, the competitive landscape for mobile services was as follows: in Region I, we had a market share of 24.3% of the total number of mobile subscribers, ahead of Telefônica Brasil and behind TIM with 25.1% and Claro with 24.7%; in Region II, we had a market share of 14.4% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 32.0%, TIM with 26.8% and Claro with 26.7%; and in Region III, we had a market share of 12.2% of the total number of mobile subscribers, ranking behind Telefônica Brasil with 33.1%, Claro with 26.1% and TIM with 25.7%.
Competition in Mobile Voice and Data Communications Services
Competitive efforts in the pre-paid and post-paid personal mobility services market generally take the form of traffic subsidies and aggressive discounts on data packages. We no longer offer handset subsidies (with the exception of theOi Pontos program, which provides credit to existing post-paid customers to be used on the purchase of a new mobile device), but we do compete on the basis of traffic subsidies, all-net plans that eliminate the community effect of traditional telecommunications services in Brazil and discounts on data packages. The aggressiveness of promotions is generally driven by the desire of the operator offering the promotion to increase market share; however, these promotions generally are for a short duration as the pricing terms offered are not sustainable over the long term.
Studies of telecommunications consumption habits in Brazil show that, given budget restrictions caused by the macroeconomic situation, users have shifted away from owning a SIM card from each of the operators (in response to traditional on-net plans that offer substantial discounts for calls to the same operator) and have begun to consolidate telecommunications services on a the SIM card that offers the best data package. This trend will result in a decline in the overall customer base for pre-paid services, which will require operators to offer increasingly comprehensive data packages at aggressive discounts in order to maintain and potentially increase their customer bases.
Our launches of theOi Mais,Oi Mais Controle andOi Livre portfolios have kept us on the forefront of competition in the mobile services market. We believe our innovative flat rate pricing, all-net model for voice services and text messaging, and robust data packages at competitive rates enable us to satisfy the growing customer demand for simpler product offerings and greater access to data.
In addition, we believe that in the medium-term, personal mobility service providers in Brazil will experience increasing competition from OTT providers, as customers shift from mobile voice and SMS communications to internet-based voice and data communications through computers and smartphone or tablet applications such as WhatsApp, Viber and Skype. Since November 2011, we have deployed a network of Wi-Fi hotspots, which is composed of sub networks that are accessible from (1) indoor public and commercial sites, such as coffee shops, airports and shopping centers, (2) outdoor public spaces and (3) residential access points of our fixed-line customers that share access points in association with Fon. As of December 31, 2015, our Wi-Fi network consisted of over two million hotspots, with broadband access compatible with over two million access points provided by Fon, which allows our customers to access Fon lines worldwide. Our data customers (both mobile and fixed) have unlimited access to our Wi-Fi hotspots, extending our mobile coverage and improving customer experience.
Competition in Mobile Data Only Services
Studies of telecommunications consumption habits in Brazil show that users are demanding more data for use in social networking sites and smartphone applications such as WhatsApp. This shift from voice to data consumption affects our Personal Mobility Services business in two ways: (1) it enables customers to use data to communicate with anyone anywhere in the world via internet instant messaging systems available on smartphone applications such as WhatsApp, and (2) it enables consumers to use data to call anyone anywhere in the world using the VoiP capabilities available in such smartphone applications.
Following a study of the telecommunications consumption habits in Brazil, in November 2015 we launched ourOi Livre portfolio, a set of innovative offerings with significant increase in data allowances and a flat fee for all-net calls (with the exception ofOi Livre Por Dia) to customers of any operator in Brazil. This initiative changes the mobile service market in Brazil and the manner in which our customers communicate, disrupting the original pre-paid model in which customers acquired SIM cards from different operators and used the respective SIM for on-net calls with that particular operator in an effort to avoid paying high rates for off-net calls.
In the post-paid mobile data communications market, our primary competitors are Telefônica Brasil, Claro and TIM. As of December 31, 2015, based on information available from ANATEL, which includes SME and Corporate Services subscribers, we had a market share of 11.9% of the total number of post-paid mobile data subscribers in Brazil (including hybrid data plan subscribers), ranking behind Telefônica Brasil with 42.4%, Claro with 22.7% and TIM with 18.5%. We believe that our most direct competitor in this market is TIM, whose customer acquisition and retention strategy of offering traffic subsidies, all-net plans and aggressive discounts on data packages most closely resembles ours. On the other hand, Vivo and Claro, whose prices are typically higher than those of the other mobile data service providers in the market, primarily focus on the high-end consumer market.
In the pre-paid mobile data communications market, our primary competitors are also Telefônica Brasil, Claro and TIM. As of December 31, 2015, based on information available from ANATEL, which includes SME and Corporate Services subscribers, we had a market share of 21.3% of the total number of pre-paid mobile data subscribers in Brazil, ranking behind Telefônica Brasil with 22.9%, Claro with 26.7% and TIM with 28.5%. As in the post-paid mobile data communications market, we believe that our most direct competitor in the pre-paid mobile data communications market is TIM, who offer plans similar toOi Livre.
Competition in Mobile Long-Distance Services
Recent reductions in the interconnections rates for Regions I, II and III have resulted in lower costs for long-distance services, both to us and to our customers. As a result, we and TIM have introduced “all-net” voice and messaging plans that allow customers to call anywhere in Brazil for a flat rate. Nearly all the plans in our recently launchedOi Mais,Oi Mais Controle andOi Livre portfolios offer all-net calling and text messaging services, which capitalized on the reductions in interconnection rates and simplified our portfolios, thereby eliminating the community effect. We believe that the introduction of all-net plans, coupled with more robust and data packages that allow consumers to use smartphones applications more freely, have substantially reduced competition in the mobile long-distance services market.
SME and Corporate Services
The competition risks relating to the fixed-line and mobile services we provide to our SME customers are similar to those relating to the fixed-line and mobile services we provide to our residential and personal mobility customers. The competition risks relating to the fixed-line and mobile services we provide to our corporate customers are also similar.
In recent years, there has been a shift among SME and corporate services providers toward value-added services. With the exception of theOi Mais Empresas app and web service, our value-added products and services for the SME segment are substantially similar to those offered by our competitors, and we rely on client service and customer satisfaction to maintain existing customers and attract new customers. Our principal competitors for both core and value-added services for SME and corporate customers are Embratel, Telefônica Brasil and TIM, as well as smaller niche companies.
The Brazilian recession has had a significant negative effect on our operating revenue and margins as SMEs generally, including our customers, have reduced the size of their businesses and in some cases ceased operations. In addition, a number of our Corporate customers have reduced their telecommunications spending as part of their overall cost-cutting efforts.
Concessions, Authorizations and Licenses
Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime or an authorization under the private regime. For additional details regarding the rights and obligations of service providers operating under the public regime and the private regime, see “—Telecommunication Regulations—Regulation of the Brazilian Telecommunications Industry— Concessions and Authorizations.” We operate under:
These concessions and authorizations allow us to provide specific services in designated geographic areas and set forth certain obligations with which we must comply.
Fixed-Line and Domestic Long-Distance Services Concession Agreements
We have entered into concession agreements with ANATEL that govern our concessions to provide (1) fixed-line services in the Federal District and each of the states of Regions I and II and (2) domestic long-distance services originating from the Federal District and each of the states of Regions I and II. Each of our fixed-line and domestic long-distance concession agreements:
In addition to the above, each of our concession agreements for fixed-line services requires us to comply with certain quality of service obligations set forth in these concession agreements as well as the quality of service obligations set forth in the General Plan on Quality Goals.
Each of our fixed line concessions requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of local fixed-line services (excluding taxes and social contributions) during the immediately preceding year, while allowing us to apply the amount of such fees to finance the expanded service obligations created by the amended General Plan on Universal Service Goals in lieu of making payment to ANATEL. Similarly, each of our domestic long-distance concessions requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of domestic long-distance services (excluding taxes and social contributions) during the immediately preceding year.
These concession agreements also required us to provide transmission lines connecting our fiber-optic internet backbones to municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these concession agreements, we were obligated to set up backhaul in 3,252 municipalities in Regions I and II. The facilities that we constructed to meet these obligations are considered to be property that is part of our concessions and will therefore revert to the Brazilian government on January 1, 2026.
These concession agreements provide that ANATEL may modify their terms in 2015 and 2020 and may revoke them prior to expiration under the circumstances described under “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry—Regulation of Fixed-Line Services—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications.
On June 27, 2014, ANATEL opened a public comment period for the 2015 revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.
For more information regarding the regulation of our fixed-line services, the General Plan on Universal Service Goals and the General Plan on Quality Goals, see “—Telecommunications Regulation—Regulation of the Brazilian Telecommunications Industry— Regulation of Fixed-Line Services.”
2G Radio Frequency Licenses
We hold five licenses to use radio frequency spectrum to provide 2G services in Regions I and II and four in Region III. These licenses grant us permission to use the applicable radio spectrum for 15 years from the date of the authorization agreement under which they are granted and are renewable for additional 15-year terms. Upon renewal of any of these licenses and on every second anniversary of such renewal, we will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services. The initial terms of our radio frequency spectrum licenses expire between 2016 and 2022.
Our authorization agreements are subject to network scope and service performance obligations set forth in these authorization agreements. Under these obligations we are required to service all municipalities in Brazil with a population in excess of 100,000. A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our personal mobile services authorizations by ANATEL. As of the date of this annual report, we have satisfied the network scope and service performance obligations set forth in these authorization agreements; however, we have not yet received ANATEL’s inspection report.
3G Radio Frequency Licenses
We hold five licenses to use radio frequency spectrum to provide 3G services in Regions I, II and III. Each of these licenses grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for additional 15-year terms. We will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services upon renewal of the license and on every second anniversary of the renewal. The initial terms of these licenses expire in 2023.
These radio frequency licenses include network scope obligations. Under these obligations, we are currently required to (1) provide service to 459 municipalities that did not have mobile services at the time these licenses were granted with either 2G or 3G mobile telecommunications services, (2) provide 3G service to all state capitals in Brazil, the Federal District and all municipalities with a population in excess of 200,000 inhabitants, (3) provide 3G service to all of the municipalities covered by these licenses with a population in excess of 100,000, and (4) provide 3G service to 50% of all of the municipalities with a population between 30,000 and 100,000. In addition, we will be
required to provide 3G service to 60% of the municipalities, including 641 specified municipalities, covered by these licenses with a population less than 30,000 by 2016.
A municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our 3G frequency licenses by ANATEL. As of the date of this annual report, we have satisfied the network scope and service performance obligations set forth in these licenses; however, we have not yet received ANATEL’s inspection report.
4G Radio Frequency Licenses
We hold three licenses to use radio frequencies in 2.5 GHz sub-bands to provide 4G services in Regions I, II and III. Each of these licenses grants us permission to use the applicable radio spectrum for 15 years from the date of grant and is renewable for additional 15-year terms. We will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from 4G services upon renewal of the license and on every second anniversary of the renewal. The initial terms of these licenses expire in 2027.
These radio frequency licenses include network scope obligations. Under these obligations, we are currently required to provide:
In addition, we will be required to:
In addition, our 4G radio frequency licenses impose minimum investment obligations in domestic technologies. At least 65% of the cost of all goods, services, equipment, telecommunications systems and data networks that we purchase to meet our 4G service obligations must developed in Brazil. This minimum requirement will increase to 70% between January 1, 2017 and December 31, 2022.
Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our 4G frequency licenses by ANATEL. As of the date of this annual report, we have satisfied the network scope and service performance obligations set forth in these licenses.
Fixed-Line Services Authorization Agreements
We have entered into authorization agreements with ANATEL that govern our authorizations to provide local fixed-line services in and domestic long-distance services originating from (1) the 57 municipalities in the State of Minas Gerais that are excluded from the concession area of Region I, (2) the nine municipalities in the States of Goiás, Mato Grosso do Sul and Paraná that are excluded from the concession area of Region II, and (3) Region III. These authorizations do not have termination dates and require us to comply with certain quality of service obligations set forth in the General Plan on Quality Goals.
We have also entered into authorization agreements with ANATEL that govern our authorizations to provide international long-distance services originating from anywhere in Brazil. These authorizations do not have termination dates and require us to comply with quality of service obligations set forth in the General Plan on Quality Goals.
Multimedia Communication Services Authorization Agreements
We have Multimedia Communication Services authorizations, which superseded our prior Telecommunications Network Transportation Services (Serviço de Rede de Transporte de Telecomunicações) authorizations, permitting us to provide high speed data service.
The Multimedia Communication Services authorizations became effective in May 2003 and cover the same geographical areas as our concession agreements. In April 2008, in connection with the amendments to our fixed-line services concessions, we agreed to provide internet service free of charge until December 31, 2025 to all urban schools in the areas of our concession agreements.
Term of Commitment to Adhere to National Broadband Plan
On June 30, 2011, we entered into a Term of Commitment (Termo de Compromisso) with ANATEL and the Ministry of Communications to formalize our voluntary commitment to adhere to the terms of the National Broadband Plan, created in May 2010 by Executive Decree No. 7,175/10 with the goal to make broadband access available at low cost, regardless of technology, throughout Brazil. Pursuant to the Term of Commitment, we are required to offer (1) broadband services with minimum upload and download capabilities to retail customers in certain sectors of Region I and II for a maximum price of R$35 per month (or R$29.90 in ICMS-exempt states), plus fees, and (2) access to our broadband infrastructure to certain wholesale customers, including small businesses and municipalities, in certain sectors of Region I and II for a maximum price of R$1,253 per 2 Mbps per month and a one-time installation fee, while observing all quality standards under ANATEL regulations. Both retail and wholesale services are subject to certain network capacity limits and need only be provided at the demand of the customer. Pursuant to the Term of Commitment, we have offered the required services to all eligible retail and wholesale customers since the date of its execution and have gradually increased the capacities offered to wholesale customers since November 2011. We have been obligated to provide the maximum capacities established by the Term of Commitment to eligible wholesale customers since June 30, 2015. In addition, the Term of Commitment requires that we:
The Term of Commitment will expire on December 31, 2016.
Subscription Television Authorization Agreement
In November 2008, we entered into an authorization agreement with ANATEL that governs our use of satellite technology to provide DTH satellite television services throughout Brazil. The authorization agreement permits us to provide DTH satellite television services for 15 years and is renewable for an additional 15-year term in exchange for a fee to be agreed upon between us and ANATEL.
Under this authorization, we are required to furnish equipment to certain public institutions, to make channels available for broadcasting by specified public institutions, and to comply with quality of service obligations set forth in applicable ANATEL regulations.
In December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access Service authorization allowing us to provide nationwide subscription television services through any technology, including satellite, wireline and coaxial cable. The Conditional Access Service authorization agreement authorized us to offer the services to be governed by such agreement, including IP TV. In accordance with the ANATEL resolution that approved the Conditional Access Service regime, our Conditional Access Service authorization prohibits us from creating television content or owning more than 30% of a company that creates content. We are also required to carry a certain percentage of Brazilian programming, including open channels and public access channels.
Research and Development
We conduct independent innovation, research and development in areas of telecommunications services but historically we have not independently developed new telecommunications technologies. We depend primarily on suppliers of telecommunications equipment for the development of new technology.
As a condition to ANATEL’s approval of Telemar’s acquisition of control of our company in January 2009, Telemar agreed to make annual investments in innovation, research and development through 2018 in amounts equal to at least 50% of the amounts of its contributions to the Fund for the Technological Development of Telecommunications (Fundo para o Desenvolvimento Tecnológico das Telecomunicações), or FUNTTEL. To fulfill this obligation, as well as to centralize our innovation, research and development activities and programs, in 2009, we created a division to manage innovation, research and development with the mission of coordinating and promoting efforts and projects that it develops.
Our technology laboratory performs a variety of functions, such as operation support systems, business support systems and information security. We conduct trials of technologies from different vendors in this laboratory to evaluate these technologies for deployment.
Since 2009, we have executed cooperation agreements with the following national research centers: Technological Projects, Research and Studies Coordination Foundation (Fundação Coordenação de Projetos, Pesquisas e Estudos Tecnológicos – COPPETEC), Telecommunications Research and Development Foundation (Fundação Centro de Pesquisa e Desenvolvimento em Telecomunicações - CPqD),
and PUC-RJ. We have also executed cooperation agreements with Brazilian national telecommunications suppliers which develop technology in Brazil, such as Nokia AsGa S.A., Digitel S.A. – Indústria Eletrônica and Padtec S.A. Since 2009, we have signed more than 10 such cooperation agreements.
In order to achieve our goals on innovation investments, in 2015, we intensified the process for the exploration of innovative services and activities concerning innovation, research and development to promote our innovation ecosystem.
Our investments in innovation, research and development totaled R$2017 million in 2015,2018, R$16 million in 20142017 and R$1320 million in 2013.2016.
Property, PlantJoint Venture, Associated Companies and EquipmentAssetsHeld-For-Sale
Joint Venture
We own 19.04% of the share capital of Hispamar Satélite S.A., or Hispamar, aSpanish-Brazilian enterprise created in BrazilNovember 1999 by Hispasat (the leading satellite telecommunications provider in the Iberian Peninsula), and our company. Hispamar operates the Amazonas 2 and Amazonas 3 satellites. In December 2002, we entered into an agreement with Hispasat that granted and transferred to Hispamar the rights to exploit geostationary orbital position 61 degrees west, and we acquired a minority equity stake in Hispamar.
In 2009, the Amazonas 2 satellite was launched and this satellite commenced commercial operations in early 2010. This satellite provides both C and Ku band transponders andon-board switching, with an expected useful life of 15 years. The Amazonas 2 satellite is owned by a subsidiary of Hispasat and Hispamar has been granted the right to operate and lease all of the transponder’s space segment on this satellite.
In 2013, the Amazonas 3 satellite was launched and commenced commercial operations. This satellite provides both C and Ku band transponders, with an expected useful life of 15 years. The Amazonas 3 satellite is owned by Hispamar, which operates and leases all of the transponder’s space segment on this satellite.
Associated Company
We own 50% of Companhia AIX de Participações S.A., or AIX. AIX provides infrastructure services to our company and is engaged in the construction of ductwork for the installation of fiber optic cables along highways in the State of São Paulo.
AssetsHeld-for-Sale
Our principal Brazilian properties, ownedboard of directors has authorized our management to take the necessary measures to market our shares in Africatel and leased, are located in Regions I and II.TPT—Telecomunicações Públicas de Timor, S.A., or TPT. As of December 31, 2015, the net book value of our property, plant and equipment in Brazil was R$25,817 million. Our main equipment in Brazil consists of transmission equipment, trunking and switching stations (including local, tandem and transit telephone exchanges), metallic and fiber-optic cable networks and lines, underground ducts, posts and towers, data communication equipment, network systems and infrastructure (including alternating and direct current supply equipment) and motor-generator groups.
As of December 31, 2015, of the net book value of our property, plant and equipment in Brazil, transmission and other equipment represented 52.2%; infrastructure, primarily underground ducts, post and towers, cables and lines represented 22.7%; automatic switching equipment represented 7.8%; buildings represented 7.2%; work in progress represented 6.4%; and other fixed assets represented 3.8%.
All Brazilian property, plant and equipment that are essential in providing the services described in our concession agreements are considered “reversible assets,” which means that, should our concession agreements expire or terminate without being renewed, these assets will automatically revert to ANATEL. There are no other encumbrances that may affect the utilization of our property, plant and equipment. For more details, see note 14 to our consolidated financial statements.
Intellectual Property
We believe the trademarks that identify us and our Brazilian businesses are important for us, and as a result, we have taken stepsrecord the assets and liabilities of Africatel and TPT asheld-for sale, although we do not record Africatel or TPT as discontinued operations in our income statement due to protect them before the Brazilian Patentimmateriality of the effects of Africatel and Trademark Office (Instituto Nacional de Propriedade Industrial), or BPTO. As of December 31, 2015, we had 1,126 trademarks registered by the BPTO and 684 pending trademark applications. Our main trademark used in Brazil, “Oi,” is registered by the BPTO in several classes, which allows us to use this trademark in a variety of markets in which we operate, including in connection with our fixed-line, mobile and broadband services. Among the various registered trademarks 36 are being contested by third parties. In addition, 173 of our pending trademark applications have been challenged by third parties.
As of December 31, 2015, we had 1,239 domain names registered by the Center of Information and Coordination of Dot Br –NIC. Br, the agency responsible for registering domain names in Brazil. The information includedTPT on our websites or that might be accessed through our websites is not included in this annual report and is not incorporated into this annual report by reference.
Asresults of December 31, 2015, the BPTO had granted 12 patents, utility models or industrial designs in the name of our company. We had also filed 18 patent applications, which are currently being examined by the BPTO. Requests for technical examination have been submitted to the BPTO for all of these pending patent applications. Once the examination is concluded, BPTO will issue an official decision accepting or rejecting the application, which will be published in the Official Gazette. If granted, the patent will be enforced for 20 years beginning from filing date.
Insurance
Pursuant to requirements in our Brazilian concession agreements, we maintain the following insurance policies: (1) all risk property insurance covering all insurable assets pertaining to the concessions; (2) loss of profit insurance covering lost profits deriving from property damage and business interruption; and (3) performance bond insurance to assure compliance with our obligations related to quality of service and universal service targets set forth in our concession agreements.
In addition to the above policies, we maintain civil liability insurance in Brazil. Our assets that are of material value and/or exposed to high degrees of risks are also insured. All of our insurance coverage was purchased from highly rated insurance companies in Brazil.
We believe that our current insurance coverage is suitable to our Brazilian operations.
Social ResponsibilityAfricatel
In 2001, we createdOi Futuro, a corporate social responsibility institute that has been designated a Public Interest Organization (Organização da Sociedade Civil de Interesse Público) by the Brazilian Ministry of Justice (Ministério da Justiça).Oi Futuro develops and supports cultural, sustainability and educational programs using information technology and communications to promote social inclusion and human development.
Oi Futuro operates two cultural centers and a telecommunications museum in Rio de Janeiro.Oi Futuro also manages the “Programa Oi de Patrocínios Culturais Incentivados,” which sponsored more than 100 projects through a public selection in 2015.
Oi Futuro supports and develops educational projects using new communication and information technologies to transform the classroom environment and prepare young people from low-income communities for future jobs.Oi Futuro’s diverse initiatives include (1) the Advanced Education Center (Núcleo Avançado em Educação), or NAVE, a public vocational high school established through a public-private partnership with campuses in Rio de Janeiro and Recife, and (2) the “Oi Kabum!” Arts and Technology School (Oi Kabum! Escola de Arte e Tecnologia) with campuses in Rio de Janeiro, Recife, Belo Horizonte and Salvador. In 2015, more than 4,000 students participated in both educational programs (NAVE and Oi Kabum!) and through partnership with other public schools.
Since 2009, NAVE has been consistently recognized by Microsoft as one of the most innovative schools in the world. The NAVE Rio was the only Brazilian school invited by Qatar Foundation to participate in the WISE (World Innovation Summit for Education) Book, one of the most relevant publications worldwide in the field of innovation and education in 2014. In 2015, NAVE was recognized by the Award Rio+Entrepreneur (Rio + Empreendedor) for its contribution to the economic and social development of the State of Rio de Janeiro.
Oi Futuro supports social-environmental programs through itsOi Novos Brasis program, which focuses on community development, environmental and biodiversity projects. In 2015, more than 8,800 people benefited from these programs. In addition, in 2015,Oi Futuro supported 20 projects through the Public Funds for Childhood and Adolescence (FIA - Fundos Públicos da Infância e da Adolescência) and sports projects.
We contributed R$24 million in each of 2015, 2014 and 2013 to these projects and programs.
Operations in Africa
In 2006, PT Ventures formed Africatel Holdings B.V., or Africatel, was formed in May 2006 and subsequently (1) contributed to Africatel itsindirectly holds our equity interests in (a) Unitel, which operates in Angola, and (b) Cabo Verde Telecom, S.A., or CVTelecom, which operates in Cape Verde, among others, and (2) acquired (a) 34% of the equity interests in Mobile Telecommunications Limited, or MTC, which operates in Namibia, and (b) 51% of the equity interest in CST – Companhia Santomense de Telecomunicações S.A.R.L., or CST, which operated in São Tomé and Príncipe. In 2007, PT Ventures sold 22% of the equity interests in Africatel to Samba Luxco, an affiliate of Helios Investors L.P., or Helios, a private equity firm operating in sub-Saharan Africa, and entered into a shareholders’ agreement with Samba Luxco regarding governance and liquidity rights relating to Africatel. In 2008, PT Ventures transferred
its equity interests in Africatel to Pharol, which sold an additional 3% of the equity interests in Africatel to Samba Luxco. In 2009, Pharol sold 100% of the equity interests in PT Ventures to Africatel.
As of December 31, 2015, in addition to its interests in Unitel, MTC, CVTelecom and CST, Africatel owns Directel—Listas Telefónicas Internacionais, Lda., or Directel, which publishes telephone directories and operates related data basesDirectel. We own 86% of the share capital of Africatel.
Unitel
Africatel indirectly owns 25% of the share capital of Unitel, a mobile service provider in Angola, Cabo Verde, Mozambique, Uganda and Kenya.
As a result ofAngola. Following our acquisition of PT Portugal in May 2014, and PT Portugal’s transferwhich resulted in our acquisition of all of the outstanding share capital of PT Participações, which holds our direct and indirect interests in Africatel and TPT, to Oi in connection with our sale of PT Portugal, we own 75% of the equity interests in Africatel. Pharol, our subsidiaries PT Ventures and Africatel GmbH & Co KG, of Africatel GmbH, and Samba Luxco are parties to a shareholders’ agreement under which we have ownership and management control of Africatel, which we refer to as the Africatel shareholders’ agreement.
On September 16, 2014, our subsidiary, Africatel GmbH, which directly holds our interest in Africatel, received a letter from Samba Luxcowe brought suits against Unitel in which Samba Luxco claimed that Oi’s acquisitionthe courts of PT Portugal was deemed a changeAngola and instituted arbitral proceedings against the other shareholders of control of Pharol under the Africatel shareholders’ agreement, and that this change of control entitled Samba Luxco to exercise a put right under the Africatel shareholders’ agreement at the fair market equity value of Samba Luxco’s Africatel shares. In the letter, Samba Luxco purported to exercise the alleged put right and thereby require Africatel GmbH to acquire its sharesUnitel in Africatel.
On September 26, 2014, Africatel GmbH responded to Samba Luxco stating that there had not been any action or event that would trigger the right to exercise the put option under the Africatel’s shareholders’ agreement and that Africatel GmbH intended to challenge Samba Luxco’s purported exercise of the put option. On the same date, we issued a Material Fact disclosing Samba Luxco’s purported exercise of the put option, our understanding that the exercise of the put option is not applicable, and that our board of directors had authorized our management to take the necessary actions to sell our interest in Africatel.
On November 12, 2014, the International Court of Arbitration of the International Chamber of Commerce notified Africatel GmbH that Samba Luxco had commenced arbitral proceedings against Africatel GmbHbased on our inability to enforce its purported put right or, in the alternative, certain other rightscollect dividends owed to us by Unitel and claims allegedly arising out of Oi’s acquisition of PT Portugal. Africatel GmbH presented its answer to Samba Luxco’s request for arbitration on December 15, 2014. The arbitral tribunal was constituted on March 12, 2015 and the proceedings are ongoing. Africatel GmbH intends to continue to vigorously defend these proceedings.
Unitel, Angola
In 2000, PT Ventures, then a wholly-owned subsidiary of Pharol, acquired 25%breaches of the share capital of Unitel a 2G mobile operator in Angola. Unitel began operations in Luanda in 2001. In connection with this investment, PT Ventures entered into a shareholders’ agreement with the other shareholders of Unitel regarding governance and liquidity rights relatingagreement. For more information about these proceedings, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Unitel, and dispute resolution provisions. In 2007, Pharol contributed its shares of PT Ventures to Africatel. As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT Participações to Oi in connection with our sale of PT Portugal, we have an 18.75% economic interestOur Interest in Unitel. We account for this investment as an asset held-for-sale.”
MTC, NamibiaCVTelecom
In 2006, Pharol entered into an agreement to acquire 34% of the capital of MTC, a Namibian mobile operator, from Namibia Post and Telecom Holdings, a state-controlled entity, or NPTH. In connection with this transaction, Pharol entered into a shareholders’ agreement with NPTH regarding governance and liquidity rights relating to MTC that allowed Pharol to set and control the financial and operating policies of MTC. In 2006, Pharol assigned its rights to acquire the capital of MTC and its rights under the shareholders’ agreement to Africatel. As a result of our acquisition of PT Portugal in May 2014 and PT Portugal’s transfer of all of the outstanding share capital of PT Participações to Oi in connection with our sale of PT Portugal, we fully consolidate MTC in our consolidated financial statements.
As of December 31, 2015, MTC had 2.4 million customers, of which 93.7% were customers under pre-paid plans.
MTC was established in 1994 and provides mobile telecommunications services under the terms of a 15-year technology- and service-neutral concession granted in March 2012 that replaced its earlier licenses. Under the terms of this concession, MTC is permitted to offer 2G, 3G and 4G services. MTC commenced offering 4G services in Windhoek, the capital of Namibia, in May 2012 and, as of December 31, 2015, MTC provided 4G services to 65% of cities in Namibia.
In 2006, a license was granted to Powercom to provide mobile telecommunications services in Namibia. Powercom commenced operations in 2007. In November 2012, Telecom Namibia, the incumbent provider of fixed-line telecommunications services in Namibia and a wholly-owned subsidiary of NPTH, acquired Powercom. Telecom Namibia re-launched Powercom’s portfolio of service plans under the brand “TN Mobile” in August 2013. In November 2013, TN Mobile began offering 4G services in Windhoek and other urban areas.
During 2015, MTC focused its marketing efforts and commercial activity on selling new pre-paid plans with increased data packages in an effort to differentiation itself from its competitors and promoting the upselling of new pricing plans aimed at increasing usage and revenues.
CVTelecom, Cape Verde
PT VenturesAfricatel indirectly owns 40% of the share capital of CVTelecom, a provider of fixed-line and mobile services in the Cabo Verde Islands. In 2000, PT Ventures, entered into a shareholders’ agreement with the other shareholders of CVTelecom, regarding governance and liquidity rights relating to CVTelecom, which allowed PT Ventures to set and control the financial and operating policies of CVTelecom. As a result of our acquisition of PT Portugal, we fully consolidated CVTelecom in our financial statements as of December 31, 2014. In November 2014, the Government of Cape Verde, which is a shareholder of CVTelecom, notified usIslands, that as a result of our acquisition of PT Portugal, the shareholders’ agreement governing CVTelecom had been terminated. At a general shareholders’ meeting of CVTelecom in March 2015, we were only able to elect three of the seven members of the board of directors of CVTelecom. In March 2015, we commenced arbitration proceedings disputing this interpretation of the shareholders’ agreement, and we intend to vigorously defend our rights under the shareholders’ agreement. We are currently engaged in negotiations with the other shareholder of CVTelecom to seek an alternative resolution of this dispute. As a result of this dispute, for dates and periods ending after January 1, 2015, we have recorded our interest in CVTelecom under the equity method.
As of December 31, 2015, CVTelecom had approximately 54,200 fixed-lines in service, which represents approximately 10.6 fixed main lines per 100 inhabitants. As of December 31, 2015, CVTelecom had approximately 404,000 active mobile telephone cards.
CVTelecom was established in 1995 and provides fixed-line and mobile telecommunications services under the terms of a25-year license granted in 1996.
Following our acquisition of PT Portugal in 2014, which resulted in our acquisition of our interest in Africatel, we instituted arbitral proceedings against the Republic of Cape Verde in the International Court of Arbitration of the International Chamber of Commerce, disputing its interpretation of the shareholders’ agreement governing CVTelecom which the Republic of Cape Verde terminate this shareholders’ agreement. In December 2011, CVTelecom was granted a license to provide 3G services inMarch 2015, we also commenced an arbitration proceeding against the Republic of Cabo Verde. In May 2012, CVTelecom’s connectionVerde before the International Centre for Settlement of Investment Disputes, or ICSID, due to the West African Cable System, a submarine cable which connectsviolation of CVTelecom’s network to networks in West Africa and Europe, began operating.
In 2006, the National Communications Agency (Agência Nacional das Comunicações) granted the second license to provide fixed-line and mobile telecommunications services in Cabo Verde to T Plus S.A., or T Plus, which commenced operationsexclusivity rights under the brand “T+” in December 2007. In December 2011, T Plus was granted a license to provide 3G services inconcession agreement by the Republic of Cabo Verde. In October 2012, a controlling interest in T Plus was acquired by Unitel Holdings, which is controlled by Mrs. Isabel dos Santos.
During 2014, CVTelecom launched several commercial offers, both mobile and fixed lines, aimed at promoting usage and customer loyalty, including: (1) the development of a youth segment, based on the “Powa Swag” service, (2) the launch of several voice promotions, such as “Di Borla Domingão,” and (3) the development of “ZAP,” an NPlay offer. As of December 31, 2015, broadband and IPTV customers represented 28.2% and 10.9% of CVTelecom’s fixed line customer base, respectively.
CST São Tomé and Principe
Africatel indirectly owns 51.0%51% of the share capital of CST, which providesa provider of fixed and mobile services in São Tomé and Principe. As of December 31, 2015, CST had approximately 155,300 mobile customers.
CSTPrincipe, that was established in 1989 and provides fixed-line and mobile telecommunications services under the terms of a20-year license granted in 2007. CST began offering 3G
Directel
Africatel indirectly owns 100% of the share capital of Directel, a Portuguese entity with subsidiaries in Angola, Cabo Verde, Mozambique, and Kenya, which publish telephone directories and operate related data bases in those countries.
TPT
We own 76.14% of the share capital of TPT, a Portuguese holding company that owns 54.01% of the share capital of Timor Telecom, S.A., or Timor Telecom, which provides telecommunications, multimedia and IT services in São Tomé and PrincipeTimor Leste in March 2012 anticipating the connection of its network to the Africa Coast to Europe submarine cable which was inaugurated at the end of 2012. In March 2013, the General Regulatory Authority (Autoridade Geral de Regulação), the telecommunications regulator in São Tomé and Principe granted the second license to provide fixed-line and mobile telecommunications services in São Tomé and Principe to Unitel Holdings, which is controlled by Mrs. Isabel dos Santos. The second operator commenced commercial activity in July 2014.
During 2015, CST worked on several initiatives designed to promote its commercial brand and customer loyalty in order to mitigate the effectsAsia. Our wholly-owned subsidiary PT Participações also holds 3.05% of the new competitor. In addition, CST also launched a new data link between the islandsshare capital of São Tomé and Principe, which increased the capacity more than nine times compare to the previous link connecting the two islands.Timor Telecom.
Regulation of the Brazilian Telecommunications Industry
Overview
Our business, including the nature of the services we provide and the rates we charge, is subject to comprehensive regulation under the Brazilian General Telecommunications Law (Lei Geral das Telecomunicações), or the General Telecommunications Law, and a comprehensive regulatory framework for the provision of telecommunications services promulgated by ANATEL. We provide fixed-line, domestic and international long-distance, and mobile telecommunications, data transmission andPay-TV services under concessions, authorizations and licenses that were granted by ANATEL and allow us to provide specified services in designated geographic areas, as well as set forth certain obligations with which we must comply. See “— Concessions, Authorizations and Licenses.”
ANATEL is aan administratively independent and financially autonomous regulatory agency that was established in July 1997 pursuant to the General Telecommunications Law and theANATEL Regulation (Regulamento da Agência Nacional de Telecomunicações). ANATEL oversees our activities and enforces the General Telecommunications Law and the regulations promulgated thereunder. ANATEL is administratively independent and is financially autonomous. ANATEL is required to report on its activities to the Brazilian Ministry of Communications. ANATELCommunication, and has authority to propose and to issue regulations that are legally binding on telecommunications service providers. ANATEL also has the authority to grant concessions and licenses for all telecommunications services, other than broadcasting services. In addition, ANATEL is authorized to direct and control the provision of services, the shareholding structure of service providers, to apply penalties and to declare the expiration of the concession and authorizations and the return of assets from the concessionaire to the government authority upon termination of the concession. Any regulation or action proposed by ANATEL is subject to a period of public comment, which may include public hearings, and ANATEL’s decisions may be challenged administratively before the agency itself or through the Brazilian judicial system.
Concessions and Authorizations
The current regulatory framework for the Brazilian telecommunications industry was adopted in 1998. Under the General Telecommunications Law and ANATEL regulations, the right to provide telecommunications services is granted either through a concession under the public regime (as discussed below) or an authorization under the private regime (as discussed below). A concession is granted for a fixed period of time following a public auction and is generally renewable only once. An authorization is granted for an indeterminate period of time and public auctions are held for some authorizations. These concessions and authorizations allow service providers to provide specific services in designated geographic areas, set forth certain obligations with which the service providers must comply and require equal treatment of customers by the service providers.
The three principal providers of fixed-line telecommunications services in Brazil, Telefônica Brasil, EmbratelClaro and our company, provide these services under the public regime. In addition, CTBC and Sercomtel, which are secondary local fixed-line telecommunications service providers, operate under the public regime. All of the other providers of fixed-line telecommunications services and all providers of personal mobile services and data transmission services in Brazil operate under the private regime.
Public Regime
Overview
Providers of public regime services are subject to more obligations and restrictions than providers of private regime services. Under Brazilian law, providers of public regime services are subject to certain requirements with respect to services such as network expansion and network modernization. Additionally,Under their concession agreements, public regime service providers are required to comply with the provisions of the General Plan of Universal Service Goals (Plano Geral de Metas de Universalização), or PGMU, which was most recently updated in December 2018. For more information about the PGMU and our obligations thereunder, see “—General Plan of Universal Service Goals (PGMU).”
In addition, public regime service providers as well as private regime service providers, are required to comply with the provisions of the General Plan of Quality Goals (Plano Geral de Metas de Qualidade), or PGMQ, which was adopted by ANATEL in June 2013, and the General Plan on Competition Targets (Plano Geral de Metas de Competição), or PGMC, which was adopted by ANATEL in November 2012 and updated in July 2018. For more information about the PGMQ and the PGMC see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
The rates that public regime service providers may charge customers are subject to ANATEL supervision. Another distinctive feature of public concessions is the right of the concessionaire to maintain certain economic and financial standards, which are calculated based on the rules set forth in ourthe concession agreements and was designed based on a price cap model. The concessionsFor more information, see “Our Services—Fixed-Line Telephone Services—Rate Regulation.”
Concessions are granted for a fixed period of time and are generally renewable only once.
Our concession agreements provide that ANATEL may modify their terms in 2015 and 2020 and may revoke them prior to expiration underterminate the circumstancesconcession of any public regime service provider upon the occurrence of certain events described below under “—Termination of a Concession.” The modification right permits ANATEL to impose new terms and conditions in response to changes in technology, competition in the marketplace and domestic and international economic conditions. ANATEL is obligated to engage in public consultation in connection with each of these potential modifications.
On June 27, 2014, ANATEL opened a public comment period for the 2015 revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. We submitted our comments during this period. Throughout 2015, ANATEL, the Brazilian Ministry of Communications and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Ministry of Communications created a working group, consisting of three members from each of ANATEL and the Ministry of Communications, to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In November 2015, the Ministry of Communications opened public consultation on the new regulatory framework for telecommunications. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications, based on the working group’s findings, issued a decree addressing guidelines for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.
Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations.
Under the concession agreements and authorizations, each of the service providers is required to comply with the provisions of (1) the General Plan onof Universal Service Goals that was adopted by ANATEL in June 2003, (2) the General Plan on Quality Goals that was adopted by ANATEL in June 2003, and (3) the General Plan on Competition Targets that was adopted by ANATEL in November 2012. Regulatory provisions are included in the relevant concession agreements and authorizations, and the service providers are subject to public service principles of continuity, changeability and equal treatment of customers.
In addition, ANATEL is authorized to direct and control the provision of services, to apply penalties and to declare the expiration of the concession and the return of assets from the concessionaire to the government authority upon termination of the concession.
Regulation of Fixed-Line Services
Rate Regulation(PGMU)
Under the concession agreements, public regime service providers are required to offer basic local fixed-line plans to users. Rates for long-distance services originated and terminated on fixed lines vary in accordance with certain criteria. The concession agreements establish a price-cap mechanism for annual rate adjustments for basic
service plans and domestic long-distance rates based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index.
ANATEL has calculated the sector’s weighted average productivity rate. As of the date of this annual report, Factor X is equal to (1) 50% of the increase in the weighted average productivity rate of public regime providers, plus (2) 75% of a factor calculated by ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow an annual adjustment in excess of the IST.
ANATEL has proposed new regulations under which it would modify the Factor X applicable to the determination of rate increases available to public concessionaires providing fixed-line services. ANATEL expected to launch a public consultation process relating to these proposed regulations during 2016.
A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment.
A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST.
For information on our rates and service plans, see “—Rates.”
General Plan on Universal Service Goals
The General Plan on Universal Service Goals was approved by ANATEL in June 2011. The General Plan on Universal Service GoalsPGMU sets forth the principal network expansion and modernization obligations of the public regime providers. The PGMU was approved by Decree No. 9,619 and became effective on December 21, 2018, the date when it was published in the Official Gazette.
Public regime providers are subject to network expansion requirements under the General Plan on Universal Service Goals,PGMU, which are revised by ANATEL from time to time. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. Our failure to meet the network expansion and modernization obligations established by the General Plan on Universal Service GoalsPGMU or in our concession agreements may result in fines and penalties of up to R$50 million, as well as potential revocation of our concessions.
The General Plan on Universal Service Goals, as amended,PGMU requires the following, among other things:
local fixed-line service providers to provide individual access to fixed-line voice services to economically disadvantaged segments of the Brazilian population within their service areas, through programs to be established and regulated by ANATEL;
local fixed-line service providers to provideinstall public telephones on demand in urban areas within theirlocations with more than 100 inhabitants;
local fixed-line service areas, including in localities with a population in excess of 100, andproviders to install residential fixed lines in locations with more than 300 inhabitants (1) in regions where there is no fixed line installed, within seven120 days of a request and (2) in localities withregions where fixed lines are already installed, within 7 days of a populationrequest for 90% of requests and in excessup to 25 days of 300;a request for the remaining 10% of requests; and
local and long-distance fixed-line service providers that obtain authorizations to use radio spectrumgradually provide voice access in the 450 Mhz bandwireless local loop technology with capacity for 4G services in 1,400 locations (of which 1,155 apply to provide universal service in ruralOi), according to the following schedule: 10% of such locations by December 31, 2019; 25% by December 31, 2020; 45% by December 31, 2021; 70% by December 31, 2022; and remote areas, as well as100% by December 31, 2023.
Similarly to provide individual and group access to fixed-line voice services.
The General Plan on Universal Service Goals is expected to be amended again in 2016 In connection with the 2008 amendments to the PGMU that eliminated the requirements to provide public telephone centers (postos de serviço telefônico) in exchange building backhaul, the 2018 PGMU eliminated the requirements to provide multifacility service centers (postos de serviço multifacilidade), which are public centers located in rural areas that offers various telecommunications services, including voice, access to the internet and digital transmission of text and images, and to install and maintain public telephones within a fixed-line service concession, agreements.in exchange for other obligations to be defined.
The value of the obligations currently imposed by the PGMU and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, is subject to discussion between the parties, with ANATEL having the ability to make the final valuation.
Termination of a Concession
ANATEL may terminate the concession of any public regime service provider upon the occurrence of any of the following:
an extraordinary situation jeopardizing the public interest, in which case the Brazilian government is authorized to start rendering the services set forth under the concession in lieu of the concessionaire, subject to congressional authorization and payment of adequate indemnification to the owner of the terminated concession;
termination by the provider (through an agreement with ANATEL or pursuant to legal proceedings) as a consequence of an act or omission of the Brazilian government that makes the rendering of the services excessively burdensome to the provider;
annulment of the concession due to a contractual term, which is deemed by subsequent law to be illegal;
material failure to comply with the provider’s universalization targets;
failure to meet insurance requirements set forth in the concession agreement;
asplit-up,spin-off, amalgamation, merger, capital reduction or transfer of the provider’s control without ANATEL’s authorization;
the transfer of the concession without ANATEL’s authorization;
the dissolution or bankruptcy of the provider; or
an extraordinary situation in which Brazilian government intervention, although legally permissible, is not undertaken, as such intervention would prove to be inconvenient, unnecessary or would result in an unfair benefit to the provider.
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services.
Service Restrictions
Pursuant to regulations in effect as of the date of this annual report, publicPublic regime service providers are subject to certain restrictions on alliances, joint ventures and mergers and acquisitions with other public regime providers, including:
a prohibition on members of the same economic group holding more than two licenses for the provision of telecommunications services in the public regime, which would include holding more than 20% of the voting shares of or controlling (as such term is defined under ANATEL’s regulations) more than one other providertwo providers of public regime telecommunications services; and
a restriction, as set forth in the PGO, on mergers between regional fixed-line service providers.providers of public regime telecommunications services.
In December 2010, ANATEL adopted new regulations eliminating the limitation on the number of authorizations to provide subscription television services. In September 2011, Law No. 12,485 became effective, which creates a new legal framework for subscription television services in Brazil, replacing and unifying the previously existing regulatorydetermines, among other provisions that governed various forms of subscription television services, such as cable television, Multichannel Multipoint Distribution Service, or MMDS, and DTH. The principal provisions of Law No. 12,485:to:
allow fixed-line telephone concessionaires, such as us, who previously were allowed to provide subscription television services using only MMDS and DTH technologies, to enter the cable television market in Brazil;
remove existing restrictions on foreign capital investments in cable television providers;
prohibit telecommunications service providers with collective interests from acquiring rights to disseminate images of events of national interest and from hiring domestic artistic talent.
Private Regime
Providers of private regime services, although not generally subject to the requirements concerning continuity and universality of service and network modernization, are subject to certain network expansion and quality of service obligations set forth in their respective authorizations and applicable regulation.
For example, private regime service providers are required to comply with the provisions of the PGMQ and the PGMC. For more information about the PGMQ and the PGMC, see “—Our Services—Fixed-Line Telephone Services—Quality Regulation” and “—Other Regulatory Matters—General Plan on Competition Targets (PGMC),” respectively.
Our Services
Fixed-Line Telephone Services
Regulatory Overview
We provide the majority of our fixed-line telephone services (Serviço Telefônico Fixo Comutado—STFC) in accordance with concession agreements under the public regime. For more information about the regulations applicable to public regime telephone service providers, see “—Public Regime.”
Our Concessions and Authorizations
The following table sets forth certain details of our concessions and authorizations to provide local, domestic long-distance and international long-distanced fixed-line telephone services:
Geographic Scope | Type of Service | Termination Date | Regime | |||
| Region I of the PGO – States of Rio De Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraiba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amapá, Amazonas e Roraima, except Sector 3 of Region I of the PGO(1) | Local / Domestic Long-Distance | December 31, 2025 | Concession | |||
| Region I of the PGO – Sector 3(1) | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| Region II of the PGO – States of Santa Catarina, Paraná, Mato Grosso, Mato Grosso do Sul, Goiás, Tocantins, Distrito Federal, Rondônia, Acre and Rio Grande Do Sul, cxcept for Sectors 20, 22 and 25(2) | Local / Domestic Long-Distance | December 31, 2025 | Concession | |||
| Region II of the PGO – Sectors 20, 22 and 25(2) | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| Region III of the PGO – São Paulo | Local / Domestic Long-Distance | Indeterminate | Authorization | |||
| National | International Long Distance | Indeterminate | Authorization |
| (1) | Sector 3 of Region II of the PGO corresponds to 57 municipalities in the State of Minas Gerais. |
| (2) | Sectors 20, 22 and 25 of Region II of the PGO correspond to the following municipalities: Londrina, Paraná; Tamarana, Paraná; Paranaíba, Mato Grosso do Sul; Buriti Alegre, Goiás; Cachoeira Dourada, Goiás; Inaciolândia, Goiás; Itumbiara, Goiás; Paranaiguara, Goiás; and São Simão, Goiás. |
Each of our concession agreements:
sets forth the parameters that govern adjustments to our rates;
requires us to comply with the network expansion obligations set forth in the PGMU;
requires payment of biannual fees equal to 2.0% of our net operating revenue that is derived from the provision of our local fixed-line and domestic long-distance services (excluding taxes and social contributions) during the immediately preceding year;
In addition, each of our concession and authorization agreements:
sets forth the conditions under which ANATEL may access information from us;
requires us to comply with certain quality of service obligations as well as the quality of service obligations set forth in the PGMQ;
requires us to pay fines for anynon-compliance with the regulatory rules including systemic service interruptions.
In addition, the PGMU requires us to provide transmission lines connecting our fiber-optic internet backbones to municipalities in our concession areas in which we did not provide internet service, which we refer to as backhaul. Under these concession agreements, we are obligated to set up backhaul in 3,188 municipalities in Regions I and II. The facilities that we constructed to meet these obligations are considered to be property that is part of our concessions and will therefore revert to the Brazilian government on January 1, 2026. For more information about the PGMU, see “—Public Regime—General Plan of Universal Service Goals (PGMU).”
On June 27, 2014, ANATEL opened a public comment period for the revision of the terms of our concession agreements. The comment period, which ended on December 26, 2014, was opened for comments on certain topics such as service universalization, rates and fees, among others. Throughout 2015, ANATEL, the Brazilian Ministry of Communication and telecommunications service providers met regularly to discuss possible amendments to each of the concession agreements granted by ANATEL, including ours, and the implications of the developments and demands in the telecommunications sector in recent years. In September 2015, the Brazilian Ministry of Communication created a working group to evaluate the status of the concessions and propose guidelines for the amendment of the concession agreements. In April 2016, the Brazilian Ministry of Communication issued an ordinance addressing guidelines for the establishment of a new regulatory framework for telecommunications, which were expected to be implemented by ANATEL through the conclusion of the concession amendments. In line with the provisions of PLC 79, these guidelines provided for, among other things, the expansion of broadband services (including in rural regions), the elimination of the reversibility of assets, and an extension of the terms of concessions, which in our case are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. The implementation of these guidelines, however, depends on the passage of PLC 79 to provide the necessary legal authority and framework. As a result of the Brazilian Congress’s failure to date to pass PLC 79, the review of our concession agreements, which was scheduled to occur by June 2017, has not yet taken place, and further discussions regarding amendments to our concession agreements have halted pending resolution of PLC 79. Under their existing terms, our concession agreements may be amended by December 2020 at the latest. If PLC 79 is not passed, our concession agreements will expire in 2025 without the possibility of renewal.
In connection with the consideration of revisions to the concession agreements under the public regime, in January 2017, ANATEL proposed revisions to the terms of the PGO, in line with the provisions of PLC 79, which include the ability of companies operating under a concession in the public regime to convert their concessions into authorizations to operate in the private regime and thereby eliminate a number of substantial obligations currently imposed by the concession regime, in exchange for the assumption of obligations to make additional investments in their networks, primarily related to the expansion of broadband services or through the payment of fees to ANATEL. The value of the obligations currently imposed by the concession agreement and, therefore, the cost of the additional investments or fees to be paid to ANATEL in exchange for the elimination of such obligations, would be subject to discussion between the parties, with ANATEL having the ability to make the final valuation. However, as a result of the legislative gridlock faced by PLC 79, ANATEL has halted implementation of the PGO.
We cannot assure you that any future amendments to our concession agreements or the PGO will not impose requirements on our company that will require us to undertake significant capital expenditures or will not modify the rate-setting procedures applicable to us in a manner that will significantly reduce the net operating revenue that we generate from our Brazilian fixed-line businesses. If the amendments to our Brazilian concession agreements have these effects, our business, financial condition and results of operations could be materially adversely affected.
Rate Regulation
Under their concession agreements, public regime service providers are required to offer basic local fixed-line plans to users. Rates for the basic long-distance services plan originated and terminated on fixed lines vary in accordance with certain criteria. The concession agreements establish aprice-cap mechanism for annual rate adjustments for basic service plans and basic domestic long-distance plans based on formulas set forth in each provider’s concession agreement. The formula provides for two adjustments to the price cap based on the local rate basket, the long-distance rate basket and the use of a price index. The price cap is first revised upward to reflect increases in inflation, as measured by an index, then ANATEL applies a productivity discount factor, or Factor X, which reduces the impact of the rate readjustment provided by the index.
Factor X is equal to (1) 50% of the increase in the productivity rate of public regime providers, plus (2) 75% of a factor calculated by ANATEL that is designed to reflect cost optimization targets for the telecommunications industry as a whole. If the weighted average productivity rate is negative, ANATEL will not allow an annual adjustment in excess of the IST.
A provider may increase rates for individual services within the local rate basket or the long-distance rate basket by up to 5% more than the IST so long as the rates for other services in that rate basket are reduced to the extent necessary to ensure that the weighted average increase for the entire rate basket does not exceed the permitted annual rate adjustment.
A provider may also offer alternative plans in addition to the basic service plan. Alternative plans must be submitted for ANATEL’s approval. The rates offered under the alternative plans may be adjusted annually based on the IST.
Local Rates
Our revenues from local fixed-line services consist mainly of monthly subscription charges, charges for local calls and charges for the activation of lines for new subscribers or subscribers that have changed addresses. Monthly subscription charges are based on the plan to which the customer subscribes and whether the customer is a residential, commercial or trunk line customer.
Under our concession agreements, we are required to offer two local fixed-line plans to users: the Basic Plan per Minute and the Mandatory Alternative Service Plan. In addition to the Basic Plan per Minute and the Mandatory Alternative Service Plan, we are permitted to offernon-discriminatory alternative plans to the basic service plans. The rates for applicable services under these plans must be submitted for ANATEL approval prior to offering those plans to our customers. Historically, ANATEL has generally not raised objections to the terms of these plans.
On an annual basis, ANATEL increases or decreases the maximum rates that we are permitted to charge for our basic service plans. In addition, we are authorized to adjust the rates applicable to our alternative plans annually by no more than the rate of inflation, as measured by the Telecommunications Services Index (Índice de Serviços de Telecomunicações – IST), or IST. Discounts from the rates set in basic service plans and alternative service plans may be granted to customers without ANATEL approval.
Local FixedLine-to-Mobile Rates(VC-1) and Mobile Long Distance Rates(VC-2 andVC-3)
When one of our fixed-line customers makes a call to a mobile subscriber of our company or another mobile services provider that terminates in the mobile registration area in which the call was originated, we charge our fixed-line customerper-minute charges for the duration of the call based on rates designated by ANATEL asVC-1 rates. In turn, we pay the mobile services provider aper-minute charge based on rates designated by ANATEL as mobile termination, or MTR, rates for the use of its mobile network in completing the call. Rates for long-distance calls that originate or terminate on mobile telephones are based on whether the call is an intrasectorial long-distance call, which is charged at rates designated by ANATEL asVC-2 rates, or an intersectorial long-distance call, which is charged at rates designated by ANATEL asVC-3 rates. If the caller selects one of our carrier selection codes for the call, we receive the revenues from the call and must pay interconnection fees to the service providers that operate the networks on which the call originates and terminates.VC-1,VC-2 andVC-3 rates, collectively, the “VC Rates” vary depending on the time of the day and day of the week, and are applied on aper-minute basis. On an annual basis, ANATEL may increase or decrease the maximum VC Rates that we are permitted to charge.
FixedLine-to-Fixed-Line Long Distance Rates
If a caller selects one of our carrier selection codes for a long-distance call that originates and terminates on fixed-line telephones, we receive the revenues from the call and must pay interconnection fees to the service providers that operate the networks on which the call originates and terminates. Rates for these long-distance calls are based on the physical distance separating callers (which are categorized by four distance ranges), time of the day and day of the week, and are applied on aper-minute basis for the duration of the call. On an annual basis, ANATEL increases or decreases the maximum domestic fixedline-to-fixed line long-distance rates that we are permitted to charge.
For more information about the rates applicable to our fixed-line services, see “—Rates, Billing and Collection—Rates.”
Quality Regulation
General Plan on Quality Goals (PGMQ)
The PGMQ for fixed-line voice services was approved by ANATEL in December 2012 and became effective in June 2013. Each fixed-line service provider operating under the public regime or the private regime must comply with the provisions of the PGMQ. All costs related to compliance with the quality goals established by the PGMQ must be borne exclusively by the service provider. The PGMQ establishes minimum quality standards with regard to:
customer complaints;
responses to repair requests;
responses to change of address requests;
rate of call completion; and
quality of public telephones.
These quality standards are measured according to the definitions and quality indicators established by ANATEL. The indicators, as well as their respective methods of collection, calculation and other quality requirements, are defined in specific regulations published by ANATEL.
ANATEL measures the performance of fixed-line service providers in each individual state in which they operate. As a result, the performance of fixed-line service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, fixed-line service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular area codes.
In November 2017, ANATEL submitted for public consultation the Quality of Telecommunications Services Regulation (Regulamento de Qualidade dos Serviços de Telecomunicações), or RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation (RQUAL).”
Mobile Telephone Services
Regulatory Overview
In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile service (Serviço Móvel Pessoal—SMP) regime. The regulations permitted ANATEL to grant authorizations to provide mobile telecommunications services under the personal mobile service regime. For purposes of the personal mobile service regulations, Brazil is divided into three service regions covering the same geographic areas as the concessions for fixed-line telecommunications services.
Auction of 3G Spectrum
In preparation for auctions of spectrum in Bands F, G, I and J (2.1 GHz), the use of which allows personal mobile services providers to offer 3G services to their customers, ANATEL issued regulations that divide the Brazilian territory into nine regions for purposes of operations using these frequency bands. In December 2007, ANATEL auctioned radiofrequency licenses to operate on each of these frequency bands in each of the nine regions and the related licenses to use these frequency bands. In this auction, we acquired the radio frequency licenses necessary to offer 3G services in two of the nine regions delineated by ANATEL for 3G services (corresponding to Regions II under the personal mobile services regime), and TNL PCS acquired radio frequency licenses necessary to offer 3G services in six of the nine regions delineated by ANATEL for 3G services (corresponding to Regions I and III under the personal mobile services regime, other than an area that consists of 23 municipalities in the interior of the State of São Paulo that includes the city of Franca and surrounding areas).
Authorizations to Use 450 MHz Band and 2.5 GHz Band
In preparation for auctions of the 450MHz band and 2.5 GHz band, the use of which allows personal mobile services providers to offer 4G services to their customers, ANATEL issued regulations that divided the Brazilian territory into three regions for purposes of providing personal mobile services. In June 2012, ANATEL auctioned radio frequency licenses to operate and the related licenses to use the frequency bands in the following manner: (1) four national lots for 2.5 GHz bands, each accompanied by a regional band of 450 MHz, and (2) 132 regional lots for 2.5GHz bands. In this auction, we acquired (1) one of the national lots for 2.5 GHz and the corresponding regional lot of 450MHz to provide rural broadband services in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District, and (2) 11 regional lots for 2.5 GHz bands to provide personal mobile services in the following areas: interior of Ceará, the capital or Roraima (and its metropolitan area), the State of Amapá, the capital of Bahia (and its metropolitan area), interior of the State of Pará, the capital of Pernambuco (and its metropolitan area), interior of Paraná, the capital of Rio Grande do Sul (and its metropolitan area), the City of Jaguarão (and its metropolitan area) and the capital of São Paulo (and its metropolitan area).
Network Sharing
In 2013, ANATEL and CADE approved the 2013 RAN Sharing Agreement between TIM and Oi for the construction, implementation and mutual assignment of network tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to ensure compliance with the scope of 4G commitments.
In 2014, TIM and Oi agreed to negotiate the joint construction, implementation and reciprocal assignment of elements of their respective 2G and 3G network infrastructures, which was approved by ANATEL and CADE.
In 2015, ANATEL and CADE approved the 2015 RAN Sharing Agreement between Telefônica Brasil, TIM and Oi for the construction, implementation and mutual assignment of network tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to ensure compliance with the scope of commitments. With respect to the latter agreement, ANATEL rejected the proposal to conduct RAN sharing in conurbations, however, because it detected interference in the service. As a result, ANATEL will not allow RAN sharing in municipalities experiencing interference until a solution has been found.
In 2018, ANATEL and CADE approved an amendment to the 2013 RAN Sharing Agreement between TIM and Oi to update the technology covered by the agreement and to permit infrastructure sharing in the 1800 MHz spectrum technology.
Our Authorizations
We hold radiofrequency spectrum authorizations to provide 2G, 3G and 4G services in Regions I, II and III. The majority of these authorizations grant us permission to use the applicable radio spectrum for 15 years from the date of the authorization agreement under which they are granted and are renewable for additional15-year terms. Upon renewal of any of these authorizations and on every second anniversary of such renewal, we will be required to pay an amount equal to 2.0% of our prior year’s net operating revenue from personal mobile services. The initial terms of one of our radio frequency spectrum authorizations expired in 2016 and was extended for an additional 15 year term.
The following table sets forth certain information about our authorizations to provide mobile telephone services:
Geographic Scope | 900 MHz | 1,800 MHz | 2,100 MHz (3G) | 2,600 MHz (4G)(5) | ||||
| Rio de Janeiro, Espírito Santo, Minas Gerais, Amazonas, Roraima, Amapá, Pará, Maranhão, Bahia, Sergipe, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco and Alagoas | March 2031* | April 2023 | October 2027 | |||||
| Rio de Janeiro, Bahia, Ceará, Minas Gerais and Pernambuco(1) | March 2031* | |||||||
| Amazonas, Alagoas, Paraíba, Piauí e Rio Grande do Norte, Pará, Maranhão, Roraima, Espírito Santo, Bahia and Sergipe | March 2031* | |||||||
| Acre, Goiás, Mato Grosso do Sul, Mato Grosso, Rondônia, Tocantins, Federal District, Paraná, Santa Catarina and Rio Grande de Sul | December 2032* | December 2032* | April 2023 | |||||
| Mato Grosso and Goiás(2) | April 2023 | |||||||
| Federal District Mato Grosso, Paraná, Rio Grande do Sul, Tocantins, Acre, Santa Catarina, Rondônia, Mato Grosso do Sul, Goiás(3) | April 2023 | October 2027 | ||||||
| São Paulo | December 2022(4) | December 2022 | April 2023 | October 2027 |
| * | The expiration dates of these licenses have already been extended and are not eligible for additional extensions. |
| (1) | Sector 1 of the State of Rio de Janeiro; sectors 2 and 3 of the State of Minas Gerais; sector 5 of the State of Bahia; sector 8 of the State of Pernambuco; and sector 11 of the State of Ceará. |
| (2) | Band “H” Sector 22 (Paranaíba/MS) and Sector 25 (municipalities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão in the State of Goiás). |
| (3) | Sub-band F. except in the States of Paranaíba and Mato Grosso do Sul and the municipalities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão in the State of Goiás. |
| (4) | Except AR11 and sector 33. |
| (5) | We have secondary use ofsub-bands X and VI in the 2.5 GHz radiofrequencies under authorizations provided to Telefônica and TIM in all of Brazil, with the same termination dates as the underlying authorizations. |
Our authorization agreements are also subject to network scope and contains service performance obligations set forth in these authorization agreements, under which we are required to service all municipalities in Brazil with a population in excess of 100,000 habitants.
Under our 3G authorizations, we are also currently required to (1) provide service to 459 municipalities that did not have mobile services at the time these licenses were granted with either 2G or 3G mobile telecommunications services, (2) provide 3G service to 50% of all of the municipalities with a population between 30,000 and 100,000, and (3) provide 3G service to 60% of the municipalities, including 684 specified municipalities, covered by these licenses with a population less than 30,000.
Under our 4G authorizations, we are also currently required to provide 4G service in (1) all municipalities with a population of 30,000 or more and (2) 60% by December 31, 2018 and 100% by December 31, 2019 of the municipalities covered by these licenses with a population less than 30,000; provided, however, that for the latter, we may comply with this obligation by providing service with transmission rates equal to 1.9/2.1 GHz or above;
In 2012 we acquired 450 MHz license on the 4G services auction, which requires us to, in 964 municipalities in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District: (1) provide voice services in the 450 MHz or other spectrum granted to us and data services at minimum upload speeds of 256 kbps and download speeds of 1 Mbps and a minimum monthly allowance of 500 MB; (2) provide unlimited data services at minimum upload speeds of 256 kbps and download speeds of 1 Mbps to rural schools in those municipalities; and (3) make our fixed-line network available to other telecommunications service providers to allow them to comply with their obligations under the PGMU.
As of the date of this annual report, although we believe that we are in compliance with the network scope and service performance obligations set forth in these licenses, ANATEL is currently debating our compliance with certain obligations to provide services under the 450 MHz spectrums. Since we do not yet have all of the necessary systems in place to support the use of the 450 MHz spectrum using land frequencies, we have been meeting our coverage obligations in certain areas using satellites. If ANATEL decides that we have not been meeting our obligations, our authorizations to use 450 MHz frequencies may be terminated.
For most obligations, a municipality is considered “serviced” when the covered service area contains at least 80% of the urban area in the municipality. Our failure to meet these targets may result in the imposition of penalties established in ANATEL regulations and, in extreme circumstances, in termination of our authorizations to use those radiofrequencies by ANATEL. As of the date of this prospectus, although we believe that we are in compliance with the network scope and service performance obligations set forth in these authorization agreements, ANATEL has not yet made its final determination with respect to our compliance with certain obligations to provide services under the 450 MHz/900 MHz/1800 MHz/2100 and 2500 MHz spectrums. Furthermore, we have obtained judicial protection under the RJ Proceedings to forego renewal of many of the performance guarantees we would have otherwise been required to maintain with respect to the obligations under discussion.
Our 4G radio frequency authorizations also impose minimum investment obligations in domestic technologies. At least 65% of the cost of all goods, services, equipment, telecommunications systems and data networks that we purchase to meet our 4G service obligations must developed in Brazil. This minimum requirement will increase to 70% by December 31, 2022.
Roaming
Under the PGMC, a mobile services provider with significant market power, such as our company, must offer roaming services to other mobile services providers without significant market power at the maximum rate that the mobile services provider with significant market power is permitting ANATEL to offer such services to its retail customers.
In March 2017, ANATEL began a pilot program with the four principal mobile services providers, including our company, to share infrastructure costs to expand the existing voice roaming agreements to voice and data roaming services to 35 municipalities with fewer than 30,000 residents. As a result of this program, which is ongoing and is in the process of expansion to include additional mobile service providers and additional municipalities with fewer than 30,000 residents, the providers began or resumed discussions about voice and data roaming tariffs and the timeline to implement the requirements of the program. As of the date of this prospectus, certain providers, including our company, have entered into bilateral agreements regarding these matters, and new municipalities count on roaming coverage, increasing satisfaction to our clients.
Rate Regulation
Mobile telecommunications service in Brazil, unlike in the United States, is offered on a “calling-party-pays” basis under which a mobile subscriber pays only for calls that he or she originates (in addition to roaming charges paid on calls made or received outside the subscriber’s home registration area). A mobile subscriber receiving a collect call is also required to pay mobile usage charges.
Our revenues from mobile services consist mainly of charges for local and long-distance calls and data packages paid by ourpre-paid and post-paid mobile subscribers and monthly subscription charges paid by our post-paid plan subscribers. Monthly subscription charges are based on a post-paid subscriber’s service plan. If one of our mobile subscribers places or receives a call from a location outside of his or her home registration area, we are permitted to charge that customer the applicable roaming rate. We charge for all mobile calls made by ourpre-paid customers, and for mobile calls made by our post-paid customers in excess of their allocated monthly number of minutes, on aper-minute basis. Rates under our mobile plans may be adjusted annually by no more than the rate of inflation, as measured by theIGP-DI.
Quality Regulation
Our personal mobile services authorizations impose obligations on us to meet quality of service standards relating to our network’s ability to make and receive calls, call failure rates, capacity to handle peak periods, failed interconnection of calls and customer complaints.
To restructure the process of assessing the quality of mobile service, with the inclusion of processes and measurement of indicators to check the quality of mobile broadband and the quality perceived by the user, ANATEL published Resolution 575/2011, approving the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), orSMP-RGQ.
TheSMP-RGQ provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. Targets are defined as 80% of speed hired (on average per month) by users and 40% of the instant speed, according to the definitions of the Resolution 575/2011.
In January 2018, ANATEL adopted a new model for measuring the quality of mobile broadband networks through the use of smartphones, replacing the previous model that required data from volunteers and often led to statistically insignificant results. The new model, which we have adopted by collecting user data directly from smartphones using theMinha Oiapplication, allows us to better manage the quality of our network, allowing us to identify corrective actions and more efficiently direct investments in our network.
As a result, the performance of mobile telephony service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, mobile telephony service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular area codes.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation (RQUAL).”
Multimedia Communication Services
Our Authorizations
We have national Multimedia Communication Services (Serviço de Comunicação Multimídia – SCM) authorizations, which superseded our prior Telecommunications Network Transportation Services (Serviço de Rede de Transporte de Telecomunicações) authorizations, permitting us to provide high speed data service.
The Multimedia Communication Services authorizations became effective in May 2003 and cover the same geographical areas as our concession and personal communication service agreements. In April 2008, in connection with the amendments to our fixed-line services concessions, we agreed to provide internet service free of charge until December 31, 2025 to all urban schools in the areas of our concession agreements.
Rate Regulation
A significant portion of our revenues from commercial data transmission services are generated by monthly charges for EILD and SLD services, which are based on contractual arrangements for the use of part of our networks. Under ANATEL regulations, we are required to make publicly available the forms of agreements that we use for EILD and SLD services, including the applicable rates, and are only permitted to offer these services under these forms of agreements. ANATEL publishes reference rates for these services and if one of our customers objects to the rates that we charge for these services, that customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.
ANATEL is expected to publishes new reference rates for these services in 2020 reflecting a methodology that takes into consideration alllong-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering our existing regulatory obligations.
Broadband services, IP services and frame relay services are market oriented but may still be subject to ANATEL regulation.
Quality Regulation
In June 2011, the President of Brazil issued Executive Decree No. 7,512/11, which mandated ANATEL to take the necessary regulatory measures to establish quality standards for broadband internet services. In compliance with such decree, on October 31, 2011, ANATEL published Resolution 574/2011 approving the Multimedia Communications Service Quality Management Regulations (Regulamentação de Gestão da Qualidade do Serviço de Comunicação Multimídia), which identify network quality indicators and establish performance goals for multimedia communications service providers, including broadband internet service providers, with more than 50,000 subscribers. Such providers will be required to collect representative data using dedicated equipment installed at the site of each network connection and be subject to periodic measurements to ensure their compliance with such regulation, including:
individual upload and download speeds of at least 40% of contracted speeds per measurement for at least 95% of all measurements;
average upload and download speeds of at least 80% of contracted speeds for all measurements; and
individual round-trip latencies for fixed-line connections of up to 80 milliseconds per measurement for at least 95% of the measurements.
To increase transparency, customers must be provided with specialized software at no cost to measure their own network quality, although such customer-generated measurements will be included in official calculations.
In January 2018, ANATEL adopted new models for measuring the quality of fixed broadband networks using automated processes that collect data from multiple data points. To measure our fixed broadband network quality, we have implemented the HDM platform. This new method allow us to better manage the quality of our network, allowing us to identify corrective actions and more efficiently direct investments in our network.
Nevertheless, the performance of fixed broadband service providers in any particular state may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory. For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, fixed broadband service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one or more particular states.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. For more information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation (RQUAL).”
Subscription Television Services
Regulatory Overview
The framework established by Law No. 12,485 of 2011 increased the availability and lowerlowered the price of subscription television services in Brazil, through increased competition among providers, and improveimproved the quality, speed and availability of broadband internet services as a result of the expected proliferation of fiber optic cables used to transmit cable television.
In March 2012, ANATEL adopted new regulations under which the authorizations to provide various existing subscription television services have been consolidated into authorizations to provide a newly-defined service called Conditional Access Service.Service (Serviço de Acesso Condicionado – SeAC). Under these regulations, authorizations to provide Conditional Access Service apply to private telecommunications services, the receipt of which are conditioned on payment by subscribers, for the distribution of audiovisual contents in the form of packages, individual channels and channels with required programming, by means of any communications technology, processes, electronic means or protocols. An authorization granted by ANATEL to provide Conditional Access Service will be valid for the entire Brazilian territory,territory; however, the provider must indicate in its application for an authorization the localities that it will service.
Our Authorizations
In November 2008, we entered into a15-year authorization agreement with ANATEL that governs our use of satellite technology to provide DTH satellite television services throughout Brazil. Under this authorization, we are required to furnish equipment to certain public institutions, to make channels available for broadcasting by specified public institutions, and to comply with quality of service obligations set forth in applicable ANATEL regulations.
In December 2012, ANATEL granted our request to convert our DTH authorization agreement into a Conditional Access Service authorization. In September 2014, we entered into a(SeAC) authorization allowing us to provide nationwide subscription television services through any technology, including satellite, wireline, optical fiber and coaxial cable. The Conditional Access Service authorization agreement with ANATEL that authorized us to offer the services to be governed by such agreement, including IP TV.
TerminationTV, and has no termination date. In accordance with Law No. 12,485/11, which approved the Conditional Access Service regime, our Conditional Access Service authorization prohibits us from creating television content or owning more than 30% of a Concessioncompany that creates content. We are also required to carry a certain percentage of Brazilian programming, including open channels and public access channels.
ANATEL may terminate the concession of any public regime telecommunications service provider upon the occurrence of any of the following:Rate Regulation
In the event a concession is terminated, ANATEL is authorized to administer the provider’s properties and its employees in order to continue rendering services.are market-driven.
General Plan on Quality GoalsRegulation
The General Planquality of service on Quality Goals was approvedPay-TV (SeAC) is monitored by ANATEL in June 2003through the operational and became effective in January 2006. Each fixed-line service provider operating under the public regime or the private regime must comply with the provisions of the General Plan on Quality Goals. All costs related to compliance with the quality goals established by the General Plan on Quality Goals must be borne exclusively by the service provider. The General Plan on Quality Goals establishes minimum quality standards with regard to:network performance indicators for telecom operators.
These quality standards are measured according to the definitions and quality indicators established by ANATEL. Every month, fixed-line service providers are required to reportResolution 411/2005. The indicators, as well as their compliance withrespective methods of collection, calculation and other quality goals to ANATEL. Additionally, they are obligated to provide ANATEL with an in-depth report and analysis on each quality goal that is not satisfied. ANATEL may also collect such data from fixed-line service providers at any time without prior notice. Fixed-line service providers that fail to meet quality goals established by ANATEL may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or cancellation of their concessions and authorizations.
ANATELrequirements, measures the performance of fixed-linePay-TV service providers in each individual stategeographic area in which they operate. As a result, the performance of fixed-linePay-TV service providers in any particular stategeographic area may not meet one or more quality performance targets even if such service provider’s overall performance is satisfactory.
For cases in which there are indications of performance or conduct other than those established in the regulations, ANATEL establishes a noncompliance process called Procedure for Determination ofNon-Compliance to Obligations (Procedimento de Apuração de Descumprimento de Obrigações – PADO) in detriment to the provider. Therefore, fixed-linePay-TV service providers, including us, could be subject to fines or penalties as a result of the failure to meet the quality performance targets in one orin each geographic area in which they operate.
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. For more particular states.information, see “—Other Regulatory Matters—Quality of Telecommunications Services Regulation (RQUAL).”
Other Regulatory Matters
Consumer Protection Regulation
In March 2014, ANATEL published a regulation approving the General Regulation on Telecommunications Customers Rights (Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações), a single regulation for the telecommunications sector with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband andPay-TV customers. This regulation establishes a period ranging from 120 days to 24 months from the date of publication for entering into compliance with the new rules. Most of the new rules that expand the rights of those who use the telecommunications services entered into force on July 8, 2014. Our failure to meet the quality of service obligations established by the General Plan on Quality Goals or in our concession agreementscomply with this regulation may result in various fines and penalties being imposed on us by ANATEL.
Interconnection Regulations
Under the General Telecommunications Law, all telecommunications service providers are required, if technically feasible, to make their networks available for interconnection on anon-discriminatory basis whenever a request is made by another telecommunications service provider. Interconnection permits a call originated on the network of upa requesting fixed-line or personal mobile services provider’s network to R$40 million.be terminated on the fixed-line or personal mobile services network of the other provider. ANATEL has adopted General Rules on Interconnection (Regulamento Geral de Interconexão) to implement these requirements.
Interconnection Regulations Applicable to Fixed-Line Service Providers
Our revenues from the use of our local fixed-line networks by other telecommunications services providers consist primarily of payments at rates designated by ANATEL asTU-RL rates from:
long-distance service providers to complete calls terminating on our local fixed-line networks;
long-distance service providers for the transfer to their networks of calls originating on our local fixed-line networks; and
mobile services providers to complete calls terminating on our local fixed-line networks.
Fixed-line service providers are not permitted to charge other fixed-line service providers for local fixed-line calls originating on their local fixed-line networks and terminating on the other provider’s local fixed-line networks.
Our revenues from the use of our long-distance networks consist primarily of payments at rates designated by ANATEL asTU-RIU rates from other long-distance carriers that use a portion of our long-distance networks to complete calls initiated by callers that have not selected us as the long-distance provider. Historically, ourTU-RIU rates have been equal to 20% of our domestic fixedline-to-fixed line long-distance rates for such calls.
TU-RL andTU-RIU rates vary depending on the time of the day and day of the week and are subject to price caps established by ANATEL. The price cap for interconnection rates varies from service provider to service provider based on the retail prices of each service provider and are adjusted annually by ANATEL at the same time that rates for local and long-distance calls are adjusted. Fixed-line service providers must offer the sameTU-RL andTU-RIU rates to all requesting providers on a nondiscriminatory basis.
The maximumTU-RL andTU-RIU rates that ANATEL has permitted us to charge have declined significantly since 2016. In December 2018, ANATEL published the maximum fixed reference rates, includingTU-RL andTU-RIU, for 2020 through 2023, using a methodology that takes into consideration alllong-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering our existing regulatory obligations.
Interconnection Regulations Applicable to Personal Mobile Services Providers
Our revenues from the use of our mobile networks by other telecommunications services providers consist primarily of payments on aper-minute basis from (1) local fixed-line, long-distance and mobile services providers to complete calls terminating on our mobile networks, and (2) long-distance service providers for the transfer to their networks of calls originating on our mobile networks.
The terms and conditions of interconnection to our mobile networks, including the rates charged to terminate calls on these mobile networks, which are designated by ANATEL as MTR rates, the commercial conditions and technical terms and conditions, may be freely negotiated between us and other mobile and fixed-line telecommunications service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things.
Personal mobile services providers must offer the same MTR rate to all requesting providers on a nondiscriminatory basis. Interconnection agreements must be approved by ANATEL before they become effective and may be rejected if they are contrary to the principles of free competition and the applicable regulations. If the providers cannot agree upon the terms and conditions of interconnection agreements, ANATEL may determine terms and conditions by arbitration. Since no agreement with fixed-line service providers could be reached regarding MTR rates when we began offering personal mobile services, ANATEL set the initial MTR rates.
The maximum MTR rates that ANATEL has permitted us to charge have declined significantly since 2016. In December 2018, ANATEL published the maximum fixed reference rates, includingTU-RL andTU-RIU, for 2020 through 2023, using a methodology that takes into consideration alllong-run incremental costs, updated to current values, of providing a particular service and the unit costs of such service based on an efficient network considering our existing regulatory obligations.
Quality of Telecommunications Services Regulation (RQUAL)
In November 2017, ANATEL submitted for public consultation the RQUAL, a proposal to review the methods by which the quality standards for fixed-line services, personal mobility services, multimedia communications services and subscription television services are measured. Under the proposal, the quality indicators would be standardized and simplified for consumer use, with the goals of assisting consumers to make informed decisions about quality and improving competition for quality among telecommunications providers. The public consultation period ended in April 2018, and we expect that the RQUAL will be approved in 2019.
General Plan on Competition Targets (PGMC)
The General Plan on Competition Targets,PGMC, which was approved by ANATEL and became effective in November 2012, contemplates the creation of one entity to manage information about telecommunications networks, act as an intermediary in contracts between telecommunications providers and supervise the offering of wholesale data traffic services. The General Plan on Competition TargetsPGMC also addresses a variety of other matters relating to both fixed-line and mobile service providers, including criteria for the evaluation of telecommunications providers to determine which providers have significant market power, regulations applicable to the wholesale markets for trunk lines, backhaul, access to internet backbone and interconnection services, and regulations related to partial unbundling and/or full unbundling of the local fixed-line networks of the public regime service providers.
The General Plan on Competition TargetsPGMC imposes stricter restrictions on providers that are deemed to have significant market power in a particular geographic area, ranging from a neighborhood within a municipality to the entire national territory. In order to determine whether a provider has significant market power, ANATEL established criteria that consider:
that provider’s market share in particular mobile interconnection markets and personal mobile services market;
the economies of scope and scale available to that provider;
that provider’s dominance over infrastructure that is not economically viable to duplicate; and
that provider’s concurrent operations in the wholesale and retail markets.
In December 2016, ANATEL launched a public consultation process to review proposed changes to the PGMC, including establishing new criteria to determine significant market power and creating a new competition framework.
In July 2018, ANATEL updated the PGMC to revise the criteria to determine which telecommunications providers have significant market power in the various wholesale markets that we serve. The revised evaluation framework also takes into account providers’ market position in several retail markets in which we participate. Under this new framework, municipalities are categorized according to degree of competition present: competitive, moderately competitive, potentially competitive and not competitive. ANATEL then regulates companies based on the degree of competition present in each municipality. The 2018 amendments to the PGMC also updated the price regulations applicable to wholesale products including EILD services, interconnection, full unbudling, bitstream, national roaming, pipelines and subducts, high capacity data transport and fixed network infrastructure usage.
Infrastructure Sharing
Prior to the adoption of the General Plan on Competition Targets,PGMC, ANATEL had established rules for partial unbundling of the local fixed-line networks of the public regime service providers, which we refer to as “line sharing,” and which (1) limited the rates service providers can charge for line sharing, and (2) addressed related
matters such asco-location space requirements.Co-location means that a service provider requesting unbundling may place its switching equipment in or near the local exchange of the service provider whose network the requesting service provider wishes to use and may connect to the network at this local exchange.
The General Plan on Competition TargetsPGMC requires public regime service providers that have significant market power, such as our company, to share their fixed-line network infrastructure with other providers, including their local fixed-line access networks. Providers that are deemed to have significant market power must offer (1) full unbundlingshare their fixed access network infrastructure for transmission of theirdata through copper wire or coaxial cable access networks, and (2) partial unbundling of their broadband networks to accommodate bitstreamswires at transmission rates of up to 1012 Mbps. The methodology by which the wholesale prices for these services will be determined will be established by ANATEL. We expect that ANATEL will commence a public consultation process with respect thereto during the second half of 2016.
Providers with significant market power must also share their passive infrastructure such as telecommunications towers, with other service providers at prices determined by bilateral negotiations between the providers.
Interconnection Regulations ApplicableOwnership and Corporate Governance Restrictions
Over the years, ANATEL has initiated several internal proceedings to Personal Mobile Services Providers
The Generalmonitor our financial situation and to evaluate our ability to continue to perform our obligations under our concession agreements. In light of the approval of the RJ Plan by the creditors on Competition Targets established regulations forDecember 20, 2017, and its subsequent ratification and confirmation by the rates charged by mobile service providersRJ Court, ANATEL began to terminate calls on their mobile networks (the VU-M rate). The General Plan on Competition Targets established a reference value for VU-M rates of providers that are deemed to hold significant market powermonitor our operating and determined that beginning in 2016, VU-M rates will be determinedfinancial positions based on the basis of costs. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost methodology will apply.
The General Plan on Competition Targets established that the VU-M would be paid only when the traffic out of a network in a given direction was greater than (1) 80%effectiveness of the total traffic exchanged until February 23, 2015,RJ Plan.
In connection with the RJ Proceedings, ANATEL gained expanded powers regarding our ownership and (2) 60%corporate governance decisions. Currently, we must: (1) notify ANATEL’s Superintendence of Competition of the total traffic exchanged from February 24, 2015dates of meetings of Oi’s board of directors and executive officers so that it may send a representative to February 23, 2016. After February 24, 2016, each mobile service provider would be entitledattend such meetings, as well as submit to collectANATEL the VU-M on all calls for which its network was used to originate or terminate the call.
In February 2015, ANATEL revised the General Plan onminutes of such meetings; (2) notify ANATEL’s Superintendence of Competition Targets regulation relating to the VU-M applicable to the relationship between companies with significant market power and companies without significant market power. Under the revised regulations,of the dates and percentages applicable to the VU-M partial bill-and-keep system were revisedof meetings of Oi’s board committees so that the VU-M will be paid only when the traffic out ofit may send a network in a given direction is greater than:
The full billing system is scheduledrepresentative to come into effect on February 24, 2019.
Roaming
Under the General Plan on Competition Targets, a mobile service provider with significant market power,attend such as our company, must offer roaming services to other mobile providers without significant market power at the maximum rate that the mobile service provider with significant market power is permittingmeetings; (3) obtain prior approval from ANATEL to offer such services to its retail customers.
Regulation of Mobile Services
In September 2000, ANATEL adopted regulations that established operating rules for providers under the personal mobile service (Serviço Móvel Pessoal) regime. The regulations permitted ANATEL to grant authorizations to provide mobile telecommunications services under the personal mobile service regime. For purposes of the personal mobile service regulations, Brazil is divided into three service regions covering the same geographic areas as the concessions for fixed-line telecommunications services.
Auction of 3G Spectrum
In preparation for auctions of spectrum in Bands F, G, I and J (2.1 GHz), the use of which allows personal mobile services providers to offer 3G services to their customers, ANATEL issued regulations that divide the Brazilian territory into nine regions for purposes of operations using these frequency bands. In December 2007, ANATEL auctioned radio frequency licenses to operate on each of these frequency bands in each of the nine regions and the related licenses to use these frequency bands. In this auction, we acquired the radio frequency licenses necessary to offer 3G services in two of the nine regions delineated by ANATEL for 3G services (corresponding to Regions II under the personal mobile services regime) and TNL PCS acquired radio frequency licenses necessary to offer 3G services in six of the nine regions delineated by ANATEL for 3G services (corresponding to Regions I and III under the personal mobile services regime, other than an area that consists of 23 municipalities in the interior of the State of São Paulo that includes the city of Franca and surrounding areas).
Authorizations to Use 450MHz Band and 2.5 GHz Band
In preparation for auctions of the 450MHz band and 2.5 GHz band, the use of which allows personal mobile services providers to offer 4G services to their customers, ANATEL issued regulations that divided the Brazilian territory into three regions for purposes of providing personal mobile services. In June 2012, ANATEL auctioned radio frequency licenses to operate and the related licenses to use the frequency bands in the following manner: (1) four national lots for 2.5 GHz bands, each accompanied by a regional band of 450 MHz, and (2) 132 regional lots for 2.5GHz bands. In this auction, we acquired (1) one of the national lots for 2.5 GHz and the corresponding regional lot of 450MHz to provide rural broadband services in the States of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and the Federal District, and (2) 11 regional lots for 2.5 GHz bands to provide personal mobile services in the following areas: interior of Ceará, the capital or Roraima(and its metropolitan area), the State of Amapá, the capital of Bahia (and its metropolitan area), interior of the Pará, the capital of Pernambuco (and its metropolitan area), interior of Paraná, the capital of Rio Grande do Sul (and its metropolitan area), the City of Jaguarão (and its metropolitan area) and the capital of São Paulo (and its metropolitan area). ANATEL is currently reviewing whether the obligations that should have been met by the end of 2015, as set out in the auction for the 2.5 GHz and 450 MHz frequencies have been met. In December 2015, ANATEL and CADE approved the RAN Sharing Agreement between Telefônica Brasil, TIM and Oi for the construction, implementation and mutual assignment of network tools to support personal mobile services (voice and broadband) in the 2.5 GHz band, among others, in order to, ensure compliance withamong other things, transfer Oi’s corporate control, including the scopereplacement of commitments between 2015Oi’s board of directors; (4) notify ANATEL of the sale or lien over any moveable asset of Oi or its controlling shareholders, affiliates and 2017subsidiaries; and (5) so long as Oi is under judicial reorganization, request the expansionshareholders who have indicated members to Oi’s board of 4G coverage in municipalities with a population over 30,000.directors or executive officers to inform ANATEL rejected the proposal to conduct RAN sharing in conurbations, however, because it detected interferenceof possible agreements or instruments, including those that may interfere directly or indirectly in the service. As a result, ANATEL will not allow RAN sharing in municipalities experiencing interference until a solution has been found.exercise of their control.
Obligations of Personal Mobile Services ProvidersRegulatory Agenda 2019-2020
As a telecommunications service provider, we are subject to requirements concerning network expansion and quality of service, as established in applicable regulations and in our personal mobile services authorizations. If we fail to meet these obligations, we may be fined, subject to a maximum penalty of R$50 million, until we are in full compliance with our obligations. While it is possible for an authorization to be revoked for non-compliance with these obligations, there are no precedents for such a revocation.
Quality of Service Obligations
Our personal mobile services authorizations impose obligations on us to meet quality of service standards relating to our network’s ability to make and receive calls, call failure rates, capacity to handle peak periods, failed interconnection of calls and customer complaints. ANATEL defines this quality of service standards, and we must report information in connection with such standards to ANATEL.
To restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of new indicators to check the quality of mobile broadband and the quality perceived by the user, and the modernization of existing indicators,On March 21, 2019, ANATEL approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (Regulamento de Gestão da Qualidade da Prestação de Serviço Móvel Pessoal), or SMP-RGQ. The SMP-RGQ provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. Targets are defined as 80% of speed hired (on average per month) by users and 40% of the instant speed, according to the definitions of the Resolution 575/2011.
Interconnection Regulations
Under the General Telecommunications Law, all telecommunications service providers are required, if technically feasible, to make their networks available for interconnection on a non-discriminatory basis whenever a request is made by another telecommunications service provider. Interconnection permits a call originated on the network of a requesting fixed-line or personal mobile services provider’s network to be terminated on the fixed-line or personal mobile services network of the other provider. ANATEL has adopted General Rules on Interconnection (Regulamento Geral de Interconexão) to implement these requirements.
Interconnection Regulations Applicable to Fixed-Line Providers
Interconnection fees are charged at a rate per minute of use of a fixed-line provider’s network. Interconnection rates charged by a fixed-line provider to terminate a call on its local network (the TU-RL rate) or intercity network (the TU-RIU rate) are subject to a price cap established by ANATEL. The price cap for interconnection rates varies from service provider to service provider based on the retail prices of each service provider.
Fixed-line service providers must offer the same TU-RL and TU-RIU rates to all requesting providers on a nondiscriminatory basis. The price caps on interconnection rates are adjusted annually by ANATEL at the same time that rates for local and long-distance calls are adjusted.
Under ANATEL regulations, fixed-line service providers are not able to charge other fixed-line service providers for local fixed-line calls originating on their local fixed-line networks and terminating on the other provider’s local fixed-line networks.
In August 2012, the TU-RIU rates were reduced to 25% of the applicable domestic fixed line rates for calls with more than 300 km, and in January 2013, TU-RIU rates were reduced to 20% of the applicable domestic fixed line rates for such calls.
In July 2014, ANATEL approved a rule for the definition of maximum fixed reference rates, including TU-RL and TU-RIU, for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, TU-RL and TU-RIU reference rates will decline from 2016 through 2019 when TU-RL and TU-RIU reference rates reflecting the long-run incremental cost methodology will apply.
Interconnection Regulations Applicable to Personal Mobile Services Providers
Interconnection fees are charged at a flat rate per minute of use of a personal mobile services provider’s network. The terms and conditions of interconnection agreements of all personal mobile services providers, including the rates charged by the operator of the network to terminate a call on its mobile network (the VU-M rate), commercial conditions and technical issues, are freely negotiated between mobile and fixed-line telecommunications
service providers, subject to compliance with regulations established by ANATEL relating to traffic capacity and interconnection infrastructure that must be made available to requesting providers, among other things.
Personal mobile services providers must offer the same VU-M rate to all requesting providers on a nondiscriminatory basis. Interconnection agreements must be approved by ANATEL before they become effective and they may be rejected if they are contrary to the principles of free competition and the applicable regulations. If the providers cannot agree upon the terms and conditions of interconnection agreements, ANATEL may determine terms and conditions by arbitration. Since no agreement with fixed-line service providers could be reached regarding VU-M rates when we began offering personal mobile services, ANATEL set the initial VU-M rates.
Personal mobile services providers negotiate annual rate increases for their VU-M charges with the fixed-line telecommunications providers. If the providers cannot agree upon the terms and conditions of annual rate increases, ANATEL may determine the annual rate increases by arbitration.
Under ANATEL regulations, in December 2013 ANATEL established the maximum VU-M rate of R$0.33 per minute that is applicable in the event that providers could not agree upon the VU-M applicable in their interconnection agreements. Under the General Plan on Competition Targets, in February 2014 the VU-M rate was reduced to 75% of the maximum VU-M rate established by ANATEL in December 2013, and in February 2015 the VU-M rate was reduced to 50% of the maximum VU-M rate established by ANATEL in December 2013. In July 2014, ANATEL approved a rule for the definition of maximum VU-M reference rates for entities with significant market power, such as our company, based on a long-run incremental cost methodology. Under this rule, VU-M reference rates will decline from 2016 through 2019 when VU-M reference rates reflecting the long-run incremental cost methodology will apply.
Consumer Protection Regulation
In March 2014, ANATEL published a regulation approving the General Regulation on Telecommunications Customers Rights (Regulamento Geral de Direitos do Consumidor de Serviços de Telecomunicações), a single regulation for the telecommunications sector with general rules for customer service, billing, and service offers, which are applicable to fixed, mobile, broadband and Pay-TV customers. This regulation establishes a period ranging from 120 days to 24 months from the date of publication for entering into compliance with the new rules. Most of the new rules that expand the rights of those who use the telecommunications services entered into force on July 8, 2014.
Number Portability Regulations
Number portability is the ability of a customer to move to a new home or office or switch service providers while retaining the same fixed-line or mobile telephone number. ANATEL’s General Regulation of Portability (Regulamento Geral de Portabilidade) establishes general rules regarding portability of fixed-line and mobile telephone numbers. These regulations permit fixed-line customers to retain their telephone numbers if they become customers of a different fixed-line service provider in the same municipality or if they move to a new home or office in the same municipality. Personal mobile services customers are permitted to retain their telephone numbers if they change their service plan or if they become customers of a different personal mobile services provider within the same registration area. Each telecommunications provider has been required to contract a third-party management entity to manage all procedures relating to number portability.
Regulation of Data Transmission and Internet Services
Under Brazilian regulation, ISPs are deemed to be suppliers of value-added services and not telecommunications service providers. Value-added services are considered an activity that adds features to a telecommunications service supported by such value-added services. Telecommunications service providers are permitted to render value-added services through their own networks. In addition, ANATEL regulations require all telecommunications service providers and cable television operators to grant network access to any party interested in providing value-added services, including internet access, on a non-discriminatory basis, unless not technically feasible.
ANATEL has adopted regulations applicable to fixed-line service providers with significant market power. Under these regulations, these providers are required to make the forms of agreements that they use for EILD and SLD services publicly available, including the applicable rates, and are only permitted to offer these services under these forms of agreement. ANATEL publishes reference rates for these services, and if a customer of one of these providers objects to the rates which that provider charges for these services, the customer is entitled to seek to reduce the applicable rate through arbitration before ANATEL.
In May 2014, ANATEL approved a standard for setting maximum values for EILD services based on a long-run incremental cost methodology. Reference rates for EILD services were published containing a single reference table which will be valid from 2016 until 2020. Under this ANATEL regulation, EILD reference rates will decline from 2016 through 2020 when EILD reference rates reflecting the long-run incremental cost methodology will apply. In addition, under the General Plan of Competition Targets, companies with significant market, such as our company, are required to present a public offer every six months including standard commercial conditions, which is subject to approval by ANATEL.
Multimedia Communications Service Quality Management Regulations
In June 2011, the President of Brazil issued Executive Decree No. 7,512/11, which mandated ANATEL to take the necessary regulatory measures to establish quality standards for broadband internet services. In compliance with such decree, on October 31, 2011, ANATEL published a resolution approving the Multimedia Communications Service Quality Management Regulations (Regulamentação de Gestão da Qualidade do Serviço de Comunicação Multimídia), or the Regulations, which identify network quality indicators and establish performance goals for multimedia communications service providers, including broadband internet service providers, with more than 50,000 subscribers. Such providers will be required to collect representative data using dedicated equipment installed at the site of each network connection and be subject to periodic measurements to ensure their compliance with such regulations, including:
To increase transparency, customers must be provided with specialized software at no cost to measure their own network quality, although such customer-generated measurements will not be included in official calculations. In addition to ensuring network quality standards, service providers must hire specialized companies to measure customer service and customer satisfaction indicators, including complaint resolution, customer service personnel competence, customer perceptions relating to billing and quality of technical support staff. Service providers must comply with the above-mentioned quality standards beginning on the thirteenth month following implementation of such regulations. Failure to meet such standards will subject non-compliant service providers to sanctions.
National Broadband Plan
On June 30, 2011, we entered into a Term of Commitment (Termo de Compromisso) with ANATEL and the Ministry of Communications to formalize our voluntary commitment to adhere to the terms of the National Broadband Plan, created in May 2010 by Executive Decree No. 7,175/10 with the goal to make broadband access available at low cost, regardless of technology, throughout Brazil. Pursuant to the Term of Commitment, we are required to offer (1) broadband services with minimum upload and download capabilities to retail customers in certain sectors of Region I and II for a maximum price of R$35 per month (or R$29.90 in ICMS-exempt states), plus fees, and (2) access to our broadband infrastructure to certain wholesale customers, including small businesses and municipalities, in certain sectors of Region I and II for a maximum price of R$1,253 per 2 Mbps per month and a one-time installation fee, while observing all quality standards under ANATEL regulations. Both retail and wholesale services are subject to certain network capacity limits and need only be provided at the demand of the
customer. Pursuant to the Term of Commitment, we have offered the required services to all eligible retail and wholesale customers since the date of its execution and have gradually increased the capacities offered to wholesale customers since November 2011. We have been obligated to provide the maximum capacities established by the Term of Commitment to eligible wholesale customers since June 30, 2015. In addition, the Term of Commitment requires that we:
The Term of Commitment will expire on December 31, 2016.
Legal Framework for the Use of the Internet (Internet Bill of Rights)
In April 2014, President Dilma Rousseff approved the Legal Framework for the Use of the Internet (Marco Civil da Internet), or the Internet Framework, which establishes the principles, guarantees, rights and duties for the use of the Internet in Brazil. The bill sets forth a number of guidelines and rules to be observed by internet and application service providers, such as the protection of privacy, the protection of personal data, the preservation and guarantee of net neutrality, the liability for damages caused by content generated or published by third parties and the storage and disclosure of usage logs. Certain parts of the Internet Framework went into effect on June 23, 2014 and others will become effective on the adoption of implementing regulations.
Under the Internet Framework, a presidential decree will be enacted to regulate the law’s provisions, and enacting specific rules regarding network traffic management techniques. The Brazilian Internet Steering Committee (Comitê Gestor da Internet) and ANATEL will express their opinion on the decree after public hearings. Brazil’s Ministry of Justice has also launched a public debate on the main themes related to this law.
Other Regulatory Matters
Regulatory Agenda 2015-2016
On June 29, 2015, ANATEL put in public consultation its proposed Regulatory Agenda for the 2015-2016 cycle, and revocation of the General Plan of the Telecommunication Regulatory Update in Brazil (PGR). The agenda contained 33 topics of interest to the sector, which should have final approval or some progress in 2015 and 2016. The listed items include: Civil Rights Framework for Internet, Revision of the Concession Agreement and General Plan on Universal Service Goals, review of the quality management model, review of spectrum management model, review the arrangements and scope of telecommunications services, review of the regulation of the SeAC (Serviço de Acesso Condicionado) and review of regulatory reversible assets.
New Regulatory Framework
On November 23, 2015, the Ministry of Communications opened public consultation2019-2020, including a study on the new regulatory framework for telecommunications. The consultation is based on a series of questions under four basic axes: purpose of the public policy, universal policy, public regime versus the private regime700MHz, 2.3GHz, 3.3GHz – 3.4GHz, 3.5GHz and public concession. The Ministry of Communications has extended the deadline for contributions on multiple occasions. In April 2016, the Ministry of Communications issued a decree addressing guidelines26GHz radiofrequencies in preparation for the establishment of a new regulatory framework for telecommunications, which will be implemented by ANATEL through the conclusion of the concession amendments. The guidelines provide for, among other things, the expansion of broadband services (including5G spectrum auctions in rural regions), the elimination of the reversibility of assets, and an extension of the term of our concessions, which
are currently scheduled to expire in 2025. As a result of the publication of these guidelines, ANATEL requested a further postponement of the review of our concession agreements, which was granted. As a result of this extension, the review of our concession agreements is currently scheduled to occur by December 2016.2020.
Environmental and Other Regulatory Matters in Brazil
As part of ourday-to-day operations, we regularly install ducts for wires and cables and erect towers for transmission antennae. We may be subject to federal, state and/or municipal environmental licensing requirements due to the installation of cables along highways and railroads, over bridges, rivers and marshes and through farms, conservation units and environmental preservation areas, among other places. As of the date of this annual report, we have been required to obtain environmental licenses for the installation of transmission towers and antennae in several municipalities with no materialexpected impact on our operations. However, there can be no assurances that other state and municipal environmental agencies will not require us to obtain environmental licenses for the installation of transmission towers and antennae in the future or that such a requirement would not have a material adverse effect on the installation costs of our network or on the speed with which we can expand and modernize our network.
We must also comply with environmental legislation regarding the management of solid waste. According to resolutions adopted by the National Environmental Council (Conselho Nacional do Meio Ambiente), companies responsible for the treatment and final disposal of solid industrial waste, special waste and solid urban waste are subject to environmental licensing. Should the waste not be disposed of in accordance with standards established by environmental legislation, the company generating such waste may be held jointly and severally liable with the company responsible for waste treatment for any damage caused. Also, in all states where we operate, we have implemented management procedures promoting the recycling of batteries, transformers and fluorescent lamps.
In addition, we are subject to ANATEL regulations that impose limits on the levels and frequency of the electromagnetic fields originating from our telecommunications transmissions stations.
We believe that we are in compliance with ANATEL standards as well as with all applicablematerial environmental legislation and regulations. We are currently not involved in any administrative or judicial proceeding involving material liability for environmental damage.
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 bynon-U.S. entities and even when such activities were conducted in compliance with applicable law.
In December 2011, we entered into a roaming agreement with MTN Irancell. Pursuant to such roaming agreement, our customers are able to roam in MTN Irancell’s network (outbound roaming) and customers of MTN Irancell are able to roam in our network (inbound roaming). For outbound roaming, we pay MTN Irancell roaming fees for use of their network by our customers, and for inbound roaming MTN Irancell pays us roaming fees for use of our network by its customers.
Our inbound and outbound roaming services with MTN Irancell were launched commercially in October and November 2012, respectively. During 2015,2018, we recorded revenues of R$2,529958 and expenses of R$2,3831,035 in connection with this roaming agreement.
We do not maintain any bank accounts in Iran. All payments in connection with our international roaming agreements are effected through our bank accounts in London.
The purpose of all of these agreements is to provide our customers with coverage in areas where we do not own networks. For that purpose, we intend to continue maintaining these agreements.
We also provide telecommunications services in the ordinary course of business to the Embassy of Iran in Brasilia. WeIn 2018, we recorded gross revenues and net profits of less than R$6,00021,166 from these services in 2015.services. As one of the primary providers of telecommunications services in Brasilia, we intend to continue providing such services, as we do to the embassies of many other nations.
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements as of December 31, 20152018 and 20142017 and for the three years ended December 31, 2015,2018, which were prepared in accordance with U.S. GAAP, and the related notes, and are included in this annual report, as well as with the information presented under the sections entitled “Presentation of Financial and Other Information” and “Item 3. Key Information—Selected Financial Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking“Cautionary Statement with Respect to Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”
Overview
We are one of the principal integrated telecommunications service providers in Brazil with approximately 70.057.1 million RGUs as of December 31, 2015.2018. We operate throughout Brazil and offer a range of integrated telecommunications services that include Residential Services, Personal Mobility Services and B2B Services. We are the largest fixed-line and mobile telecommunication services, network usage (interconnection), data transmission services (including broadband access services), Pay-TV (includingtelecommunications company in Brazil in terms of total number of lines in service as part of double-play, triple-play and quadruple-play packages), internet services and other telecommunications services for residential customers, small, medium and large companies and governmental agencies.December 31, 2018 based on our 11.8 million fixed lines in service as of December 31, 2018, with a market share of 51.1% of the total fixed lines in service in our service areas as of that date. We own approximately 363,000the largest fiber optic network in Brazil, with more than 360,000 kilometers of installed fiber optic cable, distributed throughout Brazil. Our Personal Mobility Services business offers mobile telecommunications services throughout Brazil. As of December 31, 2018, our mobile network covers areas in which approximately 88.7%94.0% of the Brazilian population lives and works. According to ANATEL,Based on our 37.7 million mobile subscribers as of December 31, 2015,2018, we had an 18.6%a 16.4% market share of the Brazilian mobile telecommunications market and, as of December 31, 2015, we had a 34.7% market share of the Brazilian fixed-line market. As part of our convergence strategy, we offer more than one million Wi-Fi hotspots in public places, such as airports and shopping malls. In 2015,that date. During 2018, we recorded net operating revenue of R$27,35422,060 million and net lossincome of R$9,57227,394 million.
Our results of operations and financial condition have been and will be significantly influenced in future periods by the Oi capital increase, the acquisition of PT PortugalRJ Proceedings and the disposition of PT Portugal.our investment in Africatel. In addition, our results of operations for the years ended December 31, 2015, 20142018, 2017 and 20132016 and our financial condition as of December 31, 20152018 and 20142017 have been influenced, and our future results of operations and financial condition will continue to be influenced, by a variety of factors, including:
the evolution of Brazilian GDP, which grew by 1.1% during 2018 and 1.0% during 2017 and declined by an estimated 3.8% in 2015, and grew by 0.1% in 2014 and 2.3% in 2013,3.5% during 2016, which we believe affects demand for our services and, consequently, our net operating revenue;
the number of our fixed lines in service, which declined to 14.911.8 million as of December 31, 20152018 from 15.812.9 million as of December 31, 2014 (excluding fixed-line customers2017 and 13.7 million as of our discontinued operations),December 31, 2016, and the percentage of our fixed-line customers that subscribe to our alternative plans which increased to 86.4%85.8% as of December 31, 20152018 from 84.5%85.4% as of December 31, 2014;2017 and 85.5% as of December 31, 2016;
the number of our mobile customers, which declined to 48.137.7 million as of December 31, 20152018 from 50.939.0 million as of December 31, 2014 (excluding fixed-line customers2017 and 42.2 million as of our discontinued operations);December 31, 2016;
the number of our fixed-line customers that subscribe to our broadband services, which declined to 5.15.4 million as of December 31, 20152018 from 5.95.6 million as of December 31, 20152017 and 5.7 million as of December 31, 2014 (excluding fixed-line customers of our discontinued operations);2016;
the number of ourPay-TV customers, which remained stable at 1.21.6 million as of December 31, 20152018 and 2014 (excluding fixed-line customersDecember 31, 2017 after growing from 1.3 million as of our discontinued operations);December 31, 2016;
the increased competition in the Brazilian market for telecommunications services, which affects the amount of the discounts that we offer on our service rates and the quantity of services that we offer at promotional rates;
our compliance with our quality of service obligations under the General Plan on Quality GoalsPGMQ and our network expansion and modernization obligations under the General Plan on Universal Service GoalsPGMU and our concession agreements, the amount of the fines assessed against us by ANATEL for alleged failures to meet these obligations and our success in challenging fines that we believe are assessed in error;
inflation rates in Brazil, which were 3.7% during 2018, 2.9% during 2017 and 6.3% during 2016, as measured by the IST, and the resulting adjustments to our regulated rates in Brazil;
| • | changes in the exchange rates of thereal against |
Our financial condition and liquidity iswill be influenced by a variety of factors, including:
our ability to generate cash flows from our operations;
our ability to borrow funds from Brazilian and international financial institutions and to sell our debt and equity securities in the Brazilian Corporation Law and our by-laws that we pay dividends on an annual basis in an amount equal to at least 25% of our adjusted net income, unless our board of directors deems it inconsistent with our financial position.
Oi Capital Increaseinternational securities markets; and Acquisition of PT Portugal
On May 5, 2014, we concluded a capital increase, which we refer to as the Oi capital increase, in which we issued (1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash, and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe in Africa and Timor-Leste in Asia.
Disposition of PT Portugal
On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise value of PT Portugal of €6,900 million, subject to adjustments based on the financial debt, cash and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 million in the event
that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.
In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company, and as of the date of this annual report have used an additional R$5,350 million of these net cash proceeds for the prepayment and repayment of indebtedness of our company. We expect to use the remainder of these net cash proceeds for the repayment of indebtedness of our company.
In anticipation of the PT Portugal Disposition, PT Portugal transferred PTIF, its wholly-owned finance subsidiary, to Oi. As a result of the completion of the PT Portugal Disposition, the indebtedness of PTIF, which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.
In addition, PT Portugal transferred to Oi all of the outstanding share capital of PT Participações which holds:
prevailing Brazilian and international interest rates, which affect our interests in TPT, which provides telecommunications, multimedia and IT services in Timor Leste.debt service requirements.
Proposed Disposition of Africatel
On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel. As a result, as of December 31, 2014 and 2015, we recorded the assets and liabilities of Africatel as held-for sale, although we do not record Africatel as discontinued operations in our income statement due to the immateriality of the effects of Africatel on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when the sale of these assets may be completed.
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our consolidated financial statements as of December 31, 20152018 and 20142017 and for the years ended December 31, 2015, 20142018, 2017 and 20132016 in accordance with U.S. GAAP. Based onGAAP, under the assumption that we will continue as a going concern. Our consolidated financial statements have been audited in accordance with Public Company Accounting Oversight Board, or PCAOB, standards.
Under U.S. GAAP, our operating cash flows andmanagement is required to assess whether there are conditions or events, considered in the impact such operating cash flows have had on our liquidity, in combination with the level of our indebtedness and the potential impact if we cannot satisfy certain financial covenants under our current debt instruments in 2016, our independent registered public accounting firm has included an emphasis paragraph related to theaggregate, that raise substantial doubt with respect toabout our ability to continue as a going concern within one year after our financial statements are issued. Our management’s assessment of our ability to continue as a going concern is discussed in theirnote 2 to our audited consolidated financial statements. As of December 31, 2018, we have fulfilled the obligations established in the RJ Plan within the established time limits. As a result of the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan through the issuance of 3,225,806,451 Common Shares for an aggregate subscription price of R$4,000 million in our preemptive offering, our management believes that as of the date of this annual report, onit has sufficient resources to continue to operate for the 12 months following the date of this annual report.
We intend to prepare our consolidated financial statements as of December 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). For our fiscal year ended December 31, 2010, we included financial statements prepared under IFRS as part of our annual report on Form20-F, applying IFRS 1, “First-time Adoption of International Reporting Standards,” considering that our previous primary GAAP was Brazilian GAAP and that January 1, 2009 was the date of transition to IFRS. Consequently, as we are not a IFRS first-time adopter, we intend to include in our annual report on Form20-F for the fiscal year ended December 31, 2019, a reconciliation from U.S. GAAP to IFRS for the comparative balance sheet (i.e., as of December 31, 2018) and comparative income statement periods preceding the most recent fiscal year (i.e., for the year ended December 31, 2015.2018) to present the changes in the basis of presentation. However, we are already including in our December 31, 2018 financial statements a reconciliation from U.S. GAAP to IFRS of our equity and income statement for the year ended December 31, 2018, as described in note 1 to our audited consolidated financial statements.
Accounting for RJ Proceedings
As a result of the RJ Proceedings, we have applied ASC 852 in preparing our consolidated financial statements. ASC 852 requires that financial statements separately disclose and distinguish transactions and events that are directly associated with our reorganization from transactions and events that are associated with the ongoing operations of our business. Accordingly, certain expenses, realized gains and losses, and provisions for losses that are realized or incurred in the RJ Proceedings have been recorded under the classification “Reorganization items, net” in our consolidated statements of operations. In addition, our prepetition obligations that may be impacted by the RJ Proceedings based on our assessment of these obligations following the guidance of ASC 852 have been classified on our consolidated statement of financial position as “Liabilities subject to compromise.” Prepetition liabilities subject to compromise are required to be reported as the amount allowed as a claim by the RJ Court, regardless of whether they may be settled for lesser amounts. Certain amounts initially recorded as liabilities subject to compromise were adjusted and reclassified to reflect new legal terms and conditions established by the RJ Court. As a result of the effectiveness of the RJ Plan on February 5, 2018, the contingencies included as “Liabilities subject to compromise” on our consolidated statement of financial position will be paid according to terms of the RJ Plan and were reclassified as current andnon-current “Provisions for contingencies” on our consolidated statement of financial position.
As a result of the completion on January 25, 2019 of the capital increase that was mandated by the RJ Plan, for purposes of the preparation of our financial statements under U.S. GAAP, we are deemed to have been prepared assumingemerged from the RJ Proceedings. Upon emergence on January 25, 2019, we would be required to adopt fresh-start accounting, as required by ASC 852. The adoption of fresh start accounting would require our company to assign the reorganization value to our assets and liabilities, in conformity with the guidance of ASC 805 applicable to business combinations. Under this guidance, our assets and liabilities would be adjusted to fair market values, with any excess recorded as goodwill. However, as we intend to report our consolidated financial statements as of dates and for the periods ending after January 1, 2019 in accordance with IFRS as issued by the IASB, we will continuenot adopt fresh start accounting as there are no requirements under IFRS to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.do so.
Business Segments and Presentation of Segment Financial Data
As a result of our acquisition of PT Portugal, we consolidated the results of PT Portugal and its subsidiaries into our financial statements as from May 5, 2014 until our disposition of PT Portugal on June 2, 2015. Following our acquisition of PT Portugal, we implemented a new organizational structure that we believe reflects our business activities and corresponds to our principal services.We use operating segment information for decision-making. We have identified only one operating segment that corresponds to the telecommunications business in Brazil.
The Telecommunications in Brazil segment includes our servicestelecommunications business in Brazil, Africa and Asia, including operations that were reported as part of our Fixed-Line and Data Transmission Services, Mobile Services and Other Services segments in prior periods. Prior to our acquisition of PT Portugal, we accounted for our operations under three segments: Fixed-Line and Data Transmission Services, Mobile Services, and Other Services. As a result of our implementation of our new organizational structure, our three previously existing segments have been combined into our Telecommunications in Brazil segment.
Within our Telecommunications in Brazil segment, our management assesses revenue generation based on customer segmentation into the following categories:
In addition to the Telecommunicationsour telecommunications business in Brazil, segment, we conduct other businesses that individually or in aggregate do not meet any of the quantitative indicators that would require their disclosure as reportable business segments. These businesses includeare conducted primarily the following companies: Mobile Telecommunications Limited in Namibia,by Companhia Santomense de Telecomunicações, Listas Telefónicas de Moçambique, ELTA – Empresa de Listas Telefónicas de Angola, and Timor Telecom, which provide fixed and mobile telecommunications services and publish telephone directories in Africa and Asia, and which have been consolidated in our financial statements since May 2014.
We evaluate and manage business
Within our Telecommunications in Brazil segment, performanceour management assesses revenue generation based on information prepared in accordance with Brazilian GAAP,customer segmentation into the following categories:
Residential Services, focused on the sale of fixed telephony services, including voice services, data communication services (broadband), and accordingly,Pay-TV;
Personal Mobility Services, focused on the segmentsale of mobile telephony services to postpaid (subscription) and prepaid customers that include voice services and data included in this “Management’s Discussioncommunication services; and Analysis of Financial Condition
B2B Services, which includes corporate solutions offered to our small,medium-sized, and Results of Operations of Oi” section is presented under Brazilian GAAP.large corporate customers, including voice services and corporate data solutions and wholesale interconnection and traffic transportation services to other telecommunications providers.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in note 2(c)2 to our audited consolidated financial statements. In preparing our consolidated financial statements in conformity with U.S. GAAP, we relied onour management uses estimates and assumptions derived frombased on historical experience and various other factors, including expected future events, thatwhich we deemedconsider reasonable and relevant. Critical accounting policies are those that are important to the portrayal of our consolidated financial position and results of operations and require management’s subjective and complex judgments, estimates and assumptions. The application of these critical accounting policies oftenfrequently requires judgments made by management regarding the effects of matters that are inherently uncertain with respect to our resultsthe outcomes of operationstransactions and the carrying value of our assets and liabilities. Our actual results of operations and financial position may differ from those set forth in our consolidated financial statements, if our actual experience differs from management’s assumptions and estimates. In order to provide an understanding of our critical accounting policies, including some of the variables and assumptions underlying the estimates, and the sensitivity of those assumptions and estimates to different parameters and conditions, we set forth below a discussion of our critical accounting policies relating to:
fair value of financial liabilities;
revenue recognition and trade receivables;
allowances for doubtful accounts;
deferred income taxes and social contribution; and
impairment of long-lived assets;
defined postretirement benefit plans;
contingencies; and
estimate of expected amount of the allowed claims in the RJ Proceedings.
Fair Value of Financial Liabilities
We have adopted the fair value option under Financial Accounting Standards Board Accounting Standards Codification 820 “Fair Value Measurement”, or ASC 820, with respect to the recording of our financial liabilities. These financial liabilities have been valued at fair value according to the criteria of ASC 820 as of the time at which we reclassified each of our financial liabilities that were legally affected by the RJ Plan from liabilities subject to compromise to loans and financings or trade payables. We estimated the fair value of each of these financial liabilities based on an internal valuation made of these financial liabilities, which takes into consideration the cash flows under these financial instruments provided for in the RJ Plan, and assumptions regarding appropriate discount rates and foreign exchange rates consistent with the tenor and currency of each of these financial liabilities.
The fair value adjustment recognized on our balance sheet with respect to each financial liability at the time that we reclassified that financial liability is amortized on a straight-line basis over the term of that financial liability and on a monthly basis we record a financial expense in the amount of the amortization in our statement of operations and a corresponding reduction in the fair value adjustment on our balance sheet.
During 2018, we recorded gains on adjustments to fair value of our loans and financings of R$13,929 million and gains on adjustments to present value of our trade payables (including trade payables toANATEL-AGU) of R$5,577 million. We do not expect to record additional significant fair value adjustments in our statements of operations.
Our assumptions regarding appropriate discount rates and foreign exchange rates used in our calculation of the fair value of our financial liabilities are subject to significant fluctuations due to different external and internal factors, including economic trends and the financial performance of our company. The use of different assumptions to measure the fair value of our financial liabilities could have a material effect on the estimated fair value of these financial instruments and the amounts recorded as loans and financings and trade payables in our balance sheet, as well as the amounts recorded as reorganization items, net in our statement of operations.
Revenue Recognition and Trade Receivables
Our revenues correspond primarily to the amount of the payments received or receivable from sales of services in the regular course of our activities and our subsidiaries’ activities.
Service revenue is recognized when services are provided. Local and long distance calls are charged based on time measurement according to the legislation in effect. The services charged based on monthly fixed amounts are calculated and recorded on a straight-line basis. Prepaid services are recognized as unearned revenues and recognized in revenue as these services are used by customers.
Revenue from sales of handsets and accessories is recognized when these items are delivered and accepted by the customers. Discounts on services provided and sales of cell phones and accessories are taken into consideration in the recognition of the related revenue. Revenues involving transactions with multiple elements are identified in relation to each one of their components, and the recognition criteria are applied on an individual basis. Revenue is not recognized when there is significant uncertainty as to its realization.
Our revenue is a material component of our results of operations. Management’s determination of price, collectability and the rights to receive certain revenues for the use of our network are based on judgments regarding the nature of the fee charged for services rendered, the price for certain services delivered and the collectability of those revenues. Should changes in conditions cause management to conclude that these criteria are not met for certain transactions, the amount of accounts receivable could be adversely affected. In addition, for certain categories of revenue we rely upon revenue recognition measurement guidelines set by ANATEL.
We consider revenue recognition to be a critical accounting policy, because of the uncertainties caused by different factors such as the complex information technology required, high volume of transactions, fraud and piracy, accounting regulations, management’s determination of collectability and uncertainties regarding our right to receive certain revenues (mainly revenues for use of our network). Significant changes in these factors could cause us to fail to recognize revenues or to recognize revenues that we may not be able to realize in the future, despite our internal controls and procedures. We have not identified any significant need to change our revenue recognition policy.
Provision for Doubtful Accounts
Our provision for doubtful accounts is established in order to recognize probable losses on accounts receivable and takes into account limitations we impose to restrict the provision of services to customers with past-due accounts and actions we take to collect delinquent accounts. For additional information regarding our provision for doubtful accounts, see note 8 to our consolidated financial statements.
We have entered into agreements with certain customers to collect past-due accounts receivable, including agreements allowing customers to settle their delinquent accounts in installments. The amounts that we actually fail to collect in respect of these accounts may differ from the amount of the allowance established, and additional allowances may be required.
Depreciation of Property, Plant and Equipment
We depreciate property, plant and equipment using the straight-line method at rates we judge compatible with the useful lives of the underlying assets. The depreciation rates of our most significant assets are presented in note 1413 to our audited consolidated financial statements. The useful lives of assets in certain categories may vary based on
whether they are used primarily to provide fixed-line or mobile services. We review the estimated useful lives of the assets taking into consideration technical obsolescence and a valuation by outside experts.
Given the complex nature of our property, plant and equipment, the estimates of useful lives require considerable judgment and are inherently uncertain, due to rapidly changing technology and industry practices, which could cause early obsolescence of our property, plant and equipment. If we materially change our assumptions of useful lives and if external market conditions require us to determine the possible obsolescence of our property, plant and equipment, our depreciation expense, obsolescencewrite-off and consequently net book value of our property, plant and equipment could be materially different.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is established in order to recognize probable losses on accounts receivable and takes into account limitations we impose to restrict the provision of services to customers withpast-due accounts and actions we take to collect delinquent accounts. The allowance for doubtful accounts estimate is recognized in an amount considered sufficient to cover possible losses on the realization of these receivables. The allowance for doubtful accounts estimate is prepared based on historic default rates. During 2018, we reassessed the methodology used to evaluate the assumption of allowance for doubtful accounts that is set up to recognize probable losses on accounts receivable taking into account the measures implemented to restrict the provision of services to and collect late payments from customers. For additional information regarding our allowance for doubtful accounts, see note 8 to our audited consolidated financial statements.
We have entered into agreements with certain customers to collectpast-due accounts receivable, including agreements allowing customers to settle their delinquent accounts in installments. The amounts that we actually fail to collect in respect of these accounts may differ from the amount of the allowance established, and additional allowance may be required.
Fair Value ofAvailable-for-Sale Investments
Our investments in Unitel, including our investment in its declared and unpaid dividends, and CVT are classified asavailable-for-sale investments and have been valued at fair value according to the operating assets used as basis in the valuation of these investments at the time of our May 2014 capital increase. Unrealized holding gains and losses, net of the related tax effect, onavailable-for-sale investments are excluded from earnings and are reported as a separate component of accumulated other comprehensive income until realized.
The fair value of theavailable-for-sale investments is estimated based on the internal valuation made, including cash flows forecasts for a five-year period, the choice of a growth rate to extrapolate the cash flows projections, and definition of appropriate discount rates and foreign exchange rates consistent with the reality of each country where the businesses are located. In addition to the financial and business assumptions referred to above, we also take into consideration the fair value measurement of cash investments, qualitative assumptions, including the impacts of developments in the lawsuits filed against third parties, and the opinion of the legal counsel on the outcome of these lawsuits. With regard to the impairment test of dividends, we use financial assumptions on the discount rate in time and the foreign exchange rate, and use qualitative assumptions based on the opinion of the legal counsel on the outcome of the lawsuits filed against Unitel for the nonpayment of dividends and interest. We monitor and periodically update the key assumptions and critical estimates used to calculate fair value.
During 2017 and 2016, we recorded losses onavailable-for-sale financial assets of R$267 million and R$1,090 million, respectively, resulting from the revision of the recoverable amount of dividends receivable from Unitel, the fair value of the cash investment in Unitel and exchange rate losses related to the depreciation of the Angolan Kwanza against the U.S. dollar and thereal. During 2018, we recorded a gain onavailable-for-sale financial assets of R$293 million, primarily as a result of a R$829 million exchange rate gain due to the 17.1% depreciation of thereal against the U.S. dollar during 2018 and R$142 million recorded with respect to our portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year, the effects of which were partially offset by a R$678 million loss recorded based on our revision of the fair value of the cash investment in Unitel.
Our estimates of future cash flows from ouravailable-for-sale investments may not necessarily be indicative of the amounts that could be obtained in the current market. The use of different assumptions to measure the fair value ofavailable-for-sale investments could have a material effect on the amounts obtained and not necessarily be indicative of the cash amounts that we would receive on the disposal of anavailable-for-sale investment.
Deferred Income Taxes and Social Contribution
Income taxes in Brazil are calculated and paid on a legal entity basis, and there are no consolidated tax returns. Accordingly, we only recognize deferred tax assets, related to tax loss carryforwards and temporary differences, if it is likely that they will be realized on a legal entity basis.
We recognize and settle taxes on income based on the results of operations determined in accordance with the Brazilian Corporate Law, taking into consideration the provisions of Brazilian tax law, which are materially different from the amounts calculated for U.S. GAAP purposes. Under U.S. GAAP, we recognize deferred tax assets and liabilities for temporary differences between the carrying amounts and the taxable bases of the assets and liabilities, and tax loss carryforwards are recorded in assets or liabilities, as applicable. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
We regularly test deferred tax assets for impairment and recognize a provision for impairment losses when it is probable that these assets may not be realized, based on the history of taxable income, the projection of future taxable income, and the time estimated for the reversal of existing temporary differences. These projections require the use of estimates and assumptions. In order to project future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to a variety of external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products sold by our company. The use of different estimates and assumptions could result in the recognition of a provision for impairment losses for the entire or a significant portion of the deferred tax assets.
Impairment of Long-Lived Assets
Long-lived assets include assets that do not have indefinite lives, such as property, plant, and equipment, and purchased intangible assets subject to amortization,amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as deemed necessary.
We have not recorded any impairment of our long-lived assets during the three years ended December 31, 2015.2018.
ProvisionsDefined Postretirement Benefit Plans
We sponsor certain defined postretirement benefit plans for our employees. We record liabilities for defined postretirement benefits plan based on actuarial valuations which are calculated based on assumptions and estimates regarding discount rates, investment returns, inflation rates for future periods, mortality indices and projected employment levels relating to postretirement benefit liabilities. The accuracy of these assumptions and estimates will determine whether we have created sufficient reserves for the costs of accumulated defined postretirement benefits plans, and the amount we are required to disburse each year to fund postretirement benefits plans. These assumptions and estimates are subject to significant fluctuations due to different external and internal factors, such as economic trends, social indicators, our capacity to create new jobs and our ability to retain our employees. All of these assumptions are reviewed at the end of each reporting period. If these assumptions and estimates are not accurate, we may be required to revise our reserves for defined postretirement benefits, which could materially impact our results of operations.
Contingencies
Liabilities for loss contingencies arising from claims, assessment, litigation, fines and penalties are recorded when it is probable that the liability has been incurred and the amount can be reasonably estimated, based on the opinion of management and itsin-house and outside legal counsel. The amounts are recognized based on the cost of the expected outcome of ongoing lawsuits.
We classify our risk of loss in legal proceedings as remote, possible or probable. Provisions recorded in our consolidated financial statements in connection with these proceedings reflect reasonably estimated losses at the relevant date as determined by our management after consultation with our general counsel and the outside legal counsel. As discussed in note 2019 to our audited consolidated financial statements, we record as a liability our estimate of the costs of resolution of such claims, when we consider our losses probable. We continually evaluate the provisions based on changes in relevant facts, circumstances and events, such as judicial decisions, that may impact the estimates, which could have a material impact on our results of operations and shareholders’ equity. While management believes that the current provision is adequate, it is possible that our assumptions used to estimate the provision and, therefore, our estimates of loss in respect of any given contingency will change in the future based on changes in the relevant situation. This may therefore result in changes in future provisioning for legal claims. For more information regarding material pending claims against our company, see “Item 8. Financial Information—Legal Proceedings” and note 2019 to our audited consolidated financial statements.
Fair ValueEstimate of Derivative Financial Instruments and Other Financial Instruments
We recognize derivative financial instruments at fair value based on future cash flow estimates associated with each instrument contracted. The financial assets available for sale related to our investment in Unitel have been valued at fair value according toExpected Amount of the operating assets used as basisAllowed Claims in the valuation related to the Oi capital increase. RJ Proceedings
Our estimates of future cash flows may not necessarily be indicativeestimate of the amounts that could be obtainedexpected amount of the allowed claims in the current market. The use of different assumptions to measureRJ Proceedings is a significant estimate. Future actions and decisions by the fair value could have aRJ Court may differ significantly from our own estimate, potentially having material effectfuture effects on our financial statements. Furthermore, these liabilities are reported as the amounts obtained and not necessarilyexpected to be indicative ofallowed by the cash amounts that we would receive or pay to settle such transactions.
Deferred Income Taxes and Social Contribution
Income taxes in Brazil are calculated and paid on a legal entity basis, and there are no consolidated tax returns. Accordingly, we only recognize deferred tax assets, related to tax loss carryforwards and temporary differences,RJ Court, even if it is likely that they willmay be realized on a legal entity basis.
We recognize and settle taxes on income based on the results of operations determined in accordance with the Brazilian Corporation Law, taking into consideration the provisions of Brazilian tax law, which are materially different from the amounts calculatedsettled for U.S. GAAP purposes. Under U.S. GAAP, we recognize deferred tax assets and liabilities based on thelesser amounts. There may be significant differences between the carrying amountssettled amount and the taxable basesexpected amount of the assets and liabilities.
We regularly test deferred tax assets for impairment and recognize a provision for impairment losses when it is probable that these assets may not be realized, based on the history of taxable income, the projection of future taxable income, and the time estimated for the reversal of existing temporary differences. These projections require the use of estimates and assumptions. In order to project future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to a variety of external and internal factors, such as economic trends, industry trends and interest rates, changes in business strategies, and changes in the type of services and products sold by our company. The use of different estimates and assumptions could result in the recognition of a provision for impairment losses for the entire or a significant portion of the deferred tax assets.
Employee Benefits
We record liabilities for employee benefits based on actuarial valuations which are calculated based on assumptions and estimates regarding discount rates, investment returns, inflation rates for future periods, mortality indices and projected employment levels relating to pension fund benefit liabilities. The accuracy of these assumptions and estimates will determine whether we have created sufficient reserves for the costs of accumulated pensions and healthcare plans, and the amount we are required to disburse each year to fund pension benefits. These assumptions and estimates are subject to significant fluctuations due to different external and internal factors, such as economic trends, social indicators, our capacity to create new jobs and our ability to retain our employees. All of these assumptions are reviewed at the end of each reporting period. If these assumptions and estimates are not accurate, we may be required to revise our reserves for pension benefits, which could materially impact our results of operations.allowed claim.
Principal Factors Affecting Our Financial Condition and Results of Operations
Effects of the RJ Proceedings and Our Declining LiquidityFinancial Restructuring
AsIn June 2016, as a result of December 31, 2015,several factors affecting our consolidated cashliquidity, we anticipated that we would no longer be able to comply with our payment obligations under our loans and cash equivalentsfinancing transactions and short-term cash investments amountedwe concluded that filing of a request for judicial reorganization in Brazil would be the most appropriate course of action (1) to R$16,700 million. We expectpreserve the continuity of our offering of quality services to useour customers, within the rules and commitments undertaken with ANATEL, (2) to preserve the value of our company, (3) to maintain the continuity of our operations and corporate activities in an organized manner that protects the interests of our company, customers, shareholders and other stakeholders, and (4) to protect our cash and cash equivalentsequivalents.
Our liquidity crisis resulted principally from:
| • | the deterioration of the Brazilian economy, which suffered low or negative GDP growth for several years and increased levels of unemployment, with negative effects on (1) our ability to retract and retain customers, and corresponding negative effects on our net operating revenue, and (2) due to increases in Brazilian interest rates and the depreciation of thereal, increases in our financing expenses; |
the increasingly marginal (or in some instances, negative) returns that we achieved through network expansion designed to meet the universalization requirements imposed on our company as a fixed line concessionaire under the PGMU, which require us to make large capital expenditures in certain areas of Brazil that are remote, have low demographic density and short-term cash investments,have alow-income population, without the corresponding ability to recoup these capital expenditures through the rates that we charge customers in these areas or elsewhere;
the change in consumption patterns of Brazilian consumers of telecommunication services as a result of the increasing attractiveness of mobile telecommunications, particularly following the global introduction of the “smart phone,” which has led to continuous sequential declines in the number of subscribers to our fixed-line services, with corresponding negative effects on our net operating revenue;
the requirement under Brazilian law that we make judicial deposits in connection with our defense of labor, tax, and civil lawsuits and regulatory claims brought against our company, which resulted in a significant amount of our liquid assets being diverted into judicial deposits, with the result that these assets were not available for us to use for our capital expenditure and debt service requirements;
the imposition of large administrative fines and penalties, including interest on unpaid charges and late fees, by ANATEL, which resulted in a significant amount of our liquid assets being diverted to pay these charges or into judicial deposits as we defend against these regulatory claims, with the result that these assets were not available for us to use for our capital expenditure and debt service requirements; and
the increases in our debt service requirements as we relied on funds obtained from financing transactions in the Brazilian and international markets to expand our data communications network and to implement projects to meet ANATEL’s regulatory requirements market.
On June 20, 2016, Oi, together with the other RJ debtors, filed a joint voluntary petition for whichjudicial reorganization pursuant to the Brazilian Bankruptcy Law with the RJ Court, pursuant an urgent measure approved by our board of directors. For more information regarding the RJ Proceedings, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings.”
Effects of RJ Proceedings on Our Statement of Operations and Balance Sheet
Our net operating revenue was negatively affected by the RJ Proceedings primarily as a result of the impact of these proceedings on our ability to attract new corporate customers for our B2B business as these potential customers have been wary of entering into long-term service contracts with us during the pendency of these proceedings. We do not believe that the RJ Proceedings had a direct impact on our net revenue from other services. However, the factors affecting our net operating revenue that led to our liquidity crisis persist.
As a result of the RJ Proceedings, we have commitments under facilities from CDBrealized gains and BNB, to fundlosses and made provisions for losses that are realized or incurred in the RJ Proceedings which have been recorded in as reorganization items, net in our operations, investments, debt service obligationsconsolidated statements of operations. Reorganization items, net was an expense of R$2,372 during 2017 and working capital requirementsR$9,006 million during the period in which our operating cash flows are insufficient to fund these cash requirements.2016.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered intoAs a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holdersresult of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going concern, based on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the successcommencement of the efforts to identifyRJ Proceedings, our loans and implement financial and strategic alternatives to optimize the liquidity and debt profile.
Should one or more of the assumptions underlying our cash flow projections and other forecasts or the outcome of the efforts to identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our cash and cash equivalents and short-term cash investments, together with our committed financing, may not be sufficient to meet our contractual obligations and commitments during 2016. If we are unable to successfully restructure our debt on terms satisfactory to our company, we may not be able to execute our business plan or meet our obligations. If we become unable to meet our obligations, we may seek the protection of the courts through a judicially supervised reorganization (recuperação judicial) proceeding in Brazil.
Effects of Investment in and Disposal of Portuguese Business of PT Portugal
On May 5, 2014, we concluded the Oi capital increase in which we issued (1) 121,674,063 of our common shares and 280,483,641 of our preferred shares for an aggregate amount of R$8,250 million in cash, and (2) 104,580,393 of our common shares and 172,025,273 of our preferred shares to Pharol in exchange for the contribution by Pharol to our company of all of the shares of its subsidiary PT Portugal. PT Portugal provides a broad range of telecommunications services in Portugal and owned significant interests in telecommunications companies in Angola, Cape Verde, Namibia, and São Tomé and Principe in Africa and Timor-Leste in Asia.
On June 2, 2015, we sold all of the share capital of PT Portugal to Altice Portugal for a purchase price equal to the enterprise value of PT Portugal of €6,900 million,financings were classified as liabilities subject to adjustments based on the financial debt, cash and working capital of PT Portugal on the closing date, plus an additional earn-out amount of €500 million in the event that the consolidated revenues of PT Portugal and its subsidiaries (as of the closing date) for any single year between the year ending December 31, 2015 and the year ending December 31, 2019 is equal to or exceeds €2,750 million.
In connection with the closing, Altice Portugal disbursed €5,789 million, of which €869 million was utilized by PT Portugal to prepay outstanding indebtedness in that amount, and €4,920 million were paid to our company in cash. As of December 31, 2015, we had used R$8,682 million of the net cash proceeds of the PT Portugal Disposition for the prepayment of indebtedness of our company,compromise and as of the date of this annual report have used an additional R$5,350 millionthe commencement of the RJ Proceedings, we ceased recording interest expenses and foreign exchange gains and losses on these net cash proceeds for the prepaymentloans and repayment of indebtednessfinancings as part of our company. We expect to usefinancial expenses, net. In addition, in connection with our deteriorating financial condition and the remainder of these net cash proceeds for the repayment of indebtedness of our company.
In anticipationcommencement of the PT Portugal Disposition, PT Portugal transferred Portugal Telecom International Finance B.V., or PTIF,RJ Proceedings, we reversed our derivative financial instruments during the second and third quarters of 2016.
We also reclassified our trade payables, provisions for civil contingencies, provisions for labor contingencies and provision for pension plans as of the date of the commencement of the RJ Proceedings as liabilities subject to compromise.
Effects of Confirmation of the RJ Plan on Our Statement of Operations and Balance Sheet
On December 19 and 20, 2017, the GCM was held to consider approval of the most recently filed judicial reorganization plan. The GCM concluded on December 20, 2017 following the approval of the RJ Plan reflecting amendments to the judicial reorganization plan presented at the GCM as negotiated during the course of the GCM.
On January 8, 2018, the RJ Court entered the Brazilian Confirmation Order, ratifying and confirming the RJ Plan, according to its wholly-owned finance subsidiary,terms, but modifying certain provisions of the RJ Plan. The Brazilian Confirmation Order was published in the Official Gazette of the State of Rio de Janeiro on February 5, 2018, the Brazilian Confirmation Date.
The Brazilian Confirmation Order, according to Oi. its terms, is binding on all parties, although still subject to appeals with no suspensive effect attributed to it. For more information regarding the recoveries which the creditors were entitled to receive under the RJ Plan, see “Item 4. Information on the Company—Our Recent History and Development—Our Judicial Reorganization Proceedings—Implementation of the Financial Settlement of the Judicial Reorganization Plan.”
As a result of the completionapproval and confirmation of the RJ Plan:
we have begun to attract new corporate customers for our B2B business as the concerns of these potential customers regarding the long-term sustainability of our business have receded;
we recorded gain on reorganization items, net of R$31,581 million during 2018;
all of our obligations recorded as liabilities subject to compromise as of December 31, 2017 have been reclassified to other line items on our balance sheet and statement of operations to reflect the recoveries of the creditors with respect to those obligations, our payment of R$161 million to settle some of our debt instruments and trade payables as part of the Small Creditors Program (a program under which creditors could engage in mediation of their claims with us under which we would settle claims of R$50,000 or less without extinguishing those claims), and the settlement of some of our other liabilities through mediation.
we recorded interest expenses and foreign exchange gains and losses on our restructured loans and financing as part of our financial expenses, net in the aggregate amount of R$4,045 million during 2018.
For more information regarding our reorganization items, net, see note 28 to our audited consolidated financial statements; for more information regarding our liabilities subject to compromise, see note 29 to our audited consolidated financial statements.
Effects of Investments in Africatel
At the time of our acquisition of PT Portugal, Disposition, the indebtedness of PTIF, which had previously been classified as liabilities associated with assets held for sale in our consolidated financial statements, was reclassified as indebtedness of our company. In addition, in connection with the PT Portugal Disposition, PTIF assumed all obligations under PT Portugal’s outstanding 6.25% Notes due 2016.
In addition, PT Portugal transferred to Oi allheld indirectly 75% of the outstanding share capital of PT Participações, SGPS, S.A., or PT Participações, which holds:
We have accounted for the acquisition of allPT Portugal.
On September 16, 2014, our board of directors authorized our management to take the shares of PT Portugal bynecessary measures to market our company in exchange for our common shares and preferred shares in the Oi capital increase under the purchase method of accounting asAfricatel. As a result, as of whichDecember 31, 2018, 2017 and 2016, we have recorded the assets and liabilities of PT PortugalAfricatel, including its investment in Unitel and the accounts receivable relating to declared and unpaid dividends of Unitel, asheld-for sale, although we do not record Africatel as discontinued operations in our income statement due to the immateriality of the effects of Africatel on our balance sheetresults of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when the sale of these assets may be completed.
During 2018, we recorded a gain onavailable-for-sale financial assets of R$293 million, primarily as a result of a R$829 million exchange rate gain due to the 17.1% depreciation of thereal against the U.S. dollar during 2018 and R$142 million recorded with respect to our portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year, the effects of which were partially offset by a R$678 million loss recorded based on our revision of the fair value of the identifiablecash investment in Unitel. During 2017 and 2016, we recorded losses onavailable-for-sale financial assets acquiredof R$267 million and liabilities assumed. We have prepared a purchase price allocation under which we adjustedR$1,090 million, respectively, resulting from the carrying values of certainrevision of the assets and liabilitiesrecoverable amount of PT Portugal.
The following table sets forthdividends receivable from Unitel, the adjustments to market value made in the context of the allocation of the fair values of identifiable assets and liabilities of PT Portugal.
List of residential segment customers List of personal mobile segment customers List of corporate segment customers Mobile licenses of the operations in Portugal Adjustments of intangible assets to market value Property, plant and equipment of operations in Portugal Adjustments to market value before taxes Effects of taxation Total adjustments to market value net of taxes Carrying
Value Adjustments
to market
value Fair Value (in millions ofreais) R$ 40 R$ 738 R$ 778 94 1,642 1,736 37 665 701 1,037 103 1,140 R$ 1,208 3,147 R$ 4,355 608 3,755 (1,012 ) R$ 2,743
The following table shows the total acquisition price for, and the goodwill arising on, the acquisition of PT Portugal.
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As a result of our decision to sell PT Portugal, the revenue and expenses of PT Portugal are presented in our income statement as discontinued operations. In addition, as a result of our decision to sell PT Portugal and its subsidiary Africatel, the assets and liabilities related to PT Portugal and Africatel were classified in our balance sheet as assets held for sale and liabilities of assets held for sale, respectively.
We recorded a loss from discontinued operations for 2014 of R$4,415 million, consisting of a loss from discontinued operations of R$250 million and an allowance for impairment loss at fair value of the PT Portugalcash investment in Unitel and divesture-related expenses of R$4,164 million.
We recorded net operating revenue of discontinued operations of R$5,082 million forexchange rate losses related to the period from our acquisition of PT Portugal on May 5, 2014 through December 31, 2014. Our profit on discontinued operations before financial expenses and taxes was R$390 million, or 7.7% of net operating revenue of discontinued operations. Financial expenses of our discontinued operations were R$694 million and we recorded an income tax and social contribution benefit on our discontinued operations was R$54 million. As a result, the loss for our discontinued operations for the year ended December 31, 2014 was R$250 million, or 4.9% of net operating revenue of discontinued operations.
In connection with the reclassificationdepreciation of the assetsAngolan Kwanza against the U.S. dollar and liabilities related to PT Portugal and Africatel, we recorded an impairment loss as part of our loss from discontinued operations for 2014 on the investment in PT Portugal, in the amount of R$4,164 million resulting from the recognition of this asset at its fair value less expenses to sell. The sale price used to determine the impairment loss allowance corresponds to the unadjusted purchase price of R$22,267 million (€6,900 million) and liabilities on retirement and other benefits assumed by PT Portugal, amounting to R$3,872 million (€1,200 million).
We recorded loss from discontinued operations for 2015 of R$867 million, consisting of comprehensive income transferred to our income statement of R$226 million, principally consisting of the cumulative foreign exchange differences related to PT Portugal, and a loss on the sale of PT Portugal and divestiture related expenses of R$625 million.
Our R$625 million loss in connection with the sale of PT Portugal consisted of (1) the derecognized investment cost that includes goodwill arising on the business combination between our company and PT Portugal and selling expenses totaling R$1,308 million, and (2) the R$683 million revenue related to cash proceeds received directly by our company.
Effects of Investment in Rio Forte Commercial Paper and PT Exchangereal
In preparing the purchase price allocation with respect to our acquisition of PT Portugal, we recognized the write-off of all commercial paper of Rio Forte owned by PT Portugal and PTIF on the date of acquisition and recorded as other assets a right to compensation receivable of R$2,763 million from Pharol, reflecting the face value of this commercial paper.
On July 15 and 17, 2014, Rio Forte defaulted on the commercial paper held by PTIF and PT Portugal. On September 8, 2014, we, TmarPart, Pharol and our subsidiaries PT Portugal and PTIF, entered into the PT Exchange Agreement and the PT Option Agreement. On March 24, 2015, PT Portugal assigned its rights under the PT Exchange Agreement and the PT Option Agreement to PTIF. On March 27, 2015, PT Portugal assigned all of its rights and obligations under the Rio Forte commercial paper that it owned to PTIF. On March 30, 2015, the transactions contemplated by the PT Exchange Agreement were completed through the transfer of Rio Forte commercial paper in the aggregate amount of €897 million to Pharol in exchange for 47,434,872 of our common shares and 94,869,744 of our preferred shares.
As of December 31, 2014, we had the right to compensation from Pharol related to its subscription in the Oi capital increase in the amount of R$2,895 million (equivalent to €897 million) and had an obligation to acquire 47,434,872 of our common shares and 94,869,744 of our preferred shares from Pharol in exchange for this amount under the PT Exchange Agreement, subject to approval by our shareholders at a meeting scheduled for March 26, 2015. Considering that this asset and liability were for the same amount and could be settled with the same entity and at the same time, we stated them on our balance sheet as of December 31, 2014 on a net basis.
Under the PT Exchange Agreement, on March 30, 2015 we complete the share exchange under which Pharol delivered 47,434,872 of our common shares and 94,869,744 of our preferred shares to PTIF and we delivered Rio Forte securities to Pharol in the total principal amount of R$3,163 million (€897 million).
Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services
As a Brazilian company with a substantial portionsubstantially all of our operations in Brazil, we are affected by economic conditions in Brazil. Brazilian GDP declinedgrew by an estimated 3.8%1.1% during 2018 and by 1.0% during 2017, following a decline of 3.5% in 2015, grew by 0.1% in 2014, and grew by 2.3% in 2013. While we believe that growth in Brazil’s GDP stimulates demand for telecommunications services, we believe that demand for telecommunications services is relatively inelastic in periods of economic stagnation and that the effect on our revenues of low growth or a recession in Brazil would not be material under foreseeable scenarios. However, a2016. The substantial and prolonged deterioration of economic conditions in Brazil couldsince the second quarter of 2014 have had a material adverse effect on the number of subscribers to our services and the volume of usage of our services by our subscribers and, as a result, our net operating revenue.
Based on information available from ANATEL, the number of fixed lines in service in Brazil increased from 39.8 million as of December 31, 2005 to 43.6 million as of December 31, 2015, the latest date for which such information has been made available by ANATEL, and the number of mobile subscribers in Brazil increased from 86.2 million as of December 31, 2005 to 257.8 million as of December 31, 2015. Although the demand for
telecommunications services has increased substantially during the past ten years, the tastes and preferences of Brazilian consumers of these services have shifted.
During the three-year period ended December 31, 2015,2018, the number of mobile subscribers in Brazil has declined at an average rate of 4.3%3.8% per year, while the number of fixed lines in service in Brazil during the three-year period ended December 31, 20152018 has declined at an average rate of 6.3%4.2% per year. As the incumbent provider of fixed-line services and a provider of mobile services in our service areas, we are both a principal target and a beneficiary of this trend. During the three-year period ended December 31, 2015, the number of our mobile subscribers has decreased at an average rate of 1% per year from 49.2 million at December 31, 2012 to 48 million at December 31, 2015, while the number of our fixed lines in service has declined by an average rate of 6% per year from 18.5 million at December 31, 2012 to 14.9 million at December 31, 2015.
Demand for Our Telecommunications Services
Demand for Our Residential ServicesEffects of Investments in Africatel
BecauseAt the numbertime of our customers terminating their residential services has exceeded new activations betweenacquisition of PT Portugal, PT Portugal held indirectly 75% of the outstanding share capital of Africatel which held 25% of the outstanding share capital of Unitel. We recognized this investment as anavailable-for-sale financial asset recognized at fair value. The fair value of the investment in Unitel of R$4,089 million was determined based on a valuation report of Pharol’s operating assets prepared by Banco Santander in connection with our acquisition of PT Portugal.
On September 16, 2014, our board of directors authorized our management to take the necessary measures to market our shares in Africatel. As a result, as of December 31, 20122018, 2017 and December 31, 2015,2016, we have recorded the numberassets and liabilities of Africatel, including its investment in Unitel and the accounts receivable relating to declared and unpaid dividends of Unitel, asheld-for sale, although we do not record Africatel as discontinued operations in our fixed lines in service declined by 19.1%, or 3.5 million, during this period, accordingincome statement due to ANATEL. As partthe immateriality of the Transformation Plan,effects of Africatel on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we are focusingcannot predict when the sale of these assets may be completed.
During 2018, we recorded a gain on offering more and higher-value added services to new and existing customers by combining upselling and cross selling initiatives, thereby increasing the ARPUavailable-for-sale financial assets of our Residential Services business. We believe that through our sales of bundles consisting of more than one service, we improve customer profitability and enhance loyalty, while also increasing ARPU and minimizing churn rates. PrimarilyR$293 million, primarily as a result of these initiatives,a R$829 million exchange rate gain due to the ARPU17.1% depreciation of our residential services grew by 5.8% tothereal against the U.S. dollar during 2018 and R$79.6 during 2015 from R$75.2 during 2014. We believe that our renewed focus on the sale of bundled services is the principal reason for the increase in the percentage of our customers that subscribe to more than one of our residential services from 61.6% as of December 31, 2014 to 63.3% as of December 31, 2015.
We are required under ANATEL regulations and our concession contracts to offer a basic service plan to our residential customers that permits 200 minutes of usage of our fixed-line network to make local calls. We also offer alternative residential plans that include significantly larger numbers of minutes and charge higher monthly fees for these plans. Over the past three years, the percentage of our customers selecting these alternative plans has grown significantly. Subscribers to our alternative residential plans, including our bundled service plans, represented 86.4% of our residential customers as of December 31, 2015 as compared to 82% of our residential customers as of December 31, 2012. We believe that our alternative residential plans contribute to a net increase in our residential services revenue as many subscribers of our alternative residential plans do not use their full monthly allocations of local minutes.
We have sought to combat the general trend in the Brazilian telecommunications industry of substitution of mobile services in place of local fixed-line services by offering a variety of bundled plans that include mobile services, broadband services andOi TV subscriptions to our fixed-line customers. As a result of these service offerings, the monthly disconnections of our fixed lines in service have declined. As of December 31, 2015:
The substantial increase in the number of mobile service users in Brazil has also negatively impacted the use of our public telephones. As the incumbent local fixed-line service provider in Region I and Region II, we are required under ANATEL regulations and our concession contracts to meet specified targets142 million recorded with respect to the availability of public telephones throughout our concession area. However, as a larger portion of dividends approved by Unitel related to Unitel’s 2017 fiscal year, the populationeffects of Region Iwhich were partially offset by a R$678 million loss recorded based on our revision of the fair value of the cash investment in Unitel. During 2017 and Region II uses mobile handsets to make calls when not in proximity to a fixed-line telephone, revenue2016, we recorded losses onavailable-for-sale financial assets of R$267 million and R$1,090 million, respectively, resulting from the userevision of the recoverable amount of dividends receivable from Unitel, the fair value of the cash investment in Unitel and exchange rate losses related to the depreciation of the Angolan Kwanza against the U.S. dollar and thereal.
Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services
As a Brazilian company with substantially all of our public telephones declined by 85.7% from 2012 to 2015.
Demand for Our Personal Mobility Services
Our customer base for mobility services (including customers in our Personal Mobility Services and SME and Corporate Services) has declined from 49.2 million at December 31, 2012 to 48.1 million at December 31, 2015, according to ANATEL. We believe that the primary reason for the decline in our Personal Mobility customer base is the reduction in the total number of mobile accessesoperations in Brazil, especiallywe are affected by economic conditions in the second halfBrazil. Brazilian GDP grew by an estimated 1.1% during 2018 and by 1.0% during 2017, following a decline of 2015. We believe this market shift reflects the trend to consolidate mobile use into a single SIM card, following the launch3.5% in 2016. The substantial and prolonged deterioration of new all-net plans and the structural market migration from voice to data in response to the offering of more robust data packages. Additionally, in the second half of 2015, operators in the Brazilian telecommunication sector (including our company) implemented a more intensive policy of disconnecting inactive users (access clean up). As a result, operators reduced regulated costs associated with the maintenance of active accesses for devices that do not generate revenue.
The market for mobile services is extremely competitive in each of the regions that we serve. As a result, (1) we incur selling expenses in connection with marketing and sales efforts designed to retain existing mobile customers and attract new mobile customers, and (2) from time to time the discounts that we offer in connection with our promotional activities lead to charges against our gross operating revenue from mobile services. In addition, competitive pressures have in the past required us to introduce service plans under which the monthly and per-minute rates that we charge our mobile customers are lowered, reducing our personal mobility ARPU. During 2015, the average monthly churn rate of our Personal Mobility Services business was 12.4% per month.
Our new service offerings have had strong performances in the first months following their releases in late 2015. As of December 31, 2015,Oi Livre has acquired 6.2 million customers, corresponding to 15.9% of our total pre-paid base. We have also been increasing our market share in the pre-paid segment, with a market share of 21.3% as of December 31, 2015, a 1.7% increase compared to December 31, 2014.
We expect our overall mobile services business to continue to grow in terms of its market share, traffic volumes and revenues from value-added services. However, due to market saturation, the current macroeconomic situation and the trend in SIM card consolidation, we expect future growth in our mobile services business to occur at lower rates than we have historically achieved.
Demand for Our SME and Corporate Services
The number of our customers for SME and Corporate Services has declined from 8.9 million as of December 31, 2012 to 7.2 million as of December 31, 2015. We believe that the primary reason for the decline in our SME and Corporate Services customer base is the declining macroeconomiceconomic conditions in Brazil which has caused manysince the second quarter of our SME customers to cease operations. Our corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activity and their spending for telecommunications products and services. In addition, provided that our SME and corporate customers also purchase the core fixed-line and mobile services offered to our Residential and Personal Mobility Services customers, demand for our SME and Corporate Services is subject to some of the same conditions that affect our Residential and Personal Mobility Services, including reductions in interconnection tariffs, which2014 have led to more robust mobile package offerings and driven the traffic migration trend of fixed-to-mobile substitution.
Effects of Expansion of Mobile Data Transmission Services
We have authorizations and radio frequency licenses necessary for us to provide 2G, 3G and 4G services throughout Brazil. During 2015, 2014 and 2013, Oi Mobile undertook extensive capital expenditure projects to
install the network equipment necessary to expand our offerings of these services, investing R$1,151 million, R$1,923 million and R$2,241 million, respectively, which has increased in our depreciation expenses. We financed the purchase and installation of our network equipment through loans and vendor financing.
In 2015, our mobile data transmission services, consisting of 2G, 3G and 4G services to mobile handsets and mini-modems, captured approximately 2,857 net disconnections (calculated basedhad a material adverse effect on the number of subscribers atto our services and the endvolume of usage of our services by our subscribers and, as a result, our net operating revenue. During the three-year period lessended December 31, 2018, the number of mobile subscribers in Brazil has declined at the beginningan average rate of that period). We increased3.8% per year, while the number of municipalitiesfixed lines in which we offered 4G services to 133, covering 51.4% ofservice in Brazil during the urban population of Brazil, as ofthree-year period ended December 31, 2015 from 45 municipalities, covering 30.6%2018 has declined at an average rate of the population of Brazil, as of December 31, 2014, and we increased the number of municipalities in which we offered 3G services to 1,288, covering 78.8% of the urban population of Brazil, as of December 31, 2015 from 1,011 as of December 31, 2014. We expect that these services will generate significant additions to our mobile customer base and lead to long-term increases in our revenues and operating income before financial income (expenses) and taxes.
The aggregate cost of our 3G authorizations and radio frequency licenses and our 2G authorizations and radio frequency licenses in Region III was R$3,129 million; we are obligated to pay the remaining balance of R$919 million to ANATEL in installments through 2019. The cost of our 4G authorizations and radio frequency licenses was R$368 million, which has been paid in full.
Under our 3G radio frequency licenses, we are required to meet certain service expansion obligations that will require capital expenditures through 2016. Under our 4G radio frequency licenses, we are required to meet certain service expansion obligations that will require capital expenditures through 2019. If we are unable to fund these capital expenditures through our operating cash flows, or incur additional indebtedness or vendor financing obligations to make these capital expenditures, we may be required to default on our obligations under these licenses, which could result in requirements to provide completion guarantees and administrative proceedings by the respective regulatory bodies, which could result in fines.4.2% per year.
Effects of Divestment of Non-Core Assets
Beginning in 2012, we entered into various transactions to monetize non-essential assets and acquire the services related to these assets at more favorable financial terms, with an aim to reduce future capital expenditures and maintenance expenses.
In August 2013, we completed the assignment of the right to use 4,226 fixed-line communications towers that formed part of our infrastructure for commercial operations by companies whose core operations consist of providing transmission tower and radiofrequency management and maintenance services. Upon the completion of these assignments, we received proceeds of approximately R$1,087 million. We have entered into agreements to lease the communications towers from the assignees for 20-year terms (renewable for another 20 years), effective upon completion of the assignments.
In November 2013, we completed the assignment of the right to use 2,113 fixed-line communications towers that formed part of our infrastructure for commercial operations by companies whose core operations consist of providing transmission tower and radiofrequency management and maintenance services. Upon the completion of these assignments, we received proceeds of approximately R$687 million. We have entered into agreements to lease the communications towers from the assignees for 20-year terms (renewable for another 20 years), effective upon completion of the assignments.
In December 2013, we and our subsidiary BrTI sold all of our equity interests in GlobeNet (other than Brasil Telecom de Venezuela S.A.) to BTG Pactual YS Empreendimentos e Participações. On January 17, 2014, the sale was concluded for an aggregate amount of R$1,779 million (based on the U.S. dollar-real exchange rate on January 15, 2014), resulting in a gain of approximately R$1,497 million after deducting the book value of the assets and related costs of approximately R$1,497 million. GlobeNet’s principal assets consist of 22,500 kilometers of fiber optic submarine cables, composed of two rings of protected submarine cables, linking connection points between the United States, Bermuda, Colombia and Brazil. As part of this transaction, GlobeNet will supply guaranteed submarine cable capacity to us and our subsidiaries at a fixed price for a term of 13 years.
In March 2014, we sold all of our equity interests in Caryopoceae, our wholly-owned subsidiary, to SBA Torres Brasil, Ltda. for R$1,525 million. Caryopoceae owned 2,007 mobile telecommunications towers and rooftop antennae used in our mobile services business. Contemporaneously with the sale of this subsidiary, we entered into an operating lease with a 15-year term (renewable for another five years) with Caryopoceae permitting us to continue to use space on these communications towers for our mobile services business.
In December 2014, we sold all of our equity interests in Tupã Torres, our wholly-owned subsidiary, to SBA Torres Brasil, Ltda. for R$1,172 million. Tupã Torres owned 1,641 mobile telecommunications towers and rooftop antennae used in our mobile services business. Contemporaneously with the sale of Tupã Torres, we entered into an operating lease with a 15-year term (renewable for another five years) with Tupã Torres permitting us to continue to use space on these communications towers for our mobile services business.
As a result of these transactions, we have received cash related to these transactions and recorded gains on disposals of these assets of R$2,399 million during 2014 and R$1,497 million during 2013. As a result of these transactions, the amount of property and equipment that we record has been reduced, and consequently we will no longer record depreciation and amortization expenses relating to these assets, nor will we be required to maintain these assets. As a result of our entering lease and other agreements to continue to use these assets in the provision of our services, our expenses and commitments relating to operating leases have increased.
Effects of Investments in Africatel
At the time of our acquisition of PT Portugal, PT Portugal held indirectly 75% of the outstanding share capital of Africatel which held 25% of the outstanding share capital of Unitel. Our management considers this a non-controlling stake in Unitel which does not grant our company significant influence over the financial, operating and strategic policies of Unitel since we do not elect enough members of the board of directors of Unitel to allow us to be involved in the decision-making process of these policies, including decisions on dividend and other distributions, material business relations, appointment of officers or managers, or the provision of key technical information. Accordingly, upon the acquisition of PT Portugal, weWe recognized this investment as anavailable-for-sale financial asset recognized at fair value. The fair value of the investment in Unitel of R$4,089 million was determined based on thea valuation report of Pharol’s operating assets prepared by Banco Santander on the valuation of Pharol’s operating assets that was used as the basis for the valuationin connection with our acquisition of PT Portugal as partPortugal.
On September 16, 2014, our board of directors authorized our management to take the Oi capital increase using a series of estimates and assumptions, including the cash flows projections for a four-year period, the choice of a growth ratenecessary measures to extrapolate the cash flows projections, and definition of appropriate discount rates.
market our shares in Africatel. As a result, as of our decision to sell Africatel,December 31, 2018, 2017 and 2016, we have recorded the assets and liabilities related toof Africatel, including its investment in Unitel and the accounts receivable relating to declared and unpaid dividends of Unitel, were classifiedasheld-for sale, although we do not record Africatel as discontinued operations in our balance sheet asincome statement due to the immateriality of the effects of Africatel on our results of operations. Due to the many risks involved in the ownership of these interests, particularly our interest in Unitel, we cannot predict when the sale of these assets held for sale and liabilitiesmay be completed.
During 2018, we recorded a gain onavailable-for-sale financial assets of assets held for sale, respectively.
As of December 31, 2015,R$293 million, primarily as a result of a R$829 million exchange rate gain due to the 17.1% depreciation of thereal against the U.S. dollar during 2018 and R$142 million recorded with respect to our updating the main assumptions and material estimates used in the fair value measurementportion of our investment individends approved by Unitel taking into consideration in this assessment possible impacts of actual events related to Unitel’s 2017 fiscal year, the investment, notablyeffects of which were partially offset by a R$678 million loss recorded based on our revision of the lawsuits filed against Unitel and its shareholders in 2015, we determined a fair value of the cash investment in Unitel. During 2017 and 2016, we recorded losses onavailable-for-sale financial assets of R$267 million and R$1,090 million, respectively, resulting from the revision of the recoverable amount of dividends receivable from Unitel, the fair value of the cash investment in Unitel and exchange rate losses related to the depreciation of R$3,436the Angolan Kwanza against the U.S. dollar and thereal.
Rate of Growth of Brazil’s Gross Domestic Product and Demand for Telecommunications Services
As a Brazilian company with substantially all of our operations in Brazil, we are affected by economic conditions in Brazil. Brazilian GDP grew by an estimated 1.1% during 2018 and by 1.0% during 2017, following a decline of 3.5% in 2016. The substantial and prolonged deterioration of economic conditions in Brazil since the second quarter of 2014 have had a material adverse effect on the number of subscribers to our services and the volume of usage of our services by our subscribers and, as a result, our net operating revenue. During the three-year period ended December 31, 2018, the number of mobile subscribers in Brazil has declined at an average rate of 3.8% per year, while the number of fixed lines in service in Brazil during the three-year period ended December 31, 2018 has declined at an average rate of 4.2% per year.
Demand for Our Residential Services
The number of our residential fixed lines in service declined by 21.3% to 8.3 million as of December 31, 2018 from 10.5 million as of December 31, 2015. We have focused on offering more and recognizedhigher-value added services to new and existing customers by combining upselling and cross selling initiatives, thereby increasing the ARPU of our Residential Services business. We believe that through our sales of bundles consisting of more than one service, we improve customer profitability and enhance loyalty, while also increasing ARPU and minimizing churn rates.
We have sought to combat the general trend in the Brazilian telecommunications industry of substitution of mobile services in place of local fixed-line services by offering a lossvariety of bundled plans that include mobile services, broadband services andOi TV subscriptions to our fixed-line customers. In addition, we have been focusing on structural network investments, including the introduction of VDSL technology, in order to offer service plans that include higher broadband speeds.
Demand for our residential services was negatively affected by a decision of the Brazilian Supreme Court that we must pay ICMS tax on customer subscriptions that do not include allowances and our subsequent inclusion of this tax in customers’ bills in the first half of 2017.
Demand for Our Personal Mobility Services
Our customer base for mobility services (including customers in our Personal Mobility Services and B2B Services) has declined by 21.6% to 37.7 million as of December 31, 2018 from 48.1 million as of December 31, 2015. We believe that the primary reason for the decline in our Personal Mobility customer base is the reduction in the total number of mobile accesses in Brazil, reflecting the trend to consolidate mobile use into a single SIM card, following the launch ofall-net plans in response to the successive reductions of the MTR tariffs, and the structural market migration from voice to data in response to the offering of more robust data packages. Additionally, we have implemented an intensive policy of disconnecting inactive users to reduce regulatory fees that we must make for each active account. Finally, we believe that the number of our prepaid accounts has been significantly reduced as a result of the increase in Brazil’s unemployment rate as our net additions of prepaid subscribers is closely correlated to movements in the unemployment rate.
The market for mobile services is extremely competitive in each of the regions that we serve. As a result, (1) we incur selling expenses in connection with marketing and sales efforts designed to retain existing mobile customers and attract new mobile customers, and (2) from time to time the discounts that we offer in connection with our promotional activities lead to charges against our gross operating revenue from mobile services. Competitive pressures have required us to introduce service plans under which we offer unlimited voice calls tied to service offerings priced in relation to the amount of data usage offered.
Demand for Our B2B Services
The number of RGUs of our B2B Services has declined by 6.9% to 6.7 million as of December 31, 2018 from 7.2 million as of December 31, 2015. We believe that the primary reasons for the decline in our B2B Services customer base has been (1) the declining macroeconomic conditions in Brazil, which has caused many of our SME customers to downsize or cease operations, (2) contractions in the fiscal strength of many of our governmental customers, which has caused them to reduce the scope of their telecommunications expenditures, and (3) market perceptions of our company during our RJ proceedings which has made it difficult for us to enter into new agreements with corporate customers, although following the approval and confirmation of the RJ Plan, we have begun to attract new corporate customers for our B2B business as the concerns of these potential customers regarding the long-term sustainability of our business have receded.
Our corporate customers, while better able to survive the current economic instability, often respond by reducing their economic activity and their spending for telecommunications products and services. In addition, provided that our B2B Services customers also purchase the core fixed-line and mobile services offered to our Residential and Personal Mobility Services customers, demand for our B2B Services is subject to some of the same conditions that affect our Residential and Personal Mobility Services, including reductions in interconnection tariffs, which have led to more robust mobile package offerings and driven the traffic migration trend offixed-to-mobile substitution.
Effects of Our Absorption of Network Maintenance Service Operations and Adoption of New Customer Care Model
We have introduced programs beginning in 2015 to control costs related to network maintenance services and third-party services by (1) absorbing operation of several network maintenance service operations and providing these services ourselves, and (2) implementing a new customer care quality model through which we have improved our method of allocation of call center traffic to promote a greater level of customer service and digitized some of our customer interactions with respect to processing order for new services, troubleshooting service issues and dispatching maintenance personnel.
Through our subsidiary Serede Serviços de Rede S.A., or Serede, we absorbed operations of our network maintenance service operations of our contractor in Rio de Janeiro in October 2015, our network maintenance service operations of our contractor in the South region of Brazil in May 2016 and our network maintenance service operations of our contractor in the North and Northeast regions of Brazil in June 2016. As a result, 75% of the members of our technical field staff are our employees and are directly managed by our company compared to 20% prior to the absorption of these operations. We have revised the focus of our network maintenance service operations to concentrate on preventive network maintenance the reduce the number of repairs, in turn reducing the volume of network interventions and increasing field force productivity, thus freeing capacity to increase our focus on preventive maintenance. This virtuous cycle improves field operations efficiency and reduces costs in terms of both the number of technicians and the volume of materials applied.
As a result, our network maintenance services expense has declined to R$408 million.1,104 million during 2018 from R$1,252 million during 2017 and R$1,540 million during 2016, the effects of which have been partially offset by increased personnel expenses relating to these services. In addition to reducing costs, we believe that this initiative has been principally responsible for (1) a reduction of the number of repairs by 17.2% during 2018, 12.5% during 2017 and 6.9% during 2016, and (2) an increase in productivity of our field staff (as measured by the number of field activities carried out divided by the total number of technicians involved) by 6.9% during 2018, 16.5% during 2017 and 6.3% during 2016. Finally, we believe that this initiative has been principally responsible for (1) the reduction in the average time for installation of new service by 18.9% during 2018, 30.4% during 2017 and 30.0% during 2016, (2) the reduction in the average waiting time for resolution of a customer service issue by 3.2% during 2018, 25.8% during 2017 and 20.1% during 2016, and (3) a reduction of complaints to ANATEL by 19.6% during 2018, 23.0% during 2017 and 10.0% during 2016.
During 2016, we implemented a new customer care quality model in which we allocated call traffic among our call center service providers based on service quality. In addition, in 2018, we began to promote electronic channels that allow self-service, increasing digital interactions and consequently reducing calls requiring interactions with call center personnel. These initiatives have stimulated better quality in the provision of services, resulting in a 17.3% and 22.8% decline in the volume of repeated calls during 2018 and 2017, respectively, and a 22.5% and 8.9% decline in call center costs during 2018 and 2017, respectively.
Effects of Adjustments to Our RegulatedInterconnection Rates
Telecommunications services rates are subject to comprehensive regulation by ANATEL. OurIn particular, interconnection rates for local fixed-line services, domestic long-distance services,and mobile services interconnection to our fixed-line network, and EILD and SLD services arein the Brazilian telecommunications industry have been subject to regulation by ANATEL.comprehensive reductions in recent years.
In July 2014, ANATEL approved rules under which interconnection rates charged by our company for the use of our fixed-line and mobile networks would be reduced over a period of years until they were set at rates based on along-run incremental cost methodology. As a result, theThe MTR tariffs that we charged to terminate calls on our mobile interconnection rates for Regions I, IInetworks were reduced by 83% from December 31, 2015 to December 31, 2018 and III declinedwere reduced by 25% each47% in February 2014, 33.3% each in February 2015 and 40.0%, 35.2% and 27.6%, respectively, in February 2016, with additional cuts approved through 2019. In addition, ANATEL approved cuts for mosttheTU-RL andTU-RIU tariffs that we charged to terminate calls on our fixed-line networks were reduced by 82% from December 31, 2015 to December 31, 2018 and were reduced by an average of our fixed interconnection rates ranging from 9.1% and 20.040% in February 2016, with additional cuts approved through 2019. In addition, ANATEL has reduced the substantially reduced our VC Rates during 2013 and 2015, as described
under the caption “Item 4. Information on the Company—Operations in Brazil—Rates.” These rate reductions have been a primary reason for the decline in our mobile interconnection revenue to R$889448 million during 20152018 from R$1,399500 million during 20142017 and from R$2,147627 million during 2013,2016, and the decline in our fixed-line interconnection revenue to R$31653 million during 20152018 from R$35471 million during 20142017 and from R$388113 million during 2013.2016. However, these rate reductions have also led to a substantial reduction of our interconnection costs, which have declined to R$1,809658 million during 20152018 from R$2,690778 million during 20142017 and R$3,9661,173 million during 2013. 2016.
As a result of the substantial reductions in our interconnection costs, and in keeping with our strategy of simplifying our portfolios to enhance the customerour customers’ experience, insince 2015 we launched severalhave been offering fixed-line and mobile plans that allowall-net calls for a flat fee.
We are required to obtain ANATEL approval prior to offering new alternative fixed-line or mobile plans. The rates established or approved by ANATEL for our services act as caps on the prices that we charge for these services, and we are permitted to offer these services at a discount from the rates approved by ANATEL. After ANATEL establishes or approves rate caps for these services, these rate caps are subject to annual adjustment based on the rate of inflation, as measured by the IST. Rate caps for local fixed-line plans are adjusted by inflation, as measured by the IST, less an amount that serves as a proxy for productivity gains achieved by our company and the local fixed-line services industry as a whole.
Effects of Claims by ANATEL that Our Company Has Not Fully Complied with Our Quality of Service and Other Obligations
As a fixed-line service provider, we must comply with the provisions of the General Plan on Quality Goals.PGMQ. As a public regime service provider, we must comply with the network expansion and modernization obligations under the General Plan on Universal Service GoalsPGMU and our concession agreements. Our personal mobile services authorizations set forth certain network expansion obligations and targets and impose obligations on us to meet quality of service standards. In addition, we must comply with regulations of general applicability promulgated by ANATEL, which generally relate to quality of service measures.
If we fail to meet quality goals established by ANATEL under the General Plan on Quality Goals,PGMQ, fail to meet the network expansion and modernization targets established by ANATEL under the General Plan on Universal Service GoalsPGMU and our concession agreements, fail to comply with our obligations under our personal mobile services authorizations or fail to comply with our obligations under other ANATEL regulations, we may be subject to warnings, fines, intervention by ANATEL, temporary suspensions of service or cancellation of our concessions and authorizations.
On an almost weekly basis, we receive inquiries from ANATEL requiring information from us on our compliance with the various service obligations imposed on us by our concession agreements. If we are unable to respond satisfactorily to those inquiries or comply with our service obligations under our concession agreements, ANATEL may commence administrative proceedings in connection with such noncompliance. We have received numerous notices of commencement of administrative proceedings from ANATEL, mostly due to our inability to achieve certain targets established in the General Plan on Quality GoalsPGMQ and the General Plan on Universal Service Goals.PGMU.
At the time that ANATEL notifies us it believes that we have failed to comply with our obligations, we evaluate the claim and, based on our assessment of the probability of loss relating to that claim, may establish a provision. We vigorously contest a substantial number of the assessments made against us. As of December 31, 2015,2018, the total estimated contingency in connection with all pending administrative proceedings brought by ANATEL against us in which we deemed the risk of loss as probable totaled R$1,149580 million, including fines which we are contesting through judicial proceedings, and we had recorded an aggregate provision related to these proceedings in the same amount. In
Effect of Level of Indebtedness and Interest Rates
As of December 31, 2018, we had loans and financings of R$30,379 million, excluding the event that we are unsuccessfulfair value adjustment to our loans and financings, and R$16,450 million, after giving effect to the fair value adjustment.
Borrowing and financing costs consist of interest on borrowings payable to third parties, inflation and exchange losses on third-party borrowings and gains and losses on derivative financial instruments as set forth in obtaining final approvalnote 6 to our audited consolidated financial statements included in this prospectus. As a result of the inclusioncommencement of the R$5 billionRJ Proceedings, we ceased recording borrowing and financing costs of finesour continuing operations with respect to our loans and claims we have proposed to be included in the TAC program, we could be required to constitute an additional provisionfinancings. As a result of the portionconfirmation of these finesthe RJ Plan, our obligations under the our restructured indebtedness began to accrue interest as of the Brazilian Confirmation Date and claims for which we have not previously established a provision.
In December 2013, ANATEL approved Resolution No. 629/2013 under which a TAC was adopted permitting telecommunications concessionaires to request that their obligations to pay fines to ANATEL for non-compliance with certain service requirements be satisfied through capital expenditure investmentsrecorded interest expenses and foreign exchange gains and losses on our restructured loans and financing as part of our financial expenses, net in their networks. Under this
regulation, Oi is currently negotiating several TACs with ANATEL related to fines in anthe aggregate amount of approximately R$5 billion, which can be classified into four categories of non-compliance: (1) universalization and quality, (2) systemic interruptions and external network, (3) consumer rights and general obligations, and (4) fiscalization.4,046 million during 2018.
On January 5, 2016, ANATEL published
As a decision defining the priority projects in caseresult of TACs executed by any operator and ANATEL. ANATEL will accept projects related to: (1) transport infrastructure based on fiber to the municipal capital; (2) transport infrastructure through high capacity digital radio to the municipal capital; (3) deployment of mobile personal service to provide 3G technology in cities that currently do not have such service; (4) deployment of mobile personal service to provide 4G technology in cities with more than 30,000 inhabitants that currently lack such service; and (5) copper network shortening through FTTC technology in order to provide broadband service. ANATEL also published the factor of regional inequalities to stimulate the implementation of these projectsthe RJ Plan, most of our obligations under our restructured indebtedness accrues interest at fixed-rates in less developed areas.
If we executeU.S. dollars. However, our obligations under our debentures and our restructured Brazilian credit agreements and CRIs accrue interest based on the CDI rate and our obligations under our restructured credit agreements with BNDES accrue interest based on the TJLP rate. As a TAC with ANATEL, then we will be subject to the terms and conditions set forthresult, increases in the TAC, including any penalties for non-compliance provided therein (in lieu of those set forthCDI rate or the TJLP rate will increase our interest expenses and debt service obligations.
In addition, the RJ Plan permits us to seek to raise up to R$2.5 billion in the regulations) forcapital markets and seek to borrow up to R$2 billion under new export credit facilities. This debt may accrue interest at floating rates and/or be denominated in foreign currencies. Accordingly, we may incur interest expenses and foreign exchange gains and losses in connection with this debt, if incurred.
Effects of Fluctuations in Exchange Rates between the lifeReal and the U.S. Dollar
Substantially all of our cost of services and operating expenses in Brazil are incurred inreais. As a result, the appreciation or depreciation of thereal against the U.S. dollar does not have a material effect on our operating margins. However, the costs of a substantial portion of the TAC. We will be requirednetwork equipment that we purchase for our capital expenditure projects are denominated in U.S. dollars or are U.S. dollar-linked. As a result, depreciation of thereal against the U.S. dollar results in this network equipment being more costly inreais and leads to comply withincreased depreciation expenses. Conversely, appreciation of the regulatory requirements only uponreal against the expirationU.S. dollar results in this network equipment being less costly inreais and leads to reduced depreciation expenses.
As a result of the relevant TAC.confirmation of the RJ Plan, our obligations under the our restructured Export Credit Agreements, our PIK Toggle Notes and ourNon-Qualified Credit Agreement are denominated in U.S. dollars and will accrue interest in U.S. dollars.
During 2015, we recorded provisions related to administrative proceedings brought by ANATEL inAs a result, when thereal appreciates against the U.S. dollar:
| • | the interest costs on our indebtedness denominated in U.S. dollars will decline inreais, which will positively affect our results of operations inreais; |
| • | the amount of our indebtedness denominated in U.S. dollars will decline inreais, and our total liabilities and debt service obligations inreaiswilldecline; and |
our financial expense, net will decline as a result of R$44.6 million. Our provisions related to administrative proceedings brought by ANATEL generally have been sufficient to pay all amountsforeign exchange gains that we were ultimately required to pay with respect to claims brought by ANATEL.record.
A depreciation of therealagainst the U.S. dollar will have the converse effects.
Effects of Inflation
After several years of relatively modest inflation in Brazil, inflation rates increased substantially during 2015 to annual rates of 10.7% as measured by the IGP-DI and the IBGE. Because substantially all of our cost of services and operating expenses are incurred inreais in Brazil, thisan increase in inflation has the effect of increasing our operating expenses and reducing our margins. Although we have taken significant measures to control and reduce operating expenses during 2015,the past three years, the benefits of these measures have been weakenedwere reduced as a result of the countervailing impact of Brazilian inflation.inflation during that time. Although our regulated rates are subject to annual adjustment based on the rate of inflation as measured by the IST, the majority of our revenue is generated from services delivered at rates that are not regulated or that are provided at a discount to the regulated rates as a result of competitive pressures in the market. As a result, we may not be able to pass our increased operating costs and expenses resulting from inflationary pressures through to our customers as incurred in the form of higher tariffs for our services.
A significant portionAs a result of the confirmation of the RJ Plan, ourreal-denominated debt bears obligations under our debentures and restructured Brazilian credit agreements and CRIs have accrued interest at the TJLP orbased on the CDI rate, which areis partially adjusted for inflation, andsince the ICPA rate, an inflation index, and, asBrazilian Confirmation Date. As a result, inflation results in increases incould increase our interest expenses and debt service obligations.
Effects of Fluctuations in Exchange Rates between the Real and the U.S. Dollar and the Euro
Substantially all of our cost of services and operating expenses in Brazil are incurred inreais. As a result, the appreciation or depreciation of thereal against the U.S. dollar does not have a material effect on our operating margins. However, the costs of a substantial portion of the network equipment that we purchase for our capital expenditure projects are denominated in U.S. dollars or are U.S. dollar-linked. This network equipment is recorded on our balance sheet at its cost inreais based on the applicable exchange rate on the date the transfer of ownership, risks and rewards related to the purchased equipment occurs. As a result, depreciation of thereal against the U.S. dollar results in this network equipment being more costly inreais and leads to increased depreciation expenses. Conversely, appreciation of thereal against the U.S. dollar results in this network equipment being less costly inreais and leads to reduced depreciation expenses.
Our consolidated indebtedness denominated in U.S. dollars and euros represented 38.2% and 40.3%, respectively, of our consolidated outstanding indebtedness at December 31, 2015. As a result, when thereal appreciates against the U.S. dollar or the euro:
A depreciation of therealagainst the U.S. dollar has the converse effects.
In order to mitigate the effects of foreign exchange variations, we have historically maintained a hedging policy under which our exposure to foreign exchange variations is subject to limits set by our board of directors. Under this policy, we typically entered into derivative transactions to swap the foreign exchange rate variation for variations of the CDI. At December 31, 2015, we had entered into hedging transactions in respect of 99.5% of our consolidated indebtedness affected by exchange rate variations. The purpose of these hedging transactions is to seek to “match” the currency of our debt with that of our revenues to mitigate foreign exchange risk. During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we have not rolled over our non-deliverable forwards and have selectively settled several of our long-term currency swaps. As a result, our exposure to foreign currency fluctuations has increased substantially.
Effect of Level of Indebtedness and Interest Rates
At December 31, 2015, our total outstanding indebtedness on a consolidated basis was R$59,857 million. The level of our indebtedness results in significant interest expenses that are reflected in our income statement. Financial expenses of our continuing operations consist of interest expense, exchange variations of U.S. dollar- and other foreign currency-denominated debt, foreign exchange losses or gains, and other items as set forth in note 6 to our consolidated financial statements. In 2015, we recorded financial expenses of our continuing operations of R$11,903 million on a consolidated basis, of which R$4,050 million consisted primarily of interest expenses on loans and debentures payable to third parties and R$10,908 million consisted of losses from monetary correction and exchange differences on third-party loans and financings. Part of the financial expenses of our continuing operations were offset by income from derivative transactions of R$5,797 million and by exchange rate gains related to cash maintained offshore to provide a natural hedge of R$3,350 million. During 2015, we hedged our foreign currency denominated debt for which we did not have corresponding foreign currency cash deposits against exchange rate fluctuations; as a result, the cost of such indebtedness was linked to fluctuations in the CDI rate rather than the exchange rate. During 2016, in connection with our consideration of potential plans to restructure our indebtedness, we have not rolled over our non-deliverable forwards and have selectively settled several of our long-term currency swaps. As a result, our exposure to foreign currency fluctuations has increased substantially.
The interest rates that we pay depend on a variety of factors, including prevailing Brazilian and international interest rates and risk assessments of our company, our industry and the Brazilian economy made by potential lenders to our company, potential purchasers of our debt securities and the rating agencies that assess our company and its debt securities.
Standard & Poor’s, Moody’s and Fitch maintain ratings of our company and our debt securities. Currently, Standard & Poor’s, Moody’s and Fitch maintain ratings of our company on a local and a global basis. On a global basis, Standard & Poor’s maintains a foreign currency rating for our company of “CCC-,” Moody’s maintains a foreign currency rating for our company of “Caa1,” and Fitch maintains a foreign currency rating for our company of “CCC.” Any decision by these agencies to downgrade the ratings of our company or of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and the inclusion of financial covenants in the instruments governing new indebtedness, and could significantly reduce our ability to obtain such financing on satisfactory terms or in amounts required by us.
Our export credit facility guaranteed by EKN contained a requirement that we prepay all outstanding amounts in the event that our credit rating was downgraded below Ba2 by Moody’s or BB by Fitch. As a result of the actions
by these rating agencies, we were required to prepay the outstanding principal amount under this export credit agreement of R$202 million in April 2016.
Seasonality
Our primary business operations do not have material seasonal operations, other than our sales of handsets and accessories in our Personal Mobility business which tends to increase during the fourth quarter of each year as compared to the other three fiscal quarters related to significant increases of volume during theyear-end holiday shopping season.
Recent Developments
ExclusivityIssuance of New Shares on Exercise of Warrants
On January 4, 2019, our board of directors confirmed the issuance of 275,985 Common Shares and the delivery of such Common Shares to holders of its Warrants that exercised their Warrants from December 4, 2018 through January 2, 2019, including Warrants represented by 55,197 ADWs that were exercised from November 28, 2018 through December 26, 2018.
All Warrants that were not exercised on or prior to January 2, 2019, including all ADWs that were not exercised on or prior to December 26, 2018, have been canceled.
Preemptive Offering and Closing Under Commitment Agreement
As contemplated by Section 6 of the RJ Plan, on November 13, 2018, we commenced a preemptive offering of Common Shares that was registered with LetterOnethe SEC under the Securities Act under which holders of our Common Shares and Preferred Shares, including the ADS Depositary and The Bank of New York Mellon, as depositary of the Preferred ADS program, received 1.333630 transferable rights for each Common Share or Preferred Share held as of November 19, 2018. Each subscription right entitled its holder to subscribe to one Common Share at a subscription price of R$1.24 per Common Share. In addition, each holder of a subscription right was entitled to request the subscription for additional Common Shares.
In October 2015,The subscription rights expired on January 4, 2019. On January 16, 2019, we entered into an exclusivity agreement with LetterOneissued 1,530,457,356 Common Shares to holders of subscription rights that had exercised those subscription rights with respect to the negotiationCommon Shares, including the depositaries under our ADS Deposit Agreements. On January 21, 2019, we issued 91,080,933 Common Shares to holders of a potential transactionsubscription rights that had requested subscriptions for excess Common Shares, including the specific purposedepositaries under our ADS Deposit Agreements. The proceeds of allowing a consolidationthese subscriptions was R$2,011 million.
On January 25, 2019, we issued 1,604,268,162 Common Shares, representing the total number of Common Shares that were offered in the Brazilian telecommunications industry involving a potential business combination with TIM. As partpreemptive offering less the total number of the potential transaction, LetterOne proposed to make a capital contribution of up to US$4.0 billion in our company, contingent on the completion of the consolidation transaction. On February 25, 2016, we were notified by LetterOne that it had been informed by TIM that the latter was no longer interested in proceeding with the negotiations of a business combination with our companyinitial Common Shares and that without TIM’s involvement, LetterOne could not proceed with transaction as previously planned.
Engagement of PJT Partners
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Notice of Default under PTIF Bonds
Under the Trust Deed governing the PTIF Bonds, we were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch Chamber of Commerce no later than January 31, 2016. On April 29, 2016, the PTIF Trustee delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the PTIF Trustee determines that this failure is materially prejudicialexcess Common Shares, to the interests of the holders of the PTIF Bonds, the PTIF Trustee could declare that the PTIF Bonds are immediately due and repayable. UnderBackstop Investors in a private placement under the terms of the PTIF Bonds,Commitment Agreement for the PTIF Trustee is not obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforceaggregate amount of R$1,989 million. In addition, under the rightsterms of the holdersCommitment Agreement, on that date we issued 272,148,705 Common Shares in a private placement to the Backstop Investors and paid US$13 million to the Backstop Investors as compensation for their commitments under the Commitment Agreement.
Pharol Settlement Agreement
On January 8, 2019, Oi, Bratel and Pharol entered into the Pharol Settlement Agreement, which provides, among other things, for the termination of all existing litigation involving Oi, Bratel and Pharol in Brazil and abroad.
As a result of the PTIF Bonds unless it shall have been indemnifiedPharol Settlement Agreement, Oi, Bratel and Pharol filed motions requesting the suspension of all pending proceedings, suits and appeals in Brazil and Portugal involving Oi, Bratel and Pharol for 60 days or until the RJ Court confirms the Pharol Settlement Agreement, whichever occurs first.
Under the Pharol Settlement Agreement Oi is required to: (1) pay Bratel an amount in U.S. dollars corresponding to its satisfaction€25 million, which under the Pharol Settlement Agreement was used by Pharol for the subscription of 85,721,774 common shares issued by Oi in the preemptive offering; and specifically directed(2) upon confirmation of the Pharol Settlement Agreement by the RJ Court, (a) transfer to Bratel 32,000,000 Common Shares and 1,800,000 Preferred Shares held in treasury, (b) pay Pharol the annual fees related to certain obligations assumed by Oi with respect to proceedings of Pharol in Portugal, and (c) in case of a sale of at least 50% of the shares of Unitel indirectly held by Oi, deposit into an escrow account an amount necessary to guarantee the payment of any potential liabilities of Pharol in tax proceedings whose chance of loss is assessed as possible or requested to do soprobable.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a requisite percentagedecision published in the Official Gazette of the holdersState of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019.
On February 28, 2019, the RJ Court confirmed the Pharol Settlement Agreement by a decision published in the Official Gazette of the PTIF BondsState of Rio de Janeiro on March 12, 2019. This decision became final on April 3, 2019. Since that date, in accordance with the termsPharol Settlement Agreement, Oi has paid Bratel an amount in U.S. dollars corresponding to €25 million and conditionstransferred to Bratel 32,000,000 common shares and 1,800,000 preferred shares of Oi held in treasury.
ICC Award in Arbitration Against Unitel Shareholders
On February 27, 2019, we were notified of the PTIF Bonds.final decision issued by the arbitral tribunal under the arbitration proceeding filed by our subsidiary PT Ventures against the other Unitel shareholders. The arbitral tribunal ruled that the other Unitel shareholders had violated several provisions of Unitel’s Shareholders’ Agreement, among other matters.
The arbitral tribunal ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of US$339.4 million corresponding to the loss of value of PT Ventures’ stake in Unitel, plus interest from February 20, 2019 at12-month U.S. dollar LIBOR +2%, compounded annually. The arbitral tribunal also ordered the other Unitel shareholders to jointly and severally pay PT Ventures the amount of US$307 million corresponding to the damages arising from the other Unitel’s shareholders’ failure to ensure that PT Ventures received the same amount of dividends in foreign currency as the other Unitel foreign shareholder. This amount is subject to interest at an annual rate of 7%, starting at various dates in 2013. In addition, the arbitral tribunal ordered the other Unitel shareholders to pay a substantial portion of PT Ventures’ legal fees and costs and the administrative and arbitrators’ fees and expenses, in the aggregate net amount of approximately US$13 million. The arbitral tribunal also entirely dismissed the counterclaim and agreed with PT Ventures that the conditions for exercising the right of first refusal to acquire PT Ventures’ 25% shareholding in Unitel had not been triggered. For more information, see “Item 8. Financial Information—Legal Proceedings—Legal Proceedings Relating to Our Interest in Unitel.”
Repurchases of Preferred Shares over the B3
During the month of February 2019, we repurchased a total of 1,800,000 Preferred Shares over the B3 at prices ranging between R$1.42 and R$1.44 per Preferred Share, for an aggregate purchase price of R$2.6 million.
Results of Operations
The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with US GAAP. In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period, except as the context otherwise indicates.
Year Ended December 31, 20152018 Compared with Year Ended December 31, 20142017
The following table sets forth the components of our consolidated income statement, as well as the percentage change from the prior year, for the years ended December 31, 20152018 and 2014.2017.
| Year ended December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | % Change | Year ended December 31, | |||||||||||||||||||||
| (in millions ofreais, except percentages) | 2018 | 2017 | % Change | |||||||||||||||||||||
| (in millions ofreais, except percentages) | ||||||||||||||||||||||||
Net operating revenue | R$ | 27,354 | R$ | 28,247 | (3.2 | ) | R$ | 22,060 | R$ | 23,790 | (7.3 | ) | ||||||||||||
Cost of sales and services | (16,250 | ) | (16,257 | ) | — | (15,823 | ) | (15,676 | ) | 0.9 | ||||||||||||||
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|
| |||||||||||||||||||||
Gross profit | 11,104 | 11,990 | (7.4 | ) | 6,237 | 8,114 | (23.1 | ) | ||||||||||||||||
Operating income (expenses) | ||||||||||||||||||||||||
Selling expenses | (4,720 | ) | (5,566 | ) | (15.2 | ) | (4,478 | ) | (4,400 | ) | 1.8 | |||||||||||||
General and administrative expenses | (3,912 | ) | (3,835 | ) | 2.0 | (2,698 | ) | (3,064 | ) | (12.0 | ) | |||||||||||||
Other operating income (expenses), net | (1,259 | ) | 2,024 | (162.2 | ) | 417 | (1,043 | ) | n.m. | |||||||||||||||
Reorganization items, net Other operating income (expenses), net | 31,581 | (2,732 | ) | n.m. | ||||||||||||||||||||
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|
| |||||||||||||||||||||
Operating income (loss) before financial income (expenses) and taxes | 1,213 | 4,613 | (73.7 | ) | ||||||||||||||||||||
Financial income | 5,365 | 1,345 | 298.9 | |||||||||||||||||||||
Financial expenses | (11,903 | ) | (5,894 | ) | 102.0 | |||||||||||||||||||
|
| |||||||||||||||||||||||
Operating loss before financial expenses, net, and taxes | 31,059 | (2,767 | ) | n.m. | ||||||||||||||||||||
Financial expenses, net | (6,538 | ) | (4,549 | ) | 43.7 | (4,012 | ) | (1,612 | ) | 148.9 | ||||||||||||||
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| |||||||||||||||||||||
Income (loss) before taxes | (5,325 | ) | 64 | n.m. | ||||||||||||||||||||
Profit (loss) before taxes | 27,047 | (4,379 | ) | n.m. | ||||||||||||||||||||
Income tax and social contribution | (3,380 | ) | (758 | ) | 345.7 | 347 | 351 | (1.1 | ) | |||||||||||||||
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| |||||||||||||||||||||
Net income (loss) from continuing operations | (8,705 | ) | (694 | ) | n.m. | |||||||||||||||||||
Net income (loss) from discontinued operations | (867 | ) | (4,086 | ) | (78.8 | ) | ||||||||||||||||||
Profit (loss) | R$ | 27,394 | R$ | (4,027 | ) | n.m. | ||||||||||||||||||
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|
| |||||||||||||||||||||
Net income (loss) | R$ | (9,572 | ) | R$ | (4,780 | ) | 100.2 | |||||||||||||||||
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| |||||||||||||||||||||||
| n.m. | Not meaningful. |
Net Operating Revenue
The following table sets forth the components of our net operating revenue, as well as the percentage change from the prior year, for the years ended December 31, 20152018 and 2014.2017.
| Year ended December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | % Change | Year ended December 31, | |||||||||||||||||||||
| (in millions of reais, except percentages) | 2018 | 2017 | % Change | |||||||||||||||||||||
| (in millions of reais, except percentages) | ||||||||||||||||||||||||
Telecommunications in Brazil Segment: | ||||||||||||||||||||||||
Residential | R$ | 9,779 | R$ | 9,995 | (2.2 | ) | R$ | 8,402 | R$ | 9,171 | (8.4 | ) | ||||||||||||
Personal mobility | 8,431 | 9,011 | (6.4 | ) | 7,250 | 7,645 | (5.2 | ) | ||||||||||||||||
SME/Corporate | 7,974 | 8,312 | (4.1 | ) | ||||||||||||||||||||
B2B | 5,981 | 6,486 | (7.8 | ) | ||||||||||||||||||||
Other services | 257 | 295 | (12.9 | ) | 227 | 256 | (11.2 | ) | ||||||||||||||||
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| 26,441 | 27,613 | (4.2 | ) | 21,860 | 23,557 | (7.2) | ||||||||||||||||||
Other operations (1) | 913 | 634 | 44.0 | 200 | 233 | (14.0 | ) | |||||||||||||||||
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Net operating revenue | R$ | 27,354 | R$ | 28,247 | (3.2 | ) | R$ | 22,060 | R$ | 23,790 | (7.3 | ) | ||||||||||||
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| (1) | Other operations includes the net operating revenue of |
Net operating revenue of our Telecommunications in Brazil segment declined by 3.2%7.2% during 2015,2018, principally due to (1)an 8.4% decline in net operating revenue from residential services, a 6.4%7.8% decline in net operating revenue from B2B services, and a 5.2% decline in net operating revenue from personal mobility services, (2) a 4.1% decline in net operating revenue from SME/Corporate services, and (3) a 2.2% decline in net operating revenue from residential services. The effects of these declines on our net income were partially offset by 44.0% increase in net operating revenue from our other operations in Africa and Asia.
Net Operating Revenue from Residential Customer Services
Net operating revenue from residential customer services represented 35.7%38.1% of our net operating revenue for the year ended December 31, 2015.during 2018. Residential customer services includesinclude fixed telephony services, including voice services, data communication services (broadband), andPay-TV. Net operating revenue from residential services declined by 2.2%8.4%, primarily due to (1) the 8.6%7.2% decline in the average number of residential fixed-line customers; andRGUs, (2) the decline in fixed-mobile tariffs.voice traffic, and (3) the reduction inTU-RL andTU-RIU fixed line interconnection tariffs and VCfixed-to-mobile tariffs in February 2017 and February 2018. These effects were partially offset by the 6.4%0.6% increase in the average monthly net residential revenue per user (calculated based on the total revenue for the year divided by the monthly average customer base for the year divided by 12) to R$78.8 in 201580.0 during 2018 from R$74.0 in 2014,79.6 during 2017, primarily due to thean increase in broadband andPay-TV revenues as well as initiatives to improve profitability of the customer base such as selling bundled services and higher value offers. revenues.
Net Operating Revenue from Residential Fixed-Line Services. Net operating revenue from residential fixed-line services declined by 9.9%14.7%, primarily due to:
Net Operating Revenue from Broadband Services. Net operating revenue from residential broadband services increaseddeclined by 4.5%8.3%, primarily as a result of (1) a 7.6% increase in the average net operating revenue per subscriber, the effects of which were partially offset by a 2.9%6.8% decline in the average number of our residential ADSL subscribers to 5.14.8 million during 20152018 from 5.2 million during 2014.2017, and (2) a 5.4% decline in the average net operating revenue per subscriber from broadband services. As of December 31, 2015,2018, our ADSLxDSL subscribers represented 39.4%58.4% of our total residential subscribersfixed lines in service and subscribed to plans with an average speed of 9.8 Mbps as compared to 30.1%55.8% of our total residential fixed lines in service at an average speed of 8.3 Mbps as of December 31, 2014.2017.
Net Operating Revenue fromPay-TV Services. Net operating revenue from residentialPay-TV services increased by 38.9%11.2%, primarily as a result of a 48.2%6.1% increase in the average number of our residentialPay-TV subscribers to 1.6 million during 2018 from 1.5 million during 2017, and a 1.5% increase in the average net operating revenue per subscriber. The average numbersubscriber, principally as a result of the shift in the our sales mix towards more comprehensive packages of channels. As of December 31, 2018, ourPay-TV subscribers represented 19.2% of our total residential Pay-TV subscribers remained stable at 1.2 million during 2015 and 2014.fixed lines in service as compared to 16.2% of our total residential fixed lines in service as of December 31, 2017.
Net Operating Revenue from Personal Mobility Services
Net operating revenue from personal mobility services represented 30.8%32.9% of our net operating revenue for the year ended December 31, 2015.during 2018. Personal mobility services include sales of mobile telephony services to post-paid andpre-paid customers that include voice services and data communication services. Net operating revenue from personal mobility services declined by 6.4%5.2%, primarily due to (1) a 5.4%4.4% decline in the average number of our personal mobility customers, (2) the reduction in VU-M interconnection tariffs, and (3) decline in handsets revenue due to our strategy to outsource handsets sales in order to increase logistical efficiency and improve the supply of handsets in our sales channels. These effects were partially offset by an increase in data revenue, as a result of better mix acquisition, increased penetration of smartphones and the launch of our recent offerings.from mobile telephony services.
Net Operating Revenue from Mobile Telephony Services. Net operating revenue from mobile telephony services increaseddeclined by 5.3%4.4%, primarily due to an increase in data revenue, primarily due to the success of commercial and operational initiatives to improve the profitability of our customer base focused on increasing sales of our mobile services, such as data
services and value added services to smartphones, that are available to our post-paid and pre-paid subscribers. The effects of this increase was partially offset by a 5.4%8.8% decline in the number of our mobile customers that subscribe to 45.9our prepaid plans to 27.3 million during 20152018 from 48.529.9 million during 2014,2017, principally as a result of (1) Brazil’s high unemployment rate as our sales net additions of prepaid subscribers is closely correlated to movements in the unemployment rate, (2) the migration of prepaid customers in Brazil to the use of a single SIM card as operators have increased the offer of“all-net” plans following the successive reductions of the MTR tariffs, and (3) our strict disconnection policy for inactive customers, which is designed to reduce fee payments that we must make for each active account.
The effects of these declines were partially offset by (1) a 1.7% increase in average monthly net revenue per user, primarily as a result of an improvement in the strict client disconnection policy that we have introduced, particularly for our pre-paid customers, to control costs and improve the profitabilityprofile of our business.customer base, and (2) a 15.0% increase in the number of mobile customers that subscribe to our postpaid plans to 7.7 million during 2018 from 6.7 million during 2017. During 2018, data revenue represented 67.2% of net operating revenue from mobile telephony services compared to 53.9% during 2017.
Net Operating Revenue from Interconnection to Our Mobile Network. Mobile interconnection revenue declined by 36.5% in 2015,10.4% during 2018, primarily as a result of the reduction in VU-M interconnectionMTR tariffs in February 2015.2017 and February 2018, the effects of which were partially offset by an increase in interconnection traffic.
Net Operating Revenue from Sales of Handsets, SIM Cards and Other Accessories.Net operating revenue Revenue from sales of handsets, SIM cards and other accessories declined by 53.4%15.1% during 2018, primarily as a result of our strategy to outsource handsetsthe reduction in sales in order to increase logistical efficiency and improve the supplyvolume of handsets indue to our sales channels.policy of not subsidizing the sale of this product.
Net Operating Revenue from SME and CorporateB2B Services
Net operating revenue from SME and corporateB2B services represented 29.2%27.1% of our net operating revenue for the year ended December 31, 2015. SME and corporateduring 2018. B2B services include corporate solutions offered to our small,medium-sized, and large corporate customers, including voice services and corporate data solutions.solutions, and wholesale customers. Net operating revenue from SME and corporateB2B services which were temporarily increased during 2014 as a result of a contract that we had entered into with FIFA in connection with the 2014 FIFA World Cup, declined by 4.1%7.8%, primarily as a result of (1) lower voice traffic, following the decreasenatural market trend, (2) the reduction in fixed-mobile and mobile interconnectionMTR tariffs and (2) an 8.5%VCfixed-to-mobile tariffs in February 2017 and February 2018, (3) the slowdown in Brazilian economic activity, which has led to efforts by corporate and government customers to reduce costs, including telecommunications services costs, and has led to the downsizing or closing of many of our SME customers, and (4) market perceptions of our company during our RJ Proceedings which made it difficult for us to enter into new agreements with corporate customers.
The total number of our B2B customers increased to 6.7 million during 2018 from 6.5 million during 2017, as the 15.3% increase in B2B mobile customers more than offset the 3.5% decline in the number of SME and corporate customers to 7.2 million during 2015 from 7.9 million during 2014 principally due to the effects of the worsening recession in Brazil. These effects were partially offset by the increase in revenues from IT and data corporate services.
Gross Profit
As a result of the 3.2% decline in net operating revenue in 2015 our consolidated gross profit declined by 7.3% to R$11,104 in 2015 from R$11,990 million in 2014. As a percentage of net operating revenue, gross profit declined to 40.6% in 2015 from 42.4% in 2014.B2B fixed-line customers.
Operating Expenses
Under the Brazilian CorporationCorporate Law, we are required to segregate cost of sales and services from operating expenses in the preparation of our income statement. However, in evaluating and managing our business, we prepare reports in which we review the elements included in cost of sales and services and operating expenses classified by nature, as presented in note 5 of our audited consolidated financial statements. We believe that this classification improves our ability to understand results and trends in our business and that financial analysts and other investors who review our performance rely on this classification in performing their own analysis. Therefore, we have presented the discussion below of our operating expenses based on the classification of operating expenses presented in note 5 of our audited consolidated financial statements.
The following table sets forth the components of our operating expenses, as well as the percentage change from the prior year, for the years ended December 31, 20152018 and 2014.2017.
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | % Change | ||||||||||
| (in millions of reais, except percentages) | ||||||||||||
Third-party services | R$ | 6,317 | R$ | 6,259 | 1.0 | % | ||||||
Depreciation and amortization | 6,195 | 5,767 | 7.4 | |||||||||
Rental and insurance | 3,600 | 3,120 | 15.4 | |||||||||
Personnel | 2,719 | 2,829 | (3.9 | ) | ||||||||
Interconnection | 1,809 | 2,690 | (32.8 | ) | ||||||||
Network maintenance services | 1,902 | 1,923 | (1.1 | ) | ||||||||
Taxes and other income (expenses) Contingencies Impairment losses Costs of handsets and accessories Advertising and publicity Allowance for doubtful accounts Other operating income (expenses), net Total cost of sales and services Year Ended December 31, 2015 2014 % Change (in millions of reais, except percentages) 1,013 1,460 (30.6 ) 862 779 10.5 591 — n.m. 284 730 (61.0 ) 406 674 (39.8 ) 721 649 11.0 (278 ) (3,246 ) (91.4 ) R$ 26,141 R$ 23,634 10.6
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | % Change | ||||||||||
| (in millions of reais, except percentages) | ||||||||||||
Third-party services | R$ | 5,925 | R$ | 6,221 | (4.8 | ) | ||||||
Depreciation and amortization | 5,953 | 5,881 | 1.2 | |||||||||
Rental and insurance | 4,342 | 4,163 | 4.3 | |||||||||
Personnel | 2,594 | 2,791 | (7.1 | ) | ||||||||
Network maintenance services | 1,104 | 1,252 | (11.8 | ) | ||||||||
Interconnection | 658 | 778 | (15.4 | ) | ||||||||
Provision for contingencies | 90 | 144 | (37.4 | ) | ||||||||
Allowance for doubtful accounts | 1,070 | 692 | 54.7 | |||||||||
Advertising and publicity | 382 | 414 | (7.6 | ) | ||||||||
Handsets and other costs | 196 | 223 | (12.1 | ) | ||||||||
Impairment losses | — | 47 | (100.0 | ) | ||||||||
Taxes and other expenses | 135 | 345 | (61.0 | ) | ||||||||
Other operating income (expenses), net | 133 | 1,233 | (89.2 | ) | ||||||||
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Total cost of sales and services | R$ | 22,582 | R$ | 24,184 | (6.6 | ) | ||||||
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Operating expenses increaseddeclined by 10.6% in 2015,6.6% during 2018, principally due to:
a 91.4%89.2%, or R$2,9681,102 million, decline in other operating income,expenses, net;
a 4.8%, or R$591297 million, increasedecline in impairment losses;third-party service costs;
a 7.4%61.0%, or R$428211 million, increasedecline in depreciationtaxes and amortization costs;other expenses; and
a 15.4%7.1%, or R$480197 million, increasedecline in rental and insurance costs;personnel expenses.
accounts.
The effects of these factors were partially offset by the declines in expenses below:
Third-Party Services
Third-party service costs increaseddeclined by 1.0% in 2015,4.8% during 2018, primarily as a result of inflationary adjustments required by many of our contracts, increasedlower selling expenses, for Pay-TV contentinformation technology expenses and an increase in energy costs. The effects of these factors were partially offset by lower costs for consulting and advisory services, gains from the renegotiation of many of our contracts for third-party services and a reduction in sales commissioncall center expenses as a result of our efforts to optimize our sales channels through the increased useadoption of our own channels.new customer care model and, to a lesser extent the deferral of a portion of our selling expenses as a result of our implementation of ASC 606 for periods ending after January 1, 2018. The effects of these factors was partially offset by higher TV content costs as a result of the growth of ourPay-TV customer base and adjustments in contractual terms by some of our content providers, and by increased electricity costs as a result of the applicable electricity tariffs.
Depreciation and Amortization
Depreciation and amortization costs increased by 7.4% in 2015,1.2% during 2018, primarily as a result of the growth of our data and mobile network due to our strategy of modernization of the core network focusing on transmission and transport infrastructure, which has increased the amount of depreciable property, plant and equipment and amortizable license.
Rental and Insurance
Rental and insurance costs increased by 15.4% in 2015,4.3% during 2018, primarily as a result of (1) an increase in rental costs relating to our network infrastructure as a result of our sale of non-strategic assets, principally mobile towers that we sold in December 2014, (2) an increase inreaisof certain rental expenses denominated in U.S. dollars as a result of the depreciation of therealagainst the U.S. dollar during 2015,2018, particularly expenses relating to our agreements with GlobeNet and our lease of capacity on theSES-6 satellite, and (3) annual contractual adjustments under our rental agreements. satellite.
Personnel
Personnel expenses (including employee benefits and social charges and employee and management profit sharing) declined by 3.9% in 2015,7.1% during 2018, primarily as a result of a reductioninitiatives that that we have implemented to promote greater efficiency and productivity as well as stricter cost controls related in the number of our employees during the first half of 2015. The effects of this reduction in headcount was partially offset by (1) an increase in the number of our employees in October 2015 as a result of our acquisition of a portion of Telemont’s network service operations in the State of Rio de Janeiro which performs plant maintenance operations for our company, and (2) increases in the compensation of some of our employees as a result of the renegotiation of some of our collective bargaining agreements at the end of 2015.personnel expenses.
Impairment Losses
Expenses on impairment losses refers a R$591 million loss related to (1) R$501 million related to goodwill and trademarks for the operations in Brazil due to a significant change in the macroeconomic conditions in Brazil, and (2) R$89 million related to loss on goodwill assets related to our operations in Africa.
Interconnection
Interconnection costs declined by 32.8%, primarily as a result of the 33% decline in VU-M interconnection tariffs that was mandated for February 2015 and the decline in off-net mobile voice traffic.
Network Maintenance Services
Network maintenance services costs declined by 1.1%11.8% during 2018, primarily as a result of a lower number of maintenance incidents as a result of our initiatives focused on preventive actions and productivity improvements, which have been increasing the efficiency of field operations, as well as efficiency gains arising from the digitalization of processes and customer service.
Interconnection
Interconnection costs declined by 15.4% during 2018, primarily as a result of the declines in 2015,MTR tariffs and theTU-RL andTU-RIU interconnection tariffs that were implemented in February 2018 and February 2017, the effects of which were partially offset by an increase in interconnection traffic.
Contingencies
Provision for contingencies declined by 37.4% during 2018, primarily as a result of our acquisitionreversal of a portion of Telemont’s network service operationsour provision for contingencies and the related inflation adjustment due to the reprocessing of the provision estimation model taking into account the new profile and history of discontinuation of lawsuits in the Statecontext of Rio de Janeiro which performs plant maintenance operationsthe approval and ratification of the RJ Plan.
Allowance for our company,Doubtful Accounts
Allowance for doubtful accounts increased by 54.7% during 2018, primarily as a result of our revision of the assumptions that we use in determining our provision for bad debt. During 2018, allowance for doubtful accounts represented 4.9% of our net operating revenue compared to 2.9% during 2017.
Advertising and Publicity
Advertising and publicity expenses declined by 7.6% during 2018, primarily as a result of a decline in the volume of our advertising campaigns.
Handsets and Other Costs
Handsets and other costs declined by 12.1% during 2018, primarily due to the lower volume of handset sales.
Impairment Losses
We did not record an impairment losses during 2018 while we recorded impairment losses of R$47 million during 2017. Impairment losses in 2017 consisted of losses on goodwill relating to Africatel, which we no longer incur costs to third parties for these services. The effectsis reported as aheld-for-sale asset, as a result of these savings were partially offset byour annual contractual adjustments under our agreements with network maintenance service providers.impairment testing.
Taxes and Other Expenses
Taxes and other expenses declined by 30.6% in 201561.0% during 2018, primarily due to a decrease in other tax expenses, due toas a decreaseresult of a decline in other revenues to which other taxes are associated, and a decrease in expenses for fines.
ContingenciesOther Operating Expenses, Net
Provisions increased by 10.5% in 2015, primarily as a result of an increase in small consumer claims against our company.
Costs of HandsetsOther operating expenses, net was R$132 million during 2018 and Accessories
Costs of handsets and accessories declined by 61.0% in 2015, primarily as a result of our strategy to outsource handsets sales in order to increase logistical efficiency and improve the supply of handsets in our sales channels.
Advertising and Publicity
Advertising and publicity expenses, which were temporarily increasedR$1,235 million during 2014 as a result of costs of advertising campaigns related to our sponsorship of the 2014 FIFA World Cup, declined by 39.8% in 2015, primarily as a result of our focus on more selective sales in 2015, which led to a reduction in our advertising and publicity efforts.
Allowance for Doubtful Accounts
Allowance for doubtful accounts increased by 11.0% in 2015,2017, primarily as a result of the increase in customer delinquencieseffects ofnon-recurring expenses, which occurred during 2017, related to unrecoverable tax,write-off of other assets and other expenses due to the worsening recession in Brazil. During the year ended December 31, 2015, allowance for doubtful accounts represented 2.7% of our net operating revenue compared to 2.3% in 2014.
Other Operating Income, Net
Other operating income, net declined by 91.4% to R$278 million in 2015 from R$3,246 million in 2014. The principal components of other operating income, net in 2015 were (1) a R$326 million reversal of a civil contingency arising from the revisionreconcile accounting balances as part of the methodology we use to calculate civil contingencies, and (2) R$48 million in costs relating to terminations of employees during 2015.RJ Proceedings.
The principal components of other operating income, net in 2014 were:
Reorganization Items, Net
Reorganization items, net was a portiongain of R$31,581 million during 2018, primarily consisting of:
a R$13,929 million adjustment to fair value of loans and financings;
a R$12,881 million gain on our restructuring of our obligationsloans and financings, trade payables owing toANATEL-AGU and other trade payables; and
a R$5,577 million adjustment to present value of our trade payables (including trade payables owing toANATEL-AGU).
Reorganization items, net was an expense of R$2,372 million during 2017, primarily consisting of (1) a R$1,569 million increase of the amount recorded relating to our contingent liabilities owed to ANATEL to the amount allowed for principal, interestthese claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings, (2) a R$736 million increase of the amount recorded relating to our contingent liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings, (3) inflation adjustment of contingencies of R$410 million, and fines utilizing tax loss carryforwards.
Operating Income (Loss) before Financial Income (Expenses)Expenses, Net, and Taxes
As a result of the foregoing, the operating income before financial expenses, net, and taxes of our Telecommunications in Brazil segment was R$31,142 million during 2018 compared to a consolidated operating loss before financial expenses, net, and taxes of R$2,697 million during 2017. As a percentage of net operating revenue, the operating income before financial expenses, net, and taxes of our Telecommunications in Brazil segment was 142.5% during 2018 compared to operating loss before financial expenses, net, and taxes of 11.4% during 2017.
Operating expenses of our other operations declined by 6.5% to R$283 million during 2018 from R$303 million during 2017, principally as a result of our disposition of our interest in MTC in January 2017. The operating loss before financial expenses, net, and taxes of our other operations increased by R$13 million to R$83 million during 2018 from R$70 million during 2017. As a percentage of net operating revenue, the operating loss before financial expenses, net, and taxes of our other operations was 41.4% during 2018 compared to 30.0% during 2017.
Our consolidated operating income before financial income (expenses)expenses, net, and taxes was R$1,21331,059 million during 2018 compared to oura consolidated operating incomeloss before financial income (expenses)expenses, net, and taxes of R$4,6132,767 million in 2014.during 2017. As a percentage of net operating revenue, operating income before financial income (expenses)expenses, net, and taxes was 4.4%140.8% during 20152018 compared to 16.3% in 2014.operating loss before financial expenses, net, and taxes of 11.6% during 2017.
Financial Expenses, Net
Financial Income
Financial income increaseddeclined by 298.9%1.7% to R$5,3651,525 million in 2015during 2018 from R$1,3451,550 million in 2014,during 2017, primarily due to the increase of exchange rate gainsa 23.0% decline in interest on foreign investmentsother assets to R$3,350809 million in 2015during 2018 from R$321,050 million in 2014,during 2017, principally as a result of a decline in interest and monetary variation on judicial deposits due to a decline in average amount of these assets. The effects of this factor was partially offset by (1) anour recording R$143 million of income on short-term investments during 2018 compared to nil during 2017, and (2) a 14.3% increase in our balances invested in cash maintained offshoreother income to R$572 million during 2018 from R$500 million during 2017.
Financial Expenses
Financial expenses increased by 75.1% to R$5,537 million during 2018 from R$3,162 million during 2017, primarily as a result of our saleincurrence of PT Portugal,R$5,046 million of borrowing and finance costs during 2018 as a result of the settlement of many of the claims in our RJ Proceedings related to our debt instruments compared to no borrowing and finance costs during 2017 due to the elimination of our borrowing and financing costs as a result of the commencement of the RJ Proceedings in June 2016, the effects of which were partially offset by a 52.9% decline in other charges to R$1,491 million during 2018 from R$3,162 million during 2017.
Borrowing and finance costs during 2018 consisted of (1) inflation and exchange losses on third-party borrowings of R$2,646 million, and (2) interest on borrowings payable to third parties of R$1,400 million, primarily as a result of our recording R$16,450 million of current andnon-current loans and financings on our balance sheet as of December 31, 2018 that had been classified as liabilities subject to compromise as of December 31, 2017 and the 22.8%19.8% depreciation of therealagainst the euroU.S. dollar during the second halfperiod between the Brazilian Confirmation Date and December 31, 2018.
Other charges declined primarily as a result of:
a 51.2% decline in interest on other liabilities to R$800 million during 2018 from R$1,641 million during 2017, principally due to the commencement of 2015.
Financial Expenses
Financial expenses increased by 102.0% to R$11,903 millionour participation in 2015 from R$5,894the Tax Recovery Program (REFIS) in 2014, primarily due to:May 2017;
| • | our recording a gain on |
our recording a 38.1% increase in interestgain on loans payable to third parties and debentures toinflation adjustment of provisions for contingencies of R$4,0508 million during 2015 from2018 compared to a loss on inflation adjustment of provisions for contingencies of R$2,933265 million during 2014,2017, primarily as a result of our classificationreversal of a portion of our provision for contingencies and the related inflation adjustment due to the reprocessing of the financial resultsprovision estimation model taking into account the new profile and history of PTIFdiscontinuation of lawsuits in our financial expenses rather than as a part of our discontinued operations following the conclusioncontext of the sale of PT Portugal in June 2015.
The effects of these factors were partially offset by an increase in gains on derivatives transactions to R$5,797 million during 2015 from R$427 million during 2014, primarily as a resultapproval and ratification of the 47.0% depreciation of thereal against the U.S. dollar and the 31.7% depreciation of thereal against the Euro during 2015 compared to the 13.4% depreciation of therealagainst the U.S. dollar and the stability of therealagainst the Euro during 2014.RJ Plan.
Income Tax and Social Contribution
The composite corporate statutory income tax and social contribution rate was 34% in each of 20152018 and 2014.2017. We recorded an income tax and social contribution expensebenefits of R$3,379347 million in 2017 and R$351 million during 2015 compared2017. The effective tax rate applicable to anour income taxloss before taxes was (1.3)% during 2018 and social contribution expense of R$758 million during 2014. Thethe effective tax rate applicable to our loss before taxes was 63.5%8.0% during 2015 and the effective tax rate applicable to our income before taxes was 1,179.5% during 2014.2017. The table below sets forth a reconciliation of the composite corporate statutory income tax and social contribution rate to our effective tax rate for each of the periods presented.
| Year Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
Composite corporate statutory income tax and social contribution rate | 34.0 | % | 34.0 | % | ||||
Tax effects of valuation allowance | (89.3 | ) | (9.1 | ) | ||||
Tax effects of differentiated tax rates | (2.0 | ) | 37.0 | |||||
Tax effects of permanent additions | (5.1 | ) | 1,071.3 | |||||
Tax effects of permanent exclusions | 2.1 | (585.3 | ) | |||||
Tax effect of REFIS permanent additions | — | 689.7 | ||||||
Tax incentives (SUDENE) | 0.1 | (56.4 | ) | |||||
Tax amnesty program | (3.1 | ) | — | |||||
Tax effects of other | (0.3 | ) | (1.8 | ) | ||||
Effective rate | (63.5 | )% | 1,179.5 | % | ||||
| Year Ended December 31, | ||||
| 2018 | 2017 | |||
| Composite corporate statutory income tax and social contribution rate | 34.0% | 34.0% | ||
| Valuation allowance | 16.1 | (25.9) | ||
| Effects of foreign rate differential | 0.0 | (0.5) | ||
| Tax effects ofnon-deductible expenses | 2.4 | (2.1) | ||
| Tax effects oftax-exempt income | (53.8) | 8.5 | ||
| Tax incentives | 0.0 | 0.3 | ||
| Tax amnesty program | 0.0 | (6.3) | ||
| Other | 0.0 | 0.0 | ||
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| Effective rate | (1.3)% | 8.0% | ||
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The effective tax rate applicable to our lossincome before taxes was (63.5)(1.3) % in 2015,2018, resulting in a tax benefit despite our generating income before taxes, primarily as a result of tax effects oftax-exempt income, mostly as a result of the effects of the novation of our debt obligations due to the confirmation of the RJ Plan, which reduced our effective tax rate by 53.8%. The effects of this factor was partially offset by, the tax effects of valuation allowance, which resulted in a decline in our tax assets by R$4,7554,367 million, that were recognized for the companies that as at December 31, 2015,2018, do not expect to generate sufficient future taxable profits against which these tax assets could be offset, which increased our effective tax rate by 16.1%.
The effective tax rate applicable to our loss before taxes was 8.0% in 2017, resulting in a tax benefit, primarily as a result of (1) the tax effects of valuation allowance and valuation allowance, which resulted in a decline in our tax assets by R$1,135 million, that were recognized for the companies that as at December 31, 2017, do not expect to generate sufficient future taxable profits against which these tax assets could be offset, which reduced the effective tax rate applicable to our loss before taxes by 89.3%25.9%, (effectively increasingreducing our tax expense).
Our effective tax rate was 1,179.5% in 2014, primarily as a result of (1) the tax effect of permanent additions related to the write-off of R$266 million of tax credits related to potential loss on the shares of Pharol held by Telemar, which increased our effective tax rate by 1,071.3%,benefit) and (2) the tax effecteffects of REFIS permanent additions related toamnesty program which reduced the settlement of principal, fines and interest in amount of R$443 million payable to the Brazilian government’s tax refinancing program through the use of tax loss carryforwards as permitted by Article 2 of Law 12996/2014 and Article 33 of Law 13043/2014, which increased our effective tax rate applicable to our loss before taxes by 689.7%6.3% (effectively reducing our tax benefit). The effect of these factors waseffects which were partially offset by the tax effect of REFIS permanent exclusion related to the settlement of principal, fines and interest in amount of R$219 million payable to the Brazilian government’s tax refinancing program through the useeffects of tax loss carryforwards,exempt income, which reduced ourincreased the effective tax rate applicable to our loss before taxes by 585.3%8.5% (effectively increasing our tax benefit).
Net Loss from Continuing Operations
Our net loss from continuing operations was R$8,705 million in 2015 compared to R$694 million in 2014. As a percentage of net operating revenue, net loss from continuing operations was 31.8% in 2015 compared to 2.5% in 2014.
Net Loss from Discontinued Operations
Net loss from discontinued operations in 2015 of R$867 million consisted of a R$226 million loss related to the cumulative foreign exchange differences recognized in other comprehensive income, transferred from equity to net income from discontinued operations for the year due to the sale of PT Portugal and expenses of R$625 million of expenses related to the derecognized investment cost that includes goodwill arising on the business combination of our company with PT Portugal less selling expenses and cash received directly our company.
Net loss from discontinued operations in 2014 of R$4,086 million consisted of (1) the allowance for loss in the amount of R$3,836 million on the investment of PT Portugal resulting from the recognition of assets of PT Portugal at fair value, less selling expenses, and (2) loss from discontinued operations of PT Portugal in the amount of R$250 million. The sales price used to determine the allowance for loss corresponds to purchase price under the PTP Share Purchase Agreement of R$22,267 million (€6,900 million) and liabilities on retirement and other benefits assumed by PT Portugal, amounting to R$3,872 million (€1,200 million).
Net Income (Loss)
As a result of the foregoing, ourwe recorded consolidated net income of R$27,394 million during 2018 compared to consolidated net loss increased by 100.2% toof R$9,5724,028 million during 2015 from R$4,780 million during 2014.2017. As a percentage of net operating revenue, our net income was 124.2% during 2018 compared to net loss was 35.0%of 16.7% during 2015 and 16.9% during 2014.2017.
Year Ended December 31, 20142017 Compared with Year Ended December 31, 20132016
The following table sets forth the components of our consolidated income statement, as well as the percentage change from the prior year, for the years ended December 31, 20142017 and 2013.2016.
| Year ended December 31, | ||||||||||||||||||||||||
| 2014 | 2013 | % Change | Year ended December 31, | |||||||||||||||||||||
| (in millions ofreais, except percentages) | 2017 | 2016 | % Change | |||||||||||||||||||||
| (in millions of reais, except percentages) | ||||||||||||||||||||||||
Net operating revenue | R$ | 28,247 | R$ | 28,422 | (0.6 | ) | R$ | 23,790 | R$ | 25,996 | (8.5 | ) | ||||||||||||
Cost of sales and services | (16,257 | ) | (16,467 | ) | (1.3 | ) | (15,676 | ) | (16,742 | ) | (6.4 | ) | ||||||||||||
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Gross profit | 11,990 | 11,955 | 0.3 | 8,114 | 9,255 | (12.2 | ) | |||||||||||||||||
Operating income (expenses) | ||||||||||||||||||||||||
Selling expenses | (5,566 | ) | (5,532 | ) | 0.6 | (4,400 | ) | (4,383 | ) | 0.4 | ||||||||||||||
General and administrative expenses | (3,835 | ) | (3,683 | ) | 4.1 | (3,064 | ) | (3,688 | ) | (16.9 | ) | |||||||||||||
Other operating income (expenses), net | 2,024 | 1,243 | 62.8 | (1,043 | ) | (1,237 | ) | (15.7 | ) | |||||||||||||||
Reorganization items, net Other operating income (expenses), net | (2,732 | ) | (9,006 | ) | (69.7 | ) | ||||||||||||||||||
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Operating income before financial income (expenses) and taxes | 4,613 | 3,983 | 15.8 | |||||||||||||||||||||
Operating loss before financial expenses, net, and taxes | (2,767 | ) | (9,059 | ) | (69.5 | ) | ||||||||||||||||||
Financial expenses, net | (1,612 | ) | (4,375 | ) | (63.2 | ) | ||||||||||||||||||
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Loss before taxes | (4,379 | ) | (13,434 | ) | (67.4 | ) | ||||||||||||||||||
Income tax and social contribution | 351 | (2,245 | ) | n.m. | ||||||||||||||||||||
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Net loss | R$ | (4,027 | ) | R$ | (15,680 | ) | (74.3 | ) | ||||||||||||||||
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Financial income Financial expenses Financial expenses, net Income before taxes Income tax and social contribution Net income (loss) from continuing operations Net loss from discontinued operations Net income (loss) Year ended December 31, 2014 2013 % Change (in millions ofreais, except percentages) 1,345 1,375 (2.2 ) (5,894 ) (4,677 ) 26.0 (4,549 ) (3,302 ) 37.8 64 681 (90.6 ) (758 ) (77 ) 889.8 (694 ) 604 (214.8 ) (4,086 ) — n.m. R$ (4,780 ) R$ 604 (890.9 )
| n.m. | Not meaningful. |
Net Operating Revenue
The following table sets forth the components of our net operating revenue, as well as the percentage change from the prior year, for the years ended December 31, 20142017 and 2013.2016.
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2014 | 2013 | % Change | 2017 | 2016 | % Change | |||||||||||||||||||
| (in millions of reais, except percentages) | (in millions of reais, except percentages) | |||||||||||||||||||||||
Telecommunications in Brazil Segment: | ||||||||||||||||||||||||
Residential | R$ | 9,995 | R$ | 10,303 | (3.0 | ) | R$ | 9,171 | R$ | 9,376 | (2.2 | ) | ||||||||||||
Personal mobility | 9,011 | 9,290 | (3.0 | ) | 7,645 | 7,849 | (2.6 | ) | ||||||||||||||||
SME/Corporate | 8,312 | 8,455 | (1.7 | ) | ||||||||||||||||||||
Other services and businesses (1) | 929 | 374 | 148.4 | |||||||||||||||||||||
B2B | 6,486 | 7,607 | (14.7 | ) | ||||||||||||||||||||
Other services | 256 | 332 | (23.0 | ) | ||||||||||||||||||||
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| 23,557 | 25,164 | (6.4 | ) | |||||||||||||||||||||
Other operations(1) | 233 | 833 | (72.1 | ) | ||||||||||||||||||||
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Net operating revenue | R$ | 28,247 | R$ | 28,422 | (0.6 | ) | R$ | 23,790 | R$ | 25,996 | (8.5 | ) | ||||||||||||
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| (1) | Other |
Net operating revenue of our Telecommunications in Brazil segment declined by 0.6%6.4% during 2014,2017, principally due to (1) a 3.0%14.7% decline in net operating revenue from B2B services, and to a lesser extent, a 2.2% decline in net operating revenue from residential services, (2)and a 3.0%2.6% decline in net operating revenue from personal mobility services, and (3) a 1.7% decline inservices. In addition, net operating revenue from SME/Corporate services. These effects were partially offsetof our other operations declined by 148.4% increase in net operating revenue from other services and businesses primarily72.1%, principally as a result of our consolidationdisposition of the results of Africatel as from May 5, 2014, which generated net operating revenue of R$635 million.our interest in MTC in January 2017.
Net Operating Revenue from Residential Customer Services
Net operating revenue from residential customer services represented 35.4%38.5% of our net operating revenue for the year ended December 31, 2014.during 2017. Net operating revenue from residential services declined by 3.0%2.2%, primarily due to (1) the 6.7%3.3% decline in the average number of residential fixed-line customers; andrevenue generating units, or RGUs; (2) the decline in fixed-mobile tariffs.voice traffic, and (3) the reduction inTU-RL andTU-RIU fixed line interconnection tariffs and VCfixed-to-mobile tariffs in February 2017. These effects were partially offset by the 5.1%3.9% increase in the average monthly net residential revenue per user (calculated based on the total revenue for the year divided by the monthly average customer base for the year divided by 12) to R$74.079.6 in 20142017 from R$70.476.6 in 2013,2016, primarily due to thean increase in broadband andPay-TV revenues.
Net Operating Revenue from Residential Fixed-Line Services. Net operating revenue from residential fixed-line services declined by 6.1%9.5%, primarily due to:
Net Operating Revenue from Broadband Services. Net operating revenue from residential broadband services increased by 3.2%0.9%, primarily as a result of a 3.2%1.5% increase in the average net operating revenue per subscriber.subscriber, primarily as a result of the migration of our broadband base to service offerings with higher speed, which generate greater revenue per user. The effects of this migration were partially offset by a 0.6% decline in the average number of our residential ADSL subscribers remained stable at 5.2 million in 2014 and 2013.subscribers. As of December 31, 2014,2017, our ADSL customer basesubscribers represented 37.2%55.8% of our total residential fixed lines in service and subscribed to plans with an average speed of 8.3 Mbps as compared to 52.2% of our total residential fixed lines in service at an average speed of 6.8 Mbps as of December 31, 2016.
Net Operating Revenue fromPay-TV Services. Net operating revenue from residentialPay-TV services increased by 22.9%, primarily as a result of a 16.0% increase in the average number of our residentialPay-TV subscribers increased to 1.5 million during 2017 from 1.3 million during 2016, and a 5.9% increase in the average net operating revenue per subscriber, principally as a result of the shift in the our sales mix towards more comprehensive packages of channels. As of December 31, 2017, ourPay-TV subscribers represented 16.2% of our total residential fixed lines in service as compared to 33.9%13.0% of our total residential fixed lines in service as of December 31, 2013.
Net Operating Revenue from Pay-TV Services. Net operating revenue from residential Pay-TV services increased by 11.3%, primarily as a result of the increase in the number of our residential Pay-TV subscribers to 1.2 million during 2014 from 0.9 million during 2013.2016.
Net Operating Revenue from Personal Mobility Services
Net operating revenue from personal mobility services represented 31.9%32.1% of our net operating revenue for the year ended December 31, 2014.during 2017. Net operating revenue from personal mobility services declined by 3.0%2.6%, primarily asdue to (1) a result of the reduction20.2% decline in VU-Mmobile interconnection tariffs. This effect was partially offset by an increase in pre-paid recharge revenues, mobile data revenue, and sales of handsets.(2) a 1.2% decline in revenue from mobile telephony services.
Net Operating Revenue from Mobile Telephony Services. Net operating revenue from mobile telephony services increaseddeclined by 3.0%1.2%, primarily due to (1) to:
a 0.7% increase9.3% decline in the number of our pre-paid mobile customers that subscribe to 41.3our prepaid plans to 29.9 million during 20142017 from 41.133.0 million during 2013,2016, principally as a result of (1) an increase in Brazil’s unemployment rate as our sales net additions of prepaid subscribers is closely correlated to movements in the unemployment rate, (2) the migration of prepaid customers in Brazil to the use of a single SIM card as operators have increased the offer of“all-net” plans following the successive reductions of the MTR tariffs, and (3) our strict disconnection policy for inactive customers, which is designed to reduce fee payments that we must make for each active account; and
a 2.1% decline in the number of mobile customers that subscribe to our postpaid plans to 6.7 million during 2017 from 6.9 million during 2016.
The effects of these declines were partially offset by a 7.5% increase in average monthly net revenue per user, primarily as a result of an increaseimprovement in pre-paid recharge revenue and mobilethe profile of our customer base. During 2017, data revenue primarilyrepresented 53.9% of net operating revenue from mobile telephony services as a result of our launches of new promotions that include bonus minutes, packages of data services and credits for use for our text messaging services, and (2) 6.4% increase in the number of our post-paid mobile customerscompared to 7.1 million47.2% during 2014 from approximately 6.7 million during 2013, primarily as a result of the success of commercial and operational initiatives focused on increasing sales of our premium services, such as data services and value added services, that are available to subscribers of our plans. These effects were partially offset by a 5.9% decline in the average monthly net mobile revenue per user to R$18.7 in 2014 from R$20.4 in 2013.2016.
Net Operating Revenue from Interconnection to Our Mobile Network. Mobile interconnection revenue declined by 34.8%20.2% in 2014,2017, primarily as a result of the reduction in VU-M interconnectionMTR tariffs in February 2014.2017.
Net Operating Revenue from Sales of Handsets and Accessories.Net operating revenue from sales of handsets and accessories increased by 50.7% as a result of our strategy of selling premium mobile devices, such as smart phones, as part of our efforts to acquire new high value customers and retain existing ones.
Net Operating Revenue from SME and CorporateB2B Services
Net operating revenue from SME and corporateB2B services represented 29.4%27.3% of our net operating revenue for the year ended December 31, 2014.during 2017. Net operating revenue from SME and corporateB2B services declined by 1.7%14.7%, primarily as a result of (1) lower voice traffic, following the decreasenatural market trend, (2) the reduction in fixed-mobile and mobile interconnectionMTR tariffs and (2) a 4.0% declineVCfixed-to-mobile tariffs in February 2017, (3) the number of SMEslowdown in Brazilian economic activity, which has led to efforts by corporate and corporategovernment customers to 7.9 million during 2014 from 8.2 million during 2013. These effects were partially offset byreduce costs, including telecommunications services costs, and has led to the increase in revenues from IT and data corporate services.
Net Operating Revenue from SME Services. Net operating revenue from SME services increased by 1.0%, primarily as a resultdownsizing or closing of an increased demand for these services.
Net Operating Revenue from Corporate Services. Net operating revenue from corporate services declined by 2.9%, primarily as a result of (1) the decrease in fixed-mobile and mobile interconnection tariffs, and (2) the 4.0% decline in the average numbermany of our SME customers, and (4) market perceptions of our company during our RJ proceedings which has made it difficult for us to enter into new agreements with corporate customers.
Gross Profit
As a result of the 0.6%these factors, we experienced a 1.6% decline in net operating revenue in 2014, coupled withthe total number of B2B customers to 6.5 million during 2017 from 6.6 million during 2016, principally as a result of a 3.2% decline in cost of sales and services of 1.3%fixed line customers, partially offset by a 1.1% increase in 2014, our consolidated gross profit increased by 0.3% to R$11,990 million in 2014 from R$11,955 million in 2013. As a percentage of net operating revenue, gross profit increased to 42.4% in 2014 from 42.1% in 2013.mobile customers.
Operating Expenses
The following table sets forth the components of our operating expenses, as well as the percentage change from the prior year, for the years ended December 31, 20142017 and 2013.2016.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2014 | 2013 | % Change | Year Ended December 31, | |||||||||||||||||||||
| (in millions of reais, except percentages) | 2017 | 2016 | % Change | |||||||||||||||||||||
| (in millions of reais, except percentages) | ||||||||||||||||||||||||
Third-party services | R$ | 6,259 | R$ | 6,120 | 2.3 | R$ | 6,221 | R$ | 6,399 | (2.8 | ) | |||||||||||||
Depreciation and amortization | 5,767 | 5,692 | 1.3 | 5,881 | 6,311 | (6.8 | ) | |||||||||||||||||
Rental and insurance | 3,120 | 2,120 | 47.2 | 4,163 | 4,330 | (3.9 | ) | |||||||||||||||||
Personnel | 2,829 | 2,534 | 11.6 | 2,791 | 2,852 | (2.1 | ) | |||||||||||||||||
Network maintenance services | 1,252 | 1,540 | (18.7 | ) | ||||||||||||||||||||
Interconnection | 2,690 | 3,966 | (32.2 | ) | 778 | 1,173 | (33.7 | ) | ||||||||||||||||
Network maintenance services | 1,923 | 2,328 | (17.4 | ) | ||||||||||||||||||||
Taxes and other income (expenses) | 1,460 | 1,398 | 4.4 | |||||||||||||||||||||
Contingencies | 779 | 657 | 18.6 | 144 | 1,056 | (86.4 | ) | |||||||||||||||||
Costs of handsets and accessories | 730 | 515 | 41.7 | |||||||||||||||||||||
Allowance for doubtful accounts | 692 | 643 | 7.5 | |||||||||||||||||||||
Advertising and publicity | 674 | 557 | 21.2 | 414 | 449 | (7.9 | ) | |||||||||||||||||
Allowance for doubtful accounts | 649 | 923 | (29.6 | ) | ||||||||||||||||||||
Handsets and other costs | 223 | 284 | (21.4 | ) | ||||||||||||||||||||
Impairment losses | 47 | 226 | (79.4 | ) | ||||||||||||||||||||
Taxes and other expenses | 345 | 559 | (38.3 | ) | ||||||||||||||||||||
Other operating income (expenses), net | (3,246 | ) | (2,370 | ) | 37.0 | 1,233 | 227 | n.m | ||||||||||||||||
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Total cost of sales and services | R$ | 23,634 | R$ | 24,440 | (3.3 | ) | R$ | 24,184 | R$ | 26,049 | (7.2 | ) | ||||||||||||
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| n.m. | Not meaningful. |
Operating expenses declined by 3.3%7.2% in 2014,2017, principally due to:
a 32.2%86.4%, or R$1,276912 million, decline in contingencies;
a 6.8%, or R$429 million, decline in depreciation and amortization costs;
a 33.7%, or R$395 million, decline in interconnection costs;
a 37.0%18.7%, or R$876 million, increase in other operating income, net;
a 29.6%38.3%, or R$273214 million, decline in the allowance for doubtful accounts.taxes and other expenses.
The effects of these factors were partially offset by the increasesour incurrence of R$1,233 million in other operating expenses, below:
during 2016.
Third-Party Services
Third-party service costs increaseddeclined by 2.3%2.8% in 2014,2017, primarily as a result of the increase inlower call center expenses on Pay-TV contentas a result of our adoption of our new customer care model and the implementationlower legal advisory and consulting services expenses as a result of IT projects for the 2014 FIFA World Cup.a reduction of judicial processes. The effects of these expendituresfactors were partially offset by a decline in expenses on consultinghigher content acquisition costs for ourPay-TV services and lower call center costs as a result of more efficientthe 16.0% increase in the average number of our residentialPay-TV subscribers, an increase in sales processes.commission expenses as a result of an increase in sales of higher value services, and a reduction in energy costs.
Depreciation and Amortization
Depreciation and amortization costs increaseddeclined by 1.3%6.8% in 2014,2017, primarily as a result of the growth of our 4G network, which has increasedincrease in the amount of our amortizable license costs and depreciablethe property, plant and equipment.equipment that has been fully depreciated.
Rental and Insurance
Rental and insurance costs increaseddeclined by 47.2%3.9% in 2014,2017, primarily as a result of (1) an increasedecline inreaisof certain rental costsexpenses denominated in U.S. dollars as a result of the appreciation ofreal against U.S. dollar during 2017, particularly expenses relating to our network infrastructureagreements with GlobeNet and our lease of capacity on theSES-6 satellite, and (2) the absence of expenses during 2017 relating to settlement agreements with other operators we entered into in 2016 related to the leasing of towers and equipment. The effects of these factors was partially offset by (1) increased tower and equipment leasing costs, and (2) increased vehicles leasing costs as a result of our saleabsorption of non-strategic assets, including GlobeNet, fixed-line communications towers and mobile communications towers, (2) an increase in rental expenses relating to our leasing of capacity on the SES-6 satellite in order to provide our own head-end DTH services within Brazil, and (3) annual contractual adjustments under our other rental agreements.network maintenance operations.
Personnel
Personnel expenses (including employee benefits and social charges and employee and management profit sharing) increaseddeclined by 11.6%2.1% in 2014,2017, primarily as a result of an(1) headcount reductions that we implemented in May 2016 and in the fourth quarter of 2016, and (2) initiatives that that we have implemented to promote greater efficiency and productivity as well as stricter cost controls related in personnel expenses. The effects of these factors were partially offset by (1) the increase in the number of our employees as a result of our internalizing a portionabsorption of our plant maintenancenetwork service operations in 2013,the state of Rio de Janeiro and in the South, North and Northeast regions in 2016, (2) increases in the compensation of some of our employees as a result of the renegotiation of some of our collective bargaining agreements at the end of 2013.
Interconnection
Interconnection costs declined by 32.2%, primarily as a result2016, (3) increased provisions for variable compensation related to the fulfillment of the 25% decline in VU-M interconnection tariffs that was mandatedoperational, financial and quality goals established for February 2014 and the decline in off-net mobile voice traffic, which reflects the success2017 under some of our offerscollective bargaining agreements, and (4) our implementation of certain strategic projects that incentivize on-net traffic.have resulted in the insourcing of services that used to be provided by third parties in order to improve quality and productivity in some of our critical processes.
Network Maintenance Services
Network maintenance services costs declined by 17.4%18.7% in 2014,2017, primarily as a result of (1) our internalizingabsorption of network service operations in the state of Rio de Janeiro and in the South, North and Northeast regions in 2016, as a portionresult of which we no longer incur costs to third parties for these services, and our focus on conducting more efficient field operations focused on increased productivity and preventive actions. The effects of this factor were partially offset by our insourcing of technical support call center operations in 2017 and annual readjustments of costs under our contracts.
Interconnection
Interconnection costs declined by 33.7% in 2017, primarily as a result of the declines in MTR tariffs and theTU-RL andTU-RIU interconnection tariffs that were implemented in February 2017 and February 2016. The effects of these factors were partially offset by an increase inoff-net mobile traffic volume as a result of our plant maintenance operationsintroduction of new mobile plans based on the“all-net” model.
Contingencies
In 2016, contingencies included R$858 million related to labor contingencies of Rede Conecta – Serviços de Rede S.A., or Rede Conecta (which merged into Serede in 2013;November 2018).
Allowance for Doubtful Accounts
Allowance for doubtful accounts increased by 7.5% in 2017, primarily as a result of an increase in consumer default rates as a result of the deterioration Brazilian macroeconomic conditions. During the year ended December 31, 2017, allowance for doubtful accounts represented 2.9% of our net operating revenue compared to 2.5% in 2016.
Advertising and (2) actions takenPublicity
Advertising and publicity expenses declined by 7.9% in 2017, primarily as a result of a decline in the volume of our advertising campaigns.
Handsets and Other Costs
Handsets and other costs declined by 21.4% in 2017, primarily due to supportthe lower volume of handset sales.
Impairment Losses
Impairment losses declined by 79.4% in 2017. Impairment losses in 2017 and 2016 consisted of losses on goodwill relating to Africatel, which is reported as aheld-for-sale asset, as a result of our commitment to enhance efficiency and productivity and procedures that we adopted to reduce costs.annual impairment testing.
Taxes and Other Expenses
Taxes and other expenses increaseddeclined by 4.4%38.3% in 2014, primarily as a result of a R$60 million increase in PIS and COFINS taxes recorded on the increased distributions of interest on shareholders equity received from some of our subsidiaries.
Contingencies
Contingencies increased by 18.6% in 2014, primarily as a result of a R$116 million increase in labor provisions in 2014, compared to a R$154 million reversal of labor provisions in 2013, principally due to our revision of the methodology used to calculate the provisions for losses in labor lawsuits. These effects were partially offset by a decline in provision for civil claims to R$340 million in 2014 from R$528 million in 2013,2017, primarily due to revisiona decrease in 2014 of the methodology we useother tax expenses, due to calculate the provisionsa decrease in other revenues in which other taxes are associated and a decrease in expenses for lossesfines.
Other Operating Expenses, Net
Other operating expenses, net increased to R$1,233 million in civil lawsuits (principally, lawsuits involving the financial participation agreements), including statistical techniques as a result of the greater experience that we have accumulated2017 from R$227 million in this matter.
Costs of Handsets and Accessories
Costs of handsets and accessories increased by 41.7% in 2014,2016, primarily as a result of the increase in saleeffects of smartphonesnon-recurring expenses related to unrecoverable tax,write-off of other assets and other expenses due to the reconciliation of accounting balances as part of our strategic initiativethe RJ Proceedings.
Reorganization Items, Net
Reorganization items, net declined by 69.7% to R$2,732 million during 2017 from R$9,006 million during 2016. Reorganization items, net during 2017 consisted of (1) a R$1,569 million increase our mobile data communications revenue.
Advertising and Publicity
Advertising and publicity expenses increased by 21.2% in 2014, primarily as a result of increased costs of advertising campaigns relatedthe amount recorded relating to our Oi TV service, and costscontingent liabilities owed to ANATEL to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of advertising campaigns relatedthe RJ Proceedings, (2) a R$736 million increase of the amount recorded relating to our sponsorshipcontingent liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the 2014 FIFA World Cup.RJ Proceedings, (3) inflation adjustment of contingencies of R$410 million, and (4) fees and expenses of R$370 million of professional advisors who are assisting us with the RJ Proceedings. The effects of these expenses were partially offset by our recognition of income from short-term investments of R$713 million, which were recognized as reorganization items.
Allowance for Doubtful Accounts
Allowance for doubtful accounts declined by 29.6% in 2014, primarily asReorganization items, net during 2016 consisted of (1) a resultR$6,604 million increase of the improvement of our credit policy as part of measures we adopted to lower our churn rate and improve the quality of our customer base. During the year ended December 31, 2014, allowance for doubtful accounts represented 2.3% of our net operating revenue compared to 3.2% in 2013.
Other Operating Income (Expenses), Net
Other operating income (expenses), net increased by 37.0% to R$3,246 million in 2014 from R$2,370 million in 2013. The principal components of other operating income (expenses), net in 2014 were:
The principal components of other operating income (expenses), net in 2013 were:
Operating IncomeLoss before Financial Income (Expenses)Expenses, Net, and Taxes
As a result of the foregoing, the operating loss before financial expenses, net, and taxes of our Telecommunications in Brazil segment declined by 70.1%, to R$2,697 million during 2017 from R$9,008 million during 2016. As a percentage of net operating revenue, the operating loss before financial expenses, net, and taxes of our Telecommunications in Brazil segment declined to 11.4% during 2017 from 35.8% during 2016.
Operating expenses of our other operations declined by 68.5% to R$303 million during 2017 from R$884 million during 2016, principally as a result of our disposition of our interest in MTC in January 2017. The operating loss before financial expenses, net, and taxes of our other operations increased by 37.5%, to R$70 million during 2017 from R$51 million during 2016. As a percentage of net operating revenue, the operating loss before financial expenses, net, and taxes of our other operations increased to 30.0% during 2017 from 6.1% during 2016.
Our consolidated operating incomeloss before financial income (expenses)expenses, net, and taxes increaseddeclined by 7.3%69.5%, to R$5,6752,767 million in 2014during 2017 from R$5,2879,059 million in 2013.during 2016. As a percentage of net operating revenue, operating incomeloss before financial income (expenses)expenses, net, and taxes increaseddeclined to 20.1% in 201411.6% during 2017 from 18.6% in 2013.34.8% during 2016.
Financial Expenses, Net
Financial Income
Financial income declinedincreased by 2.2%32.4% to R$1,3451,550 million in 2014during 2017 from R$1,3751,171 million in 2013,during 2016, primarily due to:
Financial Expenses
Financial expenses declined by 43.0% to R$323,162 million in 2014during 2017 from R$785,546 million during 2016, primarily due to the elimination of our borrowing and financing costs in 2013;2017 as a result of the commencement of the RJ Proceedings in June 2016, compared to our borrowing and
Other charges increased primarily as a result of (1) a 174.3% increase in interest on other liabilities to R$1,641 million during 2017 from R$598 million during 2016, principally due to the commencement of our participation in the Tax Recovery Program (REFIS) in May 2017, and (2) a 158.6% increase in other expenses to R$450 million during 2017 from R$174 million during 2016. The effects of these factors was partially offset by (1) a 27.3% increase75.5% decline in income from short-term investmentsloss on available for sale financial assets to R$355267 million during 20142017 from R$2791,090 million during 2013, primarily2016, principally as a result of an increase in the averagereduction of the loss recorded based on our revision of the recoverable amount of our short-term investments,dividends receivable from Unitel, the fair value of the cash investment in Unitel and exchange losses rate related to the depreciation of the Angolan Kwanza against the U.S. dollar and thereal to US$39 million during 2017 from US$242 million during 2016, and (2) a 9.8% increase in interest and inflation adjustments on other assets to R$762 million during 2014 from R$695 million during 2013, primarily as a result of an increase in average amount of our other assets.
Financial Expenses
Financial expenses increased by 26.0% to R$5,893 in 2014 from R$4,677 million in 2013, primarily due to:
The effects of these factors were partially offset by a 27.2% decline in inflation adjustment and exchange differences on third party borrowing to R$1,465 million during 2014 from R$2,013 million during 2013, primarily as a result of the 13.4% depreciation of therealagainst the U.S. dollar and the stability of therealagainst the Euro during 2014 compared to the 14.6% depreciation of thereal against the U.S. dollar and the 19.7% depreciation of thereal against the Euro during 2013.RJ Proceedings.
Income Tax and Social Contribution
The composite corporate statutory income tax and social contribution rate was 34% in each of 20142017 and 2013. Income2016. We recorded an income tax and social contribution expense increased by 889.8% tobenefits of R$758351 million in 2014 fromduring 2017 and an income tax and social contribution expenses of R$772,245 million in 2013. Ourduring 2016. The effective tax rate applicable to our loss before taxes was 1,179.5% in 20148.0% during 2017 and 11.2% in 2013.(16.7)% during 2016. The table below sets forth a reconciliation of the composite corporate statutory income tax and social contribution rate to our effective tax rate for each of the periods presented.
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
Composite corporate statutory income tax and social contribution rate | 34.0% | 34.0% | ||||||
Valuation allowance | (25.9 | ) | (30.1 | ) | ||||
Effects of foreign rate differential | (0.5 | ) | (0.1 | ) | ||||
Tax effects ofnon-deductible expenses | (2.1 | ) | (21.5 | ) | ||||
Tax effects oftax-exempt income | 8.5 | 0.9 | ||||||
Tax incentives | 0.3 | 0.2 | ||||||
Tax amnesty program | (6.3 | ) | — | |||||
Other | 0.0 | 0.0 | ||||||
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Effective rate | 8.0% | (16.7)% | ||||||
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Composite corporate statutory income tax and social contribution rate Tax effects of valuation allowance Tax effects of differentiated tax rates Tax effects of permanent additions Tax effects of permanent exclusions Tax effect of REFIS permanent additions Tax incentives (SUDENE) Tax amnesty program Tax effects of other Effective rate Year Ended December 31, 2014 2013 34.0 % 34.0 % (9.1 ) 10.1 37.0 1.9 1,071.3 11.2 (585.3 ) (41.2 ) 689.7 — (56.4 ) (4.6 ) — — (1.8 ) (0.1 ) 1,179.5 % 11.2
OurThe effective tax rate applicable to our loss before taxes was 1,179.5%8.0% in 2014,2017, resulting in a tax benefit, primarily as a result of (1) the tax effecteffects of permanent additions relatedvaluation allowance and valuation allowance, which resulted in a decline in our tax assets by R$1,135 million, that were recognized for the companies that as at December 31, 2017, do not expect to the write-off of R$266 million ofgenerate sufficient future taxable profits against which these tax credits related to potential loss onassets could be offset, which reduced the shares of Pharol held by Telemar, which increased our effective tax rate applicable to our loss before taxes by 1,071.3%25.9%, (effectively reducing our tax benefit) and (2) the tax effecteffects of REFIS permanent additions related toamnesty program which reduced the settlement of principal, fines and interest in amount of R$443 million payable to the Brazilian government’s tax refinancing program through the use of tax loss carryforwards as permitted by Article 2 of Law 12996/2014 and Article 33 of Law 13043/2014, which increased our effective tax rate applicable to our loss before taxes by 689.7%6.3% (effectively reducing our tax benefit). The effect of these factors waseffects which were partially offset by the tax effect of REFIS permanent exclusion related to the settlement of principal, fines and interest in amount of R$219 million payable to the Brazilian government’s tax refinancing program through the useeffects of tax loss carryforwards,exempt income, which reduced our effective tax rate.
Ourincreased the effective tax rate applicable to our loss before taxes by 8.5% (effectively increasing our tax benefit).
The effective tax rate applicable to our loss before taxes was 11.2%(16.7)% in 2013,2016, resulting in a tax expense despite our incurring a loss before taxes, primarily as a result of the tax effect of permanent exclusions, primarily as a result of prescribed dividends and other permanent exclusions, which decreased our effective tax rate by 41.2%. The effect of these factors was partially offset by (1) the tax effect of permanent additions, primarily as a result of non-deductible fines, tax incentives and sponsorships, which increased our effective tax rate by 11.2%, and (2) the tax effecteffects of valuation allowance, which resulted in a decline in our tax assets by R$694,050 million and increased ourthat were recognized for the companies that, as at December 31, 2016, do not expect to generate sufficient future taxable profits against which these tax assets could be offset, which reduced the effective tax rate applicable to our loss before taxes by 10.1%30.1% (effectively increasing our tax expense), and (2) the tax effects ofnon-deductible expenses, primarily as a result of the effects of the adjustments of debt obligations due to the filing of the judicial reorganization petitions and based on the RJ Plan, which reduced the effective tax rate applicable to our loss before taxes by 21.5% (effectively increasing our tax expense).
Net Income (Loss) from Continuing Operations
Our net loss from continuing operations was R$695 million in 2014 compared to net income from continuing operations of R$604 million in 2013. As a percentage of net operating revenue, net loss from continuing operations was 2.5% in 2014 compared to net loss from continuing operations of 2.1% in 2013.
Net Loss from Discontinued Operations
Net loss from discontinued operations in 2014 of R$4,086 million consisted of (1) the allowance for loss in the amount of R$3,836 million on the investment of PT Portugal resulting from the recognition of assets of PT Portugal at fair value, less selling expenses, and (2) loss from discontinued operations of PT Portugal in the amount of R$250 million.
Net Income
As a result of the foregoing, we recorded aour consolidated net loss ofdeclined by 74.3% to R$4,7804,027 million during 2014 compared to consolidated net income of income2017 from R$60415,680 million during 2013.2016. As a percentage of net operating revenue, our net loss wasdeclined to 16.9% during 2014 compared to net income of 2.1% in 20132017 from 60.3% during 2016.
Liquidity and Capital Resources
Our principal cash requirements consisthave historically consisted of the following:
working capital requirements;
capital expenditures related to investments in operations, expansion of our networks and enhancements of the technical capabilities and capacity of our networks; and
dividends on our shares, including in the form of interest attributable to shareholders’ equity.
UnlessAs a result of the commencement of the RJ Proceedings in June 2016, we ceased to pay principal and interest on our loans and financings subsequent to the date of the commencement of the RJ Proceedings. By operation of the RJ Plan and the Brazilian Confirmation Order, provided that the Brazilian Confirmation Order is not overturned or altered as a result of the pending appeals filed against it, our loans and financings were novated and discharged under Brazilian law and creditors under our loans and financings are entitled only to receive the recoveries set forth in the RJ Plan as recoveries for their claims in accordance with the terms and conditions of the RJ Plan.
Under ourby-laws, unless our board of directors deems it inconsistent with our financial position, payment of dividends is mandatorymandatory. Notwithstanding the requirements of ourby-laws, under our by-lawsthe RJ Plan, we are prohibited from declaring or paying dividends, interest on shareholders’ equity or other forms of return on capital or making any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) until the sixth anniversary of the date of the Judicial Ratification of the RJ Plan. After the sixth anniversary of the date of the Judicial Ratification of the RJ Plan, Oi and consequently, may give risethe other RJ Debtors will be permitted to significant cash requirementsdeclare or pay dividends, interest on shareholders’ equity or other forms of return on capital or make any other payment or distribution on or related to their shares (including any payment related to a merger or consolidation) if Oi meets a certain financial ratio, as described under “Item 8. Financial Information—Dividends and Dividend Policy.” There shall not be any restriction to the distribution of dividends under the RJ Plan after the full payment of the Financial Credits (as defined in future periods.the RJ Plan). The restrictions of the payment of dividends and other distributions described in this paragraph are subject to certain exceptions, as described under “Item 8. Financial Information—Dividends and Dividend Policy.”
Our principal sources of liquidity have traditionally consisted of the following:
cash flows from operating activities;
short-term and long-term loans; and
sales of debt securities in domestic and international capital markets;markets.
As a result of the commencement of our RJ Proceedings in June 2016, our access to short-term and
During 2015,the years ended December 31, 2018, 2017 and 2016, our operations generated negative cash flows of R$1,0542,863 million, R$4,402 million and R$3,100 million, respectively. We used R$6,224 million of our cash to repay loans and financings in 2016 prior to the commencement of the RJ Proceedings. In addition, our capital expenditures during the years ended December 31, 2018, 2017 and 2016 were R$5,246 million, R$4,344 million and R$3,264 million, respectively. We believe that our continued program of capital expenditures is necessary in order for us to operate in the competitive environment for telecommunications services in Brazil. As our cash flow generated from our operations has not been sufficient to meet the demands of our investing and financing activities, our balances of cash and cash equivalents have declined as of December 31, 2018, 2017 and 2016.
As of December 31, 2018, our consolidated cash and cash equivalents and cash investments amounted to R$4,624 million. As a result,of December 31, 2018, we financed investing activities, debt service andhad working capital (consisting of current assets less current liabilities, excluding assetsheld-for-sale and liabilities ofassets-held-for-sale) of R$6,677 million.
We anticipate that we will be required to spend approximately R$4,461 million to meet our long-term contractual obligations and commitments in 2020 and 2021. We expect to use our cash flows from operating activities and our cash and cash equivalents and short-term cash investments. Asinvestments to fund our capital expenditures and debt service obligations.
The RJ Plan permits us to seek to raise up to R$2.5 billion in the capital markets and seek to borrow up to R$2 billion under new export credit facilities. In the absence of December 31, 2015,funds obtained in the capital markets or under new credit export facilities, we may have insufficient funds to implement our consolidatedcapital expenditure program and modernize our infrastructure, which could result in a significant deterioration of our ability to generate cash and cash equivalents and short-term cash investments amounted to R$16,700 million. As of December 31, 2015, we had working capital of R$12,609 million, which includes net assets and liabilities held for sale of R$6,941 million.flows from operating activities.
Our audited consolidated financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going concern. Our management’s assessment of our ability to continue as a going concern basedis discussed in note 2 to our audited consolidated financial statements. As a result the completion on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the successJanuary 25, 2019 of the efforts to identify and implement financial and strategic alternatives to optimizecapital increase that was mandated by the liquidity and debt profile.
Should one or moreRJ Plan through the issuance of 3,225,806,451 Common Shares for an aggregate subscription price of R$4,000 million in our preemptive offering, our management believes that as of the assumptions underlying our cash flow projections and other forecasts ordate of this annual report, we have sufficient resources to continue to operate for the outcome12 months following the date of the efforts to identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our working capital may not be sufficient for our requirements during 2016.this annual report.
Cash Flow
Cash Flows from Operating ActivitiesThe following table sets forth certain information about our consolidated cash flows for the years ended December 31, 2018, 2017 and 2016.
| Year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| (in millions ofreais) | ||||||||||||
Net cash generated (used) in operating activities | R$ | 2,863 | R$ | 4,402 | R$ | 3,100 | ||||||
Net cash (used) generated in investing activities | (4,917 | ) | (4,422 | ) | (3,917 | ) | ||||||
Net cash (used) generated in financing activities | (424 | ) | (692 | ) | (6,119 | ) | ||||||
Foreign exchange differences on cash equivalents | 1 | 11 | (398 | ) | ||||||||
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Net decrease in cash and cash equivalents | (2,477 | ) | (701 | ) | (7,335 | ) | ||||||
Cash and cash equivalents at the beginning of the year | 6,863 | 7,563 | 14,898 | |||||||||
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Cash and cash equivalents at the end of the year | R$ | 4,385 | R$ | 6,863 | R$ | 7,563 | ||||||
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Our primary source of operating funds has historically been cash flow generated from our operations. However, during 2015, our operations generated negative cash flows of R$1,054 million. As a result, cash flows provided by our operating activities were not sufficient for our cash requirements related to operations. Historically,and we have financed our investments in property, plant and equipment through the use of bank loans, vendor financing, capital markets and other forms of financing. Our access to new funds to finance our investments in property, plant and equipment in the form of bank loans, vendor financing, capital markets and other forms of financing has been substantially eliminated following the commencement of our RJ proceedings in June 2016. During 2015,2016, we financed investing activities, debt service and working capital fromused a substantial portion of our cash and cash equivalents to pay indebtedness as it matured prior to the commencement of our RJ proceedings. As our cash flow generated from our operations has not been sufficient to meet the demands of our investing and short-termfinancing activities, our balances of cash investments.and cash equivalents have declined as of December 31, 2016, 2017 and 2018.
Net cash used by operating activities was R$1,054 million during 2015, after giving effect to net cash provided by discontinued operations of R$485 million. 2018 Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$5,5312,863 million during 2014, including cash flow from discontinued operations2018 compared to net income of R$1,878 million, and R$7,03527,394 million during 2013.
The R$6,584 million deterioration of our operating cash flows during 2015 was2018, primarily as a result of:
The effects of this factor were partially offset by (1) the effects of a 74.2% decline in operating cash flows generated by discontinued operations toour incurrence ofnon-cash depreciation and amortization expenses of R$4855,953 million during 2015 from2018, (2) our incurrence ofnon-cash losses on financial instruments of R$1,8783,415 million during 2014,2018, primarily as a result of our recording PT PortugalR$16,450 million of current andnon-current loans and financings on our balance sheet as discontinued operations for eight monthsof the Brazilian Confirmation Date that had been classified as liabilities subject to compromise as of December 31, 2017 and the 19.8% depreciation of therealagainst the U.S. dollar during 2015 compared to five months during 2014;the period between the Brazilian Confirmation Date and
These factors reducing our operating cash flows were partially offset by:
Operating cash flow declined by 21.4%, or R$1,505 million, to R$5,531 million during 2014 from R$7,035 million during 2013,2018, primarily as a result of:
These factors reducing our operating cash flows were partially offset by:
Cash Flows Used infrom Investing Activities
Investing activities provided net cash of R$12,543 million during 2015, giving effect to netNet cash used by discontinued operations ofinvesting activities was R$195 million, and used net cash of R$4,3034,917 million during 2014, including cash used by discontinued operations2018, primarily consisting of R$2,813 million, and R$6,770 million during 2013.
During 2015, investing activities of our continuing operations which provided cash primarily consisted of our sale of PT Portugal which generated cash of R$17,218 million. During 2015, investing activities of our continuing operations for which we used cash primarily consisted of (1) investments of R$3,6815,246 million in purchases of property, plant and equipment and intangible assets, primarily related to the expansion of our data communications network and IT capacity to increase the implementationquality and capacity of projectsour network in order to meet ANATEL’s regulatory requirements,promote more efficient operational performance and improvements in service quality and customer experience.
Cash Flows from Financing Activities
Financing activities used net cash of R$424 million during 2018, primarily consisting of cash used (1) to repay principal of R$162 million related to the mediation of payments of our borrowings and financing as a result of the RJ Proceedings, and (2) net judicial deposits (consisting of deposits less redemptions)to make installment payments under our tax refinancing plan in the aggregate amount of R$1,006265 million.
2017 Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$4,402 million during 2017 compared to net loss of R$4,028 million during 2017, primarily relatedas a result of:
the effects of our incurrence ofnon-cash depreciation and amortization expenses of R$5,881 million during 2017; and
the effects of our incurrence ofnon-cash provision for reorganization items, net of R$2,371 million during 2017, primarily as a result of (1) a R$1,569 million increase of the amount recorded relating to provisionsour contingent liabilities owed to ANATEL to the amount allowed for labor, taxesthese claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings (2) a R$1,146 million increase of the amount recorded relating to our contingent liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings, and civil contingencies.(3) fees and expenses of R$370 million of professional advisors who are assisting us with the RJ Proceedings.
Cash Flows from Investing Activities
During 2014,Net cash used by investing activities of our continuing operations forwas R$4,422 million during 2017. During 2017, investing activities which we used cash primarily consisted of (1) investments of R$5,3704,344 million in purchases of property, plant and equipment and intangible assets, primarily related to the expansion of our data communications network and IT capacity to increase the acquisitionquality and capacity of our 4G authorizationnetwork in order to promote more efficient operational performance and improvements in service quality and customer experience.
Cash Flows from Financing Activities
Financing activities used net cash of R$692 million during 2017. During 2017, we used cash principally (1) to purchase shares the 50% of the shares of Rio Alto that we did not own for R$300 million, (2) to make installment payments under the tax refinancing plan in the aggregate amount of R$227 million, and (3) to make installment payments relating to our permits and concessions in the aggregate amount of R$104 million.
2016 Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$3,100 million during 2016 compared to net loss of R$15,680 million during 2016, primarily as a result of:
the effects of our incurrence ofnon-cash provision for reorganization items, net of R$9,006 million during 2016, primarily as a result of (1) a R$6,600 million increase of the amount recorded relating to our contingent liabilities owed to ANATEL to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings, (2) a R$2,350 million increase of the amount recorded relating to our contingent liabilities to the amount allowed for these claims in the RJ Proceedings, which was greater than their carrying amount prior to the commencement of the RJ Proceedings, and (2) fees and expenses of R$253 million of professional advisors who are assisting us with the RJ Proceedings;
the effects of our incurrence ofnon-cash provision for contingencies of R$1,056 million, primarily as a result of an increase of the amount recorded relating to our other contingent liabilities;
the effects of our incurrence ofnon-cash depreciation and amortization expenses of R$6,311 million during 2016;
the effects of our incurrence ofnon-cash deferred income tax expenses of R$1,532 million during 2016, primarily as a result of valuation allowance of deferred taxes, net of the increase in deferred tax recognized; and
| • | the effects of our incurrence ofnon-cash losses on derivative financial instruments of R$5,150 million during 2016 prior to our reversal of our derivative financial instruments during the second and third quarters of 2016, primarily as a result of the 17.8% appreciation of therealagainst the U.S. dollar and the 16.7% appreciation of therealagainst the Euro during the first half of 2016. |
The effects of these factors were partially offset by the effects of our incurrence ofnon-cash gains on financial instruments of R$5,343 million during 2016, primarily as a result of the 17.8% appreciation of therealagainst the U.S. dollar and the implementation16.7% appreciation of projects to meet ANATEL’s regulatory requirements, and (2) net judicial deposits (consistingtherealagainst the Euro during the first half of deposits less redemptions) of R$938 million, primarily related to provisions for labor, taxes and civil contingencies. 2016.
Cash Flows from Investing Activities
During 2014,2016, investing activities generated cash flows of (1) R$4,454 million from the sale of permanent assets, primarily consisting of the net proceeds of our sales of GlobeNet, Caryopoceae, and Tupã Torres, and (2) R$357 million from the acquisition of PT Portugal, net of cash and cash equivalents of assets classified as held-for sale.
During 2013, investing activities forcontinuing operations which we used cash primarily consisted of (1) investments of R$5,9763,264 million in purchases of property, plant and equipment and intangible assets, primarily related to the expansion of our data communications network and IT capacity to increase the acquisitionquality and capacity of our 4G authorizationnetwork in order to promote more efficient operational performance and the implementation of projects to meet ANATEL’s regulatory requirements,improvements in service quality and customer experience, and (2) net judicial deposits (consisting of deposits less redemptions) of R$735660 million, primarily related to provisions for labor, taxes and civil contingencies.
Cash Flows from Financing Activities
Financing activities used net cash of R$2,357 million during 2015, including cash used by discontinued operations of R$492 million, used net cash of R$1,175 million during 2014, including cash used by discontinued operations of R$5,533 million, and R$2,299 million during 2013.
During 2015, our principal sources of borrowed funds consisted of (1) the issuance of €600 million aggregate principal amount of 5.625% Senior Notes due 2021, (2) US$700 million aggregate principal amount borrowed under a US$1,000 million revolving credit facility that Oi entered into with a syndicate financials institution during 2011, (3) US$600 million aggregate principal amount under an export credit facility that Telemar entered into with China Development Bank during 2015, (4) US$141 million aggregate principal amount borrowed under a US$397 million export credit facility agreement that Oi entered into during 2014 that is guaranteed by Finnvera plc, the Finnish Export Credit Agency, or FINNVERA, (5) US$43 million aggregate principal amount borrowed under a US$257 million export credit facility agreement that Oi entered into during 2013 that is insured by the Office National Du Ducroire/Nationale Delcrederedienst, the Belgian national export credit agency, or ONDD, and (6) US$33 million aggregate principal amount borrowed under a US$600 million export credit facility that Telemar entered into with China Development Bank, or CDB, during 2015.
During 2015,2016, we used cash principally (1) to (1) repay R$8,6045,845 million principal amount of our outstanding loans and financings, net of derivatives financial instruments, consisting primarily of (i) a revolving credit facility in the aggregate amount of US$700 million, (ii) the PTIF 5.625% Notes due 2016 in the aggregate amount of €532 million, (iii) an export credit facility guaranteed by EKN in the aggregate amount of US$62 million (iv) an export credit facility with China Development Bank in the aggregate amount of US$27 million, (v) the 1stand derivatives,2nd Series of the 9th Issuance of Debentures and the 2nd Series of the 5th Issuance of Debentures in an aggregate amount of R$59 million (vi) an aggregate of R$290 million under credit facilities with BNDES, (2) to make installment payments relating to our permits and concessions in the
aggregate amount of R$349205 million, and (3) to make installment payments under the tax refinancing plan in the aggregate amount of R$9394 million.
During 2014, our principal sources of borrowed funds consisted of (1) R$1,300 million aggregate principal amount under a revolving credit facility that we entered into with a syndicate financials institution during December 2012, (2) R$836 million aggregate principal amount borrowed under a credit facility with the Brazilian National Development Bank (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES that we entered into in December 2012, (3) US$104 million aggregate principal amount under an export credit facility that Telemar entered into with Export Development Canada, or EDC, during July 2012, and (4) US$98 million aggregate principal amount under an export credit facility that Oi entered into during March 2013. In addition, we generated cash (net of issue premium and related costs) of R$7,827 million through our sale of common shares and preferred shares for cash in the Oi capital increase.
During 2014, in addition to the R$5,533 million used by discontinued operations, we used cash to (1) repay R$5,054 million principal amount of our outstanding loans and financings and derivatives, (2) to make installment payments under the tax refinancing plan in the aggregate amount of R$870 million, and (3) to make installment payments relating to our permits and concessions in the aggregate amount of R$205 million.
During 2013, our principal sources of borrowed funds consisted of (1) R$1,500 million aggregate principal amount of non-convertible debentures issued in March 2013, (2) R$873.5 million aggregate principal amount borrowed under a R$5.4 billion credit facility with BNDES that we entered into in December 2012, (3) US$96 million aggregate principal amount borrowed under an export credit facility that Telemar entered into with EDC in July 2012, and (4) US$37 million aggregate principal amount borrowed under an export credit facility that Telemar entered into in July 2011.
During 2013, we used cash to (1) repay R$3,568 million principal amount of our outstanding loans and financings and derivatives, (2) to make installment payments relating to our permits and concessions in the aggregate amount of R$711 million, (3) to pay dividends and interest on shareholders’ equity in the aggregate amount of R$1,280 million, and (4) to make installment payments under the tax refinancing plan in the aggregate amount of R$174 million.
Projected Sources and Uses of Cash
We anticipate that we will be required to spend approximately R$19,725 million to meet our short-term contractual obligations and commitments during 2016, and an additional approximately R$30,672 million to meet our long-term contractual obligations and commitments in 2017 and 2018.
As of December 31, 2015, our consolidated cash and cash equivalents and short-term cash investments amounted to R$16,700 million. We expect to use our cash and cash equivalents and short-term cash investments, and financing for which we have commitments under facilities from CDB and Banco do Nordeste do Brasil S/A, or BNB, to fund our operations, investments, debt service obligations and working capital requirements during the period in which our operating cash flows are insufficient to fund these cash requirements.
On March 9, 2016, we announced that we had retained PJT Partners as our financial advisor to assist us in evaluating financial and strategic alternatives to optimize our liquidity and debt profile. On April 25, 2016, we entered into a customary non-disclosure agreement with Moelis & Company, who acts as advisor for a diverse ad hoc group of holders of the bonds issued by Oi and its subsidiaries, as an initial step towards discussions of a potential restructuring of its indebtedness.
Our financial statements for the year ended December 31, 2015 have been prepared assuming that we will continue as a going concern, based on our cash flow projections. Our projections depend on factors such as attainment of traffic volume targets, customer base, launching of bundled products attractive to customers, service sales prices, foreign exchange fluctuation and the success of the efforts to identify and implement financial and strategic alternatives to optimize the liquidity and debt profile.
Should one or more of the assumptions underlying our cash flow projections and other forecasts or the outcome of the efforts to identify and implement financial and strategic alternatives to optimize our liquidity and debt profile not be met, our cash and cash equivalents and short-term cash investments, together with our committed financing, may not be sufficient to meet our contractual obligations and commitments during 2016.
We have a commitment from CDB to provide us with financing in the future under a credit facility described under “—Indebtedness.” In addition, we have an undrawn credit facility with BNB as described below. We pay commitment fees to these financial institutions in connection with their commitments.
In December 2014, Oi Mobile entered into a credit agreement with BNB, under which BNB agreed to disburse a loan in the aggregate principal amount of up to R$370 million. The proceeds of this loan agreement may be used to fund equipment purchase and expenditures on our fixed-line and mobile telecommunication infrastructure in the Brazilian states of the northeastern region. Loans under this agreement bear interest at a rate of 7.06% per annum over the principal amount of BRL 37 million and 8.24% per annum over the principal amount of BRL 333 million. Interest on each of these loans is payable quarterly in the first two years and monthly thereafter until the final maturity of the debt. The outstanding principal amount of these loans is payable in 72 successive monthly installments commencing in January, 2017. As of December 31, 2015, we had not borrowed any amounts under this facility.
Contractual Commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2015:2018:
| Payments Due by Period | ||||||||||||||||||||
| Less than One Year | One to Three Years | Three to Five Years | More than Five Years | Total | ||||||||||||||||
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Loans and financings (1) | R$ | 15,282 | R$ | 24,998 | R$ | 16,894 | R$ | 6,243 | R$ | 63,417 | ||||||||||
Debentures (2) | 1,622 | 4,170 | 17 | — | 5,809 | |||||||||||||||
Unconditional purchase obligations (3) | 1,477 | 758 | 343 | — | 2,578 | |||||||||||||||
Concession fees (4) | 288 | 306 | 348 | 1,437 | 2,379 | |||||||||||||||
Usage rights (5) | 912 | 7 | — | — | 919 | |||||||||||||||
Pension plan contributions (6) | 144 | 433 | 289 | 577 | 1,443 | |||||||||||||||
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| R$ | 19,725 | R$ | 30,672 | R$ | 17,891 | R$ | 8,257 | R$ | 76,545 | |||||||||||
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Loans and financings(1) | R$ | 961 | R$ | 2,340 | R$ | 4,405 | R$ | 39,631 | R$ | 47,337 | ||||||||||
Pension plan payables(2) | — | — | 402 | 803 | 1,205 | |||||||||||||||
Other payables(3) | 582 | 1,591 | 8 | 20,052 | 21,927 | |||||||||||||||
Unconditional purchase obligations(4) | 1,634 | 343 | — | — | 1,977 | |||||||||||||||
Concession fees(5) | 172 | 187 | 210 | 496 | 1,065 | |||||||||||||||
Usage rights(6) | 86 | — | — | — | — | |||||||||||||||
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| R$ | 3,435 | R$ | 4,461 | R$ | 5,025 | R$ | 60,982 | R$ | 73,903 | |||||||||||
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| (1) | Includes |
| (2) | Cash flow estimated |
| (3) | Cash flow estimated in connection with the RJ Plan. Includes the reimbursement to us of judicial deposit amounts in excess of the amount paid to the prepetition creditors. |
| (4) | Consists of (1) obligations in connection with a business process outsourcing agreement, and (2) purchase obligations for network equipment pursuant to binding obligations which include all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. |
Consists of estimatedbi-annual fees due to ANATEL under our concession agreements expiring in 2025. These estimated amounts are calculated based on our results for the year ended December 31, |
Consists of payments due to ANATEL for radio frequency licenses. Includes accrued and unpaid interest as of December 31, |
We are also subject to contingencies with respect to tax, civil, labor and other claims and have made provisions for accrued liability for legal proceedings related to certain tax, civil, labor and other claims of R$4,4345,039 million as of December 31, 2015.2018. See “Item 8. Financial Information—Legal Proceedings” and note 2119 to our consolidated financial statements.statements included in this annual report.
Indebtedness
On a consolidated basis our Euro-denominated indebtedness as of December 31, 2015 was R$24,222 million,2018, our U.S. dollar-denominated indebtedness was R$22,7148,618 million, and ourreal-denominated indebtedness was R$12,922 million.7,633 million, and our Euro-denominated indebtedness was R$199 million, in each case after giving effect to the fair value adjustment of our indebtedness. As of December 31, 2015, our Euro-denominated indebtedness bore interest at an average rate of 5.2% per annum,2018, our U.S. dollar-denominated indebtedness bore interest at an average rate of 5.1%5.5% per annum, and ourreal-denominated indebtedness bore interest at an average rate of 13.3%6.3% per annum.annum, and our Euro-denominated indebtedness does not bear interest. As of December 31, 2015, 33.4%2018, 46.0% of our indebtedness, after giving effect to the fair value adjustment of our indebtedness, debt bore interest at floating rates, including the effect of swap operations.rates.
Short-Term Indebtedness
OurAs of December 31, 2018, our short-term debt, consisting of the current portion of long-term borrowings and financings, was R$11,927673 million, asafter giving effect to the fair value adjustment of December 31, 2015.our indebtedness. Under our financing policy, we generally do not incur short-term indebtedness, as we believe that our cash flows from operations generally will be sufficient to service our current liabilities.
Long-Term Indebtedness
Our principal sources of long-term debtborrowings and financings are:
fixed-rate notes issued in the international market;
debentures issued in the Brazilian market;
credit facilities with international export credit agencies;
credit facilities with BNDES; and
unsecured lines of credit obtained fromwith Brazilian and international financial institutions;
default recoveries owed to holders of some of our novated debt obligations.
Some of our debt instruments require that Oi or Telemar comply with financial covenants annually, semi-annually oron a quarterly the most restrictivebasis. As of which require Oi to maintain a consolidated debt to consolidated EBITDA, determined based on our financial statements prepared in accordance with Brazilian GAAP, for the prior 12-month period less than or equal to 4.0 to 1.0 at the end of each fiscal quarter until maturity. Under each of these debt instruments, the creditor has the right to accelerate the debt if, at the end of any applicable periodDecember 31, 2018, we are notwere in compliance with the definedthese financial covenants ratios.covenants.
In anticipation of the completion of the PT Portugal Disposition, we executed temporary modifications of each ofThe table below sets forth our debt instruments that contains such financial maintenance covenants (other than our debt instruments with BNDES), pursuant to which the consolidated debt to consolidated EBITDA ratio that Oi was required to maintain was increased to 6.0 to 1.0 for each of the fiscal quarters of 2015.
Our debt facilities with BNDES contained a number of financial covenants (including ratios with respect to shareholders equity to total assetslong-term loans and consolidated debt to EBITDA) that were measured on a semi-annual basis on June 30 and December 31. Under these debt facilities, noncompliance with two or more of these covenants in one
semi-annual period would automatically trigger the right of BNDES to retain proceeds (in an amount equivalent to three times our next amortization payment under each debt facility with BNDES) from receivables otherwise payable to us in reserve accounts pledged for the benefit of BNDES until such time as the breach is cured.
On June 30, 2015, we were not in compliance with the covenants in each of our debt facilities with BNDES that require Oi to maintain a shareholder’s equity to EBITDA ratio of at least 0.25 to 1 and a consolidated debt to EBITDA ratio of less than 4.0 to 1. As a result, BNDES, had the right to retain proceeds from receivables in reserve accounts pledged for the benefit of BNDES, as described above. In November, 2015, we and BNDES amended the terms of each of our debt facilities with BNDES. As a result of these amendments, (1) the consolidated debt to consolidated EBITDA ratio that Oi was required to maintain was increased to 6.0 to 1.0 for the December 31, 2015 measurement date, (2) the measurement period under each of these debt facilities was reduced to quarterly periods, and (3) BNDES has the right to accelerate the debt under each of these debt facilities, at the end of any applicable period, we are not in compliance with two or more of the financial covenants contained in these debt facilities.
Prior to December 31, 2015, we executed temporary modifications of each of our debt instruments that contains covenants requiring Oi to maintain specified levels of consolidated debt to consolidated EBITDA (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures), pursuant to which Oi was required to maintain a consolidated net debt to consolidated EBITDA ratio of no more than 6.0 to 1.0financings as of December 31, 2015. Most of these waivers and amendments continue to require Oi was required to maintain a consolidated net debt to consolidated EBITDA ratio of no more than 6.0 to 1.0 for each of the fiscal quarters of 2016. Upon the expiration of these waivers and under the terms of these amendments, the consolidated debt to EBITDA ratio that Oi is required to maintain under each of these debt instruments will be reduced to their pre-existing levels, the most restrictive of which will require that Oi maintain a consolidated debt to EBITDA ratio of less than 4.0 to 1.0. We have repaid the principal amount outstanding under Oi’s 5th and 9th issuances of debentures in the aggregate amount of R$23 million.
Under the amendments to our revolving credit facility, we agreed to additional conditions applicable to further extensions of credit under this facility. All amounts outstanding under this facility were repaid at maturity in January 2016 and we have terminated this facility.
We were in compliance with each of the financial covenants applicable the debt instruments to which Oi and its subsidiaries are a party as of December 31, 2015 (other than the debt instruments governing Oi’s 5th and 9th issuances of debentures). We are seeking waivers from those creditors for which these waivers and amendments do not cover all measurement periods to and including the periods ending on December 31, 2016. We cannot provide investors with any assurance that these waivers will be obtained. In the event that we are unable to obtain waivers of the anticipated breaches of these covenants in these debt instruments, or identify and implement financial and strategic alternatives to optimize our liquidity and debt profile, we may be unable to meet our obligations under these debt instruments in the event that the creditors under these debt instruments seek to enforce their available remedies.
Under the Trust Deed governing the PTIF Bonds, we were required to file audited financial statements of PTIF as of and for the year ended December 31, 2014 with the Dutch Chamber of Commerce no later than January 31, 2016. On April 29, 2016, the PTIF Trustee delivered a written notice to PTIF and Oi noting that the failure of PTIF to provide the 2014 audited financial statements constituted a potential event of default under the PTIF Bonds and requesting the delivery of those financial statements. PTIF is continuing to work with its auditor to complete the preparation of its 2014 audited financial statements as soon as possible.
The PTIF Trustee has notified PTIF that if PTIF fails to deliver the financial statements on or prior to May 29, 2016 and the PTIF Trustee determines that this failure is materially prejudicial to the interests of the holders of the PTIF Bonds, the PTIF Trustee could declare that the PTIF Bonds are immediately due and repayable. Under the terms of the PTIF Bonds, the PTIF Trustee is not obliged to exercise its discretion to declare any PTIF Bonds immediately due and repayable or to take any other action to enforce the rights of the holders of the PTIF Bonds unless it shall have been indemnified to its satisfaction and specifically directed or requested to do so by a requisite percentage of the holders of the PTIF Bonds in accordance with the terms and conditions of the PTIF Bonds.
The instruments governing a substantial portion of our indebtedness contain cross-acceleration clauses and the occurrence of an event of default under one of these instruments, could trigger an event of default under other indebtedness or enable the creditors under other indebtedness to accelerate that indebtedness or those obligations. Were a substantial amount of our outstanding indebtedness to be accelerated, we may not have sufficient funds to repay such debt when due.
As of December 31, 2015, all of our debt instruments with BNDES were secured by pledges of certain of our accounts receivable.
The following discussion briefly describes certain of our significant financing transactions.
Fixed-Rate Notes
As of December 31, 2015, we had 14 series of fixed-rate debt securities that were issued in the international market. All of these securities pay interest semi-annually or annually in arrears.
The following table sets forth our outstanding fixed-rate debt securities as of December 31, 2015, the outstanding principal amount of these securities and their maturity dates.2018.
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Export Credit Agency Credit Facilities
As of December 31, 2015, we had entered into 13 export credit facility agreements under which we have borrowed funds to make equipment purchases related our fixed-line and mobile telecommunications infrastructure. The lender under some of these export credit facility agreements are the export credit agencies. Under the remainder of these export credit facility agreements, the export credit agencies have guaranteed or insured our obligations to the lenders, which are international financial institutions. Interest these export credit facility agreements is payable semi-annually in arrears and principal amortizes in equal semi-annual installments through maturity.
The following table sets forth our outstanding export credit facility agreements as of December 31, 2015, the export credit agency, the borrower under the facility, the outstanding principal amount, the interest rate, the number of remaining amortization payments and the final maturity dates.
Export Credit Agency | Borrower | Outstanding Principal Amount | Interest Rate | Number of Remaining Amortization Payments | Final Maturity | |||||||||||||
| (in US$ millions) | ||||||||||||||||||
China Development Bank (2009)(1) | Telemar | US$ | 27 | LIBOR plus 2.50 | % | 1 | February 2016 | |||||||||||
China Development Bank (2009) | Telemar | 53 | LIBOR plus 2.50 | % | 2 | October 2016 | ||||||||||||
China Development Bank (2015)(2) | Telemar | (3) | 600 | LIBOR plus 1.90 | % | 5 | (4) | December 2020 | ||||||||||
China Development Bank (2015)(5) | Telemar | (3) | 33 | LIBOR plus 2.00 | % | 14 | (6) | June 2025 | ||||||||||
FINNVERA (2008) | Telemar | (3) | 106 | LIBOR plus 1.07 | % | 6 | December 2018 | |||||||||||
FINNVERA (2009) | Telemar | (3) | 235 | LIBOR plus 1.70 | % | 8 | August 2019 | |||||||||||
FINNVERA (2011) | Telemar | 129 | LIBOR plus 0.90 | % | 11 | February 2021 | ||||||||||||
FINNVERA (2014): | ||||||||||||||||||
Tranche A | Oi | 123 | LIBOR plus 1.00 | % | 14 | November 2022 | ||||||||||||
Tranche B | Oi | 0 | LIBOR plus 1.00 | % | 16 | November 2023 | ||||||||||||
ONDD (2010): | ||||||||||||||||||
Tranche A | Telemar | 36 | LIBOR plus 1.40 | % | 8 | August 2019 | ||||||||||||
Tranche B | Telemar | 84 | LIBOR plus 1.40 | % | 10 | August 2020 | ||||||||||||
ONDD (2013): | ||||||||||||||||||
Tranche A | Oi | 81 | LIBOR plus 1.50 | % | 13 | March 2023 | ||||||||||||
Tranche B | Oi | 40 | LIBOR plus 1.50 | % | 15 | March 2024 | ||||||||||||
Export Development Canada (2012) | Telemar | 153 | 2.25 | % | 13 | May 2022 | ||||||||||||
EKN (2011): (7) | June 2021 | |||||||||||||||||
Tranche A | Telemar | 22 | 2.21 | % | 7 | February 2020 | ||||||||||||
Tranche B | Telemar | 40 | 2.21 | % | 9 | February 2021 | ||||||||||||
Nordic Development Bank (2008) | Telemar | 35 | LIBOR plus 1.18 | % | 6 | July 2018 | ||||||||||||
Unsecured Lines of Credit
In May 2008, Telemar entered into an unsecured line of credit with a Brazilian financial institution in the aggregate amount of R$4,300 million to finance the acquisition of control of Oi. The loans under this line of credit originally bore interest at the rate of the CDI rate plus 1.30% per annum, payable semi-annually in arrears in May and November of each year, commencing in May 2010. As a result of the renegotiation of the terms and conditions of these loans in May 2011, these loans bear interest at the rate of the CDI rate plus 1.00% per annum from May 2011 to May 2014 and at the rate of CDI rate plus 1.83% per annum from May 2014 to May 2018. The principal of these loans is payable in seven equal annual installments, commencing in May 2010. As of December 31, 2015, the outstanding principal amount under this line of credit was R$2,304 million.
In November 2011, Oi, Oi Mobile, Telemar and TNL PCS entered together into a revolving credit facility with a syndicate of international institutions. As a result of the merger of TNL PCS with and into Oi Mobile in February 2014, Oi Mobile assumed all of TNL PCS’s rights and obligations under this credit facility. Under this facility, up to US$1 billion aggregate principal amount will be available for disbursement to the borrowers during the five-year term of this facility. As of December 31, 2015, the outstanding principal amount under this revolving credit facility was US$700 million. As of the date of this annual report, all amounts outstanding under this revolving credit facility have been repaid and this facility has been terminated.
Credit Facilities with BNDES
We and our subsidiaries have entered into a variety of credit facilities with BNDES. The proceeds of these credit facilities have been used for a variety of purposes, including funding our investment plans, funding the expansion of our telecommunications plant (voice, data and video), and making operational improvements to meet the targets established in the General Plan on Universal Service Goals and the General Plan on Quality Goals in effect at the time of these loans.
The following table sets forth selected information with respect to our BNDES credit facilities as of December 31, 2015.
Facility | Outstanding Principal Amount | Interest Rate | Amortization Schedule | Final Maturity | ||||||||||
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Oi Mobile 2009 credit facility(1): | ||||||||||||||
Floating-rate loans | 71 | TJLP plus 3.95 | % | Monthly | (2) | December 2018 | ||||||||
Fixed-rate loans | 16 | 4.50 | % | Monthly | (2) | December 2018 | ||||||||
2012 credit facility: | ||||||||||||||
Oi A loans | 360 | TJLP plus 4.08 | % | Monthly | (3) | July 2021 | ||||||||
Oi B loans | 49 | 2.50 | % | Monthly | (3) | January 2021 | ||||||||
Oi C loans | 157 | 2.50 | % | Monthly | (3) | January 2021 | ||||||||
Telemar A loans | 678 | TJLP plus 4.08 | % | Monthly | (3) | July 2021 | ||||||||
Telemar B loans | 109 | 2.50 | % | Monthly | (3) | January 2021 | ||||||||
Telemar D loans | 71 | TJLP plus 2.18 | % | Monthly | (3) | January 2021 | ||||||||
Telemar E loans | 6 | TJLP | Monthly | (3) | January 2021 | |||||||||
Oi Mobile A loans(4) | 398 | TJLP plus 4.08 | % | Monthly | (3) | July 2021 | ||||||||
Oi Mobile B loans(4) | 96 | 2.50 | % | Monthly | (3) | January 2021 | ||||||||
Oi Mobile C loans(4) | 29 | 2.50 | % | Monthly | (3) | January 2021 | ||||||||
Debentures
We have issued several series of debentures in the Brazilian market. All of these securities pay interest annually or semi-annually in arrears. The table below sets forth our outstanding debentures as of December 31, 2015, the outstanding principal amount of these securities, the applicable interest rates, and their maturity dates.
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Restructured Brazilian credit agreements and CRIs | 1,852 | February 2035 | ||||||||
Non-Qualified Credit Agreement | 326 | February 2030 | ||||||||
Local currency financial institution | 54 | December 2033 | ||||||||
Default Recovery inReais | 207 | February 2042 | ||||||||
Default Recovery in Foreign Currency | 4,125 | February 2042 | ||||||||
Total gross loans and financing | 30,391 | |||||||||
Incurred debt issuance costs | (12 | ) | ||||||||
Fair value adjustment | (13,929 | ) | ||||||||
Short-term portion | (673 | ) | ||||||||
Long-term indebtedness | R$15,777 | |||||||||
| (1) | Represents four Restructured Export Credit Agreements. |
The following discussion briefly describes certain of our significant outstanding indebtedness.
Real Estate Securitization TransactionPIK Toggle Notes
InThe PIK Toggle Notes are senior unsecured obligations of Oi denominated in U.S. dollars that mature in July 2025, with principal amount to be fully paid at maturity. The PIK Toggle Notes are guaranteed, jointly and severally, by each of Telemar, Oi Mobile, Oi Coop and PTIF. The PIK Toggle Notes accrued interests from February 5, 2018 until February 5, 2019, the first interest payment date, at a fixed rate of 10.0% per annum payable in cash. Interest on the New Notes will accrue:
from February 5, 2019 until August 2010,2021, at either (at the sole discretion of Oi): (1) a fixed rate of 10.0% per annum payable in cash on a semi-annual basis, or (2) a fixed rate of 12.0% per annum, of which 8.0% shall be payable in cash and 4.0% shall be payable by either increasing the principal amount of the outstanding New Notes or by issuingpaid-in-kind notes, at the sole discretion of Oi, in each case, on a semi-annual basis; and
thereafter, at a fixed rate of 10.0% per annum payable in cash on a semi-annual basis.
Oi 12th Issuance of Debentures
Oi has issued its 12th issuance of simple, unsecured,non-convertible debentures. These debentures are denominated inreais. The principal amount of these debentures will be paid in 24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first 10 semi-annual installments, 5.7% of the outstanding principal for the next13 semi-annual installments and the remainder at maturity in February 2035. The principal amount of these debentures will accrue interest at the rate of 80% of the CDI rate. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Oi’s obligations under these debentures are guaranteed, jointly and severally, by each of Telemar, transferred 162Oi Mobile, Oi Coop and PTIF.
Telemar 6th Issuance of Debentures
Telemar has issued its 6th issuance, simple, unsecured,non-convertible debentures. These debentures are denominated inreais. The principal amount of these debentures will be paid in24 semi-annual installments beginning in August 2023, in the amount of 2.0% of the outstanding principal for the first10 semi-annual installments, 5.7% of the outstanding principal for the next13 semi-annual installments and the remainder at maturity in February 2035. The principal amount of these debentures will accrue interest at the rate of 80% of the CDI rate. Interest will be capitalized to increase the principal balance under these debentures on an annual basis until February 2023, and will be paidsemi-annually in cash from August 2023 through the final maturity. Telemar’s obligations under these debentures are guaranteed, jointly and severally, by each of Oi, Telemar, Oi Mobile, Oi Coop and PTIF.
Restructured Export Credit Agreements
Oi has entered into one export credit agreement and Telemar has entered into three separate export credit agreements, which we refer to collectively as the Restructured Export Credit Agreements, documenting the recoveries due to the lenders under our novated export credit agreements. The obligations under the Restructured Export Credit Agreements are senior unsecured obligations of Oi and Telemar, respectively, denominated in U.S. dollars that mature in February 2035. Principal under each of the Restructured Export Credit Agreements is payable in24 semi-annual installments beginning in the August 2023, in the amount of 2.0% of the principal amount for the first10 semi-annual installments, 5.7% of the principal amount for the next13 semi-annual installments and the remainder at maturity. Principal under each of the Restructured Export Credit Agreements accrues interest at the rate of 1.75% per annum. Interest will be capitalized on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity. Oi’s obligations under its Restructured Export Credit Agreement are guaranteed, jointly and severally, by each of Telemar and Oi Mobile, and Telemar’s obligations under its Restructured Export Credit Agreements are guaranteed, jointly and severally, by each of Oi and Oi Mobile.
Restructured BNDES Credit Agreements
By operation of the RJ Plan and the Brazilian Confirmation Order, the credit agreements between BNDES and each of Oi, Telemar and Oi Mobile were novated and BNDES is entitled to receive as recovery for its claims under these credit facilities payment of 100% of the principal amount of the recognized claims inreais, adjusted by the interest/inflation adjustment rate. The principal amount of these claims will be paid in 108 monthly installments beginning in March 2024, in the amount of 0.33% of the outstanding principal for the first 60 monthly installments, 1.67% of the outstanding principal for the next 47 monthly installments and the remainder at maturity in February 2033. The principal amount of these claims accrue interest at the TJLP rate plus 2.946372%per annum. Interest will be capitalized to increase the principal balance under these claims on an annual basis until February 2022, and will be paid monthly in cash thereafter through the final maturity.
Restructured Brazilian Credit Agreements and CRIs
By operation of the RJ Plan and the Brazilian Confirmation Order, provided that Telemar’s unsecured line of credit and our obligations under CRIs backed by receivables representing all payments under leases entered into by Oi and Telemar of real estate properties to our wholly-owned subsidiary Copart 4 Participações S.A., or Copart 4, and Oi transferred 101 real estate properties to Copart 5 Participações S.A., or Copart 5, our wholly-owned subsidiary. Telemar entered into lease contracts with terms of up to 12 years for the continued use of all of the properties transferred to Copart 4 and Oi entered into lease contracts with terms of up to 12 years for the continued use of all of the properties transferred to Copart 5.
owned by Copart 4 and Copart 5 assignedwere novated and the receivables representing all paymentscreditors under this unsecured line of credit and the holders of the CRIs are entitled to receive as recovery for their claims under these leases to Brazilian Securities Companhia de Securitização, which issued Real Estate Receivables Certificates (instruments payment of 100% of the principal amount of the recognized claims inCertificados de Recebíveis Imobiliáriosreais), or CRIs, backed by these receivables. The CRIs were purchased by Brazilian financial institutions.
We received net proceeds from the assignment of lease receivablespayable in24 semi-annual installments beginning in August 2023, in the total aggregate amount of R$1,585 million on a consolidated basis,2.0% of the recognized claims for the first10 semi-annual installments, 5.7% of the recognized claims for the next13 semi-annual installments and recorded our obligations to make the assigned payments as short- and long-term debtremainder at maturity in our consolidated financial statements.February 2035. The aggregate net effectiverecognized amount of these claims accrue interest at the rate on this transaction is 102%of 80% of the CDI rate. Interest will be capitalized to increase the recognized amount of these claims on an annual basis until February 2023, and will be paid semi-annually in cash from August 2023 through the final maturity.
Non-Qualified Credit Agreement
TheNon-Qualified Credit Agreement is a senior unsecured obligation of Oi. The proceeds raised in this transaction were used to repay short-term debt. In June 2012,obligations of Oi under theNon-Qualified Credit Agreement are guaranteed, jointly and severally, by each of Copart 4Telemar, Oi Mobile, Oi Coop, and Copart 5 partially redeemedPTIF. Principal under the CRIs that they had issued for an aggregateNon-Qualified Credit Agreement will be paid in 12 semiannual installments beginning in August 2024 in the amount of R$393 million. As4% of December 31, 2015, the aggregate liability under these leases was R$952 million.
Capital Expenditures
During 2015 we followedoutstanding principal for the strategy includedfirst sixsemi-annual installments, 12.66% of the outstanding principal for the nextfive semi-annual installments and the remainder at maturity in February 2030. TheNon-Qualified Credit Agreement accrues interest at the Transformation Planrate of modernizing our core network, with a focus on infrastructure improvements and enhancing our customers’ experience, by making strategic investment decisions that allow us6% per annum. Interest will be capitalized to do more with less. As a result, we expanded our fiber optic backbone, which enhanced our data traffic capabilities for fixed and mobile networks, to keep up with the growing demand, In addition, our performance on ANATEL’s network quality metrics improved.
Our efforts to lower our capital expenditures in 2015 include: (1) renegotiating contracts with our suppliers; (2) increasing our involvement in fixed network sharing, including RAN sharing on our 4G network; and (3) structural projects that increase the efficiency of services to both fixedprincipal balance under theNon-Qualified Credit Agreement on an annual basis until February 2023, and mobile broadband customers (i.e. faster downloads, higher quality HD video channels, and improved voice and video calls) and reduce infrastructure costs.will be paid together with principal beginning in August 2024.
Our capital expenditures on property, plant and equipment and intangible assetsDefault Recovery
Under the RJ Plan, certain of our continuing operationscreditors were R$3,681 millionentitled to elect forms of recovery other than the Default Recovery between February 5, 2018 and February 26, 2018. Creditors entitled to make these elections that elected the Default Recovery or failed to make the election are entitled to the Default Recovery with respect to their recognized claims. Holders of Defaulted Bonds that were not eligible to make an election with respect to the form of recovery on their claims are entitled to the Default Recovery with respect to their recognized claims.
Under the RJ Plan, the Default Recovery consists of an unsecured right to receive payment of 100% of the principal amount of the recognized claims represented by:
Defaulted Bonds issued by Oi or Oi Coop in 2015, R$5,382 millionfive annual, equal installments, commencing on July 22, 2038;
Defaulted Bonds issued by PTIF in 2014five annual, equal installments, commencing on June 19, 2038; and R$6,614 million
Credits the holders of which were entitled to make recovery elections (other than the Defaulted Bonds), in 2013. Our capital expendituresfive annual, equal installments, commencing on property, plant and equipment and intangible assets of our discontinued operations were R$911 millionFebruary 5, 2038, which, in 2014. The following table sets forth our capital expenditure payments on plant expansion and modernization of our continuing operations for the periods indicated.
Data transmission equipment Installation services and devices Mobile network and systems Voice transmission Information technology services Telecommunication services infrastructure Buildings, improvements and furniture Submarine cables Network management system equipment Backbone transmission Internet services equipment Other Total capital expenditures Year Ended December 31, 2015 2014 2013 (in millions ofreais) R$ 1,201 R$ 1,207 R$ 1,699 358 878 625 528 877 1,120 605 663 886 380 454 370 444 281 405 73 166 289 — — 23 72 113 227 293 159 69 2 3 6 208 478 531 4,164 5,279 6,250
Our principal capital expenditures relate to a variety of projects designed to expand and upgrade our data transmission networks, our mobile services networks, our voice transmission networks, our information technology equipment and our telecommunications services infrastructure.
Data Transmission Equipment Programs
In our access networks, we have been engaged in a program of deploying FTTH technology to support our “triple play” and “quadruple play” services, using a GPON network engineered to support satellite video transport services, IP TV and RF overlay video services, internet with speeds up to up to 200 Mbps, and VoIP services.
We have acquired and installed data communications equipment to convert elements of our networks that used ATM protocol over legacy copper wire and SDH protocols to MPLS protocol over optical fiber, which supports IP and permits the creation of VPNs through our MetroEthernet networks. We also deployed an optical switching layer based on optical transport network technology in order to provide more efficient use of our DWDM capacity, fast restorations, and IP routers traffic offloading.
In 2015 Oi began implementing a new broadband data communications network architecture, whicheach case, we refer to as the Single Edge project. This architecture enables Oi to offer access network services such as mobile, broadband, IPTV, and B2BDefault Recovery Entitlement.
A holder’s Default Recovery Entitlement is denominated in a single platform, which eliminates the need for individual management of each type of access network, expedites the resolution of networks problems and minimizes maintenance and operation costs.
In 2015, we transformed our IP backbone to expand its capacity and speed to operate 10/100 Gbps line rate interfaces on our new OTN/DWDM network over 30,000 km of fiber-optic cable. The OTN/DWDM network is designed to protect against interruptions in service caused by external events and accidents. Since January 2014, Our OTN/DWDM network has experienced an average annual growth of traffic, especially in data traffic, of more than 40% per year.
In addition to expanding our IP backbone capacity, we are continuing to simplify our transport network architecture through the adoptioncurrency of the single edge concept,recognized claim with respect to which means using one single routerthe Default Recovery Entitlement relates. The Default Recovery Entitlement with respect to join our commercial, mobile and residential functions that would otherwise require many specialized routers. We believe that this network simplification will reduce both capital and operational expenditures.
Mobile Services Network Programs
2G & 3G Networks
We are implementing wireless local loop technologyDefaulted Bonds denominated in areas not supported by our fixed-line network to provide service to our customers through our 2G network.
We have undertaken a project to upgrade a portion of our mobile networks to enable us to increase the capacity of our mobile network. Since December 2007, when we acquired our authorizations to provide 3G services, we have engaged in a program of developing our 3G network. We are deploying new radio base stations and transceivers to improve our 3G coverage and quality in areas we already serve, reducing the level of signal congestion in these areas, and to expand our 3G service to municipalities in Regions I, II and III where we currently do not provide 3G service. We are continuing to upgrade portions of our 3G mobile network to support greater data rates through the HSPA+ standard.
In 2014, we extended our service area to include 118 new municipalities with 3G technology. We also activated HSPA+ in 3,302 sites in 2014, which allowed our customers to transfer data at higher speeds. We currently provide 3G services to 1,290 municipalities. We have increased the capacity of our 3G network in order to support the growing demand for mobile data services. We expect to perform capacity expansions in 37% of our existing 3G sites during 2016 to increase the speed of our 3G connection. Furthermore, in order to improve the experience of our data service users, we began granting our 2G users access to our 3G network by migrating the user’s data plan from 2G to 3G and upgrading their devices to be 3G compatible.
4G Network
In June 2012, we acquired the authorizations and radio frequency licenses necessary for us to commence the offering of 4G services throughout Brazil. We intend to offer 4G services throughout Brasil using LTE network technology and have begun deploying our 4G network. As part of this project, we have upgraded our existing mobile core to the LTE Evolved Packet Core, using an Evolved NodeB base station under a Radio Access Network that we will share with other Brazilian mobile services operators.
In 2013, we commenced offering 4G services in the 12 cities where the FIFA World Cup was held, pursuant to the 2013 RAN Sharing Agreement. For a discussion of RAN sharing, see “Item 4: Information on the Company—Network and Facilities—Infrastructure Sharing Agreements—4G Network.” In addition, we extended LTE services in 2015 to cities with over 200,000 inhabitants, including 88 new municipalities, as a result of obligations imposed by ANATEL.
Voice Transmission Network Programs
We are engaged in a program of investing in new equipment for our switching station to support next-generation networks to support offerings of new value-added services to our fixed-line customers. We believe that our investment in next-generation networks will:
As part of this program, we are concluding the deployment of an IP Multimedia Subsystem,U.S. dollars or IMS, core that will facilitate our convergent voice, broadband and IP TV offerings. The IMS core not only will provide control for the VoIP resource but also integrated access control and authentication for all three services, significantly improving automation and speed for customer provisioning.
We are also undertaking a program of removing and replacing smaller switching stations and integrating these operations with other switching stations to promote efficiency in our operations.
We monitor the anticipated demands of new residential developments and the service demand growth of existing residential areas to ensure that we make adequate network equipment available to service the demands of these areas.
Information Technology Services Programs
We are investing in the expansion of supply of our cloud computing services in data centers, particularly in the State of São Paulo, in order to support the growing demand from our corporate customers. Our cloud computing services enable us to provide our customers with integrated telecommunications and information technology solutions.
Telecommunications Services Infrastructure Programs
We are investing in several structural projects in order to improve and modernize our business support systems, or BSS, and operational support systems, or OSS, and consolidate duplicative systems resulting from integrating previously acquired companies, thereby optimizing our capital and operational expenditure investments. Based on the Telemanagement Forum frameworks and best practices, our main projects are unified customer relationship management; network provisioning services; order management; consolidation of network inventory; network planning, project and construction; network fault management; performance management; customer experience management; API management and digital self-care, among others.
One of the primary projects connected to the OSS is related to assurance and quality. In March 2013, we began investing in a transition from a network centric monitoring system to a customer focused approach and thereby our network operations will migrate from network operations centers to service operations centers which will provide more efficient and customer-based support. We expect to complete this project in January 2017.
Another of our projects is to improve fulfillment by speeding up service creation and provisioning, reduce costly human intervention and increase overall customer quality of experience through automation of fulfillment processes. Our goal is to evolve as close as possible to a zero-touch provisioning process, without user intervention. This project began in March 2012 and is expected to be completed in December 2016.
We are investing in the expansion of our transport networks in an effort to ensure that our networks continue to have the capacity to serve our customers and to support our plans to expand our services. In 2015, we activated the first chain in Brazil of entirely 100 Gbps interfaces along our OTN/DWDM network of over 30,000 km of fiber optic cables connecting 12 Brazilian capitals (Rio de Janeiro, São Paulo, Belo Horizonte, Vitoria, Porto Alegre, Florianópolis, Curitiba, Salvador, Fortaleza, Recife, Teresina and Brasilia). This structural transformation is intended to increase the quality and data transmission capacity of our networkeuros, as well as protect against interruptionsthe Default Recovery Entitlement for other credits denominated in service causedU.S. dollars, will not bear any interest. The Default Recovery Entitlement with respect to Oi’s 9.75% senior notes due 2016 and other credits denominated inreais will bear interest at the Brazilian TR rate (payable together with the last installment of principal), which will accrue as additional principal amount of the Default Recovery Entitlement until July 22, 2038 (in the case of Oi’s 9.75% senior notes due 2016) or February 5, 2038 (with respect to other credits denominated inreais) and thereafter be payable together with payments of principal amount of the Default Recovery Entitlement. The principal and accrued interest with respect to the Default Recovery Entitlement may be redeemed at any time and from time to time, in whole or in part, by external events and accidents.the RJ Debtors at a redemption price of 15% of the aggregate principal amount of the Default Recovery Entitlement.
We are also investing in projects to improve our networks by increasing the redundancy of our wire and fiber optic cable routes and establishing network mesh routes. We also perform preventive maintenance on sections of our network that have unusually high failure rates, and have a program to replace network elements in these sections.
We are investing in the standardization of our facilities to deter fraud and improve the quality of our services, including the replacement of some of our public telephones.
Off-Balance Sheet Arrangements
We do not currently have any transactions involvingoff-balance sheet arrangements.
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
OurOi’s board of directors (conselho de administração) and ourOi’s board of executive officers(diretoria) are responsible for operating our business.
Board of Directors
OurGeneral
Oi’s board of directors is a decision-making body responsible for, among other things, determining policies and guidelines for our business and our Oi’swholly-owned subsidiaries and controlled companies. OurOi’s board of directors also supervises ourOi’s board of executive officers and monitors its implementation of the policies and guidelines that are established from time to time by the board of directors. Under the Brazilian CorporationCorporate Law, ourOi’s board of directors is also responsible for hiring independent accountants.
Our Oi’sby-laws provide for a board of directors of up to 11 members and an equal number ofwith no alternate members. AsMembers who are absent at meetings will be entitled to appoint a substitute among the present members to vote in their stead. Pursuant to Oi’sby-laws, at least 20% of the datemembers of this annual report, ourthe Oi’s board of directors is composedmust be independent as defined in the listing regulations of 10theNovo Mercado segment of the B3 and must be expressly declared as independent in the shareholders’ meeting that elects them, being also considered as independent the members elected as per article 141, paragraphs 4 and nine alternate members. During periods5 of absence or temporary unavailabilitythe Brazilian Corporate Law. All of a regular memberthe members of ourOi’s board of directors the corresponding alternate member substitutes for the absent or unavailable regular member.are independent.
The members of our board of directorsDirectors are elected at general meetings of shareholders fortwo-year terms and are eligible for reelection. The termsGenerally, members of all current members expire at our annual shareholders’ meeting that approves the financial statements for the year ended December 31, 2017. Members of ourOi’s board of directors are subject to removal at any time with or without cause at a general meeting of shareholders. Our The RJ Plan, however, provides certain corporate governance rules that apply to Oi’s board of directors during the effectiveness of the RJ Plan, superseding the provisions of Oi’sby-laws. As provided in the RJ Plan, until the expiration of the term of Oi’s current board of directors, which will occur on September 17, 2020, the members of Oi’s board of directors may not be removed from office, except due to gross mistake, willful misconduct, gross negligence, abuse of term of office or violation of fiduciary duties in accordance with applicable law. Following the expiration of the term of Oi’s current board of directors, the election of subsequent boards of directors will follow the rules established by Oi’sby-laws and the Brazilian Corporate Law. Oi’sby-laws do not contain any citizenship or residency requirements for members of ourOi’s board of directors. OurHowever, a member’s tenure is conditioned on the appointment of a representative who resides in Brazil, with powers to receive service of process in proceedings initiated against such member based on the corporate legislation, by means of apower-of-attorney with a term of at least three years after the end of such member’s term of office.
Oi’s board of directors is presided over by the chairman of the board of directors and, in his or her absence, on an interim basis, by his designated alternate. The chairmanthevice-chairman of ourthe board of directors is electedand, in his or her absence, on an interim basis, by the general meeting of shareholders that elects the directors. Our by-laws provide that the chairman of our board of directors may not serve as our chief executive officer.
Our board of directors ordinarily meets once every month and extraordinarily when a meeting is calledanother member appointed by the chairman or, any twoif no such member has been appointed, by another member appointed by the other members in attendance. Pursuant to Oi’sby-laws, the chairman andvice-chairmanof our board of directors. Decisions of ourOi’s board of directors require a quorum of a majorityare elected by the members of the Oi’s board of directors during their first meeting following their election. Oi’sby-laws provide that the positions of chairman of Oi’s board of directors and are takenOi’s chief executive officer or principal executive may not be held by a majority vote of those directors present.the same person.
The following table sets forth certain information with respect to the current members of ourOi’s board of directors and their alternates.directors.
Name | Position | Member Since | Age | |||||
Eleazar de Carvalho Filho | Chairman | January 2018 | 61 | |||||
Marcos Grodetzky | Vice-Chairman | January 2018 | 62 | |||||
Henrique José Fernandes Luz | Director | September 2018 | 63 | |||||
José Mauro Mettrau Carneiro da Cunha | February 2009 | 69 | ||||||
| 54 | |||||||
| Director | September | 59 | |||||
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| Director | September | 62 | |||||
| 58 | |||||||
| Director | September | 49 | |||||
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| Director | September | 61 | |||||
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We summarize below the business experience, areas of expertise and principal outside business interests of our current directors and their alternates.Oi’s directors.
Directors
Eleazar de Carvalho Filho. Mr. Carvalho has served as the chairman of Oi’s board of directors since September 2018 and a member of Oi’s board of directors since January 2018. He currently works at Virtus BR Partners, where he is a founding partner. Mr. Carvalho also has served as a member of the board of directors at Brookfield Partners Renewables L.P., TechnipFMC and Companhia Brasileira de Distribuição (Grupo Pão de Açucar) / Cnova N.V.). He is also chairman of the board of trustees of the Brazilian Symphony Orchestra Foundation. Previously, Mr. Carvalho was CEO of Unibanco Banco de Investimento, BNDES and UBS Brasil. He was head of the corporate finance division of Banco Garantia in Rio de Janeiro, director and treasurer of Alcoa Alumínio and director of the international area of Crefisul (Citigroup). Mr. Carvalho has extensive experience as a director of large companies listed in Brazil and abroad. He was a member of the boards of directors of Tele Norte Leste Participações S.A, Petrobras, Companhia Vale do Rio Doce, Eletrobrás, Alpargatas, among others and also President of BHP Billiton Brasil. He holds a bachelor’s degree in economics from New York University and a master’s degree in international relations from Johns Hopkins University.
Marcos Grodetzky. Mr. Grodetzky has served as the vice-chairman of Oi’s board of directors since September 2018 and a member of Oi’s board of directors since January 2018. Previously, he served as an alternate member of Oi’s board of directors from September 2015 until July 2016 and as a member of Oi’s board of directors from July 2016 until September 2016. Currently, he is an independent member of the board of directors of Constellation Oil Services, Burger King Brasil, Vicunha Aços and Elizabeth S.A. Indústria Textil. He is the founding partner of Mediator Assessoria Empresarial, engaged in financial advisory and mediation. Until October 2013, Mr. Grodetzky served as CEO of DGB S.A., a logistics holding company of Grupo Abril S.A. and parent company of the following companies: Dinap – Dist. Nacional de Publicações, Magazine Express Comercial Imp e Exp de Revistas, Entrega Fácil Logística Integrada, FC Comercial e Distribuidora, Treelog S.A. – Logística e Distribuição, DGB Logística e Distribuição Geográfica, and TEX Courier (Total Express). In addition, he served as finance and investor relations vice-president of Telemar/Oi, Aracruz Celulose/Fibria, and Cielo S.A from 2002 until 2010. He holds a bachelor’s degree in economics from Universidade Federal do Rio de Janeiro and attended the Senior Management Program at INSEAD/FDC.
Henrique José Fernandes Luz. Mr. Fernandes Luz has served as a member of Oi’s board of directors since September 2018. He has been a member of the board of directors of the Maringá Group and the consulting board of Racional Engenharia since April 2018. He currently serves as chairman of the board of the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa – IBGC). He was a partner of PricewaterhouseCooper Auditores Independentes from 1988 to 2018, having previously worked various positions in that firm since 1975. He holds a degree in Accounting from Universidade Candido Mendes in Rio de Janeiro and attended various executive programs at Harvard, University of Virginia, London Business School, University of Buenos Aires and Singularity University. He also serves as a vice chairman of the board of IBEF – Instituto Brasileiro de Executivos de Finanças and of The Dorina Nowill Foundation for the Blind, and as board member of The National Children and Youth Book Foundation and of The São Paulo and Rio de Janeiro Museums of Modern Art.
José Mauro Mettrau Carneiro da Cunha.Mr. Cunha has served as our chairmana member of Oi’s board of directors since February 2009.2009, having served as its chairman until September 2018. From January 2013 until June 2013, Mr. Cunha served as ourOi’s interim chief executive officer, during which time he resigned as chairman and member of ourOi’s board of directors. He resumed his position as ourOi’s chairman and a member of ourOi’s board of directors in June 2013. Mr. Cunha has also served as chairman of the board of directors of Dommo Empreendimentos Imobiliários since 2007.S.A. from 2007 until December 2016. He previously served as chairman of the board of directors of (i)(1) TNL from April 1999 until March 2003 and from April 2007 until February 2012, where he also served as an alternate director in 2006; (ii)(2) Telemar Norte Leste S.A. from April 2007 until April 2012, where he served as a member of the board of directors from April 1999 until May 2012; (iii)(3) TNL PCS from April 2007 until April 2012; (iv)(4) Tele Norte Celular Participações S.A. from April 2008 until February 2012; and (v)(5) Coari Participações S.A. from May 2007 until February 2012. In addition, Mr. Cunha was a director of TmarPart from April 2008 until September 2015. He has also served on the board of directors of Santo Antonio Energia S.A. since April 2008 and Pharol since May 2015. He was a member of the board of directors of Vale S.A. from April 2010 until April 2015. Mr. Cunha was an executive officer of Lupatech S.A. from April 2006 to April 2012, where he served as a member of the board of directors from April 2006 to April 2012. He has also held several executive positions at the BNDES, and was a member of its board of executive officers from 1991 to 2002. He was the vice president of strategic planning of Braskem S.A. from February 2003 to October 2005, and business consultant from November 2005 to February 2007. Mr. Cunha was a member of the board of directors ofLog-In Logistica Intermodal S.A. from April 2007 to March 2011, Braskem S.A. from July 2007 to April 2010, Banco do Estado do Espírito Santo S.A. (Banestes) from April 2008 to April 2009, Light Serviços de Eletricidade S.A. from December 1997 to July 2000, Aracruz Celulose S.A. from June 1997 to July 2002, FUNTTEL from December 2000 to January 2002, FUNCEX- Fundação Centro de Estudos do Comércio Exterior from June 1997 to January 2002, and Politeno Indústria e Comércio S.A. from April 2003 to April 2004. Mr. Cunha holds a bachelor’s degree in mechanical engineering from Universidade Católica de Petrópolis in Rio de Janeiro and a master’s degree in industrial and transportation projects from Instituto
Alberto Luiz Coimbra dePós-Graduação (COPPE) at the Universidade Federal do Rio de Janeiro. He attended the Executive Program in Management at the Anderson School at the University of California in Los Angeles.
Luiz Antonio do Souto Gonçalves.Marcos Bastos Rocha. Mr. Gonçalves has been serving on our board of directors since September 2015. He is currently the superintendent of the Venture Capital area of BNDES Participações S.A. (BNDESPAR), responsible for the investment, monitoring, and divestiture in closely-held companies of the BNDESPAR portfolio and Equity Investment Funds since 2011. Mr. Gonçalves started his career at BNDES in 1982 as engineer of the Priority Area, where he also served as planning manager of BNDESPAR, head of the Urban Mobility Department, head of the Planning Department of BNDES, and superintendent of the capital markets area of BNDESPAR. He also worked as head of the Claims Department of Banco Bradesco between 1980 and 1982. Mr. Gonçalves holds a bachelor’s degree in mechanical engineering from UERJ in Rio de Janeiro (1980), an Executive MBA from COPPEAD/UFRJ in Rio de Janeiro (1980), a master’s degree in production engineering from COPPE/UFRJ in Rio de Janeiro (2001), and Ph.D. in production engineering from COPPE/UFRJ (2003 to 2004).
Rafael Luís Mora Funes. Mr. FunesRocha has served as a member of ourOi’s board of directors since October 2014 and has served as the coordinator of the Engineering, Technology and Networks Committee since September 2015. Mr. Funes is currently a member of the board of directors of Pharol, chairman of the board of directors of Webspectator Corp., and member of the Advisory Board of ISCTE Business School. Mr. Funes holds a bachelor’s degree in economy and business management from Malaga University.
João Manuel Pisco de Castro. Mr. Castro has served as a member of our board of directors since February 2016 and previously was an alternate member of our board of directors since September 2015. Mr. Castro serves as vice president of Grupo Visabeira SGPS S.A., Visabeira Imobiliária SGPS S.A., Visabeira Indústria SGPS S.A., Visabeira Participações Financeiras SGPS S.A., and Vista Alegre Atlantis SGPS S.A. He serves as the CEO of Visabeira Global SGPS S.A., Visagreen SGPS S.A., and Real Life Tecnologia de Informação S.A. and is the manager of the following companies: Ambitermo Engenharia e Equipamentos Térmicos S.A., Gevisar SGPS S.A., Granbeira Sociedade de Exploração e Comércio de Granitos, Granbeira II Rochas Ornamentais S.A., Visacasa S.A., Constructel (Belgium), Constructel Sweden AB, and Constructel (Russia). In addition, Mr. Castro has served as a member of the board of directors of Grupo Visabeira SGPS S.A. from 2002 to 2007, president of the Instituto de Gestão Financeira e de Infra-Estrutiuras da Justiça I.P. from 2007 to 2009 and as manager of the following companies: Visabeira Telecomunicações e Construção SGPS S.A. from 2002 to 2006, Visabeira Serviços SGPS S.A. from 2003 to 2005, Ifervisa S.A. from 2005 to 2007, Viatel S.A. from 2005 to 2007, Visacasa S.A. from 2003 to 2005, Figueira Paranova S.A. from 2005 to 2006 and Beiragás S.A. from 2000 to 2003. He also served as: manager of Visabeira Ltda. from 2004 to 2007, management advisor of Grupo Visabeira from 1995 to 2000, CEO of Grupo Visabeira in Azores from 1993 to 1995, regional officer of Grupo Visabeira in Lisbon from 1989 to 1993, head of department of Centro e Exploração de Carcavelos dos TLP from 1985 to 1989, specialist in production management of TLP from 1983 to 1985, professor at Escola Salesiana do Estoril from 1981 to 1983 and managing partner and professor of Externato das Neves, Viana do Castelo from 1977 to 1981. Mr. Castro holds a bachelor’s degree in electrical engineering, with a specialization in telecommunications and electronics, from Instituto Superior Técnico and an MBA from Faculdade de Economia da Universidade de Lisboa.
Luís Maria Viana Palha da Silva. Mr. Silva has served as a member of our board of directors since September 2015 and currently serves as chairman of the board of directors and CEO of Pharol. Mr. Silva served as vice-chairman of the board of directors and executive committee of GALP Energia, SGPS, SA from 2102 to 2015. He was a member of the board of directors and audit committee of NYSE Euronext from 2012 to 2013. Mr. Silva worked at Jerónimo Martins, SGPS, S.A. as CFO from 2001 to 2004, and as CEO from 2004 to 2010. In 2011, he worked at Jerónimo Martins, SGPS, S.A. as non-executive member of the board of directors and chairman of the corporate responsibility committee. He served as CFO of CIMPOR - Cimentos de Portugal from 1995 to 2001 and as State Secretary of Commerce of Portugal from 1992 to 1995, responsible for foreign economic relations, trade and investment, and supervision of domestic trade, food security, and antitrust enforcement. Mr. Silva served as CFO at COVINA, Companhia Vidreira Nacional, from 1987 to 1992. Mr. Silva holds a bachelor’s degree in economics from Instituto Superior de Economia (1978) and in business administration from Universidade Católica Portuguesa (1981). He attended the Advanced Management Program at University of Pennsylvania - Wharton School of Economics (2005).
André Cardoso de Menezes Navarro. Mr. Navarro has served as a member of our board of directors since September 2015. He also serves as general director of Millennium Investment Bank where he is responsible for the investment division, and as a member of the board of directors of Interoceanico where he is responsible for monitoring the company’s investment portfolio management. He acted as chairman of the Banco Privado Atlantico Europa from 2008 to 2014, as CEO of Société Generale Corporate and Investment Bank from 2002 to 2008, and as shareholder and managing director of Fundamentis Investimentos from 2000 to 2002. Between 1998 and 2002, he worked as managing director of the International Division of Banco Espírito Santo and, between 1992 and 1998, as managing director of the Corporate and the Investment Divisions of the same bank. He worked in the Investment Area of the Companhia Nacional de Mineração (Brazil) from 1986 to 1990, and as credit analyst of the Chase Banco Lar (Brazil) from 1986 to 1988. He graduated with a law degree from the State University of Rio de Janeiro in 1986, received a graduate degree in Finance from the Fundação Getúlio Vargas (“FGV”) in 1988, an MBA from the American Graduate School of International Business - Thunderbird, in 1992, and attended the Executive Program in Leadership at the Harvard Business School in 2014.
Thomas Cornelius Azevedo Reichenheim. Mr. Reichenheim has served as a member of our board of directors since September 2015. He has been the CEO of Carisma Comercial Ltda., a foreign trade company, since 2002, and a member of the board of directors of Jereissati Telecom S.A. since 2010. He served as market relations officer and member of the management of Grupo Jereissati from 1984 to 2015. He served as member of the board of directors of Didier & Levy Associados, a brokerage firm, from 1998 to 2014. Mr. Reichenheim served as: (i) commercial officer, insurance officer, and investment officer of Banco Auxiliar from 1977 to 1983; (ii) foreign exchange manager, commercial manager, and assistant officer of Banco Real from 1972 to 1977; and (iii) trainee of the marketing area of Banco Unibanco from 1969 to 1971. Mr. Reichenheim holds a bachelor’s degree in business administration from EAESP - FGV/SP (1972) and law from FMU (1972). He holds graduate degrees in business administration and finance from EAESP FGV/SP.
Robin Anne Bienenstock. Ms. Bienenstock has served as a member of our board of directors since September 2015. Ms. Bienenstock, a telecom expert, is a partner of Gladwyne Partners, an investment fund. Previously, she was the senior analyst covering Latin American and European Telecoms at Sanford C Bernstein for seven years. Ms. Bienenstock was an associate principal at McKinsey & Co. She started her career working for Bunting Warburg as an investment banking analyst and also worked for the European Union Administration of Mostar in Bosnia, managing a revolving loan fund for small and medium companies. Ms. Bienenstock holds a bachelor’s degree from Oxford University in politics, philosophy and economics, a master’s degree from SDA Bocconi in international economics and management.
Marten Pieters. Mr. Pieters has served as a member of our board of directors since September 2015. He served as managing director and chief executive officer of Vodafone India Ltd. (before that Vodafone Essar Ltd) in India from April 2009 until April 2015. Mr. Pieters has served as vice chairman and chairman of Cellular Operators Association of India between August 2012 and July 2015. Mr. Pieters served as chief executive officer of MSI, which became Celtel International B.V., from 2003 until 2007, during which period the company with mobile operations in 14 African countries was acquired by MTC Kuwait. Between 1989 and 2003, he worked at KPN, the Dutch incumbent operator, where he has served as member of the executive management board of KPN Telecom since 2000 as the person responsible for the Business Solutions division of KPN and for its investments in emerging markets. Mr. Pieters also served as executive vice president of the international operations division of KPN, covering Eastern and Central Europe, Asia, and the United States. In 1989, he started working at KPN as secretary of the board of directors. He also served as commercial officer and general manager of a telecommunications district. Since 1995, Mr. Pieters has been serving in KPN as vice president of the international operations division, and was responsible for the affiliates of KPN. Since 1998, he has been serving as executive vice president for KPN International. He was a member of the (supervisory) boards of a number of operators, including Cesky Telecom in Czech Republic, Eircom plc in Ireland, Utel and UMC in the Ukraine, Pannon GSM in Hungary, Euroweb, KPNQwest and Xantic, a joint venture between Telstra and KPN. Mr. Pieters served as non-executive officer of Millicom International Cellular SA between May 2008 and February 2009. Before beginning his career in the telecommunications industry, Mr. Pieters worked for 11 years (from 1979 until 1989) at the Royal Smilde Foods as chief financial and strategic planning officer and CEO of certain subsidiaries in the Netherlands. Mr. Pieters currently is a member of the board of directors of Vodafone India, INDUS Towers and Vodacom in South Africa. He is actively involved in charities and serves as chairman of the supervisory board of the Investment Fund for Health in Africa. He also serves as officer of Social Investor Foundation for Africa. Mr. Pieters holds a law degree
from University of Groningen, Netherlands, and a graduate degree in economics from the University of Groningen, Netherlands.
Ricardo Malavazi Martins.Mr. Martins has served as a member of our board of directors since September 2015.January 2018. He has been a member of the board of directors of Jereissati Participações S.A., a company that holds equity interest in other companies,IRB Brasil RE since March 2011 and2019, a member of the board of directors of PharolBC2 Construtora since May 2015. He is currently an associate of TPYX Assessoria Empresarial and has been serving asApril 2016, a member of the Corporate Governance Committeeboard of directors of Brazil Fast Food Corporation since 2009, a senior partner at DealMaker since July 2015 and anon-executive senior advisor at Roland Berger Strategy Consultants since September 2015. Between 2010 and 2015, Mr. Rocha was the vice president of finance and administration at Invepar – Investimentos e Participações em Infraestrutura and a member of the American Chamberboards of Sãdirectors of the companies in its portfolio. He was a member of the fiscal council of Abril Educação Paulo since 2003.from 2012 to 2015. Between 2008 and 2009, Mr. MartinsRocha was the CFO, investor relations officer, CIO, shared services officer and human resources officer at Globex Utilidades. Previously, he held the following positions: general executive officer at Banco Investcred Unibanco S.A. – Pontocred from 2005 until 2008; CFO and investor relations officer at Sendas S.A. from 2003 until 2005; CFO at the following companies: Horizon Telecom International from 2001 until 2002, GVT – Global Village Telecom in 2001, Global Telecom S.A. from 2000 until 2001 and Brazil Fast Food Corp (Bob’s) from 1996 until 1998; administrative officer at Sony Music Entertainment, from 1998 until 1999; and controller at Cyanamid Química do Brasil from 1991 until 1996. Mr. Rocha holds bachelor’s degree in electronic engineering from the Military Institute of Engineering (IME), an MBA in finance fromPUC-RJ and an Executive MBA in management from PDG/EXEC – SDE/IBMEC.
Maria Helena dos Santos Fernandes de Santana. Ms. Fernandes de Santana has served as chief financiala member of Oi’s board of directors since September 2018. She has been a member of the board of directors of the Spanish Stock Exchange since April 2016; a member of the audit committee of Itaú Unibanco Holding S.A. since June 2014 and investments officera trustee of PETROS for 6 years and as officer and consultant of Stratus Investimentos (a private equity management firm) for 3 years. Hethe International Financial Reporting Standards Foundation since January 2014. She was a member of the board of directors of Companhia Brasileira de Distribuição, a retail company, between February 2013 and June 2017, Totvs S.A., an information technology company, between April 2013 and March 2017 and CPFL Energia S.A., an energy company, between April 2013 and April 2015. She previously worked at the following companies: Trisul S.A.; Fras-Le S.A.; Iguatemi Empresa de Shopping Centers S.A.; CPFL;CVM, where she served as president, between July 2007 and Coteminas S.A. HeJuly 2012, and director, between July 2006 and July 2007. She was chairwoman of the executive committee of the IOSCO – International Organization of Securities Commission between 2011 and 2012. She worked at the São Paulo Stock Exchange – BOVESPA between July 1994 and May 2006, where she was responsible for listed company oversight, attracting new companies and implementing the Novo Mercado. She holds a degree in Economics from the University of São Paulo.
Paulino do Rego Barros Jr. Mr. Barros has served as a member of the fiscal council of Brasil Telecom, Brasil Telecom Participações S.A., Telemar Participações S.A., and Tele Norte Leste Participações S.A. Mr. Martins was a member of the advisory board of ABVCAP (Associação Brasileira de Venture Capital e Private Equity) and of the investment committee of ABRAPP. He started his executive career as an economist focused on treasury transactions of banks (responsible for the economic areas of BCN and Bradesco) between 1990 and 2003, when he served as vice-president of the Economy Commission (Comissão de Economia) of FEBRABAN. Mr. Martins holds a bachelor’s degree in economics from UNICAMP, where he also attended courses in the master’s program, and attended courses for the MBA program in management at IBMEC-RJ.
Alternate Directors
Fernando Marques dos Santos. Mr. Santos has served as an alternate member of ourOi’s board of directors since September 2018. He was the Interim CEO of Equifax, INC, from September 2017 to April 2018, having previously led the company’s business in theAsia-Pacific region from July to September 2017, the company’s US Information Solutions business from October 2015 to June 2017 and its international business unit, covering Latin America, Europe, Asia Pacific and Canada, from April 2010 to October 2015. Prior to joining Equifax, he founded PB&C – Global Investments (LLC), an international investment and consulting firm, and has been its President since November 2008. From January 2007 until November 2008, he was the President of AT&T Global Operations. He held various executive positions at BellSouth Corporation from December 2000 to January 2007 before BellSouth was acquired by AT&T, including Corporate Product Officer, President of BellSouth Latin America, Corporate Regional Vice-President of Latin America, and Chief Planning and Operations Officer for BellSouth International. From February 1996 to December 2000, he worked for Motorola, Inc., having served as Corporate Vice President and General Manager – Latin America Group and as Corporate Vice President and General Manager of Market Operations – Americas, for the Cellular Business Unit. He also held various positions at The NutraSweet Company, as well as at the US and Latin American divisions of Monsanto Company. He served ason the advisory board of Cingular Wireless, Converged Services Group and on the board of Alianza – the BellSouth Corporation Latino Association. Between 2012 and 2015, Paulino served on the board of NII Holdings, and he is currently a member of our board of directors from May 2012 until September 2015. Since 2012, he has been an executive officer of BNDES, where he is responsible for the human resources, AGIR Project and information technology and processes departments. Prior to being named an executive officer, he served in the office of the president and vice-president of BNDES. Mr. Santos has worked at BNDES since 1983, having served as superintendent of the credit department from 1994 to 2003, manager of the credit department (compliance) from 1989 to 1994 and manager of the projects department from 1983 to 1989.recently created McKinsey & Company, Inc. – Crisis Response Advisory Board. He holds a degree in mechanical and electrical engineering from Universidade do Estado do Riothe School of Industrial Engineering and the College of Engineering of São José dos Campos, in São Paulo, and holds a master’s degree in business administration from Washington University in St. Louis.
Ricardo Reisen de Janeiro – UERJ.
Joaquim Dias de Castro.Pinho.Mr. CastroReisen has served as an alternate member of our board of directors since September 2015. He has been manager of the Capital Markets department of the BNDES since 2008 and worked in the Credit department of the BNDES from 2004 until 2008. Mr. Castro has been a member of the fiscal council of AES Eletropaulo since April 2011 and a member of the fiscal council of JBS SA since April 2013. He served as a member of the fiscal council of AES Tiete from April 2011 to April 2013 and as a member of theOi’s board of directors of Rede Energia S.A. from April 2010 to April 2012. He alsosince August 2016 having served as a member of the board of directors of Renova S.A. from April 2013 to April 2014, aits vice-chairman until September 2018. He is also an independent member of the board of directors of Light S.A. from April 2010 to April 2012, board of directors of Tele Norte Leste Participaçõesand Brado Logística S.A., Telemar Participações S.A. from June 2015 to September 2015, and CTX Participações S.A. from 2010 to 2012. Mr. Castro holds a bachelor’s degree in economics from Universidade Federal do Rio Grande do Sul and a master’s degree in economics from Escola de Pós Graduação em Economia da Fundação Getúlio Vargas - RJ.
João do Passo Vicente Ribeiro.Mr. Ribeiro has served as an alternate member of our board of directors since September 2015. He has been as manager of Pharol SGPS, S.A. since May 2015 and served as CEO of AMP-Sociedade Gestora de Fundos de Investimento Mobiliário from 2014 to 2015. He was appointed coordinator of the Work Group on Financial Mechanisms and Instruments to Support Tourism of the Tourism Office in Portugal in 2012. Mr. Ribeiro served as manager of SLN SGPS, S.A. from 2008 to 2009, manager of Banco Português de Negócios in 2008, president and founder of Quadrantis - Sociedade de Capital de Risco from 2007 until 2008, CEO of PME Investimentos from 2004 to 2007, CEO of APFIN-Associação Portuguesa das Sociedades Gestoras de Património e Fundos de Pensões from 2002 to 2003, manager of AF Investimento - Sociedade Gestora de Património e Fundos de Investimento do Grupo BCP from 2002 to 2003, general officer of BCP-Banco Comercial Português and Banco Português do Atlântico in the private banking, large companies, and retail banking areas from 1986 to 2002 and officer in Paris and London for the branches of Banco Português do Atlântico from 1980 to 1986 and of the Instituto de Crédito de Angola from 1974 to 1975. Mr. Ribeiro holds a bachelor’s degree in finance from Instituto Superior de Economia da Universidade de Lisboa and an MBA degree from INSEAD in Fontainebleau, France.
Pedro Guimarães e Melo de Oliveira Guterres. Mr. Guterres has been a member of our board of directors since February 2016 and previously served in this capacity from October 2014 to September 2015. Mr. Guterres has served as a regular member of the board of directors of Pharol Brasil Ltda. since 2015. Mr. Guterres was an officer of Telemar Participações S.A. from 2011 to 2015, a member of the advisory board of directors of BratelEditora do Brasil from 2011 to 2015,S.A. and a member of the board of directors of Medi Telecom from 2008 to 2009 and director of planning and control of Portugal Telecom SGPS, S.A. (currently Pharol) from 2009 to 2010.Bradespar’s fiscal council, all with terms ending in April 2019. Previously, Mr. Guterres held the positions of director of corporate finance of Portugal Telecom, SGPS, S.A. from 2008 to 2010, director of planning and control of PT Comunicações S.A. from 2007 to 2008, director of planning and control of PT Multimédia from 2003 to 2007 and director of business development of Portugal Telecom, SGPS, S.A. from 2000 to 2003. Before joining the Portugal Telecom Group, Mr. Guterres worked at Merrill Lynch Investment Banking from 1997 to 2000. Mr. Guterres holds a degree in economics from the Universidade Nova de Lisboa.
Maria do Rosário Amado Pinto Correia.Mrs. Pinto Correia hasReisen served as an alternate member of our board of directors since February 2016. She has served as a member of the board of directors of Pharol since 2015, chairman of Ferreira Marques & Irmão since 2012, and CEO of Topázio since 2012. Previously, Mrs. Pinto Correia held the positions of advisor to the Board of PT International Investments in 2007, chairman and legal representative of CTTC-Archway/Beijing from 2005 until 2007, member of the board of directors of PT Asia from 2005 until 2007, responsible for business development in Asia and Brasil for CLSBE Executive Education from 2012 until 2015, supervisor of Directel (Yellow Pages) Cosmos and Telesat (technical support for MCTV) activities from 2005 until 2007, CEO of Macau Cable TV from 2005 until 2007, director of client satisfaction and service quality at PT-SGPS in 2004, director of knowledge management and communication at PT Comunicações in 2003, head of office of OGILVYONE Portugal from 1994 until 2002), publisher of the Portugal edition of the Marie Claire magazine from 1992 until 1994), account director at McCann Direct and director of client service at McCann-Erickson Lisbon from 1987 until 1992, product manager & director of the Direct Mail Office at CTT – Correios de Portugal from 1981 until 1987. Mrs. Pinto Correia holds a bachelor’s degree in economics from the Católica Lisbon School of Business and Economics, a master’s degree in business by Nova School of Business and an MBA by Wharton School.
Nuno Rocha dos Santos de Almeida e Vasconcellos. Mr. Vasconcellos has served as an alternate member of our board of directors since September 2015. He is currently the chairman of the board of directors of the following companies: Rocha dos Santos Holding SGPS S.A., Ongoing Strategy Investments SGPS S.A., Ongoing TMT, Ongoing Media, Ongoing Energy, Económica SGPS, RS Holding SGPS, Insight Strategic Investments SGPS S.A., Ongoing Comunicações e Participações S.A., and Heidrick & Struggles. Mr. Vasconcellos was first elected as an executive officer of Pharol in 2006 and was reelected in 2012 and 2015. He served as the chairman of the board of directors of Rocksun S.A. from 2008 to 2012, member of the general council of ISCTE from 2009 to 2011, member of the board of executive officers of Automóvel Clube de Portugal from 2007 to 2011, managing partner of the consulting area of Heidrick & Struggles in Portugal from 1995 to 2006 and officer of Andersen Consulting (current Accenture) from 1987 to 1995. Mr. Vasconcellos holds a bachelor’s degree in business administration from Curry College in Boston.
Sérgio Bernstein. Mr. Bernstein has served as an alternate member of our board of directors since April 2014. Mr. Bernstein is a member of the board of directors of Iguatemi Empresa de Shopping Centers S.A., a holding company that invests in other companies. He began his career as a trainee in the finance department of General Electric do Brasil in 1961, where he eventually served as director controller for six years and vice-president of finance for four years. He also served as vice-president of finance of Grupo Jereissati from 1990 until 2007, chairman of the fiscal council of TNL from May 2009 until February 2012 and member of the fiscal council of Coari from September 2009 until February 2012. Mr. Bernstein holds a bachelor’s degree in civil engineering from Escola Nacional de Engenharia do Rio de Janeiro.
Marcos Grodetzky.Mr. Grodetzky has served as an alternate member of our board of directors since September 2015). He currently is an independent member of the board of directors of SmilesEMGEA from 2018 until 2019, BR Insurance S.A. from 2016 until 2018, Tupy S.A. and Itacaré Capital Investments Ltd. From 2009 until 2015, Saraiva S.A. Livreiros Editores from 2013 until 2015 and 2009 until 2012, Metalfrio Solutions S.A. from 2007 until 2011, and Banco Nossa Caixa S.A. from 2008 until 2009. He was also a member of the fiscal council of Embratel Participações S.A. from 2009 to 2010), Centro de Cultura Judaica and Enevachairman of the advisory board of LAB SSJ S.A., and the CFO of União Israelita Brasileira do Bem Estar Social - UNIBES, a philanthropic nonprofit organization, senior advisor to Banco UBS, from 2009 until 2013, and a foundingvoluntary board member of Mediator Assessoria Empresarial Ltda. Until October 2013, Mr. GrodetzkyAACD from 2006 until 2014. As a board member, he has participated in advisory committees in the areas of finance, audit, risk and compliance, people and strategy in the above-mentioned companies. He served as CEOan executive in areas of DGB S.A., a logistics holding company of Grupo Abril S.A.corporate finance, corporate and parent company of the following companies: Dinap - Dist. Nacional de Publicações, Magazine Express Comercial Imp e Exp de Revistas, Entrega Fácil Logística Integrada, FC Comercial e Distribuidora, Treelog S.A. - Logística e Distribuição, DGB Logística e Distribuição Geográfica,investment banking and TEX Courier (Total Express). In addition, he served as
financestrategic planning in ABNAmro Bank Brasil, Banco Garantia and investor relations vice-president of Telemar/Oi, Aracruz Celulose/Fibria,Banco Itaú between 1989 and Cielo S.A from2001. From 2002 until 2010.2014, Mr. Reisen was a senior researcher at Harvard Business School. He holds a bachelor’s degree in economicsmechanical engineering and a master’s degree in production engineering/finance from Pontifícia Universidade FederalCatólica do Rio de Janeiro and attendeda doctorate in business administration/strategy from Fundação Getúlio Vargas – EAESP. Mr. Reisen also holds a degree in business administration through the SeniorAdvanced Management Program at INSEAD/FDC.of the Wharton School of the University of Pennsylvania and the Program for Management Development of Harvard Business School. He has been a Certified Accredited Board Member by the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa – IBGC) since 2010 and earned a specialization in corporate governance from Harvard Business School.
Pedro Zañartu Gubert Morais Leitão.Rodrigo Modesto de Abreu. Mr. LeitãoAbreu has served as an alternatea member of ourOi’s board of directors since September 2015.2018. He has been the chairmanChief Executive Officer of Quod, a big data company focused on credit risk analysis, since June 2017. He was Managing Partner of Giau Consultoria Empresarial Ltda, a boutique management consulting firm, from November 2016 to November 2017, and was at the same time member of the board of directors of Prio Energy SGPSVogel Soluções em Telecomunicações e Informática S.A., which operates fiber optic telecommunication services. From March 2013 to May 2016, he was the Chief Executive Officer and Board Member of TIM Participações S.A. and Chief Executive Officer of TIM Celular S.A. From December 2008 to March 2013 he served as President of the Brazilian operations of Cisco Systems, one of the largest information technology companies globally. Prior to that, Mr. Abreu was also Managing Director of Cisco Systems for the North of Latin America and the Caribbean from May 2006 to December 2008, President of Nortel Networks Brazil, a telecommunications equipment company, from June 2004 to April 2006, and Chief Executive Officer of Promon Tecnologia Ltda., a technology services company, from July 2000 to June 2004. Mr. Abreu holds a degree in Electrical Engineering from the State University of Campinas and an MBA from the Stanford Graduate School of Business.
Wallim Cruz de Vasconcellos Junior. Mr. Vasconcellos has served as a member of Oi’s board of directors since May 2015,September 2018. He has approximately 30 years of experience in the financial sector, specifically in mergers and acquisitions, debt restructuring, private equity investments and public share issuances and has participated in various boards of directors in both Brazil and abroad. In 2004, he founded Iposeira Capital Ltda., an independent company specializing in corporate advisory in Brazil. He was a partner at Lakeshore Partners from March 2013 to December 2014 and a founding partner of the STK Capital from 2010 to 2013. From June 2003 to June 2008, he served as Senior Representative in Brazil of the Special Operations Area of the International Finance Corporation – IFC, where he alsoworked on credit recovery and equity investments in Brazil and managed a portfolio of approximately US$300 million. From September 2002 to January 2003, he was Director of the BNDES Industry Segment, responsible for the bank’s projects with companies in the industry, commerce and services sectors, and from October 2001 to August 2002 he served as chairmanSuperintendent of the executive committee.BNDES Fixed Income Segment, where he oversaw the department’s restructuring. He served as chairmandirector of BNDESPAR, a subsidiary of BNDES, from April 1998 to September 2001, where he was responsible for the areas of investments and divestitures, including corporate restructuring, asset portfolio management, development of structured operations in the domestic and international markets, structuring of private equity funds and governance. He is currently an independent member of the board of directors, audit committee, and nominating committee of ONI SGPSPilgrim’s Pride Corporation and has served as a member of the boards of directors of Cremer, Sendas, Aracruz Celulose (currently Fibria), Vale, Marlim Participações, Companhia Distribuidora de Gas do Rio de Janeiro – CEG and Santos Brasil Participações. He holds a degree in Economics and a post-graduate degree in Finance from 2012the Pontifical Catholic University of Rio de Janeiro. He also holds a masters in Sports Management from the Cruyff Institute.
Roger Solé Rafols. Mr. Solé has more than 20 years of experience in telecommunications, in the areas of marketing, product development, innovation, strategy and P&L management. He has been Vice-President of Marketing at Sprint Corporation since 2015. Prior to 2013, administratorthat time, he held the following positions: Vice-President of UnyLeya Brasil and UnyLeya Portugal from 2010 to 2011. Mr. Leitão currently holds non-executive roles, including at MoteDAlma SGPS since 2009, Villas Boas ACE, S.A. since 2012, and FikOnline Ltda. since 2003. Ha previously held other non-executive roles, including at Quifel Natural Resources, S.A. from 2007 to 2012 and MegaFin S.A.Marketing from 2009 to 2012.2015, and Manager of Consumer Marketing from 2009 to 2011 at TIM Brasil; and Marketing Manager – Residential Segment from 2006 to 2008, and Manager of Value Adding Products and Services from 2001 to 2006 at Vivo. He also worked at DiamondCluster, known today as Oliver Wyman, from 1996 to 2001. Mr. LeitãoSolé holds a bachelor’s degree in business administration from Universidade Católica PortuguesaBusiness and a master’s degreeMasters in business administrationBusiness Administration from Kellogg GraduateESADE – Escuela Superior de Administración y Dirección de Empresas, Barcelona, and a Masters in Management of Audiovisual Companies from UPF – Universitat Pompeu Fabra, Instituto Desarrollo Continuo (IDEC), Barcelona. He also completed an exchange MBA program at UCLA – University of California, Los Angeles; an Advanced Management Program at IESE Business School, Universidad de Navarra, São Paulo – Barcelona; and a short executive education program in Finance and Strategy for Value Creation at The Wharton School at the University of Management at Northwestern University.Pennsylvania, Philadelphia.
Executive Officers
OurThe board of executive officers is ourOi’s executive management body. OurOi’s executive officers are ourOi’s legal representatives and are responsible for ourOi’s internal organization andday-to-day operations and the implementation of the general policies and guidelines established from time to time by ourOi’s board of directors.
Our Oi’sby-laws require that the board of executive officers consist of between three and six members, including a chief executive officer, a chief financial officer, investor relations officer and chief legal officer. Our Oi’sby-laws provide that ourOi’s chief executive officer may not serve as chairman of ourOi’s board of directors. Each officer is responsible for business areas that ourOi’s board of directors assigns to them. The members of our board of executive officers,them and, other than ourOi’s chief executive officer and ourOi’s chief financial officer, need not have no formal titles (other than the title of executive officer or “Diretor”).
TheGenerally, the members of ourOi’s board of executive officers are elected by ourOi’s board of directors fortwo-year terms and are eligible for reelection. The current term of all of our executive officers ends on the date of our first board of directors’ meeting following our annual shareholders’ meeting in 2016. OurOi’s board of directors may remove any executive officer from office at any time with or without cause. According to the Brazilian CorporationCorporate Law, executive officers must be residents of Brazil but need not be shareholders of our company. OurOi. Oi’s board of executive officers holds meetings when called by ourOi’s chief executive officer or any two other members of ourOi’s board of executive officers.
The RJ Plan, however, provides certain corporate governance rules that apply to Oi’s board of executive officers during the effectiveness of the RJ Plan, superseding the provisions of Oi’sby-laws. For example, Oi’s board of directors may appoint a new board of executive officers, provided that Eurico de Jesus Teles Neto and Carlos Augusto Machado Pereira de Almeida Brandão must remain on the board of executive officers as chief executive officer and chief financial officer/investor relations officer, respectively, until Oi ceases to be supervised by the RJ Court, which will occur on the second anniversary of the Judicial Ratification of the RJ Plan; provided that, if Mr. Teles and Mr. Brandão are removed from their positions as chief executive officer and chief financial officer/investor relations officer, respectively, prior to the closing of the RJ Plan, then they receive the compensation packages to which they are currently entitled.
The following table sets forth certain information with respect to the current members of ourOi’s board of executive officers.
Name | Position | Date Elected/ | Age | |||||
| Chief Executive Officer and Chief Legal Officer | 62 | ||||||
| Chief Financial Officer and Investor Relations Officer | 44 | ||||||
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| Executive Officer without specific designation | 52 | ||||||
| Executive Officer without specific designation | 51 | ||||||
Summarized below is information regarding the business experience, areas of expertise and principal outside business interests of ourOi’s current executive officers.
Bayard De Paoli Gontijo. Mr. Gontijo has served as our chief executive officer since January 2015 and our chief financial officer and investor relations officer since June 2013. Mr. Gontijo served as our interim chief executive officer between October 2014 and January 2015, and has served as one of our executive officers since
April 2012. Mr. Gontijo started working at Oi as Treasury Manager in 2003. Mr. Gontijo has over 23 years’ experience in the financial market and, since 1993, works with large companies and banks such as Banco Bamerindus do Brasil S.A, HSBC Bank Brasil S.A., and NET Serviços de Comunicações S.A. Mr. Gontijo holds a degree in business administration and an MBA from Coppead / UFRJ.
Flavio Nicolay Guimarães. Mr. Guimarães has served as our chief financial officer and investor relations officer since April 2015. Previously, he served as our treasury director from May 2010 to April 2015, regional corporate treasurer at Noble Brasil S.A. from 2008 to 2010 and treasury manager at Brookfield Brasil form 2006 to 2008. Mr. Guimarães has also served as a trader at CSN - Companhia Siderúrgica Nacional from 2003 to 2006 and Ford Motor Company Brasil from 2000 to 2003. He holds a bachelor’s degree in foreign trade from Faculdades Associadas de São Paulo and a specialization in the executive development program from The Wharton School, University of Pennsylvania.
Eurico de Jesus Teles NetoNeto.. Mr. Teles has served as ourOi’s chief executive officer since November 2017 and as Oi’s chief legal officer since May 2016, having previously served as one of ourOi’s executive officers from April 2012 until May 2016. He was a member of ourOi’s board of directors from 2009 to 2011 and an alternate member of ourOi’s board of directors until April 2012. He previously served as a member of the board of directors of Coari Participações S.A. from 2009 until February 2012 and has been a member of the board of directors of Telemar from 2009 until its termination in 2012. He was the legal officer of TNL from April 2007 through February 2012 and the legal manager of Telemar from April 2005 until April 2007. He previously served as manager of the securities division at Telecomunicações de Bahia S.A., where he went on to hold the position of legal consultant in 1990. Mr. Teles holds a bachelor’s degree in economic sciences and law from Universidade Católica de Salvador and holds a master’s degree in Employment Lawemployment law from Universidade Estácio de Sá.
Marco Norci SchroederCarlos Augusto Machado Pereira de Almeida Brandão. Mr. SchroederBrandão has served as one of our executive officers since April 2015. He has also served as the financial officer of our international operations since July 2014 and was elected as vice president and chief financial officer of PT Portugal in August 2014. Previously, Mr. Schroeder has served asOi’s chief financial officer and investor relations officer of Contax Participaçõessince March 2018. He served as Oi’s interim chief financial officer and interim investor relations officer since October 2017. Previously, he was an analyst at Energisa S.A., from 20112000 to 2013, a member of the board of directors of Fundação Sistel2001, an analyst at Furnas S.A. from 20092002 to 2012, officer of the controlling area of2003 and specialist in planning and control at Sendas S.A. from 2003 to 2004. He has held various positions within Oi and Telemar Norte Leste S.A. since 2004, including Market Specialist, Revenue Planning Coordinator, Business Valuation Manager, Senior Manager of New Business and M&A, Senior Manager of Planning and Budget, Director of Strategy and Fronts of Transformation and Director of International Operations. He holds a degree in management from 2002 to 2011,UFJF (Federal University of Juiz de Fora) and a degree in statistics from UFJF as well as a master’s degree in finance from IBMEC.
José Claudio Moreira Gonçalves. Mr. Gonçalves has served as Oi’s chief financialoperating officer since March 2018. He built his career in the telecommunications industry and has expertise in the operation, maintenance and technological development of Televisão Gaucha S.A. from 1991 to 1997, chief financial officerOi’s networks. Mr. Gonçalves previously served as Oi’s executive director of Televisão Cidade S.A. from 1999 to 2001operations since June 2011. He joined Oi in March 2000, having served as operations manager, director of network deployment and officerdirector of the controlling area of Net Controller from 1998 to 1999. He chairs the fiscal council of FATL.engineering. Mr. SchroederGonçalves holds a bachelor’s degree in economicsmechanical production engineering from Federal UniversityPontifícia Universidade Católica(PUC-Rio), a master’s degree in business administration from Fundação Getúlio Vargas(FGV-RJ), an executive MBA from Fundação Dom Cabral (FDC) and apost-executive MBA from Kellogg School of Rio Grande do SulManagement.
Bernardo Kos Winik. Mr. Winik has served as Oi’s chief commercial officer since March 2018. He previously served as Oi’s director of retail since December 2014 and a specializationdirector of retail sales from September 2011 to December 2014. He has experience in the general management program at Harvard Business School.technology, consulting and telecommunications markets, having worked in companies such as Claro, BS Consulting, NCR and EDS do Brasil. Mr. Winik holds a bachelor’s degree in information technology form Universidade Mackenzie and apost-graduate degree in business from Escola de Administração de Empresas de São Paulo (EAESP/FGV).
Fiscal Council
The Brazilian CorporationCorporate Law requires usOi to establish a permanent ornon-permanent fiscal council(conselho fiscal).Our Oi’sby-laws provide for a permanent fiscal council composed of between three and five members and their respective alternate members. The fiscal council is a separate corporate body independent of ourOi’s board of directors, ourOi’s board of executive officers and ourOi’s independent accountants. The primary responsibility of the fiscal council is to review ourOi’s management’s activities and ourOi’s financial statements and to report their findings to ourOi’s shareholders.
The members of ourOi’s fiscal council are elected by ourOi’s shareholders at the annual shareholders’ meeting forone-year terms and are eligible for reelection. The terms of the members of ourOi’s fiscal council expire at the annual shareholders’ meeting in 2017.2020. Under the Brazilian CorporationCorporate Law, the fiscal council may not contain members
who are members of ourOi’s board of directors or ourOi’s board of executive officers, spouses or relatives of any member of ourmemberof Oi’s board of directors or ourOi’s board of executive officers, or our employees. To be eligible to serve on ourOi’s fiscal council, a person must be a resident of Brazil and either be a university graduate or have been a company officer or fiscal council member of another Brazilian company for at least three years prior to election to ourOi’s fiscal council. Holders of preferred sharesPreferred Shares without voting rights andnon-controlling common shareholders that together hold at least 10.0% of ourOi’s voting share capital are each entitled to elect one member and his or her respective alternate to the fiscal council.
The following table sets forth certain information with respect to the current members of ourOi’s fiscal council and their alternates.
Name | Position | Member Since | Age | |||||
| Chairman | 70 | ||||||
| Alternate | April | 62 | |||||
| Member | April 2016 | 68 | |||||
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Wiliam da Cruz Leal | Alternate | April | 62 | |||||
| Member | 48 | ||||||
| Alternate | April | 52 | |||||
Raphael Manhães Martins(1) | Member | April 2019 | 36 | |||||
Domenica Eisenstein Noronha(1) | Alternate | April 2018 | 41 | |||||
| (1) | Elected by |
We summarize below the business experience, areas of expertise and principal outside business interests of the current members of ourOi’s fiscal council and their alternates.
Fiscal Council Members
Allan Kardec de Melo Ferreira.Mr. Ferreira has served as chairman of our fiscal council since February 2009. He has also served as an alternate member of the fiscal council of TmarPart since April 2006 and a member of the fiscal council of TNL from April 2002 through February 2012. From 1971 to 1993, he was an in-house counsel with Construtora Andrade Gutierrez. His current activities include management consultancy services to a number of companies in the civil, commercial and tax areas, participation in corporate restructuring processes (mergers, spin-offs, disposals, sale of assets) of the telecommunications companies of the Andrade Gutierrez Group and in several bidding processes conducted by the Minas Gerais Roads Department (Departamento de Estrada de Rodagem de Minas Gerais), the Belo Horizonte Traffic Department (Empresa de Transporte e Trânsito de Belo Horizonte), the Ministry of Communications and ANATEL. He holds a degree in law from Pontifícia Universidade Católica de Minas Gerais, in addition to having participated in several extension courses in foreign trade, in particular export services, at Fundação Centro de Comércio Exterior, FDC, Foreign Trade Ministry, and Construtora Andrade Gutierrez.
José Cláudio Rego Aranha. Mr. Aranha has served as a member of our fiscal council since April 2016. He served as a member of the independent committee of Brazil Telecom July 2011 until August 2011, a member of the independent committee of Açúcar Guarani April 10 until July 2010 and a member of the independent committee for JBS October 2009 until January 2010. Previously, he was a director of Banco Nossa Caixa Capital Markets from September 2009 until December 2009, investment analyst, manager and head of department of BNDESPAR from 1979 until 2008, advisor to the Board Finance and Infrastructure and Superintendent of Fixed Income Area of BNDES from 1983 until 2002, project analyst at PETROQUISA from 1976 until 1979, planning engineer at Promom ENGINEERING from 1974 until 1976, project analyst at Natron Engineering in 1973, engineer at Caterpillar Brazil Services from 1972 until 1973 and project analyst at Tecnometal from 1971 until 1972. Mr. Aranha holds a bachelor’s degree in industrial mechanical engineering from the School of Engineering Fluminense Federal University, a graduate degree in industrial management from the Research Institute for Management Science in Delft, Holland and an executive MBA in business administration from COPEAD.
Pedro Wagner Pereira Coelho. Mr. Coelho has served as a memberchairman of ourOi’s fiscal council since April 2017 and member since April 2016. He has also servesserved as chairman of the fiscal council of Magnesita S.ARefratários S.A. since April 2008, as member of the fiscal council of Parnaiba Gas Natural Gas S.AS.A. since October 2015 and as member of the supervisory board of EstacioEstácio Participações S.AS.A. since April 2012. Mr. Coelho was also a partner of Carpe Diem - Consulting, Business Planning and Consulting– Consultoria, Planejamento e Assessoria Empresarial Ltda. fromFrom 2011 until 2016. He worked as controller at Investment BankBanco de Investimentos Garantia S.AS/A., investment bank, from May 1982 until July 1997 at and as an auditor at Pricewaterhouse Coopers Independent AuditorsAuditores Independentes from October 1978 to April 1981. Previously, he was chairman of the fiscal council of Lojas Americanas S.A,S.A., Tele Norte Leste Participações SA,S.A., Telemar Participações S.A,S.A., TAM S.AS.A. and Enersul - Energy of SouthEmpresa Energética de Mato Grosso.Grosso do Sul S.A. (Enersul). Mr. Coelho holds a bachelor’s degree in business administration from the University SocietySociedade Universitária Augusto Motta -– SUAM and in accounting from SOMLEI.
Manuel Jeremias Leite Caldas. Mr. Caldas has served as a member of our fiscal council since March 2013. He has been a consultant at Alto Capital GestãoSociedade Madeira de Recursos since 2007 and a partner at Argucia Capital Gestão de Recursos Ltda. since 2012. In addition, he served as manager of the technical department of Banco PEBB S.A. from 1996 to 2006, research manager at Banco Gulfinvest S.A. from 1994 to 1995, manager of the economics department at Banco Nacional S.A. from 1991 to 1994, financial analyst at Banco Bozano Simonsen S.A. from 1990 to 1991, engineer at Light Serviços de Eletricidade S.A. from 1981 to 1990 and engineer at Promon in 1981. Mr. Caldas has served as a member of the board of directors of Eletropaulo Metropolitana Eletricidade de São Paulo S.A. since April 2012, an alternate member of the board of directors of Contax Holdings since 2012 and São Carlos Empreendimentos e Participações S.A. from 2011 to 2013, member of the board of directors of Forjas Taurus from 20013 until 2015; a member of the fiscal council of Centrais Elétricas Brasileiras S.A.Ley – Eletrobras since 2012 until 2015. He also served as a member of the fiscal council of Companhia Energética do Rio Grande do Norte (Cosern) from 2009 to 2011, , member of the fiscal council of Oi from 2013 until 2015, member of the fiscal council of Cesp since 2013 until 2016, member of the fiscal council of Eneva since 2015 until 2016 an member of the fiscal council of Tegma logistica from 2013 to 2014. Mr. Caldas holds a bachelor’s degree in business management from UERJ, a degree in electrical engineering from Instituto Militar de Engenharia – IME and a master’s degree and PhD in economics from EPGE - Fundação Getúlio Vargas.
Alternate Fiscal Council Members
Piero Carbone. Mr. Carbone has served as an alternate member of our fiscal council since April 2016. He also currently serves as a member of the supervisory board of the following companies: Ciapam Cia. Agropastoril Mucuri since 2015, Gado e Cana de Açúcar Fontes Agropecuária S.A. since 2015, Gado e Cana de Açúcar Itaguay Imobiliária e Participações S.A. since 2015, Condor S.A. since 2014, Industry of non-lethal weapons Risk Office S.A. since 2014 and Cultura Inglesa S.A. since 2011. Previously, he worked in accounting at Telemar and Oi from May 1999 to June 2011 and as an audit trainee at PricewaterhouseCoopers from 1978 to 1998. Mr. Carbone holds a bachelor’s degree in accounting from the University Santa Ursula, an MBA in business management from Fundação Dom Cabral and a degree in executive education at the University Estacio de Sá.SOMLEY.
Álvaro Bandeira. Mr. Bandeira has served as a member of Oi’s fiscal council since April 2017 and as an alternate member of ourOi’s fiscal council since April 2016. He has also served as chief economist of Brokerage Modalmais since 2015, the year he joined the institution. Mr. Bandeira also served as chief economist of Orama from 2011 untilto 2015 and held various positions at Ágora Corretora from April 2001 tountil December 2010. He was president of the Brazilian Futures Exchange, (BBF), president of regional chapters of APIMEC for five administrations, Director of BVRJ and BM&F, as well as former full member of the Supervisory Board of Souza Cruz. Mr. Bandeira has spoken in several conferences related to the capital markets and personal finance and has developed lectures at universities and companies on related issues. He regularly contributes to publications regarding economics, and on financial education websites including Dinheirama and Infomoney. Mr. Bandeira holds a bachelor’s degree in economics from UFRJ and a graduate degree in administration from Coppe-RUFRJ.Coppe – RUFRJ.
Daniela Maluf Pfeiffer.Mrs. Pfeiffer has served as a member of Oi’s fiscal council since April 2018. She has worked as a senior analyst at DXA Investments, an investment firm, since January 2018. She was a partner at Canepa Asset Brasil, a funds management company, and was responsible for investors’ relations from January 2014 to October 2017. She previously worked as a partner at Nova Gestão de Recursos, an investment firm, from October 2011 to June 2013. Currently, Mrs. Pfeiffer is not a member of any management body of a publicly-held company. She was previously a member of the fiscal council of Banco Sofisa S.A. from April 2014 to April 2017; a member of the fiscal council of Viver Incorporadora e Construtora S.A. from April 2011 to April 2017; a member of the fiscal council of Banco Panamericano S.A. from September 2010 to April 2014; a member of the fiscal council of Santos Brasil S.A. from 2003 to 2005; a member of the Board of Directors of Brasil Telecom S.A. from 2003 to 2005; a member of the Board of Directors of Telemig Celular S.A. from 2003 to 2005; a member of the Board of Directors of Amazônia Celular S.A. from 2003 to 2005; a member of the Fiscal Council of Amazônia Celular S.A. from 1998 to 2002 and a member of the fiscal council of Telemig Celular S.A. from 1998 to 200. She is an IBGC-certified fiscal council member. Mrs. Pfeiffer holds a degree in administration by UFRJ from 1992 and is currently enrolled in an MBA program in corporate management at FGV, which she is expected to complete in March 2019.
Raphael Manhães Martins.Mr. Martins has served as a member of Oi’s fiscal council since April 2019. He has been a partner at the law firm Faoro & Fucci since 2010. In 2010, he was a professor at Universidade Federal do Rio de Janeiro (UFRJ). From 2007 to 2009, he was a professor at Universidade do Estado do Rio de Janeiro (UERJ). Mr. Martins has served as a member of the board of directors of Eternit S.A. since 2015, Light S.A. since 2018 and Condor S.A. – Indústria Quĺmica since 2017. He has also served as a member of the fiscal council of Vale S.A. since 2015. Previously, Mr. Martins served as a member of the fiscal council of Light S.A. from 2014 to 2018 and Embratel Participações S.A. in 2014. Mr. Martins is a member of the Brazilian Bar Association, Rio de Janeiro Section (OAB-RJ).
Alternate Fiscal Council Members
Patricia Valente Stierli.Mrs. Valente has served as an alternate member of Oi’s fiscal council since April 2019. She is currently a member of the fiscal council of Eletrobras – Centrais Elétricas S.A., as a financial specialist (since 2017), a member of the board of directors of PPE Fios Esmaltados S.A. (since 2018), a member of the fiscal council of Sociedade Beneficiente de Senhoras – Hospital Sírio Libanês (tenured from 2018 to 2021) and an alternate member of the fiscal council of Centro de Integração Empresa Escola CIEE (since 2018). Mrs. Valente previously served as a member of the fiscal council of Bardella S.A. Indústrias Mecânicas, (from 2015 to October 2018, a member of the board of directors of Pettenati S.A. Indústria Têxtil (during 2015), an alternate member of the fiscal council of Dohler S.A. (from 2017 to 2018) and a member of the board of directors and fiscal council of publicly-held companies, as a minority shareholders’ representative. In addition, Mrs. Valente has experience managingthird-party resources, after having been a statutory officer at Banco Fator S.A and Sadefem Equipamentos for six years, working in management and being in charge of institutional and retail clients. She also worked as a financial officer at Montagens S.A., where she was in charge of accounting, fiscal, budget, treasury and human resources. Mrs. Valente holds a bachelor degree in business administration from the Fundação Getúlio Vargas Foundation (FGV) and completed a Management for Graduates specialization course at CEAG (MBA) –EAESP / FGV and her specialization in controllership course at GVPEC.
Wiliam da Cruz Leal.Mr. Leal has served as an alternate member of ourOi’s fiscal council since April 2016.2018. He has served asextensive experience in corporate governance, corporate sustainability, enterprise risk management, internal controls, technology and information security. Since 2011 he has been a managing partner ofat Cruz Leal Gestão Empresarial Ltda. since 2011, a consulting firm specialized in motivation, leadership, technology, corporate governance and sustainability. He has been a board member certified by IBGC -the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa – IBGC) since 2009. HePreviously, Mr. Leal worked at Tele Norte Leste Participações S.A., from 2000 to 2009, servinghaving served as executive manager of corporate governance, internal controls manager, budget and special projects manager and systems audit. Previously, he served asaudit manager. He also worked at Banco do Brasil S.A., from 1975 to 2000, having served as executive manager of changes and
as an analyst information technology consultant at Banco do Brasil S.A. from 1975 until 2000.consultant. Mr. Leal holds a bachelor’s degree in mechanical engineering from Fundação de Ensino Superior de Itaúna, Minas Gerais.
Marissa Rose Vegele RenaudLuiz Fernando Nogueira.. Ms. Renaud Mr. Nogueira has served as an alternate member of ourOi’s fiscal council since April 2016. She2019. Since May 2016, Mr. Nogueira has served as partnerchief financial officer of Agruciacapital Gestão de Recursos Ltda. since May 2015. Previously, sheNeogas, having previously served as achief financial analystofficer of Agruciacapital Gestão de Recursos Ltda. from November 2012 until April 2015,Brookfield Renewable Energy, Ferroport, Concremat, Bematech and Timnet (a TIM group company). In addition, he also served as operationsexecutive manager investor relations at Petrobras and processing assistant of Prosper SA Corretora de Valores e Cambio from March 2012 until November 2012planning and as intern from August 2010 until March 2012. Ms. Renaudcontrol manager for Latin America at IBM. Mr. Nogueira holds a bachelor’s degree in economics from Pontifícia Universidade Candido Mendes.Católica, a post-graduate degree in financial management from Fundação Getúlio Vargas and an MBA in finance from IBMEC, and he completed a training course in conflict mediation at Mediare.
Domenica Eisenstein Noronha. Ms. Noronha has served on Oi’s fiscal council since April 2018 (as a member since April 2018 and as an alternate member since April 2019). Mrs. Noronha has more than 19 years of experience in the financial industry. Since 2010, she has been a member of Tempo Capital Gestão de Recursos Ltda., an independent fund manager focused on the Brazilian equity market. Her responsibilities include economic and financial analysis of investments, investor relations, supervision of compliance and regulatory review. Previously, Mrs. Noronha worked for 11 years at Morgan Stanley in New York, where she was involved in M&A for Latin American companies, and São Paulo, where she was executive director responsible for equity and debt capital markets transactions. She served as a member of the fiscal council of the following publicly-held companies in Brazil: Fibria Celulose S.A., from February 2017 to April 2018; Usinas Siderúrgica de Minas Gerais S.A. – Usiminas, from April 2015 to April 2016 and from April 2017 to April 2018; and Embratel Participações S.A., from April 2012 to August 2014). Mr. Noronha holds a bachelor’s degree in business administration from Georgetown University, majoring in finance, international business and economics.
Compensation
According to our Oi’sby-laws, our Oi’s shareholders are responsible for establishing the aggregate compensation we pay to the members of ourOi’s board of directors, board of executive officers and members of our fiscal council. OurOi’s shareholders determine this compensation at theOi’s annual shareholders’ meeting. Once aggregate compensation is established, ourOi’s board of directors is responsible for distributing such aggregate compensation individually to the members of ourOi’s board of directors and ourOi’s board of executive officers in compliance with our Oi’sby-laws.
The aggregate compensation paid by us to all members of ourOi’s board of directors, board of executive officers and our fiscal council for services in all capacities in 2018 was R$25.6 million in 2015.81.9 million. This amount includes pension, retirement or similar benefits for ourOi’s officers and directors. On April 28, 2016, ourAt Oi’s 2019 annual shareholders’ meeting, Oi’s shareholders (acting in the annual general meeting) established the following compensation for the year 2016:2019:
board of directors (including aggregate directors):directors: an aggregate limit of approximately R$9.214.7 million;
board of executive officers: an aggregate limit of approximately R$29.444.0 million; and
fiscal council: an aggregate limitthe minimum amount established under Paragraph 3 of R$1.0 million.
We compensate our alternate directors on a monthly basis, and compensation is not contingent upon attendance at the meetingsArticle 162 of the board of directors. We compensateBrazilian Corporate Law.
