Risks - informeanual.telefonica.com · Risks 4 295 Letter to shareholders + Information Corporate...

Risks

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Risk factors associated with the issuer

Riskfactorsassociatedwiththeissuer

TheTelefónicaGroup’sbusinessisaffectedbyaseriesofintrinsicriskfactorsthataffectexclusivelytheGroup,aswellasaseriesofexternalfactorsthatarecommontobusinessesofthesamesector.Themainrisksanduncertainties facingTelefónicawhichcouldaffect itsbusiness, financialposition,reputation,corporateimage andbrand and its results of operations are set out belowandmust be considered jointlywith theinformationsetoutintheConsolidatedFinancialStatements:

WorseningoftheeconomicandpoliticalenvironmentcouldnegativelyaffectTelefónica’sbusiness.

Telefónica's international presence enables the diversification of its activities across countries andregions,butitexposesTelefónicatodiverselegislation,aswellastothepoliticalandeconomicenvironmentsofthecountriesinwhichitoperates.Anyadversedevelopmentsorevenuncertaintiesinthisregard,includingexchange-rate or sovereign-risk fluctuations,may adversely affect Telefónica's business, financial position,cashflowsandresultsofoperationsand/ortheperformanceofsomeoralloftheGroup'sfinancialindicators.

Economicconditionsmayadverselyaffectthelevelofdemandofexistingandprospectivecustomers,astheymaynolongerdeemcriticaltheservicesofferedbytheGroup.

InEurope, themacro-financialoutlook showeda slightdeteriorationduring the secondhalfof2018,influencedbyexternalfactorssuchastheweakerandmaturingglobaleconomiccycle,therecenttighteningof financial conditions, thegreateruncertaintyassociatedwith the trade tensionsbetweenChinaand theUnitedStatesandtherisksthatsuchtensionsposeoneconomicgrowthandglobalstability.Ontheregionalfront,thepoliticaluncertaintyinEuropehasdiminishedinpartaftertheresultsofthegeneralelectionsinsomeEuropeancountries,but it stillpersists invariouscountries, including Italy,giventhe lackofpoliticalcommitmentwithareformistagenda.EconomicactivityandfinancialstabilityinEuropecouldalsobeaffectedbythemonetarynormalizationthattheEuropeanCentralBankisexpectedtocontinueimplementingandbyhowGreececontinuestomanageitsongoingbankingandeconomicrestructuringprocess,afterthecountry’recentexitfromitsbailoutprogram.

Furthermore, theplannedexitof theUnitedKingdomfromtheEuropeanUnion("EU") followingtheoutcomeofthereferendumheldinJune2016isexpectedtoresultineconomicadjustmentsregardlessofthenatureofthenewtradeandinvestmentrelationshipsbetweentheUnitedKingdomandtherestofEuropeinthe future. As of the date of this Annual Report, there is significant uncertainty regarding the Brexitnegotiationsandrequiredparliamentaryapprovals,both in termsof timing (theprocesscanbesubject todelays)and the finaloutcome,withmultipleoptions stillbeingpossible, includinganodealBrexit. In themeantime,uncertaintysurroundingBrexitcouldhaveanegativeimpactoninvestment,economicactivityandemployment. It couldalso lead to financialmarket volatility,which could limitor restrict access to capitalmarkets.ThissituationcouldworsendependingonthefinaltermsofBrexit,whichcouldincreaseregulatoryandlegalcomplexities,includingthoserelatingtotax,tradeandsecurity.Suchchangescouldbecostlyandpotentiallydisruptivetobusinessrelationships inthesemarkets, includingthoseofTelefónica, itssuppliersand its customers. The elections to the European Parliament in May 2019 could also lead to politicaluncertainty,astheycouldresultinarebalancingofpoliticalgroupingsandsignificantchangesingoalsfortheEuropeanprojectinthemediumterm,aswellasinchangesinkeypositionsofthemainEuropeaninstitutionsduring2019.

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InSpain,anotherpossiblesourceofuncertaintyisCatalonia'spoliticalsituationanditsimpactontheSpanish economy. Although recent developments have contributed to reduce such uncertainty, if politicaltensionsre-emergeor intensify, therecouldbeanegative impactbothonfinancingconditionsandontheSpanish macroeconomic scenario, given the demanding sovereign bond maturity calendar and the highdependenceoftheSpanisheconomyontheinternationalinvestorsandeconomicoutlook.Thereisalsosomeuncertainty regarding theeconomicpolicymix tobe implemented in 2019as a result of the currenthighparliamentaryfragmentation.In2018,theTelefónicaGroupobtained26.1%ofitsrevenuesinSpain(24.3%in2017),15.0%inGermany(14.0%in2017)and13.9%intheUnitedKingdom(12.6%in2017).

InLatinAmerica,exchangerateriskisparticularlynoteworthy.CertainexternalfactorscontributingtothisriskaretheuncertaintyderivedfromthemonetarynormalizationprocessintheUnitedStates,increasingglobal tradetensions, thecontinuing lowcommodityprices incertaincasesanddoubtsaboutgrowthandfinancialimbalancesinChina.CertaininternalfactorscontributingtothisriskarethehighfiscalandexternaldeficitsinmajorLatinAmericancountriesandthelowliquidityincertainexchangemarkets,togetherwithlowproductivitygrowth,whichhinderamoreacceleratedprogressineconomicdevelopmentandtherebalancingofstillexistingmismatches.

In Argentina, the government is focused on resolving the country's macroeconomic and financialimbalancesandon recovering international confidence,particularlyafter theagreement reachedwith theInternationalMonetaryFundtoprovide financial support in themediumterm.Eventhoughthemeasurestakenbythegovernmentareexpectedtohavepositiveeffectsinthemediumterm,boththemacroeconomicandexchange rate risks remainhigh in the short term. Themajor challenges the economy is facing, bothinternally(withanongoingsharpreductionofpublicdeficitinanenvironmentofeconomicrecessionandhighinflation)andexternally(withsignificantfinancingneedsinthemediumterm),maketheArgentineeconomyvulnerabletoepisodesofvolatilityinthefinancialmarkets.Moreover,thepresidentialelectionsduetotakeplacein2019poseadditionalrisks,astheycouldresultinachangeinthecurrenteconomicpolicystancewithverylimitedeconomicpolicylevers.

InBrazil,afterthepresidentialelectionsresultedinachangeofgovernment,theeffectivenessofsuchgovernmentinimplementingtheannouncedandneededreformsthatwouldimprovethepotentialgrowthoftheeconomyanddrivethefiscalaccountstowardssustainabilityremainstobeseen.Ontheotherhand,whilesignsofstabilizationhaveemergedandtheeconomyhasstartedtoshowpositivegrowthfigures,thepaceoftherecoveryisstillgradual.Despitethedecreasingexternalfinancingneeds,internalfinancingneedsremainhigh, and financing conditions remain challenging, as the country sovereign credit rating remains belowinvestmentgrade.

Mexico has a high commercial and financial exposure to the United States, which could generateuncertainty. Domestically, there is also uncertainty surrounding the new government's political agenda,despitehavingarelativelystableeconomicoutlook.BoththepoliticalmanagementbythenewgovernmentofthestructuralachievementsmadeinrecentyearsandthefinalapprovaloftheAgreementbetweentheUnitedStates,MexicoandCanada(USMCA)areexpectedtohaveamaterialimpactontheeconomy.WhilethesigningofUSMCAhassignificantly reduceduncertainty, ithasnoteliminated it,as theagreementstillneeds tobe ratifiedby the respectivenational legislative chambers.Anyhigher thanexpected increase ininterest rates in the United States and/or a possible re-negotiation of trade agreements between theabovementioned countries could result in higher restrictions on imports into the United States, which,togetherwithpoliticaluncertaintysurroundingsuchmatters,couldnegativelyimpacteconomicactivityand


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exchangeratesinMexico.TherelativeweightofMexicointheconsolidatedrevenuesoftheTelefónicaGroupwas2.4%in2018.

Chile,ColombiaandPeruhavebeenabletostabilizetheireconomieswithgrowthratesclosetotheirpotentialgrowthledbydomesticdemand,whilerecentadjustmentsandpoliticaldecisionshaveaddressedcertainfiscalandexternalaccountissues.Nevertheless,theseeconomiesareexposednotonlytochangesinthe global economy given their vulnerability to abrupt movements in commodity prices, but also tounexpectedchangesinfinancialconditions.

InEcuador,adecrease indomesticpoliticaluncertaintyhasallowedforan improvement ineconomicactivitythroughexports,butriskspersist,mainlyonthefiscal front.Thecountry's financingneedsarestillhigh, which, together with low international reserves, keep the country in a vulnerable position againstvolatilityshocks.

In2018,TelefónicaBrazilrepresented20.8%oftheTelefónicaGroup'srevenues(23.1%in2017).In2018,TelefónicaHispamNorteandTelefónicaHispamSurrepresented8.4%and13.7%oftheTelefónicaGroup'srevenues,respectively(8.3%and15.8%,respectively,in2017).In2018,4.3%ofTelefónicaGroup’srevenuescame fromChile,4.3% fromPeruand4.8% fromArgentina. In2018,28.2%of theGroup's revenuesweregeneratedincountriesthatdonothaveinvestmentgradestatus(inorderoftheircontributiontotheGroup'srevenues:Brazil,Argentina,Ecuador,CostaRica,Nicaragua,Guatemala,ElSalvadorandVenezuela)andothercountriesareonlyonenotchawayfromlosingthisstatus.

"Countryrisk"factorsinclude,amongothers,thefollowing:

• unexpectedadversechangesinregulationoradministrativepolicies,includingchangesthatmodifythetermsandconditionsoflicensesandconcessionsandtheirrenewal(ordelaytheirapproval);

• abruptexchange-ratemovements;

• highinflationrates;

• expropriationornationalizationofassets,adversetaxdecisions,orotherformsofstateintervention;

• economicandfinancialdownturns,politicalinstabilityandcivildisturbances;and

• maximumlimitsonprofitmarginsimposedinordertolimitthepricesofgoodsandservicesthroughthe analysis of cost structures (for example, in Venezuela, a maximum profit margin has beenintroducedthatissetannuallybytheSuperintendenceforDefenseofSocioeconomicRights).

Anyoftheforegoingmayadverselyaffectthebusiness,financialposition,resultsofoperationsand/orcashflowsoftheGroup.

TheGroup's financial condition and results of operationsmay be adversely affected if it does noteffectivelymanageitsexposuretoforeigncurrencyexchangeratesorinterestrates.

Innominalterms,asofDecember31,2018,73.6%oftheGroup'snetfinancialdebtpluscommitmentswaspeggedtofixedinterestratesforaperiodgreaterthanoneyear.Asofthesamedate,18.7%oftheGroup'snetfinancialdebtpluscommitmentswasdenominatedinacurrencyotherthantheeuro.

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Toillustratethesensitivityoffinancialexpensestovariationsinshort-terminterestratesasofDecember31,2018:(i)a100basispointsincreaseininterestratesinallcurrenciesinwhichTelefónicahadafinancialpositionatthatdatewouldhaveledtoanincreaseinfinancialexpensesof102millioneuros,(ii)whereasa100basispointsdecreaseininterestratesinallcurrencies(evenifnegativeratesarereached),wouldhaveledtoareductioninfinancialexpensesof88millioneuros.ThesecalculationsweremadeassumingaconstantcurrencyandbalancepositionequivalenttothepositionatthatdateandtakingintoaccountthederivativefinancialinstrumentsarrangedbytheGroup.

AccordingtotheGroup'scalculations,theimpactonresultsandspecificallyonnetexchangedifferencesduetoa10%depreciationofLatinAmericancurrenciesagainsttheU.S.dollaranda10%depreciationoftherestofthecurrenciesagainsttheeurowouldresultinexchangelossesof1millioneurosfortheyearendedDecember31,2018,primarilyduetotheweakeningof theVenezuelanbolivarand, toa lesserextent, theArgentinepeso.ThesecalculationshavebeenmadeassumingaconstantcurrencypositionwithanimpactonprofitorlossasofDecember31,2018,takingintoaccountderivativeinstrumentsinplace.

During 2018, Telefónica Brazil represented 27.7% (25.9% in 2017), Telefónica United Kingdomrepresented12.0%(10.1%in2017),TelefónicaHispamNorterepresented5.1%(7.8%in2017)andTelefónicaHispamSurrepresented11.0%(14.1%in2017)oftheoperatingincomebeforedepreciationandamortization("OIBDA")oftheTelefónicaGroup.

TheTelefónicaGroupusesavarietyofstrategiestomanagethisrisk,amongotherstheuseoffinancialderivatives,whichthemselvesarealsoexposedtorisk,includingcounterpartyrisk.However,theGroup'sriskmanagementstrategiesmaynotachievethedesiredeffect,whichcouldadverselyaffecttheGroup'sbusiness,financialcondition,resultsofoperationsand/orcashflows.

TheevolutionofexchangeratesnegativelyimpactedtheGroup's2018results,decreasingtheyear-on-yeargrowthoftheGroup'sconsolidatedrevenuesandOIBDAbyanestimated8.8percentagepointsand10.3percentagepoints,respectively,mainlyduetothedepreciationoftheBrazilianrealandtheArgentinepeso(3.2percentagepointsand4.7percentagepoints,respectivelyin2017,mainlyduetothedepreciationoftheArgentinepeso,theVenezuelanBolivarandthepoundsterling).Furthermore,translationdifferenceshadanegativeimpactontheGroup'sequityof2,043millioneurosasofDecember31,2018,whereastheyhadanegativeimpactontheGroup'sequityof4,279millioneurosasofDecember31,2017.

IftheGroupdoesnoteffectivelymanageitsexposuretoforeigncurrencyexchangeratesorinterestrates,itmayadverselyaffectitsbusiness,financialposition,resultsofoperationsand/orcashflows.

ExistingorworseningconditionsinthefinancialmarketsmaylimittheGroup’sabilitytofinance,andconsequently,theabilitytocarryoutitsbusinessplan.

Theoperation,expansionandimprovementoftheTelefónicaGroup'snetworks,thedevelopmentanddistributionoftheTelefónicaGroup'sservicesandproducts,theimplementationofTelefónica'sstrategicplanandnewtechnologies,therenewaloflicensesortheexpansionoftheTelefónicaGroup'sbusinessincountrieswhereitoperates,mayrequireasubstantialamountoffinancing.

AdecreaseintheliquidityofTelefónica,oradifficultyinrefinancingmaturingdebtorraisingnewfundsasdebtorequitycouldforceTelefónicatouseresourcesallocatedtoinvestmentsorothercommitmentstopayitsfinancialdebt,whichcouldhaveanegativeeffectontheGroup'sbusiness,financialcondition,resultsofoperationsand/orcashflows.


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Funding could be more difficult and costly in the event of a deterioration of conditions in theinternationalorlocalfinancialmarketsdue,forexample,tomonetarypoliciessetbycentralbanks,includingincreases in interest rates and/or balance sheet reductions, increasing global political and commercialuncertainty and oil price instability, or if there is an eventual deterioration in the solvency or operatingperformanceofTelefónica.

As ofDecember 31, 2018, theGroup's net financial debt amounted to 41,785million euros (44,230millioneurosasofDecember31,2017)andtheGroup'sgrossfinancialdebtamountedto54,702millioneuros(55,746millioneurosasofDecember31,2017).AsofDecember31,2018,theaveragematurityofthedebtwas8.98years(8.08yearsasofDecember31,2017).

AsofDecember31,2018,theGroup'sgrossfinancialdebtscheduledtomaturein2019amountedto9,368millioneurosandgrossfinancialdebtscheduledtomaturein2020amountedto6,417millioneuros.

Inaccordancewithits liquiditypolicy,Telefónicahascovereditsgrossdebtmaturitiesforthenext12monthswithcashandcreditlinesavailableatDecember31,2018.AsofDecember31,2018,theTelefónicaGrouphadundrawncommittedcreditfacilitiesarrangedwithbanksforanamountof12,219millioneuros(11,887millioneurosofwhichwereduetoexpire inmorethan12months).Telefónica's liquiditycouldbeaffectedifmarketconditionsmakeitdifficulttorenewexistingundrawncreditlines.AsofDecember31,2018,2.7%of theaggregateundrawnamountundercredit lineswasscheduled toexpireprior toDecember31,2019.

Inaddition,giventheinterrelationbetweeneconomicgrowthandfinancialstability,thematerializationofanyoftheeconomic,politicalandexchangeraterisksreferredtoabovecouldleadtoanegativeimpactontheavailabilityandcostofTelefónica'sfinancinganditsliquiditystrategy.ThisinturncouldhaveanegativeeffectontheGroup'sbusiness,financialcondition,resultsofoperationsand/orcashflows.

AdoptionofnewaccountingstandardscouldaffecttheGroup'sreportedresultsandfinancialposition.

Accounting standard-setting bodies and other authorities may periodically change accountingregulationsthatgovernthepreparationoftheGroup'sconsolidatedfinancialstatements.ThosechangescouldhaveasignificantimpactonthewaytheGroupaccountsforcertainmattersandpresentsitsfinancialpositionanditsresultsofoperations.Insomeinstances,amodifiedstandardoranewrequirementwithretroactiveeffectmustbeimplemented,whichrequirestheGrouptorestatepreviousfinancialstatements.

Inparticular, Telefónica is required toadopt thenewaccounting standard IFRS16 Leases ("IFRS16")effectivefromJanuary1,2019.

ThisstandardrequiressignificantchangesthatwillaffecttheaccountingtreatmentforallleasecontractswhereTelefónicaactsaslessee,otherthancertainshort-termleasesandleasesoflow-valueassets.TheGroupestimates that the first-time adoption of IFRS 16 will have a material impact on the Group's financialstatementsandmaymakecomparisonsbetweenperiodslessmeaningful.ItwillalsolikelymateriallyaffecttheamountsusedtocalculatecertainfinancialmetricsreportedbytheGrouporusedbyanalystsandinvestorstoanalyzetheGroup.

Note3 to theConsolidatedFinancialStatements includes informationon themain impactsexpectedfromthefirst-timeadoptionofthenewrequirements.

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TheGroupoperates in a highly regulated industrywhich requires government concessions for theprovisionofalargepartofitsservicesandtheuseofspectrum,whichisascarceandcostlyresource.

Thetelecommunicationssectorissubjecttolawsandsector-specificregulationsinthemajorityofthecountries where the Group operates. Additionally, many of the services the Group provides require thegranting of a license, concession or official approval, which usually requires certain obligations andinvestmentstobemade,suchasthoserelatingtotheacquisitionofspectrumcapacity.Amongthemainlegalrisksarethoserelatedtospectrumregulationand licenses/concessions,rates,universalserviceregulation,regulatedwholesaleservicesoverfibernetworks,privacy,functionalseparationofbusinessesandnetworkneutrality.ThefactthattheGroup'sbusinessishighlyregulatedbothaffectsitsrevenuesandimposescostsonitsoperations.

AstheGroupprovidesmostofitsservicesunderlicenses,authorizationsorconcessions,itisvulnerabletoadministrativebodies'decisions,suchaseconomicfinesforseriousbreachesintheprovisionofservicesand,potentially,revocationorfailuretorenewtheselicenses,authorizationsorconcessions,orthegrantingofnewlicensestocompetitorsfortheprovisionofservicesinaspecificmarket.Thespectrumtowhichmostofthelicensesandadministrativeconcessionsrefertoisusedfortheprovisionofmobileserviceson2G,3Gand4Gtechnologies.Thecomplementaritybetweenthedifferentfrequencybandssuccessivelyassignedtoanoperatorinageographicmarketenablesgreaterflexibilityandefficiencyinboththedeploymentofthenetworkandtheprovisionofservicestofinalcustomersoverthecapacitiesresultingfromsuchnetwork.

Anychallengesoramendmentstothetermsoflicenses,authorizationsorconcessionsgrantedtotheGroupandnecessaryfortheprovisionofitsservicesortheGroup'sfailuretoobtainsufficientorappropriatespectrumcapacity inthejurisdictionsdiscussedbeloworanyothers inwhichitoperates,or its inabilitytoassumetherelatedcosts,couldhaveanadverseimpactonitsabilitytolaunchandprovidenewservicesandon itsability tomaintain thequalityofexistingservices,whichmayadverselyaffect theGroup'sbusiness,financialcondition,resultsofoperationsand/orcashflows.

AdditionalinformationonthekeyregulatoryissuesandconcessionsandlicensesheldbytheTelefónicaGroupcanbefoundinAppendixVIoftheConsolidatedFinancialStatements.

Additionally,theTelefónicaGroupcouldbeaffectedbyregulatoryactionsoftheantitrustauthorities.These authorities could prohibit certain actions, such as new acquisitions or specific practices, createobligationsorimposeheavyfines.Anysuchmeasuresimplementedbytheantitrustauthoritiescouldresultineconomicand/orreputationallossfortheGroup,inadditiontoalossofmarketshareand/orharmtothefuturegrowthofcertainbusinesses.

Regulationofspectrumandaccesstonewgovernmentlicenses/concessionsofspectrum

InEurope,theDirective(EU)2018/1972oftheEuropeanParliamentandoftheCouncilestablishingtheEuropeanElectronicCommunicationsCode(“EECC”),wasapprovedonDecember11,2018.TheaimoftheEECCisfosteringinvestmentinnewhigh-capacitynetworks(principallyfibernetworksandthefifthgenerationof mobile telecommunications, or 5G) and create a ‘level playing field’ between telecommunicationscompaniesandover-the-topproviders("OTTs").MemberStateshaveaperiodoftwoyears(untilDecember21,2020)totransposesaidDirectiveintotheirnationallegislation.CertainprovisionsincludedintheEECCaresoextensiveandcomplexthattheirfinalimpactonoperators,suchasTelefónica,willlargelydependonhowtheyareinterpretedbyregulatoryauthoritiesineachMemberState.TheEECCwillcontinuetoobligenationalregulatory authorities to analyze telecommunications markets and determine whether any operators


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dominate the market. Such operators will continue to be designated as having significant market power("SMP") and face additional obligations in that territory. In the case of new fiber networks, such SMPobligations could be relaxed if co-investment agreements bear fruit among SMP and non-SMP networksoperators.

Furthermore, inEurope,spectrumauctionsareexpectedtotakeplace inthecomingyears, requiringpotentialcashoutflowstoobtainadditionalspectrumortomeetthecoveragerequirementsassociatedwithsomeoftheselicenses.

InSpain,theauctionofthe3.6GHzbandwascarriedoutduringJuly2018,andTelefónicawasawarded50MHz.TheMinistryofEconomyandBusinessAffairshaspublishedtheroadmaptoclearspectruminthe700MHzbandfromitscurrentuse(digitaltelevision), in linewiththecalendarapprovedbytheEuropeanCommission ("EC") and with the 5G National Plan adopted in December 2017. The plan foresees thecompletion of the release of the 700MHz band before June 30, 2020 and theMinistry has indicated itsintentiontoholdtheauctionin2020.

In the United Kingdom, the Office of Communications ("Ofcom"), the national telecommunicationsregulatoryauthority,conductedaspectrumauctionforthe2.3GHzand3.4GHzbands inMarchandApril2018.TelefónicaUnitedKingdomwonallofthe2.3GHzspectrumavailable(40MHz)andanadditional40MHzofthe3.4GHzspectrumband(outofthe150MHzavailable),inbothcasesunder20-yearrenewablelicenses. InDecember2018,Ofcom launchedapublic consultation regarding thecoverageobligationsandauctiondesignrelatingtothe700MHz/3.6GHzbands,whichareexpectedtobeauctionedinthefirstquarterof2020.

InGermany,onMay14,2018theRegulatoryAgencyforElectricity,Gas,Telecommunications,PostandRailway("BNetzA")publishedDecisionsIandIIonthemethodtoawardfrequenciesnationwide,inthe2GHzbandandalargepartofthe3.6GHzband.Inaddition,underthesamedecisions,BNetzAallocated100MHzin the 3.6 GHz band and also frequencies in the 26 GHz band, both for local/regional assignments uponapplication.

Subsequently,onNovember26,2018,BNetzApublishedDecisionsIIIandIVestablishingtheconditionsforfrequencyusageandauctionrulesontheabove-mentioned2GHzand3.6GHzbands(AuctionRules).Therulesincludeobligationsforbettercoverageinbothurbanandruralareas,aswellasalongtransportroutesandotherconditions,suchastheobligationtonegotiateonnationalroamingandnetworksharing.Theabovefour decisions have been challenged in Court by Telefónica Deutschland Group. Nevertheless, TelefónicaDeutschlandGroupsubmitteditsapplicationtotheauctionbyJanuary25,2019.Theauctionisscheduledtobegininthefirstquarterof2019.

Allofthebandsmentionedaboveareconsideredtobetechnologicallyneutral,whichmeansthattheycouldpotentiallybeusedinthefuturefor5Gservices.

InLatinAmerica,spectrumauctionsareexpectedtotakeplaceinthecomingyears,potentiallyrequiringcash outflows to obtain additional spectrum or to meet the coverage requirements or other obligationsassociatedwiththeselicenses.Specifically,theproceduresthatwilltakeplacein2019injurisdictionsthatarerelevantfortheGroupare:

• Argentina:thegovernmentissuedonJanuary21,2018adecree(DecretodeNecesidadyUrgencia)thatcontemplatesthepossibilityofauctioningthespectrumpreviouslyreservedforARSAT(apublic

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company).ThespectrumthatwasreservedforARSATincludes20MHzinthe700MHzband(national),50MHzintheAWSband(national)and20MHzinthe1900MHzband(regional).

• Brazil: In September 2018, the Brazilian regulator, Anatel, launched a first consultation to awardspectruminthe2.3GHzTDD(time-divisionduplexing)bandandspectruminthe3.5GHzTDDband.Aconsultationontheauctionoftheremainingspectruminthe700MHzbandisexpectedtotakeplaceinthefirsthalfof2019.Anatel’s5Gcommissionhasalsoidentified1500MHzwhichcouldbeauctioned.Anauctiontoawardspectruminanyofthesebandscouldtakeplacein2019or2020.

• Colombia:Theconsultationprocesseslaunchedin2017andearly2018ontheconditionsofthe700MHzspectrumauctionweresuspendedfollowingthechangeofgovernmentthattookplaceinAugust2018. Thenewgovernmenthas submitted toCongress a draft billwith regards to information andcommunicationtechnologies.Amongthemeasuresincludedinthedraftbill,thereisanextensionofthedurationofspectrumlicenses.Theapprovalprocessofthedraftbillmayhaveanimpactonthetimingoftheauction.Thisdraftbillisexpectedtobediscussedinthefirstquarterof2019.

• Peru:InOctober2018,theMinistryofTransportandCommunicationsapprovedanewregulationforthereorganizationoffrequencybands,knownas"refarming".Thiscouldresult inaspectrumawardprocessin2019or2020.

Itispossiblethatsomeoftheabovementionedspectrumtenderprocedureswillnotbecompleted,oreven initiatedwithin the proposed time frames. In addition, in the caseswhere Telefónica has submittedcommentstotheproposedconditionsofauctionsorallocationprocedures,thereisnocertaintyastowhetherandtowhatextentsuchcommentswillbeconsideredbytherelevantregulator.Inaddition,Telefónicamaydecide to abstain from a particular process once it reviews the viability of each spectrum acquisitionopportunity.

In addition to the spectrum tender procedures referred to above, it may be the case that certainadministrationswhichhavenotyetannouncedtheirintentiontoreleasenewspectrummaydosoduring2019and thereafter. The above does not include processes announced through general statements byadministrations,whichinvolvebandsnotkeytoTelefónica'sneeds.Furthermore,Telefónicamayalsoseektoacquirespectrumonthesecondarymarketwhereopportunitiesmightarise.

Risksrelatingtoconcessionsandlicensespreviouslygranted

InSpain,pursuanttothelicenseforthe800MHzspectrumband,thereareaseriesofobligationsthatTelefónicaissubjecttowiththeaimofreachingcoveragethatallowsaccess,withaspeedofatleast30Mbpersecond,toatleast90%oftheinhabitantsinpopulationunitsoflessthan5,000inhabitants.Theapprovalof the final termsandconditions to implementthiscoverageobligationwaspublished inNovember2018.TelefónicaisundergoingaconstantprocessofdeploymentanddensificationofLongTermEvolution("LTE")solutionsoverthe800MHzbandthatwillbethebaseforcompliancewithsuchobligation.

Telefónicaownstwoconcessionsinthe2.1GHzand3.5GHzspectrum,bothawardedin2000,whichexpireinApril2020butmaybeextendedforanadditionaltenyears.

In the state of São Paulo, Telefónica Brazil provides local and national long-distance Fixed SwitchedTelephony Services ("STFC") under the so-called public regime, through a concession agreement,which isexpected to remain in forceuntil 2025.AtDecember31,2018, theestimated residual valueof theassets


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assignedtotheprovisionofSTFCwas8,622millionBrazilianreals(approximately1,943millioneurosunderthe exchange rate applicable on such date) (8,763 million Brazilian reals as of December 31, 2017,approximately 2,209 million euros under the exchange rate applicable on such date), which comprisedswitchingandtransmissionequipmentandpublicuseterminals,externalnetworkequipment,energy,systemandoperational supportequipment. Inprinciple, suchassetswereconsidered tobe reversibleassets,andwerethussupposedtoreverttothefederalgovernmentattheendoftheconcessionagreement.However,the implementationofabill amending the regulatory framework inBrazilwhichestablishes,amongotherthings,thatsuchassetswouldnolongerbereversibleunderanewlicenseregimeinexchangeforinvestmentcommitments, is currently pending. The bill was approved at both legislative houses, butwas challengedbefore the Federal Supreme Court due to an alleged procedural defect. The outcome of this lawsuit isuncertain,althoughtheSenate'sboardmayovercomeitbysendingthebillforvotinginthePlenary.Intheeventthatthebillisfinallyapproved,ANATELwouldbeentitledtoadopttherelevantadministrativedecisionsfor the amendment of the respective licenseswith the consequent amendment of the future obligationsimposedonSTFCproviders.

AsofthedateofthisAnnualReport,thereisnocertaintythattheproposedchangeintheregulatoryframeworkwillbecompleted,orthatitwillbecompletedinfullysatisfactorytermsforTelefónicaBrazil.Onlyafter this bill or a similar law is adopted (enabling the exchange of reversion obligations for investmentcommitments)couldANATELimposetheinvestmentobligationsreferredtoabove.

AsofthedateofthisAnnualReport,itisnotpossibletoestimatethehypotheticalinvestmentobligationsthatANATELcouldimposeontheconcessionaires,includingTelefónicaBrazil,inexchangeforeliminatingtheirobligationtorevertassetsusedfortheprovisionoftheSTFCservices.

InColombia,theITCissuedresolution597onMarch27,2014torenew850MHz/1900MHzbandlicensesfor tenadditionalyears.Under thescopeof suchresolution,ColombiaTelecomunicaciones,S.A. ("ColTel")(67.5% of which is owned, directly and indirectly, by Telefónica and 32.5% of which is owned by thegovernment of Colombia), renewed its license to exploit such spectrum to provide telecommunicationservices.

The concession agreements from 1994, which were renewed in 2004 and under which the mobiletelephoneserviceswereprovideduntilNovember28,2013,containedareversionclausefortheunderlyingassets. However, Law 422 of 1998 and Law 1341 of 2009 provided that upon expiration of a concessionagreement for telecommunication services, only the spectrum reverts to the State. That was theunderstandingunderwhichalltheoperators,includingtheauthorities,operatedbetween1998and2013.In2013, however, when analyzing an appeal on the constitutionality of said laws, the Constitutional Courtconfirmedtheconstitutionalityofthelawsbutruledthatitcouldnotbeconcludedthatthoselawsmodifiedwithretroactiveeffectthereversionclauseoftheconcessionagreementsof1994.OnFebruary16,2016,theITCstartedanarbitrationproceedingagainstColTelandotherdefendantsinaccordancewiththetermsoftherelevantconcessionagreementof1994,inordertoclarifythevalidityandscopeofsuchreversionclause.ThearbitrationawardwasrenderedonJuly25,2017andwasnotfavorabletoColTelanditsco-defendants.

ThearbitrationtribunalorderedColTeltopay1,651,012millionColombianpesos.OnAugust29,2017,the shareholders' meeting of ColTel approved a capital increase in a total amount of 1,651,012 millionColombianpesos(470millioneurosattheexchangerateasofsuchdate)topaytheamountimposedbythearbitrationaward.TheTelefónicaGroupandtheColombiangovernmentsubscribedthecapitalincreaseproratatotheirrespectiveshareholdinginColTel.Telefónica'sdecisiontoparticipateinthecapitalincreasedoes

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notconstitute,andshouldnotbeunderstoodas,anacceptanceofthearbitrationaward.Telefónicareservesall of its legal rights and the exercise by Telefónica or ColTel of any applicable legal action, national orinternational.BothColTelandTelefónicahavestartedlegalactions.OnAugust18,2017,ColTelfiledanappealtochallengethearbitrationawardatColombia'shighestcourtofadministrativelitigation(ConsejodeEstado),whichwasdismissedonMay24,2018.Inaddition,onDecember18,2017,ColTelalsofiledaconstitutionalaction(accióndetutela)withtheConstitutionalCourtseekingtoprotectitsconstitutionalrights,jeopardizedbythearbitrationaward.OnMarch15,2018,theconstitutionalactionwasdeniedandColTelfiledanappealagainstthisrulingonApril18,2018,whichwasdismissedonMay24,2018.OnNovember27,2018arecusalmotionwasfiledattheConstitutionalCourt,whichispendingresolution.

Inaddition,pursuanttotherelevantbilateraltreaty,TelefónicanotifiedColombiaofitsintentiontofileaclaimintheInternationalCenterforSettlementofInvestmentDisputes("ICSID").Aftertheexpirationoftherequired90-daynoticeperiod,onFebruary1,2018,TelefónicasubmittedthearbitrationrequesttotheICSIDand, on February 20, 2018, the General Secretary of ICSID registered the request for the institution ofarbitrationproceedings.Therequestforarbitration isongoingandthearbitraltribunal is intheprocessofbeingappointed.

In Peru, Telefónica has concessions for the provision of fixed-line services until November 2027. InDecember 2013, Telefónica filed a partial renewal request for these concessions for fivemore years. OnNovember 26, 2018, the Ministry of Transportation and Communications (Ministerio de Transportes yComunicaciones)notifiedthedenialofsuchrenewals.Telefónicahasfiledanappealforreconsideration.OnFebruary5,2019theMinistrydismissedthementionedappealandTelefónicaisconsideringtochallengethedecision.InDecember2014,June2016andMay2017Telefónicafiledrenewalrequestsforanadditional20yearsinrelationtoaconcessionfortheprovisionoflocalcarrierservices,oneoftheconcessionstoprovidemobile services in certain provinces, and one concession to provide fixed-line services, respectively. Inaddition,inApril2016,Telefónicafiledarenewalrequestinrelationtothe1900MHzfrequencyspectrumfortheProvincias(allofPeruexceptforLimaandCallao),whichlicenseexpiredin2018.

Asof thedateof thisAnnualReport, thedecisionof theMinistryof Transport andCommunications(Ministerio de Transportes y Comunicaciones) in these proceedings is still pending and, according to thelegislation,theunderlyingconcessionsremaininforceaslongastheproceedingsarepending.

In Chile, TelefónicaMóviles Chile, S.A. and other two telecommunications operators were awardedspectruminthe700MHzbandinMarch2014,withTelefónicaMóvilesChilebeingawarded2x10MHz.Whileservicesarebeingprovidedonsuchspectrum,aconsumerorganizationfiledaclaimbeforetheTribunalforthe Defense of Free Competition (the "TDFC") against Telefónica Móviles Chile, S.A. and the other twooperators, regarding theallocationof spectrum in the700MHzbandandchallenging theoutcomeof thespectrum allocation. The TDFC rejected this claim on consecutive occasions but, on June 25, 2018, theSupremeCourtissuedafinaljudgmentstatingthattheassignmentofspectruminthe700MHzbandtothemobileoperatorsconstitutedanticompetitivebehaviorasitawardedspectrumblockswithoutrespectingthe60MHzspectrumcapsetbytheSupremeCourtinarulingfrom2009.

TheSupremeCourtruledthattheincumbentoperatorshavetorelinquishthesameamountofspectrumthat they acquired in the 700 MHz band auction. However, the ruling of the Supreme Court allows theoperators to choose the band from which the spectrum that exceeds the fixed cap (60 MHz) is to berelinquishedandnodeadlinehasbeensettocompletesuchrelinquishment.AsofthedateofthisAnnual


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Report,TelefónicaMóvilesChilehasnotrelinquishedanyoftherequiredspectrum,sincetheproceedinghasbeentemporallysuspendedbyaresolutionissuedbytheConstitutionalCourtonJanuary29,2019.

TheSupremeCourtrulingalsostatesthatifthesector-specificauthority("Subtel")considersitnecessarytoreviewthemaximumspectrumcap,itshouldputinplaceaconsultationprocessbeforetheTDFC.Subtelmustotherwiseinitiatethenecessaryprocedurestoadaptthesetcaptothefixedparametersof60MHzforeachparticipatingoperatorintheaforementionedradiospectrum.OnOctober3,2018,SubtelsubmitteditsproposalonthereviewofthemaximumspectrumcaptotheTDFC.

Additionally, Subtel submitted to theTDFCaproposalof “complementaryconditions”withageneralscope which would be applicable to all bands, as well as another proposal of “special conditions” to beconsideredinfutureauctions.TheTDFCsetadeadlineofDecember28,2018forinterestedpartiestoprovidetheircomments.TheprocessinitiatedbytheTDFCisexpectedtolastseveralmonths.

Inaddition, theSupremeCourt rejectedtheappeal filedbyTelefónicaMóvilesChile,S.A.against theresolutionof theTDFC thatordered immediate compliancewith the spectrumrelinquishmentobligations,without waiting for the result of the spectrum cap consultation.However, on January 29, 2019, theConstitutional Court temporarily suspended the obligation to immediately comply with such spectrumrelinquishmentobligationsuntiltheremedyofinapplicabilitythathasbeenfiledbyTelefónicaisresolved.

Additionally,regardingthe3.5GHzband,SubtelissuedadecisiononJune21,2018regardingthe3.4-3.8GHz spectrum band, which, among other things, has suspended the granting of authorizations, themodificationofconcessionsandthereceptionofnetworkrolloutsinconnectionwiththisspectrumband.Itspurposeistocarryoutanin-depthstudyontheefficiencyoftheusageofthisbandfor5Gandensuringtheefficient usage of this band in light of international best practices and the need for efficient spectrummanagement.ThedecisionhadalimitedimpactonTelefónica'soperationsasTelefónicaChile,S.A.onlyhas50MHzofspectrumassignedinthatbandinRegionsXIandXII(representinglessthan2%ofthepopulation)andthatspectrumiscurrentlynotinuse.OnOctober3,2018,Subtelmodifiedtheabovementionedresolutionandresolvedtoreleasepartofthisspectrumtoenableoperatorstoprovidewirelessfixedservices.Ofthe50MHzawardedtoTelefónicaChile,S.A.,30MHzwerereleasedandmayonlybeusedformobileservices,whichisarequiredchangefor5Gprovision,oncefutureauctionson3400-3800MHzrangearefirmlyawarded.Theremainderofthespectrummaynotcurrentlybeusedforanyservice.

OnNovember20,2018,TelefónicaChile,S.A.requestedtheTDFCtoinitiateaconsultationprocesstodeterminewhetherthedecisionofSubtelregardingthe3.5GHzbandviolatescompetitionlaw.ThedeadlineforthirdpartiestoprovidebackgroundinformationexpiredonFebruary18,2019.

InMexico,inAugust2018,Telefónicaparticipatedintheauctionofthe2500-2690MHzbandandwasawarded2x20MHzofspectrum.TherulesandtheprocedureoftheauctionwerechallengedbyanoperatorandTelefónicahasrespondedtotheallegationsmade.Telefónica'sregionalholdingsinthe1900MHzband(approximately 44% of the total 1900MHz band) expired in October 2018. Telefónica has requested therenewalofthisconcession.TheInstitutoFederaldeTelecomunicaciones(“IFT”)isexpectedtodecideontherenewalrequestduringthefirstquarterof2019.TelefónicamaycontinuetousethisspectrumwhiletheIFTdecisionispending.

In2018,theGroup'sconsolidatedinvestmentinspectrumacquisitionsandrenewalsamountedto868millioneuros(538millioneurosin2017).

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Regulationofwholesaleservices

TheEC'sproposalinrespectoftheregulatoryframeworkforwholesaleservicesintends,amongothermeasures,toincorporateacostingmethodologytofixaEuropeanupperlimitforthecall-terminationpricesfor landline phones/mobile phones (FTRs/MTRs) applicable in the EU. According to this proposal, thedecreasesinwholesalemobileterminationrates("MTRs")inEuropehavebeennoteworthy.Itshouldbenotedthatsinceterminationfeesinmobileandfixedcommunicationshavedecreasedsubstantiallyinrecentyears,futuredecreasesareexpectedtobecomesmallersothatthenegativeimpactonturnoverisexpectedtobelesssignificantthaninthepast.

IntheUnitedKingdom,onJune1,2018,thepriceofMTRsfellto0.489penceperminute.FromApril1,2019,theywillbepricedat0.479penceperminute,withafurtherreductionbasedoninflation(consumerpricesindex("CPI")minus3.7%fromApril1,2020).

InSpain,inJanuary2018theSpanishNationalRegulatoryandCompetitionAuthority(ComisiónNacionalde losMercados y la Competencia or "CNMC") approved a decision setting the newMTRs for allmobileoperators,whichwill result inaprogressive reductionof40% from January2018 levels (0.0109eurosperminute).TheapprovedMTRsareasfollows:fromthedatethedecisionbecameeffectiveuntilDecember31,20180.0070eurosperminute;fromJanuary1,2019untilDecember31,20190.0067eurosperminute;andas fromJanuary1,20200.0064eurosperminute.TheCNMClaunchedapublicconsultation inNovember2018regardingfixedterminationrates(“FTRs”),whichproposedaprogressivereductioninpricesof34%fromNovember2018levels.Theproposedpricesareasfollows:fromthedatethedecisionbecomeseffectiveuntilDecember31,20190.0640eurosperminute;fromJanuary1,2020untilDecember31,20200.0591eurosperminuteandasfromJanuary1,20210.0543eurosperminute.Afinaldecisionisexpectedtobeadoptedinthefirstquarterof2019.

InGermany,onDecember1,2018thepriceoftheMTRfellfrom1.07eurocentsperminuteto0.95eurocentsperminute.ThispricewillbeinforceuntilNovember30,2019.MTRsforsubsequentperiodswillbedecidedin2019.

InBrazil,Resolution639/2014establishedthatMTRswillbesubjecttosuccessiveyearlyreductionsfrom2016until2019,whenthedefinitivecost-oriented-modelfeesareexpectedtobeinforce.Inaddition,throughActNo.6211/2014,ANATELpublishedthereferencepricestobeappliedbyoperatorswithsignificantmarketpower("SMP").In2018,throughActNo.9919/2018,ANATELpublishedthereferencepricestobeappliedbySMPoperatorsfrom2020until2023.Inadditiontotheplannedimplementationofthecost-oriented-model,thePlanoGeraldeMetasdeCompetição("PGMC"),amendedbyResolution649/2015,amongotherchanges,updated the partial "bill and keep" model for MTRs, aiming to fix an imbalanced remuneration patternbetweenSMPoperatorsandothercompaniesoperatingintherelevantmarket.ThismeasurewasintendedtoadaptthenetworkstothereductionsofMTRsandpromoteagradualadaptationtotheenforcementofthecost-oriented fees in early 2019. However, the new PGMC thatwas published in July 2018, among otherchanges,extendedthe"billandkeep"model,whichwasexpectedtoexpireinFebruary2019,untilthenextrevisionofthePGMCinfouryears.

InMexico,onNovember13,2018,theIFTannouncedthattheMTRsapplicabletotheso-calledPrevailingEconomic Agent ("PEA") for 2019 shall be 0.028313 pesos per minute while theMTRs applicable to theoperatorsotherthanthePEAshallbe0.112623pesosperminute.BoththisdecisionandthedecisionthatestablishedtheMTRsapplicableto2018werechallengedbyTelefónica.


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In Peru, on December 21, 2018, the regulator, OSIPTEL, published the new MTRs. The new MTRsapplicable to all operators ofmobile public serviceswas fixed at 0.00302 dollars perminute rated at thesecond,whichentailsa54%decreasefromthepreviousrate(0.0066.1dollarsperminuteratedatthesecond).ThenewrateshavebeenineffectsinceJanuary1,2019andwillremainineffectuntilanewMTRvalueisdefinedbytheregulator.

In Argentina, on August 17, 2018, the Ente Nacional de Comunicaciones ("Enacom") published theprovisional termination and local origination charges for mobile communications services provided bynetworksuntilthefinalchargesaredecidedpursuanttoacostmodel.Enacomsetatariffof0.0108dollarsperminuteandthemeasurementunitforvaluationispersecond.Duringthesummerof2018,Enacomlaunchedapublicconsultationonthecostmodelsformobilecommunicationsservices.OnNovember22,2018,Enacomsettheprovisionalterminationchargeinfixednetworksat0.0045dollarsperminute,thetariffforlocaltransitservicesat0.0010dollarsperminute,andthetariffforlongdistancetransportationservicesat0.0027dollarsperminute.Ineachcasethemeasurementunitforvaluationispersecond.

In Chile, regarding mobile termination rates, on February 5, 2019, Subtel notified TMCH of a newproposalontariffdecree,whichwillbeapplicableforthenextfiveyears.Theaveragetariffwhichwillapplyuntil 2024 is 1.8 Chilean pesos perminute (0.0024 euros,without VAT, based on the exchange rate as ofFebruary6,2019,tobechargedonapersecondbasis).ThenewtariffdecreeisineffectsinceJanuary26,2019.NewtariffsonfixedoperationswillcomeintoforceinMay2019.

InColombia,inDecember2018,theregulator(ComisióndeRegulacióndeComunicaciones)publishedtwoconsultations.ThefirstinitiativewouldreducetheFTRsfrom0.01to0.003dollarsin2019,whichwouldbe beneficial to ColTel as it is a net payer of FTRs. As of 2020, FTRs between fixed networks would becompletelyeliminated.Thesecondinitiative,ononehandseekstosubstitutethenationalroamingchargesinincoming calls charged to operators using national roaming, for mobile termination rates, which wouldnegatively impact the revenues of ColTel; and, on the other hand,modifies the formula that defines themaximum regulated rate for networkprovision charged toMVNOs, from theminimumARPU reportedbyMVNOstotheaverageARPUfromthepastfour(4)quarters.

Asaresultoftheforegoingactions,thepricesforcertainwholesaleservicesmaybereduced,whichmaymateriallyadverselyaffecttheGroup'sbusiness,financialcondition,resultsofoperationsand/orcashflows.During2018,thenegativeimpactofthesewholesaleregulations(mainlyMTRs,FTRsandroaming)isestimatedtohave resulted in thedeductionof approximately 1.1percentagepoints from theorganic growthof theGroup'srevenues.

Regulationofuniversalserviceobligations

Universalserviceobligations("USO")referstotheobligationsimposedontelecommunicationoperatorswhichareaimedatgrantingaccess toall consumers ina country toaminimumsetof servicesofferedatreasonableandfairpricesinordertoavoidsocialexclusion.

Asstatedabove,Directive(EU)2018/1972,ofDecember11,2018,whichapprovestheEECC,updatesUSOprovisionsinEurope,removingthemandatoryinclusionofthelegacyoutdatedservices(payphoneboxes,directoriesandinformationservices)andfocusingontheprovisionofaffordablebroadbandservices.TheEECCprovidesMemberStateswith full flexibility in relation to the financing required for theprovisionof theseservices, allowing Member States to choose between public or industry funding. This ample room for

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discretion, togetherwith thepossibility that theaffordabilityobligations couldendupbeing tooonerous,mightresultinhighercostsfortheindustry.

In Spain, Telefónica is the operator responsible for the provision of universal service elements withrespecttofixednetworkaccesswithabroadbandbandwidthofat least1Mbpersecond(untilDecember2019).OnDecember28,2018,thegovernmentapproved(byRoyalDecree1517/2018)themodificationoftheUSO framework, eliminating theobligation toprovide telephonedirectories tousers (whichhadbeenassigned from January 1, 2017 to Telefónica), but maintaining Telefónica’s designation as the operatorresponsiblefortheprovisionofpublicpayphonesuntilDecember31,2019,dateonwhichitisexpectedthatsuchobligationwillberemoved.

InBrazil,theGeneralPlanofUniverzalizationTargets(PGMUIV)ofFixedSwitchedTelephonyServices(the"GeneralPlan")thatwasduetohavebeenpublishedin2016wasfinallypublishedonDecember21,2018(PresidentialDecreen.9.619/2018)afteralongperiodofdiscussion.

The General Plan lessens the USO framework in three ways: (i) there is amaterial decrease in themaintenance obligations with respect to Public Use Terminals; (ii) there is a material reduction of theobligationstomeetrequestsforinstallationofindividualaccesseswithinsevendays;and(iii)theextinctionoftheobligationstoinstallandmaintainMultifacilitiesServiceStations.

However,theGeneralPlanimposesanewobligationwithrespectto"fixedwirelessaccesssystemswithsupportforbroadbandconnection"throughtheimplementationofabaseradiostationin310pre-determinedlocalitiesintheStateofSãoPaulo.

TheimpositionontheTelefónicaGroupofadditionalormoreonerousUSOinthejurisdictionswhereitoperatescouldhaveamaterialadverseeffectonitsbusiness,financialcondition,resultsofoperationsand/orcashflows.

Regulationoffibernetworks

In Spain, on March 6, 2018, the CNMC approved a final decision on the economic replicabilitymethodology(orERTinitsacronyminEnglish)tobeusedtoassessthemaximumwholesaleaccesspricewhichTelefónicacanchargeotheroperatorsforaccessingtheopticalfibernetworkinregulatedareas(NEBALocalandNEBAservices).Accordingtothismethodology,fromApril2018,Telefónicaistoapplyawholesaleaccessprice(NEBA)of17.57eurospermonth,withthispricebeingupdatedtwiceayearinordertoassesswhetherTelefónica'sretailoffers(broadbandflagshipproducts)areeconomicallyreplicablewithsuchwholesaleNEBAprice. In July2018, theCNMCapproveda finaldecisiononthemethodologytoassess ifTelefónica's retailoffersforthebusinesssectorcanbereplicatedbyotheroperators.

ThisandanyothersimilarobligationsandrestrictionswhichmaybeimposedinthefutureinthevariousjurisdictionswheretheTelefónicaGroupoperatescouldraisecostsandlimitTelefónica'sflexibilityinprovidingtheaforementionedservices,whichcouldmateriallyadverselyaffectTelefónica'sbusiness,financialcondition,resultsofoperationsand/orcashflows.


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Regulationsonprivacy

In Europe, the General Data Protection Regulation ("GDPR") of April 27, 2016, has been directlyapplicable inallMemberStatessinceMay25,2018and implementingmeasureshavebeen introducedbyMemberStates,includingSpain,GermanyandtheUnitedKingdom.

InSpain,onDecember5,2018thePersonalDataProtectionandDigitalRightsActwasapproved.ThisActimplementsGDPRinSpain,addressingseveralparticularitiesconcerningdatablockingforjudicialpurposesor specificmatters on databases for advertising purposes or data relating to deceased people. Equally, itimplements procedural mechanisms within the framework of legal investigations concerning potentialinfringementsoftheGDPR.

Inaddition,onJanuary10,2017,theECpresenteditsproposalforaregulationonprivacyandelectroniccommunications("ePrivacyRegulation"),whichwillreplacethecurrentDirective2002/58/EC.TheproposalimpliesanextralayerofregulationontopoftheGDPRandalsointroducesadministrativefinesofupto4%ofanundertaking'sannualglobalturnoverforbreachingnewregulations.Inthisarea,astrictdataprotectionandprivacyregulationmayresultinlimitationsontheabilitytoofferinnovativedigitalservicessuchasbigdataservices.ThefutureePrivacyRegulationisnotexpectedtobeadoptedbeforetheendof2019.

ThePrivacyShield,approvedbytheEConJuly12,2016tolayouttheframeworkfortheinternationaltransferofpersonaldatafromtheEUtotheUS,waschallengedbeforetheEU'sGeneralCourtbycivil-societygroups.OneoftheappealswasnotadmittedandtheadmissionofasecondappealisstillpendingasofthedateofthisAnnualReport.TheresultsofthesecondannualrevisionofthePrivacyShieldbytheCommissionwerepublishedonDecember19,2018.ThereportconcludesthattheUnitedStatescontinuestoguaranteeanadequatelevelofprotectionoftransferredpersonaldataunderthePrivacyShieldandthatthemeasuresadoptedbyUSauthoritiestoimplementtherecommendationsmadebytheCommissioninthe2017reporthaveimprovedthefunctioningoftheframework.

InBrazil,thePersonalDataProtectionAct(Act13709/2018)wasapprovedonAugust14,2018.ThisActentailsfurtherobligationsandrestrictionsforoperatorsinrelationtothecollectionofpersonaldataanditsprocessingandisbasedontheGDPR.ThetextwasapprovedintheChamberofDeputiesandtheSenatebutthePresidentvetoedthecreationoftheAuthority fortheProtectionofPersonalDataandoftheNationalCouncil for theProtectionofPersonalDataandPrivacy,afterconsidering themtobeunconstitutional.OnDecember27,2018thePresidentofBrazilsignedprovisionalmeasure869/2018thatcreatedtheNationalDataProtectionAuthority(ANPD)andpostponedtoAugust2020theentryintoforceofthenewPersonalDataProtectionAct.Theapprovalofprovisionalmeasure869/2018bytheNationalCongressanditsconversionintolawisstillpending.

InChileandArgentina,twobillsalignedwiththeGDPRareinprocesstopassintolaw.

AnyobligationsandrestrictionsarisingfromprivacyregulationscouldraisecostsandlimitTelefónica'sability to provide certain services, which could materially adversely affect Telefónica's business, financialcondition,resultsofoperationsand/orcashflows.

Regulationofnetworkneutrality

Under the principle of network neutrality applicable to the Internet access services realm, networkoperatorsarenotpermittedtoestablishtechnicalorcommercialrestrictionsregardingtheterminalsthatcan

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beconnectedortheservices,orapplicationsandcontentsthatcanbeaccessedordistributedthroughtheInternetby theenduser. Italso refers to thenon-discriminatorybehavior (e.g.non-anticompetitive) tobeadoptedbyoperatorsregardingthedifferenttypesofInternettrafficcirculatingthroughtheirnetworks.

Net neutrality regulation is being implemented all across Europe and in most of the Latin AmericacountrieswhereTelefónicaisoperating.

InMexico,itisexpectedthatIFTwillissueguidelinesduring2019.

Anychanges to regulationas it isestablished in thevarious jurisdictionswhere theTelefónicaGroupoperates,couldlimitthecommercialflexibilityandmighthaveanimpactonitsbusiness,financialcondition,resultsofoperationsand/orcashflowsoftheGroup.

The Telefónica Group is exposed to risks in relation to compliance with anti-corruption laws andregulationsandeconomicsanctionsprograms.

TheTelefónicaGroupisrequiredtocomplywiththelawsandregulationsofvariousjurisdictionswhereit conducts operations. In particular, the Group's international operations are subject to various anti-corruptionlaws,includingtheUSForeignCorruptPracticesActof1977andtheUnitedKingdomBriberyActof2010,andeconomicsanctionsprograms,includingthoseadministeredbytheUnitedNations,theEuropeanUnionandtheUnitedStates, includingtheUSTreasuryDepartment'sOfficeofForeignAssetsControl.Theanti-corruptionlawsgenerallyprohibitprovidinganythingofvaluetogovernmentofficialsforthepurposesofobtainingorretainingbusinessorsecuringanyimproperbusinessadvantage.AspartoftheTelefónicaGroup'sbusiness,itmaydealwithentities,theemployeesofwhichareconsideredgovernmentofficials.Inaddition,economic sanctions programs restrict the Group's business dealings with certain sanctioned countries,individualsandentities.

AlthoughtheGrouphasinternalpoliciesandproceduresdesignedtoensurecompliancewithapplicableanti-corruptionlawsandsanctionsregulations,therecanbenoassurancethatsuchpoliciesandprocedureswillbesufficientorthattheGroup'semployees,directors,officers,partners,agentsandserviceproviderswillnottakeactionsinviolationoftheGroup'spoliciesandprocedures(or,otherwiseinviolationoftherelevantanti-corruption laws and sanctions regulations) for which the Group or they may be ultimately heldresponsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties,exclusionfromgovernmentcontracts,damagetotheGroup'sreputationandresultinotherconsequences,thatcouldhaveamaterialadverseeffectontheGroup'sbusiness,resultsofoperationsandfinancialcondition.

AsofthedateofthisAnnualReport,Telefónicaiscurrentlyconductinginternalinvestigationscoveringvarious countries regarding possible violations of applicable anti-corruption laws. Telefónica continues tocooperatewithgovernmentalauthoritiesandcontinueswith theongoing investigations.Although it isnotpossible at this time to predict the scopeor durationof thesematters or their likely outcome, Telefónicabelievesthat,consideringthesizeoftheGroup,anypotentialpenaltyasaresultoftheresolutionoftheseinvestigationswouldnotmateriallyaffecttheGroup'sfinancialcondition.

Telefónicamaynotanticipateoradaptinatimelymannertochangingcustomerdemandsand/ornewethicalorsocialstandards,whichcouldadverselyaffectTelefónica’sbusinessandreputation.

Tomaintainandimproveitspositioninthemarketvis-à-visitscompetitors,itisvitalthatTelefónicahastheability toanticipateandadapttotheevolvingneedsanddemandsof itscustomers,andthat itavoids


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commercial actions thatmaygenerateanegativeperceptionof theGroupor theproductsand services itoffers, or that may have or be perceived to have a negative impact on society. In addition to harmingTelefónica’sreputation,suchactionscouldalsoresultinfinesandothersanctions.

Thereisgrowingsocialandregulatorydemandforcompaniestobehaveinasociallyresponsiblemanner.Inaddition,therisksassociatedwithpotentialdamagetoabrand’sreputationhavebecomemorerelevant,especiallyduetotheimpactthatthepublicationofnewsthroughsocialnetworkscanhave.

IfTelefónicawerenotabletoanticipateoradapttotheevolvingneedsanddemandsofitscustomersoravoidinappropriateactions,itsreputationcouldbeadverselyaffectedoritcouldotherwisehaveanadverseeffectonthebusiness,financialcondition,resultsofoperationsand/orcashflowsoftheGroup.

Telefónica’scompetitivepositioninsomemarketscouldbeaffectedbytheevolutionofcompetitionandmarketconsolidation.

TheTelefónicaGroupoperatesinhighlycompetitivemarketsanditispossiblethattheGroupmaynotbeable tomarket itsproductsandserviceseffectivelyor respondsuccessfully to thedifferentcommercialactions carried out by its competitors. The Groupmay also fail tomeet its growth plans or to retain itscustomers,anyofwhichmayresultinthedecreaseoftheGroup’sprofitsandrevenuemargins.

Inaddition,increasedmarketconcentration,includingasaresultofmergersandacquisitions,oralliancesandcollaborationagreementsamongotherindustryplayers,couldadverselyaffectthecompetitivepositionofTelefónica,aswellastheefficiencyofitsoperationsanditsbusinesscontinuity.

TheentryofnewcompetitorsintomarketswhereTelefónicaisaleader,inadditiontochangesinmarketdynamicswhichhaveledtoaggressivedataoffersandbroadbanddeploymentsbytheGroup’scompetitorsandmergersofoperatorsincertainmarkets,haveadverselyaffectedthecompetitivepositionofTelefónica,negativelyimpactingtheevolutionofrevenuesanditsshareofcustomers.

IfTelefónicaisnotabletofacethechallengesposedbyitscompetitors,thebusiness,financialcondition,resultsofoperationsand/orcashflowsoftheGroupcouldbenegativelyaffected.

Telefónicaoperatesinasectorcharacterizedbyrapidtechnologicalchangesanditmaynotbeabletoanticipateandadapttosuchchangesorselecttherightinvestmentstomake.

ThepaceofinnovationandTelefónica'sabilitytokeepupwithitscompetitorsisacriticalissueinasectorsoaffectedbytechnologysuchastelecommunications.

Whileautomationandotherdigitalprocessesmayleadtosignificantcostandefficiencygains,therearealsosignificantrisksassociatedwithsuchtransformationprocesses.

NewproductsandtechnologiesareconstantlyemergingthatcanrenderproductsandservicesofferedbytheTelefónicaGroupobsolete,aswellasitstechnology.Inaddition,theexplosionofthedigitalmarketandtheentranceofnewplayers inthecommunicationsmarket,suchasMNVOs, Internetcompaniesordevicemanufacturers,couldimplythelossofvalueofcertainassets,affectthegenerationofincome,orotherwisecauseTelefónicatohavetoupdateitsbusinessmodel.ThisforcesTelefónicatoinvestinthedevelopmentofnewproducts, technologyandservices inordertocompeteeffectivelywithcurrentor futurecompetitors,whichmayresult inthedecreaseoftheGroup'sprofitsandrevenuemargins.Additionally,this investmentmaynot lead to thedevelopmentor commercializationof successfulproductsor services. In this respect,

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marginsfromtraditionalvoiceanddatabusinessareshrinking,whilenewsourcesofrevenuesarederivedfrommobileInternetandconnectivityservicesthatarebeinglaunched.ExamplesoftheseservicesincludeIPTVservices,IoTservices,financial,securityandcloudservices.

Researchanddevelopmentcostsamountedto947millioneuros in2018,representinganincreaseof9.8%from862millioneurosin2017(906millioneurosin2016).Theseexpensesrepresented1.9%,1.7%and1.7%of theGroup's consolidated revenues in2018,2017and2016, respectively.These figureshavebeencalculatedusingtheguidelinesestablishedintheOrganizationforEconomicCooperationandDevelopment("OECD")manual.

One of the technologies currently being developed by telecommunications operators, includingTelefónica (in Spain and Latin America), is the new FTTx type networks, which allow to offer broadbandaccesses over fiber opticswith high performance, such as 600MB Internet connections or high definitiontelevision services.However, thedeploymentof suchnetworks, inwhich the copperof theaccess loop istotallyorpartiallyreplacedbyopticalfiber,implieshighlevelsofinvestments.AsofDecember31,2018,inSpain,fibercoveragereached20.2millionpremises.Thereisagrowingdemandfortheservicesthatthesenew networks can offer to the end customer. However, the high level of investments required by thesenetworksresultsintheneedtocontinuouslyconsidertheexpectedreturnoninvestment,andnoassurancecanbegiventhattheseinvestmentswillbeprofitable.

In addition, the ability of the Telefónica Group's IT systems (operational and backup) to adequatelysupport and evolve to respond to Telefónica's operating requirements is a key factor in the commercialdevelopment, customer satisfaction and business efficiency of the Telefónica Group. Any failure by theTelefónicaGrouptodevelopor implement ITsystemsthatadequatelysupportandrespondtotheGroup'sevolvingoperatingrequirementscouldhaveanadverseeffectontheGroup'sbusiness,financialcondition,resultsofoperationsand/orcashflows.

IfTelefónicawerenotabletoanticipateandadapttothetechnologicalchangesandtrendsinthesector,ortoproperlyselecttheinvestmentstobemade,thiscouldnegativelyaffecttheGroup’sbusiness,financialcondition,resultsofoperationsand/orcashflows.

Telefónicadependsonitssuppliers.

Theexistenceofcriticalsuppliersinthesupplychain,especiallyinareassuchasnetworkinfrastructure,informationsystemsorhandsetswithahighconcentrationinasmallnumberofsuppliers,posesrisksthatmayaffectTelefónica’soperations,andmaycauselegalcontingenciesordamagestoitsimageintheeventthat aparticipant in the supply chain engages inpractices thatdonotmeet acceptable standardsor thatotherwisefailtomeetTelefónica’sperformanceexpectations.Thismayincludedelaysinthecompletionofprojectsordeliveries,poor-qualityexecution,costdeviationsandinappropriatepractices.

AsofDecember31,2018,theTelefónicaGroupdependedontwohandsetsuppliersandtennetworkinfrastructuresuppliers,which, together,accounted for71%and80%, respectively,of the total contractedhandsetsasofsuchdate.Oneofthehandsetsuppliersrepresented42%ofallcontractedhandsetsasofsuchdate.

Thesesuppliersmay,amongotherthings,extenddeliverytimes,raisepricesandlimitsupplyduetotheirown stock shortfalls and business requirements or for other reasons. In addition, the suppliers onwhichTelefónicareliesmayalsobesubject to litigationwithrespect totechnologyonwhichTelefónicadepends,


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including litigation involving claims of patent infringement. Such claims are frequently made in thecommunicationsindustry.

If suppliers cannot supply theirproducts to theTelefónicaGroupwithin theagreeddeadlineorsuchproductsandservicesdonotmeettheGroup’srequirements,thiscouldhinderthedeploymentandexpansionplansofthenetwork,whichincertaincasescouldaffectTelefónica'scompliancewiththetermsandconditionsofthelicensesunderwhichitoperates,orotherwiseadverselyaffectthebusinessandoperatingresultsoftheTelefónicaGroup. Inaddition, thepossibleadoptionofnewprotectionistmeasures in certainpartsof theworld, including as a result of trade tensionsbetween theUnited States andChina,mayhaveanadverseimpactoncertainofTelefónica’ssuppliersandothersignificantplayersintheindustry.

Theimpositionoftraderestrictionscouldresultinhighercostsandlowermargins,andcouldadverselyaffecttheGroup’sbusiness,financialcondition,resultsofoperationsand/orcashflows.

Unanticipatednetworkinterruptionscanleadtoqualitylossortheinterruptionoftheservice.

Unforeseennetworkinterruptionsduetosystemfailures,includingthoseduetonaturaldisasterscausedbynaturalormeteorologicaleventsorphenomena,networkfailures,hardwareorsoftwarefailures,theftofnetworkelementsorcyber-attacks thataffect thequalityof,orcause interruption to, theprovisionof theservicesoftheTelefónicaGroup,couldcausecustomerdissatisfaction,areductioninrevenuesandtraffic,therealization of expensive repairs, the imposition of sanctions or othermeasures by regulatory bodies, anddamagetotheimageandreputationoftheTelefónicaGrouporcouldotherwisehaveanadverseeffectonthebusiness,financialcondition,resultsofoperationsand/orcashflowsoftheGroup.

InformationtechnologyiskeytotheGroup’sbusinessanditcouldbesubjecttocybersecurityrisks.

TheGroupoperatesinanenvironmentincreasinglypronetocyber-threats.Consequently,itisnecessaryfortheGrouptocontinuetoadvanceitscapacitytoidentifyanddetecttechnicalthreatsandvulnerabilitiesandimproveitsabilitytoreacttoincidents.ThisincludestheneedtostrengthensecuritycontrolsinthesupplychainaswellastoplaceincreasedfocusonsecuritymeasuresadoptedbypartnersoftheGroupandotherthirdparties.

Telecommunications companies worldwide face increasing cybersecurity threats as businesses havebecome increasingly dependent on telecommunications and computer networks and have adopted cloudcomputing technologies. Cybersecurity threats may include gaining unauthorized access to Telefónica'ssystemsorinsertingcomputervirusesormalicioussoftwareinitssystemstomisappropriateconsumerdataandothersensitiveinformation,corruptTelefónica'sdataordisruptitsoperations.Unauthorizedaccessmayalsobegained through traditionalmeans suchas the theftof laptop computers,datadevicesandmobilephonesandintelligencegatheringbyemployeeswithaccess.Further,theGroup'semployeesorotherpersonsmayhaveunauthorizedorauthorizedaccesstotheGroup'ssystemsand/ortakeactionsthataffecttheGroup'snetworksinaninconsistentmannerwiththeGroup'spoliciesorotherwiseadverselyaffecttheGrouporitsabilitytoadequatelyprocessinternalinformation.

Telefónicaattemptstomitigatetheserisksthroughanumberofmeasures,includingbackup,logreview,vulnerabilities checks, network segregation measures and protective systems such as firewalls, intrusiondetectionorpreventionsystems,virusscannersandotherphysicalandlogicalsecuritymeasures.However,theapplicationofthesemeasuresmaynotalwaysbeeffective.TheTelefónicaGrouphasinsurancepoliciesinplacewhichcouldcover,subjecttothepoliciesterms,conditions,exclusions,limitsandsublimitsofindemnity,

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anddeductiblesapplying,certainlossesarisingoutofthistypeofincidents.Todatetheinsurancepoliciesinplace have covered some incidents of this sort, yet due to the potential severity and uncertainty of thementionedevents,thesepoliciesmaynotbesufficienttocoverallpossiblemonetarylossesarisingoutofanindividualevent.

Possible regulatory, business, economic or political changes and other factors could lead to assetimpairment.

TheTelefónicaGroupreviewsonanannualbasis,ormorefrequentlywhenthecircumstancesrequireit,thevalueofassetsandcash-generatingunits,toassesswhethertheircarryingvaluescanbesupportedbythefuture expected cash flows, including, in some cases synergies allowed for in acquisition costs. Potentialchangesintheregulatory,business,economicorpoliticalenvironmentmayresult intheneedtointroducechangestoestimatesmadeandtorecognizeimpairmentsingoodwill,intangibleassets,property,plantandequipmentorfinancialassets.Althoughtherecognitionofimpairmentsoftheseassetsresultsinanon-cashchargeontheincomestatement,itcouldadverselyaffecttheresultsoftheTelefónicaGroup'soperations.Inthis respect, theTelefónicaGrouphasexperienced impairmentsoncertainof its investments,affecting itsresultsofoperationsintheyearinwhichtheywereexperienced.In2018,impairmentlossesinthevalueofgoodwill,havebeenrecognizedamountingto350millioneuros,relatedtoTelefónica'soperationsinMexico.No impairments were recognized in 2017. In 2016, impairment losses, in the value of goodwill, wererecognizedamountingto215millioneuros,relatedtoTelefónica’soperationsinVenezuela(124millioneuros)andinMexico(91millioneuros).Inaddition,Telefónicamaynotbeabletorealizedeferredtaxassetsonitsstatement of financial position to offset future taxable income. The recoverability of deferred tax assetsdependsontheGroup’sabilitytogeneratetaxableincomeovertheperiodforwhichthedeferredtaxassetsremaindeductible. If Telefónicabelieves it isunable toutilize itsdeferred taxassetsduring theapplicableperiod,itmayberequiredtorecordanimpairmentagainstthemresultinginanon-cashchargeontheincomestatement. In2018,TelefónicaMóvilesMéxicoderecognizeddeferred taxassetsamounting to327millioneuros.Furtherdetailson intangibleassetsandgoodwillareprovided inNotes6and7totheConsolidatedFinancialStatements.

TheTelefónicaGroup’snetworkscarryandstorelargevolumesofconfidential,personalandcorporatedata,anditsInternetaccessandhostingservicesmayleadtoclaimsforillegalorillicituseoftheInternet.

TheTelefónicaGroup'snetworkscarryandstore largevolumesofconfidential,personalandbusinessdata, through both voice and data traffic. The Telefónica Group stores increasing quantities and types ofcustomerdatainbothbusinessandconsumersegments.Despiteitsbesteffortstopreventit,theTelefónicaGroupmaybefoundliableforanyloss,transfer,orinappropriatemodificationofthecustomerdataorgeneralpublicdatastoredonitsserversortransmittedthroughitsnetworks,anyofwhichcouldinvolvemanypeopleandhaveanimpactontheGroup'sreputation,orleadtolegalclaimsandliabilitiesthataredifficulttomeasureinadvance.

Inaddition,theTelefónicaGroup'sInternetaccessandhostingserverscouldleadtoclaimsforillegalorunlawfuluseoftheInternet.Telefónica,likeothertelecommunicationsproviders,maybeheldliableforanyloss, transfer or inappropriate modification of the customer data stored on its servers or carried by itsnetworks.

InmostcountriesinwhichtheTelefónicaGroupoperates,theprovisionofitsInternetaccessandhostingservices (including the operation ofwebsiteswith shelf-generated content) are regulated under a limited


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liabilityregimeapplicabletothecontentthatitmakesavailabletothepublicasatechnicalserviceprovider,particularlycontentprotectedbycopyrightorsimilarlaws.However,regulatorychangeshavebeenintroducedimposing additional obligations on access providers (such as blocking access to awebsite) as part of thestruggleagainstsomeillegalorillicitusesoftheInternet,notablyinEurope.

Anyoftheforegoingcouldhaveanadverseeffectonthebusiness,financialposition,resultsofoperationsand/orcashflowsoftheGroup.

TelefónicaandTelefónicaGroupcompaniesarepartytolawsuits,antitrust,taxclaimsandotherlegalproceedings.

TelefónicaandTelefónicaGroupcompaniesarepartyto lawsuits,taxclaims,antitrustandother legalproceedingsintheordinarycourseoftheirbusinesses,thefinancialoutcomeofwhichisunpredictable.AnadverseoutcomeorsettlementintheseorotherproceedingscouldresultinsignificantcostsandmayhaveamaterialadverseeffectontheGroup'sbusiness,financialcondition,resultsofoperations,reputationand/orcashflows.Inparticular,theTelefónicaGroupispartytocertainjudicialtaxproceedingsinPeruconcerningtheclearanceofcertainpreviousyears'incometax,inrespectofwhichacontentious-administrativeappealiscurrentlypendingandtocertaintaxandregulatoryproceedings inBrazil,primarily relatingtothe ICMS(aBrazilian tax on telecommunication services) and the corporate tax. Further details on thesematters areprovided inNotes22and26totheConsolidatedFinancialStatements.Additionaldetailsonprovisionsforlitigation,taxsanctionsandclaimscanbefoundinNote21totheConsolidatedFinancialStatements.

The telecommunications industry could be affected by factors related to sustainability and theenvironment. It couldalsobeaffectedby thepossibleeffects thatelectromagnetic fields couldhaveonhealth.

Telefónica’soperationsandassets(includingitstowersandsubmarinecables)arelocatedinmanyareasthataresubjecttonaturaldisastersandsevereweather,andwhichmaybeadverselyaffectedinthefuturebyclimatechange.Climate-relatedfactors,suchasheatwaves,drought,sealevels,stormsorflooding,couldleadtounanticipatednetworkinterruptionsandcostlyrepairs,andnegativelyimpactthedemandforTelefónica’sservicesinaffectedareas.Furthermore,iftheGroup’sinsurancedidnotfullycoverbusinessinterruptionsorlossesresultingfromtheseevents,anyoftheforegoingcouldhaveanadverseeffectonthebusiness,financialposition,resultsofoperationsand/orcashflowsoftheGroup.

Inaddition,governmentrestrictions,standards,orregulationsintendedtoreducegreenhousegasemissionsorpotentialclimatechangeimpactsarelikelytoresultinincreasedenergy,transportation,orrawmaterialandother supply costs.Moreover, local, national or international policy responses to climate change, such ascarbonpricing or levies, emission caps or subsidywithdrawalsmay also lead to the strandingor financialimpairmentofcertainoftheGroup’sassets.Furthermore,theGroupmayfaceincreasedreputationalpressureifitsactivitiesareperceivedtobeinconsistentwithaddressingclimatechange.

WhiletheGrouphastakenseveralstepstoincreaseitsresiliencetoclimatechangeandtolimititscarbonfootprint,thereisnocertaintyastowhethersuchstepswillbeeffectiveorsufficient.

The telecommunications industry couldalsobeaffectedby thepossibleeffects thatelectromagneticfieldsemittedbymobiledevicesandbasestationscouldhaveonhealth,aswellasbyconcernsrelatingtosuchmatters.Theseconcernshaveledsomegovernmentsandadministrationstotakemeasuresthathave

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compromisedthedeploymentofthenecessaryinfrastructurestoensurequalityofservice,andhaveaffectedthecriteriaforthedeploymentofnewnetworksandthedevelopmentofdigitalservicessuchassmartmeters.

There is consensusamongseveral groupsofexpertsandpublichealthagencies, including theWorldHealth Organization, who state that, to date, there have been no proven risks of exposure to low radio-frequencysignalsfrommobilecommunications.Thescientificcommunitycontinuestoinvestigatethisissue,especiallywithregardtomobiledevices.

Concerns about electromagnetic fieldsmay discourage the use ofmobile telephony and newdigitalservices,andmayleadgovernmentauthoritiestoimposesignificantrestrictionsonthelocationandoperationofantennasorcellsandtheuseofradiofrequenciesbymobilephones,aswellasthedeploymentofsmartmetersandotherproductsthatusemobiletechnology.ThiscouldleadtotheimpossibilityofexpandingorimprovingtheGroup’smobilenetwork.

Anyoftheforegoingcouldhaveanadverseeffectonthebusiness,financialposition,resultsofoperationsand/orcashflowsoftheGroup.

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