Relato Web...service packages throughout the year, reaching 68% of our base in December 2013. In the...

2013 SUSTAINABILITY REPORT

How to read this report 2Message from the Chairman and the CEO 3Main indictors 5GRI Index 67Corporate information/credits 75

AlgAr Telecom 6

Algar Telecom 7Awards and recognition 8Mission, vision and values 8 A history of dedication to the customer 9

Serving 10

Businesses 11Governance 15Strategy 23Innovation 27Risk management 29Regulations 34

ALGAR TELECOM 2013 SUSTAINABILITY REPORT

SUMMARY

inTegrATion 35

Human talents 36Human rights 47

SuSTAinAble buSineSSeS 48

Sustainable management 49 Environmental sustainability 50Social sustainability 58Financial-economic analysis 60Outlook 66

ALGAR teLecom 2013 SUStAINABILItY RePoRt 1

Serving, integration and sustainable business are the base concepts of our mission: “To serve and integrate people and businesses in a sustainable manner”. And these are the three aspects that guide the preparation and organization of the Algar Telecom 2013 Sustainability Report.

Information about our management, performance indicators and profile and governance items, in addition to the main highlights of the year, are distributed across these chapters and consolidated on the index presented at the end of the publication. The text was prepared with the goal of presenting the topics considered internally as most important for target audiences, covering Algar Telecom and its five subsidiaries.

For the eighth year in a row, our economic, environmental and social performance is presented according to the international directives of the Global Reporting Initiative (GRI) on the G3 version, and this year the report is classified at level B of this methodology. This edition refers to the year of 2013 and, when applicable, the indicators may be compared to those of 2011 and 2011.

The calculation of financial data follows the criteria defined by the International Financial Accounting Standards (IFRS), and is audited by KPMG Auditores Independentes. Meanwhile, social and environmental performance indicators are calculated and validated

internally, and do not undergo external verification. The only relevant changes compared to the 2012 fiscal year were the division of Engeset and the absorption of its activities by Algar Telecom and Algar Tech.

Like in previous years, this report is available only in the electronic version, a result of our commitment to the environment. The whole preparation process included the support and dedication of our associates (employees), who actively participated in the collection and validation of information.

HOw TO REAd THIS REPORT

For the eighth year in a row, we present our sustainability results [IP 2.9; 3.1-3.11; 3.13]

Contact information in case of questions or requests for further information Érika Marques Andrade Advisor for Relationships with Investors and Fund-raising 55 34 3256-2978 [email protected] www.algartelecom.com.br/riAddress: Rua José Alves Garcia, 415 Bairro Brasil Uberlândia (MG)CEP 38400-668

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT HOW TO READ THIS REPORT 2

mailto:[email protected]

http://www.algartelecom.com.br

For us, the year of 2013 can be considered the year of consolidation, as we look towards the future while working to reap the results of planning and commitment in execution of our management. We have therefore initiated new actions focused on sustainable growth, always with a long term perspective.

The performed investments will enable us to reap even better results in the future. In 2013, we invested a total of $ 371 million in the modernization and expansion of telecom networks, and in the development of new technologies in internal platforms, thus reducing reliance on external suppliers, while also expanding capability of broadband Internet access and cell phone networks.

One of the most relevant actions that reinforced our future outlook was the acquisition of Asyst by Algar Tech, concluded right at the start of 2014, with the goal of reinforcing the portfolio of managed services in Information and Communication Technology.

Always aiming towards improvement in customer service and service quality, we have reorganized our whole operation for installation and maintenance of our products and services, as well as the use of our networks through partial internalization of subsidiary Engeset. The third party service provision segment was integrated to Algar Tech, which reinforced its service portfolio.

In 2013, we proceeded with the process of raising awareness for our brand in the Telecom business corporate and retail segments. Simultaneously, we have worked on the migration of the CTBC brand to Algar Telecom, an action that will be concluded in the first quarter of 2014, when we celebrate 60 years of operations. Also regarding our image, we achieved significant recognition from the Reputation Institute as the company with the best reputation in the telecommunications sector.

In the corporate segment, we added four new sites to our operations: Bauru, Jaú, Anápolis and Sorocaba, while reinforcing the networks at the metropolitan regions in which we were already active. With the contracting of two new circuits – from Macaé to Santos Bay and from Baixada Fluminense to Betim – we have ensured the resilience and strength of our backbone, in addition to further increasing our activity area, as these circuits will enable access to new regions where we currently don't operate yet. In 2013, the corporate segment gained a thousand new customers, reaching the milestone of 8 thousand. In addition, in September the Department of Micro and Small Companies was created, aimed at providing more focus on this market niche.

In retail there was a growth of 37% in the customer base for cell phone telephony, above market performance. Pay TV also presented a strong evolution, closing the year with 20% growth. We have also experienced a significant increase in fixed broadband

MESSAGE fROM THE CHAIRMAN ANd THE CEO

A year to reap results and look towards the future [IP GRI 1.1; 2.9]

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT mESSAgE FROm THE cHAIRmAn AnD THE cEO 3

Internet access services, because in 2013 we have accelerated the replacement of metallic networks with fiber optics to customer homes, enabling the offer of ultra broadband service plans - with speeds that reach 100 Mbps. Another highlight was the consolidation of our strategy to serve retail customers with product and service packages throughout the year, reaching 68% of our base in December 2013.

In the regulation area, we continue to expect the Brazilian government to proceed with the deployment of its regulation policy, adopting initiatives that ensure better competition. For this purpose, we have reinforced our regulation team for accelerated work, in order to analyze Anatel actions, particularly regarding new bids and regulations that could yield additional obligations and opportunities. In 2013, we highlight the start of deployment of the General Plan for Competition Goals – PGMC, which strengthened competitive conditions in the mobile telephony market, with a positive impact on the lives of our customers.

During the whole year, we reinforced our commitment towards sustainability of our business in all its aspects. As a result of this effort, the Exame Sustainability Guide recognized us as a model company for sustainability in the telecommunications industry, and Época 360º Negócios ranked the company as the most profitable in its segment. Two other received awards prove that the culture of innovation and appreciation of our human talents have been recognized by the market: 1 – Best Innovator Award,

from consulting company A.T.Kearney and Época Negócios magazine, with Algar Telecom as the only telecom company listed among the 20 most innovative in Brazil; and 2 – Best Companies to Work for, from Época magazine.

We therefore consider that the results achieved in 2013 have met the expectations of our planning, confirming the 5% growth trend in revenue and EBITDA, even though faced with the growth difficulties of the Brazilian economy.

For 2014, the Telecom business strategy will continue to focus on geographic expansion and increasing the capacity of our networks, with high quality and efficient customer service as our main operational goal. In the Business Processes Technology business, operated by Algar Tech, the focus will be on consolidation and expansion of international activities and customer base, developing customized solutions for the markets in which it operates.

Finally, we reinforced our commitment towards gradually building management based on long term relationships and investment, with constant innovation and renewal to keep bringing value and charming our customers, the reason for existence of the Algar group, Algar Telecom and all its controlled companies.

Divino Sebastião de Souza CEO of Algar Telecom

Luiz Alberto Garcia Chairman of the Board of Directors

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT mESSAgE FROm THE cHAIRmAn AnD THE cEO 4

operational indicators(In thousands of units)

FIxed TeLePhoNY 2011 2012 2013 2013/2012

AcTIvE lInES 924 1,070 1,205 12.6%

I. AuTHORIzATIOn 231 310 401 29.6%

II. cOncESSIOn 693 760 804 5.7%

BRoAdBANd

TOTAl 332 420 494 17.6%

I. ADSl 276 326 370 13.5%

II. mObIlE (3g) 56 93 125 34.4%

moBILe AcceSSeS

TOTAl 611 674 922 36.8%

I. POST-PAID 406 211 225 6.6%

II. PRE-PAID 205 463 696 50.3%

PAY TV

TOTAl 94 113 135 19.5%

Financial indicators(in millions of R$)

2011 2012 2013 2013/2012

gROSS REvEnuE 2,157 2,339 2,458 5.1%

nET REvEnuE 1,682 1,812 1,902 5%

EbITDA 411 452 477 5.5%

EbITDA mARgIn 24.4% 25% 25% —

nET PROFIT 144 141 137.8 - 2.3%

nET mARgIn 8.6% 7.8% 7.2% - 0.6 p.p.

InvESTmEnTS 372 351 371 5.7%

TOTAl DEbT 815 925 1,074 16.1%

nET DEbT 637 739 882 19.4%

nET DEbT/EbITDA (mulTIPlIER) 1.5 1.6 1.9 18.8%

corporate indicators

2011 2012 2013 2013/2012

ASSOcIATES (OuR EmPlOyEES) 15,060 14,351 13,813 - 3.7%

I. mEn 6,235 6,309 6,316 0.1%

II. WOmEn 8,735 8,042 7,497 -6.8%

TRAINING

HOuRS OF TRAInIng 166,887 352,568 761,142 115.8%

emISSIoN oF GReeNhoUSe GASeS ((In TOnS OF CO2E)

DIREcT EmISSIOnS 1,309 637 3,071 –

InDIREcT EmISSIOnS 1,572 3,023 8,114 –

OTHER InDIREcT EmISSIOnS 1,543 2,153 12,674 –

MAIN INdICATORS


ALGAR TELECOM

We have been providing telecommunications services for 60 years with a focus on the customer and an eye towards the future.


We are a Brazilian company, a publicly-traded corporation since 2007, not listed on the stock exchange, belonging to the Algar group. Full and integrated in the segments in which we operate, we stand out in the market thanks to effective customer service and close relationships with over 1 million customers. We directly control five subsidiaries, whose solutions form a portfolio of products and services in two complementary areas: Telecommunications and Business Processes Technology.

In the Telecom business, we offer fixed and mobile telephone services, broadband Internet (ADSL I, ADSL II, HFC, GPON & 3G), data communications, Internet provider, pay TV (DTH and cable), phonebooks and guides and other media convergence solutions for the residential and corporate segments. Algar Tech, the new name for Algar Tecnologia, is responsible for the business processes technology services area. In 2013, these segments accounted respectively for 77% and 23% of our consolidated gross revenue.

Corporate and retail customers across Brazil receive high quality services and products, supported by a modern technological infrastructure. Close and customized service, our hallmark, is provided by a team that in 2013 added up to 13,813 associates (employees) committed to the People Serving People, a vision inherited from Commander Alexandrino Garcia, who founded CTBC (today's Algar Telecom) in 1954. The company has national presence and is physically

active in six states – Minas Gerais, São Paulo, Rio de Janeiro, Goiás, Mato Grosso do Sul and Paraná - and in the Federal District.

Our founder’s legacy of beliefs and values also include attributes like ethical and transparent business management, innovation culture, well-being of associates and commitment towards the future of the country, principles that led to a solid policy of corporate governance.

We believe that only through continuous effort to practice these values – summarized in our People Serving People vision – can we continue to perform our mission to serve and integrate people and businesses in a sustainable manner.

ALGAR GRoUP The Algar group, one of the top corporate conglomerates in the country, currently operates in four sectors: Information and Communication Technology (ICT), Agribusiness, Services and Tourism. The Group has approximately 21 thousand associates, distributed across all Brazilian states.

ALGAR TELECOM

A company that celebrates its 60 years of existence by looking towards the future, searching for better solutions for our customers [IP 2.2; 2.3; 2.4; 2.8; 4.8]

among the most sustainable telecom companies in Brazil, according to the Exame Sustainability Guide 2013

1st place

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT AlgAR TElEcOm 7

ALGAR TeLecom

• Most sustainable company in the telecommunications sector, according to the Exame Sustainability Guide 2013.

• 225th position at the ranking of 1,000 Biggest Companies of Valor 1,000 and second place in the profitability criteria for the telecommunications sector.

• One of the best companies to work for in Brazil and the IT and telecom area, according to the Great Place to Work award by Época magazine.

• One of the 100 biggest Telecom companies in Brazil and among the 10 most profitable ones, according to the Telecom Yearbook 2013.

• One of the 100 companies with the best reputation among customers, according to the Brazil Reputation Institute.

• One of the 20 companies with best sustainable practices in Brazil, according to the Época Empresa Verde.

• Most innovative company in the Telecom sector and 16th in the general ranking of the Best Innovator 2013 award.

• Best managed company in the Telecommunications sector, according to the Época 360º award.

• Honorable mention in Financial-Economic Analysis in the 15th Abrasca Annual Report Award.

• Gold Trophy Award of the Brazilian Telecommunications Association (ABT) in the “Technology Solutions” category, with the 360º Vision Portal case.

• One of the companies selected for the Companies that Best Communicate with Journalists award.

ALGAR Tech

• Second company with highest growth, according to ranking of International Data Corporation (IDC).

• One of the 50 biggest companies in the digital world. • Best provider of relationship services for the

seventh year in a row in the Interaction 2013 award, promoted by Mercedes Benz.

• One of the companies selected for the “Companies that Best Communicate with Journalists” award.

• Oracle award in the category “Rising Company in Sales".

ALGAR mídIA

• Citizen Company Award from the city hall of Uberlândia.

AwARdS ANd RECOGNITION

[IP 2.10]

Mission [IP 4.8]

To serve and integrate people and businesses in a sustainable manner

VisionPeople serving People

Values• customer, our

reason for existing• Appreciation

of human talents• integrity• Sustainability• belief in the country


60 years ago, visionary Alexandrino Garcia founded CTBC with the dream of connecting the inland regions of Brazil with the capital cities. This goal, combined with true desire to serve the communities, has led to the development, over six decades, of a history of entrepreneurship, pioneer status and innovation. We are a company that never settles down, because we are always reinventing ourselves, seeking new technologies, developing new services and predicting trends. This is proven by the internally created cutting edge technology, the two patent processes and the more than 40 projects currently tracked by the Innovation Management Office (IMO).

This view towards the future, which exists since our foundation, led us to reach the title of a model company in sustainability in the telecom sector. Creating succession programs, working focused on strategic planning in all fronts and company areas and thinking about the community and the future of the planet are continuous actions at the company. “These past 60 years went by too quickly, but our mind is on the next one hundred years", said Luiz Alberto Garcia, Chairman of the Board of Directors of the Algar group, during the 60 years celebration, featuring the attendance of more than 120 authorities, including representatives, businessmen, mayors, opinion makers, suppliers, customers and associates.

We want to be the best company in the services we provide, in our social and environmental work, in management of human talents and many other aspects.

Throughout this report, you will read testimonials in which some of our associates explain what they expect for the next six decades.

A HISTORY Of dEdICATION TO THE CUSTOMER

Six decades looking towards the future

"We are an experienced company, a pioneer in many moments of our history, always looking forward, always renewing. We are a contemporary company, ahead of our time." (Divino Sebastião, CEO)

ALGAR TELECOM +60

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT AlgAR TElEcOm 9

SERvING

We offer diversified and high quality services. Our differentials are built on a foundation of solid relationships, sustainable strategy and transparent management.


Active in the areas of Telecom and Business Processes Technology, we provide diversified and high quality services to retail and corporate customers.

TeLecom In this area, we offer fixed and mobile telephony, broadband Internet, data communications, Internet provider, TV, phonebooks and guides and other media convergence solutions to the retail and corporate segment.

PrOduCts and sErviCEs• Fixed telephony: Local calls, national

and international long distance (CSP 12), public telephony and VoIP telephony (Voice over Internet Protocol).

• Mobile services: Post-paid, pre-paid and third generation (3G) plans, with videocall and Internet access services.

• Broadband: ADSL (I& II), HFC and GPON (Gigabit Passive Optical Network) access, 3G mobile broadband and ultra broadband Internet, with the capacity to transmit data at up to 100 Mbps.

• Data communications: High speed data for the corporate market, offered through a modern IP network.

• Pay TV: Line up with more than 150 SD and HD channels, provided through cable and satellite technologies.

• Media: Convergent interaction solutions in three segments: Update – newspaper Correio de Uberlândia (printed and online version); query – phonebook Sabe, Sei and Viver guides and Netsabe (search engine with the contents of the list and guides); and exposure – Out of Home Alooh Network Digital Media (off-line tools – voice and online – information monitors with screen).

arEas Of OPEratiOn Our Telecom services are provided in two different areas: concession and authorization. In the first one, we have operated for 60 years and we are active in 87 cities of the states of Minas Gerais, São Paulo, Goiás and Mato Grosso do Sul. In this region, our revenue is concentrated in the retail segment.

In 2003, Anatel granted us the right to provide data and fixed telephony services across the country. Therefore, strategically, we have decided to serve the corporate market of cities near our backbone. Currently, we have 82 cities in the authorization area, distributed in the states of São Paulo, Rio de Janeiro, Minas Gerais, Goiás and Paraná, plus the Federal District.

Also in the authorization area, we serve the retail segment solely in the state of Minas Gerais (DDD codes 34, 35 and 37). The initiative, called Minas Expansion, arose three years ago when we acquired in

BUSINESS

We provide diversified products for corporate and retail customers in the Telecom and business Processes Technologies segments [IP 2.3; 2.7; 3.6]

“We have the best view of our business. We will have national telecom activities and we will be the top customer choice, thanks to the quality of our services, our customer service and relationships.” (Jean Carlos Borges, vP of Operations)

ALGAR TELECOM +60

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT SERvIng 11

an auction the last 2,100 MHz frequency bandwidth (H Band). Since the end of 2011, we brought to 19 cities (out of a total of 233 allowed) packages that combine the services of broadband Internet, pay TV, 3G mobile telephony and fixed telephony.

In order to ensure close and unique service for our customers, we rely on 25 commercial offices in the states in which we operate and 33 locations with maintenance and deployment teams.

infrastruCturE Our backbone, circular long-distance fiber optics network, has 13 thousand kilometers in length and passes through the main cities in the states of Goiás, Minas Gerais, Rio de Janeiro, São Paulo and Paraná, plus Brasília in the Federal District, and has two international Points of Presence (POPs) at Nap of the Americas, designed to link Brazil to the rest of the world.

The sustainability of growth of this network, essential to ensure the quality of our products, requires, among other measures, the strategy of sharing antennas with other companies, avoiding the construction of unnecessary structures and their impact. At the end of 2013, 34% of our inventory of 1,629 antennas, buildings and towers were shared structures.

The construction and authorizations of antennas follow determinations of city, state, and federal legislation, through agencies such as Anatel and the Regional Air Command of the Air Forces (Comar), which are frequently consulted.

served by the company in the states of Minas Gerais, são Paulo, rio de Janeiro, Goiás, Mato Grosso do sul and Paraná

188cities

Since February 2014, the CTBC brand ceased to exist in the Algar Telecom retail segment, after 60 years. The decision of adopting a single identity for the Group, which is increasingly expanding beyond the borders of its traditional area of operations, has been demonstrated as strategic for the Company's future.

The change from the CTBC brand to Algar Telecom is part of the Algar Holding strategic decision, which established the mother-brand name for all companies in order to achieve higher synergy between the businesses. This change was performed in a well-structured manner. In addition to the gradual change in public telephones, storefronts, buildings, office supplies and general use materials, a campaign has been studied in detail to transfer the attributes associated with CTBC to Algar Telecom.

THE CHALLENGE Of EvOLvING THE BRANd


Our backbone

FIBeR commeRcIAL oFFIceS

cAPTIoN

Brasília

Goiânia

Paracatu

vazante

Patos de Minas

Patrocínio

uberlândia

araguari

itumbiara

ituiutaba

uberaba

franca

Matãoararaquara

são Carlos

Jaú

Campinas

Jundiaí

são Paulo

rio de Janeiro

Macaé

duque de Caxias

santos

Curitiba

araucária

indaiatuba

sorocaba

Botucatu

Bauru

ribeirão Preto

s. J. da Barra

s. J. do rio Preto

frutal

Paranaiguara

Paranaíba

ibiá

Campos altos

Betim

Pará de Minas

Belo Horizonte

divinópolis

that is the extension of our backbone, which passes through five Brazilian states and the federal district. it has enough length to cross Brazil three times from north to south

13 thousand kilometers


that is the approximate number of job positions available in our area responsible for contact center and collection actions

7.8 thousand

BUSINeSS PRoceSSeS TechNoLoGYWe offer in this area technology solutions for business processes, information technology and managed services, through the Algar Tech subsidiary.

PrOduCts and sErviCEs• Services in the IT infrastructure area (data

center): Provide productivity gain with the best cost-performance ratio. We have three data centers – two in Uberlândia (MG) and one in Campinas (SP) - interconnected by fiber optics and serving Brazil and overseas.

• ITC managed services (service desk, field service): The support and management of IT and Telecom services ensure the availability of IT services and higher security for customer operations, leveraging the main technologies and practices in the market.

• Business applications (business support, software factory and SAP): Through our software factories or strategic partnerships with the top manufacturers in the market, we offer full application solutions, designed for the customer's profile.

• Customer relationship (contact center and collection): With an infrastructure of approximately 7.8 thousand job positions for service, credit risk management, telephone sales, business back-office and customer experience management, we support the relationships of our customers with their users through contact centers and also web and social networks.

Our team works to provide the best services and products to corporate and retail customers


Principles inherited from our founder, commander Alexandrino Garcia, such as ethics, transparency, the purpose of serving and commitment towards the future, guide our governance. Our model includes tools to ensure safe decision making and to identify, measure, control and manage corporate risks. In addition, it values associates, disseminates internal culture and seeks improvements that can lead the company to an even higher level of commitment and transparency regarding its target audiences.

The Algar group handles corporate governance as a living, dynamic organism, creating value by reinforcing its vision of the future and increasing long-term prospects. We also believe that best practices improve the ecosystem, creating value not only for the company, but for society as a whole. That is why, in spite of the recognition and the already developed tools, the improvement process is continuous, with research and visits to companies and universities across the world, seeking the latest novelties in the area.

Our practices made the Algar group a reference in Brazil and overseas, qualifying it to participate in the Latin American Companies Circle of Corporate Governance, a unique initiative from IFC (World Bank), OECD and the Global Corporate Governance Forum (GCGF), which currently includes a group of 14 Latin-American companies that have stood out in the adoption of best practices of corporate governance, sharing them with the goal of helping develop more resilient business in the region.

GOvERNANCE

Our practices ensure execution of our mission, reinforce our values and generate value for society [IP 4.1; 4.12; 4.13]

• Most of our Board of Directors consists of independent members, considerably surpassing the 20% minimum determined by most regulations.

• Dialogue with stakeholders. Even without a formal structured process for engagement or definition of stakeholders, we are mindful of the needs of our stakeholders and maintain continuous channels for dialogue with them.

OUR GOvERNANCE dIffERENTIALS

[IP 4.14-4.17]


ALGAR TECH

SYNOSENGESET ALGAR TECH SAS

ALGAR MídIA

ALGAR MULTIMídIA

IMAGE TELECOM

ALGAR CELULAR

ALGAR S.A.

ALGAR TELECOM

coRPoRATe STRUcTUReOn the second semester of 2013, with the goal of reinforcing the focus on customer service, we decided to internalize the whole operation for installation and maintenance of our networks. Therefore, Algar Telecom and the other subsidiaries that provide Telecom services assumed control of the service providing professionals in their network, gaining end to end control of the provided services and better contact with customers. On the other hand, the third party service provision was integrated to Algar Tech, reinforcing the ITC managed services branch, its strategic focus. The approval of the partial merger of controlled company Engeset and incorporation of the divided part by Algar Telecom occurred on July 2013. In a later shareholder act, Engeset became a full subsidiary of Algar Tech.

In addition, at the end of 2013, Algar Tech formed a subsidiary in Colombia, in the city of Medellin. The company, called Algar Tech SAS, is the initial move in the international expansion process.

Right at the start of 2014, we reinforced our future prospects with the acquisition of Asyst by Algar Tech. The goal is to strengthen the portfolio of Information and Communication Technology managed services.

100% 100%

100%78.43%100%

89.94%

Pay TV Data products and Internet provider

21.57% 13.59%

100%

Cell phone telephony and satellite TV

86.41%

Business Processes Technology

100%

Phonebooks and guides

Fixed telephony, broadband and data

Position on 12/31/2013.


AUdIT ANd RISk MANAGEMENT

COMMITTEE

GENERAL MEETING

HUMAN TALENTS COMMITTEE

CORPORATE GOvERNANCE COMMITTEE

BOARd Of dIRECTORS

fISCAL COUNCIL

INTERNAL AUdIT ExTERNAL AUdITCEO

OUR PRACTICES

Among the corporate governance practices we adopt, we highlight the following:

bOARD OF DIREcTORS

SuPPORT cOmmITTEES FOR THE bOARD OF DIREcTORS

ExEcuTIvE bOARD

InTERnAl AnD ExTERnAl AuDITS

RISk mAnAgEmEnT

cODE OF cOnDucT

cOuncIl OF uSERS

ASSOcIATES cOmmITTEE

gOvERnAncE PORTAl

DeLiBerAtive exeCutive

cAPTIoN


governance structure

BoARd oF dIRecToRS [IP 4.2-4.3; 4.5-4.7; 4.9; 4.10]

The Board of Directors, chosen annually in an Annual General Meeting, is the agency that establishes the strategic directives for the company.

The activities, attributions and responsibilities of the council are ruled by an internal statute, in compliance with the terms of the Shareholder Company Law, the Social Statute and the Code of Best Practices of Corporate Governance of the Brazilian Institute of Corporate Governance (IBGC).

Even without shares negotiated in the stock exchange, we have decided voluntarily to not only have independent members, but also make them the majority of the board, formed by nine components, elected by an Annual General Meeting for a mandate of one year, with the possibility of reelection. On December 2013, six members were external1 - that is to say, with no commercial link to the company, not executives of the Algar S.A controller and not direct or indirect shareholders. In addition to bringing external knowledge and expertise, independent board members add important value to the board, contributing with higher objectivity and rationality to the decision process and topics involving potential conflicts of interest.

The voluntary practice of segregating the functions of executive director and board member is established in the Internal Statute, prohibiting one person from accumulating both positions. This also means that the Chairman of the Board of Directors and the CEO must be different people.

Regular meetings are held six times a year, according to a previously established dates and agenda, and extraordinary meetings are held whenever necessary. In 2013, nine meetings were conducted, four of them at the company’s offices in the expansion areas. The board members perform an annual self-assessment of the performance of the board and each of the Directors since 2005. The members also evaluate the Chairman, which has specific functions and responsibility, in addition to the CEO.

1. 1In 2013, a spot was filled out that had been vacant since 2012. Sérgio Alair Barroso was elected, and he also became part of the Audit and Risk Management Committee. The choice of a new member followed the recommendations of the Board of Directors in its last annual evaluation and considered, among other factors, his experience as senior executive and participation in other Boards of Directors, as well as the absence of a conflict of interest, reinforcing a team consisting of professionals with various paths and profiles from the corporate environment.

MISSION Of THE BOARd Of dIRECTORS

“To ensure the company's longevity, establishing general guidance for the business, preserving the values of the organization, supervising executive management, protecting the equity, seeking maximization of the company's value and sustainable return of investments within a long term perspective, while maintaining balance and harmony between the interests of shareholders and other stakeholders.”


BoARd commITTeeSThe Board of Directors features the support of three committees, non-deliberative, formed by external members of the Board itself and internal and external experts, all with a renewable mandate of one year.

audit and risk ManaGEMEnt This committee has the goal of ensuring quality, integrity, transparency and credibility in financial statements, while also guaranteeing effectiveness in the processes for internal and independent audits, internal controls and compliance with applicable legislation, in addition to guiding and monitoring the dissemination and strengthening of a risk management culture throughout the Company. Learn more about it on the section Risk Management.

HuMan talEnts This Committee is aimed at ensuring the execution of a policy of appreciation and development of human talents, within the best practices of strategic people management.

COrPOratE GOvErnanCE This committee has the mission of discussing, proposing and evaluating the effectiveness and continuous improvement of corporate governance practices that reinforce the Vision of the future while expanding long term prospects, within a sustainability concept that creates value not only for the company, but for society as a whole. It also analyzes the evaluations of the Administration Council and proposes actions that contribute to the effectiveness of the organization and its committees.

luiz alberto Garcia Chairman of the Board of Directors

luiz alexandre Garcia Vice-Chairman of the Board of Directors

alexandrino Garcia neto Board member and member of the Corporate Governance Committee

Eliane Garcia Melgaço Board member and president of the Corporate Governance, Human Talents and Audit and Risk Management Committees

Hélio Marcos Machado Graciosa Board member and member of the Corporate Governance Committee

darc antônio da luz Costa External board member

Eduardo Moreira da Costa External board member

Geraldo sardinha Pinto filho External board member

Ozires silva External board member

Walter fontana filho External board member and member of the Corporate Governance Committee

sérgio alair Barroso External board member and member of the Audit and Risk Management Committee

*on 12/31/2013.

COMPOsitiOn Of tHE BOard Of dirECtOrs*


Our governance places high value on associates, disseminates the internal culture and seeks improvements that can take us to an even higher level of commitment and transparency regarding our target audiences.


mANAGemeNTThe Corporate Management is the body responsible for instituting management policies according to the guidance of the Board of Directors, under the law or bylaws. Formed by qualified professionals with broad expertise in their areas of operation, the Management meets ordinarily once a week or whenever necessary, for alignment and decision making in strategic execution affairs.

EvALUATION Of MANAGEMENT

All executives of the company participate annually in a 360 degrees evaluation process. Through this procedure, essential Algar competencies and those specific of each position and occupant are evaluated, by analysis of peers, subordinates and superiors. This process results in an action plan, highlighting the positive points and gaps of each executive, including initiatives for training and improvement. [IP 4.10]

luis antônio andrade lima Director of Operations and Technology

Osvaldo César Carrijo Director of Retail Business

Márcio Estefan Director of Corporate Business

Marcelo almeida nunes Director of Wholesale Business

*on 12/31/2013.

INTeRNAL ANd exTeRNAL AUdITSWe have two audits, one internal and another external, reporting in a hierarchical manner to the Board of Directors, through the Audit and Risk Management Committee, and functionally to the holding company, in order to ensure autonomy and independence regarding operations.

The internal audit has the goal of promoting the evaluation of controls and verifying compliance with internal rules, policies and values. It operates based on an annual agenda and plan defined with the Board of Directors.

ManaGEMEnt*

divino sebastião de souza CEO

Jean Carlos Borges Vice-president of Operations

tatiane de souza lemes Panato Director of Finance and Investor Relations

Marineide da silva Peres Director of Human Talents


Meanwhile, the external audit collaborates in the evaluation of information standards and tax and accounting compliance, according to current legislation. Since 2009, this function is performed by KPMG Auditores Independentes. In 2014, it will be replaced by EY, following a voluntary practice of rotation after five years of activity, a directive from the Brazilian Securities Exchange Commission (CVM) for publicly traded companies.

USeRS coUNcIL The Users Council is a consultation body with participation of customers, working to guide, analyze and evaluate the services and the quality of customer service, while also suggesting improvements.

We have this instance since 1999. That is why, when Anatel determined the creation of user councils through the Commuted Fixed Telephony Service User Council Regulation, we just had to adjust already existing practices.

oTheR PRAcTIceS ANd GoVeRNANce BodIeSassOCiatEs COMMittEE Our internal audience has an Associates Committee, consisting of professionals from many areas of the Company, promoting interaction and alignment between associates, the area of Human Talents and the Management.

GOvErnanCE POrtal Online tool with restricted and exclusive access for members of the Board of Directors, consolidating documents and information needed for their work.

Dialogue and transparency are essential values for Algar Telecom and its governance

“Our experience ensures that we have strong ballast and helps us accelerate our growth. We are recognized in the market thanks to our history and commitment towards business continuity.” (Márcio estefan, director of Corporate Business)

ALGAR TELECOM +60


In 2013, we have deployed strategies that will reinforce our resilience and contribute towards our sustainable growth. In the Telecom business, we chose to ensure higher focus and quality in relationships. We have accelerated the Premium Service activities, which ended the year with over 100 accounts, and created the Relationship Department. These processes resulted in a drop in the complaint ratio and also created the perception of improvement in services among customers.

We have also internalized the responsibility to work on the field and going to the customer’s house to install products and solve problems. In 2014, we will deploy the TOA system, which consists in commitment of service through scheduling installation and services at the customer’s house, forging a closer relationship with that customer.

In the corporate segment, we have added four new locations to our operations – Bauru (SP), Jaú (SP), Anápolis (GO) and Sorocaba (SP), while reinforcing the networks in the metropolitan areas in which we already operated. We have also strengthened the resilience of our backbone, contracting two new circuits: One of them starts in Macaé (RJ) and goes to Santos bay (SP), and the other starts in Baixada Fluminense, in the Metropolitan Region of Rio de Janeiro, and goes to Betim (MG).

In retail, we have made significant progress in the modernization of networks in Uberaba (MG), Uberlândia (MG) and Franca (SP), with technology based on fiber optics to enable offering of broadband products with higher speed. Ultra broadband, with speeds that can reach 100 Mbps, has already earned the loyalty of 70% of our base. Another initiative was the reinforcement of pay TV teams, a product that offers more than 150 SD and HD channels.

We also observed significant growth in the mobile telephony base: 37% compared to 2012, an addition of 248 thousand customers. With the network in operation, 82 new stations were assembled and 160 others were expanded.

For 2014, the Telecom business strategy will focus on geographic expansion and increasing the capacity of our networks, with high quality and efficient customer service as the main operational goal.

In the Business Processes Technology, this was the year of our first steps towards international expansion. In October, Algar Tech inaugurated its office in the city of Bogotá, in Colombia, establishing a service exporting platform in that country. In January 2014, the acquisition of Asyst was completed, a global service desk and help desk company, with significant activities in Latin America, including branches in Argentina and Chile.

STRATEGY

Sustainable growth and international expansion are among our main goals [IP1.2; 4.11]

“We want to increase our presence in Brazil, latin america and united states, supported by a continuously well-trained and motivated human talent team.” (José Antônio Fechio, CEO of algar tech)

ALGAR TELECOM +60


The acquisition strengthens the Algar Tech portfolio with more than 170 customers and expands the activities in Brazil to 3,700 cities, while also adding over three thousand new associates, making it a key player in managed services in Brazil.

ITC Managed Services had already been expanded in the second semester of 2013, with the incorporation of Engeset, a field service company of the Algar group.

Throughout this process, Algar Tecnologia had its name changed to Algar Tech, further reinforcing its positioning as a multinational company of the Group.

INTANGIBLe ASSeTSWe call intangible the assets that can't be measured in numbers, and are therefore usually not included in financial-economic statements. However, they are essential to enable our company to stand out, and have an essential role in our value building process. Among the intangible assets we have consolidated during more than six decades of activities, the following stand out:

Brand strEnGtH We are the oldest telephone concessionaire in Brazil, through the CTBC brand, recognized for the quality of provided services and customer satisfaction since its foundation in 1954. We are also a national capital company that is part of the Algar group, which enjoys recognition and respect from the market.

tECHnOlOGiCal ExCEllEnCE The technological excellence, the offering of innovative services and customized customer service are our market differentials. This positioning is a result of our innovation culture, active in all instances of the company.

HuMan and intEllECtual CaPital Qualification and commitment are among the characteristics of our professionals, thanks to our vision of People serving People and our policy of appreciation for human talents. Another highlight is the investments in training: UniAlgar

was the growth in the mobile network base of algar telecom in 2013

37%

“Our major challenge in the retail area is to maintain the market share of more than 90% and defend our territory, surfing the wave of new products that the telecom market has provided us to ensure continuity for our organization.”

(Osvaldo Carrijo, director of retail Business)

ALGAR TELECOM +60


supports human and intellectual development of each associate, while also performing management of the accumulated knowledge and making it available to the whole Group.

WOrk CliMatE The many awards ranking us among the best companies to work for in Brazil are evidence of our commitment to provide a healthy environment to our associates, in which all our proud to belong.

In order to track the effectiveness of our actions and improve our planning, we annually perform the quantitative Climate and Engagement Survey, and every two years the qualitative version. In 2013, the quantitative survey includes 84 questions. In total, 1,241 people answered the questions, representing 88% participation. The general satisfaction rate among Algar Telecom professionals was at 67%. Among the results per topic, 94% of interviewees declared commitment towards the goals and objectives in their area and 73% claimed they felt free to express their points of view with their superiors.

cUSTomeR SATISFAcTIoN [PR5]

We conduct constant satisfaction surveys among our customers in the retail and corporate segments. The variable compensation of our president and some executives and associates depends on achievement of the established goals.

The conducted surveys have different frequencies and may be performed each month, quarter, semester or year, and can be both qualitative and quantitative. We conduct these surveys by hiring specialized external organizations, ensuring neutrality in data collection and analysis. Another important mechanism for obtaining customer feedback is the Customer Service (through telephone, email and websites). In 2013, the Telecom business created a department exclusively dedicated to dealing with issues related to customer service and satisfaction. Below is a description of the main surveys and results by business.

tElECOM Annual measurements are performed through institutes hired to measure customer satisfaction, through telephone surveys segmented by customer type – retail and corporate. The results are announced annually and require actions from the whole company regarding the achieved results.

The surveys handle issues related to general satisfaction and also regarding specific products of the portfolio (mobile fixed telephony, TV, broadband and media products). It is worth mentioning that sampling is performed in the many regions of operation.

In 2013, the general satisfaction rate in the Telecom business was 78.3%, 86% in the B2B segment (corporate customers) and 72% in the B2C segment (retail). These indexes are above the values presented

was the general satisfaction rate of our customers in the telecom business

78.3%


by the market: in corporate, this percentage is 80% and in retail it is 70%.

alGar tECH Customer satisfaction surveys are conducted annually, in order to identify their perception regarding our activities, their propensity towards maintaining the contract, receptivity for the brand, aspects that need improvement and highlights. Each quarter, we research the satisfaction level regarding provided services.

These results are sent to operations and processed. In addition, the satisfaction surveys are audited in the certification processes for various ISO rules.

In 2013, the annual satisfaction survey obtained 80% satisfaction regarding the company as a whole, and the average of quarterly surveys achieved a rating of 83%. The survey also pointed out that most competitors would recommend Algar Tech to other companies, and more than 60% prefers the company when faced with proposals from competitors. We have adopted

surveys and quality control practices to ensure a high degree of customer satisfaction

“Ericsson and algar are companies that blur together when it comes to customers, foundation and history. We have relied on algar as a customer for over 60 years.” (Sérgio Quiroga, president of Ericsson for latin america)

ALGAR TELECOM +60


Innovation is in the essence of the Algar group, contributing to our future growth and to our longevity. Internally sponsored by the chairman and executed by the Company’s CEO, our innovation policy seeks to ensure that good ideas will generate business and development for the group. Currently, approximately 6 thousand associates participate in our innovation-related initiatives. In 2013, the Group’s investment in innovation surpassed the R$20 million mark.

We use the Innovatrix methodology, which implements innovative ideas through prototypes, helping to develop the innovative spirit of associates and encouraging the innovation culture. In 2013, there were 8 thousand hours of training, with 23 classes, 78 multipliers and 500 trained people, resulting in 28 prototypes, one of them already deployed, for one of our customers in the educational area.

Since 2001, the Group has applied the Process Management Program (PGP) and the Idea Management Program (PGI), which stimulate innovation in all areas. The authors of the best ideas receive financial bonuses, and the best projects participate in the Algar Innovation Exhibit. In this period, R$51.1 million was invested in 810 projects and 558 ideas that, together, generated gains of R$291.6 million.

We maintain an Innovation Committee, with the purpose of evaluating and coordinating the deployment of projects that generate new revenue or savings and spread the innovation culture. Algar Telecom was chosen as the most innovative company in the telecommunications sector and the 16th most innovative company in Brazil by the Best Innovator award, organized by A.T. Kearney consulting and Época magazine.

Over the next years, the Algar group challenges include strengthening the Algar Incubator, expanding Open Innovation with national and international entities, using more actively fiscal incentives for innovation through the Law of Good (Law# 11.196), and establishing partnerships with customers and vendors for co-creation.

INcUBAToRThrough the incubator, the Group ensures technical and financial support for ideas proposed by associates or new external entrepreneurs. In 2013, the first incubation project was approved for a company in the area of photovoltaic energy generation.

Ideas that are candidates for incubation are registered in a portal created for this purpose. The proposals are initially submitted to the company’s Innovation Committee. If approved, the proposals are then analyzed by the holding company’s Corporate Innovation Committee.

INNOvATION

An essential characteristic of our group, it is encouraged in all aspects of our business

was the quantity of hours used in training with the innovatrix methodology at the algar group

8 thousand


more than

R$ 9.8 million

PARTNeRShIPSSince 2010, we have maintained a Technical Cooperation Term with the Foundation to Support Research in the State of Minas Gerais (Fapemig), with a total amount of R$15 million. Half of these resources are invested in a subsidized manner. We also have signed agreements with the Federal University of Uberlândia (UFU), the Presidente Antônio Carlos College (Unipac), in Uberlândia, and Georgetown University, in the United States.

We are members of the National Association of Research and Development of Innovative Companies (Anpei) and of the Reference Center in National Innovation, of the Fundação Dom Cabral. In order to promote an exchange with students and recent graduates in the innovation area, we have an agreement with Aiesec, an organization recognized by Unesco that gathers young university students from across the world.

PIoNeeR AcTIoNS IN INNoVATIoNThroughout the years, we have confirmed our calling for innovation through actions such as the deployment of the first Brazilian optic communication system in Uberlândia, in 1984. Eight years later, the same city received the cell phone mobile telephony system before many Brazilian capitals. In 1998, we presented the pre-paid telephone to Brazil, a model that currently dominates in the national cell phone telephony system. In 2007, predicting the exponential

future growth of data networks, we made the strategic decision of replacing the analogic network by a Next Generation Network (NGN), with higher flow capacity.

In 2013, one of our highlights in innovation was the creation of the Customer Exposure Management (Gexp), a solution launched by Algar Tech that uses artificial intelligence to monitor the exposure of customers and their competitors on social networks.

RecoGNITIoNWe strongly invest in the innovation environment in 2013, and for the second year in a row achieved the recognition of being the most innovative company in the telecommunications sector.

Throughout the last year, we have invested over R$9.8 million in innovation. In addition to financial gains, our culture of innovation is reflected in the admiration that the company enjoys in the market. In 2013, the expertise in organizing programming marathons with students enabled the company to host in Uberlândia the Brazilian Programming Marathon Finals, which selected the most brilliant Brazilian talents, who will represent the country at the world finals in June 2014.

was the investment of algar telecom in innovation in 2013

The culture of transparency is integrated in our business and is shared by our associates


Risk management integrated to the management process helps optimize resource usage and opportunity selection, in order to maximize the generation of shareholder value. The process is focused on identification, evaluation and mitigation of internal and external factors capable of jeopardizing the results and strategy execution of each business.

We perform integrated tracking of risks, preserving and adding value to the collegiate decision environment, developing and implementing methodologies, and control and measurement models. The risks and their evaluation are monitored by the Board of Directors, supported by the Audit and Risk Management Committee.

RISk mAPOur risks were grouped in a map, distributed in four classes: strategic, financial, operations and compliance, according to the graph below:

RISk MANAGEMENT

We have adopted processes focused on identification, evaluation and mitigation of risks [IP1.2; 4.11]

Our risks are divided into four categories and they are tracked in an integrated manner


RELIANCE ON vENdORS

PLANNING & BUdGET

OPERATIONAL EffICIENCY ANd CAP.

ACCESS ANd CONfIdENTIALITY

ATTRACTION ANd RETENTION

LABOR/HEALTH ANd SAfETY SECTOR REGULATION

ACCESS TO CAPITAL dEfAULT

ACCOUNTING PRACTICES

POLITICAL ANd ECONOMIC SCENARIO INvESTMENT dECISIONS

PerFOrMAnCe inDiCAtOrS

OPERATION CONTINUITY

AvAILABILITY ANd PERfORMANCE dEvELOPMENT TAx/fISCAL CAPITAL MARkET

ExCHANGE RATE

CASH fLOwBEHAvIOR CHANGECOMMUNICATION

ANd REPORTS

PROjECT ExECUTION

OBSOLESCENCE Of ASSETS

INTEGRITY Of INfORMATION

ExECUTIvE SUCCESSION CIvIL

INTEREST RATE

dEBT ACCELERATIONCOMPETITION

INNOvATION

INSTITUTIONAL RELATIONSHIP

OUTSOURCING

IMAGE

RELATIONSHIP BETwEEN SHAREHOLdERS ANd

INvESTORS

Strategic Financial

compliance

Strategygovernance

management Processes iT People laws and rules

market liquidity credit

Accounting

operations

corporate Risk map


STRATeGIc RISkSstratEGy These are risks inherent to the process of formulating and executing strategy, involving factors related to investment decisions, accelerated competition and image, which may undermine company goals, particularly in the long term.

Each year, we design, evaluate and discuss scenarios considering regulation aspects, macroeconomic prospects for the telecommunications sector, competition, and the risk factors that arise from them regarding investment decisions. After evaluating the scenarios, we define the strategic plan, which includes definition of goals and the projects for achieving them. The arrival of new competitors in this segment and intensification of competition could hinder fulfillment of the goals. As a result, we monitor the competition environment, evaluating potential impact and defining strategies in order to defend the concession area and maintain growth in the authorization area.

GOvErnanCE Risk related to business longevity and sustainability, due to incapacity to establish coexistence and succession rules for shareholders, administrators and institutional relationships, leading to errors in the company's directives and reduction of its market value. Learn more about this on the Corporate Governance topic.

FINANcIAL RISkSMarkEt This is the risk represented by the possibility of decline in investment capacity, due to foreign exchange variation and increase in financial expenses due to interest rate fluctuation.

We continuously monitor foreign exchange volatility and evaluate scenarios seeking to predict potential impact. Regarding interest rate risk, we monitor the interest curve trends, seeking alternatives to minimize the effects on financial costs. The actions include extending the debt and using subsidized credit lines.

liquidity Related to the company’s inability to honor its obligations, whether due to scarcity of financial resources in the market or due to any low attractiveness of the company regarding investors. The liquidity risk is also related to our debt capacity.

Under this point of view, we have established financial health indexes that are conservative when compared to contractual indexes. A set of indicators is monitored continuously, in order to ensure that they are adjusted to established limits.

CrEdit Credit risk is the possibility of losses due to default by the counterparty regarding its corresponding obligations and flaws in the evaluation of limits,

“We are not an old company. and of course innovation is a relevant topic for our Company. We always have new products, new technologies and new people.” (Marineide Peres, director of Human talents)

ALGAR TELECOM +60

31ALGAR TeLecom 2013 SUSTAINABILITY RePoRT SERvIng

With the goal of integrating strategy and operation, we have adopted the Balanced Scorecard (BSC) management methodology. The goal is to enable joint discussion by the managers of the performance of each area regarding approved strategic goals, while proposing alternatives when needed. This tool enables detailing the strategy for all levels of the company, promoting alignment of the organization and yielding higher discipline in execution, therefore mitigating management risk.

Another management practice used is the Project Management Office (PMO), whose function is to ensure the compliance of projects regarding business strategy and execution discipline. Periodically, the projects are evaluated and recommendations are prepared to correct deviations. In order to mitigate the dependency risk, we classify suppliers according to share in volume of purchases and the degree of difficulty in replacing the provided services. We then monitor their financial health and work on developing suppliers of services and/or equipment that are considered critical.

PrOCEssEs Risk related to operational capacity and continuity, particularly in services that are critical for customers, arising from potential incidents on sites, networks and towers, as well as obsolescence or lack of redundancy in equipment, which can generate service downtime, equipment loss, damages to third parties and loss of profits.

guarantees and endorsements, resulting in costs for renegotiation or recovery of credits.

In the sale of post-paid services, the customer is submitted to a detailed analysis before product enablement. We adopt procedures that contribute to risk reduction, such as payment of invoices by automatic debit. This and various other procedures have ensured that risk is maintained within projected limits.

aCCOuntinG Risk related to the use of accounting practices in deviation from generally accepted principles, calculation errors or obsolete information for business management, exposing the company to decisions based on incorrect information.

oPeRATIoN RISkSManaGEMEnt Risk resulting from lack of or inappropriate monitoring of our performance, or flaw in execution of strategic projects, regarding planned goals and results, schedules, and alignment to strategy. In this category, we highlight the risk of supplier dependency, with the possibility of interruption in the provision of relevant services and equipment for the company. In order to mitigate it, we classify suppliers according to share of purchased volume and the degree of difficulty in replacing the provided services. We then monitor their financial health and work on developing suppliers of services and/or equipment that are considered critical.

The management of operational risks is focused on quality and continuity of services. Monitoring is performed through processes, systems and indicators of the Network Operations Center, a structure dedicated to detection and handling of incidents. The indicators are reported monthly to Anatel. Since 2010, we have a Crisis Manual, which describes situations that can compromise the company's reputation, such as interruption in services, accidents with associates and third parties and strikes. For each situation, it describes actions, people in charge and timely communication for stakeholders.

infOrMatiOn tECHnOlOGy Risk of paralyzed systems, hindering service availability or interrupting critical company processes, particularly those that support customer service. It is also related to unauthorized access to data and information, as a result of vulnerabilities of logic access controls, lack or violation of responsibility terms and policies, external attacks or inappropriate disclosure of information.

With the goal of ensuring availability of systems and services, we have identified the systems that are critical for operation and established indicators and availability goals, which are monitored in order to seek reduction in interruptions. Regarding the security aspect, we provide to our associates the Information Security Policy, while also maintaining routines for monitoring, backup and restore of systems and data. In 2014, we plan on developing


through turnover indicators and by a Climate and Engagement Survey, which is aimed at measuring the effectiveness of actions to improve the work environment and the satisfaction and retention of associates. We invest in the training and development of our associates, seeking to develop the necessary competencies to fulfill the goals. In order to minimize the effects of competition for labor and the loss of key talents, we periodically update our compensation and benefits plan, in order to maintain the company's attractiveness compatible with the market.

comPLIANce RISklaWs and nOrMs Non-compliance regarding environmental, labor, and tax laws and regulations or lack of best practices, exposing the Company to sanctions from regulation agencies. The industry regulation risk is represented by the possibility of changes in the regulation scenario with impact for the company or violations of existing regulations, exposing the company to penalties such as fines, third party compensations and impact on image.

The regulation issue is inherent to our business. In order to reduce exposure, we monitor the actions of Anatel, other operators and entities of the sector. Based on this, we define strategies and plans to reduce risks.

We constantly invest in innovation and encourage the participation of our associates in the search for new solutions

a disaster recovery policy, which will indicate the measures to be adopted to restore the IT environment, downtime duration and the impact for customers.

PEOPlE Risk arising from difficulty in attracting and retaining talents with the necessary qualifications, due to external and internal factors, such as competition and organizational climate.

The risks in attracting and retaining people and executive development and succession are monitored


We do not have any ongoing or closed legal proceeding in the reporting period resulting from unfair competition, trust or monopoly practices.

We are also not regulated by national and industry codes or laws regarding marketing communications. However, the Company maintains a set of standards for communications, marketing, sponsorship and events, plus a manual for application of brands. Partner companies operate according to the rules established by the National Council for Self-Regulation in Advertisement (Conar)`.

We develop directives and rules for publicity and disclosure, such as the Event Policy, Spokespeople Policy, Institutional Representation Policy, Brand Book and the Code of Conduct for Social Networks. All associates are aware of this content, which is available on the intranet and is occasionally proactively distributed (when a circumstance demands it or when there are updates). Suppliers also have access to these materials and must follow the directives in the execution of their work.

REGULATIONS

Even when there is no specific legislation, we seek to maintain practices similar to the best market practices [So7; PR6]

“algar was the first company we had as a customer in Brazil. this was our entrance in the Brazilian market. a 10-year relationship that we want for the next ‘n’ years with a great friendship between the companies.” (veni Shone, president of Huawei)

ALGAR TELECOM +60


INTEGRATE

We were born with the mission and calling of integrating people and businesses in a sustainable manner. This directive guides our relationship with all stakeholders, particularly our associates.


HUMAN TALENTS

Our management is based on the appreciation of people, considered associates of our business

The appreciation of people who work with us is based on the principle of viewing them as associates, and not just employees. This management model is one of our main differentials and contributes to the success of the organization.

This principle has also maintained the Company at the top of surveys of the best companies to work for in Brazil, helping to retain and attract a large contingent of human talents.

And it's not just for show that for 20 years we call the area that manages people as Human Talents. This identification replaces the human resources name, and makes it clear that we look at the collaborator's talent as more than just an available resource.

This area has always been considered strategic, with a seat at the Executive Committee and participation in decision making, with the mission of establishing guidance for each area.

The chALLeNGe oF GRowINGThe main challenge for our Human Talents area in 2013 was the internalization of Engeset associates, thanks to the aforementioned shareholder reorganization, by the Telecom and Business Processes Technology areas. Not to mention the specific challenges of the telecommunications market, which is very active in the fight for talents.

There was a strengthening in the technical academies used for training the teams, which are working more closely with customers. In order to support the corporate strategy, the Human Talents area also created programs to improve the relationship with the many kinds of customers.

The internal use of talents for opportunities that arise inside the company is an aspect highly valued by associates. On average, 40% of the positions opened in the Company are filled out by internal associates, a policy that ends up encouraging personal mobility, helping to retain and attract new talents.

Also in 2013, we deployed a campaign to have all customer-facing associates to consume products and services of the Company, such as fixed phones, Internet and TV. The goal is to have associates who are going to perform services at customer homes to understand

3 thousandnew associates

will be incorporated by algar tech as a result of the acquisition of asyst

36ALGAR TeLecom ReLATóRIo de SUSTeNTABILIdAde 2013 InTEgRATE

deeply the characteristics and technologies offered by the company. For this purpose, we offered a financial subsidy to each associate.

In 2014, the major challenge for the Human Talents area will be the incorporation of more than 3 thousand people coming from Asyst, a company that was just acquired by Algar Tech, consolidating the Company's international expansion strategy. In addition to the office in Colombia, opened in October, we gained associates in Argentina and Chile, another challenge, considering distance, language and culture of each country.

oUR ASSocIATeS [LA1]

Our team is formed by professionals with characteristics and competencies that demonstrate identification with the organization's strategies and businesses. Guided by the People serving People vision, we appreciate people who like to develop relationships, demonstrate willingness to help, know how to work as a team and show innate talent for innovation.

We ended the year of 2013 with 13,813 associates, of which 135 are executives and 13,678 are non-executives. We also have training programs with a total of 131 trainees. The reduction of 4.6% in the number of associates, compared to 2012, is directly linked to the end of managed services agreements of the Algar Tech subsidiary.

In 2013, with the restructuring of Engeset, the associates linked to the Telecom operation were incorporated by it, with the others being transferred to Algar Tech. Therefore, the Telecom business, which in 2012 ended the year with 2,116 associates, in 2013 started to consider telecommunications engineering as part of the business, ending the year with 3,528 associates.

The Business Processes Technology area ended the year of 2013 with 9,998 associates, compared to 10,096 in 2012. In spite of the addition of nearly one thousand associates form the Engeset merger, the headcount was reduced due to the end of managed services agreements.

The operations are spread across all regions of the country, with higher concentration in the Southeast region, where the headquarters of the companies are located. As a result of the contact center service provided by the Business Processes Technology area, 48% of associates work part-time, of which 78% are women.

of the positions opened in the Company are filled out by internal associates

40%

We encourage integration and leisure activities among associates, families and community, inside and outside the workplace

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT InTEgRATE 37

15 MEn 3 WOMEn

200 MEn 71 WOMEn

50 MEn 12 WOMEn

28 MEn 3 WOMEn

238 MEn 71 WOMEn

54 MEn 9 WOMEn

50 MEn 4 WOMEn

278 MEn 70 WOMEn

63 MEn 8 WOMEn

116 MEn 2 WOMEn

5,944 MEn 8,647 WOMEn

103 MEn 5 WOMEn

5,888 MEn 7,952 WOMEn

106 MEn 6 WOMEn

5,819 MEn 7,409 WOMEn

SOuth

Associates by region

Associates by type of contract

Associates by functional level

32

24 11

30

42 133

13,781

15,036 14,340

Associates by type of employment

2011

2011

6,224

6,325 6,309 6,316

8,7358,042 7,497

101 112 102

3431 338,701

6,197

8,011

6,2147,464

PArt-tiMeFuLL tiMe

FixeD terMinDeFinite terMthirD PArtieS

exeCutive MennOn-exeCutive MenexeCutive WOMennOn-exeCutive WOMen

2012

2012

2013

2013

2011

2011

2012

2012

2013

2013

2013

2013

2013

2012

2012

2012

2011

2011

2011

2011 2012

2013

7,706

7,354

15,06014,351 13,813

7,478

6,873

7,236

6,577

cAPTIoNcAPTIoN

cAPTIoN

nOrth

Center-WeSt

nOrtheASt

SOutheASt


With clear processes, broadly disclosed and involving all associates, regardless of their hierarchy level, the model includes tools to encourage commitment and autonomy with responsibility. In this manner, each professional tracks and participates in the decisions that guide the company.

In practice, this methodology transforms each of our departments into a Results Center, with its own budget and goals. The Executive Board manages everything strategically, aligning them to the goals established in agreement with the Board of Directors. However, after the budgets are approved, each Results Center has the autonomy to perform its planning, which results in higher speed in decision-making.

comPeNSATIoNThe compensation system consists of a fixed and a variable part, plus the benefits package, and seeks to encourage and reward fulfillment of our goals. The fixed part includes the monthly base wage, the amounts related to vacation and additional pay and the annual 13th wage.

Our compensation policy was developed to enable transparent and fair administration. We conduct periodic wage surveys, adopting the Hay methodology for management of positions and wages, one of the most widely used in the word. With it we have access to data about wage statistics in our market and subsidies for the management of wage progression of

PeoPLe wITh dISABILITIeS We adopt in all our businesses practices for hiring people with disabilities (PWDs). In the contact centers, for instance, there are visually impaired people working as masseurs, hired to collaborate in actions dedicated to the well-being of associates.

NeTwoRk-comPANY Created by the Algar group over 20 years ago, the network-company model is the foundation for the human talents policy of the whole organization. In this innovative concept, commitment and responsibility of associates are individual and collective at the same time. This method of managing people has helped the group quadruple in size over the last two decades.

our associates, based on merit and performance, both at the executive and non-executive levels.

In 2013, there was a process of wage adjustment, resulting from a broad work of analysis and review in the description of positions and functions for all associates. Over 40% of associates experienced some kind of wage adjustment, in addition to those negotiated in collective bargaining.

VARIABLe comPeNSATIoNVariable compensation is aimed at encouraging and rewarding our associates for reaching individual goals negotiated every six weeks with the managers. In addition to variable compensation, we have participation on profits, which consists of the distribution to associates of up to 12% of the net profit calculated each year.

We distributed in 2013 R$16.5 million in bonuses through participation in the profits of the previous fiscal year.

coLLecTIVe AGReemeNTS [LA4]

We maintain a solid relationship with the unions. In 2013, 99% of the associates were covered by collective negotiations. Only the executives, as they have specific payment policies, do not participate in the collective bargaining agreements.

received some kind wage increase, in addition to the one negotiated through collective bargaining

40%+associates


at lunch hour, soccer championships, walks and other events and enable flexible working hours using the home office system, whenever the function allows it.

Created by associates and with free participation through discount on the payroll, variable between 1% and 10%, the Algar credit cooperative offers loans with interest rates lower than those practices in the financial market. The associates also have access to special discounts in products and services of Algar Telecom.

cAReeR BUILdING [LA12]

Attracting and retaining human talents is one of our main challenges, as a company in the area of telecom and business processes technology. In order to face it, we have a fair compensation system linked to merit and a Career Path, which allows associates to visualize their growth possibilities.

Another important tool is the performance evaluation, applied to all company associates at least once a year. At Algar Tech, 100% of associates focused on contact center activities undergo monthly performance evaluation, and then an improvement plan is designed, with periodic follow-up. Other associates, six months after being hired, join the annual process of performance evaluation. The evaluation process begins at the end of the year and ends on the following year. In 2013, the performance evaluation for 2012 was concluded for 100% of associates. By May 2014, the evaluations regarding 2013 will have been executed.

RewARdSOur benefits policy includes private social security (with joint participation of the Company in executive positions), child support, food coupons and unique health plans for each region, with the goal of offering the best service conditions for all associates, regardless of their geographic area.

In case of medical leave higher than 15 days, we complement the associate’s income by up to 40%. The illness aid has the purpose of enabling maintenance of its gain, for a period of up to two years. We also offer cash aid for associates with children with disabilities. In addition, we have an agreement with a mobile ICU for situations that demand on-site aid and an integration fund with optional participation, providing complementary medical procedures that are not included by the health plan.

We also offer external opportunities for training and development, subsidized through the education aid concession policy. Managed by the Associates Committee, the budget offers subsidies that can reach 50% of the tuition fee for graduation, post-graduation, MBA and masters courses.

Another differential of our benefits policy is the concession of vacation bonuses of 66.67% in addition to the 1/3rd described in legislation, making up one base wage. We promote movie and theater sessions

Another way of adding value to human capital is to seek, on the associates base, qualified people to assume new positions at all levels, instead of resorting to the market. In 2013, 1,863 associates were promoted, 363 in the Telecom business and 1,500 in Business Processes Technology.

While also meeting demand for specialized labor, promotions contribute to the positive climate in the company. The identification of talented professionals to assume key positions at the Company, as well as the preparation of professionals, is covered by a specific program: Talents in Development.

TRAINING ANd qUALIFIcATIoNS The qualification and professional development of associates are one of the pillars that sustain our growth. The update of expertise improves their professional quality and therefore contributes to their employability.

In 2013 the significant increase in the training hours load resulted from including the Algar Tech operational training, starting this year. In these operational trainings, women account for a higher share, because they are more focused on contact center activities, in which female concentration is higher. As a result, it is noticeable that from 2012 to 2013, the variation in the average hour training load


of the non-executive female group is substantially higher, jumping from 10 to 68 average hours.

A significant part of the training is provided by UniAlgar, and specific courses are taken externally. In 2012, the Telecom business launched Integrar, a development program focused on remote training. In addition to developing talents, the program seeks to retain and transfer knowledge while providing indicators for tracking goals.

In 2013, the program involved 1,900 associates. 62 multipliers were qualified, and 816 associates participated in at least one of the program’s courses.

coRPoRATe UNIVeRSITYThe corporate university of the Algar group (UniAlgar) is the main ally of the Human Talents area in training and development of people. In its 15 years of existence, it has become a strategic tool for all businesses, contributing to turn our team's qualifications into a market differential.

UniAlgar stands out by basing its curriculum on real corporate concepts and practices, with a focus on the needs of the Algar group. Today, the institution features a broad portfolio of courses and training and development programs, provided remotely or through personal attendance, disseminated by tools such as online courses, chats, discussion forums, content hotsites and social networks.

Average of training hours per associate [LA10]

exeCutiveS

tOtAL

nOn-exeCutiveS

MenWOMen

cAPTIoN

2011

2011

20112012

2012

20122013

2013

2013

227

5

454

10

10102

68

68166

19

1748

43

43122

40

39

FUNcTIoNAL cATeGoRY2011 2012 2013

mEn WOmEn mEn WOmEn mEn WOmEn

ExEcuTIvESTOTAl HOuR lOAD 16,742 7,710 5,382 1,669 12,422 3,374

AvERAgE HOuRS PER ASSOcIATE 166 227 48 54 122 102

nOn-ExEcuTIvETOTAl HOuR lOAD 103,578 38,857 263,739 81,778 241,283 504,063

AvERAgE HOuRS PER ASSOcIATE 17 4 43 10 39 68

tOtALtOtAL hOur LOAD 120,320 46,567 269,121 83,447 253,705 507,437

AverAGe hOurS Per ASSOCiAte 19 5 43 10 40 68


The syllabus is reviewed annually, and new courses are included in the curriculum. Each year, UniAlgar conducts a Study of Development Needs among the associates of the companies. The goal is to understand business challenges and strategic topics, and therefore the competencies that need development.

UniAlgar is also dedicated to topics such as dissemination of corporate culture, performance evaluation, organizational engagement and climate management, corporate management of associate health, and personal and professional development.

In this manner, it functions as a catalyzer of actions focused on promoting a pleasant work environment, capable of offering career development prospects. It also conducts knowledge management for the Algar companies.

Simultaneously, UniAlgar maintains the Potential Successor program to form a database of talents capable of assuming future leadership positions. Meanwhile, Young Entrepreneur is the trainee program of the Algar group, and in 2013 it brought 60 professionals to work in different areas of the Group.

Recognized by its quality and efficiency in development of programs and courses, UniAlgar has been recognized by the market with major awards in the area of corporate education.

• In 2013, IQPC, an international corporate information organization, granted to UniAlgar first place in the Excellence Awards in Corporate Education, in the category of Best E-learning Program`.

• The University was also one of the winners of the 12th Human Being Award 2013, in the People Management category, granted by the Brazilian Association of Human Resources (ABRH-MG).

• It then received first place in the national version of the Oswaldo Checchia award – national ABRH, with the Sales Academy case.

• In October, it received the Top of Mind Estadão award for HR, in the E-Learning category.

ExCELLENCE IN EdUCATION

heALTh ANd weLL-BeING [LA6; Io3; Io7]

Quality of life and health of associates are among the highest concerns, leading to actions that go far beyond mere compliance with legal obligations. Among the most important initiatives is the Individualized Health


Development Process, or Health PDI, which is focused on promoting health and quality of life among all our associates. In this Process, after clinical, physical and nutritional evaluation, associates receive guidance regarding the adoption of healthy practices, particularly those focused on fighting sedentarism, obesity and stress, among other factors that affect quality of life.

It is our goal to have all our associates participate in the Health PDI. For executives of Algar Telecom, participation in the program and fulfillment of proposed individual goals influence the calculation of variable compensation. In 2013, 91.11% of them were considered active.

In order to fulfill the actions of the Health PDI and others linked to health and well-being, we have the Specialized Services in Safety Engineering and Occupational Medicine (SESMT), formed by a multidisciplinary team, including safety technicians, doctors and social assistants, with initiatives that cover 100% of our associates. Among the regular actions is work gymnastics, in environments spread across the countries. SESMT also collaborates with actions developed by the Internal Committee for Prevention of Accidents (Cipa), such as vaccination campaigns.

Cipa is active in all operational units, with over 50 associates. It is formed by representatives indicated by the company and members chosen by the associates, and has the mission of observing and reporting risk

All our associates are served by actions developed by the Service Specialized in Occupational Safety and Medicine (SESMT)

conditions in work environments, requesting measures to reduce and/or eliminate existing risks. In 2013, 94% of the associates were represented by this kind of formal health and safety committee.

At Algar Tech, the Ergonomics and Health committees were created, to better serve the improvement needs identified in previous year regarding issues of body position, work equipment and associate health, covering 100% and 68% of contact center associates, respectively.

sECurity in installatiOn Of antEnnas Regarding antenna installations for Algar Telecom activities, the base is within the laws in effect at each city and, when it is necessary to build a vertical structure, we first investigate the possibility of sharing an existing structure (tower).

When it is really necessary to build, we hire a homologated company, which is responsible for the whole process for licensing and construction of the new structure. The currently adopted conduct for installation and maintenance of antennas is to demand from vendors the use of safety equipment, medical exams and certificate of participation in course for work at heights, according to NR8, for all workers. Visits and audits at work locations are performed to verify compliance with requirements and health and safety rules.


We support and value human talents and their continuous training and qualification.


TURNoVeR [LA2]

The termination and hiring rates did not present significant variations in the last three years, indicating stability in our turnover rates. These rates come mostly from the Business Processes Technology area, which accounts for 82% of its volume and, as its headcount consists mainly of women, this is also reflected in the rates, with a slight lead of the female group in the composition of hirings and terminations. The mostly significant age range is the group including youngsters below 25 years, which represented 55% of the total hirings and 47% of total terminations. The turnover by region also remains stable, with higher concentration in the Southeast Region, where most of the companies’ operations are located.

commUNIcATIoN chANNeLS We maintain different communication channels for interaction with our associates. Algar TV is a weekly corporate and exclusive TV program, which can be accessed through AlgarNet (corporate intranet) using a computer, cell phone or tablet, or watched on the

Hirings and terminations

2011 2012 2013


TERmInATIOnS 3,386 (23%) 6,213 (41%) 2,762 (19%) 6,022 (42%) 3,388 (25%) 4,937 (36%)

HIRIngS 4,061 (27%) 6,621 (44%) 3,421 (24%) 4,794 (33%) 3,819 (28%) 4,883 (35%)

Hirings and terminations by age range

hIRINGS

2011 2012 2013


unDER 25 yEARS 1,473 2,695 1,466 2,391 1,945 2,885

bETWEEn 25 AnD 35 yEARS 1,748 2,708 1,385 1,667 1,364 1,410

bETWEEn 35 AnD 50 yEARS 730 1,032 509 656 460 527

AbOvE 50 yEARS 110 186 61 80 50 61

TeRmINATIoNS

unDER 25 yEARS 1,036 2,218 1,312 2,431 1,451 2,486

bETWEEn 25 AnD 35 yEARS 1,617 2,811 1,579 2,376 1,297 1,748

bETWEEn 35 AnD 50 yEARS 643 1,017 591 886 559 619

AbOvE 50 yEARS 90 167 90 129 81 84


Hirings and terminations by region

hIRINGS

2011 2012 2013


SOuTH REgIOn 37 7 25 5 23 7

SOuTHEAST REgIOn 3,840 6,581 3,242 4,759 3,568 4,836

cEnTER-WEST REgIOn 117 28 110 26 159 33

nORTHEAST REgIOn 51 3 27 4 46 4

nORTH REgIOn 16 2 17 0 23 3

TeRmINATIoNS

SOuTH REgIOn 18 3 20 8 15 7

SOuTHEAST REgIOn 3,215 6,176 3,434 5,787 3,219 4,896

cEnTER-WEST REgIOn 88 30 75 26 111 30

nORTHEAST REgIOn 55 4 39 1 30 3

nORTH REgIOn 10 0 4 0 13 1

televisions on display at all company buildings and regional offices. In addition, we have the Algar Telecom intranet, in which the main news of the company and internal campaigns (endomarketing) are published.

All The Time, with real time news, communicates the main events at the company. This bulletin is transmitted through the televisions installed at collective locations. Meanwile, the Stay Updated consists of murals exhibited in all regional offices, publishing clipping, news, job positions in the Group, schedule for the Algar TV, etc.

Our mix of communication vehicles also includes an intranet channel called Follow; the TH Portal, corporate communication channel available for all associates, which includes services related to requests for vacation, compensation statements and revenue information; and Conect@, a remote learning (E-Learning) training channel, with targeted courses and training customized for each associate. We occasionally publish complementary vehicles, such as a booklet distributed by the Human Talents area to associates in 2013, listing the main differentials of working at the Company.


HUMAN RIGHTS

We value respect towards people and do not tolerate any kind of prejudice or discrimination

[hR4; hR6; hR7]

We are against any kind of discrimination and we adopt every appropriate measure to avoid this kind of conduct in our business. The Code of Conduct establishes as a rule the prohibition against using or accepting child or slave labor practices from our partners and suppliers.

There were no reports of any internal or external case of discrimination due to ethnical origin, color, sex, religion, ideology, nationality or social origin in 2013. During the year of 2012, two cases of sexual discrimination were reported at Algar Tech. The Ombudsman area investigated the accusations, confirmed the situations and recommended the dismissal of the leaders who committed these acts, which was performed by the Company. In addition, as a prevention measure, workshops were organized about the topic for the executive staff. In the training program for midlevel leaderships, modules about the topic were also included, and all 420 leaders received information and guidance regarding appropriate behavior in relationships with associates, in order to avoid new harassment and discrimination incidents.

All contracts entered into by the companies have clauses ensuring compliance with these rules and confirming that the partners do not employ minors, except as apprentices, nor do they keep workers in hazardous conditions, capable of harming their health, or in a situation similar to slavery. In 2013, no operations or suppliers were identified as presenting

risk and/or existence of child labor, forced labor or labor similar to slavery.

Also, the work safety area demands specific documentation for contracting companies, including employment registration books, associate records, health exams and collection receipt for FGTS, PIS and Cofins, while also tracking and monitoring partners and suppliers through periodic visits.

code oF coNdUcT [IP 4.8]

We have a code establishing the ethical principles and rules of conduct that must guide the internal and external relationships of our associates, regardless of their attributions and responsibilities, within a concept of sustainability and integration of economic, social and environmental aspects in business execution. The determinations expressed in the code are at the origin and reason of being of our business, reinforcing the commitment towards being a group that acts in an ethical manner in all business aspects and developing sustainable results with all stakeholders.

Our Code of Conduct is part of our General Policy for human talents and is available for access at site


http://www8.algartelecom.com.br/show.aspx?idCanal=NvLUkr1ZnOIgxVOjOP7Hzg==

SUSTAINABLE BUSINESSES

We are a company that is serious about the commitment of becoming increasingly sustainable, with an increasingly cleaner operation regarding the communities in which we operate and the environment.


We maintain an environmental program that goes far beyond efforts to reduce the impact of our activities. The goal is to encourage environmentally sustainable practices, offering conditions and incentives for associates, customers, suppliers and community members to also contribute towards the planet’s future. In addition, we achieved maintenance of the ISO 14001 certification, issued by Bureau Veritas Certification, in recognition of our efficient Environmental Management System.

In the economic area, we adopt best practices in order to generate value for our shareholders and share it with our stakeholders, prioritizing actions that ensure long term prosperity.

In the economic area, we have adopted best practices with the goal of generating value for our shareholders and sharing it with all interested parties, always prioritizing actions that ensure long-term prosperity. This work model led to our recognition as a model company in the sector, according to the 2013 Exame Sustainability Guide.

We seek to share value with the communities in which we operate and to be part of them

SUSTAINABLE MANAGEMENT

Our businesses generate results regarding environmental, social and financial aspects

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT SuSTAInAblE buSInESSES 49

ENvIRONMENTAL SUSTAINABILITY

We invest in mobilization towards sustainable practices and mitigating the impact of our activities

[ eN28; eN30]

Our environmental actions go beyond mitigating the environmental impact of our activities. Our main goal is to encourage environmentally sustainable practices, offering conditions and

environmental investments [eN30]

(in thousands of reais)

2011 2012 2013

coSTS FoR dISPoSAL oF ReSIdUeS, TReATmeNT oF emISSIoNS ANd mITIGATIoN

35.9

8

175.4

TREATmEnT AnD DISPOSAl OF RESIDuES 35.9 8 142.4

ExPEnSES WITH PuRcHASE AnD uSE OF EmISSIOn cERTIFIcATES 0.00 0.00 33

eNVIRoNmeNTAL mANAGemeNT ANd PReVeNTIoN coSTS

488.5

348

767.5

PERSOnnEl In EDucATIOn AnD TRAInIng 15 15 20

ExTERnAl SERvIcES In EnvIROnmEnTAl mAnAgEmEnT 202.1 124.1 360.1

ExTERnAl cERTIFIcATIOn OF mAnAgEmEnT SySTEmS 15 15 32.7

PERSOnnEl FOR gEnERAl AcTIvITIES OF

EnvIROnmEnTAl mAnAgEmEnT224.9 183.9 222.6

RESEARcH AnD DEvElOPmEnT 10 10 20

ADDITIOnAl ExPEnSES FOR clEAnER TEcHnOlOgIES 0.00 0.00 80

ADDITIOnAl ExPEnSES FOR gREEn PuRcHASES 0.7 0.00 2.1

OTHER EnvIROnmEnTAl mAnAgEmEnT cOSTS 20 0.00 30

ToTAL

524.4

356

942.9

incentives for associates, customers, suppliers and community members to also adopt them. Internally, the initiative to involve all audiences in this sustainability pillar is called Green Influence.


In 2013, we started including in the calculation the environmental investments of the Telecom and Business Processes Technology areas, and that is why total investments increased significantly, when compared to 2012. A total of approximately R$943 thousand was invested, 81.5% of which in preventive and environmental management actions.

There were new investments in inventory and certification for the program to collect potentially hazardous waste from customers, as well as higher expenditure in the appropriate disposal of lamps and hazardous waste of the Company itself.

In environmental education actions, highlights include higher spending in training for suppliers and customers and the Environmental Forum. Also, in general, higher investments were made on environmental management consulting and internal and external audit services, as a result of the expansion in the activities of the Environmental Management System and the environmental governance actions.

We have invested approximately R$ 80 thousand in the photovoltaic energy project, which consists in installation of panels for generation and internal consumption of electricity. Throughout 2013, awareness projects were executed, with planting of seedlings, distribution of seedlings to associates and their families and replacing the use of plastic cubs through acquisition of mugs for associates.

In 2013, we did not suffer any kind of fine or non-monetary sanction from non-compliance with environmental laws and regulations.

GReeN TeLecomOur environmental program, Green Telecom, adds unique actions, campaigns and projects that, when incorporated to the day to day of operations, have the potential to reduce the use of environmental resources and waste. The search for new ideas with this goal is continuous and driven by various actions with associates.

Since 2011, engagement in environmental causes is a goal linked to the bonus included in the variable compensation of associates. Last year, 100% of associates achieved their goals.

Also with the goal of accelerating dissemination of environmental culture and development of new ideas, we maintain the Green Telephone (4005-9912), an exclusive voice portal created for customers, suppliers, community and associates to register suggestions of best practices and environmental projects, report problems and ask questions regarding environmental sustainability. The call can be generated anywhere in Brazil, with the cost of a local call, and we pledge to return contact in up to 48 business hours.

While contributing to the ecosystem, the Environmental Program practices strengthen our culture, as each and every financial gain from projects with an environmental

focus is, by strategic determination from the Presidency, considered Green Money, which must be 100% applied in training and development of talents.

The main practices of the Environmental Program have contributed to generate savings of over R$1 million in 2013. The biggest achievements, however, are those that can’t be measured in numbers, but are rather translated in the admiration we enjoy in the market, which is essential for our longevity.

rECyClinG On tHE linE PrOJECt With the goal of providing an environmentally sound end to public telephone bubbles that are in no conditions to be recovered, together with community partners we use this material to make trash collectors and boxes to collect batteries.

day Of EnErGy EffiCiEnCy and tHE EnvirOnMEnt The Day of Energy Efficiency and the Environment is organized by the Algar Telecom Environmental Management System, and is aimed at promoting a change in culture, encouraging awareness in consumption and sustainable environmental practices. The event happened in May, in the Administrative Center and in many regional offices, and included several workshops, product presentations and stands about energy efficiency and the environment.

trEE PlantinG The action is aimed at promoting sequestration of CO

2, one of the main gases


responsible for the greenhouse effect. In 2013, the goal was reached by 18 regional offices. Overall, we ended the year with over 20 thousand trees planted by our associates (compared to 3,264 in 2012), in four Brazilian states: Minas Gerais, São Paulo, Paraná and Goiás. The relevance of this action is reinforced in the New Talent Integration Program (Pint) – when joining the company, each new associate plants a tree and promises to look after it.

mITIGATIoN AcTIoNS [eN9; eN18; eN19; eN24; eN26]

We have incorporated in our daily actions initiatives to reduce the environmental impact of products and services, ranging from the simplest, like the replacement of disposable cups with mugs, to the installation of photovoltaic panels for generation and consumption of renewable energy. We are dedicated to reducing and recycling the use of materials, water, residues and emissions.

EMissiOns Regarding GEE emissions, our main actions involve the installation of photovoltaic panels, exchanging equipment for more efficient devices (displays), and the deployment of some LED lighting spots. In addition, the Carpooling Project, which consists in forming two carpooling clubs among associates, and awareness campaigns such as the World Carless Day, in which information blitzes were conducted among associates, promoting more awareness and rationality in the use of transportation. We also prioritize supplying our internal fleet with ethanol.

0

2012

2012

2012

GenerAtiOn OF eLeCtriCity, heAt Or SteAMOther COMBuStiOn PrOCeSSeStrAnSPOrtAtiOn OF MAteriALS, PrODuCtS AnD reSiDueSSFuGitive eMiSSiOnS

eMPLOyee trAnSPOrtAtiOnSBuSineSS triPSOther eMiSSiOnS

PurChASeD GenerAtiOn OF eLeCtriCity, heAt Or vAPOr

2013

2013

2013

1,516637 30 0.17

7,864

1,444209

3,845

8,114

3,0231,526

965500

2,1532012

12,6742013

11,1862013

3,6602012

0 0

Total emissions of gHg, direct and indirect [eN16]

(in tCO2e)

other indirect emissions of gHg [eN17]

(in tCO2e)

dIRecT emISSIoNS

oTheR INdIRecT emISSIoNS

cAPTIoN

cAPTIoN

ToTAL oF oTheR INdIRecT emISSIoNS

INdIRecT emISSIoNS

ToTAL dIRecT ANd INdIRecT emISSIoNS


We have been working on quantifying and monitoring the reduction of emissions resulting from initiatives related to energy conservation and efficiency, better residue management, recycling and consumption of materials. In 2013, it was already possible to estimate the results of some projects, such as the energy efficiency in Telecom projects, which led to a total reduction of 246.7 tons of CO

2e.

Another action, the replacement of disposable cups with mugs, has reduced consumption by approximately 27 thousand units, generating a reduction of 0.98 tons of CO

2e, considering their manufacturing process.

In the operations of the Telecom business, the only ozone depleting substance is the R22 gas, used to recharge the air conditioning system in all operational units. In 2013, the used quantity of this gas was 1.01 ton.

EnErGy EffiCiEnCy We conducted strong energy efficiency projects and actions, as well as campaigns to reduce consumption through the Internal Committee for Energy Conservation (Cice). One of the pillars of this work is the management of new technologies, with the purpose of maintaining an ecologically correct telecommunications network.

We have improved the calculation of energy consumption, expanding and improving the control

In 2012, for total calculation of emissions, we considered only the operations of the Telecom business, with all consolidated information in the generation of electricity, heat or steam. The 2013 amounts also considered emissions from the Business Processes Technology.

The significant increase in direct and indirect emissions has occurred as a result of inclusion of all companies, as well as the improved measurement of energy consumption. Most emissions are the result of consumption of electricity (73%), consumption of fuel by internal fleet and consumption of electricity through internal generation (photovoltaic panels). The company responsible for most direct and indirect emissions is Algar Telecom (60%), followed by Algar Tech (39%) and Algar Mídia (1%).

The national interconnected system emission factor was increased by a considerable factor (47%) in the year of 2013, when compared to 2012, directly impacting the scope 2 emissions (indirect emissions).

For calculation of scope 3 emissions (other indirect emissions), we considered national and international business air travels, the emissions from disposal of residues at landfills and treatment of effluents, and the emissions related to production and use of paper and transportation of associates and third parties.

All Algar Telecom areas plan and develop initiatives to mitigate environmental impact


and measurement mechanisms. In 2013, training was offered to the team involved in gathering this information and new regional offices were included, plus emission sources that were not considered in the 2012 inventory. In this manner, the comparison between the data of 2012 and 2013 is not fully possible, because there are differences in scope.

Through projects like the Sustainable Fleet, the use of energy from renewable sources has been gaining ground in comparison with fossil fuels, demonstrating our commitment towards reducing greenhouse gas emissions and raising environmental sustainability. In 2012, 26% of the total direct energy consumed came from renewable sources, and in 2013 this percentage rose to 44%.

There was a drop in gasoline consumption of 30%, while ethanol consumption increased from 18,061 GJ to 35,125 GJ, approximately 95%. The consumption of electricity increased 8% compared to the 2012 numbers, as a result of the aforementioned improvement in precision and scope of data collection.

Each year, we add more positive effects coming from the deployment of projects for improvement in conservation and efficiency. In 2013, the achieved reduction reached 9,249 GJ.

The actions listed below are part of the energy efficiency program deployed in 2010, with gradual

Consumption of direct and indirect energy (in GJ) [EN3, EN4]

(in GJ)

354,870

2012

385,459

2013

35,125

18,061

1,050

1,092

755

787

23,540

22,779

22,207

32,015

302,872

280,136

Direct energy: non-renewable

automobile gasolineDiesel oil liquefieD Petrol gas (lPg)

Direct energy: renewables

ethylic alcohol, anhyDrous anD hyDrateDbioDiesel

inDirect energy

electricity

CaptioN

aLGaR tELECom 2013 SUStaiNaBiLitY REpoRt SUSTAINABLE BUSINESSES 54

actions. The calculation of generated savings takes into consideration the consumption of that year compared to the pre-deployment levels of 2010 (base year).

Materials The Nature in Check project is aimed at reducing paper consumption and is aimed at customers of the Telecom business. Adoption of the electronic bill is rewarded with 50 additional minutes of conversation per month credited to the account. Since the program was launched, these actions have resulted in savings of tons of paper, reaching 120,100 electronic bills, a volume that accounts for 15% of the total of monthly invoices.

• Temperature increase project – standardization of adjustment temperatures of air conditioning systems at sites at 25 degrees Celsius

• Exchange of compact centrals – replacement of old air conditioning equipment with new equipment, using superior technology

• Exchange of chiller – replacement of the temperature control central with new equipment, newer and with lower consumption

• Lead Lag Project – installation of lead lags, a device for automatic management of air conditioners

ActionsAndprojectsforenergyefficiencyAndconservAtion [EN18]

• Deactivation of CDMA Centrals• Switches in meeting rooms – separation of

lighting circuits in meeting rooms• Physical restructuring of store in Franca mall,

using LED lighting• Modernization of air conditioning at Ibiraci site• EcoSwitching Project – deactivation of

underused switching equipment• Green Unix project – replacement of Unix

servers with more efficient technology• Araguari Headend – exchange of analogic Pay

TV equipment with digital devicess• Replacement of old direct current power

supplies with high-yield supplies• Replacement of ACJ air conditioning equipment

with Split

Saved energy(in GJ)

9,249

8,068

4,555

2011 2012 2013

Improvements In energy conservatIon and effIcIency

CaptioN

Aware that incorrect disposal of materials such as batteries, cell phones, charges and inductive cards may cause serious damage to the environment due to the presence of heavy and toxic metals, we developed a project that offers collection points for these materials

aLGaR tELECom 2013 SUStaiNaBiLitY REpoRt SUSTAINABLE BUSINESSES 55

in our stores, credentialed installations, offices, schools, suppliers and customers, conducting campaigns among consumers for their collection.

After performing the separation procedure and return to the industry the materials that can be reused, the recycling project provides appropriate disposal for potentially hazardous components. In 2013, we performed the certified and audited disposal of 550 kilos of this kind of residue.

WastE ManaGEMEnt The increase in the volume of residue results from the fact that after 2013 calculations include all businesses and recycling incentive environmental actions. In addition, in 2013 Algar Tech also started an initiative for composting of organic residue through a partnership with another company.

Hazardous residue originating from the previously mentioned materials consists of residues generated from the company and those collected from customers (reverse logistics) at the collection points. All hazardous residues are properly stored and transported to the specialized company, which performs the recycling process, issuing a certificate for the Company. All process of disposal and treatment is audited and certified.

There is a significant difference between the generated and transported volumes of hazardous

residues [eN22]

(in tons)

2011nOn-hAzArDOuS reSiDueS

COMPOStinGreCyCLinGLAnDFiLL

hAzArDOuS reSiDueS

reCyCLinGOtherS (LAMPS)

2012

2013

106.9

30.9

0.7 1.1

0.2

148.9

221.8

226.6 84.2 39.6

180.0

CAPtiOn

note: the 2013 numbers started including all Group companies in the calculation, while 2012 and 2011 numbers considered only the residue generated at Algar Telecom

255.8

432.9

352.2

residues, thanks to the execution in 2012 of the Green Bonus campaign with customers. The campaign offered a bonus of R$ 50 in the purchase of a new cell phone device for customers who handed in their old device at points of sale. The goal was to provide an appropriate disposal for the growing volume of accumulating electronic waste.

There was no significant spill or leak in the last three years. Therefore, we reached the goal established for 2013 of keeping the zero count of spills, and maintained it for 2014.

WatEr Regarding the rational and efficient use of water, we conduct monthly meetings with the Internal Committee for Water Conservation (Cica), with the goal of identifying units with the highest consumption of water and deploying projects to reduce waste. Actions such as the installation of faucets with sensor, exchanging the tip of hoses and dry washing the vehicle fleet, as well as awareness campaigns, have resulted in significant improvements in water consumption. In addition to these measures, improvements have also been obtained through continuous follow-up, environmental


education actions, workshops, presentations, meetings and internal communications.

The Telecom business has also launched actions to raise awareness among customers, regarding reduction and recycling of used oil. Company stands, at fairs and at the headquarters, allowed people to find out in practice what happens when kitchen oil is disposed of incorrectly. All collected oil, approximately 3 thousand liters, was delivered to the Mobile Biodiesel Plant of the Biominas company. The plant produced over a thousand liters of biodiesel with the collected kitchen oil, and the unused part was offered to the Bela Vista Community Association (Abev) for the production of soap.

The calculation of our water consumption gained scope throughout the years: in 2011, the disclosed volume considered only Telecom operations; in 2012, the operations of Algar Tech were included; and in 2013, the numbers also include Engeset and Algar Mídia. Not considering the companies included in 2013, the consumption of the other companies remained stable throughout the years.

Regarding water sources significantly affected by the extraction of water, there is no study about the average annual volumes of bodies of water. The seven underground extraction sources are not considered as protected.

oTheR eNVIRoNmeNTAL INdIcAToRS [eN11]

usaGE Of arEas We do not operate in permanent protection or conservation unit areas, but we have biodiversity conservation programs through planting of seedlings of native species of the Cerrado ecosystem. In addition, we develop environmental education programs for associates, suppliers and partners.

In 2013, we planted approximately 18 thousand seedlings, a number significantly higher than in 2012, when 3,500 seedlings were planted. The seed planting process is always performed through partnerships with government, environmental and civil society organizations at each location.

The planting of trees is part of the Company’s greenhouse gas (GHG) emission compensation program, as well as the environmental programs for associates and suppliers.

suPPliEr qualifiCatiOns We seek to establish partnerships with suppliers that are also committed towards sustainability. In order to do so, we have maintained since 2010 an environmental clause in agreements, also handling issues such as documentation and child or slave labor. In addition, with the purpose of achieving higher compliance with the topic, each supplier needs to undergo a remote learning (E-Learning) training, in which the Company and its environmental projects are presented.

consumption of water per source [eN8]

(in m³)

wATeR SoURceS

COnCeSSiOnAire/ SuPPLy COMPAny unDerGrOunD WAter

2012 2013

128,888143,289

114,302127,096

14,586 16,193

cAPTIoN

2011

16,982

29,160

46,142


SOCIAL SUSTAINABILITY

We understand that education is the means through which human beings can reach their full development

Committed towards sustainable development in the regions in which we operate, we understand how essential it is to promote the full development of human beings through education. Conducted by the Algar Institute, specific programs with partner schools are aimed at ensuring complementation of learning, without ever replacing the role of the formal educational system or educators.

In 2013, the institute established partnerships with 130 public schools in primary schools and trained 300 educators, who worked on the educational complementation of 4 thousand students. The educators received 755 hours of training, and students received 1,700 hours.

The ALGAR INSTITUTeThe Algar Institute exists for 12 years and is responsible for a major part of the management of the Algar’s group sustainability, consolidating the corporate educational and environmental programs. Its attributions also include managing resources from fiscal incentives obtained by the Group and assigned to support culture, sports, and the protection of children and teenagers in risk situations.

The institute is a public interest civil society organization (Oscip), formed to receive donations from all the Algar group companies and direct them towards investments in sustainability, prioritizing two key aspects: education and environment.

In the education area, the focus is on actions aimed at human development of students in public primary schools in 20 cities of four states in which we operate. Working in alignment with the departments of education of cities and the regional superintendents of education, the institute develops four programs, which operate in different aspects of education: Algar Educates, Algar Reads, Algar Transforms and Algar Includes.

Algar Educates is dedicated to training educators for full education. It works with 10% of the public network of primary schools in each city in which the Group operates (except Porto Franco and Balsas, in Maranhão, with 100% of the urban network of primary schools). The personal attendance education of the Algar Educates Program was developed in 14 cities.

The Algar Reads Program is an initiative of the Algar Institute that seeks to improve reading and writing of students in primary school. It is a continued education project, preparing educators to use newspapers in the classroom as teaching support material. It operates in Uberlândia (MG), in partnership with the City Department of Education.

The Algar Transforms Program, dedicated to children ages 6 to 17, seeks to work on the full development of students in public Primary Schools, on school afterhours, including the areas of culture and arts, environmental education, digital culture and volunteer


work. Literature and music are among the main activities of the program, which already led to the Young Orchestra of Uberlândia. After the age of 14, students start to participate in guidance workshops to help their training for the job market.

Algar Includes is the Group’s Volunteer Program. The goal is to encourage participation of associates in the activities conducted by the Algar Institute with students of partner public schools. The two main activities of the program are the Reading Club and the Mail Club.

The Garcia Alexandrino Award – Education Category is an initiative aimed at recognizing and publicizing successful and innovative educational curriculum experiences with the topic "Quality Education", performed in regular Primary School classes, in the 20 cities served by the Algar Institute. In 2013, there were 14 finalists, and the winner was educator Walkiria Teixeira de Paiva, from Pará de Minas (MG), responsible for the “Confabulando” report. Click here and learn more.

Education

In the environmental program, the institute trains environmental leaders, consolidates data from all Algar companies, stimulates actions, integrates and mobilizes personnel for the activities. Meanwhile, through the Algar Sustainable program, it develops and leads actions for environmental mobilization and education in areas such as emission and residue management, among others.

Our educational programs establish partnerships to contribute towards the training of students in the regions in which we operate

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT SUSTAINABLE BUSINESSES 59

http://www.institutoalgar.org.br/conteudo.aspx?cont=7

ECONOMIC-fINANCIAL ANALYSIS

main economic performance number for our businesses

ecoNomIc SceNARIoEven though better than in 2012, the Brazilian economy's performance in 2013 - 2.3% growth - was still weak. Meanwhile, inflation was higher than in the previous year and ended the year of 2013 above the center of the goal sought by the Central Bank, even though it was below the ceiling.

evolution of revenue generating units

16.8% tOtAL

43.4% tv

20.0% BrOADBAnD

15.9% MOBiLe ACCeSSeS

14.5% FixeD teLePhOny

2011 2012 2013

1,962

2,276

2,756

332

420

494

113

135

94

612

674

922

9241,070

1,205

19.9%

17.8%

36.8%

12.6%

21.1%

Therefore, in 2013 the government reversed the reduction trend for the base interest rate, which had ended 2012 at 7.25%. Interest rates have been gradually raised again as a way of controlling economic activity and contain the expansion of credit, which was exerting inflationary pressure. Selic again reached double digits and closed 2013 at 10% year-to-year, accumulating a rise of 2.75 percentage points. Further rises are expected during 2014.

Meanwhile, domestic demand has remained at a high level. Unemployment indicators have maintained in 2013 record low levels, explained in part by the deceleration in the growth of the economically active population. The job market is expected to maintain a favorable position, even with some rise in the unemployment rate during 2014.


Technology allows us to bring people closer, at many different places, to offer the best services and products to our customers

oPeRATIoNAL PeRFoRmANcetElECOM We registered at the end of 2013 approximately 2.8 million Revenue Generating Units (URG) in the Telecom business, a growth of 21.1% compared to 2012.

fixEd tElEPHOny We reached 1,205 thousand fixed lines, surpassing by 12.6% the number reported in 2012. In concession, the number of lines went from 760 thousand to 804 thousand, an evolution of 5.7% driven by the offer of packages. In the authorization area, with a focus on the corporate segment, the growth was 29.6%, reaching a total of 401 thousand lines, as a result of winning over customers in the cities near the backbone.

BrOadBand The volume of broadband access reached 494 thousand in 2013, a 17.3% increase compared to 2012, thanks to growing investments in the expansion and improvement of the network, providing more quality and speed for customers. In fixed broadband (ADSL), in which we offer ultra broadband with speeds that reach 100 Mbps, the access volume evolved 13.2%, totaling 370 thousand. In 3G technology, an important offering complement, the number of customers went from 93 thousand in 2012 to 125 thousand in 2013, a growth of 33.9%.

MOBilE aCCEssEs At the end of 2013, our customer base was 36.8% higher than in the previous year, reaching 922 thousand – thanks to new

campaigns and more competitive plans offered since the beginning of the year, particularly in the pre-paid segment. This segment registered a growth of 50.4%, going from 463 thousand customers in 2012 to 696 thousand in 2013. The post-paid segment, on the other hand, presented an evolution of 6.8% and reached a total of 225 thousand customers. At the end of the year, we had 24% of our mobile customers allocated in post-paid plans and the ARPU (average revenue per user) was R$27.65.

Pay tv The Pay TV service ended the year of 2013 with 135 thousand users, a growth of 19.9% when compared to 2012. This performance results from the continuous focus on packages that combine TV, broadband Internet and voice. At the end of the year, we were offering over 150 SD and HD channels.

FINANcIAL PeRFoRmANce In 2013, we made some adjustments in the way we disclose financial results, as a result of the shareholder processes mentioned on the Governance section. Previously, revenue and Ebitda information were presented divided into three businesses: Telecom, Business Processes Technology and Complementary Businesses. With the shareholder changes, the amounts that previously formed Complementary Businesses were allocated to the two other areas, in the following manner: The results from the phonebooks and guides service were included in the Telecom business,


and the telecommunication engineering amounts – originating from CNPJ Engeset – became part of the Business Processes Technology area.

COnsOlidatEd GrOss rEvEnuE In 2013, our consolidated gross revenue grew 5.1% compared to the previous year, adding up to R$2,458.2 million. In this amount, 77% came from the Telecom business (64% from fixed services and 13% from mobile services) and 23% from the Business Processes Technology area (of which 54% from customer relationship and 46% from ITC services).

costs of operational expensesin millions of reais

BusinEss PrOCEssEs tECHnOlOGy The gross revenue of the Business Processes Technology (23% of the total revenue) surpassed by 5.6% the one recorded in the previous year, reaching R$553.6 million in 2013, compared to R$524.3 million in 2012. This performance is explained by the growth in the revenue of managed services and IT, thanks to the increased scope of current agreements and the conquest of new customers. This increase was partially compensated by the reduction in contact center revenue.

nEt OPEratiOnal rEvEnuE We have achieved a consolidated net revenue of R$1,902 million in 2013, compared to the R$1,811.5 million 2012 – a growth of 5%.

OPEratiOnal COsts and ExPEnsEs The consolidated operational costs and expenses, excluding amortization and depreciation, totaled R$1,425.5 million in 2013, 4.9% higher than in 2012, when they reached R$1,359.1 million. The personnel and third party service items were the main factors behind the growth, partially compensated by a drop in interconnection costs.

2012 2013

199.2229.1

68.1

48.245.429.9

72.2

46.949.938.4

377.1340.6

607.5

571.9

1,359.2

1,425.4

*Includes other operational revenues (expenses)

PerSOnneL

thirD PArty ServiCeS

interCOnneCtiOn AnD COnneCtiOn MeAnS

rentAL AnD inSurAnCe

OtherS* MAteriALSPCLDADvertiSeMent AnD MArketinG 26.0 34.2

23%

teLeCOM BuSineSS PrOCeSSeS teChnOLOGy

CAPtiOn

tElECOM The Telecom business reported a gross revenue of R$1,904.7 million, 5% higher than the R$1,814.3 million registered in 2012. The biggest highlights in the period were the 13.2% (R$63.9 million) in revenue from corporate customers, 16.4% (R$33.3 million) in mobile voice revenue and 36.4% (R$30.7 million) in TV revenue, which more than compensated the drop in the revenues for local traffic, long distance and fixed phone cards.

77%


· Personnel: Personnel costs and expenses totaled R$607.5 million in 2013. The 6.2% growth (R$35.6 million) when compared to 2012 is mainly explained by: (i) adjustment resulting from collective agreement in the telecom business; (ii) increase in the headcount of commercial and quality and service teams – strategic foci for the Company; and (iii) change in the commissioning criterion.

· interconnection and connection means: Interconnection costs dropped 13% (R$29.8 million) compared to 2012, adding up to R$199.2 million. This performance is a result of the change in methodology for charging local mobile-mobile traffic under the General Plan of Competition Goals (PGMC).

· third party services: The costs and expenses for third party services added up to R$377.1 million in the year, an increase of 10.7% (R$36.5 million) when compared to the previous year. This increase consists mainly of: (i) higher costs with TV programming, thanks to the increase in our customer base; (ii) rise in expenses with sales commissions; and (iii) higher expenses with consulting.

· rentals and insurance: In 2013, the costs and expenses with rentals and insurance reached R$72.2 million. The 6% variation (R$4.1 million) results both from adjustments and from the addition of new property rental agreements.

· Materials: The costs and expenses related to materials reached R$49.9 million in 2013, compared

to R$45.4 million in 2012. The 10% increase (R$4.5 million) was mainly driven by higher costs for cell phone devices, resulting from the growth in the mobile telephony customer base (36.8%).

· Advertisement and marketing: Expenses with advertisement and marketing totaled R$38.4 million. The 28.5% (R$8.5 million) increase, when compared to the previous year, occurred as a result of the launch of new campaigns for retail, advertisement actions on the Internet (Facebook, Youtube, Twitter) and sponsorship/execution of events for customers and the community.

· Provision for bad credits (PCLD): Expenses with PCLD surpassed in 31.4% (R$8.2 million) those registered in 2012, reaching R$34.2 million in 2013. The PCLD/gross revenue ration reached 1.4%, compared to 1.1% in the previous year. Even though aligned with the best ratios in the industry, we will maintain strict control of credit and collection actions, in order to keep these indexes under control.

EBitda We ended the year of 2013 with a consolidated Ebitda of R$ 476.5 million, a 5.3% evolution when compared to the previous year, with a maintenance of the consolidated Ebitda margin at 25%.

Ebitda of the Telecom business reached R$400.3 million in 2013, a 5.2% evolution compared to 2012. The margin was maintained at 28%.

ebiTDA and (margin)In millions of reais and variation %.

75.5(13%)

400.3(28%)

476.5(25%)

71.0(12%)

380.4(28%)

452.3(25%)

5.3%

5.2%

6,3%

2012

2012

2012

2013

2013

2013

COnSOLiDAteD eBitDA

teLeCOM

BuSineSS PrOCeSSeS teChnOLOGy


finance part of the investments this year, which added up to R$370.9 million.

In November 2013, subsidiary Algar Tech performed its first issuing of non-convertible debentures, under the terms of CVM Instruction #476.This issuing resulted in a raised amount of R$80 million, resources that were used for the acquisition of the Asyst company, focused on the service desk and field services segment.

Even though our debt has increased, we still have leverage indexes compatible with internal and external covenants. The debt profile is long term, with 14% due in the short term. On December 31, 2013, the debt was 44% indexed to CDI, 29% to IPCA and 27% to TJLP.

The Business Processes Technology area presented a positive evolution of 6.3% for Ebitda, which reached a total of R$75.5 million in 2013. This performance is mainly due to the prioritization of a portfolio of products/services with higher added value and better operational performance, arising from projects with efficiency and quality.

nEt finanCial rEsult The net financial result totaled a financial expense of R$87.1 million, 5.7% higher than the one reported in 2012, mainly as a result of higher expenses with interest, due to a higher average debt to finance our growth projects and a higher average debt rate.

nEt PrOfit We registered a consolidated net profit of R$137.8 million in the fiscal year that ended in 2013, 2.3% lower than the one recorded in the previous year. This effect, in spite of a better operational performance measured by Ebitda, is explained by higher expenses with depreciation, due to the volume of investments needed for our expansion and higher financial expenses in the period. The net margin was 7.2%.

indEBtEdnEss At the end of 2013, our gross and net indebtedness were R$1,073.9 million and R$881.8 million, respectively, compared to R$925.5 million and R$738.7 million in 2012. The increase in gross debt – R$148.4 million is explained by the amount raised to

12%

16%

18%

18%

16%

15%

20%

39%

32%

14%

in 1 yeAr

1 tO 2 yeArS

2 tO 3 yeArS

3 tO 4 yeArS

MOre thAn 4 yeArS

DeCeMBer 2012DeCeMBer 2013

Schedule for amortization of gross debt

CAPtiOn


INVeSTmeNTSIn 2013, we invested R$370.9 million to support that year’s growth and reinforce our competitive positioning for the next years. Out of the total investments, 63% were assigned to expanding the networks and the resulting growth in data, voice and TV services. Another 5% was invested in the growth of business processes technology services and 32% to ensure the maintenance and quality of operations.

dVA [ec1] The added value statement (DVA) is the direct economic value generated and distributed by us, including revenue, operational costs, compensation for employees, donations and other investments on the community, accumulated profits and payments for capital providers and government. We generated in 2011, 2012 and 2013 R$1,402 million, R$1,437 million and R$1,502 million, respectively. The larger part of these amounts was distributed to associates and to the government. The amount assigned to shareholders has remained practically stable over the three past years.

Statement of added value and distribution (in millions of R$)

dVA 2011 2012 2013

1. revenue 2,182.61 2,336.01 2,451.40

SAlE OF gOODS, PRODucTS AnD SERvIcES 2,182.61 2,336.01 2,451.40

2. inPut ACQuireD FrOM thirD PArtieS

(inCLuDeS iCMS AnD iPi tAxeS)-667.21 -762.72 -788.88

cOSTS OF SOlD gOODS AnD SERvIcES -402.89 -488.98 -498.74

mATERIAlS, EnERgy, THIRD PARTy SERvIcES AnD OTHERS -264.32 -273.73 -290.15

lOSS/REcOvERy OF AcTIvE AmOunTS 0 0 0

3. GrOSS ADDeD vALue 1,515.40 1,573.30 1,662.52

4. retentiOnS -144.82 -161.62 -186.81

DEPREcIATIOn, AmORTIzATIOn AnD ExHAuSTIOn -144.82 -161.62 -186.81

5. net ADDeD vALue 1,370.59 1,411.67 1,475.71

6. ADDeD vALue reCeiveD in trAnSFer 31.44 25.09 26.42

ASSET EquIvAlEncE RESulT 0 0 0

FInAncIAl IncOmE 31.44 25.09 26.42

7. tOtAL ADDeD vALue tO DiStriBute 1,402.02 1,436.77 1,502.13

8. DiStriButiOn OF ADDeD vALue 1,402.02 1,436.77 1,502.13

PERSOnnEl AnD cHARgES 484.46 572.77 608.50

TAxES, FEES AnD cOnTRIbuTIOnS 594.50 583.91 607.80

InTEREST AnD REnT 179.19 139.09 148.03

DIvIDEnDS AnD InTEREST On OWn cAPITAl 34.75 34.42 32.76

RETAInED PROFITS / lOSS OF FIScAl yEAR 109.12 106.58 105.04

exPAnSiOn OF netWOrkS exPAnSiOn OF BuSineSS PrOCeSSeS teChnOLOGy OPerAtiOn MAintenAnCe

CAPtiOn

118 / 32%

20 / 5%233 / 63%

investment total for 2013: r$370.9 million

ASSOCiAteS GOvernMent COMPenSAtiOn FOr thirD-PArty CAPitALShArehOLDerSreinveStMent OF PrOFitS

CAPtiOn

Amount distributed by stakeholder

41%

40%

10%7%

2%


experience of the 60 years of operation, celebrated in 2014, to benefit the customer and the relationship - at a company that already achieves a high satisfaction rate among its users. The areas in which this directive will be reflected more strongly will be contact center and operations. They are expected to gain effectiveness, quality and controls, becoming true customer research centers, constantly evaluating the status of relationships between customers and the company. In addition, the retail segment will continue to invest in the modernization of our broadband networks, in the continuous improvement of the TV product and in the offering of attractive mobile telephony plans. The 2P, 3P and 4P product and service packages, which combine these three services with fixed telephony, will continue to be a priority for the segment.

For the corporate segment, one our main growth drivers, the year of 2014 will be a year for expanding borders. The history of successful radial expansions in the cities surrounding our backbone qualifies us for bigger and stronger leaps. New cities will be covered by us. The experience of serving small, medium and large companies, with a high quality network extending across many important states and cities of the Southeast and South regions of Brazil, connecting them through various metropolitan networks, guarantees peace of mind to continue with our planning.

In the Business Processes Technology area, there are many challenges in 2014. Among them, one that

OUTLOOk

Always looking ahead

stands out is the integration of the Asyst company, strengthening the family of ITC managed services, already reinforced in 2013 with the field services in telecom networks originating from the incorporation of Engeset. In addition, the expansion to the Latin American market gains strength, not only with the office opened in Colombia but also with the work of Asyst in Argentina and also in Chile. Therefore, Algar Tech ended 2013 with a consolidated services portfolio and good growth prospects.

Another challenge for 2014 is continuing the transition of the CTBC brand to Algar Telecom. The celebrations of our birthday, in February 2014, coincide with the intensification of this transition plan. The birthday also marks the beginning of a new cycle of planning and growth for the next five years.

The quality of our service and the longevity of our relationships are two essential pillars for the sustainability of our businesses. Confident in the relevance of these topics for our growth and positioning in the market, we maintain the commitment of developing people to improve our operational efficiency, relationship quality and corporate responsibility.

Our challenge is to use the experience of six decades to benefit our customers and relationships

60years

We believe that the information and communication technology (ICT) market scenario in Brazil will remain a promising one in the areas and segments in which the Company and its subsidiaries operate. The financial results and recognition received from our customers and the market point towards maintaining the bases of a strategy that has proven itself right over time.

We are committed towards maintaining and strengthening our differentials. Through our retail segment, we will continue to expand our actions in order to further improve the quality of our products and services, as well as customer service. Among the challenges is consolidating the practice of using the


GRI Index

[IP3.12]

ProfIle and Governance Items

Item descrIPtIon

1. StrategyandanalySiS

1.1 StatementfromthepersonwhoholdsthepositionwithhighestdecisionpowerabouttherelevanceofsustainabilityfortheorganizationanditsStrategy

1.2 Descriptionofmainimpact,risksandopportunities

2. OrganizatiOnalprOfile

2.1 OrganizationName

2.2 Mainbrands,productsand/orservices

2.3 Operationalstructureoforganization

2.4 Locationoforganization’sheadquarters

2.5 Numberandnameofcountriesinwhichtheorganizationoperates

2.6 Typeandlegalnatureoftheproperty

2.7 Coveredmarkets

2.8 Organizationsize

rePorted chaPter/sectIon

3-4

23-26; 29-33

7

7

7; 11-14

7

7

7

11-14

7

alGar telecom 2013 sUstaInaBIlItY rePort GRI INDEX 67

ITem deScRIPTIoN

2.9 Main changes during the period covered by the report

2.10 Awards received in the period covered by the report

3. ParaMEtErs fOr tHE rEPOrt

3.1 Period covered by the report

3.2 Date of most recent previous report

3.3 Report issuing cycle

3.4 Contact information in case of questions regarding the report or its content

3.5 Process for defining the content of the report

3.6 Limit of the report

3.7 Statement about any specific limitations regarding scope or limits of the report

3.8 Basis for preparation of the report

3.9 Techniques for data measurement and calculation bases

3.10 Reformulation of information provided in previous years

3.11 Significant changes in comparison with previous years

RePoRTed chAPTeR/SecTIoN

2

8

2

2

2

2

2

2; 11-14

2

2

2

2

2

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT gRI InDEx 68

ITem deScRIPTIoN

3.12 Table identifying the location of information on the report

3.13 External verification

4. GOvErnanCE, COMMitMEnts and EnGaGEMEnt

4.1 Governance structure of organization

4.2 Indicate if president of highest Governance body is also an executive director

4.3 Statement of number of independent or non-executive members of the highest Governance body

4.4 Mechanisms that allow shareholders and employees to offer recommendations or guidance to the top Governance body

4.5 Relationship between payment to the members of the top Governance body, executive directors and other executives and the organization’s performance

4.6 Processes established at the highest Governance body to avoid conflicts of interest

4.7 Process to determine qualifications and knowledge of members of the highest Governance body

4.8 Mission statement and values, codes of conduct and internal principles relevant to economic, environmental and social performance


67-74

2

15-17

18

18

22

18

18

18

8


ITem deScRIPTIoN

4.9 Procedures of the top Governance body to supervise the identification and management by the organization regarding economic, environmental and social performance

4.10 Processes for performance self-evaluation of the top governance body

4.11 Explanation of if and how the organization applies the precaution principle

4.12 Externally developed letters, principles or other initiatives that the organization subscribes to or endorses

4.13 Participation in associations

4.14 Stakeholder groups engaged by the organization

4.15 Base for identification and selection of stakeholders

4.16 Approaches for interaction with stakeholders

4.17 Main topics and concerns raised through stakeholder engagement


18

18

32

15 e 16

15, 16 ANd ThRoUGhoUT The RePoRT

15

15

15

15


PeRFoRmANce INdIcAToRS

INdIcAToR deScRIPTIoN

ECOnOMiC PErfOrManCE

ECOnOMiC-finanCial analysis

ec1 Direct economic value generated and distributed

EnvirOnMEntal PErfOrManCE

EnErGy COnsuMPtiOn and EMissiOns

eN3 Direct energy consumption discriminated by primary energy source

eN4 Indirect energy consumption discriminated by primary energy source

eN8 Total withdrawal of water per source

eN9 Water sources affected by water extraction

eN11 Owned area and areas with high biodiversity index

eN16 Total direct and indirect emissions of greenhouse gases, by weight

eN17 Other relevant indirect emissions of greenhouse gases, by weight


60-66

65

52-57

54

54

57

57

57

52

52



52-53

53

56

56

51-57

52-57

50-51

51

50-51

36-37

37-38

45-46


eN18 Initiatives to reduce greenhouse gas emissions and achieved reductions

eN19 Emissions of substances that destroy the ozone layer, by weight

eN22 Total weight of residues, by type and method of disposal

eN24 Weight of residues considered hazardous

rEduCtiOn Of EnvirOnMEntal iMPaCt

eN26 Initiatives for mitigating environmental impact of products and services and how much this impact was reduced

EnvirOnMEntal invEstMEnts

eN28 Amount of significant fines and total number of non-monetary sanctions resulting from violations of environmental laws and regulations

eN30 Total investments and expenses in environmental protection, by type

laBOr PraCtiCEs and fair WOrk

JOBs – PrOfilE Of assOCiatEs

LA1 Total number of employees, by type of employment, work contract and region

LA2 Total number and turnover rate of employees, by age range, gender and region



rElatiOnsHiPs WitH intErnal audiEnCE

LA4 Percentage of employees covered by collective negotiation agreements

WOrk safEty and HEaltH

LA6 Percentage of employees represented in formal committees of safety and health

traininG and EduCatiOn

LA10 Average of training hours per year, per employee, divided by functional category

LA12 Percentage of employees who regularly receive performance and career development analysis

HuMan riGHts

HuMan riGHts

hR4 Total number of discrimination cases and measures taken

hR6 Operations and vendors identified as having a significant risk of use of child labor

hR7 Operations and suppliers identified as having a significant risk of use of forced labor or labor similar to slavery


39, 40 e 46

40

43

43

40-42

41

41

47

47

47

47



sOCiEty

unfair COMPEtitiOn

So7 Total number of legal proceedings due to unfair competition, trust and monopoly practices and their results

rEsPOnsiBility fOr tHE PrOduCt

CustOMEr satisfaCtiOn

PR5 Practices related to customer satisfaction

MarkEtinG COMMuniCatiOns

PR6 Programs for compliance with laws, rules and voluntary codes in marketing communications

sECtOr suPPlEMEnt fOr tElECOMMuniCatiOns

Io3 Practices that ensure safety and health of personnel working on installation and maintenance of antennas, base stations and other installations

Io7 Description of policies and practices regarding installation of antennas


34

25-26

25-26

34

34

43

43

43


CORPORATE INfORMATION

ALGAR TeLecom S/A invEstOr rElatiOns - ir Telephone: (55 34) 3256-2978 E-mail: [email protected] Website: www.algartelecom.com.br/ri Address: Rua José Alves Garcia, 415, Uberlândia, Minas Gerais, Brazil, ZIP CODE 38400-668

cRedITGri COnsultinG, EditOrial COOrdinatiOn and dEsiGn: Report Sustentabilidade tEaM: Fábio Valverde (project management and relationship), Paloma Cavalcanti (GRI consulting), Marcelo Vieira (editing), José Carlos Videira (text), Fernando Rocha (graphic project) and Miguel Nóbrega (layout) rEviEW: Assertiva Produções Editoriais tyPEfaCE: DAX

ALGAR TeLecom 2013 SUSTAINABILITY RePoRT cORPORATE InFORmATIOn 75

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