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Financing policy

KPN seeks to ensure a sustainable and prudent financial framework, with a ratio of net debt to operating result plus depreciation, amortization and impairments (Net debt to EBITDA) within the range of 2.0 to 2.5. Furthermore, KPN intends to maintain an investment grade credit profile with a minimum credit rating of Baa2 and BBB with Moody’s and Standard & Poor’s respectively. This financing policy allows KPN to accommodate its stated shareholder returns policy, while maintaining flexibility to grow and invest in its business.

This policy may change and is based on a number of assumptions concerning future events and is subject to uncertainties and risks that are outside KPN’s control.

Amounts in millions of EUR 2011 2010

Total borrowings (carrying values, excluding derivatives) 13,099 12,537

Difference between carrying value and nominal value −345 78

Total borrowings (nominal values, see breakdown below ) 12,754 12,615

Cash and cash equivalents (including held for sale) 1,026 840

Net Debt 11,728 11,775

EBITDA (definition for Net Debt / EBITDA calculation) 5,132 5,428

Net Debt / EBITDA 2.3x 2.2x

123

Consolidated Financial Statements

KPN | Annual Report 2011 Notes to the Consolidated Statements of Cash Flows

Breakdown of total borrowings (nominal values) 2011 2010

Bonds 12,129 12,284

Financial lease obligations 149 172

Bank overdraft 76 158

Credit Facility 400 –

Other – 1

Total borrowings 12,754 12,615

KPN defines EBITDA as operating result before depreciation and impairments of PP&E and amortization and impairments of intangible assets.

Note that KPN’s definition of EBITDA deviates from the literal definition of earnings before interest, taxes, depreciation and amortization and should not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. In the Net Debt/EBITDA ratio, KPN defines EBITDA as a 12 month rolling total excluding book gains, release of pension provisions and restructuring costs, when over EUR 20 million.

As of Q4 2011, Net Debt is based on the nominal value of interest bearing financial liabilities excluding derivatives, representing the repayment obligations in Euro. Prior periods have been recalculated, the reported Net Debt to EBITDA ratio was not impacted.

Shareholder remuneration policy

KPN intends to pay out an attractive dividend and to return excess cash to shareholders via share repurchases or special dividends. Excess cash depends on strategic investments (e.g. spectrum auction, fiber), business performance, the broader macroeconomic environment and a solid financial framework. KPN does not intend to hold unutilized excess cash balances, other than to manage its liquidity risks and working capital needs.

This policy may change and is based on a number of assumptions concerning future events and is subject to uncertainties and risks that are outside KPN’s control.

Financial risk management

KPN is exposed to a variety of financial risks. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on KPN’s financial position and performance. KPN uses derivative financial instruments to hedge certain risk exposures.

The financial risks are managed by KPN’s Treasury department under policies approved by the Board of Management. These policies are established to identify and analyze financial risks faced by KPN, to set appropriate risk limits and controls, and to monitor adherence to those limits. Treasury manages these risks in close co-operation with the Group companies, business operations and other corporate departments.

In 2010 and 2011, the Treasury policies have been reviewed and approved by the Board of Management, including the following key policies:

• Credit risk and counterparty risk

• Liquidity risk

• Market risk (currency risk and interest rate risk)

In addition, KPN’s Treasury department provides cash management and funding services to the Group companies and business operations.

This note presents information about the Group’s exposure to each of the above-mentioned risks, the Group’s objectives, policies and processes for measuring and managing risk. Further quantitative disclosures are included throughout these Consolidated Financial Statements.

124

Consolidated Financial Statements

Other Notes to the Consolidated Financial Statements

The table below summarizes the Group’s financial assets and liabilities:

December 31, 2011 December 31, 2010

Amounts in millions of EUR Carrying amount Fair value Carrying amount Fair value

Financial assets

Fair value through profit and loss:

Derivatives – non-current [26] 169 169 17 17

Derivates – current [26] 3 3 – –

Loans and receivables:

Non-current receivables from financial leases [13] 3 3 2 2

Loans to associates and joint ventures [12] 127 127 33 33

Trade receivable [15] 1,022 1,022 1,153 1,153

Other receivables [15] 51 51 77 77

Cash and cash equivalents [17] 990 990 823 823

Subtotal 2,365 2,365 2,105 2,105

Available for sale financial assets [16] 48 48 53 53

Total 2,413 2,413 2,158 2,158

Financial liabilities

Fair value through profit and loss:

Derivatives – non-current [26] 229 229 250 250

Derivatives – current [26] – – 1 1

Subtotal 229 229 251 251

Financial liabilities measured at amortized costs:

Borrowings [21] 13,099 13,966 12,537 13,466

Non-current payable [24] – – 12 12

Trade payables [25] 1,423 1,423 1,340 1,340

Other payables and accrued expenses and

interest [25] 1,486 1,486 1,598 1,598

Subtotal 16,008 16,875 15,485 16,416

Total 16,237 17,104 15,736 16,667

[..] Bracketed numbers refer to the related notes.

The following table presents the Group’s assets and liabilities that are measured at fair value at December 31, 2011.

Amounts in million of EUR

Total

Level 1 Level 2 Level 3 Balance

Assets

Financial assets at fair value through profit and loss:

Derivatives (cross currency interest rate swap) – 158 – 158

Derivatives (interest rate swap) – 11 – 11

Other derivatives – 3 – 3

Available-for-sale financial assets:

Listed securities 12 – – 12

Unlisted securities – – 36 36

Total assets 12 172 36 220

Liabilities

Financial liabilities at fair value through profit and loss:

Derivatives (interest rate swap) – 26 – 26

Other derivatives [12] – – 203 203

Total liabilities – 26 203 229

[..] Bracketed numbers refer to the related notes.

125

Consolidated Financial Statements

KPN | Annual Report 2011 Other Notes to the Consolidated Financial Statements

The following table presents the Group’s assets and liabilities that were measured at fair value at December 31, 2010.

Total

Amounts in million of EUR Level 1 Level 2 Level 3 Balance

Assets

Financial assets at fair value through profit and loss:

Derivatives (cross currency interest rate swap) – 17 – 17

Available-for-sale financial assets:

Listed securities 19 – – 19

Unlisted securities – – 34 34

Total assets 19 17 34 70

Liabilities

Financial liabilities at fair value through profit and loss:

Derivatives (cross currency interest rate swap) – 103 – 103

Other derivatives [12] – – 148 148

Total liabilities – 103 148 251

[..] Bracketed numbers refer to the related notes.

The fair value of financial instruments traded in active markets is based on quoted market prices. If applicable, these instruments are included in Level 1.

An instrument is included in Level 2 if the financial instrument is not traded in an active market and if the fair value is determined by using valuation techniques based on maximum use of observable market data for all significant inputs. For the derivatives used for hedging purposes, KPN uses the estimated fair value of financial instruments determined by using available market information and appropriate valuation methods. The estimated fair value approximates the value at which the instruments could be exchanged in an arm’s length transaction between knowledgeable, willing parties, other than in a forced liquidation or sale. For derivatives used for hedging, the fair value of derivatives is estimated by using discounted cash flow models taking into account spot rates on the balance sheet date and Euro and foreign currency swap curves. KPN has its derivative instruments outstanding with financial institutions that had a credit rating of A3 or higher with Moody’s at December 31, 2011.

If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3 and their fair value is estimated using models and other valuation methods. To the extent possible, the assumptions and inputs used take into account market pricing information and expectations. However, such information is by its nature subject to uncertainty. Changes arising as new information becomes available could impact income or other comprehensive income.

The valuation of available-for-sale unlisted securities is based upon a discounted cash flow model.

Other derivatives relate to the call/put arrangements of Reggefiber Group B.V. These options are valued using a binominal tree approach and depend on the business performance of Reggefiber under various scenarios with different probabilities (combination of penetration, price structure and approval of Dutch competition authority NMa), discount rates and the conditions of the call/put arrangement itself. Based on current business performance and management’s best estimate of the likelihood of possible scenarios and expected business performance, the value of the call/put arrangements was EUR 203 million (liability) as at December 31, 2011 (2010: 148 million). The change in value during the year of EUR 55 million is recorded in the consolidated statement of income as a loss under Financial results. In case of a 5%-point lower expected penetration rate, ceteris paribus, the value of the call/put arrangement would have been approximately EUR 80 million higher.

For more information on the call/put arrangements of Reggefiber Group B.V. reference is made to Note 12.

The following table presents the net changes in ‘other derivatives’ in Level 3:

Amounts in million of EUR 2011 2010

Balance as of January 1 148 102

Losses recognized in profit or loss [12] 55 46

Balance as of December 31 203 148

[..] Bracketed numbers refer to the related notes.

For other financial assets and liabilities the following methods and assumptions were used to determine fair value:

• Borrowings: based on the listed price of the bonds

• Cash, cash equivalents, accounts receivable and payable: as the maturity of these financial instruments is short, the carrying value approximates the fair value.

126

Consolidated Financial Statements

Other Notes to the Consolidated Financial Statements