Our principal liquidity and capital resource requirements are applied to finance capital expenditures and investments related to the expansion, improvement and maintenance of our property, plant and equipment. Historically, we have financed capital expenditures and investments with internally generated funds and indebtedness.

We incurred capital expenditures of R$1,413 million, R$1,653 million and R$1,203 million in 2000, 1999 and 1998, respectively. These expenditures are described more fully in the capital expenditures section.

Our primary source of funds is cash generated from operations. Net cash flow generated by operating activities was R$1,038.3 million, R$838.0 million, and R$1,521.0 million in 2000, 1999, and 1998, respectively.

Our indebtedness (including the current portion thereof), totaling R$2,246.3 million at December 31, 2000, was denominated in foreign currencies, 76.5% of which was in U.S. dollars. Our effective cost of borrowing in foreign currencies depends principally on the exchange rate between the real and the currencies in which our borrowings are denominated. In 2000, we started to hedge our short-term debt against foreign currency losses to ensure that debt payments would stay constant in Brazilian reais. However, we have not hedged our obligations under our foreign currency-denominated long-term indebtedness. In 2000, the real devalued against the U.S. dollar by 9.3%. If this devaluation is sustained, or worsens, the cost in Brazilian reais of servicing our U.S. dollar-denominated debt will increase proportionately. The loans and financing with financial institutions were primarily denominated in foreign currency. We are exploring various alternatives with respect to hedging this risk to avoid future foreign exchange losses.

The average effective interest rate, or "all in", of the total debt is equivalent to 10.12% per annum. Since substantially all of our long-term debt is denominated in foreign currencies, the foreign exchange rate variations add to our overall effective interest costs. Our foreign currency-denominated debt is evidenced by credit agreements that contain certain restrictions and covenants, including negative pledge provisions, prohibitions on the reduction of capital, prohibitions on mergers and consolidations and prohibitions on the selling, transferring or otherwise disposing of all or substantially all of our assets.

Our total long-term indebtedness was R$1,364.4 million, R$878.7 million, and R$511.1 million as of December 31, 2000, 1999, and 1998, respectively. The increase in long-term indebtedness at December 31, 2000 from December 31, 1999 was strongly impacted by the devaluation of the reais. R$766.1 million of our debt matured in 2000, and an additional R$881.9 million will mature in 2001.
We benefit from a strong relationship with export credit agencies such as the Export-Import Bank of the United States and Export Development Corporation of Canada and we are able to obtain direct long-term loans and have the advantage of lower tax remittances on such loans. Besides these two primary agencies, we also have contracts supported by Coface (France), ECGD (England), Overseas Private Investment Corporation (United States), BNDES (Brazil) and Hermes (Germany). In order to qualify for these loans, the loan has to be related to our capital expenditure program. The terms of these loans are generally more favorable than terms from commercial banks, and they help to finance projects such as satellites, international ocean cables, and domestic fiber routes.

Our two principal categories of long-term indebtedness (including the current portion thereof) at December 31, 2000 were the following:

Financial institutions (R$2,160 million). Borrowings (principal and interest) from financial institutions consist of various unsecured short- and long-term loans, generally in foreign currencies. Our policy has been to always take foreign currencies debt whenever they are cheaper than real-denominated bank borrowings. However, with the volatility of the reais since 1999, we have increased our short-term borrowings in reais to reduce our exposure to foreign currency fluctuations. In recent months, new short-term borrowing have been hedged to reais to further reduce this exposure.

Supplier credits (R$86 million). Supplier credits (in the form of principal and accrued interest) are available for purchases of imported equipment, principally fiber optic transmission equipment.

There were certain agreements signed prior to the privatization that required both Brazilian Government and Telebrás guarantees which could have constituted an event of default, but we have successfully concluded negotiations with such creditors replacing those guarantees. In addition, most of our other credit agreements include cross-default provisions and cross-acceleration provisions that would permit the holders of such indebtedness to declare the indebtedness to be in default and to accelerate the maturity thereof if a significant portion of the principal amount of our debt is in default or accelerated. As of December 31, 2000, none of our debt was in default or is expected to be in the future.

We paid dividends and interest on capital (a form of dividend that receives favorable tax treatment in Brazil) of R$211.5 million, R$163.7 million, and R$80.4 million in 2000, 1999, and 1998, respectively.

With respect to dividend payments, we are currently able to nominate and elect all the members of the board of directors of Embratel, and thus, control the payment of dividends. However, under Brazilian law and the regulations of the Brazilian securities commission, persons holding more than 10% of the voting stock of a company (a percentage that may decrease up to 5% in the case of listed companies) may require us to adopt cumulative voting. We believe that, based on current holdings in our operating subsidiary, if cumulative voting were required, we would still be able to control the payment of dividends by Embratel, which, with respect to the mandatory dividend, could be limited only under very strict circumstances. Board members, even if elected by one specific shareholder, have fiduciary duties toward the company and all our shareholders.