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Integrated Report / February 2016 The energy that drives us • • • • Comfort for homes Sustainability for the future Competitiveness for companies Innovation for Infrastructure Our goal is to offer a reliable, high-quality, and environmentally-friendly energy supply, in order to: • Improve the well-being of people. • Drive the economic and social development of the communities in which we are present. • Create sustainable value for our shareholders, employees, customers, and suppliers. Mission Vision We create value in a sustainable way and we are committed to We want to be one global energy lider and create a better future for people with the support of our social return human team Values The twelve values inspire and guide the group’s strategy and all of its actions Race in the Whitelee wind farm / United Kingdom Iberdrola’s Public Information Iberdrola makes all of its public information available to our shareholders, employees, customers, suppliers, and society in general to provide trustworthy and relevant information regarding the Company’s performance and its strategic lines for the coming years. Annual information Integrated Report. Prepared based on the recommendations of the International Integrated Reporting Council (IIRC). Financial Report. Prepared according to international financial reporting standards and externally audited. Corporate Governance Report. Prepared according to the form provided by the National Securities Market Commission of Spain. Sustainability Report. Prepared according to the Global Reporting Initiative (GRI) guidelines and externally assured. Activities Report of the Consultative Committees of the Board of Directors. Prepared according to Iberdrola internal standards. Director Remuneration Report. Prepared according to the form provided by the Spanish National Securities Market Commission. Report on Compliance with Legal Provisions on the Separation of Regulated Activities. Prepared according to Iberdrola internal standards. Report on Related-Party Transactions with Directors and Significant Shareholders. Prepared according to Iberdrola internal standards. Annual Report on the Application of the Shareholder Engagement Policy and the Policy regarding Communication and Contacts with Shareholders, Institutional Investors, and Proxy Advisors. Prepared according to Iberdrola internal standards. Report on the Independence of the Auditor in relation to the Audit Report for Financial Year 2015. Prepared according to Iberdrola internal standards. Additional information Information on the corporate website www.iberdrola.com Quarterly Results Report. IBE Watch Fact Sheet. Quarterly Shareholder Bulletin. Innovation Report. Biodiversity Report. Greenhouse Gas Report. About Us Reputation and Sustainability Press Room Shareholders and Investors Suppliers Customers Networks Access the annual reports for financial year 2015 and supplementary documentation regarding the Iberdrola group by scanning the corresponding QR code using your smart phone or tablet. This icon refers to related information. It also indicates the existence of other specific reports where more information of interest can be accessed. Integrated Report / February 2016 Table of Contents 1. 3. 2. Iberdrola Today Business Iberdrola’s Model Primary and Strategy Businesses Letter from the Chairman & CEO 2.1 The Future of Energy 1.1 Iberdrola Today 1.2 Company Performance 1.3 Key Figures 4 8 3.2 Networks 28 2.3 Iberdrola, a Different Company 29 9 2.4 Asset Management 10 1.4 Presence by Areas of Activity 2.2 Business Model 26 2.5 Value Chain 12 2.8 Comparative Results and Awards 38 44 3.4 Renewables 3.5 Supply Costs 32 2.7 Capital and Business Relationship 37 42 3.3 Wholesale and Retail 49 30 2.6 Strategic Foundations 3.1 Regulatory Environment 34 52 56 Notes: — The company Iberdrola, S.A., parent company of the Iberdrola group, is referred to as “Iberdrola” or the “Company” in this report. — The figures included in this translation follow the customary English convention, with figures in thousands separated by a comma (,) and decimals indicated by a full stop (.). — €M: millions of euros; $M: millions of dollars. 4. 5. 6. Our Assets A Framework of Trust About this Report 4.1 Financial Capital 5.1 Corporate Governance Model 76 6.1 About this Report 88 60 4.2 Manufactured Capital 62 4.3 Intellectual Capital 4.4 Human Capital 4.5 Natural Capital 5.2 Three Lines of Defence 64 82 5.4 Ethics and Social Responsibility 84 66 68 4.6 Social and Relationship Capital 5.3 Risks 80 70 Letter from the Chairman & CEO 4 Letter from the Chairman & CEO Dear friends: For the third consecutive year, I am pleased to present to you Iberdrola’s Integrated Report, which provides a balanced reflection of the group’s performance, reflects the most significant aspects affecting the performance of the company, and presents its strategic lines for the coming years. In the near future, Iberdrola will be dealing with an energy scenario characterised by strong growth in global energy demand (30% increase by 2040, according to forecasts by the International Energy Agency), which must be supplied with clean and efficient technologies to meet global commitments on reducing emissions. Ignacio S. Galán. Chairman & CEO of Iberdrola © Adrián Ruiz “In anticipation of the energy transition, Iberdrola has committed to sustainable solutions that require greater electrification of the global economy”. / Integrated Report 2016 Although it represents only 25% of global greenhouse gas emissions, the electricity sector will play a decisive role in efficiently facing these challenges because of its enormous technological potential to contribute to decarbonising the economy, thanks to renewable energy. The forecasted 70% growth in electricity demand by 2040 is also explained by factors like the significant increase in the global population, heading towards 10 billion inhabitants by the middle of the century, mainly concentrated around urban areas, or the fact that more than 1 billion people still lack access to electricity supply. In anticipation of the energy transition, Iberdrola has committed to sustainable solutions that require greater electrification of the global economy: more clean energy, more storage capacity, more backup power, more and smarter grids, and more digitisation. Iberdrola will continue in this environment to develop its sustainable business model, which is focused on growth in regulated businesses and clean energy; geographic diversification in countries with high credit ratings; an increase in operational efficiency; the financial strength to exploit growth opportunities in the markets in which it does business; sustainable remuneration for shareholders; and a firm social commitment that seeks the creation of value for all of our Stakeholders. 5 Letter from the Chairman & CEO A new growth phase Outlook 2016-2020, which was recently presented by Iberdrola, establishes a net investment programme of 24,000 million euros, of which 17,000 million is for investments in growth. Of that total amount, the company already has investments of approximately 22,000 million euros in projects under construction or committed to in the United Kingdom, the United States, Mexico, Spain, and Brazil. 88% of the investments planned during the next five years will be focused on regulated businesses or longterm contracts, mainly in the areas of networks and renewables, which provide the safety, stability, and visibility that characterise our business model and which should generate 81% of the group’s Ebitda by 2020. By line of business, Iberdrola will allocate 46% of total investments to the areas of transmission networks and electric power distribution, 33% to renewable energy, and 9% to regulated wholesale generation. 12% of the total will be allocated to the traditional wholesale and retail business. At the same time, we will continue improving operational efficiency thanks to progress in automation and digitisation in all businesses and processes, maintaining a solid financial position that will allow us to exploit opportunities for growth in our markets. Based on the foregoing, we expect to obtain average annual growth of 6% in both gross operating profit and net profit of the group during 2016-2020. This forecasted growth will allow us to increase shareholder remuneration in an upwardly sustainable manner, in line with results, with a payout of around 65-75%. Iberdrola will also maintain the flexible dividend formula used in recent years, keeping the current number of shares stable through buy-backs and retirements of shares as part of this formula. This strategy will be supported by the Company’s traditional values and in strict compliance with the principles of transparency and business ethics set out in our Corporate Governance System, which incorporates the main international recommendations in this field. Firm commitment to sustainability These strategic projections reaffirm our ongoing commitment to economic and social development in the areas in which we are present, in addition to the well-being of their citizens. We will continue to act as an engine of growth, wealth, and employment with our business activities, our investments, and our procurement from thousands of suppliers. Iberdrola will continue to encourage the use of clean energy and looking after the environment. Although our “We will continue to act as an engine of growth, wealth, and employment with our business activities, our investments, and our procurement from thousands of suppliers”. emissions per kWh generated are already some 30% below the average for the European electricity sector, we have set the goal of an additional 50% reduction by 2030 and to be carbon neutral by 2050. And we are headed on the right path, given that by the end of last year, emissions intensity had already dropped 25% compared to 2007, with 63% of our current installed capacity being completely emissions-free. The achievement of these goals is closely linked to our wager on technological innovation, which will continue to be a priority in order to maintain our lead in the development of new products, services, and business models that are transforming the industry. In 2015, we allocated 200 million euros to R&D, mainly to initiatives relating to clean energy, offshore wind, smart grids, digitisation, and new technologies, which will allow Iberdrola to continue meeting the energy needs of its customers, offering them new products and services to improve their well-being and quality of life. This wager on innovation, which encompasses the entire Company, pushes us to continue strengthening the ongoing high-quality training of our workforce and to contribute to training new generations through the international scholarship programme, to which we have allocated approximately 11 million euros and by which more than 500 young people have engaged in masters’ and postgraduate studies at the best universities of the countries where we do business. In the coming years, we will continue with the “Electricity for all” programme to keep bringing electric power to people without it in emerging and developing countries. Under this programme, we have already contributed to almost a million and a half people being able to access electricity in various countries of Latin America and Africa. Finally, in the area of social-welfare action, we will strengthen our activities supporting vulnerable groups, mainly through the Social Assistance Programme and the Corporate Volunteering Programme. And we will continue to encourage actions in the area of art and culture as a part of our corporate social responsibility, supporting the creation, preservation, and dissemination of our historical artistic heritage. Integrated Report 2016 / Iberdrola Today 6 Drone inspection of wind farm / Spain / Integrated Report 2016 7 Iberdrola Today 1. Iberdrola Today Integrated Report 2016 / Iberdrola Today 8 1.1 Iberdrola Today Our Activities What We Are • P roduction of electricity from renewable and conventional sources. The process of internationalisation carried out in recent years has led Iberdrola to be one of the leading electric companies, and among the largest utilities in the world by stock market capitalisation. • P urchase/sale of electricity and gas on wholesale markets. • Transmission and distribution of electricity. •S upply of electricity, gas, and related energy services. • Other activities, mainly linked to the energy sector. Iberdrola is one of the leading electric companies in the world. The corporate and governance structure is described in chapter 5.1 of this report and consists of: • Iberdrola, as a holding company. •C ountry subholding companies in the 5 main geographic areas of activity. •H ead of business companies reporting to the country subholding companies. Presence focused on the Atlantic area Iberdrola carries out its activities mainly in the five countries of the Atlantic area: Spain, the United Kingdom, the United States, Mexico, and Brazil. Iberdrola group 2015 data 46,471 MW Installed capacity 14,787 MW Renewable installed capacity 214,226 360,000 GWh Electric power distributed (1) 33.8 Million users 136,794 30,938 GWh Net production People Direct employment (2) (1) Takes into account 100% of Neoenergia. (2) At 31 December 2015. (3) Annual impact estimated by Analistas Financieros Internacionales (AFI), based on Iberdrola’s business during the 2010-2015 period. / Integrated Report 2016 People(3) Indirect and induced employment 11,630 €M Tax contribution (€M 5,520 direct + €M 6,110(3) indirect and induced) 7,300 M€ Procurement awarded 3,223 M€ Investments 9 Iberdrola Today 1.2 Company Performance Revenues (€M) Ebitda (€M) Net Profit (€M) 45,000 3,000 2,805 2,841 2,572 9,000 2,327 34,201 31,648 31,077 30,000 30,032 31,419 7,651 7,727 6,757 7,000 15,000 6,965 7,306 3,000 2011 2012 2013 2014 2015 Installed capacity (MW) 50,000 2,000 1,000 5,000 0 2,422 0 2011 2012 2013 2014 2015 2011 2012 2013 Net output (GWh) Energy distributed (GWh) (1) 180,000 250,000 2014 2015 151,050 46,918 46,950 139,932 46,471 44,992 136,435 138,892 136,794 45,000 120,000 200,000 40,000 60,000 150,000 35,000 0 2011 2012 2013 2014 2015 Assets (€M) 214,873 212,617 214,226 2012 2013 2014 2015 100,000 2011 2012 2013 2014 2015 Employees 110,000 35,000 100,000 2011 Users (millions) 34.50 32,809 30,744 104,664 30,532 30,938 33.80 29,597 25,000 97,016 214,042 204,843 45,089 33.00 32.63 96,816 93,771 32.08 31.70 89,787 90,000 15,000 31.50 30.70 80,000 2011 2012 2013 2014 2015 5,000 2011 2012 2013 2014 2015 30.00 2011 2012 2013 * Note: Due to legal requirements, Iberdrola has applied International Financial Reporting Standard IFRS-11 to the financial information for the financial years 2013 to 2015, which aspect should be taken into account in evaluating the historical performance of the Company. (1) Takes into account 100% of Neoenergia. Integrated Report 2016 / 2014 2015 Iberdrola Today 10 1.3 Key Figures 2012 2013 2014 2015 Δ annual average 2011-15 Δ 20142015 Revenues 31,648.0 34,201.2 31,077.1 30,032.3 31,418.7 –0.2% 4.6% Consolidated Gross Margin 12,025.8 12,578.1 11,781.9 12,179.5 12,842.7 1.7% 5.4% Financial performance (€M) 2011 Consolidated Ebitda 7,650.5 7,726.6 6,756.9 6,964.5 7,305.9 –1.1% 4.9% Ebitda - Networks (regulated) 3,825.4 3,773.7 3,346.5 3,534.7 3,601.6 –1.5% 1.9% Spain 1,555.2 1,348.3 1,450.3 1,438.5 1,449.7 –1.7% 0.8% United Kingdom 832.3 937.3 939.0 1,024.8 1,138.0 8.1% 11% United States 547.7 660.2 718.2 772.0 774.4 9.0% 0.3% Brazil 890.2 827.9 239.0 299.4 239.5 Ebitda - Wholesale and Retail (liberalised) 2,270.7 2,355.2 1,986.6 2,292.2 2,320.0 0.5% 1.2% Spain 1,570.7 1,605.4 1,341.2 1,517.6 1,502.2 –1.1% –1.0% 322.5 360.6 320.4 456.6 420.7 6.9% –7.9% 15.6 9.1 –22.6 –32.0 –58.4 361.9 380.1 347.6 350.0 455.5 5.9% 30.1% 1,423.9 1,620.3 1,501.1 1,326.0 1,572.3 2.5% 18.6% Spain 668.1 804.3 668.4 420.6 473.2 –8.3% 12.5% United Kingdom 173.9 168.1 231.8 265.2 437.6 25.9% 65.0% United States 417.5 412.2 448.0 495.3 499.5 4.6% 0.8% 13.7 37.2 34.1 38.2 43.0 33.1% 12.6% United Kingdom United States Mexico Ebitda Renewables Mexico –28.0% –20.0% — –82.5% Brazil 12.9 11.3 9.1 33.0 26.9 20.2% –18.5% Other 137.8 187.2 109.7 73.7 92.1 –9.6% 25.0% Ebitda - other businesses 168.6 44.3 0.5 –17.0 –10.6 — 37.6% Ebitda Corporation and adjustments –38.1 Amortisation charge, provisions, –3,145.4 and other Operating profit (EBIT) Financial result Results from companies accounted for using the equity method Gains on noncurrent assets –66.9 –77.8 –171.4 –177.4 –46.9% –3.5% –3,349.7 –4,537.5 –3,023.6 –3,476.6 –2.5% –15.0% 4,505.1 4,376.9 2,219.5 3,940.9 3,829.3 –4.0% –2.8% –1,061.9 –1,100.3 –1,277.9 –1,122.4 –1,023.1 0.9% 8.8% –34.5 –187.5 205.0 135.4 55.3 — –59.2% 2011 2012 2013 2014 2015 Δ annual average 2011-15 Δ 20142015 Ebitda - outside eurozone (%) 48.3 51.0 49.5 54.0 56.0 3.8% 3.7% Ebitda margin (Ebitda/revenue) (%) 24.2 22.6 21.7 23.2 23.3 –1.0% 0.2% 8.9 8.3 8.3 7.7 7.7 –3.5% 0.1% NOE/Gross margin (%) 29.2 30.1 29.4 29.8 29.8 0.5% 0.0% Net financial debt/ebitda (multiple) 4.14 3.92 3.97 3.68 3.80 –1.9% 4.3% Financial leverage (%) 48.8 47.1 43.2 41.7 40.7 –4.5% –2.5% Funds from operations (FFO)/ Net financial debt (NFD) 19.1 20.4 20.8 21.3 21.0 2.5% –1.2% Retained cash flow (RCF/NFD) (%) 17.2 17.2 17.5 17.4 18.7 2.1% 7.5% 8.6 8.3 7.5 6.7 6.3 –7.5% –6.0% 2011 2012 2013 2014 2015 Δ annual average 2011-15 Δ 20142015 28,465 25,753 28,922 35,756 41,507 9.9% 16.1% 5,882 6,139 6,240 6,388 6,337 1.9% –0.8% Share price (€) 4.84 4.20 4.63 5.60 6.55 7.9% 17.0% Earnings per share (EPS) 0.47 0.45 0.41 0.36 0.38 –5.2% 5.6% Dividend per share (DPS) 0.34 0.34 0.31 0.275 0.276 –5.1% 0.4% Dividend yield (%) 6.96 8.13 6.65 4.91 4.21 –11.8% –14.3% 1,982 2,093 1,922 1,716 1,732 –3.3% 0.9% 71.1 65.4 65.5 73.8 71.5 0.1% –3.1% 10.10 9.31 11.25 15.37 17.17 14.2% 11.7% Net profit margin (Net profit/ Revenues) (%) Return on equity (ROE) (%) Stock market performance Stock market capitalisation (€M) Number of shares at year-end (millions) Total dividend (including payment in kind) (€M) Payout ratio (%) Price/net earnings per share (PER) 45.8 –13.9 –10.4 247.9 125.1 3,454.4 3,075.1 1,136.1 3,201.8 2,986.6 –3.6% –6.7% Corporate tax –549.2 –206.5 1,466.7 –837.1 –527.1 1.0% 37.0% Non-controlling interests –100.7 –27.9 –31.0 –38.2 –38.0 21.6% 0.5% Net attributable profit 2,804.5 2,840.7 2,571.8 2,326.5 2,421.6 –3.6% 4.1% Total assets 97,016.5 96,816.4 89,786.8 93,771.4 104,664.1 1.9% 11.6% Equity 33,207.8 34,084.8 35,288.6 35,790.5 40,956.1 5.4% 14.4% Profit before Tax (PBT) Financial ratios 28.6% –49.5% Net investments 4,002.0 3,259.0 3,053.0 2,848.0 3,223.0 –5.3% 13.2% Funds from operations (FFO) 6,047.0 6,196.0 5,619.0 5,459.0 5,906.7 –0.6% 8.2% Net financial debt 31,705.7 30,324.4 26,836.3 25,618.4 28,067.1 –3.0% 9.6% / Integrated Report 2016 Sustainability Report Quarterly Results Report Consolidated Annual Financial Statements * Note: Due to legal requirements, Iberdrola has applied International Financial Reporting Standard IFRS-11 to the financial information for the financial years 2013 to 2015, which aspect should be taken into account in evaluating the historical performance of the Company. 11 Iberdrola Today 2011 2012 2013 2014 2015 Δ annual average 2011-15 Δ 20142015 46,918 46,950 44,992 45,089 46,471 –0.2% 3.1% Net output (GWh) 151,050 139,932 136,435 138,892 136,794 –2.4% –1.5% Operating performance Installed capacity (MW) Electric power distributed (GWh) (1) 204,843 214,042 214,873 212,617 214,226 1.1% 0.8% 2011 2012 2013 2014 2015 Δ annual average 2011-15 Δ 20142015 Users (millions) 30.7 31.7 32.1 32.6 33.8 2.4% 3.6% Electrical power 27.5 28.1 28.5 29.0 29.7 2.0% 2.5% Spain 10.8 10.9 10.9 10.9 10.9 0.3% 0.1% 3.2 3.5 3.5 3.5 3.5 2.3% 0.3% 22.2% Social performance United Kingdom Environmental performance 2011 2012 2013 2014 2015 Δ medio anual 2011-15 Emission-free installed capacity (%) 58.2 59.4 61.2 61.9 63.0 2.0% Δ 20142015 1.8% United States 1.9 1.8 1.8 1.8 2.2 3.7% Latin America 11.7 11.9 12.4 12.8 13.1 2.9% 2.3% Gas 3.3 3.6 3.6 3.6 4.1 5.4% 12.4% Spain 0.8 0.8 0.8 0.8 0.9 2.7% 11.3% United Kingdom 2.0 2.2 2.2 2.2 2.2 2.4% 0.0% United States 0.6 0.6 0.6 0.6 1.0 13.3% 65.0% 32,809 30,744 30,532 29,597 30,938 –1.5% 4.5% Renewable energy installed capacity (%) 29.7 Emission-free production (%) 48.8 51.9 54.6 56.8 52.5 1.8% –7.6% Permanent contracts (%) 98.0 98.0 98.5 98.5 98.4 0.1% –0.0% Renewable energy production (%) 19.8 23.6 24.9 24.4 24.0 4.9% –1.7% Specific CO2 emissions (t/GWh) 81.2 79.8 79.4 79.0 76.6 –1.5% –3.0% 248 264 226 212 225 –2.4% 6.1% Employees with collective bargaining agreement (%) Fuel consumption (M Tep) 20,172 19,236 18,968 18,849 19,001 –1.5% 0.8% Employee turnover (%) 6.2 10.6 6.6 8.6 7.0 3.1% –18.5% Environmental investments (€M) 1,297.6 1,062.4 1,015.7 1,100.9 1,014.2 –6.0% –7.9% 77/23 76/24 76/24 77/23 76/24 — — 261.3 723.3 686.4 635.7 669.2 26.5% 5.3% 162 151 154 161 153 –1.5% –5.5% 87.6 85.2 84.4 85.0 84.0 –1.0% –1.2% Injury rate (IR) 0.46 0.34 0.46 0.39 0.28 –11.7% –28.2% Hours of training (millions of hours) 1.25 1.12 1.2 1.0 0.9 –7.0% –9.0% Hours of training per employee (h) 47.1 44.2 44.7 38.7 38.6 –4.9% –0.2% 116.2 51.7 91.7 65.0 46.0 –20.7% –29.2% Contributions to society (€M) 34.7 37.7 31.6 34.0 38.0 2.3% 11.8% Rural electrification programmes (€M) 81.5 14 60 31 8 –44.0% –74.2% 136 145 159 170 200 10.1% 17.6% 5,322 4,830 4,359 4,599 5,093 –1.1% 10.7% 78 84 87 92 94 4.8% 1.3% 1,078 1,233 1,202 1,326 1,536 9.3% 15.8% 9.9 8.9 12.0 10.7 10.8 2.3% 1.2% 91 90 86 87 85 –1.7% –2.3% Environmental expenses (€M) Energy produced under certified environmental management systems (%) Water use/overall production (m3/GWh) 30.5 31.6 32.5 31.8 1.7% –2.1% 620 699 976 509 533 –3.7% 4.7% Direct CO2 emissions. Scope 1 (kt) 36,193 35,461 31,846 30,217 31,752 –3.2% 5.1% Indirect CO2 emissions. Scope 2 (kt) 1,156 CO2 avoided due to efficiency initiatives (kt) 2,122 997 1,544 963 –4.5% –37.6% Number of employees Diversity (men/women) Ratio between basic entry level wage and local minimum wage (%) Funds for social development (€M) 37,462 24,014 18,480 21,459 19,269 –15.3% –10.2% Investments in R&D (€M) SO2 emissions (t/GWh) 0.295 0.366 0.217 0.154 0.125 –19.3% –18.8% General procurement (€M invoiced) (2) NOx emissions (t/GWh) 0.276 0.334 0.262 0.236 0.230 –4.5% –2.5% Sustainability Report Quarterly Results Report Consolidated Annual Financial Statements (1) Takes into account 100% of Neoenergia. (2) Supplies in the amount of 7,300 million euros were awarded during 2015. Procurement from qualified suppliers (%) Number of suppliers with social responsibility standards Procurement in sensitive countries per ILO (%) Procurement from local suppliers (%) Integrated Report 2016 / Iberdrola Today 12 1.4 Presence by Areas of Activity United States Mexico Brazil / Integrated Report 2016 13 Iberdrola Today United Kingdom Spain Integrated Report 2016 / Iberdrola Today 14 Iberdrola in Spain Leading energy company. Δ 2015 / 2014. GDP +3.2%. Electricity demand +1.8%. Primary facilities and brands Spain Subholding Company Renewables business Networks business Wholesale and retail business Real estate Engineering Foundation 2015 data 26,187 MW Installed capacity(1) 6,106 MW Renewable installed capacity 92,676 10,569 GWh Electric power distributed 266,818 649 Km Power lines 55,512 11.8 GWh Net production Employees Million users €M Investments 3,493 €M Direct tax contribution (1) Total MW managed. The International Financial Reporting Standard IFRS-11 is not being applied for operational purposes. / Integrated Report 2016 15 Iberdrola Today 195 89 1 78 8 21 6 2 Wind farms 5,753 MW Hydroelectric plants 9,712 MW Nuclear plants 3,410 MW Mini-hydro plants 303 MW Combined cycle gas plants 5,695 MW Thermal plants 874 MW Solar thermal plant 50 MW Cogeneration plants 390 MW Main offices Electricity distribution Area of influence Integrated Report 2016 / Iberdrola Today 16 Iberdrola in the United Kingdom Leading wind producer. 3rd-leading network company. Δ 2015 / 2014. GDP +2.2% / Electricity demand –1.2%. Primary facilities and brands United Kingdom Subholding Company Renewables business Networks business Wholesale and retail business Engineering Foundation 2015 data 6,465 MW Installed capacity(1) 36,213 GWh Electric power distributed 6,696 Employees 1,630 108,234 1,461 Km Power lines €M Investments 18,635 5.7 640 MW Renewable installed capacity GWh Net production Million users €M Direct tax contribution (1) Total MW managed. The International Financial Reporting Standard IFRS-11 is not being applied for operational purposes. / Integrated Report 2016 17 Iberdrola Today 33 1 1 3 1 4 Wind farms 1,629 MW Hydroelectric plants 563 MW 1 Thermal plant 2,304 MW Marine energy 1 MW Cogeneration plant 1 MW Underwater power line 425 Km Combined cycle gas plants 1,967 MW Main offices Electricity distribution Area of influence Integrated Report 2016 / Iberdrola Today 18 Iberdrola in the United States Second-leading wind producer. Electricity and gas distributor in New York, Maine, Connecticut and Massachusetts. Δ 2015 / 2014. GDP +2.4% / Electricity demand –1.1%. Primary facilities and brands United States Subholding Company Renewables business Regulated networks business and sale of electricity and gas Engineering Foundation 2015 data 6,458 31,337 5,695 121,990 6,889 MW Installed capacity(1) MW Renewable installed capacity 17,418 GWh Net production GWh Electric power distributed Km Power lines 3.2 Million users 2.4 BCM Gas storage capacity Employees 503 €M Investments 563 €M Direct tax contribution / Integrated Report 2016 (1) Total MW managed. The International Financial Reporting Standard IFRS-11 is not being applied for operational purposes. 19 Iberdrola Today 54 2 1 9 1 2 Wind farms 5,645 MW Hydroelectric plants 118 MW 4 Gas storage facilities Photovoltaic plants 50 MW Cogeneration plant 636 MW USA-Canada transmission line 708 Km Combined cycle gas plants 9 MW Main offices Electricity distribution Area of influence Integrated Report 2016 / Iberdrola Today 20 Iberdrola in Mexico Leading private electricity producer. Δ 2015 / 2014. GDP +2.5% / Electricity demand +2.9%. Primary facilities and brands Mexico Subholding Company Renewables business Generation business Engineering 2015 data 5,449 38,866 494 367 801 175 MW Installed capacity(1) MW Renewable installed capacity GWh Net production Employees €M Investments €M Direct tax contribution (1) Total MW managed. The International Financial Reporting Standard IFRS-11 is not being applied for operational purposes. / Integrated Report 2016 21 Iberdrola Today 7 Wind farms 367 MW 2 Cogeneration plants 201 MW 5 Combined cycle gas plants 4,881 MW Main offices Area of influence Integrated Report 2016 / Iberdrola Today 22 Iberdrola in Brazil Leading distributor in Brazil by number of customers. Δ 2015 / 2014. GDP -3.8% / Electricity demand –2.1%. Primary facilities and brands Brazil Subholding Company Renewables business Networks business Generation business Engineering Foundation 2015 data 1,169 MW Installed capacity(1) 53,999 GWh Electric power distributed(2) 3,747 Employees 246 579,042 109 4,802 13.1 MW Renewable installed capacity GWh Net production Km Power lines Million users €M Investments 600 €M Direct tax contribution (1) Total MW managed. The International Financial Reporting Standard IFRS-11 is not being applied for operational purposes. (2) Takes into account 100% of Neoenergia. / Integrated Report 2016 23 Iberdrola Today 11 Wind farms 246 MW 1 Combined cycle gas plant 211 MW 12 Hydroelectric plants 682 MW 6 Cogeneration plants 31 MW Main offices Electricity distribution Area of influence Integrated Report 2016 / Business Model and Strategy 24 West of Duddon Sands offshore windfarm / United Kingdom / Integrated Report 2016 25 Business Model and Strategy 2. Business Model and Strategy Integrated Report 2016 / Business Model and Strategy 26 2.1 The Future of Energy Opportunities for continued growth The energy sector presents various opportunities for growth over the long term. Change in global installed power generation capacity (GW) Source: World Energy Outlook 2015 – International Energy Agency Coal The electricity sector is experiencing a process of transition in which rapidly growing economies must supply electrical power in an accessible, affordable, reliable, and sustainable manner. The coming decades will see a scenario marked by a 40% increase in energy demand through 2040 and by the commitments resulting from the Climate Change Conference held in Paris. The energy mix must thus be substantially changed, reducing the consumption of fossil fuels and increasing the contribution of electricity, mainly in sectors like transportation. Gas Oil Nuclear Bioenergy Hydroelectric Wind Solar Other –800 –400 0 400 800 1,200 Capacity added Capacity eliminated 2015-2025 The future of electricity according to the WORLD ECONOMIC FORUM 2016 2026-2040 2015-2025 1,600 Net change 2026-2040 2015-2040 “Hydroelectric generation, onshore and offshore wind power, and solar photovoltaic will spearhead this transformation, which should be accompanied by improvements in networks and back-up and storage technologies.” Ignacio Galán, at the WORLD ECONOMIC FORUM 2016 The technologies considered for further development in the coming years are those that are sufficiently mature to provide large-scale solutions at a reasonable cost, including hydroelectric, with a 60% increase in the next 25 years, and onshore and offshore wind. An investment of approximately $7 trillion will be needed in OECD countries ($13 trillion in non-OECD countries) through 2040 to satisfy the growing demand for electricity and to meet the goals of global energy policies. Investment in electricity infrastructure within and outside of the OECD NON-OECD Source: The Future of Electricity Report, World Economic Forum 2016. Indicates the investment required to meet policy objectives OECD $MM 600,000 Indicates the investment required to meet policy objectives $MM 600,000 528 p.a. 451 p.a. $MM 400.000 $MM 400.000 288 p.a. 266 p.a. $MM 200.000 260 p.a. 244 p.a. Transmission and distribution $MM 200.000 188 p.a. Other renewables Wind and solar Hydroelectric Nuclear 0 Fossil fuels 2000 - 06 2007 - 14 2015 - 25 ≈$3 Billion (≈$3 Trillion) / Integrated Report 2016 2026 - 40 ≈$7 Billion (≈$7 Trillion) 0 2000 - 14 ≈$4 Billion (≈$4 Trillion) 2015 - 25 2026 - 40 ≈$13 Billion (≈$13 Trillion) 27 Business Model and Strategy Evolution of demand1,2 Growth in global electricity production (TWh)1 According to World Energy Outlook 2015, in a central scenario, world energy use will increase by more than one-third through 2040, led mainly by India, China, Africa, the Middle East, and South East Asia. Despite the use of more costly technology and a foreseeable future increase in the prices of fossil fuels, electricity will be more accessible in relation to GDP in most of these regions. The EU Roadmap forecasts that electricity will at least double its share in final energy demand to 36-39% in 2050, for which reason it would reduce carbon emissions in heating systems and in the transport sector. Sources: 1.World Energy Outlook 2015 – International Energy Agency; 2. Energy Roadmap 2050 of the European Parliament. 2013 23,318 TWh 16% Hydroelectric 41% Coal 11% Nuclear 22% 4% Gas The electricity sector is leading the fight to eliminate CO2 emissions, which causes a displacement towards power generation technologies with low CO2 emissions. Oil 4% Bioenergy 9% Wind 4% 2040 39,444 TWh Solar 30% Coal 15% Hydroelectric 12% Nuclear 23% Gas Trends in production and use of electricity Sectoral1,2 Technological2,3 Consumption1,2 • Generation based on renewable energy will increase by some 8,300 TWh (more than one-half of the increase in total production) by 2040, reaching 50% in the EU, around 30% in China and Japan, and more than 25% in the United States and India; conversely, coal will represent less than 15% of electricity supply outside of Asia. • T echnological advances and an improvement in efficiency are positive factors, but constant political efforts are essential to improve energy trends. •1 .2 billion people, or 17% of the global population, currently lack access to electricity, and 2.7 billion people, or 38% of the global population, put their health at risk by resorting to the traditional use of solid biomass for cooking. • Preferences for policies favourable to energy options low in CO2 emissions will be strengthened by cost trends, as the extraction of oil and gas becomes increasingly more expensive, while the costs of renewables and more efficient end-use technology continue to fall. • Unsustainable pressure on natural resources. A world economy four times larger than today is projected to use 80% more energy in 2050. •S mart grids will introduce home automation to network management and electricity demand management, improving process efficiency. • T echnological developments, such as new renewable energies and advances in distributed generation, can change the current model of the electricity markets. •E lectricity storage, as a still-embryonic technological possibility, can open up new vistas for the operation and management of power systems. • T echnological progress as a path toward reducing emissions, both in obtaining fuels and in producing electricity and managing its use. •U niversal access to energy, as an element to improve well-being. “World electricity demand will grow by 80% over the next 30 years driven by improved efficiency and the expansion of service to the 1.2 billion people who still do not have access to power” (Ignacio Galán). • T he development of new uses and applications for electricity may result in new markets and opportunities: electric vehicles, robotics in the use of electricity, etc. Sources: 1 World Energy Outlook 2015 – IEA; 2 Energy Roadmap 2050 of the European Parliament; 3 World Energy Outlook 2014. Integrated Report 2016 / Business Model and Strategy 28 2.2 Business Model The purpose of the business model defined for the Iberdrola group is the “supply of reliable, high-quality and environmentally-friendly energy”, through a sustainable, long-term industrial enterprise. The model is built on three pillars: a framework of trust based on an advanced governance model; the Mission, Vision, and Values of the Iberdrola group defined by the Board of Directors; and the distinguishing factors that make Iberdrola a different company. The model’s competitiveness is achieved through responsible management of the tangible and intangible assets of the Company. To apply this model, Iberdrola has defined the activities in which it seeks to be an active player, structuring its management into three global businesses: the Networks Business; the Wholesale and Retail Business; and the Renewables Business, with a Corporation as the group’s central management unit. The Corporation develops the group’s strategy and oversees its execution. Networks Business Strategic Foundations / page 34 Wholesale and Retail Business Renewables Business Value Chain / page 32 Management of tangible and intangible assets Financial / Manufactured / Intellectual / Human / Natural / Social and Relational Framework of Trust To ensure the sustainability of its business model, Iberdrola has implemented: •A Corporate Governance System consistent with best international practices. •C orporate ethics, internalised by the management units and the organisation as a whole. •S ocial Responsibility Policies, with a view to meeting the expectations of Stakeholders. •A dvanced risk control, to maintain an optimal “risk/opportunity” balance, taking advantage of opportunities and mitigating risks. / Integrated Report 2016 The energy that drives us Corporation Framework of trust Strategic Foundations / page 34 Supply of reliable and high-quality energy Mission, Vision and Values Distinguishing Factors Competitiveness / page 30 Pillars / page 28 Mission, Vision, and Values of the Iberdrola group “We want to be the leading multinational group in the energy sector at the forefront of a better future, sustainably creating value with a quality service for people...”. This vision is based on twelve corporate values: • • • • • • • • • • • • alue creation V Ethical principles Good corporate governance and transparency Development of our workforce Social commitment Sense of belonging Safety and reliability Quality Innovation Respect for the environment Customer focus Institutional loyalty 29 Business Model and Strategy 2.3 Iberdrola, a Different Company Iberdrola’s Primary Businesses / page 41 P resence by Areas of Activity / page 12 Focus on basic and regulated businesses International diversification Commitment to clean and competitive energies Approximately 75% of Ebitda comes from regulated businesses and long-term contracts. Approximately 55% of earnings are generated outside of Spain. •G eneration and production of largely emissions-free electricity. Natural Capital / page 68 • L arge portfolio of offshore wind generation projects and wave and tidal power projects. •C lear goals for reducing emissions. Operational efficiency Financial strength and solidity of the group Global, committed, and qualified workforce In a comparative analysis of six European companies in the sector, according to a study by Ernst&Young, Iberdrola leads in three efficiency variables: net operating expenses over gross margin, workforce per unit of installed power, and workforce per number of users. •S trengthening of the balance sheet due to growth in Ebitda and operating cash flow, which allows for continued strength in solvency ratio levels. •S table and high-quality jobs, with high level of training. Iberdrola’s Primary Businesses / page 41 • L iquidity position that covers financial needs for more than 18 months under a stress scenario. F inancial Capital / page 60 •H ealth and safety as values: “accident reduction” goal. • T he companies of the group have been recognised: In Spain for their reputation (Merco) and in Brazil as the best company to work for in Latin America (Great Place to Work). H uman Capital / page 66 Integrated Report 2016 / Business Model and Strategy 30 2.4 Management of Tangible and Intangible Assets F inancial Capital / page 60 Manufactured Capital / page 62 Intellectual Capital / page 64 Financial Capital Manufactured Capital Intellectual Capital What is it? Financial resources the company already has or obtains through financing. Tangible assets or goods used by the Company to carry out its business activities. Intangible, knowledgebased assets. Management Approach Create value for shareholders through sustainable growth. Offer a competitive supply of energy in a safe and reliable environment. Consider innovation as a strategic element of the Company. Significant Aspects • Balanced growth. • P ower generation assets. • Promotion of R&D. •S ound financial structure. • Operational efficiency. •S ustainable results and dividends. / Integrated Report 2016 • P ower transmission and distribution assets. • Other assets. •E fficiency and new products and services. •D isruptive technology and business models. 31 Business Model and Strategy The Iberdrola group holds valuable assets for the development of its business model. The strategy defined by the Company transforms these assets to create value for all its Stakeholders. H uman Capital / page 66 N atural Capital / page 68 S ocial and Relationship Capital / page 70 Human Capital Natural Capital Social and Relationship Capital Employee knowledge, skills, experience and motivation. Natural resources affected by the Company’s activities. Ability to share, relate, and collaborate with its Stakeholders, promoting community development and well-being. Guarantee the availability of a committed and qualified workforce. Ensure the sustainable use of natural resources and contribute to combating climate change. Promote relations of trust with Stakeholders, improving the quality of life of people in areas where the group has a presence. •G lobal human resources management. • Environmental management. • Stakeholder relations. • Preservation of biodiversity. • Goal of “accident reduction”. • Prevention of pollution. •C ommunity support and electricity access programmes. • Talent management. •O perating excellence and energy efficiency. • Iberdrola group foundations. • Waste management. • Brand management. •D iversity, equal opportunity, and reconciliation. • Corporate reputation. • Informational transparency. Integrated Report 2016 / Business Model and Strategy 32 2.5 Value Chain Power generation Power transmission and distribution Electricity production through the construction, operation, and maintenance of generating plants, and purchase/sale of energy on wholesale markets. Construction, operation, and maintenance of electrical lines, substations, transformer centres, and other infrastructure, to transfer electrical power from production centres to the end user. Generating plants* Electric grids* * % of 2015 net output * At 31 December 2015 34% 17% Overhead lines Combined cycle Nuclear 5% Cogeneration 4,000 High and medium voltage transformer substations 29,857km of transmission lines 8% Conventional thermal 36% Renewables (Hydroelectric + wind) / Integrated Report 2016 856,461km of distribution lines 33 Business Model and Strategy Retail sale of energy Supply to end users of energy and additional products and services. Users* * % by sector at 31 December 2015 Underground lines 1.4 million Medium to low voltage distribution transformers 938 km of transmission lines 188,828 km of distribution lines 90.2% Residential 5.8% Retail 0.9% Institutional 0.9 % Industrial Integrated Report 2016 / 2.2% Other Business Model and Strategy 34 2.6 Strategic Foundations for 2016-2020 Market conditions The global energy markets currently reflect geopolitical factors affecting the countries producing oil and gas. Our scenario for the 2016-2020 period forecasts that current prices remain the same over the short term, sustained by a stable climate in the economies of Europe and North America, followed by a soft recovery at the end of the period. The diversification of businesses and countries will allow the Company to develop a strategy of growth and value creation that conforms to this environment. Challenges and opportunities Challenges Opportunities •D ecarbonisation in the energy sector. Demand for cleaner and more sustainable energy. • Management of a scenario of constant prices for energy in the short term. • Attainment of higher efficiency levels in all businesses. • Regulatory management in all businesses, with special emphasis on transmission and distribution businesses, and in the development of the single market in Europe. • Implementation of an investment plan focused on growth in the businesses of regulated networks, renewables, and long-term contracted generation. •B alanced business model focused on regulated activities and clean energy. • Significant experience in the development and construction of network and emission-free generation projects. • International diversification with a presence in countries with a stable and predictable regulatory framework that require investment in the electricity and gas sectors. • High quality of assets. • Proven management capacity, culture of efficiency, and results. • Culture of innovation to implement digitisation in relation to customers and the development of new products and services. Growth vectors 2016-2020 Investments •U nited Kingdom: Iberdrola continues with its growth phase in the power transmission and distribution businesses and with the start-up of onshore and offshore renewable energy projects. Offshore wind will become significant beginning in 2018. •U nited States: the Company, through AVANGRID, is facing growth in the area of distribution networks and also in transmission. It will also continue with new onshore wind developments. •M exico: it will consolidate its position as the largest private power generator in Mexico, taking advantage of the opportunities arising from the liberalisation of the sector. •B razil: experiencing a period of growth in hydroelectric capacity. •S pain: maintenance and improvement of facilities. Operational efficiency • In all areas of activity. .... expanding the geographic diversification of the Company and increasing its presence in regulated businesses with low risk and the generation of recurring cash flows. T he Future of Energy / page 26 / Integrated Report 2016 35 Business Model and Strategy Strategic pillars Iberdrola’s strategy for 2016-2020 will remain focused on balanced growth, ensuring its financial strength and the sustainability of its dividend policy, the growth of which will be linked to the growth in results. New investments will be concentrated in countries with high credit ratings and in businesses that are preferably regulated or in long-term contracts, thus improving the profile of the Company. 1. Balanced growth • Investments focused on businesses and countries with stable and predictable regulatory frameworks. • Net investment of more than €M 24,000. Investments of more than approximately €M 22,000 are already awarded or under construction. •O f the total investments during the period, €M 17,000 are focused on growth and the rest on maintenance and replacement. •E lectric power transmission and distribution networks will account for 46% of net investments. Of the overall amount, 33% will be dedicated to renewable energy and 9% to regulated wholesale generation. 12% of the total will be invested in the liberalised wholesale and retail business. • T he regulated businesses (networks, renewables, and long-term contract) will account for 88% of all planned investments. Investment by business and currency 2016-2020 •G eographically, Iberdrola will concentrate the bulk of its growth in the international area. By currency, 43% will be invested in dollars, 35% in pounds Sterling, 20%* in the Euro zone, and 2% in Brazilian reais. From 2016 to 2020, investments will be focused on countries with stable regulatory environments and the businesses of regulated networks, renewables, and generation under long-term contracts. F inancial Capital / page 60 * Includes the offshore wind farm in Germany: Wikinger 12% Wholesale and Retail 9% Regulated Wholesale Generation 46% Networks 33% Renewables 2% Reais 20% Euros* 43% Dollars 35% Pounds Integrated Report 2016 / Business Model and Strategy 36 2. Financial strength • 2015 results were higher than initially forecast due to the good performance of the businesses, especially the regulated and long-term contract businesses, and the positive effect of the appreciation of the dollar and the pound Sterling. Ebitda reached €M 7,306 (+4.9%), with net profit of €M 2,422 (4.1%). • In the coming years, the efficient operation of operating assets, together with the above-described investment plan, will lead to sustainable growth in the Company’s results, with an estimated average annual increase of approximately 6% through 2020. • As a result of the increase in investments, net debt will grow some €M 1,000 annually during the first years of the period, to reach approximately €M 31,000 in 2018/2019 thanks to the increase in operating cash flow. The profile of the Company’s businesses, together with a balanced investment plan, will allow for sustained growth in results of approximately 6%... • Average annual operating cash flow (FFO) in the amount of €M 6,900 will amply exceed investments, which will reach an annual average of €M 4,800. By business, cash flow generation from the Liberalised and Networks businesses will Ebitda by business (forecast to 2020) be significantly greater than investments, while Renewables will generate cash somewhat higher than investments. • Maintenance of the current financial model to provide subsidiaries with an optimal capital structure giving appropriate financial signals and which is consistent with an investment grade rating, while respecting current guidelines for structural subordination. • Optimisation of liquidity position (around €M 8,000 - 9,000) to current market conditions in order to improve financial costs, maintaining 18 months of coverage even during stress scenarios. •S trengthening of financial ratios, with the following medium-term goals: • Net debt/Ebitda ≤ 3.6 • FFO/Net debt ≥ 22% ...resulting in the Company proposing a sustainable shareholder remuneration policy linked to the growth in results. 3. Sustainable dividend • Thanks to the strength of the results obtained in 2015, the Company has announced a proposed increase in the annual divided to 0.28 euro per share with a charge to financial year 2015. • In the coming years, shareholder remuneration will grow in line with the increase in results, converging with a payout ranging between 65% and 75%. Ebitda by currency (forecast to 2020) * Includes the offshore wind farm in Germany: Wikinger 3% Reais 19% Wholesale and Retail 36% Euros* 36% Dollars 8% Regulated Wholesale Generation 23% Renewables 50% Networks 25% Pounds / Integrated Report 2016 37 Business Model and Strategy 2.7 Capital and Business Relationship The value created by the business strategy and model of Iberdrola over time translates into an increase in its capital, which in turn feeds back into a cycle of value creation, efficiently inter-relating the operations of the businesses and the capital of the Company. The chart below shows for each chapter its strategic focus and quantifies an aspiration or achievement of the Company in this area. This process creates shared value for both Iberdrola and for its Stakeholders, and constitutes a main vector for achieving the Company’s goal to offer a reliable, high-quality, and environmentally-friendly energy supply. Electricity demand Growth Technological changes and digitisation Opportunities Economic environment GDP Growth External Context Commoditites markets Outlook Supply costs Prices and regulation Financial Capital Framew ork Environmental management and energy efficiency 50% reduction in CO2 emissions by 2030 compared to those of 2007 (1) Annual impact estimated by Analistas Financieros Internacionales (AFI), based on Iberdrola’s business during the 2010-2015 period. Mis sio n Networks Renewables Wholesale and Retail sti Di Natural Capital t ru s ft ng n and Value isio s ,V o Strengthen trust and link to the community Direct tax contribution: €M 15,700 in the last 3 years or s Social and Relationship capital Growth, financial strength, sustainable dividend Approximately 6% average annual increase in net profit between 2016 and 2020 uishing f act Manufactured Capital Supply of safe and competitive energy, with a focus on networks and renewables Investment of €M 24,000 through 2020 Intellectual Capital Promotion of R&D 174% increase in R&D investment over the last 8 years Human Capital Diverse workforce within a stable and safe environment 360,000 direct, indirect and induced job positions1 Integrated Report 2016 / Business Model and Strategy 38 2.8 Comparative Results and Awards Comparative analysis* Comparative economic/financial variables 2015 Comparative performance of total shareholder return Growth in Ebitda ACGR (%) Average comparables Iberdrola 2.1%** 8.0% 31-Dec.-05 / 31-Dec.-15 Growth in capitalisation Total growth (%) Average comparables Iberdrola –30.5% 99.4% Iberdrola held 5th place at the European level in terms of stock market capitalisation for the last 10 years. It is now in first place. Share price 31-Dec.-05 / 31-Dec.-15 31-Dec.-05 / 31-Dec.-15 Average comparables Eurostoxx Utilities Iberdrola –9.1% 19.0% 64.2% Iberdrola’s performance 31-Dec.-05 / 31-Dec.-15 Total growth (%) Profitability (%) Average comparables Eurostoxx Utilities Iberdrola –55.1% –30.2% 13.5% Over the last 10 years, Iberdrola has tripled its assets, has practically tripled its revenues, has doubled its Ebitda and net profit, and has increased shareholder remuneration by more than 20%, while maintaining its financial strength. Iberdrola 31-Dec.-05 31-Dec.-15 Multiple Assets (€M) 30,479 104,664 3.4x Revenues (€M) 11,738 31,419 2.7x Ebitda (€M) 3,378 7,306 2.2x Net Profit (€M) 1,382 2,422 1.8x 0.22 0.27 1.2x 3.8 3.84 1.0x Dividends (€/share) * Comparable companies analysed: Engie, EDF, E.On, Enel, RWE. ACGR: Annual Compound Growth Rate, i.e. weighted average annual growth. **Bloomberg data. For EDF, E.ON, and RWE, the 2015 Ebitda figures are the estimates published by Bloomberg, due to the absence of final closing figures on the date of preparation of this document. In addition, for Engie, the 2005 figure is for GDF (prior to the merger of GDF and Suez SA). / Integrated Report 2016 Net Debt/Ebitda 39 Business Model and Strategy Ignacio Galán at the offices of Torre Iberdrola / Bilbao External awards For the Company: For the chairman & CEO: • Best European Utility (Institutional Investor Research): 2015, 2014, 2013, and 2011. • Best European Utility CEO (Institutional Investor Research): 2015, 2014, 2013, and 2011. • Best Corporate Governance in Spain (World Finance): 2015, 2014, and 2012. • Responsible Capitalism Award (First): 2014. • Best Corporate Governance among European Utilities (Ethical Boardroom): 2015 and 2014. • World’s Most Ethical Company Index (Ethisphere Institute): 2016, 2015, and 2014. • Leading Ibex 35 company in the tax transparency ranking 2014, from Fundación Compromiso y Transparencia. • Euroshareholders Award for the best initiative in favour of minority shareholders (AEMEC): 2015 • Best European utility in investor relations (IR Magazine): 2015. • Olimpia Award to recognise support and promotion of sport among people with disabilities, given by the Sports Council (Consejo Superior de Deportes): 2015. • Commander of the Most Excellent Order of the British Empire: 2014. • Honorary Doctorate from the Universities of Strathclyde (2013), Salamanca (2011) and Edinburgh (2011). For other members of the Company: • Best European Utility CFO (Institutional Investor Research): 2015, 2014, and 2012. • Best European Utility Investor Relations (Institutional Investor Research): 2015, 2014, 2013, 2012, and 2011. Other Awards / page 67, 85 Integrated Report 2016 / Iberdrola’s Primary Businesses 40 West of Duddon Sands offshore wind turbine / United Kingdom / Integrated Report 2016 41 Iberdrola’s Primary Businesses 3. Iberdrola’s Primary Businesses Regulation is a key factor in the sustainability of Iberdrola’s activities. Energy policies must set clear and predictable goals in order to attract the investment needed to guarantee a safe, competitive, and sustainable supply, developing its potential as a source of growth and employment. Integrated Report 2016 / Iberdrola’s Primary Businesses 42 3.1 Regulatory Environment European Union Spain •2 015 saw the formalisation of the Paris Climate Change Conference (COP21) agreements, which entail a multilateral commitment to implement measures to reduce emissions in order to limit the increase in temperature to a maximum of 2ºC through 2100. These measures will involve a major investment effort, which should be supported by signals incentivising low-carbon technologies, and the costs should be paid in accordance with the “polluting party pays” principle. •M ost of the regulatory steps on electricity and gas reform were already taken during 2013 and 2014, eliminating the deficit in 2014. • T here will be intensive regulatory activity by the European Commission in 2016. •M ore far-reaching measures include expected market design reform proposals, as well as a directive on the safety of supply. There will also be proposals to modify the frameworks for renewables and energy efficiency, in line with the 2030 goals. • F urthermore, there will be continued steps to reform the emissions market and it will be completed with a reform of the treatment of “diffuse” sectors. •A n energy efficiency fund is maintained by which all energies (electricity, gas, and petrol) contribute in proportion to their demand to the costs of implementing the European goal of energy efficiency for 2020. •C ontinuation of a regulated tariff applying to approximately 90% of consumers. United Kingdom • T he investigation by the Competition and Markets Authority (CMA) into the operation of the industry continues. Its final conclusions and proposed remedies are expected to be published in June 2016. • T he provisional conclusions of the CMA indicate that there is little concern about the wholesale market or vertical integration, although competition is considered to be weak in the Standard Variable Tariff sector and in the SME market. There will probably be reforms to deal with these problems. • T he new British government has taken measures to reduce the expected cost of the “green energy” support frameworks, but only for future facilities. Various support systems have been reduced or shut down, while it can be expected that others will be maintained. / Integrated Report 2016 43 Iberdrola’s Primary Businesses United States and Canada Brazil • The State of New York, along with other states, will continue to consider changes in the regulatory model for utilities, taking into account technological advances both in generation and distribution of electricity. • T he debate on the distribution of hydrological risk opened the door to the possibility of the renegotiation thereof (Law 13,2013/2015) based on a voluntary decision of the generator and in exchange for the payment of a premium into the “tariff flag” account. • In this context, in June the NY Public Service Commission, within the framework of the Reforming the Energy Vision (REV) process, published its white paper proposing reforms in the regulatory distribution model. •D uring 2016, litigation progressed in determining whether the Environmental Protection Agency (EPA) can implement two independent regulations proposing a reduction in CO2 emissions for the electricity generation sector with a 2030 horizon. This process will have a considerable impact on decision-making by electric companies. Mexico • T he new energy reform, the legislative development of which will continue during 2016, ends the state monopoly in the hydrocarbon and electricity sectors. In the electricity sector, it will encourage investment in new generation projects that will operate in a competitive environment after the creation of various markets. The share of clean energy is forecast to increase by up to 35% by 2024 with the creation of a clean energy certification system, based on which certain supply obligations will be determined. Furthermore, contracts with individuals will also begin in the area of networks, which are still under state ownership and considered to be a public service. •D espite the difficulties at the beginning of 2015, hydrological conditions improved and the possibility of rationing was excluded, which has allowed for a decoupling of the more expensive thermal plants and a reduction of the additional amount charged in the “red flag”. The price of energy in the spot market has significantly decreased during the course of the year, in line with the improvement in hydrological conditions. • T he concession of 29 hydroelectric plants that did not adhere to Provisional Measure MP 579/2012 was terminated in 2015. At the end of the year they were auctioned, including the obligation to pay a fee for the award, which allowed the government to collect R$M 17,000. The power from these plants has been distributed among the players in the form of contributions. • T he requirements to renew the distribution concessions were defined during the year, focusing on quality and governance. 17 distributors have renewed their concession contracts within this new framework. Integrated Report 2016 / Iberdrola’s Primary Businesses 44 3.2 Networks Regulatory environment of the business Spain United States • The transitional remuneration methodology approved in 2013 applied in 2015. • T he current tariff conditions of NYSEG and RG&E (New York) were extended during 2015, while negotiations continued on the new terms to come into effect in 2016. • Base unit costs and the methodology for calculating the pending remuneration parameters were approved in December 2015. The first regulatory period begins in 2016 and ends in 2019. • In Maine, the first tariff agreement is being negotiated for MNG. Furthermore, the terms of the tariff agreement for CMP have been extended for an additional year. United Kingdom • In 2016 Ofgem set the standards for the review of outputs expected for the mid-period RIIO-T1. This revision does not affect defined financial terms. • T he DPCR5 regulatory distribution period ended in March 2015 and RIIO-ED1 began for 2015-2023. New tariff conditions for NYSEG and RG&E, the gas and electricity distributors in the State of New York (USA), will come into effect in 2016. / Integrated Report 2016 Brazil • T he indicators to be used in the 4th cycle of the tariff revision for distributors were determined in 2015. • T he 4th tariff cycle for Elektro came into effect in August for the 2015-2019 period. The average tariff increase from this review was 4.2% for these four years. • T he tariff agreements for the distributors of Neoenergia will be in force through April 2017 for Celpe and April 2018 for Coelba and Cosern. • T he annual tariff update for 2015 was 11.43% for Coelba, 9.57% for Cosern, and 11.25% for Celpe. •C oelba and Celpe have signed an agreement to improve the quality of supply with the regulator Aneel. 45 Iberdrola’s Primary Businesses Denny substation, Scotland / United Kingdom Integrated Report 2016 / Iberdrola’s Primary Businesses 46 Objectives, risks, and principal activities Objectives Principal activities 2015 •S atisfy supply under strict safety conditions, in compliance with environmental requirements. •S pain: continuation of the STAR project for the rollout of smart grids, after already installing over 6.5 million meters. 11 new electric substations were also placed into service. • Increase quality in energy supply by investing in the expansion and renewal of networks, improvement of our processes, and use of the latest advances in technology. • Maximise efficiency in system operations. • Zero accidents. •U nited Kingdom: the DPCR5 period ended in March 2015, meeting the objective established for this period. •U nited States: completion of construction phase for the MPRP transmission project in Maine (700 km of network, 5 new substations, and 6 expanded substations). Significant risks • Regulatory uncertainty. • Safety of individuals due to risk of accidents. • Incidents with environmental impact. • Major network incidents. • Increased fraud. • T echnological and cybersecurity risks affecting the security of the facilities. 2015 saw the commencement of the first project of IUSA Networks within NY Transco, a $1,700 M initiative sought by New York electric transmission companies to develop transportation infrastructure in New York. Iberdrola’s has a 20% interest in NY Transco. •B razil: improvement plan launched at Neonergia to improve supply efficiency and quality. At Elektro, development of facilities to meet demand and connect new customers. Outlook 2016-2020 • Increased regulatory visibility in all countries, with investments of €M 11,000, allowing for a 22% increase in RAV*. • Focus on digitalisation and grid automation (smart grids), service quality, and operational improvements. • 2% increase in efficiency over the period (NOE/GM and NOE/RAV)*. • Opportunities for selective growth in transmission. *RAV: Regulatory Asset Value; NOE: Net Operating Expenditure; GM: Gross Margin. Net Investment of €M 11,000 between 2016 and 2020, mainly in the United States and the United Kingdom 4% Brazil 2016-2020 cash flow generation to finance investments (€ millions) 5,900 16,900 15% Spain 11,000 32% United Kingdom 48% United States / Integrated Report 2016 Operating Cash Flow Net Investment Free Cash Flow 47 Iberdrola’s Primary Businesses Key figures of the Networks business Spain United United Kingdom States1 Brazil Total Elektro Neoenergia2 Item Unit 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 Gross margin €M 1,936 1,952 1,331 1,472 1,498 1,698 459 392 – – 5,225 5,514 Ebitda €M 1,438 1,450 1,025 1,138 772 774 299 240 – – 3,534 3,602 Electric power distributed GWh 90,741 92,676 36,564 36,213 31,302 31,337 16,933 16,190 37,077 37,809 212,617 214,226 Users (Electricity) Millions Gas supply 2.2 2.4 2.5 10.3 10.6 28.8 29.7 – – 38,261 36,325 – – – – 38,261 36,325 – – – 0.6 0.8 – – – – 0.6 0.8 304 346 729 847 432 429 78 71 – – 1,541 1,693 3,906 3,801 2,894 2,851 4,133 5,113 3,801 3,486 4,050 4,338 18,784 19,589 10.8 10.9 3.5 GWh – – Users (Gas) Millions – Investments €M Workforce Nº people 3.5 1.8 International Financial Reporting Standard (IFRS) 11 has been applied to the financial information for both 2014 and 2015. (1) UIL included in users and workforce in 2015. (2) Operational information is deemed to be 100% from Neoenergia. Quarterly Results Report Safety, quality of supply, and operational efficiency are the three strategic pillars of the Networks business upon which the entire business rests. Safety Quality of supply Efficiency • Ongoing efforts to improve safety in networks activities, which is reflected in the decrease in the Incident Rate. • Ongoing effort to improve supply quality indicators. • Increase in operating expenses contained despite strong increase in activity. • Implementation of best practices at all networks companies to reduce the risks associated with operation. • Strengthened measures to protect against cybersecurity risks associated with new grid management technologies. • Development of safety improvement initiatives for all Networks personnel and subcontractors. • The service quality indicators between January and December 2015 were affected by poor meteorological conditions in Spain and the United States. • Development of transmission and distribution projects to ensure the reliability of supply and optimise the cost of energy. • Network automation project in Spain to improve operations. • Implementation of best practices throughout the networks companies, mainly in the areas of asset management, processes and technology, control systems, digitisation and automation, and customer service. • Emphasis on the fight against electricity fraud in Spain, with recovery of almost 420 GWh. Integrated Report 2016 / Works at the combined cycle plant in Castellón / Spain / Integrated Report 2016 Iberdrola’s Primary Businesses 48 49 Iberdrola’s Primary Businesses 3.3 Wholesale and Retail Regulatory environment of the business Europe United Kingdom •A n agreement was reached in 2015 on the introduction of a Market Stability Reserve within the European Emissions Market. With a start date of 2019, it will reduce the surplus of emission rights in the market. • T he auction in the 2019/2020 capacity market took place in December 2015, with the participation of both existing plants and new projects. The resulting price was £18/kW and no combined cycle project won the auction. • T he REMIT(1) reporting obligations will enter into force in 2016 to ensure the integrity and transparency of the gas and electricity market. • T he Carbon Tax, which applies to carbon emissions, has been £18.08/t since April 2015. It will remain constant until 2020. REMIT: Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency. (1) • Implementation of Project TransmiT, which establishes a new distribution of transmission charges among generators. The changes will take effect in April 2016. Spain • T he Royal Decree governing administrative, technical, and financial conditions for internal consumption was approved in October 2015. It establishes the framework for this activity with legal guarantees for consumers and producers, and the charges for energy produced and internally consumed, with exemptions for consumers of <10kW. • L aw 8/2015 amending the Hydrocarbon Sector Act (Ley del Sector de Hidrocarburos) has created an organised Iberian gas market (Mibgas), which commenced operations on 16 December. • T he new interconnection between Spain and France entered into commercial operation in October 2015. In addition, the presidents of France, Spain, and Portugal and the president of the European Commission have signed a declaration committing to promote the interconnections between the three countries. In electricity, the goal is to reach 10% by 2020 using an undersea cable through the Bay of Biscay and two connections in the Pyrenees. Mexico • T he Wholesale Electricity Market Rules (Bases del Mercado Eléctrico) were approved in September 2015. The Electricity Market contemplates capacity auctions and Clean Emissions Certificates (Certificados de Emisiones Limpias) (CELs). • T he Short-term Market commenced operations in January 2016. • T he market respects the contracts previously established by Independent Power Producers and for Self-supply Plants. •A s from August 2015, consumers with consumption greater than 2MW can acquire their energy on the market. • T he current capacity availability service of the generation facilities has been extended in 2016 until approval of the Royal Decree that will modify capacity payments. Integrated Report 2016 / Iberdrola’s Primary Businesses 50 Objectives, risks, and principal activities Objectives Principal activities 2015 •O perating excellence, safety, and respect for the environment. •S pain: start-up of the San Pedro II (25 MW) and Muela II (852 MW) hydroelectric plants. Continued development of products and services adapted to the needs of customers (Customised Plans, Smart Solar, Iberdrola Smart Home ...). • Risk identification and minimisation. •S afety and continuous improvement in operating efficiency. •C ompetitive supply and excellence in service to customers. • Analysis of growth opportunities. Significant risks •R egulatory uncertainty in the countries in which it operates. •O perating risks: downtime of facilities and incidents with environmental impact. •M arket risk: uncertainty regarding fuel prices and revenues from the sale of electricity and gas. • Credit, exchange-rate, and interest-rate risks. • T echnological and cybersecurity risks affecting the security of the facilities or the information of our customers. •U nited Kingdom: the evacuation capacity of the Longannet TP has been abandoned and its closure has been requested for April 2016. Decrease in variable rates for domestic gas customers (–4.8%), effective as from February 2015, which will be followed by an additional decrease (–5.4%) beginning on 15 March 2016. •M exico: the construction programme for the Baja California III CCGT (300 MW), 5th unit of Monterrey CCGT (300 MW), and Ramos Arizpe cogeneration (50 MW) plants continues on schedule, with start-up in 2016. The San Juan del Río (50 MW) and Dynasol (57 MW) cogeneration projects also commence. CFE tender awarded for the Escobedo CCGT (857 MW), with entry into operation in 2018. •B razil: at year-end 2015, construction ended on the Teles Pires hydroelectric plant, with a total of 1,820 MW, of which 362 MW correspond to Iberdrola, which holds its stake through Neoenergia. Outlook 2016-2020 • Investments of €M 5,100, mainly to increase installed capacity and to deploy smart meters in the United Kingdom. • Start-up of 3,450 MW in Mexico, of which 1,600 MW are already under construction. • In Retail, wager on digitisation, personalisation of products for the customer, and service excellence. • Continuing improvement of operational processes and practices to increase efficiency. Investment of €M 5,100 during the period, of which €M 3,700 are for growth 2016-2020 cash flow generation to finance investments (€ millions) 4,500 9,600 36% 38% Spain 5,100 Mexico 26% United Kingdom / Integrated Report 2016 Operating Cash Flow Net Investment Free Cash Flow 51 Iberdrola’s Primary Businesses Key figures of the Wholesale and Retail business Spain United Kingdom United States and Canada Mexico Total Item Unit 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 Gross margin €M 3,068 2,971 1,205 1,306 3 –20 457 584 4,734 4,842 Ebitda €M 1,517 1,502 457 421 –32 –58 350 455 2,292 2,320 Installed capacity MW 19,174 20,081 4,835 4,835 NA NA 5,028 5,082 29,037 29,998 Net output (excluding renewables) GWh 47,844 43,616 15,810 14,925 NA NA 35,175 38,128 98,829 96,669 Electricity contracts Millions 10.4 10.4 3.3 3.3 NA NA NA NA 13.7 13.7 Gas contracts Millions 0.8 0.9 2.2 2.2 NA NA NA NA 3.0 3.1 Products and services contracts Millions 4.4 4.9 0.1 0.1 NA NA NA NA 4.5 5.0 Total retail contracts Millions 15.7 16.2 5.5 5.5 NA NA NA NA 21.2 21.7 Investments €M 146 188 98 94 4 4 170 370 419 655 Workforce Nº people 3,478 3,395 2,505 2,491 114 108 434 489 6,531 6,483 Quarterly Results Report International Financial Reporting Standard (IFRS) 11 has been applied to the financial information for both 2014 and 2015. The Wholesale and Retail business is focused on the safety of operations, the loyalty of customers, and growth in Mexico, which will allow for the stability of results and ensure the generation of funds for the group. Efficiency Growth in generation Supply • Optimisation of coal production, with investments in low-cost NOX in Spain. • Mexico: Placement into service of more than 750 MW in 2016-2017: •C ustomer loyalty-building in mature markets through the development of new products and personalised services adapted to the needs of customers. • Facilitating operations in complementary markets. • Operating improvements to increase the availability and energetic yield of the Mexico facilities. • Abandonment of evacuation capacity of the Longannet TP as from April 2016. Prices • Minimisation of risks through appropriate hedging of all generation, including renewable generation. – Baja California III CCGT (300 MW). – 5th Unit of Monterrey CCGT (300 MW). – Kimberly Clark Ramos cogeneration (50 MW). •R etail development in Mexico pursuant to changes in legal provisions on energy reform. – Kimberly Clark San Juan del Río cogeneration (50 MW). – Dynasol cogeneration (57 MW). • United Kingdom: Widespread deployment of smart meters beginning in 2016, to reach 100% of customers by 2020. Integrated Report 2016 / Iberdrola’s Primary Businesses 52 3.4 Renewables Regulatory environment of the business Spain United States • T he terms and conditions for new renewable capacity auctions were defined in 2015, which means recommencement of investment in the wind sector after various years without investments. This auction was held on 14 January, with the award of 500 MW in wind and 200 MW in biomass. • T he tax incentives for wind and solar power have been extended once again. This time the extension is for various years (through 2020 in the case of wind and 2022 for solar), with a gradual reduction that in the case of non-residential solar stays at 10% until the deadline. This extension gives the project portfolio greater visibility. United Kingdom •U pon completion in 2016 of the various current reforms to contain expenses, it is expected that there will be more visibility regarding the changes in the Levy Control Framework and the existing margin for growth in offshore wind. •2 016 will also be key for the definition of support for the future development of onshore wind, after moving forward the end of the Renewable Obligation to April 2016, with a one-year grace period. The business will engage in sustainable growth, based on onshore and offshore wind investments in the countries most important to the group. • It is expected that government schemes to encourage renewables will retain a relatively stable framework. Mexico •A Clean Energy goal of 35% by 2024 has been set in the Energy Transition Act (Ley de la Transición Energética). • In the renewables area, there will be auctions of clean energy certificates. The first will take place in March 2016 with delivery in 2018. The second auction, which may include capacity and clean energy certificates for 2019, will also be held in 2016. Brazil • T he auction model for the development of wind and solar energy is expected to be stable. 1.2 GW of wind and 1.8 GW of photovoltaic were awarded under this mechanism during 2015. • T he proper development of the transmission grid will be increasingly important for growth of the renewables sector, as well as the mechanisms for integrating areas such as the North East. / Integrated Report 2016 53 Iberdrola’s Primary Businesses Working inside a wind turbine / United States Integrated Report 2016 / Iberdrola’s Primary Businesses 54 Objectives, risks, and principal activities Objectives Principal activities 2015 • Safety in operations. •2 015 saw the start-up of a 202 MW wind farm in the United States and two wind farms in Mexico with a total of 136 MW. •E fficiency in operations to maximise the profitability of the assets. •E fficiency in construction costs, with a particular emphasis on offshore projects. • P rofitable growth in onshore and offshore wind investments in the countries that are strategic for the group. Significant risks • P rice uncertainty due to competitive auctions in the markets in which it operates. • Prices of energy and green certifications. • Operational and technological risk. •R isk of access to evacuation networks and limits on production due to technical restrictions on networks. • T here has also been commencement/approval of the construction of 5 wind farms with a total of 746 MW in the United States, 8 wind farms with a total capacity of 450 MW in the United Kingdom, and six winning projects for 174 MW from the 2014 tenders in Brazil. • In offshore wind, there is continued progress on the construction of the 350 MW Wikinger offshore projects in the Baltic Sea (Germany). In addition, the East Anglia I offshore project in the United Kingdom has been awarded a “contract for difference” in the first auction of this kind in the United Kingdom, with a maximum capacity of 714 MW. •C ybersecurity risks with an impact on operations centres of the facilities. Outlook 2016-2020 • Increase in competition for the entry of new capacity, mainly via auction. • Investments of €M 7,700, mainly to increase installed capacity in the United States, the United Kingdom, and Brazil. • Start-up of 3,450 MW, of which 2,440 MW are already under construction. • Start-up of two offshore wind farms: Wikinger (350 MW) and East Anglia I (714 MW). •C ontinuing operational improvement, with cost savings, optimisation of useful life of the assets, and improvement in the capacity curve. Investment plan of €M 7,700 over the period, of which €M 7,000 are for growth 5% 2% International Spain 2016-2020 cash flow generation to finance investments (€ millions) 7,800 7,700 100 Operating Cash Flow Net Investment Free Cash Flow 36% United States 57% United Kingdom / Integrated Report 2016 55 Iberdrola’s Primary Businesses Key figures of the Renewables business Spain United Kingdom Item United States Mexico Brazil Rest of World Total Unit 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 Gross margin €M 728 751 368 572 736 822 51 57 42 36 108 123 2,033 2,361 Ebitda €M 421 473 265 438 495 499 38 43 33 27 74 92 1,326 1,572 Installed capacity MW 5,865 5,861 1,612 1,615 5,534 5,534 231 367 187 187 621 621 14,051 14,186 Output GWh 12,685 11,463 3,083 3,694 14,462 13,868 671 738 344 441 1,247 1,371 32,492 31,576 Load factor % Investments €M 24.7 22.3 23.4 26.2 31.0 28.8 33.2 31.5 37.2 39.1 22.9 25.2 27.2 25.7 –13.4 9.9 475.2 488.8 236.5 69.6 62.7 124.7 20.8 38.4 –23.4 3.4 758.2 734.8 Quarterly Results Report Notes: – The figures for the United Kingdom include those of the offshore division. – The investment figures for Spain and Rest of World in 2014 are negative due to writeoffs and reclassifications of past investments. The business will focus on the safety of operations and on sustainable growth, based on onshore and offshore wind investments in the countries most important to the group. Efficiency is a key factor for business sustainability in the medium and long terms. Iberdrola will take technological advances into account and will act on the supply chain to allow for improvement in the coming years. Load factor Maximising the load factor of facilities, while minimising down time through operating and maintenance measures, as well as other external factors. Operation and maintenance costs Continuous improvement in efficiency through global standardisation and systematisation processes. Project portfolio Development of the portfolio of onshore wind projects in the United Kingdom, the United States, Mexico, and Brazil, and the East Anglia 3 (United Kingdom) and St Brieuc (France) offshore wind projects. Integrated Report 2016 / Iberdrola’s Primary Businesses 56 3.5 Supply Costs, the Main Factor in the Political and Social Agenda The cost of electricity supply is taking on a greater role in the political and social agenda. The principal challenge is to reconcile safe and environmentally-friendly supply with the use of renewable energy at prices that are competitive and can be afforded by society as a whole. In the European Union In Spain •A n analysis of electricity prices in recent years reveals that taxes and components associated with energy and environmental policies have grown the most, reaching half of the bill in countries like Spain, due to the significant renewables effort made by the electric sector. A competitive electricity supply necessarily entails the elimination of cost components outside of the service itself in the electricity bill, and paying for these costs through general taxes or taxes on all polluting energies. •R ates paid by electricity consumers include costs deriving from the pursuit of strategic energy goals: environmental (aid for renewable energy and the costs of reducing CO2 emissions), industrial (interruptibility of large consumers and aid for cogeneration), social (subsidies for electricity in nonmainland territories), economic (recovery of tariff deficits from previous years), and public finance. • T he strategy of the Energy Union that commenced in 2015 responds to the need to comply with the 2030 environmental agenda (according to the European Council in October 2014: 40% reduction in greenhouse gas emissions, 27% increase in renewables, and 27% improvement in energy efficiency), monitoring the safety of supply as well as the competitiveness of the European industry and the need for prices that are accessible for European citizens. / Integrated Report 2016 • L ess than half the costs of electricity supply are directly related to providing the service; the rest are subsidies and taxes. With some supply costs below the European average, the end prices of electrical energy for Spanish consumers are higher than the Community average. 57 Iberdrola’s Primary Businesses In the United Kingdom In Mexico • P ublic debate on energy prices has focused on the investigation launched by the Competition and Markets Authority (CMA). •E nergy reforms were launched in 2014, with one of the key goals being to reduce system costs in order to lower electricity prices for end users. The reform is ongoing at the corresponding regulatory bodies: the implementing act is already approved and the various market instruments are being put into operation. • T he increase in costs unrelated to energy, such as those associated with networks and government support systems, have restricted an expansion of the reductions in energy prices. • T he fall in commodities prices during 2015 has allowed for a reduction of the CFE’s tariff. In the United States • T ariff revisions currently under discussion or preparation reflect pressure by regulators to limit returns on capital, while at the same time maintaining the investments required to improve the network infrastructure. • T he closure of coal plants and the new regulation developed by the Environmental Protection Agency (EPA) may increase pressure on gas and electricity prices, although shale gas production may limit this impact. •R estrictions on transporting natural gas by pipeline in the Northeast could lead to volatility in electricity market prices during periods of extreme weather. • T he development of smart grids, the rapid replenishment of supplies in the face of extreme weather conditions, new EPA regulations, and the integration of new energy sources into the system require major investments, which sometimes conflicts with the desire to limit compensation to the companies. In Brazil • T o cover the high costs from the long period of drought, “tariff realism” has been applied by which extraordinary tariff revisions and a readjustment of the “tariff flags” has rebalanced the economic/ financial equilibrium of the distributors. •2 015 was marked by negotiations of hydrological risk, which culminated with the approval of law 13,203/2015. This allows hydroelectric generators to voluntarily assign hydrological risk in exchange for a premium, obtaining funds from a power production cost overrun offset mechanism, called “tariff flags”. Iberdrola will support frameworks that expand market deregulation and transparency and that provide incentives for required investments and efficient operations, through tariff structures that give efficient signals to consumers and do not penalise them with costs unrelated to the supply of electricity. Integrated Report 2016 / Our Assets 58 West of Duddon Sands offshore wind turbines / United Kingdom / Integrated Report 2016 59 Our Assets 4. Our Assets Iberdrola’s assets are the basis for the creation of value by the Company, which carries out its activities through the sound management thereof. In this report, Iberdrola’s assets are identified in accordance with the IIRC classification system: • Financial Capital • Manufactured Capital • Intellectual Capital • Human Capital • Natural Capital • Social and Relationship Capital Integrated Report 2016 / Our Assets 60 4.1 Financial Capital Balanced growth Management Approach Results 2105 Outlook The Company has an investment policy consistent with its strategic vision and financial policy. The main goals are: • Total investment of €M 3,223, with almost 91% channelled into regulated businesses. • Strict investment criteria based on earnings security, project profitability, and strategic fit. • Ensure a return on capital through projects and investments preferably in regulated businesses, renewable assets, or long-term contracts. • Increase geographic diversification, further balancing the contribution of the countries in which it does business. • The United Kingdom was the country absorbing the highest volume of • Selection of businesses and countries with investments, with 46% of the total, followed predictable and stable regulation. by Spain with 20%, the United States with • Net investment of more than €M 24,000 16%, and Mexico with 15% of the amount over the 2016-2020 period, of which invested. 88% will be dedicated to regulated businesses, renewables, or long-term contracts. • The United Kingdom will continue to be the area with the highest volume of investments, with 39% of the total, followed by the United States with 34%, Spain with 16%, and Latin America with 11%. • Tailor investment levels to the actual needs of each market. Solid financial structure • Iberdrola considers financial strength to be one of the strategic cornerstones that allows it to successfully face potential turbulence in the markets and to be in a position to exploit growth opportunities in the countries in which it does business. • Gross margin of €M 12,843, growing by 5.4%. • The financial policy seeks stabilisation and subsequent improvement in solvency ratios, balancing an increase in debt with the generation of additional cash flow from new investments. • Pro forma net debt is practically the same, as the generation of cash flow offsets the impact of the appreciation in foreign currency. The merger of UIL adds €M 2,406, putting the year-end figure at €M 28,067. • The debt structure is in line with the profile of the business, which is mostly regulated, and the composition thereof reflects the results obtained in the relevant currencies. • Net profit of €M 2,422, a 4.1% increase over the prior year. Recurring net profit was €M 2,261 (+7.0%), as a result of the favourable performance of the businesses. • Cash flow of €M 5,907 (+8.2%). • Liquidity of more than €M 8,000, which covers more than 36 months of financing needs. • Average annual Ebitda and net profit growth of approximately 6% during the 2016-2020 period. • Average annual net investments of approximately €M 4,800, compared to average annual cash flow generation (FFO) of €M 6,900. • As a result of the investment process, increase in net debt to approximately €M 31,000 between 2018 and 2019, and subsequent decrease to €M 30,000 by 2020. • Progressive improvement of the net debt/ Ebitda and operating cash flow/net debt financial ratios. • Optimisation of the liquidity position to cover financing needs for 24 months. Operational efficiency • The current macroeconomic and regulatory environment requires an additional effort to keep operating costs under control. • Net operating expense increases 5.4% due to the effect of the appreciation of the pound and the dollar. Excluding this impact, it would have decreased by 1.6%. • Progressive absorption of the increase in expenses, which will grow less than gross margin during the 2016-2020 period, maintaining an industry-leading position of leadership in cost efficiency. Sustainable results and dividends • Iberdrola offers its shareholders an industrial enterprise for the long-term creation of value. The confidence of its shareholders enables Iberdrola to secure the resources needed to move its enterprise forward. • Shareholder remuneration of 0.28 euro per share, equal to a dividend yield of 4.21% • Increase of dividend to 0.28 euro per share, with a charge to 2015 profits. • Flexible dividend offering tax benefits. • Maintenance of the flexible dividend programme. • Target of maintaining the number of shares at 6,240 million, neutralising the capital increases associated with implementation of the flexible dividend programme. • Potential growth in shareholder remuneration, in line with the increase in results, based on a payout ratio of between 65% and 75%. / Integrated Report 2016 61 Our Assets Create value for the shareholder with sustainable growth Net Debt (€M) Ebitda by business 2015 Cash payment to shareholders 28,067 150 541 Net debt 436 –716 758 UIL debt 6% Regulated Wholesale Generation 27,917 25,661 25,183 dec-2014 Renewables 1,865 25,619 Deficit 25% Liberalised Wholesale and Retail 21% Funds from operations Tc Impact dec-2015 (excluding UIL) UIL Impact 48% Networks dec-2015 Pro forma Net Debt is practically the same, as the generation of cash flow offsets the impact of the appreciation in foreign currency. The merger of UIL adds €M 2,406 (value at 31 December 2015), putting the year-end figure at €M 28,067. Debt structure by currency in 2015 Maturity of financial debt* (€M) 16.0 1% Reais and others 14.7 14.0 12.0 49% 30% Euro Dollar 10.0 8.0 6.0 4.0 2.7 2.0 2.2 3.2 3.3 3.1 2018 2019 2020 20% Pound 0 2016 2017 2021+ Includes €M 1.5 in notes. Includes €M 1,865 of UIL debt (value at 31 December 2015). Debt structured by origin of cash flow earned in each currency. Includes derivatives to hedge net investment. Comfortable maturity profile. Investment by geographic area 2015 15% Mexico 3% Brazil Gross margin by business 2015 2% Other Businesses and Corporation 20% Spain 18% Renewables 37% Liberalised 16% United States 46% United Kingdom Diversification of investments, with a heavy concentration outside of the euro zone. 43% Networks Integrated Report 2016 / Our Assets 62 4.2 Manufactured Capital Electric power generation assets Size Principal Activities 2015 Outlook • Iberdrola’s generation assets comprise nearly 300 wind farms, almost 90 hydroelectric power plants (in addition to the mini-hydro plants), 34 thermal power stations using various technologies, 5 of which are nuclear, and other facilities built and operated according to the best available practices. • ISO 9000 certification has been attained for the operation of wind farms in Spain and the United Kingdom. • Almost 1,400 MW of onshore wind (450 MW United Kingdom, 746 MW United States, and 174 MW Brazil) and 1,060 MW offshore wind (350 MW Wikinger and 714 MW East Anglia I) under construction. • In Mexico, construction will continue on 1,450 MW in combined cycle and 160 MW in cogeneration. • In Portugual, there is continued construction of the Tamega hydro complex, with 1,160 MW. • In Brazil, work continues on the construction of the Baixo Iguazu (350 MW total) and Belo Monte (11,233 MW total) hydroelectric plants, through Neoenergia. Power transmission and distribution assets • Iberdrola’s electricity transmission and distribution networks comprise over 30,000 km of transmission lines, over 1 million km of distribution lines, roughly 4,000 substations and over 1.4 million transformers, built and operated to supply a highquality, reliable service. • The Maine Power Reliability Project in Maine has been completed. This began in 2010 and entailed an investment of more than $M 1,400. • The DPCR5 regulatory period has ended in the United Kingdom. During its 5-year term (2010-2015), it has made a fundamental leap forward in renewal of the distribution networks in Scotland and Wales. • Significant proposed transmission projects in the State of Maine to allow for the construction of two wind farms that will help to meet the demands for renewable generation in New England by 2020. • Investments in the United Kingdom transmission network, to improve the reliability and quality of supply. Especially noteworthy is a subsea cable linking the networks of Scotland and England (Western Link). • Development of the P2020 strategic project in Spain, aimed at achieving increased efficiency, operational safety, and quality of supply. Other Assets • Iberdrola manages more than 680,000 m2 of offices throughout the world, with a total of 769 properties, of which 358 are located in Spain, 44 in the United Kingdom, 117 in the United States, 231 in Brazil, and 19 in the rest of the world. These properties are designed, built, and operated in accordance with sustainability and efficiency standards. / Integrated Report 2016 • All of the real property in Spain is covered by a certified environmental management system in accordance with the ISO 14001 standard, with the scope being expanded this year to the offices in Portugal (Porto and Lisbon) and to the United Kingdom (Ochil House). • The headquarters in Madrid and Bilbao also have a certified energy management system in accordance with the international ISO 50001 standard. • Expansion of the scope of the energy management system at the main properties in Spain, in order to understand energy use and consumption. This information is obtained by implementing control systems and defining base lines. • 2016 is expected to see the completion of phase I of the San Augustín Campus construction project and the new ScottishPower headquarters in Glasgow; both projects under a LEED certification for sustainable building. 63 Our Assets Offer a secure supply of energy that is competitive in price and quality Average availability factor of Iberdrola’s generation facilities (%) 86 81 Conventional thermal 75 91 92 Combined cycles 93 91 96 Cogeneration 91 89 93 Nuclear Ibedrola’s average: 87.11% 89 87 85 Hydroelectric 85 97 94 Mini-hydro 95 97 Wind 97 97 0 50 2013 2014 100 2015 Quality of electricity supply Property, plant, and equipment (€M) 56,602 Average power outage duration 2014 2015 50,983 46,857 Spain TIEPI (m) 55.7 61.9 United Kingdom CML (m) 44.0 34.8 United States CAIDI (h) 1.89 1.89 Brazil DEC (h) 19.93 18.81 2014 2015 47.837 Power outage frequency Spain NIEPI (number) 1.07 1.20 United Kingdom CI (ratio) 48.0 40.1 United States SAIFI (index) 1.23 1.21 Brazil FEC (frequency) 7.62 7.22 4,347 4,124 5,187 2013 2014 2015 In progress Operating TIEPI: Installed Capacity Equivalent Interrupt Time. CML: Customer Minutes Lost Per Connected Customer. CAIDI: Customer Average Interruption Duration Index. DEC: Equivalent Duration of Interruption by Consumer Unit. NIEPI: Installed Capacity Equivalent Interrupt Number. CI: Customer Interruptions Per 100 Connected Customers. SAIFI: System Average Interruptions Frequency Index. FEC: Equivalent Frequency of Interruption by Consumer Unit. Integrated Report 2016 / Our Assets 64 4.3 Intellectual Capital Promotion of R&D Management Approach Principal Activities 2015 Outlook • Innovation is Iberdrola’s primary tool for ensuring the Company’s sustainability, efficiency, and competitiveness. R&D efforts are aimed at optimising operational conditions, improve security, and reduce environmental impact. • Significant increase in R&D investment: €M 200 in 2015, a 18% increase over 2014. • Development of the R&D Plan 2015-2017. • More than 200 R&D projects, with initiatives relating to smart grids, clean generation, offshore wind power, and new business technologies and models. • Strengthening of an open and decentralised international management model that prioritises collaboration with technology providers and the promotion of employee innovation. Innovation Report Efficiency and new products and services • Continuous optimisation of our operations, management of the lifecycle of facilities and equipment, reduction in operating and maintenance costs, and decreasing environmental impact. • Development of new and competitive products and services that adapt to an increasingly global market, the main goal of which are to meet the needs of customers. Disruptive technology and business models Through Iberdrola Ventures-Perseo, the Company’s corporate venture capital programme, investments are made in disruptive technologies and new businesses to ensure the sustainability of the energy model. Lines of activity: • Customer-Focused Solutions: energy efficiency, demand management, green mobility, etc. • Distributed Energy Resources: innovative generation and storage solutions. • Renewable Energy: technologies related to renewable generation (solar, wind, offshore). • New technologies applied to the operation and maintenance of energy infrastructures: robots, sensors, software, etc. / Integrated Report 2016 • Iberdrola has been given the National Innovation and Design Award 2015 in the category of “Internationalisation”. • New category of products that allow customers to choose the plan that best suits their lifestyle, without needing to change their consumption habits. • New products and services in the areas of energy efficiency, electric vehicles, smart grids, and distributed generation. This includes Smart Solar Iberdrola, through which customers can generate and consume their own electrical power, optimising consumption and improving the energy efficiency of their facility. • Continue to promote R&D projects. • Positioning as innovation leaders on prestigious external indices and ratings. • Foster the creation of new business opportunities for Iberdrola. With an investment of more than €M 50 since 2008. The main activities in 2015 included: • Ensure Iberdrola’s access to the energy technologies of the future. • Investment alongside CDTI in the Basque company Atten2, a spin-off of IK4TEKNIKER with headquarters at the Guipúzcoa Technology Park in Eibar. The company is specialised in the design, manufacture, and sale of sensors to monitor fluid flows, primarily lubricating oil, in industrial applications. Its first products, OilHealth and OilWear, are sensors used for monitoring oil in wind turbines. • Foster entrepreneurship and the development of an innovative entrepreneurial fabric within the energy sector: investment in initiatives with a high social and job creation component. • In the social investment sphere, investment in SunFunder, which has built a funding platform to allow financial investors and companies to participate in a diversified portfolio of off-grid solar projects in emerging market countries in Africa, Latin America, and Asia. To date, SunFinder has financed more than 5 million dollars in projects, to the benefit of more than 360,000 users. • Establish alliances with key technology providers for Iberdrola (Open Innovation Ventures). • Through the Innvierte programme alongside CDTI, use public and private venture capital to develop and strengthen innovative technological startups with high growth potential in Spain. 65 Our Assets Highlight the value of the Company’s intangible assets Main R&D research projects Renewable energy •V arious projects to improve the efficiency of assets and models for the design of wind farms. Diagnosis Matrix Project to diagnose anomalies and prevent failures of wind turbines. •C ontinuation of OWA activities in the United Kingdom to reduce costs and the implementation risk of offshore wind technology. Floating Lidar project, to replace fixed meteorological towers with floating stations using an alternative measuring system known as “Lidar”. • Integration of renewable energies. SmartWind project, which implements models and simulations for the use of wind farm-related storage to provide standby services. Smart Grids •C ompletion of the Price project, the goal of which was to meet the needs identified for the development of a smart grid within an efficient, safe, and sustainable framework. •U pGrid project for the integration of active demand and low-voltage distributed generation. • T he Arc, Flexnet, and Visor projects are being carried in the United Kingdom to strengthen smart grids. Clean generation • T he CO2Formare project to capture CO2 emitted by generation plants and use it to replace sodium hypochlorite to resolve the problem of “macrofouling” in a sustainable manner while reducing the environmental impact on both atmospheric emissions and that aquatic environment. •S ignificant progress was made on the Filtraciones Project, with the development of a new methodology for efficiently inspecting water channels. Investments in R&D (€M) +174% 200 170 159 145 130 136 91 73 2008 2009 2010 2011 2012 2013 2014 2015 Integrated Report 2016 / Our Assets 66 4.4 Human Capital Global human resources management Management Approach Principal Activities 2015 Outlook • Achieve the goals of competitiveness and business efficiency in a climate of social peace, fostering stable, highquality employment. • Implementation of the project for global consolidation of the Human Resources Model (OneHR project) at Elektro. • Strengthen the commitment to social responsibility, fostering ethical and responsible behaviour. • Management of an appropriate labour relations framework that can be adapted to suit business and social requirements. • Consolidate the Human Resources function at AVANGRID, extending and unifying best practices. • Attainment and/or maintenance of the OHSAS 18001 certification, and approval of a system of global prevention standards in accordance with the group’s policy. Assessment of level of conformance to global standards. • Continue with assessment of level of conformance to global standards and the implementation of improvement groups to promote safe behaviour. • Monitoring of proactive and reactive indicators among the group’s companies for the global scorecard. • Analysis of incident rate and establishment of goals for a global model for the management of occupational health and safety at subcontractors. • Harmonise human resources processes and make inroads with implementing the Iberdrola culture in all countries, respecting specific local conditions. Goal of “accident reduction” • Prioritise the safety of individuals at the group’s facilities and within its sphere of influence, fostering a progressive reduction in incident rates and improving health and safety conditions. • Replicate throughout the group the best practices identified in the area of occupational health and safety, fostering a culture of excellence in management and coordinating global preventive activities. Talent management • Drive staff qualifications, preparing employees to work in a multicultural environment and making continual efforts to improve their employability. • Develop alternatives to compensate for factors stemming from the ageing of the workforce. • Define a framework to develop a global quality management system. • Continue harmonisation and monitoring of goals. • Continue developing certifications of the group in accordance with OHSAS 18001. • Identification and application of best safety practices/Exchange of lessons learned/Creation of groups to promote safe behaviour. • Global campaigns to raise awareness on certain types of common accidents. • Promotion of job and international mobility within multicultural teams. • Strengthen the talent and leadership development management model at the international level. • Review of the programmes and initiatives at the Management School, launch of the mobile version of e-leaders. • Expansion of the professional training and development model to other countries (Mexico and Brazil). • Unification of the process for identifying the group with potential for management development. • Define the global SSL strategy for the coming years. • International certification of training quality. • Define and implement the Global Development Roadmap for the Iberdrola group. • Global executive talent management. • Campaign to encourage Gender Equality in hiring processes. Diversity, equal opportunity, and reconciliation • Guarantee a social model committed to professional excellence and the quality of life of our employees. • Development of labour relations based on equal opportunity, nondiscrimination, and respect for diversity. • Create a high-quality working environment by committing to reconciliation. • In the countries in which the Company operates, foster a position of leadership in these areas similar to that enjoyed in Spain. / Integrated Report 2016 • International cultural exchange programmes. • Corporate Volunteerism focused on the integration of vulnerable groups, including: “International Volunteering Day”, the “Sao Paulo 2.0” international volunteering programme, the “Luces y Acción” (“Lights, Action”) programme, and the “IBERDROLA con los refugiados” (“IBERDROLA for refugees”) project. • Joining in the “Engineering Foundation Programme” in the United Kingdom and renewal of “Troops to Energy” in the United States and “Energy for the future” in Brazil. • Increase in team pride, workforce satisfaction, job commitment, and productivity. • Foster improvements in the quality of people’s lives through social-welfare activities in all of the countries in which the Iberdrola group has a presence, creating a global volunteer community. • Promote the internationalisation of social programmes and strengthen ties among the employees of the group at the global level. 67 Our Assets Ensure the availability of a committed, qualified workforce in a safe and stable environment Growth and geographic diversification of the workforce 2006: 16,155 employees. 2015: 30,938 employees 22% 1% Latam 7% Affiliates Other 15% Latam 34% Spain 78% Spain 22% United States 21% United Kingdom Key Figures / page 10 Commitment to people Social recognition • Iberdrola Sao Paulo Volunteerism 2.0-2015 • “My guest” cultural exchange programme 2015. • Iberdrola: top preferred company to work for in Spain in the energy sector and 7th place generally among companies in Spain. First MBA Iberdrola graduates 2015-2016 in “Global Energy Industry” • Elektro: again chosen as best company to work for in Brazil. Incident rate (2012-2015): gradual reduction 1.20 1.00 0.29 0.32 0.80 0.92 0.26 0.21 0.72 0.65 0.77 0.60 0.40 0.20 0.00 2012 Subcontracted 2013 2014 2015 Company personnel 37.5% in subcontracted personnel and 36.4% in Company personnel. Integrated Report 2016 / Our Assets 68 4.5 Natural Capital Environmental management and biodiversity Management Approach Principal Activities 2015 Outlook • Actively promote environmental contemplating the life cycle and biodiversity due to the repercussions thereof on the availability of natural resources and its ties to social development. • New environmental projects from the product life cycle perspective. • Broader implementation of the ISO 14001 standard. • Development of the Iberdrola group’s Environmental Footprint. • Verification by AENOR of the organisation’s Environmental Footprint. • Inform and raise awareness, both internally and externally, of the compatibility of the Company’s activities with the protection, conservation, and sustainable use of the natural environment. • The Comprehensive Environmental Management System has been expanded in Portugal. • ISO 14001 certification of the Integrated Management System in the United Kingdom. • Development and certification of Environmental Product Declaration (EPD) for the kWh produced by the Degollada and los Lirios wind farms. • Participation in the Biodiversity Pact (Pacto por la Biodiversidad) working group. • Development of EDP for an offshore wind farm. • Certification of a Sustainable Shareholders’ Meeting. • Restoration, recovery, improvement, and maintenance of surroundings and habitats. • Identification and classification of the biodiversity in the vicinity of Iberdrola’s facilities and dissemination of the knowledge acquired. • Assessment of ecosystemic services generated by infrastructure. Prevention of pollution • Prevent pollution and the emission of greenhouse gases through practices that reduce or eliminate the production of pollutants at source. • Reduce emissions per GWh produced via the installation of desulphurisation units, the introduction of improvements to the combustion process, and the decommisisoning of less environmentally efficient units. • 25% reduction in intensity of CO2 emissions per kWh produced since 2007. • Achieve a 50% reduction in emissions intensity by the year 2030 in comparison to 2007. • Thermal emission factor has decreased from 476 gr/thermal kWh generated in 2014 to 461 gr/kWh generated in 2015. • Carbon neutral by 2050. • Increase in emission-free installed capacity to 63%. • Registration of verified carbon footprint by the Spanish Ministry of Agriculture, Food, and Environment. • Develop innovation projects geared towards reducing pollution. • Actively participate in achieving the Sustainable Development Goals approved in September 2015 (goals 6, 7, and 13). • New commitment to reduce emissions and actively participate in the Paris Climate Change Conference. • Preparation of new sustainable mobility plan. Operating excellence and energy efficiency • The performance of activities that foster environmental conservation will enable Iberdrola to improve its competitiveness, with greater efficiency in the production and use of energy. • Activities aimed at continual improvement to increase energy efficiency and promote the use of environmentally friendly resources. • Development and promotion of ecodesign initiatives. • Reuse of waste from thermal coal plants. • Make progress in the optimisation of waste management: circular economy. • Life-cycle and green purchasing analysis. • Efficient management of scarce resources such as water is a priority for the Company. Waste management • Non-hazardous waste is managed via environmental management systems, which set targets for waste reduction and the use of recycled material. • The production and disposal of hazardous waste is carried out in accordance with the strict laws applicable in each country. / Integrated Report 2016 • Carry out waste minimisation plans, recycling plans, and awareness campaigns aimed at employees. • Draw up economic/financial analyses of the best waste management strategies. 69 Our Assets The environmental dimension is a key factor in the concept of sustainability CO2 emissions at companies in the sector Production of Iberdrola plants using local energy sources in the countries in which it operates (Carbon factor in kg of CO2/MWh) DEI 1,110 RWE Group Iberdrola average 88% Spain* 87% 740 Drax Scottish & Southern 72% United Kingdom 583 84% United States 470 100% Mexico CEZ 446 78% Brazil Vattenfall 0% 420 EDP Group 413 E.ON Group A2A Enel Group Intensity of emissions at the thermal plants of the group (CO2/MWh ) 409 600 476 461 2013 2014 2015 400 360 Engie 483 500 363 EnBW 100% 410 395 Gas Natural Fenosa 50% * Nuclear fuel acquired from the Spanish company Enusa is considered a local source. 300 356 200 Dong 272 Iberdrola Volume of recovered, reused, or recycled waste (t) 178 PVO 350,000 141 311,836 300,000 EDF Group 250,000 83 200,000 Verbrund 52 150,000 Fortum 153,487 143,376 139,020 128,281 100,000 39 50,000 Statkraft 3 250 0 2012 500 2013 750 1.000 2014 European carbon factor 2014: 313 kg CO2 /MWh 0 8,608 2011 Hazardous 11,583 2012 7,768 2013 14,433 2014 Non-hazardous K ey Figures / page 10 Source: “Facteur carbone européen Comparaison des émissions de CO2 des principaux électriciens européens” PwC France. Nov 2015 Integrated Report 2016 / 7,512 2015 Our Assets 70 4.6 Social and Relationship Capital Stakeholder relations Iberdrola wants to strengthen trust and the connection to institutions and companies in its environment, maintaining responsible relations with groups that affect or are affected by the activities carried out by the Company (Stakeholders). Management Approach Principal Activities 2015 and Outlook Iberdrola’s strategic approach sets great store by its relations with Stakeholders, giving importance to the dual facets of this relationship: • In terms of social responsibility, meeting their expectations and needs. • In terms of reputation, managing Stakeholders’ perception of the Company. • Updating the channels of communication with Stakeholders to identify the most important issues and provide a well balanced, reasonable response thereto. •M onitoring of the AA1000 Assurance Standard, in accordance with the principles of inclusiveness, materiality, and responsiveness established in such standard, both in the businesses as well as in the corporate areas of the group. The AA1000 standard will continue to be advanced and applied throughout the Company in the coming years. • The Board of Directors approved a Stakeholder Relations Policy, which has undergone an exhaustive review by a working group in which external experts have participated. A materiality analysis allows for prioritisation of the issues most important to the Company’s Stakeholders. Materiality Materiality analysis A study of materiality allows for prioritisation of the issues most important to the Iberdrola’s Stakeholders. The chart below summarises the main issues. In the Sustainability Report 2015 Iberdrola explains the management approaches taken by the Company in regard to these significant issues and any results achieved during the financial year. 2015 Iberdrola Group Materiality Analysis Material matters 4 12 4. 5. 6. 7. 1 7 5 6 2 3 11 Priority for Stakeholders 10 1. Business innovation and opportunities 2. Economic performance and fiscal transparency 3. Customer satisfaction 9 8 Development of renewable energy Electricity generation Climate change strategy Electricity and gas supply 8. Human rights 9. Attraction and retention of talent 10. Socioeconomic impact on the local community 11. Health and safety of employees and contractors 12. Access to energy for vulnerable customers Other identified matters Anti-corrupción Unfair competition and monopolistic practices Public policy Supply chain management Priority for Strategy Economic dimension Environmental dimension Social dimension / Integrated Report 2016 Environmental performance: operating efficiency Environmental impact management Biodiversity impact management Water use management Labour practices Development of human capital Social-welfare actions Physical security of facilities (community) 71 Our Assets Community support and electricity access programmes Primary programmes Iberdrola group foundations Activities 2015 Activities 2015 •C ontribution of €M 38 to the community, measured according to the London Benchmarking Group (LBG) international standard, in the countries in which Iberdrola operates. • Iberdrola has implemented a new foundation structure that entails having a foundation in the countries in which it does business. Each foundation is linked to Iberdrola’s country subholding company in Spain, the United Kingdom, the United States, Mexico, and Brazil. • International corporate volunteering programme, offering more than 8,000 volunteering opportunities to employees in Spain, the United Kingdom, the United States, Mexico, and Brazil. •E ntrepreneurial support: over €M 36 of procurement from companies in operation for less than 5 years, and €M 70 in venture capital for new initiatives with high technological value. • P rogrammes and pricing to aid vulnerable groups in Spain, the United Kingdom, the United States, and Brazil. •R ural electrification programmes in Brazil, to which over €M 8 has been allocated on a consolidated basis. • P rogrammes implemented by the foundations created by Iberdrola in the principal countries in which it operates. •D evelopment of the Programa Electricidad para todos (Electricity for All Programme). Electricity for All • T he Sustainable Development Goals (SDGs) 2015-2030, approved at the UN Sustainable Development Summit in New York (September 2015), entail the recognition of energy as an engine of sustainable growth. • T he Electricity for All Programme is Iberdrola’s response to this demand to extend universal access to modern forms of energy, with environmentally sustainable, financially affordable, and socially inclusive models. This initiative is focused on sustainable electrification activities in emerging and developing countries. • Iberdrola has set itself the goal of reaching 4 million beneficiaries of this programme by 2020. At year-end 2015, the programme already exceeded 1.4 million users. •A s regards the activities themselves, it has adapted and promoted the four areas of the Master Plan: – Training and research – Art and culture – Sustainability and biodiversity – Cooperation and community service (solidarity) • In the training area, Iberdrola’s Scholarships and Research Assistance Programme gave a total of 115 scholarships for students in the five aforementioned countries in 2015. • In the area of art and culture, projects in Spain included the illumination of special buildings and museums, including the Lighting the Prado project and the Atlantic Romanesque restoration project. • In the area of sustainability and biodiversity, there have been multiple collaboration projects with educational and environmental centres in these five countries. • T he area of cooperation and community service (solidarity) includes the Iberdrola España Social Assistance programme, which supports more than 30 social-welfare projects annually. Programme results 2015 Contribution by region (%) 26% Mexico and Brazil 35% Spain 5% United States Economic value distributed (€M) Item 2014 2015 Procurement from suppliers 4,599 5,093 Payments to providers of capital 2,753 1,646 Payments to government administrations 2,445 2,746 Employee remuneration 2,086 2,187 Sustainability Report • It has also created a Foundations Committee, an internal body that must ensure the proper coordination of all of the foundation-related activities of the Iberdrola group. 34% United Kingdom Contribution by programme (%) 11% 4% Energy sustainability Other 26% Socioeconomic development 19% Cooperation and community service 14% Education and training 26% Art and culture Integrated Report 2016 / Our Assets 72 Soundness and strength of the brand Corporate reputation •M anagement of the brand in such a way that it transmits the principles set out in the Mission, Vision, and Values of the Iberdrola group and reflects the Company’s strategy of commitment to the environment. • Iberdrola’s Reputational Management Model progressed in the improvement of tools to understand the opinion of Stakeholders during 2015. •C onsolidation of an international brand, strengthening communication and alignment under a single brand positioning strategy in the countries in which the Company operates. Brand value* (€M) 1,036 996 794 872 +120% 670 470 484 2003 2005 2007 2009 2011 2013 2015 * Source: Ranking of Best Spanish Brands by Interbrand. Evolution of the digital ecosystem • Offer of useful and dynamic information, with messages adapted to each stakeholder. • Facilitate direct interaction with our stakeholders, overcoming barriers and making use of existing synergies. Iberdrola on social media and the Internet Twitter Linkedin Slideshare Google+ Youtube Pinterest Flickr Unience Facebook Instagram Web Blog / Integrated Report 2016 • To strengthen this understanding, an analysis and intelligence department has been established to properly respond to the specific needs of the Stakeholders. • In 2015, the drive to evaluate the group’s reputation allowed for an evaluation of the Company’s reputation within 12 groups or subgroups, using the international Reptrak standard. 1. Society 2. Shareholder 3. Employees 4. Employees’ family environment 5. Former employees 6. Competitors 7. Environment 8. Customers 9. Loyal customers 10. Potential customers 11. Former customers 12. Non-customers • This evaluation has contributed to the Company’s materiality analysis and to understanding the level of alignment between Iberdrola’s actions and the perceptions of its Stakeholders. • It has also contributed to the implementation and improvement of the recommendations of the Reputation Plan 2015-2017 during this financial year. • The improvement in coordination with the departments responsible for Stakeholder relations has allowed for progress in managing reputation risk, in the application of the Company’s Reputational Risk Framework Policy, and in the international standardisation of the types of activities with reputational impact. • Advances in the progressive integration of online and offline listening tools favour the detection of reputational opportunities to differentiate Iberdrola from the rest of the industry, as well as to better understand the reputational and media context. • Based on the Stakeholder Relations Policy, a department was created in 2015 to further the development of this policy and thus to assist in improving reputation. 73 Our Assets Prado Museum Restoration Workshop / Spain © 2015 National Heritage Integrated Report 2016 / A Framework of Trust 74 Iberdrola tower, Bilbao / Spain / Integrated Report 2016 75 A Framework of Trust 5. A Framework of Trust Integrated Report 2016 / A Framework of Trust 76 5.1 Corporate Governance Model Foundations of Iberdrola’s corporate governance model A. Corporate Governance System Iberdrola is a multinational leader in the energy industry that seeks to create value in a sustainable manner for society, citizens, customers, and shareholders; which innovates and uses environmentally-friendly energy sources and considers its employees to be a strategic asset; committed to social return through all its business activities, generating employment and wealth in its environment, all within a strategy of social responsibility and compliance with tax regulations. Iberdrola has adopted a Corporate Governance System made up of the Mission, Vision, and Values of the Iberdrola group, By-Laws, Corporate Policies, Internal Corporate Governance Rules, and other internal codes and procedures, all available at www.iberdrola.com. The content thereof is inspired by and based on a commitment to best corporate governance practices, business ethics, and social responsibility in all of its areas of activity. Position Director Status Date of last appointment Ending Date Chairman & CEO Mr José Ignacio Sánchez Galán (Salamanca, Spain, 1950) Executive 27-03-2015 27-03-2019 Director Mr Xabier de Irala Estévez (New York, United States, 1946) Proprietary 22-06-2012 22-06-2016 Director Mr Íñigo Víctor de Oriol Ibarra (Madrid, Spain, 1962) Other external 22-06-2012 22-06-2016 Director Ms Inés Macho Stadler (Bilbao, Spain, 1959) Independent 22-06-2012 22-06-2016 Director Mr Braulio Medel Cámara (Marchena, Seville, Spain, 1947) Independent 22-06-2012 22-06-2016 Director Ms Samantha Barber (Dunfermline, Fife, Scotland, United Kingdom, 1969) Independent 22-06-2012 22-06-2016 Director Ms María Helena Antolín Raybaud (Toulon, France, 1966) Independent 27-03-2015 27-03-2019 Director Mr Santiago Martínez Lage (Betanzos, A Coruña, Spain, 1946) Independent 27-03-2015 27-03-2019 Director Mr José Luis San Pedro Guerenabarrena (Bilbao, Spain, 1946) Other external 27-03-2015 27-03-2019 Director Mr Ángel Jesús Acebes Paniagua (Ávila, Spain, 1958) Independent 27-03-2015 27-03-2019 Director Ms Georgina Kessel Martínez (Mexico City, Mexico, 1950) Independent 28-03-2014 28-03-2018 Director Ms Denise Mary Holt (Vienna, Austria, 1949) Independent 27-03-2015 27-03-2019 Director Mr José W. Fernández (Cienfuegos, Cuba, 1955) Independent 27-03-2015 27-03-2019 Director Mr Manuel Moreu Munaiz (Pontevedra, Spain, 1953) Other external 27-03-2015 27-03-2019 / Integrated Report 2016 77 A Framework of Trust B. Governance model Appropriate differentiation between the duties of strategy and supervision and those of guidance and management: • T he Board of Directors of Iberdrola, made up of a large majority of independent directors, focuses its activity on the determination, supervision, and monitoring of the strategies and general guidelines that must be followed by the group. • T he chairman of the Board of Directors & chief executive officer and the rest of the management team are responsible for the organisation and strategic coordination of the group, through the dissemination, implementation, and monitoring of the overall strategy and basic guidelines. • In all of the countries in which the group operates, organisation and strategic coordination is implemented through country subholding companies, which group together equity stakes in the energy head of business companies carrying out their activities in the respective country and centralise the provision of services common to such companies. In addition, the group has a country subholding company that groups together the non-energy businesses. Country subholding companies have boards of directors, including independent directors and their own Audit and Compliance Committees, Internal Audit divisions or units, or Compliance divisions. • T he head of business companies are in charge of the day-to-day administration and effective management of each business. They also have boards of directors, which include independent directors and specific management teams. This structure, which operates together with the group’s Business Model, allows for an overall integration of the businesses (Networks, Wholesale and Retail, and Renewables) and focuses on maximising the operational efficiency thereof through the implementation of best market practices. Corporate and governance structure of Iberdrola, S.A Board of Directors Consultative Committees Chairman & CEO + Management Team Audit and Risk Supervision Committee Executive Committee Appointments Committee Remuneration Committee Corporate Social Responsibility Committee Country Subholding Companies Board Board Board of Directors Board Board of Directors of of Directors of of Iberdrola of Directors of of Directors of Avangrid (*) Iberdrola México ScottishPower Iberdrola Brasil Iberdrola España Iberdrola Participaciones Head of Business Companies Boards of Directors of each of the head of business companies (*) Company listed on the New York Stock Exchange. Integrated Report 2016 / A Framework of Trust 78 C. Equity structure Iberdrola has more than 600,000 shareholders throughout the world, and none of them alone has the power of control. 62.9% Foreign investors Domestic institutional investors Domestic individual investors 13.7% 23.4% Iberdrola’s response to the corporate governance challenge A. Continuous Improvement of its corporate governance rules and practices On corporate governance matters, the Company looks to the Good Governance Code of Listed Companies published by the CNMV and generally accepted recommendations in the international markets. 69% of the non-executive directors are independent. Executive directors’ variable remuneration tied to objectives. Foreign institutional shareholders account for 62.9% of the capital. Remuneration policy Provision for revising deferred variable remuneration. External corporate governance awards / page 39 With Shareholder Week, which culminates with the holding of the General Shareholders’ Meeting, Iberdrola brings the company closer to and promotes interaction with its shareholders to give form to its corporate governance and social responsibility strategy, sharing events and initiatives regarding social-welfare, cultural, technological innovation, and digital transformation actions. Transparency. 69% of non-executive directors are independent, all having less than 12 years in office. System of checks and balances, including a lead independent director (consejera coordinadora). Operation of the Board All consultative committees have 100% or a majority of independent directors. Gender diversity: 5 women on the Board. All consultative committees are chaired by women. Cultural diversity: directors from 7 countries of origin. Rationale for proposed appointments. External evaluation of governance bodies. Specific Corporate Social Responsibility Committee. Social responsibility and corporate reputation Social Responsibility Policies. Company social action strategy through foundations related to the Iberdrola group in Spain, United Kingdom, Brazil, United States, and Mexico. Ethics and Social Responsibility / page 84 / Integrated Report 2016 79 A Framework of Trust B. Commitment to shareholders and investors • T he strength of the group’s industrial and financial model will allow us to continue on a path of increased profits and shareholder remuneration thanks to balanced growth focused on the regulated networks businesses, renewables, and long-term contracted assets. •E ngagement: shareholders are the key players within the Corporate Governance System, which includes good governance practices beyond those required by applicable law. The Shareholder Engagement Policy is implemented through various channels of participation intended to build a continuous dialogue beyond the General Shareholders’ Meeting. •B oost shareholders’ participation at the General Shareholders’ Meeting through the payment of an attendance bonus. Since its implementation in 2007, the quorum in attendance at the General Shareholders’ Meeting has exceeded 75%, and has exceeded 78% during the last two years. The quorum in attendance at the 2015 General Shareholders’ Meeting was 78.65%. Office of the Shareholder Shareholder Week Corporate Governance Roadshows On-Line Shareholders (OLS) Shareholders Club C. Alignment between corporate governance and strategy •D irector remuneration aligned with strategic objectives. The remuneration model for directors is based on three primary components: Remuneration model for the Board Type of remuneration External (non-executive) directors Fixed According to their On market terms. duties. Short-term variable Not applicable Tied to annual targets. Long-term variable Not applicable Tied to multi-annual targets and paid in shares (3-year accrual period and payment deferred over 3 years following accrual). Executive directors There were only 1.15% votes against the Annual Director Remuneration Report 2014. Parameters to which the annual variable remuneration of executive directors is tied in 2016 Financial Results. Shareholder return. Industrial Quality and service level. Labour climate. Social responsibility Growth in emission-free installed capacity. Presence on international indices. Level of consensus received for the proposals of the Board at the General Shareholders’ Meeting. Annual Director Remuneration Report 2015 Engagement Investor Relations APP Investor Relations Office Integrated Report 2016 / A Framework of Trust 80 5.2 Three Lines of Defence Three lines of defence model The Internal Control System of Iberdrola and the companies of its group is configured by reference to international best practices. It is based on a guarantee combined around three lines of defence, providing a comprehensive view of how the different parts of the organisation interact in an effective and coordinated manner, increasing the efficiency of the processes for management and internal control of the entity’s significant risks. Governance Bodies Management Team 1st line of defence 2nd line of defence 3rd line of defence Operational Management Assurance Functions Internal Audit External Assurance (External Auditors, Regulators, etc) Based on the document “Guidance on the 8th EU Company Law Directive, article 41” ECIIA/FERMA, September 2010. Operational Management Assurance functions As the first line of defence, the management team and the professionals of Iberdrola and its group are the direct managers of the risks of the entity. Thus, the Management of the Company is responsible for maintaining effective control and implementing procedures to control risks on a continuous basis. As the second line of defence, certain functions provide the foundation for the entity’s internal control system, proposing guidelines to the Board and monitoring how the first line of defence implements them. Risks facing Iberdrola’s primary businesses / pages 46, 50, 54 Internal Control Objectives (COSO. May 2013) •O perations objectives- Pertain to the effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss. •R eporting objectives- Pertain to internal and external financial and non-financial reporting and may encompass reliability, timeliness, transparency, or other terms as set forth by regulators, recognised standard setters, or the entity’s policies. •C ompliance objectives- Pertain to adherence to laws and regulations to which the entity is subject. / Integrated Report 2016 The primary assurance functions within Iberdrola, within their respective areas of responsibility, are: (i) the group’s Risk Division, within the framework of its functions within the Comprehensive Risk Control and Management System; (ii) the Compliance Unit, which is responsible for the Compliance System; and (iii) the Internal Control Division, which is part of the Administration and Control Division, within its duties relating to the internal control and risk management systems in relation to the preparation of financial information (ICFRS). Comprehensive Risk Control and Management System / page 82 Compliance Unit / page 84 81 A Framework of Trust Iberdrola adopts the three lines of defence model to ensure effective and integrated management of its Internal Control System. Internal Audit The Internal Audit function, as the third line of defence, oversees the internal control and risk management systems, auditing how the first and second lines carry out their respective duties of management and control. To ensure its independence, the director of the Internal Audit Area reports hierarchically to the chairman of the Board of Directors and functionally to the Audit and Risk Supervision Committee. The Internal Audit divisions of the various country subholding companies have this same positioning, and are coordinated under the framework of the Basic Internal Audit Regulations of the Company and its group. The 2015 annual activities plans of the Internal Audit Area Division of the Company and of the Internal Audit divisions of the group responded to the requirements established by the Audit and Risk Supervision Committee of the Company and the respective Audit and Compliance Committees of the country subholding companies in their respective regulations, and included work for the Senior Management and the rest of the organisation, including: •A nnual audits of compliance with the Code of Ethics at Iberdrola and at each of the country subholding companies. •A udits of the process for determining and monitoring the limits and indicators of the Risk Policies of the businesses of the group. •H alf-yearly reviews of the operation of the most critical controls of the Internal Control Over Financial Reporting (ICFR) System, as well as reviews of the various cycles of preparation of the financial information of Iberdrola and the various companies of the group, within the framework of the general goal of reviewing the entire ICFR over a period of 3 years. Basic Internal Audit Regulations •A pproved by the Board of Directors of the Company upon a proposal of its Audit and Risk Supervision Committee (updated on 15-Dec-2015). •D efines the nature, as an independent internal unit, and establishes the regulation, competencies, powers, and duties of Internal Audit, among other things. •E stablishes the framework of relations with: i) the Board of Directors, its chairman, and the Audit and Risk Supervision Committee; ii) the Internal Audit divisions of the other companies of the group; and iii) the rest of the organisation. •D isseminates the knowledge of the Internal Audit function among the professionals of the group. •S erves as a reference for the management model and the quality system of the Internal Audit Area of the Company and the Internal Audit divisions of the other companies of the group. External assurance The auditors, regulatory bodies, and other entities external to the organisation play a significant role in the general structure of governance, internal control, and risks of Iberdrola, especially in the regulated businesses. The regulators establish requirements with the intention to strengthen the controls of an organisation and perform a function of independent and separate monitoring. On the other hand, the auditors provide assurance regarding the true and fair view of the entity’s financial information. Regulatory Environment / page 42 Audit Report on the Consolidated Financial Statements Continuing with the commitment made in 2005, Internal Audit continues to submit to an exhaustive review every five years by the Global Institute of Internal Auditors of compliance with professional internal audit rules (called a Quality Assurance Review). In 2015 the certification of Iberdrola and of ScottishPower was renewed and the scope of the certification was expanded to include Iberdrola España and AVANGRID. Integrated Report 2016 / A Framework of Trust 82 5.3 Risks Main risks facing the Iberdrola group The Iberdrola group is exposed to various risks inherent in the different countries, industries, and markets in which it operates and in the activities it carries out, which may prevent it from achieving its objectives and from successfully implementing its strategies. The following significant risks can be pointed out: A detailed description of the risks that materialised in 2015 can be found in section “E.5” of the Annual Corporate Governance Report 2015, available at www.iberdrola.com. •R egulatory uncertainty in the countries in which it operates. Iberdrola’s Board of Directors and senior management is strongly committed to and engaged in the management of the group’s risks: •V olatility in the prices of electricity and fuel, including the potential effects of the collapse in oil prices. • Volatility in exchange rates and interest rates. • Changes in the production of and demand for electricity and gas due to the effect of climatological variables (temperature, hydraulic activity, wind activity), and growth in internal consumption over the long term. •O perational risks due to downtime of facilities and significant incidents affecting the grids, including those arising from improper access to information or to the information technology and communications systems of the group (cyberattacks). Commitment of the Board of Directors and of senior management •A cceptable levels of risk tolerance are reviewed and approved ex ante on an annual basis through risk policies and limits the qualitative and quantitative risk appetite at the group level and at each of the main businesses. • T here is then a periodic monitoring ex post of significant risks and threats and of compliance with the approved risk policies and limits. Consolidated Annual Financial Statements Duties of the Risk Division ERM Approach – Integrated Vision Ensure that the group’s significant risks are adequately identified, measured, managed, and controlled and that they are periodically reported. Basic instruments: • Risk policies and limits. • Reports on key risks. Centralised Approach – Active Management Credit risk • Approval of counterparties and limits and/or establishment of admission criteria in order to minimise credit losses within the group. Market risk • Approval of detailed limits in order to delimit the effects of volatility in the markets in which the group operates. Operational risk management through insurance and participation on the group’s information technology governance and cybersecurity committees. / Integrated Report 2016 83 A Framework of Trust The essential elements of proper risk management are foresight, independence, and commitment to the business objectives. Comprehensive Risk Control and Management System At the operational level, the commitment of the Board of Directors is implemented by means of a Comprehensive Risk Control and Management System, supported by a Risk Committee and an independent specialised risk organisation deployed within the main businesses of the group. Risks facing Iberdrola’s primary businesses / pages 46, 50, 54 Audit and Risk Supervision Committee Board of Directors Risk Policies Operating Committee of the group Corporate governance, market, credit, business, regulatory and political, operational, technological and cybersecurity, environmental, social, legal, and reputational risks Audit and Compliance Committees and Boards of the subsidiaries Risk Committee Corporate Risk Division Risk Divisions of the Business Units Integrated Report 2016 / A Framework of Trust 84 5.4 Ethics and Social Responsibility Compliance Unit Powers of the Compliance Unit Iberdrola has a Compliance Unit, which is a collective, internal, and permanent body linked to the Corporate Social Responsibility Committee of the Board of Directors. The Compliance Unit has powers related to the Code of Ethics, the Crime Prevention and Anti-Fraud Policy, the Internal Regulations for Conduct in the Securities Markets, legal provisions regarding the separation of activities, and all other powers that may be entrusted thereto by the Corporate Social Responsibility Committee or the Board of Directors of the Company or that are established in Iberdrola’s Corporate Governance System. Within each country subholding and/or head of business company, there are also compliance divisions linked to the Audit and Compliance Committees or the Board of Directors of each company. Their duties including promoting a culture of ethical behaviour and zero tolerance for the commission of unlawful acts or fraud. Iberdrola’s Compliance System is made up of the substantive rules, formal procedures, and major activities within the group to encourage the organisation to act in accordance with applicable ethical principles and legal provisions, through a set of procedures and actions designed to prevent, detect, and react to irregular actions, fraud, or actions contrary to the Iberdrola group’s Code of Ethics or applicable laws and regulations. Main activities in the area of ethics and compliance Various programmes and control frameworks for different regulatory environments are implemented at the group within the framework of the Compliance System. These include crime prevention programmes, which are implemented taking into consideration the duties imposed by the Spanish Criminal Code, without prejudice to the legal provisions applicable in any other jurisdiction in which the Company does business, as well as the programme for compliance with the Code of Ethics, which includes specific training and communication plans for all professionals of the group, among other things. Iberdrola also has a Compliance Unit Office (the “Office”), managed by the director of the Compliance Unit and made up of members representing various regulatory areas and assurance functions of the group. The Office is configured as a consultative and support committee relating to the various activities of the group within the framework of developing an effective Compliance System. / Integrated Report 2016 The Iberdrola group’s ethics and compliance system •P eriodic evaluation of risks. •D evelopment of policies, procedures, and protocols. • T raining, dissemination, and communication measures. React Detect Prevent •P eriodic reports. Grievance systems and channels. • Investigation of grievances. • Identification and evaluation of compliance controls. •D isciplinary rules. •C orrective measures. Commitment of the Governance Bodies Integrated within the organisation Traceable and Documented System Auditable and under continuous Improvement Compliance leader verification In 2015, NYSE Governance Services, together with the Ethisphere Institute, performed an independent evaluation of the Compliance System, after which Iberdrola received “Compliance leader verification” certification. This acknowledgement is given to those companies with the best compliance programmes in their industry, and which have decided to proactively invest resources to promote a culture of compliance. 85 A Framework of Trust Iberdrola considers its corporate values to include ethical principles, good corporate governance and transparency, and social commitment. Organisation of social responsibility within the Iberdrola group The group has an organisational structure designed to promote and manage responsible actions with its Stakeholders. Iberdrola Corporate Divisions Foundations Iberdrola Iberdrola España Avangrid (USA) Total score: 87 points. Only European electric company to have been included in all 16 editions of the index. Only Spanish electric company among the world’s 100 most sustainable companies. Businesses of the group: • Networks • Wholesale and Retail • Renewables • Other businesses Networks of relationships within the Brand, CSR, and Reputation Division to manage CSR within the Iberdrola group ScottishPower External awards Iberdrola Mexico Iberdrola Brasil The Corporate Social Responsibility and Reputation Committee and the Corporate Social Responsibility and Reputation Committees of the country subholding companies coordinate the balanced development social responsibility within the Iberdrola group. The Corporate Social Responsibility Committee of the Board of Directors performs the duties of supervision within its purview. Corporate social responsibility plans of the group 2015 saw the approval of the Corporate Social Responsibility Plan 2015-2017 for the Iberdrola group, covering five areas of activity (dialogue with local communities, measurement tools, etc.), with a focus based on the various Stakeholders. This Plan is made up of various programmes, projects, and monitoring indicators, both cross-sectional for all involved organisations of Iberdrola as well as specific for each business or corporate area of the Company. Five consecutive years on the index. First utility with nuclear assets selected for the index. Climate Disclosure Leadership Index (CDLI). Rating: 100 points. Climate Performance Leadership Index A. Iberdrola a sponsor. Iberdrola selected. Iberdrola selected. Sustainability Yearbook 2015: “Silver Class” in the electricity sector. Most sustainable Spanish utility and fourth most sustainable utility in the world. Leader among Spanish utilities: electricity, gas, and water. Leading company on the Ibex 35 in Transparency ranking 2014. Monitoring of the Plan is analysed on a half-yearly basis by the Corporate Social Responsibility and Reputation Committee and by the Corporate Social Responsibility Committee of the Board of Directors. Integrated Report 2016 / About this Report 86 Commercial office customer / Spain / Integrated Report 2016 87 About this Report 6. About this Report This report, which Iberdrola directs to both its shareholders and investors and all of its Stakeholders, has been prepared under the emerging “integrated report” concept, and constitutes one more example of the group’s desire to be innovative in the area of transparency. Integrated Report 2016 / About this Report 88 6.1 About this Report Integrated report Information boundaries Material aspects identified • T his report has been prepared in accordance with the reporting framework published by the International Integrated Reporting Council (IIRC) and in accordance with the recommendations thereof, taking into consideration the individual and consolidated financial statements of the Company formulated by the Board of Directors, audited and pending approval by the shareholders at the General Shareholders’ Meeting of Iberdrola. • A multi-disciplinary team made up of corporate businesses and areas of the group was created in order to provide a complete view of the Company, its business model, the challenges and risks it faces, and its social, environmental, financial, and governance performance. The participating organisations guarantee the completeness of the information included. • T he information submitted covers Iberdrola and its subsidiaries and affiliates. The information boundaries are defined in the group’s consolidated annual financial statements and Sustainability Report. • The group’s performance over the last years is connected to external corporate transactions and internal management decisions, which the reader should take into account in order to properly interpret this report. These transactions and activities are described in the group’s public information, the following being particularly noteworthy: – The acquisition and merger of companies in Brazil (2011) and the nationalisation in Bolivia (2011). – The focus on a group management model based on global businesses as from 1 January 2011. – The application of IFRS 11 to the 2013 to 2015 figures, which mainly affects Brazil. – The merger of Iberdrola USA and UIL Holdings in the United States (December 2015), with the new company taking the name AVANGRID. • Iberdrola has channels of communication and dialogue with its Stakeholders, developed in accordance with the principles of the AA1000 Assurance Standard, as described in detail in the Sustainability Report. • T he Corporate Social Responsibility Committee of the Board of Directors has reported favourably on this report and has submitted it to the Board of Directors for the approval thereof. This report has also been reviewed by the Company’s Operating Committee. Iberdrola’s Board of Directors, after analysing this report and considering these assessments, approved the Integrated Report February 2016 at its meeting of 23 February 2016. • In addition, it performs materiality analyses that help identify matters of significance to the Company’s Stakeholders, bringing to light particularly sensitive financial, environmental, or social issues related to the business in the various communities and geographic areas in which the group operates. • The contents of this report have been selected by taking into account the existing channels for dialogue as well as the materiality analyses and the framework defined by the IIRC for this kind of information. Social and Relationship Capital / page 70 This report has been prepared in accordance with the reporting framework published by the International Integrated Reporting Council (IIRC). Internal and external verification • This report has been subject to a process of internal verification, by means of a limited review performed by the Management of the Internal Audit Division of Iberdrola. • Although it has not been subject to a process of independent external verification, a significant portion of the information contained herein relating to financial year 2015 and to previous years comes from annual financial reports and sustainability reports, all of which have been the subject of an external audit or verification for which the respective certificates are available. The remaining information comes mainly from other reports or public presentations made by the Company. / Integrated Report 2016 89 About this Report Legal disclaimer with respect to forward-looking statements, errors, and omissions • This document contains forward-looking information and statements about Iberdrola. Such statements include projections and estimates and their underlying assumptions, statements regarding plans, objectives, and expectations with respect to future transactions, investments, synergies, products, and services, and statements regarding future performance. Forward-looking statements are not historical facts and are generally identified by the words “expects”, “anticipates”, “believes”, “intends”, “estimates”, and similar expressions. • In this regard, although Iberdrola believes that the expectations reflected in such statements are reasonable, investors and holders of Iberdrola shares are cautioned that forward-looking information and statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the control of Iberdrola, which risks could cause actual results and developments to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. These risks and uncertainties include those identified in the documents sent by Iberdrola. to the National Securities Market Commission (Comisión Nacional del Mercado de Valores) and which are accessible to the public. • Forward-looking statements are not guarantees of future performance and have not been reviewed by the auditors of Iberdrola. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date they were made. All forward-looking statements reflected in this report are subject to the warnings provided and are based on information available as of the date of approval hereof. Except as required by applicable law, Iberdrola does not undertake any obligation to publicly update its forward-looking statements or to revise any forward-looking information, even if new data are published or new events occur. Integrated Report 2016 / Integrated Report, February 2016 Publisher: IBERDROLA, SA. Spain © 2016 Iberdrola, S.A. 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