ANNUAL CONSOLIDAted. financial statements. PORTADA Consolidated

Transcription

1 ANNUAL CONSOLIDAted financial statements PORTADA Consolidated Financial Statements

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3 ANNUAL CONSOLIDATED FINANCIAL STATEMENTS 2011

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5 Annual Consolidated financial statements 2011/Contents Independent Auditor s Report pág. 6 Annual Consolidated Financial Statements pág Consolidated Management Report 04 Certification pág. 291 pág

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7 independent auditor s report

8 NOTICE: This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. Independent auditor S REPORT Ernst & Young, S.L. was re-elected auditor of IBERDROLA, S.A. and of IBERDROLA, S.A. and its Consolidated Group pursuant to resolutions adopted at the General Shareholders Meeting held on May 27, 2011, following a proposal of the Audit and Risk Supervision Committee of the Board of Directors of IBERDROLA,S.A. dated February 10, The criteria for apponting and hiring the auditor, as well as the supervisory powers of the Audit and Risk Supervision Committee, are contained in the Annual Corporate Governance Report of IBERDROLA, S.A. for fiscal year

9 Annual Consolidated financial statements 2011 / Independent auditor s report 7

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11 ANNUAL CONSOLIDATED FINANCIAL STATEMENTS

12 Translation of Consolidated financial statements originally issued in Spanish and prepared in accordance with IFRS,,as adopted by the European Union (Note 53). In the event of a discrepancy, the Spanish-language version prevails. IBERDROLA, S.A. AND SUBSIDIARIES Consolidated statements of financial position at 31 December 2011 and 2010 NON-CURRENT ASSETS: ASSETS Note December 31, 2011 Thousands of euros December 31, 2010 (*) Intangible assets 8 20,272,579 18,222,861 Goodwill 8,272,894 7,830,563 Other intangible assets 11,999,685 10,392,298 Investment property 9 523, ,793 Property, plant and equipment 10 52,406,117 50,202,245 Property, plant and equipment in use 45,998,858 43,831,369 Property, plant and equipment under construction 6,407,259 6,370,876 Non-current financial assets 2,857,894 2,636,156 Investments accounted for using the equity method 11.a 764, ,960 Non-current equity instruments 11.b 697, ,371 Other non-current financial assets 11.d 907, ,842 Derivative financial instruments , ,983 Non-current trade and other receivables , ,995 Deferred tax assets 27 4,545,185 3,487,732 CURRENT ASSETS: 81,144,013 75,446,782 Nuclear fuel , ,676 Inventories 15 2,112,572 1,971,233 Current trade and other receivables 16 5,364,791 5,819,237 Current financial assets 4,876,208 6,924,074 Current equity instruments 11.c 20, Other current financial assets 11.d 4,097,536 5,967,782 Derivative financial instruments , ,257 Income tax receivable , ,732 Other tax receivables , ,361 Cash and cash equivalents 17 2,091,007 2,101,857 Assets held for sale ,697-15,760,719 18,254,170 TOTAL ASSETS 96,904,732 93,700,952 (*) The Consolidated statements of financial position at 31 December 2010 is presented for comparative purposes only. The accompanying Notes 1 to 53 and the Appendix are an integral part of the Consolidated statements of financial position at 31 December 2011 and

13 Annual consolidated financial statements 2011 / Financial statements IBERDROLA, S.A. AND SUBSIDIARIES Consolidated statements of financial position at 31 December 2011 and 2010 EQUITY AND LIABILITIES Note December 31, 2011 Thousands of euros December 31, 2010 (*) EQUITY: Of shareholders of the parent 19 32,887,873 29,078,799 Share capital 4,411,868 4,112,882 Unrealised assets and liabilities revaluation reserve (385,758) (360,243) Other reserves 27,648,118 24,474,576 Treasury shares (383,762) (284,332) Translation differences (1,207,138) (1,735,008) Net profit for the year 2,804,545 2,870,924 Of non-controlling interests 319,927 2,584,271 33,207,800 31,663,070 NON-CURRENT EQUITY INSTRUMENTS HAVING THE SUBSTANCE OF A FINANCIAL LIABILITY , ,282 NON-CURRENT LIABILITIES: Deferred income 21 5,229,808 4,463,483 Provisions 3,426,858 3,642,941 Provisions for pensions and similar obligations 22 1,372,369 1,260,798 Other provisions 23 2,054,489 2,382,143 Bank borrowings 30,453,501 26,397,550 Bank borrowings - loans and others 24 29,872,231 25,916,689 Derivative financial instruments , ,861 Other non-current payables , ,630 Deferred tax liabilities 27 9,741,959 8,773,704 49,247,118 43,574,308 CURRENT LIABILITIES: Provisions 572, ,611 Provisions for pensions and similar obligations 22 9,361 8,583 Other provisions , ,028 Bank borrowings 4,173,951 6,937,475 Bank borrowings and other financial liabilities - loans and others 24 3,356,269 5,902,157 Derivative financial instruments ,682 1,035,318 Trade and other payables 9,120,562 10,365,206 Trade payables 29 6,044,351 6,208,228 Income tax payable , ,724 Other tax payables , ,189 Other current liabilities 1,796,449 2,871,065 13,867,477 17,811,292 TOTAL EQUITY AND LIABILITIES 96,904,732 93,700,952 (*) The Consolidated statements of financial position at 31 December 2010 is presented for comparative purposes only. The accompanying Notes 1 to 53 and the Appendix are an integral part of the Consolidated statements of financial position at 31 December 2011 and

14 Translation of Consolidated financial statements originally issued in Spanish and prepared in accordance with IFRS,,as adopted by the European Union (Note 53). In the event of a discrepancy, the Spanish-language version prevails. IBERDROLA, S.A. AND SUBSIDIARIES Consolidated income statements for the years ended 31 December 2011 and 2010 Note December 31, 2011 Thousands of euros December 31, 2010 (*) Net revenue 31 31,648,035 30,431,034 Procurements 33 (19,622,228) (18,785,835) 12,025,807 11,645,199 Staff costs 34 (2,151,463) (2,158,723) Capitalised staff costs , ,958 Outside services (2,274,956) (2,174,164) Other operating income 650, ,107 (3,268,244) (3,208,822) Taxes other than income tax (1,107,093) (908,408) 7,650,470 7,527,969 Depreciation and amortisation charge, allowances and provisions 36 (3,145,377) (2,698,228) OPERATING PROFIT 4,505,093 4,829,741 Result of companies accounted for using the equity method - net of taxes 11.a (34,543) 27,356 Finance income 38 1,468,787 1,626,254 Finance cost 39 (2,530,708) (2,914,141) Gains on disposal of non-current assets 37 61, ,109 Losses on disposal of non-current assets (15,948) (4,334) PROFIT BEFORE TAX 3,454,411 3,840,985 Income tax 27 (549,182) (899,270) NET PROFIT FOR THE YEAR 2,905,229 2,941,715 Non-controlling interests (100,684) (70,791) NET PROFIT FOR THE YEAR ATTRIBUTABLE TO THE PARENT 2,804,545 2,870,924 EARNINGS PER SHARE IN EUROS (BASIC AND DILUTED) (*) The Consolidated income statements at 31 December 2010 is presented for comparative purposes only. The accompanying Notes 1 to 53 and the Appendix are an integral part of the Consolidated income statements for the years ended 31 December 2011 and

15 Annual consolidated financial statements 2011 / Financial statements IBERDROLA, S.A. AND SUBSIDIARIES Consolidated statements of comprehensive income for the years ended 31 December 2011 and 2010 Thousands of euros (*) NET PROFIT RECOGNISED DIRECTLY IN EQUITY Of the Parent Of noncontrolling interests Total Of the Parent Of noncontrolling interests In other reserves (276,987) - (276,987) (108,197) (772) (108,969) Actuarial gains and losses on pension schemes (Note 22) Total (417,543) - (417,543) (159,373) (1,269) (160,642) Spain (electricity for employees) 2,657-2,657 5,172-5,172 United Kingdom (164,706) - (164,706) (93,641) - (93,641) U.S.A. (227,876) - (227,876) (70,330) (1,269) (71,599) Brazil (46,777) - (46,777) 8,172-8,172 Others 19,159-19,159 (8,746) - (8,746) Tax effect 140, ,556 51, ,673 In unrealised asset and liability revaluation reserves (Note 19) Change in the value of available-for-sale investments (25,515) 1,655 (23,860) (147,004) (5,669) (152,673) (11,974) 511 (11,463) (196,868) - (196,868) Change in the value of cash flow hedges (31,241) 1,882 (29,359) 79,985 (8,858) 71,127 Tax effect 17,700 (738) 16,962 (30,121) 3,189 (26,932) In translation differences 527,870 (77,581) 450, ,429 68, ,119 NET PROFIT RECOGNISED DIRECTLY IN EQUITY 225,368 (75,926) 149, ,228 62, ,477 NET PROFIT FOR THE YEAR 2,804, ,684 2,905,229 2,870,924 70,791 2,941,715 TOTAL INCOME AND EXPENSES RECOGNISED IN THE YEAR 3,029,913 24,758 3,054,671 3,127, ,040 3,260,192 (*) The Consolidated statements of comprehensive income for 2010 is presented for comparative purposes only. The accompanying Notes 1 to 53 and the Appendix are an integral part of the Consolidated statements of comprehensive income for the years ended 31 December 2011 and

16 Translation of Consolidated financial statements originally issued in Spanish and prepared in accordance with IFRS,,as adopted by the European Union (Note 53). In the event of a discrepancy, the Spanish-language version prevails. IBERDROLA. S.A. AND SUBSIDIARIES Consolidated statements of changes in equity for the years ended 31 December 2011 and 2010 Issued capital (Note 19) Treasury shares (Note 19) Legal reserve (Note 19) Revaluation reserves (Note 19) Other reserves Share premium (Note 19) Other restricted reserves (Note 19) Retained earnings (Note 19) Unrealised assets and liabilities revaluation reserve (Note 19) Translation differences Net profit for the year Thousands of euros Noncontrolling interests As at 1 January ,112,882 (284,332) 787,848 1,215,769 13,015,498 86,270 9,369,191 (360,243) (1,735,008) 2,870,924 2,584,271 31,663,070 Comprehensive income for the period (276,987) (25,515) 527,870 2,804,545 24,758 3,054,671 Operations with partners or owners Profit distribution , ,645, (2,870,924) - (174,667) Transactions with treasury shares (Note 19) - (1,621,231) (15,852) (1,637,083) Capital increase (Note 19) 253, ,652,178 - (2,911) ,903,032 Iberdrola Renovables, S.A. dividends (Note 19) (1,014,927) (1,014,927) Acquisition non-controlling interest Iberdrola Renovables, - 1,521, (269,659) (1,252,142) - S.A. (Note 19) Free capital increase (Note 19) 45, (45,221) - - (856) (856) Free allowance acquisition (Note 19) (550,840) (550,840) Other changes in equity Share-based payment transactions (Note 19) (2,830) (2,830) Other changes (9,737) (22,033) (31,770) As at 31 December ,411,868 (383,762) 838,286 1,170,548 14,667,676 86,270 10,885,338 (385,758) (1,207,138) 2,804, ,927 33,207,800 Total Issued capital (Note 19) Treasury shares (Note 19) Legal reserve (Note 19) Revaluation reserves (Note 19) Other reserves Share premium (Note 19) Other restricted reserves (Note 19) Retained earnings (Note 19) Unrealised assets and liabilities revaluation reserve (Note 19) Translation differences Net profit for the year Thousands of euros Noncontrolling interests As at 1 January ,939,243 (232,614) 750,348 1,389,408 13,015,498 86,270 7,323,842 (213,239) (2,246,437) 2,824,335 2,393,198 29,029,852 Comprehensive income for the period (108,197) (147,004) 511,429 2,870, ,040 3,260,192 Operations with partners or owners Profit distribution , ,788, (2,824,335) - 1,782 Transactions with treasury shares (Note 19) - (51,718) (4,586) (56,304) Free capital increase (Note 19) 173, (173,639) - - (1,616) (1,616) Free allowance acquisition (Note 19) (609,647) (609,647) Other changes in equity Share-based payment transactions ( Note 19) , ,821 Other changes (29,043) ,033 28,990 As at 31 December ,112,882 (284,332) 787,848 1,215,769 13,015,498 86,270 9,369,191 (360,243) (1,735,008) 2,870,924 2,584,271 31,663,070 Total (*) The Consolidated statement of changes in equity for 2010 is presented for comparative purposes only. The accompanying Notes 1 to 53 and the Appendix are an integral part of the Consolidated statements of changes in equity for the years ended 31 December 2011 and

17 Annual consolidated financial statements 2011 / Financial statements IBERDROLA, S.A. AND SUBSIDIARIES Consolidated statements of cash flow for the years ended 31 December 2011 and 2010 Thousands of euros Note December December 31, , 2010 (*) Cash flows from operating activities: Profit before tax 3,454,411 3,840,985 Non cash - Adjustments for Depreciation and amortisation charge, allowances, provisions and staff costs for pensions 22, 34, 36 3,259,564 2,922,741 Results of companies accounted for using the equity method net of taxes 11 34,543 (27,356) Grants credited to income 36 (72,450) (48,440) Finance income and costs 38, 39 1,061,921 1,287,887 Gains from disposal of non-current assets (45,782) (271,775) Changes in working capital Change in trade and other receivables 454,447 (630,506) Change in inventories (188,862) 165,997 Change in trade and other payables (1,302,241) 1,698,371 Effect of translation differences on working capital of foreign companies (8,508) (341,075) Change in non-current receivables and other payables 38,538 (21,943) Provisions paid (339,797) (422,397) Income taxes paid (744,543) (599,479) Interests received 459, ,751 Dividends received 51,052 56,303 Net cash flows from operating activities 6,111,677 7,919,064 Cash flows from investing activities: Subsidiary acquisition 41 (1,672,211) - Change in cash due to changes in consolidation method and/or scope 18, ,757 (39,757) Investments in intangible assets 8 (501,799) (324,379) Investments in associates 11 (32,698) (98,283) Equity instruments 11 (29,921) 49,735 Other investments 11 (73,539) 43,019 Investments in investment property 9 (33,645) (16,083) Investments in property, plant and equipment 10 (4,043,359) (5,225,914) Changes in working capital due to current financial assets 1,870,247 (1,466,937) Income taxes paid - (91,042) Proceeds from disposals of non-financial assets 3,055 1,312,424 Proceeds from disposals of financial assets 144, ,597 Net cash flows from investing activities (4,202,966) (5,577,620) Cash flows from financing activities: Free allowances acquisition 19 (550,840) (609,647) Dividends paid 19 (174,667) - Ordinary dividends paid Iberdrola Renovables (20,713) - Non-controlling shareholders acquisition of Iberdrola Renovables - - Treasury shares acquisition (1,521,801) - Extraordinary dividend Iberdrola Renovables (994,214) - Proceeds from borrowings 11,971,224 6,910,774 Repayment of borrowings (11,316,954) (6,665,988) Grants related to assets 535, ,500 Interest paid including capitalised interest (1,609,309) (1,490,900) Proceeds from capital increase 19 1,902,176 (1,616) Treasury shares acquisition 19 (759,203) (358,242) Proceeds from disposals of treasury shares , ,938 Net cash flows from financing activities (1,894,790) (1,411,181) Effect of exchange rate changes on cash and cash equivalents (24,771) 80,975 Net increase in cash and cash equivalents (10,850) 1,011,238 Cash and cash equivalents at the beginning of the year 2,101,857 1,090,619 Cash and cash equivalents at the end of the period 2,091,007 2,101,857 (*) The Consolidated cash flow statement for 2010 is presented for comparative purposes only. The accompanying Notes 1 to 53 and the Appendix are an integral part of the Consolidated cash flow statements for the years ended 31 December 2011 and

18 NOTICE: This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. IBERDROLA, S.A. AND SUBSIDIARIES Notes to the Consolidated financial statements for the year ended December 31, GROUP ACTIVITIES Pursuant to article 2 of its By-laws, the corporate purpose of Iberdrola, incorporated in Spain with limited liability (Sociedad Anónima) (hereinafter, IBERDROLA) is as follows: - To carry out all manner of activities and construction work and provide services required for, or related to, the production, transmission, switching and distribution or retailing of electric power or electricity byproducts and their applications, and involving the raw materials or primary energies required for electric power generation, energy, engineering, computer and telecommunication services, services relating to the Internet, the treatment and distribution of water, the integral provision of urban and gas retailing services, and other gas storage, regasification, transmission or distribution activities, which will be provided indirectly through the ownership of shares or other equity investments in companies that do not engage in the retailing of gas. - The distribution, representation and marketing of all manner of goods and services, products, articles, merchandise, computer programs, industrial equipment, machinery, machine and hand tools, spare parts and accessories. - To engage in the research, study and planning of investment and corporate organisation projects, and to promote, set up and develop industrial, commercial and service companies. - To provide assistance and support services to the group companies and other investees, providing for them the guarantees and collateral required for this purpose. The aforementioned activities may be performed in Spain and abroad, and may be performed totally or partially either directly by IBERDROLA or through the ownership of shares or other equity investments in other companies, subject in all cases to the legislation applicable at any given time and, in particular, to the legislation applicable to the electricity industry (Note 3). In general, the corporate purpose of the subsidiaries consists of the production, switching, distribution and retailing of electricity and gas, the provision of telecommunication services and the performance of real estate and other related activities in Spain and abroad. Until 27 September 2011, IBERDROLA s registered address was at Calle Cardenal Gardoqui 8, in Bilbao. On that date it was relocated to Plaza Euskadi 5, also in Bilbao. 2. BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS a) Applicable accounting legislation The IBERDROLA Group s 2011 Consolidated financial statements were prepared by the directors on 20 February 2012, in accordance with International financial reporting standards (hereinafter, IFRS), as adopted by the European Union, in conformity with Regulation (EC) no. 1606/2002 of the European Parliament and of the Council. The Directors of IBERDROLA expect these Consolidated financial statements to be approved at the General Shareholders Meeting without modification. The IBERDROLA Group s Consolidated financial statements corresponding to the year 2010 were approved at the General Shareholders Meeting on 27 March These Consolidated financial statements have been prepared on a historical cost basis, except for available-forsale financial assets and derivative financial instruments, which have been measured at fair value. The carrying amounts of assets and liabilities hedged by fair value hedges are restated to reflect variations in their fair value as a result of the risk hedged. In the preparation of the 2011 Consolidated financial statements, the IBERDROLA Group has applied the following standards for the first time: Revised IAS 24: Related party disclosures. 16

19 Annual consolidated financial statements 2011 / Financial statements Amendments to IAS 32: Classification of rights issues annual improvements to IFRS. IFRIC 19: Extinguishing financial liabilities with equity instruments. Amendments to IFRIC 14: Prepayments when there is a minimum funding requirement. The adoption of these standards, interpretations and amendments did not have any significant effect on the IBERDROLA Group s financial policy or results. The standards approved by the European Union which application was not mandatory for 2011 did not entail significant changes in these Consolidated financial statements. In addition, the IFRS provide certain alternatives for their application, including most notably the following: - Interests in joint ventures may be proportionately consolidated or accounted for by the equity method. The same method must be applied to all the group s interests in joint ventures. The IBERDROLA Group proportionately consolidates all its investments in companies over which it shares control with the shareholders. - Intangible assets and assets recorded under Property, plant and equipment and Investment property may be measured at market value or cost, less any accumulated amortisation and any accumulated impairment losses. The IBERDROLA Group decided to measure these assets at adjusted acquisition cost. - Under IFRS, actuarial differences exceeding the higher of 10% of the actuarial present value of guaranteed benefit or 10% of the market value of the plan assets, may be allocated to income and differed over the average remaining life of the employees covered by the pension plan. Alternatively, the actuarial differences that arise in relation to its defined benefit obligations may be allocated to reserves. The IBERDROLA Group decided to recognise the full amount of the actuarial variances charged or credited, as appropriate, to reserves. - Under IFRS, grants related to assets can be treated in two ways: the amount of the grants related to assets received for the acquisition of the assets can be deducted from the carrying amount of the assets or they can be set up as deferred income on the liability side of the Consolidated statement of financial position. The IBERDROLA Group opted for the latter treatment. b) Basis of consolidation The subsidiaries over which the IBERDROLA Group exercises control are fully consolidated, except when they are scantly material with respect to presenting fairly the accounts of the IBERDROLA Group. The IBERDROLA Group considers that it has control over a company when it has the power to govern its financial and operating policies, so as to obtain benefits from its activities. The entities that the IBERDROLA Group manages jointly with other companies are proportionately consolidated. The associates over which the IBERDROLA Group does not exercise control but does have a significant influence were accounted for in the Consolidated statement of financial position by the equity method. For the purposes of these Consolidated financial statements, it is considered that a significant influence is exercised over companies in which the Group has an ownership of over 20% and it can be proven that such significant influence exists. In addition, there are specific cases that, despite having a lower ownership percentage, a significant influence can be demonstrated and, therefore, the equity method is applied. In the specific case of Gamesa Corporación Tecnológica, S.A. (hereinafter GAMESA, Note 11.a), this significant influence is demonstrated, inter alia, by the fact IBERDROLA, being the main shareholder, has two representatives on this company s Board of Directors, which has ten members, and there are significant transactions between both companies. The Appendix to these Consolidated financial statements contains a detail of the subsidiaries, jointly controlled entities and associates of IBERDROLA, together with the consolidation or measurement basis used in preparing the Consolidated financial statements and other disclosures relating thereto. The closing date of the financial statements of subsidiaries, jointly controlled entities and associates is 31 December. These companies accounting policies are the same as or have been conformed to those used by the IBERDROLA Group in preparing these Consolidated financial statements. The financial statements of each of the foreign companies have been prepared in their respective functional currencies, defined as the currency of the economy environment in which each company operates and in which it generates and uses cash. The operations of IBERDROLA Group are consolidated in accordance with the following basic principles: 17

20 1. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are recognised at their market value. Any excess of the cost of acquisition of the subsidiary over the market value of its assets and liabilities is recognised as goodwill, as it corresponds to assets that cannot be separately identified and measured. If the difference is negative, it is recognised via a credit to income in the Consolidated income statement. The results of the subsidiaries acquired or disposed of during the year are included in the Consolidated income statement from the effective date of acquisition or until the effective date of disposal. 2. Goodwill arising from business combinations has not been amortised since 1 January 2004, the date of transition to IFRS, although it is reviewed to ascertain whether any impairment loss should be recognised once a year. 3. The result of accounting for investments using the equity method (after eliminating the results on intra-group transactions) is classified under Other reserves and Result of companies accounted for using the equity method net of taxes in the Consolidated statement of financial position and in the Consolidated income statement, respectively. 4. The interest of minority shareholders in the equity and results of the fully consolidated subsidiaries and of the subsidiaries of proportionately consolidated jointly owned entities is presented under Equity of non-controlling interests on the liability side of the Consolidated statement of financial position and Noncontrolling interests in the Consolidated income statement, respectively. 5. Gain or losses on acquisitions from non-controlling interests in companies over which the Group exercises control and sales transactions without loss of control are recognised against or credited to reserves. 6. The financial statements of foreign companies were translated to euros using the year-end exchange rate method. This method consists of translating to euros all the assets, rights and obligations at the exchange rates prevailing at the date of the Consolidated financial statements; the Consolidated income statement items at the average exchange rates for the year; and equity at the historical exchange rates at the date of acquisition (or in the case of retained earnings at the average exchange rates for the year in which they were generated provided that there are no significant transactions that make the use of the average exchange rate inappropriate), as appropriate. The resulting translation differences are taken directly to reserves. 7. All balances and transactions between the fully and proportionately consolidated companies were eliminated on consolidation. c) Comparability of information On 19 January 2011, the IBERDROLA Group entered into a purchase agreement with Ashmore Energy International, Ltd. (hereinafter, AEI) to acquire 99.68% of the share capital of Elektro Electricidade e Serviços, S.A. (hereinafter, ELEKTRO), a Brazilian company that provides electricity distribution services in the state of Sao Paulo and Mato grosso de Sul. The fulfilment of the purchase agreement was contingent upon compliance with certain conditions precedent, the last of which was fulfilled on 27 April 2011, the date on which the IBERDROLA Group acquired control over ELEKTRO (Note 41). In addition, and as described in Note 37, at the end of 2010 the IBERDROLA Group disposed of all its indirect equity investments in some Guatemalan companies and in three companies that provide services relating to natural gas in the United States. These three transactions should be taken into account when comparing figures included in these 2011 Consolidated financial statements with those relating to 2010, since: - The Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated statement of changes in equity and the Consolidated statement of cash flow for the year ended 31 December 2011 include the operations of ELEKTRO from 27 April 2011 but do not contain the activities of the Guatemalan companies or the US companies that were sold, as occurred in

21 Annual consolidated financial statements 2011 / Financial statements - The Consolidated statement of financial position at 31 December 2011 includes the assets and liabilities of ELEKTRO, which did not appear in the Consolidated statement of financial position at 31 December In October 2010 IBERDROLA s Board of Directors approved changes to the organisation and to the management model with effect from 1 January These changes meant abandoning the previous, country-based model in favour of focussing on the entire activity on the basis of the various businesses in order to encourage the creation of synergies and economies of scale. As a result of this change and in accordance with IFRS 8, the IBERDROLA Group amended the information on operating segments for the year ended 2010 (Note 7). 3. INDUSTRY REGULATION AND FUNCTIONING OF THE ELECTRICITY AND GAS SYSTEM Both IBERDROLA and certain of the fully and proportionately consolidated subsidiaries engage in electricity business activities in Spain and abroad (see the Appendix to these Consolidated financial statements) that are heavily affected by the respective regulatory frameworks. Following is a description of the main regulations affecting the IBERDROLA Group: a) Industry regulation and functioning of the electricity system in Spain The electricity sector is currently regulated by the Electricity Industry Law 54/1997, of 27 November This law and its subsequent updates have transposed the provisions contained in Directives 96/92/CE and 2003/54/CE concerning common rules for the electricity internal market. Electricity Industry Law 54/1997, of 27 November, and the subsequent implementing legislation established, inter alia, the following principles: 1) Separation of activities: It prescribes a separation between the activities carried out in the competitive sector and others that are considered to be regulated activities. Companies that carry out any activities defined by the law as regulated (economic and technical management of the system, transmission and distribution) must have these as their sole corporate purpose and cannot, therefore, engage in unregulated activities (generation, supply, to either eligible or last resort customers, other activities unrelated to electricity or activities abroad). In addition, it prescribes a separation between regulated and deregulated activities for accounting purposes. However, a group may carry out incompatible activities provided that these are done by different companies within it. In addition, Law 17/2007, which transposed European Directive 2003/54/EC, introduced the functional separation of regulated activities. 2) Introduction of competition in the power generation activity through the following measures: - Since 1 January 1998, the producers of electricity, other than the special cases and exceptions provided for in the law, have tendered hourly bids for the selling price of electricity of each of the production units owned by them. The operating order of the production units is established on the basis of the lowest bids made until demand is satisfied in each programming period as a result of matched supply and demand. There is also the option of recourse to the intraday markets (six every day), where operators can adjust their positions relative to what they offered on the daily market. Meanwhile, the production facilities contribute to the provision of whatever additional services may be necessary to guarantee adequate supply, obtaining additional remuneration for such services. The organisation and regulation of the electricity production market was defined and implemented by Royal Decree 2019/1997, of 26 December. - In addition to the market remuneration, the Ministry of Industry, Energy and Tourism may establish remuneration entailing payment for capacity. In this regard, orders ITC 2794/2007, ITC 3860/2007 and ITC 3127/2011 regulate said payments for capacity, which consist of an investment incentive, an environmental incentive and an availability service. 19

22 - In 2007 instituted the regulation of auctions to buy energy that would then be supplied at the regulated tariff (CESUR). Since 1 July 2009, the last resort suppliers have acquired energy for supply to customers signed up for the last resort tariff. The outcome of the auctions feeds into the calculation of the additive rate for last resort tariffs. - The installation of new generating facilities is deemed to be liberalised, without prejudice to the obtainment of the necessary authorisations. - Producers are entitled to use in their generating facilities the primary energy sources that they deem most appropriate, subject to such restrictions in respect of the environment, etc. as might be provided for in current legislation. - An option is being considered to prioritize the dispatch to facilities that use domestic fuel (e.g. domestic coal) as their primary energy, provided that it does not represent more than 15% of the total primary energy required for the production needed to satisfy domestic demand and that the necessary measures are adopted to avoid distorting the market price. In this respect, Royal Decree 134/2010 introduced a Security of Supply Restriction procedure which established an obligation on certain owners of coal-fired thermal units to acquire set amounts of this fuel at set prices each year according to a Secretary of State for Energy ruling. Furthermore, this Royal Decree gives priority in the dispatch to said coal-fired thermal units over the other thermal units in the system, up to a certain maximum annual amount of electricity production, which is also set in the aforementioned Secretary of State for Energy ruling and which must comply with the 15% limit at all times. In addition, regulated remuneration is established for these thermal units designed to reflect the full costs relating to their production associated with the aforementioned maximum annual amount of domestic coal-based electricity production. The Security of Supply Restriction procedure was applied for the first time on 26 February A maximum annual amount of domestic coal-based electricity production of 23.3 TWh was established for At the end of the year, the actual amount produced was 18.5 TWh. - Plants not exceeding 50 MW of installed capacity that qualify as co-generation facilities under Law 54/1997 or plants whose primary energy source is renewable can come under the Special Regime, with a separate regulatory system and remuneration that is different from the market price. - On May 28, 2007, the government published Royal Decree 661/2007, which regulates the Production of Electricity under the Special Regime, replacing the previous Royal Decree 436/2004. The main implications of this royal decree for the economic framework for electricity generation by the IBERDROLA Group are the following: a) Owners of facilities commissioned after 31 December 2007 must have selected, for periods of one year or more, between the following two options: To supply the grid through the transmission or distribution network in exchange for a regulated tariff. To sell electricity on the spot electricity generation market either at the applicable sales price on the organised market or at the price freely negotiated between the facility owner, plus, where appropriate, a premium. In this instance, there are minimum and maximum prices in place. b) Facilities commissioned prior to 31 December 2007 (except photovoltaic solar farms) must have elected, before 1 January 2009, whether to remain within the regime provided for in Royal Decree 436/2004 or to switch to the new one. This Royal Decree 436/2004 established two remuneration schemes. The first consisted of supplying electricity to the electricity distributor at the pre-existing price set for this modality, without scope for future resetting. The second option consisted of selling electricity onto the wholesale generation market at the prevailing price plus the incentive and premium provided for in said royal decree when the new legislation was published, also without update and ending on December c) On 26 September 2008 the government published Royal Decree 1578/2008, on Remuneration for Electricity Generation via Solar Photovoltaic Technology for installations brought into service after the date for continued application of the remuneration system set out in Royal Decree 661/2007, of 25 May, for this technology. This royal decree established premiums of between 32 and 34 euro cents per kwh generated and sets a calls system for the allocation of pre-established quotas and feed-in tariffs, such that only those projects submitted that fall within the pre-defined quotas are eligible to receive the feed-in tariff. Allocations are based on chronological order of the applications received. The feed-in tariff declines as the pre-defined quotas are met. 20

23 Annual consolidated financial statements 2011 / Financial statements d) Royal Decree Law 6/2009 established a register for pre-allocation of remuneration covering all technologies included under the special regime except photovoltaic energy, requiring registration of a project before it is eligible to receive remuneration in accordance with Royal Decree 661/2007. Projects were registered in chronological order, and must have met some administrative requirements and guarantees must have been provided. All registered facilities have the right to be remunerated in accordance with Royal Decree 661/2007, although the total amount may not surpass the limit established in this legislation. If the total amount of capacity registered in a single category is below the established limit, the subsequent projects will be entitled to this remuneration up to the limit. e) Towards the end of 2010, a number of regulations affecting the Special Regime were published: Royal Decree 1565/2010, Royal Decree 1614/2010 and Royal Decree-Law 14/2010. These amend the remuneration of the various technologies as follows: Wind power. The benchmark premiums for 2011 and 2012 are reduced for wind farms accessing the market under Royal Decree 661/2007 by 35%. A limit is placed on equivalent hours of operation of the wind farms, whereby hours that exceed the limit are not eligible for the related premium. For the individual wind farm limit to be triggered, the national level must also exceed the overall limit. Solar thermal. The regulations state that during the first year of either the life of the plant or from enactment of Royal Decree 1614/2010, these plants may only choose the regulated tariff option (the market option disappears). Limits are also placed on equivalent hours in accordance with the technology of each plant. Photovoltaic. The number of years of eligibility to obtain the premium is limited to 28 (previously there was no limit). Limits are also placed on equivalent hours of operation according to the technology and the climate area after which the plants no longer receive the premium (tentatively for installations under Royal Decree 661/2007 until 2013, more restrictive equivalent hours than those established in general). The number of years with premium is extended for which are under Royal Decree 661/2007 to 30 years according to Sustainable Economy Law (Law 2/2011, of 4 March). 3) Guarantee of the proper functioning of the system, by using of the following measures: - System: - Market: Red Eléctrica de España, S.A. carries on the transmission management and system operation activities which, pursuant to the Law, have been unbundled for accounting purposes. As system operator, it is responsible for managing the adjustment markets to guarantee a balance between energy demand and generation. In 1998, OMEL, S.A (hereinafter, OMEL) was created for managing the Spanish electricity peninsular market. The offshore system was run following its own rules. Iberian Electricity Market (hereinafter, MIBEL). On 1 October 2004, Spain and Portugal agreed the International Convention setting up an Iberian Market for Electric Power between the Kingdom of Spain and the Republic of Portugal. In January 2008, this agreement was revised at the Braga Summit to comply with the March 2007 Regulatory Compatibility Plan. Since July 2006 the Portuguese and Spanish forward markets have operated together and since July 2007 the short-term markets. Several of the measures described above are designed to implement a single Iberian market for electricity. Currently, the Operation of the Iberian market is split between two companies: OMIE (OMI-Polo Español) which is responsible for managing the daily and intraday markets for MIBEL and futures auctions for last resort demand in the Spanish system (CESUR), and OMIP (OMI-Polo Portugués) which runs the overall MIBEL futures markets. 21

24 The International Convention between the Portuguese Republic and the Kingdom of Spain, setting up a single Iberian market for electricity, revised according to Braga Agreement in Braga on 18 January 2008, envisaged the creation of the Iberian Market Operator (Operador del Mercado Ibérico, OMI) by merging OMIE and OMIP, via two shareholding companies with head offices in Spain and Portugal, 10% crossshareholdings and a corporate structure comprising the current two market operating companies. This reorganisation process was completed as of 31 December ) Legislation applying to regulated activities: The Electricity Industry Law establishes that distribution and transport are classified as regulated activities that are not subject to the free competition and market regime. On 1 December 2000, Royal Decree 1955/2000, regulating the transmission, distribution, retailing and supply activities and electricity facility authorisation procedures, was approved. The basic aim of this royal decree was to establish the measures required to guarantee the supply of power and the authorisation procedures relating to all electricity facilities that are the responsibility of the Spanish Government. On 15 February 2008, the government approved Royal Decree 222/2008, establishing the prevailing remuneration framework for the electricity distribution business. Pursuant to this Royal Decree, the remuneration paid for distribution activities will be set for regulatory periods of four years and will be calculated using a reference network model as a technical comparison tool. A reference network model is a model that maps out, for all Spanish territory, the areas in which each distributor is active and determines the reference distribution network needed to link up the transmission network, where applicable, and distribution network with the final consumers of electricity, based on their geographical location, feed voltage and demand for power and electricity. The reference remuneration of each distribution company will be calculated by summing together three components: remuneration for investment, remuneration for operating and maintenance, remuneration for all other costs necessary to the exercise of distribution activities, which will include commercial management, network planning and energy management costs. Within each period, the annual remuneration is calculated by updating the base remuneration of the previous year -in line with the CPI and IPRI- and adding the remuneration for the new investments made. Annual incentives are also set for enhancing quality and reducing losses. The quality incentive is established in Appendix I of Royal Decree 222/2008. In general, the incentive consists of comparing utilities global quality indicators with target indicators, resulting in penalties or bonuses. The limits of the incentive/bonus are +3% of the remuneration. Legislation for the incentives for losses is Order ITC 2524/2009 of 8 September. This incentive is calculated as the sum of a) the difference between the actual loss percentage and a target, b) a loss price and c) the power flowing through the networks of distribution companies. The limits of the incentive/bonus are +2% of the remuneration. Order ITC/3353/2010 of 28 December establishes the final distribution remuneration for 2009 and 2010 (Note 4.y). Order IET/3586/2011 of 30 December established provisional remuneration for 2011 and 2012, and makes a slight adjustment to the final remuneration of 2010 for certain companies. With regard to the electricity transmission business, Royal Decree 325/2008 established the new remuneration regime for facilities brought into service after 1 January It provided that the remuneration of each transmission facility commissioned after 1 January 2008 will consist of two components: a remuneration for investment and a remuneration for operating and maintenance costs. Order ITC/368/2011 of 21 February approves the new reference unit values for investment costs and operating and maintenance costs for these facilities. Transmission facilities prior to 1 January 2008 continue to be governed by the model and standard costs established in Royal Decree 2819/

25 Annual consolidated financial statements 2011 / Financial statements 5) Access tariffs or tolls: On 24 September, Royal Decree 1202/2010 was published establishing the periods of review for the access tolls to transmission and distribution networks for electricity. According to this regulation, in addition to its mandatory obligation of reviewing access tariffs and tolls to transmission and distribution networks for electricity each year, the Ministry of Industry, Tourism and Trade may review the tolls with a quarterly maximum frequency (previously it was half-yearly) when temporary imbalances arise in the settlement of regulated activities in the industry or when regulatory changes or special circumstances warrant. This allows for a better adjustment of income when there are changes in the calculation of electricity system costs. Royal Decree-Law 14/2010 of 23 December, which amended Law 54/1997, extended the application of access tolls to electricity producers of both the ordinary and the special regime, and established that the producers would be regulated taking into consideration the energy fed into the grid. In addition, as from 1 January 2011, provided the tolls to be paid by the electricity producers have not been implemented, this royal decree-law establishes that an access toll of EUR 0.5 per MWh fed into the grid will be applied to producers that are connected to the grid. Subsequently, Royal Decree 1544/2011 of 31 October implemented the aforementioned regulation of access tolls for electricity producers. Also, it included an order for the CNE (National Energy Commission) to send to the Ministry of Industry, Energy and Tourism, within six months, a proposed methodology for calculating said access tolls, while temporarily maintaining the toll set in Royal Decree-Law 14/2010 and establishing a specific toll for pumping facilities. 6) Progressive liberalization of the electricity supply and introduction of the supply activity: - Law 54/1997 provided for the gradual deregulation of the electricity supply market, progressively giving each of the different types of customer segments the possibility of choosing their supplier. All electricity consumption has been deregulated since 1 January This means that consumers who so wish can freely contract their energy with the supplier of their choice, paying an access tariff for the right to use the networks. - The new regime gives qualifying customers and suppliers the right to use the transmission and distribution networks, setting a single toll applicable nationwide for use of the networks, without prejudice to any specialised services provided due to voltage and/or network usage requirements, or to the type of energy supplied, depending whether transmission or distribution networks are involved. Royal Decree 1164/2001, published on 26 October 2001, established the access tariffs for the electricity transmission and distribution networks, passwords, which have been updated each year. - From 1 July 2009, the Last Resort Supply has been in place. Low-voltage customers connected with a contracted capacity of less than 10 kw who do not choose another supply option shall be supplied by a last-resort supplier at a price calculated automatically. This additive rate is called last resort tariff. Iberdrola Comercialización de Último Recurso, S.A.U. has been designated, among others, as last resort suppliers of electricity and natural gas in Spain. 7) Price formation and tariff structure: On 4 July 2007, the government published Law 17/2007, amending the Spanish Electricity Industry Law 54/1997, of 27 November to bring it in line with the provisions of Directive 2003/54/EC of the European Parliament and of the Council, of 26 June 2003, on Common Standards for the Domestic Electricity Market. This law establishes the concept of last resort supply and the additive calculation mechanism used to set last resort tariffs based on the cost of energy, the access tariff and an additional cost for commercial management. This was developed through Royal Decree 485/2009 which implements the last resort supply and sets the terms and scope of application. Order ITC 1659/2009 lays down the mechanism for transferring customers from the tariff market to last resort electricity supply and, specifically, the procedure for calculating and structuring last resort tariffs. Through this procedure, the last resort tariff is calculated as an additive rate replicating supplier costs. In this way, energy acquisition costs, regulated access tolls and supply costs are included. Since 1 July 2010, the last resort tariffs are calculated and published quarterly, coinciding with each calendar quarter, in the ruling of the Directorate General of Energy Policy and Mining. On 31 December 2011, the ruling that publishes the last resort tariffs for the first quarter of 2012 included, exceptionally, a review of the last resort tariffs applicable from 23 to 31 December 2011, in application of the Supreme Court judgement of 20 December, which provided for the cancellation of certain aspects of the tolls applicable in the fourth quarter of

26 8) Social Tariff: On 7 May 2009, Royal Decree-Law 6/2009 was published, adopting certain energy sector measures and approving the social tariff (bono social). Among the main features, it creates the social tariff for certain consumers with certain social, consumption and purchase power characteristics supplied at the last resort tariff at their normal residence. This tariff is calculated as the difference between last resort tariff and the tariff indexed to a reference value, the so-called reduced tariff. This reduced tariff will be the prevailing tariff applicable to domestic consumers at the date the royal decree-law takes effect, although it may be modified via the Ministry of Industry, Energy and Tourism. Until these social and economic indicators are developed for application, the social tariff will apply to natural persons in their normal residence supplied under the last resort scheme with contracted capacity of less than 3 kw, to large families or families whose members are all unemployed and to certain pensioners over 60 years of age receiving minimum pensions. Subsequently, the General Secretary for Energy s Resolution of 26 June establishes the procedure for implementing the social tariff. According to Royal Decree-Law 6/2009, financing of the social tariff will be split among owners of the electricity generation facilities. This legislation also states that the financing and features of the social tariff will be revised by order of the Ministry of Industry, Energy and Tourism at least every four years. In this respect, Royal Decree-Law 14/2010 extends the period for the first revision of the financing until 1 January 2014, maintaining the transitional financing provided for in the second transitional provision of Royal Decree-Law 6/ ) Load Manager: Royal Decree-Law 6/2010 introduces the figure of the load manager, defined as follows: Royal Decree 647/2011, which was approved in May, regulates the functions of these load managers and defines them as companies providing energy charging services defined in article 9.h) of Electricity Industry Law 54/1997 of 27 November which, while consumers, are authorised to resell electricity for power recharging services for electric vehicles for the resale of energy to electric vehicles. The same royal decree sets forth the requirements and obligations of these agents. It also created a new super off-peak tariff applicable to contracts of up to 15 kw, thereby creating a third hour period (from 1 a.m. to 7 a.m.) aimed at encouraging the charging of electric vehicles in this period. 10) Emission allowances: Regarding environment regulations, the issue of CO 2 emissions rights or allowances should be noted. This concern the obligation placed on companies by Directive 2003/87/EC to hold an emission allowance for every tonne of CO 2 emitted by a plant. Royal Decree 1866/2004, of 6 September, as amended by Royal Decree 60/2005, of 21 January, set up a National Plan for the Allocation of Emission Allowances, as required by the directive. This plan came into effect on 1 January 2005 and ran for 3 years. Emission allowances allocated free of charge to the Spanish electricity sector for amounted to 269 million tonnes, of which 43 million tonnes corresponded to facilities of the IBERDROLA Group. Subsequently, Royal Decree 1402/2007, amending Royal Decree 1370/2006, of 24 November, and approving the National Allocation Plan for CO 2 emission allowances for , allocated 270 million tonnes of CO 2 to the electricity sector for this five-year period, of which 42 million tonnes correspond to IBERDROLA Group facilities. On the other hand, Royal Decree-Law 3/2006 stated in article 2 that, as from 2 March 2006, remuneration for electricity generated under the ordinary regime would be reduced by an amount equal to the value of greenhouse gas emission allowances allocated free to power generators under the ordinary regime. This measure was extended in various regulations until the publication of Royal Decree-Law 6/2009, of 30 April, introducing certain measures in the energy sector and approving the social tariff, limiting its applicability until the abolishment of the integrated tariff system and introducing the last resort tariff in the electricity sector from 1 July On 7 December 2010, the Supreme Court issued a ruling on the appeals filed by IBERDROLA against the regulations governing the allocating of CO 2 emission rights for the period. The ruling accepted IBERDROLA arguments and declared the discrimination of the allocation to coal technologies compared to gas natural technologies unjustified. 24

27 Annual consolidated financial statements 2011 / Financial statements As a result of the execution of the Supreme Court sentence, the CO 2 emission rights of the Allocation Plan assigned to each company may be modified. If this were the case, it would be necessary to recalculate the netting of electricity generation remuneration in 2008 and the first half of ) Revenue shortfall: Electricity Industry Law 54/1997, of 27 November, introduced the liberalisation of electricity generation and supply activities. However, it was noted that the sustainability of the system was heavily dependent on the tariff system. The difference between the access tariff revenue established by the Government and real costs related to these tariffs resulted in a revenue shortfall which led to problems and modifications in the functioning of the system. To fund this shortfall, which is deferred through the recognition of long-term collection rights recovered by the annuities incorporated to annual fee, a series of measures have been adopted that so far have proven to be insufficient. Royal Decree-Law 6/2009, of 30 April, sets limits to the increase of the deficit and defines a framework for the gradual sufficiency of the access tolls. It also addresses the mechanism for funding the tariff deficit. This royal decree states that from 1 January 2013, access tolls will be sufficient to meet the entire cost of regulated activities, preventing the appearance of an ex-ante deficit. It also regulates the transitional period until that date, limiting the revenue shortfall in the settlements of regulated activities in the electricity industry for 2009, 2010, 2011 and 2012 to EUR 3,500 million, EUR 3,000 million, EUR 2,000 million and EUR 1,000 million, respectively.in addition, it states that if the settlements of regulated activities in each period result in a higher revenue shortfall than expected, the excess would be recognised in the provisions approving the access tolls for the ensuing period. At the same time, it envisages the assignment of the related present and future collection rights to a securitisation fund set up for this purpose, which will issue the related liabilities via a competitive mechanism in the financial market with a Government guarantee. Royal Decree-Law 6/2010, of 9 April, reinforces the aim of eliminating the shortfall and is more precise than the provisions of Royal Decree-Law 6/2009, while it also states that electricity companies designated to temporarily finance the deficit are also required to finance the exante deficits until the securitisation fund makes the related issues. It also requires these companies to fund any temporary shortfalls above the exante deficit, recognising their right to receive the amounts financed, plus interest, in the following year through an increase in access tariffs. Royal Decree 437/2010 implementing the securitisation process for the revenue shortfall in the Spanish electricity system was published on the same date. This legislation specifies the collection rights and the initial holders, regulates the method for determining the price and conditions of the assignment, and lays the framework for the procedure for issuing the financial instruments comprising the fund s liabilities. However, as the tariff increases preclude the established limits from being observed, Royal Decree-Law 14/2010 was published in December 2010 establishing urgent measures to correct the shortfall. Among other things, this legislation raised the maximum limits for 2010, 2011 and 2012 to EUR 5,500, EUR 3,000 and EUR 1,500 million, respectively, and led to an amendment of the 2011 Spanish Budget Act to include up to EUR 22,000 million of guarantees for the electricity system shortfall securitisation fund. Royal Decree 1307/2011, of 26 September, which amends Royal Decree 437/2010, provides flexibility to the procedure for issuing financial instruments more competitively. In this regard, it introduces the possibility of the simple sale of securities, thus enabling the electricity system deficit securitisation fund to take advantage of this form of financing and helping achieve the overall objective of minimising financing costs over the life of the fund. To achieve the twin objective of minimising prices and launching competitive issues, in simple sale transactions the royal decree stipulates that one or more subscribing entities must be selected on an individual basis using a competitive procedure based on criteria such as term, price and volume to be subscribed. On 16, 17 and 18 March 2011, the Supreme Court handed down a judgment on the claims filed by the electricity companies against the regulations for recognising the financial costs relating to the deficit of The Supreme Court considered that the Euribor interest rate was not sufficient to totally restore the capital of the companies obliged to finance the tariff deficit. The key argument that the Supreme Court took into consideration was that the guiding criterion for setting the spread should be that the companies holding the collection rights do not suffer any economic loss due to the deferral of a payment due to them and, accordingly, the recovery of the amounts advanced by them should include compensatory interest to ensure full reimbursement. The Supreme Court argued that, given the market situation at that time, the electricity companies had to seek financing on the capital market and that the cost of the debt borne by them, which included the amount necessary for meeting the deficit financing obligation, was higher than the rate of interest stipulated in additional provision 8 th of Royal Decree 485/2009 and, since that the latter was not sufficient, it required the addition of a spread or margin. 25

28 b) Industry regulation and functioning of the gas system in Spain The natural gas sector in Spain has undergone significant changes in structure and operation in the last 10 years, from a monopoly to a fully open market, driven mainly by the deregulation measures in European Directives (1998/30/EC, 2003/55/EC and 2009/73/EC) aimed at opening up markets and creating a single European gas market. These liberalised principles have been incorporated and developed in Spanish law through Law 34/1998 on the Hydrocarbons Sector, which began the deregulation process and, more recently, through Law 12/2007 which completed it. In 2011 a draft law for transposing Directive 2009/73/EC was passed and subsequently cancelled due to the dissolution of parliament and the calling of a general election. The 1998 Hydrocarbons Law laid the foundations for the new gas system, particularly with regard to the separation of activities (regulated and deregulated), the introduction of third-party access to the regulated network, the abolition of the former concessions for piped gas supply and their conversion into regulated administrative permits, and the establishment of a timetable for progressive market deregulation. In line with these principles, the gas system has been structured around two types of activities: regulated activities (regasification, storage, transportation and distribution) and deregulated activities (trading and supply). With regard to the separation of activities, Law 34/1998 provides for the legal separation of deregulated and regulated activities and the segregation for accounting purposes of the various regulated activities. In addition, with the publication of Law 12/2007, Spain moved a step closer to achieving functional separation between network activities and deregulated activities and between network activities and technical system management. Although the Hydrocarbons Law had established the general principles underpinning the new Spanish gas system, the sector s deregulation did not commence in practice until 2001, following publication of Royal Decree-Law 6/2000, on urgent measures to intensify competition in the goods and services markets, and Royal Decree 949/2001, regulating third party access to gas installations and establishing an integrated economic system for the natural gas sector. The first of these decrees enacted certain elements of the Hydrocarbons Law with the aim of fostering measures that would facilitate the elimination of entry barriers for new supply companies. In particular, it created the Technical System Manager (ENAGAS, S.A.), provided for a 25% gas release under the contract for natural gas brought from Algeria through of the Maghreb pipeline, and brought forward the timetable for deregulation. The second, Royal Decree 949/2001, established firstly the specific terms and conditions for third-party network access and, secondly, a remuneration system for regulated activities and a cost-based system of tariffs, tolls and charges structured according to pressure levels and consumption bands. The publication of the specific criteria to be applied for third-party network access (guarantees, capacity assignment criteria, grounds for refusal, etc.) and the actual level of the tariffs, tolls and charges were key in encouraging new operators to enter the market. The remuneration assigned to each company as well as the tariffs, tolls and charges are updated periodically by ministerial orders and resolutions. The economic system also established a settlement procedure that would allow for redistribution of revenues collected in the form of tariffs, tolls and charges between the various regulated activities in accordance with the remuneration method established. The body responsible for effecting this redistribution is the National Energy Commission. Other issues related to the regulation of the transmission, distribution and supply businesses, the administrative authorisation procedures for natural gas facilities and the regulation of certain aspects of the supply business are dealt with in Royal Decree 1434/2002. As for the technical operation of the system, the operating regulations are established in Order ITC 3126/2005 enacting the Gas System Technical Management Rules. Inter alia, these regulations establish that each operator is individually responsible for maintaining its liquidity and enact specific protocols for the conduct of the Technical System Manager in exceptional operating circumstances. Despite the sector s progressive deregulation, prevailing regulations uphold the State s obligation to ensure the safety and continuity of supply. To this end, Royal Decree 1766/2007 stipulates that direct market suppliers and consumers must maintain minimum security stocks equivalent to 20 days consumption. In addition, it limits the maximum percentage of gas supplies that may be sourced from a same country to 50%. 26

29 Annual consolidated financial statements 2011 / Financial statements The State also maintains responsibility for obligatory planning work for certain infrastructures (gas pipelines forming the core transmission network, the secondary transmission network, determining the total liquid natural gas regasification capacity necessary to supply the system and core natural gas storage facilities). For all other infrastructures, the state s planning work is provisional only. As part of this process, planning is carried out by the Government with contributions from the Regional Governments of Spain and subsequently submitted to the Congress for approval. As mentioned above, in Spain the deregulation process was completed with Law 12/2007 transposing Directive 2003/55/EC. The two key changes enacted with this law were the elimination of regulated supply and the functional separation between network activities and deregulated activities. In the Spanish gas system, the market deregulation process was completed on 1 July 2008 with the elimination of regulated supply for Group 3 customers and the creation of last resort supply. Currently, low-pressure customers with annual consumption of less than 50,000 kwh who do not choose another supply option shall be supplied by a last-resort supplier at a price calculated automatically. This additive rate is called the last resort tariff. Iberdrola Comercialización de Último Recurso, S.A.U. has been designated as last resort supplier of electricity and natural gas in Spain. c) International regulation 1) Industry regulation in the UK The principal laws that govern Scottish Power Ltd. s (hereinafter, SCOTTISH POWER) activities are the Electricity Act 1989 and the Gas Act 1986, as substantially amended and supplemented by numerous subsequent enactments, including the Gas Act 1995, the Utilities Act 2000, the Energy Act 2004, the Energy Act 2008, the Energy Act 2010, the Energy Act 2011 and various EU directives. Significant parts of the Energy Act 2011, as well as some points of previous Energy Acts are still in the process of being implemented. Other laws relating to subjects such as environmental protection, health and safety, and planning and competition are also very important parts of the framework in which SCOTTISH POWER operates. These laws are enforced respectively by the Environment Agency (or in Scotland, the Scottish Environmental Protection Agency); the Health & Safety Executive; local and national planning authorities; and the Office of Fair Trading (OFT) working concurrently with the Office of Gas and Electricity Markets (OFGEM). Aspects relating to the customer protection are imposed by the Authorities of Fair Trading, OFT and OFGEM. Aspects relating to the customer protection are imposed by Authority of fair trading, OFT and OFGEM. The Authority The Utilities Act 2000 replaced individual gas and electricity regulators with one regulatory authority, the Gas and Electricity Markets Authority (GEMA), comprising a chairman and other members appointed by the Secretary of State for Energy and Climate Change. GEMA is supported by a non-ministerial Government department, OFGEM. The main instrument of regulation used by GEMA is the licensing regime which in most cases requires the various aspects of the energy industry (such as transmission, distribution, generation, supply) to be carried out under a licence to which standard conditions apply. In addition, there are a number of statutory obligations, known as relevant requirements, which are enforced by GEMA as if they were licence conditions. GEMA s principal objective is to promote the interests of present and future consumers, wherever appropriate, by promoting effective competition. The interests of such consumers are their interests taken as a whole, including their interests in the reduction of greenhouse gases and in the security of the supply of gas and electricity to them; and before GEMA protects consumers interests by means of competition they must consider whether an alternative course of action would better protect those interests. In furthering this objective they must ensure that all reasonable demands for electricity and gas are met, ensure that licence holders are able to finance the activities they are obliged to undertake, and contribute to the achievement of sustainable development. Numerous other duties are also required to be taken into account, but do not override the principal duties. They include the interests of customers who are disabled or chronically sick, of pensionable age, have low incomes or are residing in rural areas. They also include the interests of users of other utilities, promoting the efficient running of the companies in the industry, protecting the public from danger, securing a diverse and viable long term energy supply, and complying with good regulatory practice. 27

30 GEMA s functions include the granting of licences (and their revocation in certain limited circumstances), the proposing of changes to licence conditions (including the operation of price controls for the monopoly network functions), and the review of industry code modifications and operating schemes for promoting renewable electricity and energy efficiency. The Authority has power to impose monetary penalties for past and ongoing breaches of licence conditions and relevant requirements. Fines can be up to 10 % of the licensee s applicable turnover. The Secretary of State and GEMA have to provide an annual report to Parliament on the security of energy supply and also the capacity of the network to deliver that energy. Licences Companies within the SCOTTISH POWER Group hold licences for various functions including: - the supply of electricity; - the generation of electricity; - the distribution of electricity in the South Scotland area; - the distribution of electricity in the Manweb area (Merseyside and North of Wales); - the transmission of electricity in the South Scotland area; - the supply of gas; - the shipping of gas (that is, arranging to insert it into and remove it from the public network); and - the transportation of gas to certain specific sites (such as proposed new gas fired power stations). The same company cannot hold both an electricity transmission or distribution licence and an electricity supply licence or generation licence. Similarly the same company cannot hold a gas transporter licence and a gas supply or gas shipper licence. However it is possible for different entities within the same group to hold such licences. The conditions of licences regulate such matters as: - for network licensees, the quality of service and the charges that can be made. - for supply to domestic consumers, consumer protection provisions including rules on debt and disconnection, cost reflective pricing (especially in relation to payment methods) and on fair marketing. - for most types of licence, rules requiring adherence to industry codes that set down the detailed technical rules for operating the industry, and providing for OFGEM to determine whether proposed changes to the codes should go ahead. The Gas Act 1995 and Utilities Act 2000 introduced standard licence conditions to ensure that all holders of a particular licence type are normally subject to the same conditions and to allow modifications to be made collectively. The Secretary of State determined the initial standard licence conditions, although subsequent modifications are made by GEMA. Modifications currently require that the great majority of all relevant licence holders do not object. However, affected license holders and other parties can do claims to the Competition Commission in issues related to procedures. The rules for the claim have been purposed by the Competition Commission. The Energy Acts 2008, 2010 and 2011 contain clauses allowing the Secretary of State to modify licence conditions without the consent of the licence holders (and without appeal to the Competition Commission) for certain specified purposes, including the introduction of smart meters, the introduction of feed-in tariffs for small scale renewable or CHP generation, the creation of a renewable heat incentive, implementing assistance schemes for people in fuel poverty (it contents customers who spend over a percentage currently 10% - of their salary), setting notice periods to be given for tariff changes, the limitation of excessive returns in the balancing market, setting up the Green Deal energy efficiency scheme, providing additional information on consumer bills and facilitating the proposed special administration regime in the event of supplier insolvency. In most cases, these powers are time limited. Changes to licence conditions can also be made without licensees consent in pursuance of an EU obligation, using powers in the European Communities Act The National Market of Electricity and Gas Ruling 2011 applied this to change the standard conditions of the electricity and gas grid. 28

31 Annual consolidated financial statements 2011 / Financial statements When OFGEM makes a decision on modifying an industry code which runs contrary to the views of the relevant industry governance body, the decision can, with certain exceptions, be appealed to the Competition Commission. Competition Legislation GEMA also has concurrent powers with the OFT to apply the Competition Act 1998, the Fair Trading Act 1973 and the Enterprise Act 2002 to the energy sector in Great Britain. The prohibitions of the Competition Act are based on the provisions of Articles 81 and 82 of the EC Treaty and GEMA can levy fines of up to 10% of turnover for breaches of the prohibitions. Under the Enterprise Act, the GEMA and the OFT have powers to initiate a market investigation where it appears that competition has been prevented, restricted or distorted by any feature of a market in Great Britain (or for the OFT, the UK) for goods and services, so far as they relate to commercial activities connected with the generation, transmission and supply of electricity, but where there has been no obvious breach of the prohibitions on anticompetitive agreements or arrangements or abuse of a dominant position under the Competition Act or under articles 81 or 82 of the EC Treaty. Features that could be examined are the structure of the electricity market (or any aspect of its structure), the conduct of companies operating within it, and the conduct of such companies customers. The market is assessed according to a competition-based test. The Energy Act 2010 empowers the Secretary of State to create additional licence requirements in the area of potential market abuses regarding transmission constraints. Any penalty imposed for failure to comply with these requirements is subject to appeal to the Competition Appeal Court, instead of the legal review process applied in cases of normal penalties for breach of licence. The Government launched a consultation on 8 December 2011 on a proposal for implementing these powers and OFGEM carried out a parallel consultation about establishing usage guidelines. The deadline for the consultations is 1 March Price controls Prices for the sale of electricity and gas by utilities to final consumers are not controlled in Great Britain. There is no controlled tariff for certain categories of consumer, although all the major suppliers do offer preferential tariffs for certain disadvantaged customers and have undertaken to the Government to spend a certain minimum amount on these tariffs and other similar measures. Under the Energy Act 2010, the Government has implemented the Warm Home Discount programme to requires utilities to pay disadvantaged customers fixed rebates of a standardised sum, to be paid in a way that does not distort competition. The existing preferential tariffs are expected to be phased out. OFGEM has implemented licence modifications requiring any price variation by payment method to be cost reflective, and also (as an interim measure) requiring broader non-discrimination in charges. Similarly, there are currently no controls other than those established in the Competition Act on prices charged to commercial customers or on the wholesale electricity and gas markets. OFGEM is carrying out a consultation on the proposals for the retail market review programme for limiting the products that can be sold in the domestic energy market. If these proposals are approved, suppliers will be limited to one long-term product per payment method (with options for two tariffs for clients with electric heating), which will consist of a fixed tariff set by OFGEM and a domestic tariff that the supplier may set freely. Suppliers may also offer a limited number of fixed-term products that will be based on either a fixed price or one that is linked to an external index. OFGEM states in the consultation document that: we intend to monitor the impact of our proposals closely. We will keep open the option of further interventions to protect consumers, particularly vulnerable consumers, including potentially a backstop tariff. It is currently not clear if OFGEM will amend its proposals in response to the consultation and, otherwise, if suppliers will accept the proposals or will refer the matter to the Competition Commission. OFGEM has also stated that it could request a wider review by the Competition Commission, saying that if we believe it is likely that suppliers will oppose our proposals, we retain the option that we have flagged in our previous consultations of referral to the Competition Commission for a market investigation reference. 29

32 The networks are however recognised to be a natural monopoly. Their prices have been so far controlled according to a five-year formula known as RPI-X. The regulator assesses the costs of an efficient network operator and the likely capital programme in order to calculate the return needed to meet a target return on capital. Various incentives are then added to the formula which also takes account of the Retail Prices Index (RPI) and any projected efficiency improvements (-X) in order to calculate the permissible revenues for the network. This framework is being replaced by the new RIIO framework (Revenue = Incentives + Innovation + Outputs). RIIO is similar to RPI-X, but there are several important changes. These changes are to be applied over the next price reviews which will affect regulatory periods of 8 years (with a limited revision after 4 years), using a market index for checking the debt cost, and the introduction for electricity of an amortisation period of the installations of 45 years which replaces the 20 years period using under RPI-X. The Scottish Power RPI-X transmission control was last reset in April 2007 and OFGEM proposed in 28 November 2011, with modifications, covering from April 2012 to March These proposes were acceptable for SCOTTISH POWER transmission area. In the end of the year the negotiation of control RIIO to 8 years was in progress which will start in April 2013; the distribution controls for SCOTTISH POWER s networks in the South of Scotland and the Manweb were reset in April 2010 (DPCR5) and it expects that they would be checked under RIIO framework, with a new control which will enter into force in April Other issues Other key elements of the regulatory regime in Great Britain include: - The Renewables Obligation (RO). The UK government has set out a target of sourcing 30 % of electricity from renewable sources by 2020 and it has introduced the Renewables Obligation scheme as the main support scheme for renewable electricity projects in the UK. The Renewables Obligation Orders (which apply separately to different parts of the UK within a unified scheme) place obligations on suppliers of electricity to source an increasing proportion of their electricity from renewable sources (based on the expected level of renewable energy production in the year plus a spread). Suppliers meet their obligations by presenting sufficient Renewables Obligation Certificates (ROCs). When suppliers do not have sufficient ROCs to meet their obligations, they must pay an equivalent amount into a fund, the proceeds of which are paid back to those suppliers that have presented ROCs in proportion to the number of ROCs presented. Since April 2009, the RO has been banded so that differing technologies will get different levels of support. The RO ends on 31 March 2027 for projects that started generation before 1 April 2009 and 20 years after the start of generation (but not later than 31 March 2037) for later projects. The Government has indicated that the RO will close for new projects on 1 April 2017, to be replaced by a new aid scheme relating to the Energy Market Reform (EMR). It will continue to operate for new facilities joining the RO before this date. - EU-ETS: like all EU Member States, generators in the UK participate in the EU Emissions Trading Scheme (EU ETS). The Department of Energy and Climate Change (DECC) has responsibility for administering the National Allocation Plan. So far, the majority of European Union Allowances (EUAs) have been issued as free allowances: the UK government decided to auction or sell 7% of EUAs issued under its Phase II NAP. From 2013, the government will be required to auction all allocations to the power sector. For the UK, the Kyoto agreement calls for a 12.5% reduction of greenhouse gas (GHG) emissions from 1990 levels by , but the UK Government has adopted more stringent targets. The Climate Change Act of 2008 set out a trajectory towards reducing GHG emissions from 1990 levels by at least 80% by 2050, with interim reduction targets. - Support for Emissions Prices: the Treasury has introduced a new rate on fuel used in electricity generation in effect from 1 April Its effect is that power generators in the United Kingdom will have to pay a higher effective emissions price than that established under EU ETS. As from 1 April 2013, the increase will be GBP 4.94 per tonne. The intention is for the combination of this rate with the low EU ETS price to reach GBP 30 per tonne in Carbon Emissions Reduction Target (CERT). CERT is the government s main policy instrument for improving energy efficiency in the domestic sector. It requires large energy suppliers (over customers) to achieve a specified amount of carbon reduction, benchmarked against eligible measures such as cavity wall insulation, loft insulation and appliance improvements. The CERT is due to run from April 2008 to December At the end of 2011, the Government was consulted about the plans of a substitution scheme of CESP and CERT: Energy Company Obligation (ECO). 30

33 Annual consolidated financial statements 2011 / Financial statements - The Community Energy Saving Programme (CESP). CESP is an additional energy efficiency programme operated by forced suppliers and large generators which is designed to achieve concentrated energy efficiency upgrades, largely going beyond the normal CERT measures, in a small number of targeted areas of intense economic need. Like CERT, CESP ends on 31 December Energy Market Reform (EMR). In July 2011, the UK government published its proposals for EMR, aimed at providing a framework for the necessary investment for decarbonisation of Britain s energy supply while maintaining security of supply and an acceptable level of costs. In December 2011, this was followed by updated technical information giving more details about the way to follow. The elements of the proposals are - a new incentive scheme, based on feed-in tariffs and contracts for difference to support low carbon generation, with the RO preserved for plants commissioning until April 2017; - a capacity mechanism to support security of supply (market-wide mechanism); and - an emission performance standard, to control the construction of high carbon plant. The CFD system and the capacity mechanisms will be administered by the National Grid in accordance with the criteria established by the Government. More details on the system are expected to be revealed in 2012 and the legislation is set to be introduced this year as well. - Pollution controls: The Integrated Pollution Prevention and Control (IPPC), the Large Combustion Plant Directive (LCPD) and the Industrial Emissions Directive (IED). This covers the regulatory regime for controlling pollution from certain industrial activities, including thermal combustion generation, and imposes limits on various categories of emissions. In particular, the LCPD limits the emission of sulphur dioxide (SO 2 ), oxides of nitrogen (NOx) and particles from power stations, whereby operators of such plant had the option of meeting those requirements or accepting a limited hours derogation prior to closure by the end of The IED puts in place a similar regime for 2016 and beyond, with more stringent standards. - New nuclear power stations. The Energy Act 2008 sets out rules to ensure the proper funding of decommissioning for new stations and the Planning Act 2008 provides a new mechanism that will allow questions of development consent in England & Wales to be decided more quickly. These measures, together with the financial framework to be brought forward under EMR are expected to allow new nuclear power plants to be operational by Offshore wind. The Energy Act 2004 brought in a regime for the permitting, connection and eventual decommissioning of offshore wind farms. - Green Deal: The Green Deal is a mechanism which is planned to commence in October It will enable homes and businesses to receive financing for energy efficiency measures that will be repaid through a surcharge on electricity prices which, in turn, is expected to be covered by lower consumption. Suppliers are obliged to apply the collection measures and may also take part as suppliers of the Green Deal. The measures must be designed by authorised suppliers and must meet the Golden Rule that the savings due to reduced consumption exceed the payments. In certain cases, this will be achieved by the receipt of a subsidy through the ECO scheme described above. The Green Deal is a key political priority for the UK Government though it is as yet unclear how enthusiastic consumers will be about taking up the opportunity. 31

34 2) Sector regulation in the US Electricity generation from renewable energy resources - In the United States, numerous state Governments and the Federal Government have adopted measures and implemented numerous regulations designed to foster the development of electricity production from renewable resources. State programmes have generally come in the form of one Renewable Portfolio Standards (RPSs) that usually require utilities to generate or purchase a minimum amount of renewable electricity and two tax incentives. To date, the Federal Government has primarily supported renewable energy development through tax credits to production and investment as well as accelerated depreciation. - Twenty-nine states and the district of Columbia have adopted mandatory RPS requirements, which vary across the states but will generally range from 15-30% of utility generation by The requirements are typically implemented through a system of tradable renewable energy certificates that verify that a kwh of electricity has been generated from a renewable resource. - Most states also offer a variety of tax incentives to promote investment in renewable energy resources. For instance, Washington and Colorado, among other states, exempt the sale and use of renewable energy equipment from taxation, which reduces development costs substantially. Several States reduce property tax requirements on renewable generation facilities through enterprise zones or similar designations, while Minnesota has substituted a fixed-rate production tax in lieu of property taxes. - In 1992 the US Congress enacted legislation that established a Production Tax Credit (PTC) of USD 15/MWh (adjusted for inflation) for the production of electricity from wind power facilities with 10-year duration. This programme has been renewed on several occasions and has been expanded to include the production of electricity from several additional renewable resources, including biomass, geothermal, municipal solid waste and hydroelectric power. The production tax credit, which is currently valued at USD 21/MWh, is presently applicable to all wind power projects placed in service prior to 1 January 2013 and all other eligible projects placed in service prior to 1 January In 2005 Congress established a 30% investment tax credit (ITC) for solar power projects. This investment credit is currently applicable to all solar projects placed in service prior to 1 January The purposes of the PTC and ITC are to make electricity production from renewable resources more competitive relative to fossil fuel and nuclear power facilities. - In response to the effects of the economic crisis in the US, in 2009 Congress approved legislation authorising companies eligible for the PTC to receive an ITC instead or, in the alternative, for companies eligible for the PTC or ITC to receive a cash payment equivalent to 30% of the eligible investment in a facility for projects which commence construction no later than 31 December 2011 (after extension agreed by Congress in Lame Duck 2010 Session) and are placed in service prior to 1 January 2013 for wind facilities, 1 January 2014 for other projects currently eligible for the PTC, and 1 January 2017 for solar facilities. - In addition to the PTC and ITC, renewable energy facilities are eligible for accelerated five-year tax depreciation on their investments. This programme, which is known as the Modified Accelerated Cost Recovery System (MACRS), does not have expiration date. As a result of 2009 and 2010 legislation, many facilities placed in service during 2008, 2009, and 2010 qualified for bonus depreciation which allows a 50% depreciation deduction in the year a facility is placed in service. Subsequent legislation in 2010 allows 100% depreciation for facilities placed in service after 8 September 2010 and no later than 31 December 2011, with facilities placed in service during 2012 receiving 50% bonus depreciation. Electricity and natural gas distribution - The New York tariff reviews, the New York Management Audit, the sale of the Seneca Lake storage facility and the Maine transmission and distribution tariffs are some of the most important specific regulatory processes that affected Iberdrola USA, Inc. (hereinafter, IBERDROLA USA) in The revenues of IBERDROLA USA are essentially regulated, being based on tariffs established in accordance with administrative procedures negotiated with the various regulatory bodies. The tariffs applied to regulated activities in the United States are approved by the regulatory commissions of the different states and are based on service costs. The revenues of each regulated utility are set to be sufficient to cover all its operating costs, including energy costs, finance costs and the costs of equity, the last of which reflect the company s capital ratio and the reasonable return on equity. 32

35 Annual consolidated financial statements 2011 / Financial statements - Energy costs that are set on the New York and New England wholesale markets are passed through to consumers. The difference between energy costs that are budgeted for and those that are actually incurred by the utilities is offset by applying compensation procedures that result in either immediate or deferred tariff adjustments. These procedures apply to other costs, which are in most cases exceptional (effects of extreme weather conditions, environmental factors, regulatory and accounting changes, treatment of vulnerable customers, etc.) that are offset in the tariff process. Any revenues that allow a utility to exceed target returns (usually because of better-than-expected cost efficiency) are generally shared between the utility and its customers, resulting in future tariff reductions. - Each of the five supply companies in IBERDROLA USA, which are between them active in four different states, must comply with regulatory procedures that differ in form but in all cases conform to the basic framework outlined above. As a general rule, tariff reviews cover various years (three in New York and five in Maine) and provide for reasonable returns on equity, protection and automatic adjustments for exceptional costs incurred and efficiency incentives. New York New York tariff reviews: - On 21 September 2010, New York Public Service Commission (NYPSC) approved the rates for the New York State Electric & Gas Corporation (NYSEG) and Rochester Gas and Electric Corporation (RG&E) for a three years and four month period. The rates approved allow increases ranging between average 3 7% for the different companies, based on 10%. ROE applicable on a 48% equity ratio. The rate term is extended until December 2013, with specific Earning Sharing Mechanisms rules giving clear incentives to the companies to introduce efficiency measures with strict quality targets. Rates also carry protection against uncontrollable cost variations and include a revenue decoupling mechanism. New York management audit: - In 2011 the NYPSC commenced a management audit of NYSEG, RG&E, IBERDROLA USA and IBERDROLA (with regard to its operations in the United States). The management audit is being conducted pursuant to the requirements of the New York Public Service Law and affects four public service companies. The audit centres on the gas and electricity transmission and distribution operations including the corporate objectives, planning, budgeting, capital budget and personnel management. The final audit report will be issued in the second quarter of 2012, followed by an order from the Commission and an implementation plan by the company. Sale of the Seneca Lake storage facility: Maine - In January 2010 NYSEG signed an agreement to sell its Seneca Lake storage facilities and related assets for USD 65 million. The sale of the facility was dependent on regulatory approvals from the NYPSC. The Federal Energy Regulatory Commission (FERC) issued an order on 26 August The NYPSC issued an order on 4 March 2011 approving the transaction which included a set of conditions that were met by the company. The sale of the facility was finished on 13 July The sale was accounted for in the third quarter of 2011, recognising a gain of USD 33 million, of which USD 20 million are used for future tariff remuneration pursuant to the NYPSC mandate to return a portion of the gains to taxpayers. - The transmission tariffs of Central Maine Power (CMP) are set by the FERC through a regulated tariff and are administered by ISO New England. The transmission tariffs are set annually using the formula authorised by the FERC which permits the recovery of the direct operating and maintenance expenses assigned to transmission, and the return on the investment in transmission assets. The FERC offers a Return on Equity (ROE) and additional incentives applicable to the assets based on age, voltage and other factors. The formula also includes provisions for the tariff to include the budgeted investments in facilities, subject to reconciliation the following year. In accordance with the FERC s tariff incentive order, CMP receives an ROE of 12.89% and its tariffs are allowed to include the construction work relating to the Maine supply security programme (USD 1,400 million were invested in CMP for the transmission project from 2011 to 2015), subject to an annual reconciliation. 33

36 - In September 2011, the attorney general of Massachusetts and other public officials filed a claim with the FERC stating that the base return on equity of ISO New England for the owners of the transmission facilities in New England was too high and should be lowered. CMP is a member of the New England Transmission Owners (NE-TO). The current base return on equity is 11.14%. The owners of the transmission facilities in New England do not agree with the claim, are asking for it to be withdrawn and have submitted a statement arguing that the current tariff is reasonable. The FERC is expected to decide in 2012 whether the claim should be upheld or withdrawn. - CMP s distribution tariffs are set under the Alternative Rate Plan 2008 (ARP 2008) approved by the Maine Public Utilities Commission (MPUC) for a five-year period commencing 1 January Under the ARP 2008, CMP s distribution tariffs are adjusted on 1 July each year in line with an inflation index less a productivity factor of 1%. The tariff plan also includes changes in prices for the recovery of unexpected significant costs, including those arising from changes in the law, capital gains or losses, environmental expenditure and major storms. 3) Sector regulation in Mexico The Mexican electricity sector has been regulated for more than 30 years by the Electricity Public Service Act (LSPEE) which, in accordance with the Political Constitution of the United States of Mexico, establishes that it corresponds ( ) exclusively to the Nation, to generate, transmit, transform, distribute and supply electricity that is intended to be used to provide a public service ( ). In this field, concessions will not be awarded to individuals and the Nation, via the Federal Electricity Commission, will exploit the assets and natural resources that are necessary for such purposes. The same law charges the aforesaid Federal Electricity Commission (CFE), which has the legal status of a decentralised public sector institution, with responsibility for the planning of the national electricity system, generation, transmission, transformation, distribution and sale of electricity, and the realisation of all civil engineering, installations and other work that may be necessary to planning, overseeing, operating and maintaining the national electricity system (directly or through subsidiaries). Since October 2009 the CFE distributes and sells electricity throughout all the country. Before that date, CFE area of distribution had a significant exception representing about 30% of the national consumption: the metropolitan Federal District and portions of the surrounding area (the states of Mexico, Morelos, Puebla and Hidalgo), were managed by Luz y Fuerza del Centro (LyFC), till its decommissioning in last quarter of 2009 was another public sector body that entered into a Zone Delimitation Agreement with the CFE in 1982 until its decommissioning presidential decree. CFE operates and does the planning and expansion of the entire National Electricity System (Sistema Eléctrico Nacional or SEN) and is subject to regulation by the Energy Regulating Commission (Comisión Reguladora de Energía or CRE). Established in 1995, the CRE has as its main duties: - Participating in the process of setting tariffs for electricity supply. - Approving the criteria used to determine the contributions of the Government and other federal bodies to the execution of work necessary for the supply of electricity; checking the efficiency, quality, safety and stability of the service; granting and revoking the licences and permits that are required, pursuant to applicable law, to perform regulated activities. - Issue permits for all types of power generation not intended for public service: independent power producer, self generation, cogeneration, renewable energy generation, import and export of power and small independent power producer. These forms of privately owned power generation mechanisms are explained below. 34

37 Annual consolidated financial statements 2011 / Financial statements The Energy Secretariat (SENER), meanwhile, is responsible for planning and guiding national energy policy, for guaranteeing efficient supply and for undertaking the technological developments necessary for promotion of the use of innovative energy sources. The aforementioned LSPEE was amended in 1993 to specify the activities not considered a public service and in which the participation of other private companies was therefore permitted. As a result, there are now six ways in which private investors (licensees) can participate in the electricity sector, provided they have first obtained a CRE licence. Pursuant to the LSPEE, these are: - Self-supply: own-use of electricity generated by the generators themselves or by their partners. - Cogeneration: electricity generated in this way must be used to satisfy the needs of establishments associated with cogeneration. In this case, as with self-supply, consumers or partners sign an interconnection agreement with the CFE for support, transport and other services. - Independent production: this is the option most frequently used in Mexico and allows for the establishment of an independent generator provided the power its plants generate is sold exclusively to the National Electricity System or to the export market through a public tender. The LSPEE Regulations also require that companies thus established are domiciled in national territory and that their plants have a minimum capacity of 30 MW. These licences are granted for a term of 30 years, while all other types of licence are granted for indefinite terms. - Small-scale production: generation at plants with capacity of less than 30 MW. - Exports: via the cogeneration, independent production and small-scale production models. - Imports: the CRE may authorise import agreements between foreign suppliers and domestic consumers. The regulatory framework for the development of power plants using renewable energy sources by private companies envisages four distinct models: - Independent Power Producer (PIE): generation capacity of more than 30 MW. The CFE puts the contract for the construction and operation of a plant out to public tender, on the undertaking that it will acquire the energy thus generated under long-term contracts at a price determined in the tender process. All required investment is made by the winner of the tender. - Self-supply: exclusively for shareholder consumption. - Small-scale producer: capacity of less than 10 MW; the CFE acquires the energy generated at a regulated price. - Exports: a licence is required to export energy outside the country. Recently, CRE has been charged with the implementation of the Renewable Energy Law, designed to create a framework for the promotion of wind energy, mini-hydro, biomass and efficient cogeneration by private investment, yet not by subsidies. To promote generation from renewable sources, the interconnection Agreement for renewable sources, intended to provide the framework for the interconnection to the SEN network has been adapted. The benefits of the interconnection Agreement for renewable sources are: - A banking mechanism of the electricity, for a period up to 12 months. - Wheeling studies are not required. - A fixed reduced wheeling tariff to send the electricity to remote customers (estampilla postal). - Credit of the user s demand charges based on average generation in peak hours during each month. - Waiver on charges such as connection services, permitting charges and backup. In addition, investments in these plants are eligible for accelerated tax depreciation of up to 100% during the first 10 years. During 2010, CRE passed a resolution to extend the benefits of the interconnection Agreement for renewable sources to the efficient cogeneration plants, and issued the efficiency criteria to qualify. April 2008 saw the launch of a set of seven proposals aimed at reforming the Mexican energy sector in two areas: reform of the oil industry and the introduction of a legal framework for energy efficiency and the development of renewable energy. 35

38 In the area of renewable energy, two proposals were passed in 2008 whose implementation was carried out during 2009: - Draft decree enacting the Law on Sustainable Energy Usage. - Draft decree creating the Law on Renewable Energy Usage and funding of the Energy Transition. These are two of the seven energy proposals approved by the Senate on 23 October 2008 and which have been submitted to the Federal Executive for the relevant constitutional purposes. In the summer of 2009 the Special Renewable Energy Usage Programme was published, which establishes non-binding targets for different renewable technologies by year The programme aims to increase electricity generation capacity from 3.3% of the total in 2008 to 7.6% in Wind generation is designed to reach 4.3% of the total in 2012 compared to 0.15% in This programme is within the framework of a broader CO 2 emission reduction strategy (Special Climate Change Programme), which could amount to 200 Mton in the entire period. Since the CFE sets the growth plan for the National Electricity System (SEN) only on the basis of economic and reliability criteria, the CRE has imposed on the CFE the application of a cost criteria that is added to fossil fuel generation: the cost of CO 2 emissions must be considered to form part of energy costs (it is calculated on the basis of the CO 2 emissions certificates), which provides an opportunity for renewable energies. This new cost criterion should be included in the Power Sector Construction and Investment Programme (POISE), which is the CFE s vehicle for presenting its SEN expansion plan to the SENER and it sets a framework for the Board to approve investments. On 2 February 2011, the CRE issued a methodology for calculating electricity cogeneration efficiency and the criteria for determining efficient cogeneration. This ruling states that for a system to be efficient and receive the benefits of renewable sources, the facility must comply with a higher level of efficiency than that indicated by the CRE, depending on the electricity power grid, altitude and the reference values. The benefits from meeting this regulation are those indicated in the interconnection Agreement for renewable energies: lower transmission tariffs, electricity balance and a capacity benefit equal to the average of peak-time generation. On 4 December 2009, the National Hydrocarbons Commission (CNH) issued a resolution on technical provisions to prevent or reduce the burning and venting of gas in oil and gas exploration and operations, which is obligatory for PEMEX. It establishes, inter alia, the procedures PEMEX must follow to present the CNH with a programme that includes targets, investment timetables and commitments to reduce gas flaring to the lowest technical and economically viable volume. This resolution gives rise to investment opportunities in Mexico in natural gas storage and usage. In November 2011, the president of Mexico unveiled an ambitious investment programme of over USD 10,500 million to increase the expansion process of natural gas from public and private investments. The projects will increase the transmission network by 38% (4,374 km more for the current network) and the distribution network by 125% (56,568 km more for the current network). Gas distribution will increase from 22 to 26 states in the country, doubling the number of users from 2 million to over 4 million. The strategy envisages developing 8 gas pipelines which will contribute mainly to: - boosting the current transport system through the construction of a new network of gas pipelines and new gas compression infrastructure; - developing new gas distribution and supply infrastructure by road to meet the needs of industrial, commercial and domestic customers; and - strengthening natural gas regulation. Until last year, under the tariff scheme for gas transport in Mexico any new gas pipeline installed had to be paid for by its new users, regardless for whether they were connected to the National Gas Pipeline System (SNG) of PEMEX. However, to prevent discrimination among users, the CRE has implemented a new tariff scheme that recognises the benefits to the consumers from each new infrastructure in an Integrated National Transport System (STNI). 36

39 Annual consolidated financial statements 2011 / Financial statements All natural gas transport and storage systems joining the new integrated tariff system must meet certain general characteristics, i.e. they must: - be part of an interconnected system; - provide benefits, enhance security, continuity, duplicity and efficiency of the integrated systems; and - standardise the integrated systems with the current conditions for providing services. Furthermore, the CRE has already made adjustments to the Natural Gas Regulations in order to develop the STNI using integrated tariffs. Lastly, in December 2011, the CFE published an agreement approving the amendment to the tariffs for supplying and selling electricity. The agreement took effect on 1 January Until January 2008, tariffs were changed every six years. However, the new proposal of the Secretariat of Finance and Public Credit (SHCP) is for a new change to be made in January 2012 and, thereafter, in April of each year. In January 2008, this adjustment gave rise to a flow of income to the tariffs and there are reasons to believe that the same effect could occur again in ) Sector regulation in Brazil The electricity distribution activities carried out by subsidiaries consolidated using proportionate consolidation, being Companhia de Eletricidade do Estado do Bahía, S.A. (Coelba), Companhia Energética do Río Grande do Norte, S.A. (Cosern) and Companhia Energética do Pernambuco, S.A (Celpe) is subject to the regulations of the countries in which they operate. On 27 April 2011 ELEKTRO was acquire, a distribution company which operates in Sao Paulo and Moto Grosso do Sul states, therefore, it is subjected to the same regulation. The Brazilian regulatory framework is based on a system of maximum tariffs (Price-Cap) that is revised every five years. The tariffs are updated annually by the Brazilian National Energy Agency (ANEEL). The tariffs have two components: - Component A: which corresponds to energy purchases and to other costs that are extraneous to the distributor and passed through to the end tariff. - Component B: which corresponds to costs relating to the distributor s system of remuneration and which factor in operating and maintenance expenses, a return on investment (determined by applying a rate of return to the value of the distribution assets) and an efficiency-related factor. The aim of the annual revision is to ensure that component A costs are passed on and that component B costs perform in line with inflation and with the pre-determined efficiency factor. In November 2011, ANEEL approved the rules applying to the third cycle of Periodic Tariff Reviews (RTP) for the distribution companies in Brazil. With regard to the rules prevailing in the previous regulatory period, the main changes were: - WACC (actual after tax): reduced from 9.95% to 7.5%. - Benchmark company: the methodology was changed from a benchmark company to a benchmark model relating to operating costs. - Other income: other items invoiced to customers were included in the base tariff, particularly penalties (surplus demand, surplus reactive power, etc.). - Base remuneration: there were no significant methodological changes (assets are taken into consideration at the beginning of the second cycle plus the investments incurred in the regulatory period, less depreciation and amortisation, plus accumulated inflation). - X factor: a service quality component was added based on specific indices (frequency and duration of service interruptions). A route factor is also taken into account. This sets a destination route for operating costs until the end of the third regulatory period, depending on each distribution company s benchmark model. - Transfer of SUDENE tax incentives to customers: this item is a subject of litigation and the transfer was suspended by the judge until a final decision has been taken. The third RTP will be fully operational in April 2013 for the distribution companies of Neoenergía (Coelba, Cosern and Celpe). In ELEKTRO s case, the scheme will be applicable in August 2012 with retroactive effect from August

40 In September 2010, ANEEL issued a draft version of Ruling 414 for establishing new rules on the supply of electricity to customers. This rule sets new service quality requirements for distribution companies. The companies must meet these new requirements in For the electricity generation business, the new model for the Brazilian electricity sector introduced in 2004 made the Government responsible for guaranteeing adequate expansion of the supply of energy to the system, eliminating the risk of further rationing. This expansion is being pursued via the public tendering of generation projects in which the successful bidder is the supplier that offers the lowest price in Brazilian reals per MWh generated, in exchange for which the bidder is awarded a concession or permit for between 15 and 30 years (depending on the technology) to operate a power station under a sales contract and at a price that is predetermined at the time of the tender. 5) Other EU regulation For the last two years, work has been underway to implement the important regulation approved in 2009 related, first, to internal gas and electricity markets and, second, to promotion of renewables and the struggle against climate change. With regard to the former matter, it should be noted that the third package officially came into force on 3 March Implementation of directives, which must be transposed, has been delayed, while the Agency for the Coordination of Energy Regulators (ACER) has been created. Work is also proceeding on the development of technical codes and guidelines with a view to the interior energy market becoming operative in 2014, as agreed by the Council. Further, additional regulations are being developed to enable trade in greenhouse gas emission rights envisaged in the directive to be operative by 1 January National plans have also been submitted for the development of renewable energies, as called for in the directive. A new regulation was also published, featuring: Regulation for security of gas supply, establishing preventive and operating criteria to reduce the impact of incidents in gas supply. Taking the necessary steps for its implementation. - Guidelines covering state aid for the closure of non-competitive coal mines, allowing aid for plants up to 2018 subject to their decommissioning. - Other regulations affecting the energy sector were the Energy performance of buildings directive, the regulation regarding information on investment projects in energy infrastructure and the Directive on industrial emissions, which sets limits on pollutant emissions, among others, by electricity generation facilities. - Directive on treatment of radioactive waste that establishes an EU framework ensuring that all member States manage such waste safely. - Regulation on transparency and integrity of wholesale energy markets that establishes rules prohibiting abusive practices and use of inside information. In 2011, the following proposed regulations have been presented and are now under consideration: - Directive on energy tax which amends the present regulation and proposes new taxes both for energy content and for emissions of CO 2. - Directive on energy efficiency that amends the present directive and proposes additional measures to achieve the target of 20% by Regulation on energy infrastructure that establishes guidelines for facilitating the development of priority energy corridors. Finally, a number of documents and initiatives were presented in 2011 that are of great importance to the energy sector, most significantly: - Communication to promote the development of smart grids. - Performance of stress tests in nuclear facilities following the accident at Fukushima. - Communication on international cooperation in energy policy. - Road map for decarbonisation of energy by

41 Annual consolidated financial statements 2011 / Financial statements 4. ACCOUNTING POLICIES a) Revenue recognition Revenue from sales is measured at the fair value of the assets or rights received as consideration for the goods and services provided in the normal course of the group companies business, net of discounts and applicable taxes. Income each year from regulated activities where remuneration is based on a fixed margin is booked, by IBERDROLA Group under Net revenue on the Consolidated income statement for the corresponding year for the amount of such fixed margin. In the case of some regulated activities carried out by IBERDROLA Group, deviations between costs estimated when setting the annual tariff and costs actually incurred are corrected in the following years tariffs. These variances are recognised as income or payment for the year only when it is guaranteed that the additional cost will be reimbursed, independently of future sales. Revenue from construction contracts is recognised in accordance with the accounting policy described in Note 4.e. The IBERDROLA Group recognises housing sales when legal ownership is transferred to the buyer, which generally coincides with when the sale is being registered by public deed. Interest income is accrued on a time proportional basis, by reference to the principal outstanding and the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the asset to that asset s carrying amount. Dividend incomes are recognised when IBERDROLA Group companies are entitled to receive them. b) Associates Associates are companies over which the group exercises significant influence but which cannot be classified as subsidiaries or jointly controlled companies. Therefore, the Group has the power to participate in the financial and operating decisions, but not to fully or jointly control them. In general, investments in associates are accounted for under the equity method of accounting. Accordingly, investments are measured initially at acquisition cost, subsequently adjusted for changes to each company s equity, taking into consideration the percentage ownership and impairments, if any. Certain investments in associates that are not material in relation to these consolidated financial Statements are recorded at acquisition cost under Non-current financial assets Non-current equity instruments in the Consolidated statements of financial position at 31 December 2011 and 2010 (Note 11.b). Gains or losses on transactions with associates are eliminated to the extent of the Group s interest in the associates. The IBERDROLA Group regularly analyses the existence of impairment at its associates by comparing the total carrying amount of the associate in question, including goodwill, with its recoverable amount, which is the higher of its value in use and its fair value less costs to sell. If the carrying amount exceeds the recoverable amount, the IBERDROLA Group recognises the related impairment with a charge to the Consolidated income statement. c) Joint ventures A joint venture is a company whose activity is jointly controlled. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when both the strategy and financial and operating decisions relating to the activity require the unanimous consent of all the ventures. Joint ventures are proportionally consolidated in the Consolidated financial statements, whereby the financial statements include the IBERDROLA Group s share of assets, liabilities, expenses and income. Goodwill arising on the acquisition of interests in joint ventures is recognised in accordance with the Group s accounting policies described in Note 4.d. 39

42 d) Goodwill Goodwill represents future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill arising from acquisitions of companies with a functional currency other than the euro is translated to euros at the exchange rates prevailing at the reporting date of the Consolidated statement of financial position. Goodwill acquired on or after 1 January 2004 is measured at acquisition cost and that acquired earlier is measured at the carrying amount at 31 December 2003 in accordance with Spanish GAAP and as provided for in IFRS 1 First-time adoption of International Financial Reporting Standards. Goodwill is not amortized, although it is reviewed annually for impairment to its recoverable value and any impairment is written down (Note 4.l). e) Construction contracts When the income from a construction contract can be estimated reliably, the income is recognised according to the percentage of completion method of the construction project at each statement of financial position date, by measuring the contract costs incurred to date as a proportion of the total construction costs. When the income from a construction contract cannot be estimated reliably, it is recognised to the extent of contract costs incurred only if they are recoverable. When estimated contract costs exceed estimated contract revenue, the loss is recognised immediately in the Consolidated income statement. f) Intangible assets Concessions, patents, licenses, trademarks and others The amounts recognised as concessions, patents, licenses, trademarks and others relate to the cost incurred in their acquisition. The electricity distribution concessions and transmission concessions held in UK by SCOTTISH POWER and those linked to the activities of IBERDROLA USA, are not subject to any limits, of a legal or other nature. Accordingly, as intangible assets with an indefinite useful life, they are not amortised by the IBERDROLA Group, although they are assessed for signs of impairment each year, as described in Note 4.l. This heading also includes the concession permitting the IBERDROLA Group to build the hydro-electric complex in Alto Támega, Portugal. IFRIC 12: concerning public-private service concession arrangements that meet two prerequisites: - the grantor controls or regulates which services the operator must provide using the assets, to whom, and at what price; and - the grantor controls any significant residual interest in the infrastructure at the end of the term of the arrangement. Infrastructure within the scope of a service concession arrangement should not be recognised as property, plant and equipment of the operator, because the operator does not have the right to control the use of the infrastructure. If the operator performs more than one service under a single contract (i.e. operation services and construction or upgrade services), the consideration received under the agreement for provision of services is recognised separately in the Consolidated income statement, pursuant to the standards applicable in each case: IAS 18: Revenue recognition and IAS 11: Construction contracts. IFRIC 12 established two ways in which consideration received may be recognised for construction or upgrading services: - As a financial asset: if the operator has an unconditional contractual right to receive cash from the grantor. - As an intangible asset: if the operator does not have such a right, but instead has a right to charge users of the public service. IFRIC 12 mainly affects the electricity distribution activities carried out by the Iberdrola Group in Brazil. Remuneration for network construction and upgrade work carried out by the IBERDROLA Group in this country consisted on the one hand of an unconditional right to receive cash and, on the other, of the right to pass on certain amounts to consumers. As a result, by applying IFRIC 12, two different assets were recognised for the two types of consideration received: 40

43 Annual consolidated financial statements 2011 / Financial statements - An available-for-sale financial assets, which is recognised under Other non-current financial assets in the Consolidated statement of financial position (Note 11.d). - An intangible asset, amortisable in the concession period, which is recognised under Other intangible assets in the Consolidated statement of financial position (Note 8). The costs incurred in relation to the other items included under this heading in the Consolidated statement of financial position are amortised on a straight-line basis over their useful lives, between five and ten years. Emission allowances The IBERDROLA Group recognises emission allowances once it is the owner thereof. Allowances allocated free of charge to each facility as part of the national emission allowance assignment plan (Notes 3 and 4.s) are initially measured at market value on their allocation date and are credited to Deferred income on the Consolidated statement of financial position. Allowances acquired from third parties are measured at acquisition cost. Emission allowances acquired for the purpose of benefiting from fluctuations in their market price are measured at fair value with a credit or debit to the Consolidated income statement. Emission allowances are derecognised when they are sold to third parties, have been delivered or expire. When the allowances are delivered, they are derecognised with a charge to the provisions made when the CO 2 emissions were produced. If impairment is detected in emission allowance it is recognised with a charge to the Consolidated income statement. Computer software The acquisition and development costs incurred in relation to the applications are recorded with a charge to Other intangible assets in the Consolidated statement of financial position. Maintenance costs of computer software are recorded with a charge to the Consolidated income statement for the year in which they are incurred. Computer software is amortised on a straight-line basis over a period of between three and five years from the entry into service of each application. Other intangible assets This heading includes wind farm projects and gas storage facilities in the development phase which meet the identifiability requirement under IAS 38, as they are separable and susceptible to individual sale and are carried at acquisition cost. The IBERDROLA Group transfers these assets to Property, plant and equipment in the Consolidated income statement when construction of each wind farm commences. Research and development expenditure IBERDROLA Group s policy is to record research expenses in the Consolidated income statement for the period when they are incurred. The Consolidated income statements for the years ended 31 December 2011 and 2010 recognise EUR 136,382 thousand and EUR 130,174 thousand, respectively, for this connection. Development costs are recognised as an intangible asset on the Consolidated statement of financial position if the Group can identify them separately and show the technical viability of the asset, its intention and capacity to use or sell it, and how it will generate probable future economic benefits. During 2011 and 2010 IBERDROLA Group has activated financial expenditures as intangible assets of EUR 27,093 and 15,736 thousand, respectively, as a credit under Finance income of the Consolidated income statement. g) Property, plant and equipment Property, plant and equipment are stated at cost of acquisition, modified, where appropriate, as follows: - Prior to the transition to IFRSs (1 January 2004), the IBERDROLA Group revalued certain spanish assets under Property, plant and equipment in the Consolidated statement of financial position as permitted by the applicable legislation, including Royal Decree-Law 7/1996, and considered the amount of these revaluations as part of the cost of the assets, in accordance with IFRS 1. 41

44 - In case that IBERDROLA Group is required to dismantle installations or to recondition the site on which they are located, the present value of such costs is added to the carrying amount of the asset, based on their net present value, with a charge to Provisions - Other provisions in the Consolidated statement of financial position (Note 4.t). The IBERDROLA Group periodically reviews its estimates of this present value and increases or reduces the carrying amount of the assets on the basis of the results obtained. On the other hand, cost of acquisition includes the following items: 1. Borrowing costs relating to external funding incurred during the construction period only, are determined as follows: a) The interests on specific-purpose sources of financing used to build certain of the assets are fully capitalised. b) The interest on general-purpose borrowings is capitalised by applying the average effective interest rate on this financing to the average cumulative investment qualifying for capitalisation, after deducting the investment financed with specific-purpose borrowings, provided that it does not exceed the total borrowing costs incurred in the year. The average capitalisation rates used in 2011 and 2010 amounted to 3.62% and 3.51%, respectively. In 2011 and 2010 the IBERDROLA Group capitalised to property, plant and equipment, applying the policy described above, borrowing costs totalling 67,471 EUR thousand and EUR 82,811 thousand respectively, with a credit to Finance income in the Consolidated income statements in 2011 and Staff costs relating directly or indirectly to construction in progress. The amounts capitalised in this connection in 2011 and 2010 totalled 432,192 EUR thousand and EUR 392,652 thousand, respectively (Note 34). The IBERDROLA Group transfers property, plant and equipment under construction to property, plant and equipment in use at the end of the related trial period. The costs of expansion or improvements leading to increased productivity or capacity or to a lengthening of the useful lives of the assets are capitalised. Replacements or renewals of complete items are recorded as additions to property, plant and equipment, and the items replaced are derecognised. Gains or losses arising on the disposal of items of property, plant and equipment are calculated as the difference between the amount received on the sale and the carrying amount of the asset disposed of. 42

45 Annual consolidated financial statements 2011 / Financial statements h) Depreciation of property, plant and equipment in use The cost of property, plant and equipment in use is depreciated on a straight-line basis, less any material residual value, at annual rates based on the following years of estimated useful life: Average years of estimated useful life Fossil-fuel plants Combined cycle plants 35 Nuclear plants 40 Wind power facilities 25 Gas storage facilities Transmission facilities Distribution facilities Meters and measuring devices Buildings Dispatching centres and other facilities 4-50 As hydroelectric plants are operated under concessions (Note 4.aa), the depreciation of civil engineering assets is performed over the life of the concession, while electromagnetic equipment is depreciated over the lower of the concession period or 35 years. In the second half of 2011 the IBERDROLA Group concluded the analysis it had been performing of the useful life of its wind farms, using internal and external sources of information. The result was that, in light of current circumstances, the best useful life estimated is 25 years. As a result, Depreciation and amortisation charge, allowances and provisions in the 2011 Consolidated income statement includes the impact of this change in the estimate since 1 July 2011, which gave rise to a lower depreciation charge of EUR 66 millions approximately. The IBERDROLA Group estimates that, as from 2012, this adjustment to useful life will give rise to an annual reduction in the depreciation charge of approximately EUR 132 million approximately. This amount will gradually decrease as the useful lives of the wind farms in operation at 1 July 2011 terminate. Depreciation and amortisation charge, allowances and provisions in the 2011 and 2010 Consolidated income statements include EUR 2,333,156 thousand and EUR 2,278,253 thousand, respectively, in relation to the period depreciation of property, plant and equipment in use (Notes 10 and 36). i) Investment property Investment property is recognised at acquisition cost and its carrying amount represents 1.00% and 0.83% respectively of the IBERDROLA Group s total property, plant and equipment at 31 December 2011 and Investment properties are depreciated on a straight-line basis, minus material residual value, over each asset s estimated useful life which ranges between 50 and 75 years based on the features of each asset concerned. The investment property owned by the IBERDROLA Group relates primarily to properties earmarked for lease. The rental income earned in 2011 and 2010 from the lease of investment property amounted to EUR 26,680 thousand and EUR 29,541 thousand, respectively. These amounts are presented under Net revenue in the Consolidated income statements. These amounts represented 0.08% and 0.10% of the Group s revenues in 2011 and 2010, respectively. Direct operating expenses arising on the investment property in 2011 and 2010 are not material. The fair value of the IBERDROLA Group s investment properties is disclosed in Note 9. The fair value is determined on the basis of valuations by independent valuers commissioned each year. 43

46 To determine fair value and net realisable value, the Group engaged the following three leading portfolio valuers to issue appraisals at 31 December 2011, distributing the portfolio among these by standard groups and the location and use of the assets: CB Richard Ellis Valuation Advisory, S.L. Aguirre Newman Madrid, S.A.U. Tinsa Tasaciones inmobiliarias, S.A. The assets were appraised individually, considering their individual sale and not as part of a property portfolio. In general, fair value is determined by referring to the benchmark values of valuations performed by independent valuers according to the Valuation Standards and Valuer s Guide of the Royal Institution of Chartered Surveyors (RICS) of Great Britain or in accordance with the Order ECO/805/2003, of 27 March, concerning valuation standards. Discounted cash flow methods were used to calculate market value, comparing where possible the amounts with peer valuations to reflect the market paradigm and prices at which transactions involving similar assets are being carried out. The discounted cash flow method involves estimating possible net cash flows that a property could generate over a period, and considering the residual value of the asset at the end of the period. Cash flows are discounted at a target internal rate of return considered appropriate to each asset in order to obtain their present value. For leased property, the key variables and assumptions used in the discounted cash flow analysis are: Net income from ownership over a specific period of time, bearing in mind the initial contractual situation, changes in tenants and expected rent, marketing expenses, disposal costs (variable percentage of 1%-3% depending on the selling price), etc. The discount or target internal rate of return adjusted to reflect the investment risk based on location, occupancy, quality of tenant, age of the property, etc. The exit value, which consists of an estimate of the exit (sale) price of the property applying an estimated of the value at the end of transaction considering criteria of obsolescence, liquidity and market uncertainty. For leased properties without as many variables, with long-term leases (10 years or longer) and a single tenant, the cost or income capitalisation approaches are used. This method entails the capitalisation to perpetuity of the contractual rent using a discount rate that factors in all the potential market risks. j) Leases The IBERDROLA Group classifies as finance leases all arrangements under which the lessor transfers to the lessee substantially all the risks and rewards incidental to ownership of the asset. All other leases are classified as operating leases. Assets acquired under finance leases are recognized as non-current assets in accordance with their nature and function. Assets are measured at the lower of the fair value of the leased asset and the present value of the future lease payments, and it is amortised by the useful life of each asset. The expenses arising from operating leases are allocated to the Consolidated income statement on an accrual basis over the life of the lease agreement. The IBERDROLA Group has electricity generation capacity assignment contracts with the Mexican Federal Electricity Commission (FEC) that have a term of 25 years counting from the date on which each facility enters into commercial operation. These contracts set a pre-established payment timetable for assignments of electricity supply capacity and for plant operation and maintenance. The IBERDROLA Group considers these agreements to be leases in accordance with IFRIC 4: Determining whether an arrangement contains a lease. Also, after analysing their economic substance, the Group considers these agreements are operating leases due to the following reasons, inter alia: The ownership of the assets will not be transferred to the FEC at the end of the agreement, nor do the agreements include any type of purchase option. The term of the agreements is less than the useful life (35 years) of the facilities (Note 4.h). 44

47 Annual consolidated financial statements 2011 / Financial statements The FEC is not entitled to extend the agreement unilaterally. The plants whose capacity is assigned are not of a specific nature and may be leased to third parties other than the FEC. k) Nuclear fuel The IBERDROLA Group measures its nuclear fuel stocks on the basis of the costs actually incurred in acquiring and subsequently processing the fuel. Nuclear fuel costs include the finance charges accrued during construction, calculated as indicated in Note 4.g. The amounts capitalised in this connection in 2011 and 2010 were 1,618 EUR thousand and EUR 681 thousand, respectively (Notes 14 and 38). The nuclear fuel consumed is recognised under Procurements in the Consolidated income statement from when the fuel loaded into the reactor starts to be used, based on the cost of the fuel in each reporting period. The nuclear fuel stocks consumed in 2011 and 2010 amounted to EUR 104,786 thousand and EUR 108,793 thousand, respectively (Notes 14 and 33). l) Non-Financial assets impairment Each closing date at every accounting year, the IBERDROLA Group reviews the carrying amounts of its noncurrent assets to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if it is finally necessary. For this purpose, in the case of assets that, taken individually, do not generate cash flows, the IBERDROLA Group estimates the recoverable amount of the cash-generating unit to which belongs. In the case of goodwill and other intangible assets which have not come into use or which have an indefinite useful life, the IBERDROLA Group performs the recoverability analysis systematically every year. For purposes of this recoverability analysis, goodwill is allocated to the cash generating units in which it is controlled for internal management purposes. In no instance, are these cash generating units bigger than the operating segments defined by the IBERDROLA Group (Notes 7 and 8). Recoverable amount is the higher of fair value less costs to sell and value in use, which is taken to be the present value of the estimated future cash flows. The assumptions used in assessing value in use, in making the estimates include discount rates, growth rates and expected changes in selling prices and direct costs. The discount rates reflect the time value of money and the risks specific to each cash-generating unit. The growth rates and the changes in prices and direct costs are based on contractual commitments that have already been signed, information in the public domain, sector forecasts and the experience of the IBERDROLA Group (Note 8). If the recoverable amount of an asset is less than its carrying amount, an impairment loss is recognised for the difference with a charge to Depreciation and amortisation charge, allowances and provisions in the Consolidated income statement. Impairment losses recognised for an asset are reversed with a credit to the aforementioned heading when there is a change in the estimates concerning the recoverable amount of the asset, increasing the carrying amount of the asset, but so the increased carrying amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised, except in the case of the goodwill, which impairment is not reversible. Depreciation and amortisation charge, allowances and provisions of the 2011 and 2010 Consolidated income statements include EUR 342,105 thousand and EUR 39,638 thousand, respectively, related to corresponding non current asset impairment losses. Also, in 2011 and 2010, EUR 5,324 thousand and EUR 4,152 thousand of impairment losses recognised on non-current assets were reversed (Note 36). m) Financial instruments Financial assets The Group IBERDROLA measures its current and non-current financial assets in accordance with the criteria described below: 1. Financial assets classified at fair value through profit or loss, which are assets that meet any of the following requirements: - They have been classified as held-for-trading financial assets, on the basis that intends to generate a profit from fluctuations in their prices. - They have been included in this asset category since initial recognition. 45

48 The assets included in this category are stated at fair value in the Consolidated statement of financial position, and changes in fair value are recognised as Finance cost or Finance income in the Consolidated income statement, as appropriate. The IBERDROLA Group includes in this category the derivative financial instruments which do not satisfy the conditions necessary for hedge accounting based on the requirements established for this purpose in IAS 39 Financial Instruments (Note 25). 2. Loans and receivables: these are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest rate method. The IBERDROLA Group records the related provisions for the difference between the amount of the receivables considered recoverable and the carrying amount of the receivables. 3. Held-to-maturity investments, which are investments that the IBERDROLA Group has the intention and ability to hold to the date of maturity, which are also measured at amortised cost. 4. Available-for-sale financial assets: these are the other financial assets that do not fall into any of the aforementioned three categories and correspond in almost all cases to equity investments (Note 11.b). These investments are also recognised in the Consolidated statement of financial position at fair value at year-end which, in the case of companies that are not publicly listed, is obtained using a range of methods such as comparable company transactions or, if there is sufficient information, by discounting the expected cash flows. Changes in fair value are recognised with a charge or credit, as appropriate, to the Unrealised assets and liabilities revaluation reserve in the Consolidated statement of financial position (Note 19) until the disposal or impairment of these assets at which time the cumulative balance of this heading is recognised in full in the Consolidated income statement. Investments in the share capital of companies that are not publicly listed the market value of which cannot be determined reliably are carried at cost of acquisition. The IBERDROLA Group determines the most appropriate classification for each asset on acquisition and reviews the classification at each year-end date. The IBERDROLA Group recognises conventional financial asset purchases and sales on the date of operation. Cash and cash equivalents This heading in the Consolidated statement of financial position includes cash, current accounts and other highly liquid short-term investments that can be realised in cash quickly and are not subject to a risk of change in value. Financial liabilities and equity instruments Financial liabilities and equity instruments issued by IBERDROLA Group are classified on the basis of their nature. The IBERDROLA Group classifies as an equity instrument any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments having the substance of a financial liability In United States, the IBERDROLA Group has undertaken several transactions that bring minority shareholders as external partners of certain of its wind farms in exchange for cash and other financial assets primarily. The main characteristics of these transactions are as follows: - Regardless of the equity stake taken by the minority shareholders, the IBERDROLA Group retains ownership and management control of the wind farms; accordingly they are fully consolidated in these Consolidated financial statements. - The minority shareholders have the right to a substantial portion of the profits and tax credits generated by these wind farms up to the return level established at the beginning of the contract. - The minority shareholders remain shareholders of the wind farms until they achieve the stipulated returns. 46

49 Annual consolidated financial statements 2011 / Financial statements - Once these returns have been obtained, the minority shareholders lose their entitlement to hold capital in the wind farms, simultaneously renouncing their claim on the profits and tax credits generated. - Whether or not the minority shareholders of the IBERDROLA Group obtain the agreed upon returns depends on the economic performance of the wind farms. Although the IBERDROLA Group is bound to operate and maintain these facilities in an efficient manner and to take out the appropriate insurance policies, it is not obliged to deliver cash to the minority shareholders over and above the aforementioned profits and tax credits. Following an analysis of the economic substance of these agreements, IBERDROLA Group classifies the consideration received at the outset of the transaction under Equity instruments having the substance of a financial liability in the Consolidated statement of financial position. Subsequently, this consideration is measured at amortised cost (Note 20). Debentures, bonds and bank borrowings Loans, debentures and similar items are recorded initially at the amount received, net of transaction costs. In subsequent periods, all these financial liabilities are measured at amortised cost, using the effective interest rate method, except for hedged transactions, which are measured using the method described below in this same note. Also, obligations under finance leases (Note 4.j) are recognised at the present value of the lease payments under Bank borrowings and other financial liabilities loans and others in the Consolidated statement of financial position. Trade and other payables Trade payables are initially recognised at fair value and are subsequently measured at amortised cost. Contracts to buy or sell non-financial items The IBERDROLA Group performs detailed analysis of all its contracts to buy or sell non-financial items to ensure they are classified correctly for accounting purposes. As a general rule, contracts that are settled net in cash or in another financial asset are classified as derivatives and are recognised and measured as described in this note, except for contracts entered into and held for the purpose of the receipt or delivery of a non-financial item in accordance with the IBERDROLA Group s purchase, sale, or usage requirements. Contracts to buy or sell non-financial items to which the treatment described in the preceding paragraph does not apply are designated as own-use contracts and are recognised as the IBERDROLA Group receives or delivers the rights or obligations originating thereunder. In the specific case of short-term contracts to buy or sell electricity and gas concluded on certain highly-liquid markets, the IBERDROLA Group adopts the following accounting treatment: - Until the month preceding the supply date, the IBERDROLA Group classifies as own-use contracts only those contracts to buy or sell electricity and gas that reflect its best estimate of the actual purchase requirements of the IBERDROLA Group. - In the month preceding the date of supply, and given that demand estimates become more and more accurate each day, the IBERDROLA Group assumes that all contracts written solely in response to changes in demand estimates, whether for purchase or sale, are own-use contracts, and not therefore derivatives. - All contracts entered into with the intention of realising short-term gains on fluctuations in the market price of electricity and gas, as well as those that do not correspond to the situations described in the preceding two points are considered derivatives, and are therefore recognised on the Consolidated statement of financial position at their fair value. Derivative financial instruments and hedge accounting Financial derivatives are initially recognised at acquisition cost in the Consolidated statement of financial position and the required value adjustments are subsequently made to reflect their fair value at all times. Gains and losses arising from these changes are recognised in the Consolidated income statement, unless the derivative has been designated as a cash flow hedge or a hedge of a net investment in the foreign. For accounting purposes, hedges are classified as follows: - Fair value hedges: where the risk hedged is a change in the fair value of an asset or liability or a firm commitment. - Cash-flow hedges: where the risk hedged is the variation in cash flows attributable to a specific risk associated with an asset or liability or a forecast transaction, or to exchange rate risk in a firm commitment. - Hedge of a net investment in a foreign operation. 47

50 Each time a hedge transaction is entered into the IBERDROLA Group formally documents the transaction to be treated under hedge accounting. This documentation includes its identification as a hedge instrument, the item hedged, the nature of the risk the hedge is designed to cover and the way the effectiveness of the hedge is to be measured. In addition, hedges are reviewed periodically to ensure they are highly effective (between 80% and 125%). The accounting treatment for hedging transactions is as follows: - In the fair value hedges, changes in the fair value of the derivative financial instruments designated as a hedge and changes in the fair value of a hedged item due to the hedged risk are recognised with a charge or credit to the same heading of the Consolidated income statement. - In cash flow hedges and hedges of a net investment in a foreign operation, changes in the fair value of the hedging derivative are recognised, in respective of the ineffective portion of the hedges, in the Consolidated income statement, while the effective portion is recognised under Unrealised assets and liabilities revaluation reserve and Translation differences, respectively, in the Consolidated statement of financial position. The cumulative gain or loss recognised in these headings is transferred to the relevant heading of the Consolidated income statement as the hedged item affects net profit or loss or in the year in which the item is disposed of. - If a hedge of a forecasted transaction results in the recognition of a non-financial asset or a liability, its balance is taken into account in the initial measurement of the asset or liabilities arising from the hedged transaction. - If a hedge of a forecasted transaction results in the recognition of a financial asset or liability, this balance is recognised in the Unrealised assets and liabilities revaluation reserve until the hedged item affects the Consolidated income statement. - If a forecasted transaction does not result in recognition of an asset or a liability, the amounts credited or charged, to Unrealised asset and liabilities revaluation reserve in the Consolidated statement of financial position will be recognised in the Consolidated income statement in the same period in which the hedge transaction is realised. - When hedge accounting is discontinued, the cumulative amount at that date recognised under Unrealised asset and liability revaluation reserve is retained under that heading until the hedged transaction occurs, at which time the gain or loss on the transaction will be adjusted. If a hedged transaction is no longer expected to occur, the gain or loss recognised under the aforementioned heading is transferred to the Consolidated income statement. Derivatives embedded in other financial instruments are recognised separately when the IBERDROLA Group considers that their characteristics are not closely related to the financial instruments in which they are embedded and so long as the entire contract is not already and entirely carried at fair value through profit or loss, registering changes in fair value with the gain or loss recognised in the Consolidated Income statement. The fair value of the derivative financial instruments is calculated as follows (Note 13): - For derivatives quoted on an organised market, at market price at year-end. - To measure derivatives not traded on an organised market, the IBERDROLA Group uses assumptions based on market conditions at year-end. Specifically, the fair value of interest rate swaps is calculated as the value discounted at market interest rates of the interest rate swap contract spread; currency futures are measured by discounting the future cash flows calculated using the forward exchange rates at year-end; finally, the fair value of contracts to trade non-financial items falling under the scope of IAS 39 Financial instruments is calculated on the basis of the best estimate of future price curves for the underlying non-financial items at the year end on Consolidated financial statement, using, wherever possible, prices established on futures markets. 48

51 Annual consolidated financial statements 2011 / Financial statements Derecognition of financial assets and liabilities A financial asset is derecognised when: - The rights to receive cash flows from the asset have expired. - The IBERDROLA Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full to a third party and has transferred substantially all the asset s benefits and risks or does not retain them substantially. - The IBERDROLA Group has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all risks and rewards of the asset, but has transferred control of the asset. Financial liabilities are derecognised when the obligation under the liability is discharged or cancelled or expires. n) Inventories Fuel stocks Fuel stocks are measured at the lower of acquisition cost, calculated using the average weighted price method, or net realisable value. No adjustments to the value of fuel stocks that are part of the production process are made provided it is expected that the finished products into which they will be incorporated will be sold at above cost. Real estate inventories The real estate inventories were measured at cost of acquisition, which includes both the acquisition cost of the land and the costs of urban infrastructures and construction of real estate developments incurred until the year end. These costs include those incurred by the architecture and construction departments. Acquisition cost also includes finance costs incurred during the planning, urban infrastructure and construction period until the land is ready to be used, calculated using the method described in Note 4.g. Finance income in the Consolidated income statements for 2011 and 2010 includes EUR 4,977 thousand and EUR 6,174 thousand, respectively, in this connection (Note 38). Commercial costs are charged to Consolidated income statement on an accrual basis. The IBERDROLA Group periodically compares the cost of acquisition of real estate inventories with their net realisable value, recognising the necessary impairment losses with a charge to the Consolidated income statement when the latter is lower. If the circumstance leading to the valuation adjustment no longer exists, it is reversed recognising the corresponding income. For land, construction in progress and unsold units, net realisable value is used. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs to finish the production and the necessary costs to carry on with the sale of the element. This value is determined using the residual method, where the estimated total cost of the work, plus allowance for developer s risk and profit, is deducted from the gross value of the completed project. The key variables of the residual method are: The total cost of the development, comprising the potential value of development at the valuation date based on the best estimates of independent valuers. The cost of the development, including all disbursements to be made by the developer of the work depending on the type (e.g. government-sponsored or private single-family dwellings) and quality of the construction. In addition to the cost of the work, it includes the cost of projects and licenses (10%-12% of the physical construction project), legal fees (1%-1.5% of the material implementation project), marketing and promotional expenses (2%-4% of income) and unforeseen contingencies (3%). The developer profit considered for each asset, depending on the zone state of the land, size and complexity of the development, ranging to 18% to 25% of total costs. 49

52 For land with licences, construction in progress and unsold units, the main difference relative to unlicensed land is the developer profit, which in this case is lower given the stage of completion of the work and the decrease in risk as the completion of construction nears. Net revenue in the 2011 and 2010 Consolidated financial statements includes EUR 32,791 thousand and EUR 62,726 thousand, respectively, relating to sales of real state. These amounts represent the 0.10% and 0.21% of the IBERDROLA Group s total revenue at those dates. 0) Treasury shares At year end the IBERDROLA Group s treasury shares are deducted from Equity-Treasury shares on the Consolidated statement of financial position and are measured at acquisition cost. The gains and losses obtained on disposal of treasury shares are recognised in Other reserves in the Consolidated statement of financial position. p) Deferred income This heading includes the following concepts: Government Grants Income recognised by virtue of the agreements entered into with the Ministry of Industry and Energy and Autonomous Communities, Provincial and Municipal Governments in connection with investments relating to rural electrification plans and service quality improvements is recognised under Deferred income on the liability side of the Consolidated statement of financial position when the related investments have been made and when the IBERDROLA Group is notified that the amounts have been officially granted and recognized. Also, this item on the Consolidated statement of financial position includes cash payments from the US government under the Investment Tax Credits scheme (Note 3) in response to the start-up of wind farms. Also included are non-repayable grant to finance property, plant and equipment. All capital grants are imputed to profit and loss under Depreciation and amortisation charge, allowances and provisions of the Consolidated income statement as the financed plants are depreciated, thereby offsetting the depreciation expense. Transfer of assets from customers Pursuant to the regulations applicable to electricity distribution in the countries in which it is active, the IBERDROLA Group occasionally receives cash payments from its customers for the construction of electricity grid connection facilities or in some cases is directly assigned such facilities by its customers. Both the cash received and the fair value of the facilities received are credited to Deferred income in the Consolidated statement of financial position. These amounts are subsequently recognised under Other operating income in the Consolidated income statement as the facilities are depreciated. Emission rights Emission rights allocated to the IBERDROLA Group without charge in application of national allocation plans (Note 3) are recognised on the asset side of the Consolidated statement of financial position at their fair value with a credit to Deferred income. This deferred income is taken to Other operating income on the Consolidated income statement as the CO 2 emissions for which the allowances were granted are emitted. Other deferred income Deferred income also includes amounts received from third parties in relation to the assignment of the right to use certain facilities which connect to the electricity grid, the IBERDROLA Group s fibre optic network and other owned assets. These amounts are taken to profit or loss on a straight-line basis over the term of each contract under Other operating income in the Consolidated income statement. 50

53 Annual consolidated financial statements 2011 / Financial statements q) Post-employment and other employee benefits The contributions to be made to the defined contribution post-employment benefit plans are expensed under Staff costs in the Consolidated income statement on an accrual basis. In the case of the defined benefit plans, the IBERDROLA Group recognises the expenditure relating to these obligations on an accrual basis over the working life of the employees by commissioning the appropriate independent actuarial studies using the projected unit credit method to measure the obligation accrued at year-end, and the positive or negative actuarial differences are recognised as Other reserves when they arise (Note 2.a). The provision recognised in this connection represents the present value of the defined benefit obligation reduced by the market value of the related plans. If the market value of the assets exceeds the present value of the obligation, the net asset is not recognised in the Consolidated statement of financial position unless it is practically certain that it belongs to IBERDROLA Group. r) Collective redundancy procedure and other early retirement plans for employees The IBERDROLA Group recognises termination benefits, when there is an agreement with the employees or a certain expectation that such an agreement will be reached that will enable the employees to be terminated in exchange for indemnity payment. The Group IBERDROLA recognises the full amount of the expenditure relating to these plans when the obligation arises by performing the appropriate actuarial studies to calculate the present value of the actuarial obligation at year-end. The actuarial gains and losses are recognised in the Consolidated income statement. s) Provision for emission allowances The IBERDROLA Group records a provision for contingencies and expenses in order to recognise the obligation to deliver CO 2 emission allowances in accordance with the methods provided for in the national assignment plans (Note 3 and 23). The amount of the provision is determined on the assumption that the obligation will be settled: - Through the emission allowances transferred free of charge to the Group companies under the national emission allowance assignment plan. - Through other emission allowances in the Consolidated statement of financial position that were acquired subsequently. For the portion of emissions covered by the allowances granted under these plans or by allowances acquired by the group, the provision is recognised at the carrying amount of the allowances. If it is estimated that it will be necessary to deliver more emission allowances, the provision for this shortfall is calculated based on the market price of the allowances at the statement of financial position date. The amounts comprising Provisions - Other provisions on the liability side of the Consolidated statements of financial position ending 31 December 2011 and 2010 includes provisions for this shortfall in the amounts of EUR 280,118 thousand and EUR 341,108 thousand, respectively (Note 23). In addition, under Procurements the 2011 and 2010 Consolidated income statements include EUR 276,275 thousand and EUR 368,074 thousand, respectively. t) Production facility closure costs The IBERDROLA Group will incur in several decommissioning costs of its thermal plants, among which include those arising from necessary tasks to fit the land where they are located. Additionally, it has the obligation to carry out similar tasks in a part of its wind farms, and in accordance with the current legislation, the Group must perform certain tasks prior to the decommisioning of its nuclear plants. The estimated present value of these costs is capitalised with a credit to Provisions Other provisions at the beginning of the useful life of the related asset (Note 23). This estimate is subject to annual revision so that the provision reflects the present value of the full amount of the estimated future costs. The value of the asset is only adjusted for variances with respect to initial. Any change in the provision as a result of its discounting is recognised in Finance cost in the Consolidated income statement. 51

54 u) Other provisions The IBERDROLA Group recognises provisions to cover present obligations, whether these be legal or constructive, which arise as a result of past events, provided that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. A provision is recognised when the liability or obligation (Note 23) arises, with a charge to the relevant heading in the Consolidated income statement depending upon the nature of the obligation, for the present value of the provision when the effect of discounting the value of the obligation to present value is material. The change in the provision due to its discounting each year is recognised under Finance costs in the Consolidated income statement. These provisions include those recorded to cover environmental damage, which were determined on the basis of a case-by-case analysis of the situation of the polluted assets and the cost of cleaning them. On the other hand, according to labor regulations in force, IBERDROLA Group is obliged to pay compensations to employees who, under certain conditions, terminate their employment relationship. IBERDROLA Group does not expect lay offs in the future from which significant liabilities that may arise. v) Onerous contracts The IBERDROLA Group defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations thereunder exceed the economic benefits expected to be received under the contract. The IBERDROLA Group records a provision for the present value of the difference between the direct costs and the economic benefits of the contract. No provision was deemed necessary under this heading at 31 December 2011 and w) Transactions in currencies other than the euro Transactions carried out in currencies other than the functional currency of the Group companies are translated at the exchange rates prevailing at the transaction date. During the year, the differences arising between the exchange rates at which the transactions were recorded and those in force at the date on which the related collections or payments are made are charged or credited, as appropriate, to the Consolidated income statament. Also, fixed-income securities and receivables and payables denominated in currencies other than those in which the financial statements of the Group companies are denominated are translated at the year-end exchange rates at 31 December of each year. Exchange differences are charged to Finance cost or credited to Finance income in the Consolidated income statement, as appropriate. The foreign currency transactions in which the IBERDROLA Group has decided to mitigate foreign currency risk through the use of financial derivatives or other hedging instruments are recorded as described in Note 4.m. x) Current / non-current debt classification In the Consolidated statement of financial position debts are clasified by their maturity date at year-end. Debts due to be settled within twelve months are classified as current items and those due to be settled within more than twelve months as non-current items. y) Settlements relating to regulated activities, netting of emission rights and shortfall in revenue Following is a description of the accounting impact on the Consolidated financial statements of certain regulatory issues arising in Spain in 2010 and

55 Annual consolidated financial statements 2011 / Financial statements 2010 a) Electricity distribution On 29 December 2010, Order 3353/2010 of 28 December was published, revising the access tolls from 1 January 2011 and the tariffs and premiums of certain facilities operating under the special regime. This order established a remuneration of EUR 1,681,932 thousand for the distribution of electricity in Spain by the IBERDROLA Group during This remuneration is recognised under Net revenue in the 2010 Consolidated income statement. Furthermore, this order set a definitive remuneration for the electricity distributed by the IBERDROLA Group in 2009 at EUR 1,621,069 thousand. Given that, at the date of authorisation for issue of the Consolidated financial statements for 2009, only a provisional remuneration amount was available, Net revenue in the 2010 Consolidated income statement included income of EUR 74,824 thousand relating to the difference between the aforementioned amount of EUR 1,621,069 thousand and the provisional remuneration. b) Revenue shortfall Royal Decree-Law 6/2010 was published on 9 April 2010, setting out Measures for Boosting the Recovery of the Economic and Employment. This legislation has explicitly guaranteed the full recover of the 2010 and 2009 revenue shortfall. Shortly after, Royal Decree 437/2010, of 21 April, was published, implementing the rules for securitisation of the deficit in the electricity system. It detailed, inter alia, the amounts recognised for the IBERDROLA Group for collection rights on the 2006, 2008 and In the latest of 2010, Royal Decree-Law 14/2010, of 23 December was implemented, establishing urgent Measures to Correct the Electricity System Deficit. This law increased the shortfall limits established for 2011 from EUR 2,000 million to EUR 3,000 million and for 2012 from EUR 1,000 million to EUR 1,500 million. It also considered the temporary imbalance of settlements in the system arising in 2010 as eligible for securitisation up to a maximum amount of EUR 2,500 million. The best estimation available by IBERDROLA Group about the generated revenue shortfall in 2010 is EUR 5,040,498 thousand. The 35.01% to be finance by the Group totalling an amount of EUR 1,764,679 thousand of which they have recovered 56,421 thousand in The recovery of this amount is fully guaranteed by the current legislation regardless of IBERDROLA Group s future revenues. As a result, Other current financial assets on the Consolidated statement of financial position at 31 December 2010 includes EUR 5,556,003 thousand for the 2010 revenue shortfall and the shortfalls generated in prior years. At the date of authorization for issue of the Consolidated financial statements for the year ended 2010, the IBERDROLA Group considered, after analyzing the financial market situation and the prevailing legislation in this connection, that the definitive securitization of this entire amount would take place in

56 2011 a) Electricity distribution On 31 December 2011, Order IET/3586/2011 was published, setting the Access Tolls from 1 January 2012 and the Tariffs and Premiums of Facilities under the Special Regime. This Order sets a provisional remuneration for the electricity distribution activities performed by the IBERDROLA Group in Spain in 2011 at EUR 1,751,665 thousand. It is recognised under Net revenue in the Consolidated income statement for b) Revenue shortfall Royal Decree 1307/2011 was published on 26 September 2011 in amendment of Royal Decree 437/2010, increasing 2010 shortfall collection rights by EUR 2,500 million and flexibilising the revenue shortfall securitisation process. At the date of authorisation for issue of these Consolidated financial statements, the IBERDROLA Group estimates that the revenue shortfall in 2011 is EUR 4,055,702 thousand. The amount it must finance (35.01%) totals EUR 1,419,901 thousand, of which, at 31 December 2011, no amount has been collected. As with the amount generated in previous years, the recovery of this amount is guaranteed by current legislation, regardless of whether the IBERDROLA Group continues its activity. In 2011 several securitisations took place of revenue shortfalls generated in previous years, for which the IBERDROLA Group collected EUR 2,961,446 thousand in total. Also, despite the fact that the estimate made in this connection in the preparation of the 2010 Consolidated financial statements was not met, the IBERDROLA Group, having analysed the current state of the financial markets and applicable legislation, considers that the definitive securitisation of substantially all the uncollected revenue shortfall will take place in 2012, except for the amount mentioned in the following paragraph. Therefore, the related amount, i.e. EUR 3,604,783 thousand, was recognised under Other current financial assets in the Consolidated statement of financial position at 31 December In this regard, it is important to note the securitisations carried out in the early months of 2012 which are described in Note 49. Taking into account that the amount exceeding the ex ante shortfall for 2011 recognised in Royal Decree-Law 14/2010 will be collected in the settlements made by the National Energy Commission in 2012, Other non-current financial assets in the Consolidated statement of financial position at 31 December 2011 contains the IBERDROLA Group s best estimate of the portion of this excess amount that will be included in the last settlements relating to 2012, which the National Energy Commission will make at the beginning of This amount stands at EUR 88,396 thousand. z) Income Tax Since 1986 IBERDROLA has filed Consolidated Tax Returns with certain Group companies. Foreign companies are taxed according to the current legislation of their respective jurisdiction. Income Tax is accounted for using the general balance liability method, which consists of determining deferred tax assets and liabilities on the basis of the carrying amounts of assets and liabilities and their tax base, using the tax rates that can objectively be expected to be in force when the assets or liabilities are realised or settled. Deferred tax assets and liabilities arising as a result of direct charges or credits to equity are also accounted for with a charge or credit to equity. The IBERDROLA Group recognises deferred tax assets provided future taxable profits are expected against which said assets can be recovered. Deductions in order to avoid double taxation tax credits and other tax credits and tax relief earned as a result of economic events occurring in the year are deducted from the Income Tax expense, unless there are doubts as to whether they can be realised. 54

57 Annual consolidated financial statements 2011 / Financial statements aa) Administrative concessions for hydroelectric plants Pursuant to Law 29/1985, of 2 August, partially amended by Law 46/1999, of 13 December, all the Spanish hydroelectric plants, are operated under the temporary administrative concession system, whereby at the end of the concession period title to the facilities is returned to the State, at which time the facilities have to be in good working order. The Group s administrative concessions expire in the period from 2000 to However, the facilities which concessions had expired at 31 December 2011 are scantly material in terms of installed capacity, and had been fully amortised as of that date, although they continued to be operated by the IBERDROLA Group, as these concessions are renewed tacitly. IBERDROLA considers that it is not necessary to record a provision to a reversion reserve since the maintenance programmes ensure the good working condition of the facilities at all times. ab) Final radioactive waste management costs Royal Decree 1349/2003, was published on 8 of November 2003 regulating the Empresa Nacional de Residuos Radioactivos, S.A. (ENRESA) activities and its financing. This royal decree grouped together the previous legislation regulating the activities that ENRESA develops as well as its financing, and repeals, inter alia, Royal Decree 1899/1984, of 1 August. Meanwhile, Royal Decree-Law 5/2005, of 11 March, on urgent reforms to boost productivity, and Law 24/2005, of 18 November, established that the costs relating to the management of radioactive waste and spent fuel from nuclear plants, and to the decommissioning and shut-down of the plants, attributable to their operation and incurred after 31 March 2005, will be financed by the owners of the nuclear plants in use. On the other hand, on 7 May 2009, was published the Royal Decree-Law 6/2009, adopting various energy sector measures and approving the social tariff. The principal measures introduced are as follows: - Necessary costs incurred in the management of radioactive waste and nuclear fuel at nuclear power stations that are definitively decommissioned before the state-owned radioactive waste management company ENRESA begins operating, which it had still not done at the date of preparing these Consolidated financial statements, and all necessary costs incurred in dismantling and closing these power stations, will be treated as diversification and capacity guarantee costs. - Amounts used to cover the cost of managing radioactive waste generated by research activities directly related to nuclear electricity generation and the costs deriving from the reprocessing of spent fuel sent overseas prior to the entry into force of Electricity Industry Law 54/1997, and all other costs that may be specified by royal decree shall also be considered diversification and capacity guarantee costs. - Amounts used to establish provisions to cover the costs incurred in managing radioactive waste and spent fuel generated at operational nuclear power stations after the establishment of ENRESA as well as dismantling and closure costs will not be treated as supply diversification and security costs, since these will be borne by the owners of the nuclear power stations while they are operational, irrespective of the date on which they are generated. - The balance of ENRESA s provisions remaining after deduction of the amounts needed to cover the supply security and diversification costs will be used to cover costs not included in this category. - To cover the costs associated with nuclear power stations in operation, the companies owning the stations must pay a charge directly proportional to the volume of energy generated at each. The definitive method used to calculate this charge will be approved by resolution of the Spanish Cabinet. This fact has not take place yet as of the date of issue of these Consolidated financial statements. After a detailed analysis of the impact of Royal Decree-Law 6/2009, the IBERDROLA Group considers that the rate is the best estimate available of the accrued expenses payable to the IBERDROLA Group in this connection. The heading Taxes other than income tax of Consolidated income statements for 2011 and 2010 include EUR 176,443 thousand and EUR 188,600 thousand, respectively, in this connection. 55

58 ac) Earnings per share Basic earnings per share are calculated by dividing the net profit for the year attributable to the Parent by the weighted average number of ordinary shares outstanding during the year, excluding the average number of shares of the parent IBERDROLA held by the IBERDROLA Group companies (Notes 19 and 51). Meanwhile, diluted earnings per share are calculated by dividing the net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, adjusted by the weighted average number of ordinary shares that would have been outstanding assuming the conversion of all the potential ordinary shares into ordinary shares of IBERDROLA. For these purposes, it is considered that shares are converted at the beginning of the year or at the date of issue of the potential ordinary shares, if the latter were issued during the current period. In the Consolidated financial statements of the IBERDROLA Group for the years ended 31 December 2011 and 2010, basic earnings per share coincide with diluted earnings per share, since there were no potential shares outstanding during these years that could be converted into ordinary shares (Note 51). ad) Dividends The dividend proposed by the Board of Directors of IBERDROLA to the General Shareholders Meeting is not deducted from equity until it has been approved by the latter. ae) Non-current assets held for sale and discontinued operations If the carrying amount of a non-current asset (or disposal group of assets) will be recovered principally through its sale rather than through continuing use, the IBERDROLA Group classifies it as held for sale and values it at the lower of carrying amount and fair value less costs to sell. A discontinued operation is a component of an entity that either has been sold or disposed by other means or is classified as held for sale and: represents a separate major line of business or geographical area of operations that is significant and can be considered separately from the rest; is part of a single coordinated plan to sell or dispose by other means of a separate major line of business or geographical area of operations and can be considered separately from the rest; or is a subsidiary acquired exclusively with a view to resale. If it considers that there are discontinued operations, the IBERDROLA Group recognizes a single amount in the Consolidated statement of comprehensive income that includes the total amount of: profit or loss after tax from discontinued operations, and profit or loss after tax recognized by measurement at fair value less costs to sell, or sale or disposal by other means of the assets or disposal groups of assets of the discontinued operation. af) Consolidated statements of cash flow The following terms are used in the Consolidated statements of cash flow, which were prepared using the indirect method, with the meanings specified: - Operating activities: the principal revenue-producing activities of the Group companies, as well as other activities that are not investing or financing activities. - Investing activities: the acquisition and sale or disposal of other means of long-term assets and other investments not included in cash and cash equivalents. - Financing activities: activities that result in changes in the size and composition of the equity and liabilities of the company that are not operating activities. 56

59 Annual consolidated financial statements 2011 / Financial statements ag) Share-based employee compensation The delivery of IBERDROLA shares to employees as compensation for their services is recognised under Staff costs in the Consolidated income statement as the workers perform the remunerated services, with a credit to equity under Equity Other reserves in the Consolidated statement of financial position at the fair value of the equity instruments on the grant date, i.e., the date the IBERDROLA Group and its employees reach an agreement establishing the terms of the share grant. In the event of cash settled share-based payments, i.e., linked to IBERDROLA s share price, the payment is charged to Staff costs in the Consolidated income statement and credited to Other non-current payables or Other current liabilities on the liability side of the Consolidated statement of financial position, as appropriate. The fair value of the cash settled compensation is reestimated at each accounting close. 5. FINANCING AND FINANCIAL RISK MANAGEMENT POLICY The IBERDROLA Group is exposed to various inherent risks in the countries, industries and markets in which it operates and the businesses it carries out, which could prevent it from achieving its objectives and executing its strategies successfully. In particular, the financing and financial risk policy approved by the Board of Directors identifies the risk factors described below, accompanied by a sensitivity analysis. The IBERDROLA Group has an organisation and systems which allow the financial risks to which the Group is exposed to be identified, measured and controlled. Interest rate risk The IBERDROLA Group is exposed to the risk of fluctuations in interest rates affecting cash flows and market value in respect of items in the statement of financial position, debt and derivatives. In order to adequately manage and limit this risk the IBERDROLA Group manages annually the proportion of its debt that bears fixed interest to that which bears floating interest and establishes the actions to be carried out throughout the year: new sources of financing (at a fixed, floating or indexed rate) and/or the use of interest rate derivatives. The debt structure at 31 December 2011 and 2010, after taking into account hedges via derivatives, is the following: Thousands of euros Fixed interest rate 18,343,654 16,335,479 Floating interest rate 13,652,795 15,151,465 Limited floating interest rate (*) 1,232, ,902 33,228,500 31,818,846 (*) Relating to certain borrowing agreements whose exposure to interest rate fluctuations is limited by caps and floors. The reference interest rates for the floating rate borrowings are basically Euribor, Libor- sterling pound and Libor- dollar and the most liquid local reference rates in the case of the borrowings of the Latin American subsidiaries. 57

60 The sensitivity earnings and equity to changes in interest rates after taking into account the effect of the derivatives is the following: Increase / decrease in interest rate (basis points) Impact on profit before taxes Thousands of euros Impact on equity before taxes (32,522) (9,590) ,522 9, (36,240) 3, ,240 (3,745) Foreign currency risk As the IBERDROLA Group s functional currency is the euro, fluctuations in the value of the currencies, mainly the sterling pound and the US dollar, in which borrowings are instrumented and transactions are made, with respect to the euro may have an effect on the finance costs and profit for the year. The following items could be affected by foreign currency risk: - Debt denominated in currencies other than the local or functional currency arranged by the IBERDROLA Group companies. - Collections and payments for supplies, services or equipment in currencies other than the local or functional currencies. - Income and expenses of certain foreign subsidiaries indexed to currencies other than the local or functional currencies. - Taxes derived from the accounting for tax purposes in local currencies other than the functional currency. - Profit or loss on consolidation of the foreign subsidiaries. - Consolidated carrying amount of investments in foreign subsidiaries. The IBERDROLA Group reduces this risk by ensuring that all its economic flows are denominated in the presentation currency of each Group company, provided that this is possible and economically practicable and efficient. The resulting open positions are integrated and managed through the use of derivatives, within the approved limits. 58

61 Annual consolidated financial statements 2011 / Financial statements The sensitivity of the consolidated earnings and equity of the IBERDROLA Group to changes in the dollar/euro and sterling pound/euro exchange rate is as follows: Change in the dollar/euro exchange rate Impact on profit before taxes Thousands of euros Impact on equity before taxes % 3,240 (500,661) -5% (3,529) 553, % (13,264) (456,872) -5% 9, ,686 Change in the sterling pound/ euro exchange rate Impact on profit before taxes Thousands of euros Impact on equity before taxes % (1,886) (501,415) -5% (3,773) 548, % (33,697) (460,628) -5% 23, ,646 The sensitivity of the market value of the IBERDROLA Group s financial borrowings, bearing in mind hedges entered into, to changes in the US dollar/euro and in the sterling pound/euro exchange rate is as follows: Thousands of euros Changes in the dollar/euro exchange rate +5% -5% +5% -5% Change in the market value of the borrowings (256,250) 283,224 (246,848) 272,832 Changes in the sterling pound/euro exchange rate Thousands of euros +5% -5% +5% -5% Change in the market value of the borrowings (201,616) 222,839 (200,289) 221,373 Commodity price risk The activities carried out by the IBERDROLA Group are subject to a range of business risks, such as the fuel prices fluctuations including the CO 2 emission allowances. The exposure to these risks is managed and mitigated by monitoring the positions, arranging derivatives, diversifying contracts and various clauses contained in the related purchase and sale agreements of these commodities. In Spain and in the United Kingdom market, the current generating mix provides a natural hedge against the range of generating technologies used, limiting the business and market risks associated with the energy supply, production and sale to final customers. The remaining risk arising from fluctuations in prices of products to which fuel prices are indexed and exchange rates is mitigated through the appropriate diversification and management of the supply contracts. 59

62 With regard to the measurements of the risk of a change in the market price of gas in those markets which are sufficiently liquid (United Kingdom and United States), the IBERDROLA Group uses, among other control indicators, the value at risk, establishing limits for each business. Value at risk figures are calculated with a confidence level of 99% and a holding period of five days, as follows: Thousands of euros Value at risk at 31 December 17,916 22,610 Average value at risk for the 12 preceding months 26,073 25,299 Maximum value at risk in the 12 preceding months 49,897 47,776 Minimum value at risk in the 12 preceding months 14,663 12,245 In the rest of markets where the IBERDROLA Group operates, the risk is measured through the sensitivity to the earnings and to the equity, which is as follows: Thousands of euros Change in gas price Impact on profit before tax Impact on equity before tax % (12,261) (12,091) -5% 12,261 12, % (9,180) (7,674) -5% 9,180 7,674 Liquidity risk Exposure to adverse situations in the debt or capital markets or to IBERDROLA Group s economic and financial situation can hinder or prevent the IBERDROLA Group from obtaining the financing required to properly carry on its business activities and implement. IBERDROLA Group s liquidity policy is designed to ensure that it can meet its payment obligations without having to obtain financing under unfavourable terms. For this purpose, it uses various management measures such as the arrangement of committed credit facilities of sufficient amount, term and flexibility, diversification of the coverage of financing needs through access to different markets and geographical areas, and diversification of the maturities of the debt issued (Notes 24 and 49). Credit risk This risk is defined as the risk that a third party will not fulfil its contractual obligations and, therefore, generate losses for the group. With regard to credit risk relating to trade accounts receivable, this risk is historically very low. Trade payables are recognised on the Consolidated statement of financial position, net of provisions for bad debts. The cost of doubtful debts has historically remained at moderate and stable levels, despite the current difficult economic situation. The IBERDROLA Group is also exposed to the risk that its counterparties will not meet their obligations in transactions with derivatives, the placement of cash surpluses, energy trading operations and guarantees received by third parties. The corporate risk function of the IBERDROLA Group establishes strict criteria in selecting counterparties based on the creditworthiness of the entities, which translates into a highly creditworthy and highly solvent counterparty portfolio. It should be noted that in 2011 and 2010 there were no material non-payments or losses. At 31 December 2011 and 2010 there was no material credit risk concentration at the IBERDROLA Group. 60

63 Annual consolidated financial statements 2011 / Financial statements The age at 31 December 2011 and 2010 of the financial assets that are past due but not considered impaired is the following: Thousands of euros Less than 90 days 439, , days 177, ,057 Over 180 days 177, , , , USE OF ESTIMATES AND SOURCES OF UNCERTAINTY a) Accounting estimates The most significant estimates made by the IBERDROLA Group in these Consolidated financial statements are as follows: - Unbilled power supplied: The revenue figure for each year includes an estimate of the power supplied to customers of liberalised markets but not billed because it had not been metered at year-end for reasons relating to the regular meterreading period. The estimated unbilled power at 31 December 2011 and 2010, amounted to EUR 1,022,115 thousand and EUR 972,466 thousand, respectively. This amount is included under Current trade and other receivables on the Consolidated statements of financial position at 31 December 2011 and Settlements relating to regulated activities in Spain: At the end of each year the IBERDROLA Group estimates the definitive settlements relating to regulated activities in Spain for that year, establishing the shortfall in revenue, if any, that corresponds, together with the amount that will be recovered in the future on the basis of the announcements made by the authorities in this connection and the periods during which this recovery will take place (Note 4.y). The estimates are made on the basis of the provisional settlements published up to the date of preparation of the Consolidated financial statements and all available information on the sector. - Contracts to trade energy supplies: As mentioned in Note 4.m, the IBERDROLA Group analyses its contracts to trade energy supplies to ensure they are properly classified for accounting purposes. This analysis involves estimating final customer demand and other variables. These estimates are revised at regular intervals. - Provisions for contingencies and expenses: As indicated in Note 4.u, the IBERDROLA Group recognises provisions to cover present obligations arising from past events. For this purpose, it must assess the outcome of certain procedures of a legal or other nature that are ongoing at the date of authorisation for issue of these Consolidated financial statements based on the best information available. - Useful lives: The IBERDROLA Group s property, plant and equipment operate over very prolonged periods of time. The Group estimates their useful lives for accounting purposes (Note 4.h) taking into account each asset s technical characteristics, the period over which they are expected to generate economic benefits and applicable legislation in each case. - Costs incurred in dismantling electricity production and distribution facilities: The IBERDROLA Group periodically revises the estimates made concerning the costs to be incurred in the dismantling its generating facilities, and in the dismantling work that will have to be performed on the basis on agreements entered into for the disposal of land on which distribution facilities are located (Note 23). 61

64 - Provision for pensions and similar obligations and restructuring plans: At each year-end the IBERDROLA Group estimates the current actuarial provision required to cover obligations relating to restructuring plans, pensions and other similar obligations to its employees in several cases, it involves the valuation of the assets affected to certain plans. In making these estimates, the IBERDROLA Group receives advice from independent actuaries (Notes 4.q, 4.r and 22). - Discontinued operations: The IBERDROLA Group considers that neither at 31 December 2011 nor the date of preparation of these Consolidated financial statements exist discontinued operations in relation to these Consolidated financial statements. - Fair value of investment property: The IBERDROLA Group appraises its investment property each year. While these appraisals are particularly important given the current situation of the real estate market. The IBERDROLA Group considers that its appraisals, commissioned by independent valuers, appropriately reflect this situation. - Impairment of assets: As described in Notes 4.l and 8, the IBERDROLA Group, in accordance with applicable accounting regulations, tests the cash-generating units that require testing for impairment each year in September. These impairment tests require estimating the future cash flows of the businesses and the most appropriate discount rate in each case. The IBERDROLA Group believes its estimates in this respect are appropriate and consistent with the current market situation and reflect its investment plans and the best available estimate of its future expense and income. Also, the discount rates reflect the risk of cash-generating units. - Other intangible assets: As disclosed in Note 4.f of these Consolidated financial statements, the Other intangible assets caption on the Consolidated statement of financial position includes wind farm projects and gas storage facilities in the development phase. The IBERDROLA Group estimates that these projects meet the identifiability requirement under IAS 38 for them to be capitalised, and that the Group s future investment plans will include constructing the facilities proposed in these projects. Although these estimates were made on the basis of the best information available at the date on which these Consolidated financial statements were prepared, events that take place in the future might make it necessary to change these estimates (upwards or downwards) in coming years. Changes in estimates would be applied prospectively, recognising the effects of the change in estimates in the related future Consolidated financial statements. b) Sources of uncertainty There are certain aspects that, at the date of approval of these Consolidated financial statements constitute a source of uncertainty concerning the accounting effect: - Other current financial assets in the Consolidated statement of financial position at 31 December 2011 includes EUR 3,604,783 thousand relating to the best available estimate of substantially all the uncollected revenue shortfall at that date. Whether the entire amount is collected in 2012 depends on certain circumstances, some of which (such as the performance of the financial markets) do not depend on the IBERDROLA Group s management (Notes 4.y and 49). - In 2009 and against the backdrop of the Recovery and Reinvestment Act, a series of renewable energy incentives were established in the United States. These measures solely related to wind facilities coming on stream prior to 31 December 2012 (Note 3). Although the regulation governing wind facilities entering service in United States after 1 January 2013 is pending publication at the date of preparing the Consolidated financial statements, the IBERDROLA Group considers that this regulation will ensure adequate returns at the new facilities and, therefore, that the property, plant and equipment and intangible assets of its US renewables are not impaired (Notes 8 and10). 62

65 Annual consolidated financial statements 2011 / Financial statements - The operating licence in effect for the majority of the IBERDROLA Group s nuclear facilities, all located in Spain, span a 30 year period once they become operational. Renewal of these licences cannot be applied for until a few years before they expire. On 13 July 2009, Order ITC 1785/2009 was published, establishing 6 July 2013 as the definitive decommissioning date for the Santa María de Garoña nuclear power station, 42 years after it was brought into operation. In this regard, on 19 January 2012, the Spanish Nuclear Safety Council received a request from the Ministry of Industry, Energy and Tourism for it to assess whether there is any impediment to amending the order, for the purpose of keeping open the option of renewing the licence to operate when it expires. For the rest of Nuclear plants the Sustainable Economy Law approved on 15 February 2011 sets out, without any time limit, that its contribution in the production mix will be determined according to the operational schedule and the potential renewals required by the facilities owners under the regulatory framework. Taking this into account, as well as the investment and maintenance policies followed at its nuclear plants, the IBERDROLA Group considers that the corresponding operating licences will be renewed for at least an additional 10 years period. Accordingly, for accounting purposes a useful life of 40 years will be applied to these plants, except in the case of Santa María de Garoña, installation to which the above-mentioned 42 years are being implemented (Note 4.h). - The legislation applicable to Iberdrola Distribución S.A.U. and other Group companies applying Vizcaya regional tax legislation to settle their 2011 Income Taxes is Regional Law 3/1996 of 26 June, as amended by more recent regulations, which is currently in force despite a series of ongoing appeals. The IBERDROLA Group companies that settle their taxes under this legislation have calculated the amounts corresponding to this tax for years 2011 and 2010 and for those years open to inspection in accordance with the regional regulations in effect at the end of each year based on their judgment that the final outcome of the legal proceedings and appeals filed will not have a significant effect on the Consolidated financial statements. - Royal Decree-Law 6/2009 created the register for pre-allocation of remuneration, in which projects must be registered to have access to the renewable energy premiums defined in Royal Decree 661/2007 which regulates special regime electricity generation. One of the main prerequisites for obtaining these premiums is to be in operation prior to 1 January The IBERDROLA Group registered 1,590 MW of wind power in the pre-allocation register, of which 1,298 MW were in operation at 31 December On the other hand, Royal Decree-Law 1/2012 was published on 28 January It suspends the preallocation of remuneration procedures and suppresses the economic incentives for new electricity facilities using co-generation, renewable energies and waste, thereby suspending the inscription of new renewable projects in the register and the economic incentives for renewable facilities not inscribed in this register, at least until the resolution of the revenue shortfall (Note 4.y). The IBERDROLA Group considers that it will be able to put into service the rest of 292 MW before 1 January It also considers that the costs capitalised up until then on projects not included in the pre-allocation register, that are affected by the mentioned Royal Decree-Law 1/2012, will be recovered under the new regulatory framework when it is approved. The IBERDROLA Group and its legal and tax advisors consider that no losses of assets and no significant liabilities will arise for the IBERDROLA Group as a result of the matters detailed in the paragraphs above. 63

66 7. GEOGRAPHICAL AND BUSINESS SEGMENT REPORTING IFRS 8: Operating segments provides that an operating segment is a component of an entity. that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), which operating results are reviewed regularly by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Transactions among different segments are carried out on an arm s length basis. The operating segments identified by the IBERDROLA Group are as follows: - Network business: including all the energy transmission and distribution activities, and any other regulated activity originated in Spain, the United Kingdom and the United States. - Deregulated business: including electricity generation and sales businesses carried on by the Group in Spain, Portugal, the United Kingdom and Mexico. - Renewables: activities relating to renewable energies in Spain, the United Kingdom, the United States and the rest of the world, and the gas trading and storage businesses in the United States. - South America: the businesses established in this geographical area, primarily Brazil. - Other businesses: comprising the engineering and construction businesses, non-power businesses and gas activities in Canada. - Corporation: this includes the costs of the Group s structure (Single Corporation), of the administration services of the corporate areas that are subsequently invoiced to the other companies through either specific service agreements or a management fee. The IBERDROLA Group manages globaly not only the financial activities but also the effects of taxation on profits. Consequently, financial income and expenses and Income Tax have not been allocated to operating segments. 64

67 Annual consolidated financial statements 2011 / Financial statements The key figures for the operating segments identified are as follows: Business segment reporting for 2011 NET REVENUE External revenues Inter-segment revenues Spain and Portugal Deregulated Renewable Network United Kingdom Mexico Total Spain United Kingdom USA Other countries Total Spain United Kingdom Southamerica Other business Thousands of euros Struc. and adjust. USA Total Brazil Total Total 12,082,370 7,630,569 1,354,356 21,067, ,002 15, , ,061 1,596,841 1,851, ,847 2,449,260 5,081,178 2,821,374 1,081, ,648, , , , , ,345 3, , , , ,660-4,669 12,935 1,719,543 Eliminations (548,827) - - (548,827) (1,170,716) (1,719,543) Total sales 21,089,836 2,293,752 5,514,838 2,821,374 1,086,015 (1,157,780) 31,648,035 INCOME STATEMENT Segment Operating profit (loss) Result of companies accounted for using the equity method net of taxes ASSETS 1,069,364 (294,946) 299,566 1,073, ,154 82, ,494 64, ,669 1,204, , ,991 2,202, , ,571 (129,084) 4,505,093 6, ,218 13,896 (11) (11) 3, ,063 5,898 (57,389) - (34,543) Segment assets 11,282,575 8,438,032 1,936,952 21,657,559 5,597,517 3,504,715 12,551,267 1,956,027 23,609,526 9,195,100 8,551,019 8,969,638 26,715,757 4,798,443 2,669,982 1,416,030 80,867,297 Investments in companies accounted for using the equity method LIABILITIES Segment liabilities OTHER INFORMATION Total cost incurred during the year in the acquisition of property, plant and equipment and non-current intangible assets Depreciation and amortisation charge, allowances and provisions Expenses for the year other than depreciation and amortisation that did not result in cash outflows 31,179 1,064 48,761 81, , ,864 49, , ,821 2,526,660 1,217, ,158 4,056, , ,343 2,323, ,037 2,743,416 5,093,790 1,042,462 1,577,873 7,714, , ,705 1,633,365 17,653, , ,225 15, , , , , ,560 1,505, , , ,086 1,765, ,063 54,664 8,411 4,524, , ,494 62,323 1,181, ,982 91, ,702 99, , , , , , ,271 20,848 90,977 3,145,377 7,662 23, ,759 1,472 1,265 (6,436) 379 (3,320) 14,461 13,802 11,985 40,248 6,764 1,956 21,127 98,534 Total 65

68 Business segment reporting for 2010 NET REVENUE External revenues Inter-segment revenues Spain and Portugal Deregulated Renewable Network United Kingdom Mexico Total Spain United Kingdom USA Other countries Total Spain United Kingdom Southamerica Other business Thousands of euros Struc. and adjust. USA Total Brazil Total Total 10,515,948 7,576,623 1,640,980 19,733, ,378 13, , ,544 1,629,753 1,869, ,179 3,132,026 5,734,087 1,598,131 1,732,380 3,132 30,431,034 29,428 8,233-37, , ,758 3, , , , ,358-13,757 52,957 1,162,057 Eliminations (17,752) - - (17,752) (1,144,305) (1,162,057) Total sales 19,753,460 2,241,077 6,180,445 1,598,131 1,746,137 (1,088,216) 30,431,034 INCOME STATEMENT Segment Operating profit (loss) Result of companies accounted for using the equity method net of taxes ASSETS 953, , ,791 1,521, ,548 26, ,910 52, ,986 1,202, , ,012 2,291, , (149,860) 4,829,741 1,093 (316) 7,658 8, ,069-2,455 5,524 5,881 7,727 (221) 27,356 Segment assets 11,174,806 8,874,470 1,872,149 21,921,425 5,739,542 3,064,374 11,924,368 1,938,504 22,666,788 8,878,653 7,885,706 8,248,934 25,013,293 2,626,963 2,663,771 1,620,817 76,513,057 Investments in companies accounted for using the equity method LIABILITIES Segment liabilities OTHER INFORMATION Total cost incurred during the year in the acquisition of property, plant and equipment and non-current intangible assets Depreciation and amortisation charge, allowances and provisions Expenses for the year other than depreciation and amortisation that did not result in cash outflows 2, ,803 49, ,151-18,347 46,498 28, ,678 22, ,960 2,899,774 1,735, ,202 4,940, ,265 79,522 2,032, ,523 2,511,426 4,918,654 1,001,425 1,326,101 7,246, ,583 1,556,248 1,344,927 17,997, , ,071 25,251 1,027, , ,296 1,721, ,111 2,937, , , ,576 1,512, ,947 53, ,249 5,851, , ,617 69, , ,693 85, ,881 83, , , , , ,934 80,682 47, ,784 2,698,228 43,183 21, ,982 6,327 1,025 2, ,191 54,672 23,206 52, ,256 8, (12,000) 202,412 Total 66

69 Annual consolidated financial statements 2011 / Financial statements A breakdown of revenues and non-current assets by geographical area is as follows: Thousands of euros Net revenue Spain 15,286,346 14,629,123 United Kingdom 8,450,417 8,325,923 Rest of Europe 257, ,588 USA 3,277,273 4,035,204 South America 4,376,870 3,267,196 31,648,035 30,431,034 Thousands of euros Non-current assets (*) Spain 25,353,630 24,979,206 United Kingdom 18,985,449 18,489,590 Rest of Europe 1,829,540 1,758,881 USA 20,985,881 19,529,374 South America 6,047,615 4,086,848 73,202,115 68,843,899 (*) Excluding non-current financial assets, deferred tax assets and non-current trade and other receivables. In addition, the reconciliation between segment assets and liabilities in the Consolidated statement of financial position is as follows: Thousands of euros Segment assets 80,867,297 76,513,057 Non-current financial assets 2,857,894 2,636,156 Deferred tax assets 4,545,185 3,487,732 Current trade and other receivables 916, ,907 Current financial investments 4,769,896 6,871,150 Current income tax assets 566, ,732 Other tax receivables 290, ,361 Cash and cash equivalents 2,091,007 2,101,857 Total Assets 96,904,732 93,700,952 Thousands of euros Segment liabilities 17,653,272 17,997,433 Equity 33,207,800 31,663,070 Equity instruments having the substance of a financial liability 582, ,282 Non-current bank borrowings 30,453,501 26,397,550 Deferred tax liabilities 9,741,959 8,773,704 Other non-current payables 394, ,630 Current bank borrowings 4,173,951 6,937,475 Other current liabilities 696, ,808 Total Equity and Liabilities 96,904,732 93,700,952 The operating profit of the IBERDROLA Group in Spain has reached EUR 2,803,093 thousand during

70 8. INTANGIBLE ASSETS The changes in 2011 and 2010 in intangible assets accounts and in the related accumulated amortisation, allowances and provisions were as follows: Cost: Balance at Changes in the consolidation method and/or scope Translation differences in foreign currency Additions or charges for the year Capitalised staff costs (Note 34) Disposals, derecognition, Transfers reductions and write-offs Balance at Changes in the consolidation method and/or scope (Notes 18 and 41) Translation differences in foreign currency Additions or charges for the year Capitalised staff costs (Note 34) Thousands of euros Disposals, derecognition and Write-offs Transfers Balance at reductions Goodwill 7,588,687 (75,128) 316, (28) - 7,830, , , (10,496) - - 8,272,894 Concessions, patents, licenses, trademarks and other 7,835,074 (391,904) 609, ,058 20,024 (166,766) - 8,040,871 1,861,615 (211,286) 279,048 45,990 (655) - (1,380,332) 8,635,251 Computer software 1,005,117-20, ,878 13,052 (11,720) - 1,127,962 (2,632) 18,333 71,329 16,108 (30,362) - 4,375 1,205,113 Emission allowances 382,128-6, ,364 - (427,042) - 347,939-5, ,670 - (355,968) ,043 Other intangible assets 3,889, ,106 38,025 16,649 (5,571) (926,666) 3,220,067 (12,825) 192,013 75,503 13,821 (30,793) (13,179) 1,221,552 4,666,159 Total cost 20,700,530 (467,032) 1,160, ,018 49,725 (611,127) (926,666) 20,567,402 2,090, , ,550 75,919 (428,274) (13,179) (154,405) 23,101,460 Accumulated amortisation and allowances Concessions, patents, licenses, trademarks and other 916,885-54, ,110 - (21,054) - 1,206,776 (6,937) (82,084) 279,549 - (231) - (119,044) 1,278,029 Computer software 708,664-13,881 90,552 - (10,090) - 803,007 (2,244) 15,409 98,209 - (26,105) ,617 Other intangible assets Total accumulated amortisation Impairment allowances Total accumulated amortisation and allowances Total carrying amount 245,473-1,541 81,251 - (482) - 327,783 (12,087) 28, ,111 - (26,020) - 118, ,428 1,871,022-70, ,913 - (31,626) - 2,337,566 (21,268) (37,737) 586,869 - (52,356) - - 2,813,074 4, ,596-6, , ,807 1,875,401-70, ,913 - (29,030) - 2,344,541 (21,268) (37,737) 595,701 - (52,356) - - 2,828,881 18,825,129 (467,032) 1,090, ,105 49,725 (582,097) (926,666) 18,222,861 2,111, , ,849 75,919 (375,918) (13,179) (154,405) 20,272,579 68

71 Annual consolidated financial statements 2011 / Financial statements The fully amortised intangible assets in use at 31 December 2011 and 2010 amounted to EUR 833,026 thousand and EUR 702,153 thousand, respectively. On 8 January 2010, Iberdrola Renovables, S.A. (hereinafter, IBERDROLA RENOVABLES) and Swedish company Vattenfall AB (Vattenfall) obtained the rights in the United Kingdom to build and develop one of the world s largest offshore wind farms, with up to 7,200 MW of installed capacity in the region of East Anglia (Central-East England). IBERDROLA RENOVABLES and Vattenfall set up a 50% joint venture, East Anglia Offshore Wind Ltd., to develop this project. The preliminary permits required for the plant could be obtained in 2012 and construction could start in Following the merger process described in Note 19, IBERDROLA has subrogated the rights and obligations of IBERDROLA RENOVABLES. The costs incurred to date for this concept, totaling EUR 13,916 thousand, are recognised under Other intangible assets of the Consolidated financial statements at 31 December In addition, at 31 December 2011 and 2010, there were no significant restrictions on the ownership of intangible assets. The allocation of goodwill to the cash generating units at 31 December 2011 and 2010 is as follows: Electricity generation and electricity and gas supply in the UK Thousands of euros ,475,933 4,350,011 Electricity transmission and distribution in the UK 690, ,489 Production of renewable energies in the UK 437, ,312 Deregulated activities in the USA (*) 1,272,340 1,232,062 Gas storage in Canada 179, ,281 Corporate activities 365, ,212 Regulated activities in the US (IBERDROLA USA) 571, ,633 Regulated activities in Brazil (ELEKTRO) 246,191 - Others 33,415 59,563 8,272,894 7,830,563 (*) Renewable energies production, gas storage and other non-regulated activities in the United States. 69

72 The allocation of indefinite life and in-progress intangible assets at 31 December 2011 and 2010 to the various cash generating units is as follows: Intangible assets with indefinite useful lives 2011 Intangible assets in progress Thousands of euros Electricity distribution in Scotland 796, ,600 Electricity distribution in Wales and the UK 766, ,671 Electricity transmission in the UK 302, ,765 Renewable energies in the UK - 605, ,363 Renewable energies in the USA - 781, ,882 Gas storage and other deregulated activities in the USA - 228, ,099 Gas storage in Canada - 36,098 36,098 Electricity and gas distribution in New York (NYSEG) (*) 914, ,737 Electricity and gas distribution in New York (RG&E) (*) 824, ,500 Electricity transmission and distribution in Maine (CMP) (*) 227, , ,529 Others - 336, ,438 Total 3,832,435 2,653,247 6,485,682 (*) Belonging to the IBERDROLA USA subgroup. Intangible assets with indefinite useful lives 2010 Intangible assets in progress Thousands of euros Electricity distribution in Scotland 773, ,047 Electricity distribution in Wales and the UK 744, ,002 Electricity transmission in the UK 293, ,814 Renewable energies in the UK - 647, ,771 Renewable energies in the USA - 795, ,880 Gas storage and other deregulated activities in the USA - 266, ,991 Gas storage in Canada - 33,804 33,804 Electricity and gas distribution in New York (NYSEG) (*) 886, ,674 Electricity and gas distribution in New York (RG&E) (*) 799, ,200 Electricity transmission and distribution in Maine (CMP) (*) 220, , ,753 Others - 357, ,561 Total 3,716,928 2,748,569 6,465,497 (*) Belonging to the IBERDROLA USA subgroup. 70

73 Annual consolidated financial statements 2011 / Financial statements The discount rates, before taxes, used by the IBERDROLA Group for impairment test purposes are the following: Cash Generating Unit 2011 rates 2010 rates Generation and electricity and gas retail in UK 7.12% 7.12% Electricity transmission and distribution in UK 6.12% 6.12% Renewable energy production in UK 6.72% 6.72% Renewable energy production in USA 8.50% 8.54% Gas storage and other non-regulated activities in USA 7.47% 7.55% Regulated activities in USA 5.87% 5.95% Gas storage in Canada 7.49% 7.55% The future cash flows projection period as well as the growth rate (g) used for estimating the subsequent periods are as follows: Cash Generating Unit Period g Generation and electricity and gas retail in UK Useful life / 10 - / 2% Electricity transmission and distribution in UK 10 1% Renewable energy production in UK Useful life - Non-Regulated activities in USA Useful life - Regulated activities in USA 10 1% Activities in Canada Useful life - Corporate activities 20 - Although IAS 36 recommends the use of projections to five year for impairment test purposes, IBERDROLA Group has decided to use the periods included in this table for the following reasons: - The method most appropriate for generation assets is with their remaining useful lives. This is due to the fact that in the generation business there are long-term energy sale contracts in force and long-term estimated prices curves are frequently used in the operating activity of the IBERDROLA Group (contracts, hedges, etc.). - The electricity transmission and distribution concessions include more comprehensive regulatory periods (generally between five and eight years) and it is known the method that the regulator will use to calculate the new tariff at the beginning of the new regulatory period. - Corporate activities include the part of the assigned price in the SCOTTISH POWER purchase to the fiscal deductibility of goodwill during 20 years. - The IBERDROLA Group considers its projections to be reliable and that past experience demonstrates its ability to predict cash flows in periods such as those under consideration. Also, the nominal growth rate considered in the electricity and gas distribution activities in the United Kingdom and the United States is consistent with the market and inflation growth forecasts used by IBERDROLA for these markets. 71

74 The main assumptions on which impairment tests are based on are as follows: - Power produced at electricity generation facilities: the latest available estimate is used for this purpose. This takes into account the long-term predictability of wind output and also the fact that wind generation is supported in nearly all countries by regulatory mechanisms that allow for production whenever weather conditions permit. It was also confirmed that the hours of operation for each wind farm are consistent with their historical output and wind studies carried out. In the case of generating plant located in the United Kingdom, the hours of operation used were consistent with previous years and with the future United Kingdom energy mix projected by the IBERDROLA Group. - Electricity and gas prices: prices used for electricity and gas generation and supply in the United Kingdom were those stated in the long-term gas supply contracts entered into by SCOTTISH POWER and prices in the United Kingdom gas and electricity futures markets, which offer liquidity for periods of between two and three years. Also, the wind generation plants in the United States and some of those in the United Kingdom have signed contracts to sell all their output at a fixed price for virtually the whole of their useful life and these were the prices used for the impairment tests. With reference to the gas storage activity in the United States and Canada, future prices from the North American gas market have been used for the period presenting liquidity (2-3 years), while longer periods have been based on external sources. For other cashgenerating units, the prices used were the contractual supply prices. For uncontracted output and unlisted derivatives, usual curves applied by the IBERDROLA Group have been used, based on its experience in the markets where it operates. - Electricity and gas retail margin: growth forecasts were used for the number of customers and unit margins based on knowledge of the British market and the company s relative position in that business. - Regulated remuneration: in the electricity and gas distribution businesses carried out by the IBERDROLA Group in the United Kingdom and United States, the approved remuneration has been applied where is available. Where this is not available, the mechanisms for updating the remuneration established in the various legislations are taken and applied on a consistent basis with the estimated costs of the cashgenerating units. - Investment: tests were based on the best information available on plants due to come on stream in coming years. In the case of wind farms, tests considered the fixed prices stated in the contracts to buy turbines from various suppliers, including GAMESA (Note 48), and the technical and financial capacity of the IBERDROLA Group to successfully complete the projects planned. In the regulated business, tests took account of investment consistent with the expected growth in demand in countries where the IBERDROLA Group has electricity transmission and distribution operations. - Operating and maintenance costs: in the British generation and supply market, signed long-term maintenance contracts were considered. In the case of renewables, with their highly predictable costs, the prices used were those for the land leases and maintenance contracts for the whole useful life of the plants. Other operating costs were projected consistent with the expected growth of each cash-generating unit, assuming the headcount would rise in line with said growth. - Discount rate: the discount rates used reflect the IBERDROLA Group s best estimate of the risks specific to each cash-generating unit. The projections used in the impairment tests coincide with the best forecast information held by IBERDROLA at the date the tests were carried out and include the investment plan for each country prevailing at that time. 72

75 Annual consolidated financial statements 2011 / Financial statements The IBERDROLA Group has performed a set of sensitivity analyses of the impairment test results including reasonable changes in a series of basic assumptions defined for each cash-generating unit: - Electricity and gas generation and retail in the United Kingdom: A 10% decline in energy generated. A 10% decline in the margin obtained per kwh. A 10% decline in the increase in electricity and gas customers. A 10% decline in the margin per kwh of selling electricity and gas. A 10% increase in operating and maintenance costs. A 10% increase in investment cost. - Electricity transmissions and distribution in United Kingdom and United States: A 10% decline in the rate of return on which the regulated remuneration is based. A 10% increase in operating and maintenance costs. A 10% decline in investment (which would lead to a consequent decline in remuneration). - Renewable energy production in the United Kingdom and the United States: A 5% decline in energy generated. A 10% decline in the total price obtained per kwh, only applicable to production for which no long-term sales agreements have been entered into. A 10% increase in operating and maintenance costs. A 10% increase in the investment cost. - Gas storage in the United States and Canada: A 15% decline in the gas storage spread (margin per bcm due to the seasonality of prices). A 10% increase in operating and maintenance costs. A 10% increase in the investment cost. The IBERDROLA Group performed an additional sensitivity analysis of a 100 basis point increase in the discount rate applicable in each case. These sensitivity analyses carried out separately for each basic assumption did not detect the existence of any impairment, except in the following cases: - Non-regulated activities in the United States (a segment that includes mainly renewable energy production and gas storage carried out in this country), of which the value in use exceeds the carrying amount by EUR 429 million, in which a 45 basis point increase in the discount rate, a 4% decline in generated wind power, a 9% decline in the price of uncontracted wind production or a 12% decline in the gas storage spread would cause the value in use to be less than the carrying amount. - Gas storage in Canada, of which the value in use is very similar to the carrying amount, in which a 10 basis point increase in the discount rate, a 1% decline in the gas storage spread or a respective 5% increase in operating and maintenance costs and in the investment cost would cause the value in use to be lower than the carrying amount. In the most adverse case in this sensitivity analysis, the impairment would not exceed EUR 110 million. 73

76 9. INVESTMENT PROPERTY The changes in 2011 and 2010 in the IBERDROLA Group s investment property were as follows: Balance at External additions/ (charge for the year) Increase (decrease) due to transfer Decreases, disposals or reductions Balance at External additions/ (charge for the year)/ reversals Increase (decrease) due to transfer Thousands of euros Decreases, disposals or reductions Balance at Investment properties 420,002 16,083 21,373 (1,019) 456,439 33,645 77,128 (2,675) 564,537 Impairment (6,192) (1,815) (6,034) 242 (13,799) 1, (12,646) adjustments Accumulated depreciation (26,008) (3,920) 6, (23,847) (4,849) (28,472) Carrying amount 387,802 10,348 21,373 (730) 418,793 29,901 77,128 (2,403) 523,419 The market value of the investment properties in use at 31 December 2011 and 2010 was EUR 611,451 thousand and EUR 518,159 thousand, respectively. This market value was generally calculated as described in Note 4.i. At 31 December 2011 and 2010, none of the investment properties had been fully depreciated and there were no restrictions on their realisation. Also, there were no contractual obligations to acquire, build, develop, repair or maintain investment property. 10. PROPERTY, PLANT AND EQUIPMENT The changes in 2011 and 2010 in property, plant and equipment accounts and in the related accumulated amortisation and provisions were as follows: 74

77 Annual consolidated financial statements 2011 / Financial statements Cost: Operating plants Balance at Changes in the consolidation scope Translation differences in foreign currency Additions and charge for the year Increase (decrease) due to transfer Disposals Balance at or reductions Translation differences in foreign currency Change in consolidation method and scope (Notes 18 and 41) Additions and charge for the year Increase (decrease) due to transfer Disposals or reductions Thousands of euros Write-offs Balance at Hydroelectric plants 6,038,082-43,216 8, ,748 (10,824) 6,181,752 (12,162) - 23, ,179 (34,092) - 6,465,582 Fossil-fuel plants 3,264,696-62,137 2, ,156 (3,305) 3,577,863 55, ,683 (20,400) - 3,676,827 Combined cycle plants 6,704,737 (9) 210,697 19, ,326 (65,836) 6,987,372 98,161-22,290 69,090 (84,763) - 7,092,150 Nuclear plants 7,094, , ,481 (24,994) 7,220, , ,292 (86,457) - 7,379,731 Wind-powered facilities Gas storage facilities and other alternative plants Electricity transmission facilities Gas transmission facilities Electricity distribution facilities Gas distribution facilities Meters and measuring devices Dispatching centres and other facilities Total operating plants in use Other items of property, plant and equipment in use 11,730, ,366-3,566,745 (10,040) 15,671, ,364-1,222 1,343,633 (12,802) - 17,258,971 1,191,591 (11,945) 107, ,216 (1,201) 1,305,829 41, ,864 (17,298) - 1,435,131 2,521,228 (5,104) 135,237 60, ,280 (24,810) 2,972, ,023-70, ,459 (12,886) - 3,376,662 47,091-3, ,659-53,028 (554) (262) (33,470) - 18,938 18,536,573 (21,435) 297, , ,663 (156,946) 19,997, , , ,189 (86,315) - 21,438,215 1,632,370 (866,650) 127,654 31,450 2, ,174 33,126-34,100 13,167 (6,375) - 1,001,192 1,505,880 (94,116) 34,742 77,923 53,073 (18,671) 1,558,831 21,621-76,685 18,261 (30,563) - 1,644, ,534 (32,466) 23,773 8, ,938 (124) 1,192,922 2,448 (963) 12,107 51,343 (15,971) - 1,241,886 61,243,092 (1,031,725) 1,429, ,702 5,653,635 (316,751) 67,646, ,436 (963) 614,243 3,379,898 (441,392) - 72,030,120 3,363,644 (98,162) 113, ,250 (659,850) (195,882) 2,626,471 50,612 (5,023) 99, ,693 (67,208) - 2,902,574 Plants in progress 5,213,235 (4,601) 171,679 4,801,985 (4,141,475) (33,362) 6,007, ,599-3,516,484 (3,463,728) (11,035) (63,515) 6,118,266 Advances and other items of property, plant and equipment in the course of construction (*) 210,939-2, ,322 73,183 (31,973) 363,415 3,441 (262) 71,704 (116,806) (32,499) - 288,993 Total cost 70,030,910 (1,134,488) 1,718,039 5,682, ,493 (577,968) 76,644,245 1,018,088 (6,248) 4,301,460 (1,943) (552,134) (63,515) 81,339,953 (*) Advances at 31 December 2011 and 2010 were EUR 129,111 thousand and EUR 126,026 thousand, respectively. 75

78 Accumulated depreciation and allowances: Plants in use Balance at Changes in the consolidation scope Translation differences in foreign currency Additions and charge for the year Increase (decrease) due to transfer Disposals Balance at or reductions Translation differences in foreign currency Change in consolidation method and scope (Notes 18 and 41) Additions and charge for the year Increase (decrease) due to transfer Disposals or reductions Thousands of euros Write-offs Balance at Hydroelectric plants 3,048,087-7, ,074 11,544 (648) 3,179,953 1, ,774 - (27,044) - 3,259,025 Fossil-fuel plants 2,382,364-27, ,454 - (1,983) 2,602,234 38, ,904 - (19,513) - 2,802,619 Combined cycle plants 1,265,868 (9) 44, ,959 77,051 (36,769) 1,612,169 29, ,803 - (52,385) - 1,849,575 Nuclear plants 4,441, ,338 - (22,762) 4,647, ,906 - (82,417) - 4,803,515 Wind-powered facilities Gas storage facilities and other alternative plants 1,997,812-25, ,857 - (3,738) 2,701,346 51, ,490 - (1,472) - 3,466, ,232 (11,249) 11,549 34, (5) 150,120 6,223-52,669 - (16,833) - 192,179 Transmission facilities 824,138 (5,104) 48,561 59,777 45,027 (9,539) 962,860 31,463-36,541 - (11,272) - 1,019,592 Gas transmission facilities 13,027-3,497 1, ,757 (7) - 20,429 - (28,884) - 9,295 Distribution facilities 6,854,757 (21,435) 83, ,481 61,499 (48,829) 7,381,442 79, ,579 - (65,413) - 7,816,415 Gas distribution facilities Meters and measuring devices Dispatching centres and other facilities 697,604 (404,175) 59,007 2, ,637 12,961-21,378 - (3,250) - 385, ,377 (41,787) 18,861 85,667 6,924 (15,919) 894,123 10,396-95,222 - (29,584) - 970, ,996 (6,853) 9,350 23,970 40,906 (41) 630,328 3,624 (448) 28,295 - (10,085) - 651,714 Total 123,043,712 (490,612) 339,573 2,138, ,070 (140,233) 25,133, ,718 (448) 2,173,990 - (348,152) - 27,226,103 Other items of property, plant and equipment in use Total accumulated amortisation 1,465,707 (61,395) 31, ,768 (243,066) (140,660) 1,191,856 32,546 (5,852) 159,166 - (47,088) - 1,330,628 24,509,419 (552,007) 371,075 2,278,253 4 (280,893) 26,325, ,264 (6,300) 2,333,156 - (395,240) - 28,556,731 Impairment allowances 114, ,336 - (2,807) 116,149 8, ,551 - (5,212) - 377,105 Total accumulated amortisation and allowances 24,623,920 (552,007) 371,194 2,282,589 4 (283,700) 26,442, ,881 (6,300) 2,590,707 - (400,452) - 28,933,836 Total carring amount 45,406,990 (582,481) 1,346,845 3,399, ,489 (294,268) 50,202, , ,710,753 (1,943) (151,682) (63,515) 52,406,117 76

79 Annual consolidated financial statements 2011 / Financial statements Depreciation and amortisation charge, allowances and provisions in the 2011 Consolidated income statement includes a charge for EUR 288,733 thousand for the impairment of certain thermal generation facilities owned by the IBERDROLA Group in the United Kingdom. The fully depreciated items of property, plant and equipment in use at 31 December 2011 and 2010, amounted to EUR 6,202,397 thousand and EUR 5,572,074 thousand, respectively. At 31 December 2011, the IBERDROLA Group had property, plant and equipment purchase commitments amounting to EUR 2,940,704 thousand. At 31 December 2011 and 2010, other items of Property, plant and equipment in use included EUR 215,493 thousand and EUR 238,126 thousand, respectively, for assets held under finance leases corresponding primarily to IBERDROLA s corporate offices in Madrid. The information on the minimum payments under the leases at 31 December 2011 is as follows: Thousands of euros , , and subsequent years 166,506 Total lease payments payable 236,437 Finance costs 54,895 Present value of the lease payments 181, ,437 77

80 11. FINANCIAL INVESTMENTS a) Investments accounted for using the equity method The changes in 2011 and 2010 in the carrying amount of investments of the IBERDROLA Group companies accounted for using the equity method (see Appendix) were as follows: Gas Natural México GAMESA Amara Anselmo León Euskaltel Medgaz Thousands of euros Others (Appendix I) Balance at 1 January , ,067 34,323 24,900 51,932 5,420 48, ,131 Increase in percentage of ownership - 74, ,000 6,934 98,283 Profit (loss) for the year and impairment 5,379 8,523 (273) 2,528 3,767 (221) 7,653 27,356 Dividends (2,384) - - (15,202) (17,586) Changes in the consolidation method and/or scope Total ,586 7,586 Translation differences 4,744 2, ,910 Disposal of investment (11,883) (11,883) Other ,723-26,440 28,163 Balance at 31 December 2010 Profit (loss) for the year and impairment 45, ,480 34,080 25,044 57,422 22,199 70, ,960 7,217 (60,087) 539 2,495 4,623 6,778 3,892 (34,543) Dividends - (327) - (1,814) - - (6,480) (8,621) Changes in the consolidation method and/or scope ,664 34,664 Translation differences (4,259) (36) (3,987) (8,204) Other ,320 5,565 Balance at 31 December , ,030 34,697 25,725 62,290 28, , ,821 In the case of GAMESA, the market value of the investment in this company at 31 December 2011 and 2010 amounted to EUR 155,731 thousand and EUR 271,561 thousand, respectively. Since its share market price at 31 December 2011 is less than its carrying amount, the IBERDROLA Group has tested for impairment, based on the strategic plan presented by GAMESA at the end of 2011, by discounting cash flows at 31 December The main assumptions used in this impairment test are as follows: 9% discount rate (after tax). Cash flow projection period of 5 years. 1.5% growth rate in nominal terms for subsequents cash flows. Following this impairment test, the IBERDROLA Group deemed it necessary to recognise an impairment loss of EUR 70,053 thousand on its stake in GAMESA with a charge to Result of companies accounted for using the equity method - net of taxes in the 2011 Consolidated income statement. The main transactions performed by the IBERDROLA Group in connection with these equity investments accounted for using the equity method were as follows: 78

81 Annual consolidated financial statements 2011 / Financial statements 2011 On 30 September 2011, the IBERDROLA Group formed an Economic Interest Group called Bidelek Sareak, A.I.E., dedicated to the installation of smart meters, in which it has a 54% ownership interest. The amount contributed, EUR 28,062 thousand, was recognized under Investments accounted for using the equity method in the Consolidated statement of financial position at 31 December This company has been consolidated by the equity method as it is not significant in relation to these Consolidated annual accounts During the second half of 2010, the IBERDROLA Group acquired additional GAMESA shares on the continous market. These acquisitions involved a total outlay of EUR 74,349 thousand and took the IBERDROLA Group s stake in GAMESA to 19.58%, at 31 December On 11 January 2010, the IBERDROLA Group sold its 15.68% holding in Petroceltic International, Plc to Mirabaud Pereire Nominees Limited for GBP 34,175 thousand. At the same time as this sale, it agreed the return of the initial payment of USD 7,330 thousand for an option to acquire a 49% holding in the Algerian Isarene asset. The Group s combined gain of EUR 3,693 thousand from these two transactions has been recognised under the Gain on disposal of non-current assets of the 2010 Consolidated income statement (Note 37). The most significant figures (at 100%) for the most important subgroups consolidated by this method are as follows: Subgroup Total assets Liabilities Ordinary income Profit for the year Total assets Liabilities Thousands of euros Ordinary income Profit for the year Gas Natural México 725, , ,304 40, , , ,435 40,593 GAMESA 5,523,000 2,542,000 3,150,000 51,000 4,544,612 2,192,933 1,786,000 25,000 Amara 64,096 29,359 99, ,740 24,588 93,644 (273) Anselmo León 22,902 1,956 6,060 2,497 24,074 2,258 7,228 4,401 Euskaltel 1,110, , ,000 38,000 1,113, , ,000 27,000 Medgaz 1,047,417 65, ,081 33,904 1,001, ,569 - (1,103) The 2011 data included in this table are unaudited and are taken from provisional financial statements at 31 December b) Non-current equity instruments The detail of the carrying amounts of the main investments in non-current equity instruments at 31 December 2011 and 2010 is as follows: Company Thousand of euros % of ownership Non-current Energías de Portugal, S.A (EDP) 594, , % 6.79% Others 103,353 93, , ,371 At 31 December 2011 and 2010, the market price of IBERDROLA Group s stake in EDP is higher than its cost of acquisition. All the financial assets included under this heading in the Consolidated statement of financial position at 31 December 2011 and 2010 were classified as available-for-sale assets. 79

82 c) Current equity instruments All the assets included in this heading in the Consolidated statement of financial position at 31 December 2011 and 2010 are classified as available-for-sale. In 2011 the IBERDROLA Group acquired 0.32% of Bankia, S.L., which was recognised in the amount of EUR 20,084 thousand under Current equity instruments in the Consolidated statement of financial position at 31 December d) Other financial assets The detail of Other non-current financial assets and Other current financial assets in the IBERDROLA Group s Consolidated statement of financial position at 31 December 2011 and 2010 is as follows: Thousands of euros Interest rate Maturity Non-current Collection rights in Brazil (Note 4.f) 343, ,618 Linked to inflation From 2027 on Long-term deposits and guarantees (a) 204, ,257 - Not established Fixed-income securities Related to equity instruments having the substance of a financial liability 65,140 80, % 6.5% From 2013 on Others 27,991 14,878 Several From 2013 on Revenue shortfall for 2011 (Note 4.y) 88,396 - Linked to EURIBOR 2013 Long-term loans and deposits 123,988 60,710 Linked to EURIBOR and LIBOR From 2013 on Pension plan financial assets (Note 22) 4,210 97, % % From 2013 on Others 49,214 72,370 0% 8.72% From 2013 on Current 907, ,842 Short-term cash deposits 42,197 34,467 Fixed-income securities Related to equity instruments having the substance of a financial liability Others 2,241 1,240 Revenue shortfall for the year Linked to EURIBOR and LIBOR Less than 1 year 19,064 16, % - 6.5% Less than 1 year Linked to EURIBOR and LIBOR Less than 1 year 2011 (Note 4.y) 1,331,505 - Linked to EURIBOR Less than 1 year 2010 (Note 4.y) 807,166 1,708,258 Linked to EURIBOR Less than 1 year 2009 (Note 4.y) 63,083 1,518,164 Linked to EURIBOR Less than 1 year 2008 (Note 4.y) 480,787 1,316,189 Linked to EURIBOR Less than 1 year 2006 (Note 4.y) 922, ,289 Linked to EURIBOR Less than 1 year Loans to associates 13,541 19,819 Linked to EURIBOR Less than 1 year Short-term deposits and guarantees 223, ,052 Linked to EURIBOR and LIBOR Less than 1 year Others 191, , ,097,536 5,967,782 (a) This heading relates mainly to the portion of the guarantees and deposits received from customers at the contracting date (included under Other non current payables in the Consolidated statement of financial position - Note 26) to secure payment for the electricity supply, which were deposited in the competent Public Authorities in accordance with current legislation in Spain. 80

83 Annual consolidated financial statements 2011 / Financial statements 12. NON-CURRENT TRADE AND OTHER RECEIVABLES The detail of Non-current trade and other receivables in the Consolidated statements of financial position at 31 December 2011 and 31 December 2010, is as follows: Thousand of euros Interest rate Maturity Madrid Municipal Council 13,424 15, % France Telecom España, S.A. 7,727 9,972 Libor - Euro +0.3% Receivables from Brazilian customers 192, ,476 Local inflation +1% From 2013 on Receivable due to linearization of revenue from capacity assignment contracts (Note 4.j) 275, , % From 2013 on Others 49,444 37, % % From 2013 on 538, ,995 These balances relate to accounts receivable arising in the normal course of business of the IBERDROLA Group and, therefore, are recognised at amortised cost. This broadly coincides with market value. 13. MEASUREMENT OF FINANCIAL INSTRUMENTS The comparison between fair value and carrying amount of the IBERDROLA Group s financial instruments at 31 December 2011 and 2010 is as follows: Thousands of euros Financial assets Equity instruments (Available-for-sale investments) Carrying amount Fair value Carrying amount Fair value 717, , , ,406 Other financial assets 5,004,759 5,004,759 6,593,624 6,593,624 Derivative financial instruments 1,247,039 1,247,039 1,478,240 1,478,240 Current trade and other receivables 5,903,610 5,903,610 6,298,232 6,298,232 Cash and cash equivalents 2,091,007 2,091,007 2,101,857 2,101,857 Financial liabilities Bank borrowings and others 33,228,500 33,515,024 31,818,846 31,748,002 Derivative financial instruments 1,398,952 1,398,952 1,516,179 1,516,179 Other non-current payables 394, , , ,630 Trade payables 6,044,351 6,044,351 6,208,228 6,208,228 Other current liabilities 1,796,449 1,796,449 2,871,065 2,871,065 The fair value of these financial instruments has been calculated as set out in Note 4.m. As shown in the preceding table, the IBERDROLA Group measures certain assets and liabilities at fair value, classifying them into three levels: - Level 1: assets and liabilities quoted in liquid markets. - Level 2: assets and liabilities whose fair value is determined using valuation techniques with observable market data. 81

84 - Level 3: assets and liabilities whose fair value is determined using valuation techniques without observable market data. The breakdown of financial instruments measured at fair value by levels is as follows: Thousands of euros Value at Level 1 Level 2 Level 3 Securities portfolio (available-for-sale assets) 717, ,830-69,653 Other financial investment Brazil receivables 343, ,460 - Derivative financial instruments (financial assets) 1,247,039 16,693 1,101, ,158 Derivative financial instruments (financial liabilities) 1,398,952 36,121 1,318,909 43,922 Thousands of euros Value at Level 1 Level 2 Level 3 Securities portfolio (available-for-sale assets) 712, ,858-93,548 Other financial investment Brazil receivables 135, ,618 - Derivative financial instruments (financial assets) Derivative financial instruments (financial liabilities) 1,478,240-1,408,596 69,644 1,516,179 4,264 1,464,143 47, NUCLEAR FUEL The detail of Nuclear Fuel in the Consolidated statement of financial position at 31 December 2011 and 2010, and of the changes therein in 2011 and 2010 is as follows: Fuel loaded into the reactor core Nuclear fuel in progress Thousands of euros Balance at 1 January ,614 38, ,774 Additions , ,014 Capitalised financing expense (Notes 4.k and 38) Transfers 20,858 (20,858) - Fuel consumed (Note 4.k) (108,793) - (108,793) Balance at 31 December , , ,676 Additions 2, , ,691 Capitalised financing expense (Notes 4.k and 38) - 1,618 1,618 Transfers 187,708 (187,708) - Fuel consumed (Note 4.k) (104,786) - (104,786) Balance at 31 December ,891 81, ,199 Total The IBERDROLA Group s nuclear fuel purchase commitments at 31 December 2011 and 2010 amounted to EUR 970,978 thousand and EUR 878,954 thousand, respectively. 82

85 Annual consolidated financial statements 2011 / Financial statements 15. INVENTORIES The detail of Inventories (Note 4.n) in the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows: Thousands of euros Fuel stocks 853, ,017 Property developments 1,214,526 1,196,182 Other inventories 44, ,034 2,112,572 1,971,233 At 31 December 2011, the IBERDROLA Group has take or pay contracts suscribed with several natural and liquefied natural gas suppliers for the supply of 70 bcm of gas in the period from 2012 to 2029 for retailing and consumption at the electricity production facilities. The prices under these contracts are determined on the basis of formulas commonly used in the market which index the price of gas to the performance of other energy variables. 16. CURRENT TRADE AND OTHER RECEIVABLES The detail of this heading in the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows: Thousands of euros Trade receivables 5,068,095 5,359,200 Accounts receivables 552, ,834 Receivable from associates 28,059 21,232 Bad debt provision (284,180) (272,029) 5,364,791 5,819,237 Generally, the amounts included do not bear any interest under this caption in the Consolidated statement of financial position. The variations in the bad debt provision in 2011 and 2010 has been as follows: Thousands of euros Opening balance 272, ,792 Changes in consolidation scope 15,783 (18,347) Charge to provision 204, ,376 Reversals and translation differences (165,818) (140,808) Long-term transfers (15,328) - Surplus (26,668) (46,984) 284, ,029 The bad debt provision relates basically entirely to gas and electricity consumers. 83

86 17. CASH AND CASH EQUIVALENTS The detail of this heading in the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows: Thousands of euros Cash and cash equivalent 260, ,328 Short-term deposits 1,830,011 1,887,529 2,091,007 2,101,857 Short-term deposits mature within a period of less than three months and bear market rates. There are no restrictions on cash withdrawals for significant amounts. 18. ASSETS AND LIABILITIES HELD FOR SALE These captions of the Consolidated statement of financial Position at 31 December 2011 include the assets and liabilities of the Corporación IBV Group, over which the IBERDROLA Group exercises joint control, since the decision was taken to carry out an orderly disposal thereof. The figures relating to the Corporación IBV Group included in the IBERDROLA Group s Consolidated income statement are as follows: Thousands of euros Net revenue 518, ,594 Procurements (447,807) (492,382) Other operating expense (55,779) (72,586) Operating profit 15,409 16,626 Financial profit (2,814) (2,874) Profit before tax 12,595 13,752 Income tax (2,847) (3,282) Net profit for the year 9,748 10,470 Non-controlling interests (530) (455) Net profit of the year attributable to the parent 9,218 10,015 84

87 Annual consolidated financial statements 2011 / Financial statements The assets and liabilities of the Corporación IBV Group at 31 December 2011 after applying 50% of the ownership interest that the IBERDROLA Group holds in this company are as follows: Thousands of euros 2011 NON-CURRENT ASSETS Intangible assets 17,937 Property, plant and equipment 8,769 Non-current financial assets 4,853 Non-current trade and other receivables 62 Deferred tax assets 8,179 CURRENT ASSETS Inventories 41,689 Current trade and other receivables 77,053 Current financial assets 42,688 Income tax receivable - Other tax receivables 1,220 Cash and cash equivalents 41,044 TOTAL ASSETS 243,494 NON-CURRENT LIABILITIES Deferred income 32 Provisions 1,894 Bank borrowings 21,844 Non-current trade and other payables - Deferred tax liabilities 3,855 CURRENT LIABILITIES Provisions 1,835 Bank borrowings 10,176 Trade and other payables 72,161 TOTAL LIABILITIES 111, EQUITY Share capital 2010 At 31 December 2009 the IBERDROLA s share capital totalled EUR 3,939,242,787 represented by 5,252,323,716 shares each with a nominal value of EUR Pursuant to shareholder approval granted at the General Shareholders Meeting of 26 March 2010, IBERDROLA carried out two rights issues in 2010 in order to introduce a new shareholder remuneration scheme known as Iberdrola Flexible Dividend, whereby shareholders can decide whether they wish to be paid, either fully or partly, in cash or in fully paid up IBERDROLA shares. The first rights issue was held in June A total of 129,540,284 shares were issued, each with a nominal value of EUR There was no share premium. The second rights issue was held in December A total of 101,979,000 shares were issued each with a nominal value of EUR There was no share premium. Therefore, IBERDROLA s share capital at 31 December 2010 totalled EUR 4,112,882,250 represented by 5,483,843,000 shares each with a nominal value of EUR

88 2011 Furthermore, on 14 March 2011, the Board of Directors of IBERDROLA entered into a strategic memorandum of understanding with Qatar Holding, LLC (hereinafter, QATAR HOLDING), the purpose of which is the creation and consolidation of a cooperation framework to develop their respective business activities through the establishment of a long-term strategic alliance. In particular, IBERDROLA and QATAR HOLDING will collaborate to develop new business opportunities in various areas of the electricity value chain on a global level, focusing especially on emerging and developing markets. Against this backdrop, IBERDROLA is expected to establish its main offices in the Middle East region in the State of Qatar where, among others, research and development activities will be carried out. In addition, and on that same date, the Board of Directors of IBERDROLA agreed to increase capital with the disapplication of pre-emption rights (in exercising the office granted by the General Shareholders Meeting held on 30 March 2006) and to sell treasury shares with a view to enabling, among other matters, Qatar Holding Luxembourg II, S.À.R.L. (hereinafter, QATAR LUXEMBOURG, a company wholly owned by QATAR HOLDING) to acquire a 6.16% ownership interest in the share capital of IBERDROLA resulting from the capital increase. The effective nominal amount of the capital increase amounted to EUR 253,764,750, whereby 338,353,000 new shares were issued at an issue rate (par value plus premium) of EUR Therefore, the cash obtained in the capital increase, net of expenses, amounted to EUR 1,903,032 thousand. Accordingly, on 14 March 2011, the IBERDROLA Group sold 20,400,000 treasury shares to QATAR LUXEMBOURG, representing 0.35% of the share capital of IBERDROLA, for an aggregate amount of EUR 114,913 thousand. In addition, pursuant to the authorisation granted for this purpose by the shareholders at the General Shareholders Meeting on 27 May 2011, in 2011, IBERDROLA carried out a further capital increase in application of the Iberdrola Flexible Dividend shareholder remuneration scheme. In this capital increase, which took place in July 2011, 60,294,000 shares were issued, each with a nominal value of EUR There was no share premium. The share capital of IBERDROLA has not experienced any variation apart from those described above or any obligation relating to its share capital in addition to those laid down by the Spanish Companies Law. After these transactions, at 31 December 2011, the share capital of IBERDROLA amounted to EUR 4,411,867,500, represented by 5,882,490,000 shares with a nominal value of EUR 0.75 each. IBERDROLA shares are listed for trading on the Spanish electronic trading system (the Continuous market), forming part of the IBEX-35 and the Eurostoxx-50 indices. Major shareholders Since IBERDROLA s shares are represented by the book-entry system, the exact stakes held by its shareholders are not known. The table below summarises major direct and indirect shareholdings in the share capital of IBERDROLA at 31 December 2011, as well as the holdings of financial instruments disclosed by the owners of these stakes in compliance with Royal Decree 1362/2007 of 19 October. This information is based on filings by the owners of the stakes in the official registers of the National Securities Market Commission (CNMV) or the company financial statements or press releases. Owner ACS. Actividades de Construcción y Servicios, S.A. (ACS) %of voting rights % Direct % Indirect % Total Financial instruments Qatar Investment Authority Bilbao Bizkaia Kutxa (BBK) Banco Financiero y de Ahorros, S.A. (*) Directors of IBERDROLA (*) From 1 January 2011 on is the company that forms the Institutional Protection System (IPS) of the union of seven saving banks among them, BANCAJA. On 13 June 2011 the ACS Group, Actividades de Construcción y Servicios, S.A., also notified the CNMV the reorganisation of its interests in IBERDROLA. 86

89 Annual consolidated financial statements 2011 / Financial statements In addition, 4.725% of voting rights are held by ACS, Actividades de Construcción y Servicios, S.A. through a nominee, Nexgen Capital Ltd. These voting rights attach to the shares underlying the equity swap contract drawn up by the entities, whereby Nexgen Capital, Ltd. (a subsidiary of Natixis, S.A.) has undertaken to give a proxy for each General Shareholders Meeting held by IBERDROLA in favour of the representative appointed by ACS, Actividades de Construcción y Servicios, S.A., who may vote at his discretion. The exercise of the political rights inherent in such underlying IBERDROLA shares therefore belongs to ACS, Actividades de Construcción y Servicios, S.A. The direct owners of the equity interest in ACS, Actividades de Construcción y Servicios, S.A. (ACS) are as follows: Owner % of voting rights Residencial Monte Carmelo, S.A Corporate Funding, S.L Roperfeli, S.L Nexgen Capital Limited, S.A The direct owners of the equity interests in BBK and Banco Financiero y de Ahorros S.A. are as follows: Owner % of voting rights Kartera 1, S.L Bancaja Inversiones, S.A The direct holders of the Qatar Investment Authority stake are as follows: Owner % of voting rights Qatar Holding Luxembourg II, S.A.R.L Qatar Holding, LLC On 1 January 2012 the financial business of Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea (BBK), Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián-Gipuzkoa eta Donostiako Aurrezki Kutxa (Kutxa) and Caja de Ahorros de Vitoria y Álava Araba eta Gasteizko Aurrezki Kutxa (Vital), respectively, segregated as Kutxabank, S.A. Consequently, on 4 January 2012 Kutxabank, S.A. informed to the CNMV that it was the new major shareholder of 322,730,655 IBERDROLA shares, a 5.486% interest previously held by BBK and Kutxa. At 31 December 2010, Actividades de Construcción y Servicios, S.A. (ACS), Bilbao Bizkaia Kutxa and Caja de Ahorros de Valencia, Castellón y Alicante (BANCAJA) owned stakes in IBERDROLA, directly or indirectly, of %, 6.553% and 5.494%, respectively. Capital management The IBERDROLA Group s main capital management objectives are to ensure short and long-term financial stability, a positive performance by IBERDROLA shares, appropriate funding of investments and a reduction in the IBERDROLA Group s levels of debt, while at all times guaranteeing that the IBERDROLA Group maintains its financial strength with an A credit rating and robust financial ratios to bolster its businesses, and maximise shareholders value. All rating agencies have held their A credit ratings (currently: Moody s A3, Standard and Poor s A- and Fitch A). 87

90 Leverage at 31 December 2011 and 2010 stood at: Thousands of euros Bank borrowings - Loans and other financial liabilities (Note 24) 33,228,500 31,818,846 Equity instruments having the substance of a financial liability (Note 20) 582, ,282 Derivative financial liabilities 653, ,627 Gross debt 34,464,230 32,984,755 Derivative financial assets 583, ,992 Other current financial assets 84,204 98,077 Cash and cash equivalents (Note 17) 2,091,007 2,101,857 Cash assets 2,758,463 2,969,926 Net debt 31,705,767 30,014,829 Equity of the parent 32,887,873 29,078,799 of non-controlling interests 319,927 2,584,271 33,207,800 31,663,070 Leverage 48.8% 48.7% Only derivative financial instruments related to financing are included. The breakdown is as follows: Thousands of euros 2011 Derivative assets Derivative liabilities Current Non current Total Current Non current Total Interest rate hedges (Note 25) (6,474) 86,813 80,339 9, , ,011 Foreign currency hedges (Note 25) 222, , , ,921 81, ,402 Total hedging derivatives 215, , , , , ,413 Foreign currency derivatives (Note 25) 9,032 21,539 30,571 19,639 8,066 27,705 Interest rate derivatives (Note 25) - 6,169 6,169 (992) 27,267 26,275 Total non-hedging derivatives 9,032 27,708 36,740 18,647 35,333 53, , , , , , ,393 Thousands of euros 2010 Derivative assets Derivative liabilities Current Non current Total Current Non current Total Interest rate hedges (Note 25) 27,769 36,140 63,909 (8,013) 166, ,420 Foreign currency hedges (Note 25) 110, , , , , ,319 Total hedging derivatives 137, , , , , ,739 Foreign currency derivatives (Note 25) 221,583 3, ,878 (7,090) 1,126 (5,964) Interest rate derivatives (Note 25) (1,061) 755 (306) Other non-hedging derivatives (Note 25) ,158 26,158 Total non-hedging derivatives 221,583 3, ,410 (8,151) 28,039 19, , , , , , ,627 88

91 Annual consolidated financial statements 2011 / Financial statements At the General Shareholders Meeting on 27 May 2011 the Board of Directors under point nine of the Agenda authorized to delegate to the Board of Directors the authorisation for a five year period to issue bonds or stock convertible into Company or group companies shares or other companies shares, and warrants on shares of new issue or IBERDROLA or another group companies outstanding shares. The maximum limit is EUR 5,000 million, with the option to exclude the shareholders preemptive subscription rights. Legal reserve Under the Spanish Companies Law, 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufficient other reserves are not available for this purpose. Revaluation reserves The balance of Revaluation reserves arose as a result of the revaluation of property, plant and equipment made by IBERDROLA pursuant to Royal Decree-Law 7/1996. This balance can be used, free of tax, to offset recorded losses both prior years accumulated losses and current year losses or losses which might arise in the future, and to increase share capital. From 1 January 2007, the balance of this reserve can be taken to unrestricted reserves, provided that the monetary surplus has been realised. The surplus will be deemed to have been realised on the portion on which depreciation has been taken for accounting purposes or if the revalued assets have been transferred or derecognised. If the balance of this account were used in any way other than as specified in Royal Decree-Law 7/1996, it would be subject to tax. Share premium The Spanish Companies Law expressly permits the use of the share premium account balance to increase capital and does not establish any specific restrictions as to its use. Other restricted reserves Other restricted reserves of the heading Equity of the Consolidated statement of financial position primarily includes the restricted reserve set up by IBERDROLA in accordance with article 335.c) of the Spanish Companies Law arising from the capital reductions carried out in prior years through the retirement of treasury shares. The restricted reserves relating to Group companies other than the parent IBERDROLA are included under Retained earnings of the same heading. Retained earnings On 8 March 2011, IBERDROLA made public the merger by absorption proposal made to IBERDROLA RENOVABLES, in which it had an 80% ownership interest. The proposal entails the dissolution without liquidation of IBERDROLA RENOVABLES, and the transfer en bloc, by universal succession, of its assets and liabilities to IBERDROLA. The common merger project was approved by the Boards of Directors of IBERDROLA and IBERDROLA RENOVABLES on 22 March 2011, and by their respective Annual General Meetings held at the end of May The main matters relating to this merger are as follows: - Procedure: merger by absorption whereby the absorbed company is dissolved without liquidation and all assets and liabilities are transferred to the absorbing company, which acquires, by universal succession, all assets, liabilities, rights and obligations relating to the aforementioned absorbed company. - Share exchange formula: the shareholders of IBERDROLA RENOVABLES have received, at 11 July 2011, shares of IBERDROLA per share of IBERDROLA RENOVABLES they held. This exchange was carried out using treasury shares held by the IBERDROLA Group by virtue of the share buyback programme approved by the Board of Directors on 11 March 2011, with 1,521,801 thousand of shares of IBERDROLA delivered. - Tax regime: the transaction is included under the special tax regime of chapter VII of the Income Tax Law, whereby the absorbed company transfers all its assets and liabilities to the absorbing company according to the carrying amounts in the group s consolidated financial statements. 89

92 In addition, the General Shareholders Meeting of IBERDROLA RENOVABLES held on 30 May 2011 approved the distribution of an extraordinary dividend of EUR 1.20 gross per share, the payment of which had to take place prior to the registration of the merger. This dividend was paid on 5 July 2011, corresponding to Non-controlling interests EUR 1,014,927 thousand. This merger was finalized on 8 July 2011 (date of registration in the Commercial Register) and, therefore, these Consolidated financial statements include the effect of a reduction of the equity amounting to EUR 269,659 thousand, recorded under the heading Retained earnings in the Consolidated statement of financial position. Unrealised assets and liabilities revaluation reserve The change in this reserve arising from valuation adjustments to available-for-sale assets and derivatives designated as cash flow hedges at 31 December 2011 and 2010 are as follow: Available-for-sale assets: Energías de Portugal. S.A. (EDP) (Note 11.b) Change in market value Amounts allocated to income and others (a) Change in market value Amounts allocated to income (a) Thousands of euros ,245 (161,006) (40,371) (42,132) (24,844) - (66,976) Other 3,994 9,776 (5,267) 8,503 12,870-21, ,239 (151,230) (45,638) (33,629) (11,974) - (45,603) Cash flow hedges: Interest rate swaps (350,288) (81,232) 62,784 (368,736) (130,253) 51,177 (447,812) Collars (6,115) (4,021) 4,251 (5,885) (14,890) 2,027 (18,748) Commodity swaps (351,943) (43,348) 183,418 (211,873) (178,755) 243,400 (147,228) Tradeable securities 107,799 - (22,882) 84, ,917 Foreign exchange hedges 9,539 32,241 (51,226) (9,446) 10,050 (13,997) (13,393) (591,008) (96,360) 176,345 (511,023) (313,848) 282,607 (542,264) Tax effect 214,530 22,984 (53,105) 184,409 58,847 (41,147) 202,109 (213,239) (224,606) 77,602 (360,243) (266,975) 241,460 (385,758) (a) In 2011 and 2010, EUR 151,143 thousand and EUR 44,503 thousand have been registered, not including tax effects, as the lowest and the highest value of hedged assets of which corresponding transactions were subscribed, respectively. Treasury shares The changes in 2011 and 2010 in the shares of IBERDROLA owned by Group companies (Note 4.o) were as follows: No. of shares Thousand of euros Balance at 1 January ,631, ,917 Additions 69,273, ,242 Disposals (57,342,482) (306,188) Balance at 31 December ,562, ,971 Additions 378,976,411 2,203,603 Disposals (369,087,184) (2,163,941) Balance at 31 December ,451, ,633 90

93 Annual consolidated financial statements 2011 / Financial statements At December 2011, 35,181,834 shares belonged to IBERDROLA and 2,269,808 shares to SCOTTISH POWER. Disposals in the year 2011 contain the delivery of 250,834,615 shares to IBERDROLA RENOVABLES shareholders in the aforementioned merger. In 2011 and 2010, treasury shares held by the IBERDROLA Group were below the legal limit. In addition, the IBERDROLA Group has four equity swaps on its on shares with these features: during the contract IBERDROLA will pay EURIBOR 3 months plus a spread on the notional and will receive the dividends of the charged shares by financial companies. At the end of the contracts IBERDROLA will purchase again the share at the same price of the previous sale. The IBERDROLA Group recognised the transaction directly in equity under Treasury shares and recorded the obligation to buy back the shares under Bank borrowings loans and others of the liabilities side of the Consolidated statement of financial position. The characteristics of these contracts are as follows: No. of shares Exercise price Maturity date Interest rate Thousands of euros Total return swap 12,800, /07/ months euribor +0.80% 77,401 - Total return swap 7,300, /04/ months euribor +1.14% 67,899 84,165 Total return swap 5,167, /10/ months euribor +0.9% 32,915 32,915 Total return swap 1,713, /10/ months euribor +0.9% 10,914 12,281 26,981, , ,361 Shareholder remuneration 2010 Under point six of the agenda of the IBERDROLA General Shareholders Meeting held on 26 March 2010, the shareholders approved the establishment of the Iberdrola Flexible Dividend scheme. This option has been implemented through rights issues approved by IBERDROLA in a General Shareholders Meeting, who authorised the Board of Directors to manage the scheme. The scheme was executed on two occasions in 2010: In the first instance in June 2010, coinciding with the date on which final dividends have traditionally been paid, the holders of 1,884,276,316 subscription rights accepted the irrevocable purchase commitment assumed by the IBERDROLA Group, which therefore acquired the rights for a gross amount of EUR 359,897 thousand. This amount was fully paid up at 31 December In the second instance in December 2010, coinciding with the date on which interim dividends have traditionally been paid, the holders of 1,710,619,992 subscription rights sold them to IBERDROLA for a gross amount of EUR 249,750 thousand Under point six of the agenda of IBERDROLA s General Shareholders Meeting held on 27 May 2011, the shareholders approved a new program Iberdrola Flexible Dividend scheme that was executed in one instance in July 2011 in which the holders of 3,531,023,985 subscription rights accepted the irrevocable purchase commitment assumed by the IBERDROLA Group and, as a result, it acquired them for a gross amount of EUR 550,840 thousand. 91

94 Distribution of dividends with charge to 2011 results The IBERDROLA Board of Directors has agreed that when the time comes to call the ordinary General Shareholders Meeting, at the meeting it will propose, with charges to 2011 results and the retained earnings from previous years, a gross dividend of EUR 0.03 for each IBERDROLA share with dividend entitlement, outstanding at the date on which payment is made. If the number of IBERDROLA shares outstanding at the date on which the proposed dividend payment is made is equal to the number of shares outstanding at the date on which these Consolidated financial statements are authorised for issue (i.e. 5,972,865,000 ordinary shares), the dividend will amount to EUR 179,186 thousand. In addition, at the date of prepare of these Consolidated financial statements, IBERDROLA s Board of Directors resolved to propose to the General Shareholders Meeting, when the call notice is issued, to maintain the Iberdrola Flexible Dividend remuneration scheme that was launched in Under this scheme, IBERDROLA would offer shareholders an alternative that allows them to receive bonus shares of the Company without limiting their eligibility to receive in cash at least an amount equal to that which would have been paid out as the 2011 final dividend. This alternative would be articulated via a bonus share issue subject to authorisation at the General Shareholders Meeting of IBERDROLA. If approved, the script issue will be executed by the Board of Directors or, by delegation, by the Executive Committee at one or several times. It would be executed first on the date on which the shareholders would traditionally be paid the final dividend for In the issue, each shareholder of the Company would receive a subscription right for each share of IBERDROLA they hold. These subscription rights would be eligible for trading on the Madrid, Barcelona, Bilbao and Valencia stock exchanges. According to the different alternative chosen, each IBERDROLA shareholder would receive new bonus shares of the Company or an equivalent amount in cash from the sale of the subscription rights to IBERDROLA (by virtue of a commitment that the Company would assume at a guaranteed fixed price) or on the market (in which case the consideration would vary in accordance with the price of the rights). A new development this year is that a proposal will be made at IBERDROLA s General Shareholders Meeting to amend the Iberdrola Flexible Dividend scheme, which may or may not be applied by the Board of Directors, in order to increase the shareholder base and offer the possibility of a higher yield for those opting to sell their rights on the market. The issue would be carried out free of fees and expenses for subscribers with regard to the allocation of the new shares issued. IBEDROLA would assume the issue, subscription and admission to trading expenses, and any other expenses relating to the issue. However, the entities participating in the Spanish Central Securities Depository (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. or Iberclear) at which the Company s shares are deposited are free to establish, in accordance with prevailing legislation, any administration fees, commissions or expenses chargeable to the shareholders for maintaining the securities in the accounting records. Furthermore, these participating entities may freely establish, in accordance with prevailing legislation, any fees, commissions or expenses chargeable to the shareholders for processing purchase and sale orders of subscription rights. Share-based compensation plans Strategic Bonus Programme On 17 April 2008, the General Shareholders Meeting resolved, under point six of the agenda, on the establishment of a long-term variable share-based remuneration scheme for the chairman and CEO, senior executives and other executives of IBERDROLA and its Group (236 beneficiaries), linked to the achievement, at the end of the term of the scheme, of certain objectives linked to the Strategic Plan (hereinafter, Strategic Bonus ). The Strategic Bonus had a term of three years for the period and share payment will be delivered as deferred income in 2011, 2012 and In 2011, the Board of Directors, on the recommendation of the Nominating and Remuneration Committee, approved to pay the Strategic Bonus on determining that 74% of the objectives had been met. The scheduled expansion plans, both with regard to internationalisation and growth, had been met. The efficiency and leverage ratios were within the expected targets, the performance of the share with regard to reference companies on a global scale was noteworthy, and the credit rating had been maintained, despite the adverse effects of the increased country risk associated with Spain. In the first half of 2011 the first partial payment of the Strategic Bonus Programme was made through the delivery of 1,749,048 shares. 92

95 Annual consolidated financial statements 2011 / Financial statements Strategic Bonus Programme The General Shareholders Meeting of 27 May 2011 approved the establishment of a strategic bonus for the executive directors, senior directors and other executive personnel of IBERDROLA and its subsidiaries linked to attaining strategic objectives for the period and to be paid through the delivery of IBERDROLA shares (hereinafter, Strategic Bonus ), in accordance with the following terms: 1. Description: The Strategic Bonus is designed as a long-term incentive plan linked to attaining, at the completion of the reference period of the Strategic Bonus, various strategic objectives that will be set by the Board of Directors and linked, among other criteria, to: (a) Performance of consolidated net profit in comparison with that of the five main European competitors (Enel, Eon, RWE, EDF and GDF-Suez). This objective is considered not to have been attained if the performance of consolidated net profit is less than the average of the benchmark group. This objective has a weighting of 20%. The scale of achievement depends on the final situation compared to the average. (b) Fluctuation in the share price with respect to the average of the Eurostoxx Utilities index and the shares of the five main European competitors (Enel, Eon, RWE, EDF and GDF-Suez) on the basis of the trend in prices since January 2011 for the period of the bonus scheme. This objective is considered not to have been attained if the share price underperforms the benchmark group average by more than 5%. Its weighting is 60% and the scale of achievement is from 95% to 105% depending on IBERDROLA s final situation compared with the average mentioned above. (c) Maintaining the Company s A- credit rating. The weighting in this case is 20%. 2. Beneficiaries: the chairman, CEO and other executive directives, and, where applicable, senior executives and other executives of IBERDROLA and its Group who are included in the Strategic Bonus during its term by virtue of the resolutions adopted by the Board of Directors in the performance of this agreement, with a maximum of 350 beneficiaries. 3. Amount: each beneficiary will be assigned a number of theoretical shares when the Strategic Bonus is established which, on completion of the reference period and based on the degree to which the objectives set were achieved, will give rise to the effective delivery of IBERDROLA shares on the three set payment dates. The maximum number of shares to be delivered to the group of Strategic Bonus beneficiaries will be 17,000,000 shares, equal to 0.29% of the share capital, where the number of shares to be delivered to each of the executive directors participating in the Strategic Bonus may not exceed 1,900,000 shares. 4. Term: The Strategic Bonus has a term of six years, whereby the period from 2011 to 2013 will constitute the reference period for the purposes of attaining objectives and the period from 2014 to 2016 the payment period, which will occur through the delivery of shares as deferred income over the three year period. Staff costs in the 2011 and 2010 Consolidated income statement includes EUR 17,824 and 9,821 thousand, respectively, relating to the vested amount of these incentive schemes, with a credit to Other reserves - Retained earnings in the Consolidated statement of financial position. Scottish Power share bonus Lastly, Scottish Power has share-based plans for its employees. There are two types of plan: Sharesave Schemes: savings plans in which employees decide the amount they want to contribute to the plan and this is deducted monthly from their salary. At the end of a three- or five-year period, as applicable to each plan, employees may decide between being paid in cash or in shares. At 31 December 2011, the contributions made by the employees until that date entitled them to receive 5,720,200 shares or a cash equivalent. Share Incentive Plan: this plan has an option for purchasing shares with tax incentives plus a contribution from the company. The employees decides on the amount they wish to contribute, which is deducted from their monthly salary (the maximum contribution allowed by law in the United Kingdom is GBP 125). The shares purchased with this contribution are called partnership shares. Additionally, SCOTTISH POWER complements these shares to a maximum of GBP 50. The shares purchased with the company contribution are called matching shares. All shares are purchased at market prices at the date of purchase of each month. 93

96 The contributions, both from the company and the employees, contribute to a trust which buys the shares, and they are held in this trust until withdrawn by the employees. The partnership shares are owned by the employees who purchase them with their own money. However, the shares acquired with the contribution from the company (matching shares) are not consolidated until three years have passed since the purchase date. The cash contributions are made monthly and are charged to the income statement for the three years the employee must remain in the company in order to be entitled to these shares. The effect on the 2011 Consolidated income statement amounted to EUR 4,195 thousand and the number of matching shares in the plan at that date was 2,517, EQUITY INSTRUMENTS HAVING THE SUBSTANCE OF A FINANCIAL LIABILITY The change in this heading of the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows (Note 4.m.): Thousands of euros Balance at 1 January ,446 Finance costs accrued during the year (Note 39) 53,554 Payments (125,713) Translation differences 52,995 Balance at 31 December ,282 Finance costs accrued during the year (Note 39) 45,286 Payments (139,986) Translation differences 24,755 Balance at 31 December ,337 The balance under this heading of the Consolidated statements of financial position at 31 December 2011 and 2010 accrues interest at an average rate of 7.39% and 8.00%, respectively. 94

97 Annual consolidated financial statements 2011 / Financial statements 21. DEFERRED INCOME The change in this heading of the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows: Balance at 1 January 2010 Government grants Investment Tax Credits (Note 4.p) Emission rights Transfer of assets from customers Other deferred income Thousands of euros Total deferred income 239, ,808 1,934 2,180, ,543 3,709,641 Additions 60, , , , ,047 1,126,604 Disposals (2,539) - (139) - (15,548) (18,226) Translation differences 3,562 28,025-6,083 3,525 41,195 Charged for the year to income statement (Note 4.p) Balance at 31 December 2010 (13,348) (35,092) (248,424) (73,217) (25,650) (395,731) 287, ,413 2,513 2,488, ,917 4,463,483 Additions 61, , , ,510 95,006 1,154,925 Disposals - - (175) - (17,070) (17,245) Translation differences 4,262 48,107-13,237 2,286 67,892 Charged for the year to income statement (Note 4.p) Change in consolidation method and/or scope (Notes 18 and 41) Balance at 31 December 2011 (25,013) (47,527) (261,633) (69,905) (35,137) (439,215) (32) (32) 327,686 1,080,576 3,531 2,788,013 1,030,002 5,229, PROVISIONS FOR PENSIONS AND SIMILAR OBLIGATIONS The detail of this heading in the Consolidated statements of financial position is as follows: Thousands of euros Defined benefit plans (Spain) 376, ,578 Long-term benefits (Spain) 68,265 66,972 Defined benefit plans (UK) 253, ,807 Defined benefit plans (USA) 532, ,780 Defined benefit plans (ELEKTRO) - - Defined benefit plans and other long term benefits (Spain and other countries) 78,617 91,461 Restructuring plans 72, ,783 1,381,730 1,269,381 95

98 Each year the IBERDROLA Group estimates through independent experts actuarial studies the payment amount for pensions and similar commitments in the year ahead. This amount is recorded as a current liability in the Consolidated statement of financial position. a) Defined benefit and other non-current benefits Spain The IBERDROLA Group s main defined benefit obligations to its employees in Spain, other than Social Security benefits, are as follows: - Employees covered by the IBERDROLA Group s collective labour agreement retiring before 9 October 1996 are covered by a defined benefit retirement pension scheme, the actuarial value of which was externalised in full at 31 December 2011 and The IBERDROLA Group has no liabilities to these employees nor does it have any claims on any potential returns from this plan in excess of the guaranteed benefits. - Also, in relation to serving employees and employees who have retired since 1996 and covered by the IBERDROLA Group s Collective Labour Agreement, risk benefits (e.g. for death of spouse, permanent disability or death of present employee s parent), guaranteeing a defined benefit at the time the event giving rise to such benefits occurs, are instrumented through an annually renewable insurance policy. The defined benefit is measured as the difference between the present actuarial value of the benefit at the time of the contingency and the employees consolidated rights at the time of the event giving rise to the benefits under the aforementioned defined benefit plan, if lower. The premium paid for this insurance policy in 2011 and 2010 amounted to EUR 11,890 thousand and EUR 9,815 thousand, respectively, and is recorded under Staff costs in the Consolidated income statements. - In addition, the IBERDROLA Group also has certain commitments to its employees in Spain other than those indicated above, which are covered by in-house provisions related to social benefits, consisting mainly of free electricity supply for retired employees, and other long-term benefits, primarily long-service bonuses for active employees. The changes in 2011 and 2010 in the provision recognised to meet the commitments set out in the paragraph above are as follows: Thousands of euros Electricity for employees Long-service bonuses Balance at 1 January ,289 64,025 Normal cost (Note 34) 4,410 3,046 Other costs charged to Staff costs (Note 34) (2,086) - Finance cost (Note 39) 17,866 2,863 Actuarial deviations To profit and loss (Note 34) - 3,667 To reserves (5,172) - Payments and other (14,729) (6,629) Balance at 31 December ,578 66,972 Normal cost (Note 34) 4,836 3,109 Other costs charged to Staff costs (Note 34) (15,015) - Finance cost (Note 39) 16,788 2,744 Actuarial deviations To profit and loss (Note 34) To reserves (2,657) - Payments and other (12,902) (5,297) Balance at 31 December ,628 68,265 96

99 Annual consolidated financial statements 2011 / Financial statements The main assumptions used in the actuarial studies undertaken to determine the provision required at 31 December 2011 and 2010 to cover the aforementioned obligations are as follows: Long-service bonus and electricity for employees Discount rate CPI/ wage inflation Survivorship tables Discount rate CPI/ wage inflation Survivorship tables 4.30% 2.50% PERM/F 2000P 4.30% / 4.40% 2.50% PERM/F 2000P The most relevant figures for this plan in the last years are the following: Thousands of euros Present value accrued 444, , , , ,043 Experience adjustments (8,523) (14,765) 2,496 (8,011) 1,851 United Kingdom SCOTTISH POWER employees residing in the UK, hired before 1 April 2006, are covered by several defined benefit retirement plans. The key data pertaining to the UK plans are the following: Thousands of euros United Kingdom Present value of obligation (4,172,546) (3,886,709) Market value of plan assets 3,918,618 3,699,902 Net asset / (net provision) (253,928) (186,807) Amounts recognised in the Consolidated statement of financial position: - Provision for pensions and similar commitments (253,928) (186,807) Net asset / (net provision) (253,928) (186,807) The movement in the present value of the obligation in this connection is as follows: Thousands of euros United Kingdom Present value of obligation at 1 January ,445,931 Normal cost (Note 34) 55,674 Finance cost (Note 39) 206,218 Actuarial deviations credited to reserves 228,416 Employee contributions 12,142 Payments (170,133) Translation differences 108,461 Present value of obligation at 31 December ,886,709 Normal cost (Note 34) 27,017 Finance cost (Note 39) 199,446 Actuarial deviations credited to reserves 82,561 Employee contributions 12,721 Payments (160,743) Translation differences 124,835 Present value of obligation at 31 December ,172,546 97

100 The movement in the fair value of the plan assets is as follows: United Kingdom Fair value at 1 January ,311,612 Estimated revaluation (Note 38) 212,673 Actuarial deviations credited to reserves 134,775 Company contributions 94,536 Employee contributions 12,142 Payments (170,133) Translation differences 104,297 Fair value at 31 December ,699,902 Estimated revaluation (Note 38) 218,333 Actuarial deviations credited to reserves (82,145) Company contributions 113,728 Employee contributions 12,721 Payments (160,743) Translation differences 116,822 Fair value at 31 December ,918,618 The main categories allocation of the plan assets, as a percentage of total plan assets, at the close of each year, are shown in the table below: Equity securities 2011 Fixed-income securities United Kingdom 34% 57% 9% Other Equity securities 2010 Fixed-income securities United Kingdom 38% 52% 10% Other The expected return on plan assets was calculated on the basis of market expectations for returns over the entire life of the related obligations. The assets associated with these plans include neither financial instruments issued by the IBERDROLA Group nor tangible nor intangible assets. The main assumptions used in the actuarial studies undertaken to determine the provision required at 31 December 2011 and 2010 to cover the aforementioned obligations are as follows: United Kingdom 4.70% 2011 Discount rate CPI/ Wage inflation Survivorship tables 2012: 3.5% and ss: 3% / 2012: 5% and ss: 4.5% Men: 85% AMC00 ultimate / 130% PNMA00 mc 1% underpin Women: 85% AFC00 ultimate / 105% PNFA00 mc 0.5% underpin 98

101 Annual consolidated financial statements 2011 / Financial statements 2010 Discount rate CPI/ Wage inflation Survivorship tables United Kingdom 5.30% 3.50% / 5.00% Men: 85% of AMC00 ultimate / 130% PNMA00 mc 1% underpin Women: 85% of AFC00 ultimate / 105% PNFA00 mc 0.5% underpin The most relevant figures for this plan in the last years were the following: Thousands of euros Present value accrued (4,172,546) (3,886,709) (3,445,931) (2,621,562) (3,736,219) Plan assets 3,918,618 3,699,902 3,311,612 2,793,664 4,034,651 (Deficit) / surplus (253,928) (186,807) (134,319) 172, ,432 Experience adjustments in the plan liabilities Experience adjustments in the plan assets 20,165 20,535 (25,843) (13,049) 42,029 (82,145) 134, ,102 (502,033) 3,094 United States The former employees of SCOTTISH POWER that now form part of the workforce of the IBERDROLA Group in the United States, most of them belonging to the workforce of the Iberdrola Renewables Holding Inc. Group (hereinafter, IRHI), are members of various post-employment plans (Supplemental Executive Retirement Plan, Iberdrola Renewables Retiree Benefits Plan, Iberdrola Renewables Retirement Plan). With effect from 30 April 2011, a change affecting all plan participants occurred in the Iberdrola Renewables Retiree Benefits Plan, whereby the benefit receivable at retirement age is set at the amount vested until 30 April 2011 and the plan became a definedcontribution scheme from that date onwards. An excess provision of EUR 7,831 thousand, which arose as a result of this change, was recognised as a credit to Staff costs in the Consolidated income statement. The employees of IBERDROLA USA are affiliated to various defined benefit pension plans (Qualified Pension Plans, Non Qualified Pension Plans and Long Term Disability Plan) and health insurance plans (Postretirement Welfare Plan). The most significant data for the IRHI and IBERDROLA USA plans are as follows: Thousands of euros United States (IRHI) United States (IBERDROLA USA) Present value of obligation (60,443) (66,779) (2,173,148) (2,023,178) Fair value of plan assets 35,779 33,653 1,665,791 1,720,886 Net asset / (net provision) (24,664) (33,126) (507,357) (302,292) Amounts recognised in the Consolidated statement of financial position: Other non current financial investments (Note 11.d) ,362 Provision for pensions and similar commitments (24,664) (33,126) (507,357) (367,654) Net asset / (net provision) (24,664) (33,126) (507,357) (302,292) 99

102 The movement in the present value of the obligation in this connection is as follows: Thousands of euros IRHI Present value of obligation at 1 January ,791 Normal cost (Note 34) 3,349 Finance cost (Note 39) 3,378 Actuarial deviations credited to reserves 7,554 Employee contributions 145 Payments (3,291) Translation differences 3,853 Present value of obligation at 31 December ,779 Normal cost (Note 34) 1,398 Finance cost (Note 39) 2,921 Actuarial deviations credited to reserves (1,472) Amendment of the plan (Note 34) (7,831) Payments (2,991) Translation differences 1,639 Present value of obligation at 31 December ,443 The movement in the fair value of the plan assets is as follows: Thousands of euros IRHI Fair value at 1 January ,079 Estimated revaluation (Note 38) 2,272 Actuarial deviations credited to reserves 1,205 Company contributions 5,021 Employee contributions 145 Payments and other (3,066) Translation differences 1,997 Fair value at 31 December ,653 Estimated revaluation (Note 38) 2,676 Actuarial deviations credited to reserves (3,295) Company contributions 4,337 Payments and other (2,777) Translation differences 1,185 Fair value at at 31 December ,

103 Annual consolidated financial statements 2011 / Financial statements In the case of IBERDROLA USA, the movement in the present value of this same obligation is as follows: Thousands of euros IBERDROLA USA Present value of obligation a 1 January ,018,226 Normal cost (Note 34) 52,378 Finance cost (Note 39) 120,815 Actuarial deviations credited to reserves 141,462 Payments (155,688) Change in consolidation scope (Note 37) (312,842) Translation differences 158,827 Present value of obligation at 31 December ,023,178 Normal cost (Note 34) 27,590 Finance cost (Note 39) 93,245 Actuarial deviations credited to reserves 84,511 Payments (126,935) Translation differences 71,559 Present value of obligation at 31 December ,173,148 The movement in the fair value of the plan assets is as follows: Thousands of euros IBERDROLA USA Fair value at 1 January ,666,186 Estimated revaluation (Note 38) 149,772 Company contributions 27,090 Actuarial deviations credited to reserves 76,212 Payments (123,398) Change in consolidation scope (Note 37) (205,723) Translation differences 130,747 Fair value at 31 December ,720,886 Estimated revaluation (Note 38) 137,849 Company contributions 22,879 Actuarial deviations credited to reserves (141,542) Payments (122,613) Translation differences 48,332 Present value at 31 December ,665,

104 The principal categories of plan assets, as a percentage of total plan assets at the close of its year, are shown in the table below: United States (IRHI) Equity securities 2011 Fixed-income securities Other Retirement Plan 51% 24% 25% Retiree Benefits Plan 46% 52% 2% United States (IBERDROLA USA) Qualified Pension Plans 45% 41% 14% Postertirement Welfare Plans 53% 37% 10% Long term Disability Plans % United States (IRHI) Equity securities 2010 Fixed-income securities Other Retirement Plan 53% 20% 27% Retiree Benefits Plan 51% 47% 2% United States (IBERDROLA USA) Qualified Pension Plans 56% 30% 14% Postertirement Welfare Plans 56% 37% 7% Long term Disability Plans % The expected return on plan assets was calculated on the basis of market expectations for returns over the entire life of the related obligations. The assets associated with these plans include neither financial instruments issued by the IBERDROLA Group nor tangible nor intangible assets. The main assumptions used in the actuarial studies undertaken to determine the provision required at 31 December 2011 and 2010 in connection with these plans were as follows: Discount rate CPI/ Wage inflation United States (IRHI) 5.00% 2.50% / 0.00% United States (IBERDROLA USA) 4.75% 2.50%/4.00% 2011 Health insurance cost RX: 2012: 8.50%; 2013 to 2027: 8.20%-0.3% or 0.2% year 2027: 4.50% RX: 2012: 7.70%/; 2013 to % % / 0.30% / 0.20% or 0.10%; 2024: 4.50% Survivorship tables RP-2000 Combined fully generational RP 2000 AA Scale projected 2019 for annuitants and 2027 for non - annuitants Discount rate CPI/ Wage inflation United States (IRHI) 4.90% / 5.00% 2.50% / 4.00% United States (IBERDROLA USA) 5.00% 2.50% / 4.00% 2010 Health insurance cost RX: 2011: 8.70%; 2012 to 2027: 8.50%-0.3% or 0.2% year 2028: 4.50% RX: 2011 to 2028: 7.80%; 0.20% year 2028: 4.50% Survivorship tables RP-2000 Combined fully generational RP

105 Annual consolidated financial statements 2011 / Financial statements The main figures for the IRHI pension plans in recent years are as follows: Thousands of euros Actuarial value accrued (60,443) (66,779) (51,791) (49,629) (43,401) Plan Assets 35,779 33,653 26,079 22,952 27,113 Deficit (24,664) (33,126) (25,712) (26,677) (16,288) Experience adjustments arising on plan liabilities 790 (1,878) 1, (3,806) Experience adjustments arising on plan assets (3,295) 1,205 1,710 (7,620) (1,356) The main figures for the IBERDROLA USA pension plans in recent years are as follows: Thousands of euros Actuarial value accrued (2,173,148) (2,023,178) (2,018,226) (1,991,090) Plan Assets 1,665,791 1,720,886 1,666,186 1,514,910 Deficit (507,357) (302,292) (352,040) (476,180) Experience adjustments arising on plan liabilities 20,185 10,706 (430) 2,296 Experience adjustments arising on plan assets (141,542) 76, ,251 (280,036) The tables above only show figures for the years when IRHI and IBERDROLA USA formed part of IBERDROLA Group. Elektro The employees of ELEKTRO (Notes 2.c and 41) are the beneficiaries of a defined-benefit retirement plan. The most significant data regarding this plan are as follows: Thousands of euros ELEKTRO (Note 41) Present value of obligation (315,198) (306,202) Fair value of plan assets 382, ,994 67,428 80,792 The related amounts were not recognised in the Consolidated statement of financial position at 31 December 2011 since the requirements set forth in current legislation for their accounting treatment are not met. The movement in the present value of the obligation in this connection is as follows: Thousands of euros ELEKTRO Present value of obligation at 27 April ,202 Normal cost (Note 34) 2,424 Finance cost (Note 39) 20,918 Actuarial deviations credited to reserves 13,660 Employee contributions 808 Payments (10,525) Translation differences (18,289) Present value of obligation at 31 December ,

106 The movement in the fair value of the plan assets is as follows: Thousands of euros ELEKTRO Fair value at 27 April ,994 Estimated revaluation (Note 38) 29,434 Company contributions 719 Employee contributions 808 Actuarial deviations credited to reserves (2,210) Payments (10,525) Translation differences (22,594) Fair value at 31 December ,626 As the surplus was not recognised, the actuarial differences recognised against reserves were adjusted by EUR 13,364 thousand in application of current legislation (IFRIC 14). The allocation of plan assets, as a percentage of total plan assets, at the close of each year is shown in the table below: Equity securities 2011 Fixed-income securities Other ELEKTRO 13% 80% 7% The main assumptions applied in the actuarial reports that determined the provisions needed to meet the abovementioned commitments at 31 December 2011 and 27 April 2011 are as follows: Discount rate CPI/ Wage inflation Survivorship tables Discount rate CPI/ Wage inflation Survivorship tables ELEKTRO 10.46% 4.50% / 7.63% AT 83 / AT % 4.50% / 7.63% AT 83 / AT -49 The most relevant figures for ELEKTRO s pensions plan are as follows: Thousands of euros 2011 Present value accrued (315,198) Plan assets 382,626 Deficit 67,428 Experience adjustments in the plan liabilities (1,982) Experience adjustments in the plan assets (2,210) 104

107 Annual consolidated financial statements 2011 / Financial statements Other companies The employees of other IBERDROLA Group companies which include Spanish companies alien to the Collective Labour Agreement of IBERDROLA Group and which are located in countries other than those detailed individually above are covered by defined benefit retirement schemes instrumented by pension funds. The detail of the actuarial liabilities and assets as per these plans are as follows: Thousands of euros Present value of obligation (183,972) (178,118) Fair value of plan assets 137, ,415 Net asset / (net provision) (46,312) (10,703) Amounts recognised in the Consolidated statement of financial position: - Other non-current financial investments (Note 11.d) 4,210 31,972 - Provision for pensions and similar obligations (50,522) (42,675) Net asset / (net provision) (46,312) (10,703) The movement in the present value of the obligation is as follows: Thousands of euros Present value of obligation at 1 January ,838 Normal cost (Note 34) 331 Actuarial deviations credited to reserves (4,806) Employee contributions 542 Finance cost (Note 39) 17,925 Payments (19,212) Translation differences 18,500 Present value of obligation at 31 December ,118 Normal cost (Note 34) 153 Actuarial deviations credited to reserves 18,358 Employee contributions 397 Finance cost (Note 39) 17,639 Payments (15,556) Translation differences (15,137) Present value of obligation at 31 December ,

108 The movement in the fair value of the plan assets is as follows: Thousands of euros Fair value at 1 January ,320 Actuarial deviations credited to reserves 3,366 Estimated revaluation (Note 38) 16,559 Company contributions 4,906 Employee contributions 542 Payments (19,212) Translation differences 16,934 Fair value at 31 December ,415 Actuarial deviations credited to reserves (25,913) Estimated revaluation (Note 38) 18,083 Company contributions 5,019 Employee contributions 397 Payments (15,556) Translation differences (11,785) Fair value at 31 December ,660 The main assumptions used in the actuarial studies undertaken to determine the provision required at 31 December 2011 and 2010 to cover the aforementioned obligations were as follows: Other defined benefit plans in other companies Discount rate CPI/ Wage inflation Survivorship tables Discount rate CPI/ Wage inflation Survivorship tables 10.99% 5.00% / 6.58% UP 94 AT % 4.50% / 6.59% UP 94 AT 2000 All these plan assets do not include equity of debt instruments issued by the IBERDROLA Group nor any tangible or intangible assets. In addition, the employees of some IBERDROLA Group companies are covered by certain commitments, other than those described above, which are met by in-house pension provisions. 106

109 Annual consolidated financial statements 2011 / Financial statements The changes in 2011 and 2010 in the provision recognised to meet the commitments referred to in the preceding paragraph are as follows: Thousands of euros Balance at 1 January ,493 Normal cost (Note 34) 3,339 Finance cost (Note 39) 1,563 Transfers 19,956 Actuarial deviations (Note 34) To profit and loss (Note 34) (159) To reserves 8,746 Payments and other (4,152) Balance at 31 December ,786 Normal cost (Note 34) 3,301 Finance cost (Note 39) 1,706 Actuarial deviations To profit and loss (Note 34) 510 To reserves (19,159) Payments and other (7,049) Balance at 31 December ,095 b) Defined contribution plans The active employees of IBERDROLA Group and employees who have retired since October 9, 1996, contributors or beneficiaries of IBERDROLA Group pensions plan are covered by an occupational, defined-contribution retirement pension system independent of the social security system. In accordance with this system and the IBERDROLA Group s effective Collective Labour Agreement, the periodic contribution to be made is calculated as a percentage of the annual pensionable salary of each employee, except for employees hired since 1 January 1996, for whom the company contributes one-third and the employee contributes two-thirds. The pertinent subsidiaries finance the contributions for all their current employees. The contributions made by the IBERDROLA Group in 2011 and 2010 amounted to EUR 27,862 thousand and EUR 22,626 thousand, respectively. These amounts are recognised under Staff costs in the Consolidated income statements. Employees of SCOTTISH POWER hired after 1 April 2006 have the choice to be included by a defined contribution plan. The contribution made on account of these employees in 2011 and 2010 amounted to EUR 2,831 thousand and EUR 1,486 thousand and is recognised under Staff costs in the Consolidated income statements. c) Restructuring plans In 1997, the Board of Directors of IBERDROLA resolved to adapt, by various ways, the labour force of IBERDROLA and of certain of its subsidiaries to the demands of the new competitive environment with the intention of establishing in the period from 1998 through 2004 specific early retirement plans and other means of reducing the headcount until the targets had been met. These restructuring plans were put before the company s employees representatives, and an agreement was reached. From 1998 to 2001, fulfilling the intention expressed previously, the IBERDROLA Group proposed to employees who met the stipulated conditions certain early retirement plans and a special labour situation arrangement prior to adhesion to the early retirement plan. The obligations to the employees who, having availed themselves of the above-mentioned retirement plans, were retired at 30 November 2000, were externalised at December 2000, and a single premium was paid to a third party for the actuarial value relating to the aforementioned obligations. 107

110 Without prejudice to the maintenance of the restructuring plans agreed on in prior years, in 2003 the IBERDROLA Group reached an agreement with the trade union representatives to implement a collective redundancy procedure applicable to all employees reaching 58 or more years of age before 31 December 2006, which was approved by the Ministry of Employment and Social Affairs. To the abovementioned collective redundancy program opted a total of 2,333 employees, 633 of whom were already part of the restructuring plans established earlier. Prior to 31 December 2006, the IBERDROLA Group, after reaching the corresponding agreement with the trade union representatives, extended the 2003 collective redundancy program to employees turned 58 in The faculty to so extend the program was provided for in the initial agreement and approved by the Labour Authorities in A total of 431 employees had taken advantage of the aforementioned extension. At 31 December 2011, remain in the collective redundancy program 781 employees, one of whom was already part of the restructuring plans established earlier, as well as 408 opted the extension. During 2010, subsidiary Iberdrola Generación, S.A.U. initiated a headcount restructuring procedure to adapt to new circumstances and following the conclusion of the useful life of certain plants involved. This company will promote a reorganisation over the next three years affecting a maximum of 144 employees. This restructuring plan was notified to and agreed by the company s employee representatives. At 31 December 2011, a provision amounting to EUR 9,116 thousand for this plan had been recognised. The discount to present value of the provisions is charged to Finance costs in the Consolidated income statement. The changes in 2011 and 2010 in the provision recognised to meet these commitments are as follows: Thousands of euros Restructuring plans Balance at 1 January ,222 Normal cost (Note 34) 19,597 Finance cost (Note 39) 5,176 Actuarial deviations and other (Note 34) (1,400) Payments and translation differences (52,812) Balance at 31 December ,783 Finance cost (Note 39) 3,485 Actuarial deviations and other (Note 34) (7,593) Payments and translation differences (61,404) Balance at 31 December ,271 The main assumptions used in the actuarial studies undertaken to determine the provision required at 31 December 2011 and 2010 to cover the Group s obligations in relation to the aforementioned restructuring plans are the following: Collective redundancy program and other restructuring plans Discount rate CPI 3.25% 2.50% Survivorship tables PERM/F 2000P GRM/F 95 GRM/F 80 (-2) Discount rate CPI 3.25% % 2.50% Survivorship tables PERM/F 2000P GRM/F 95 GRM/F 80 (-2) 108

111 Annual consolidated financial statements 2011 / Financial statements 23. OTHER PROVISIONS The detail and movement of Other Provisions on the liability side of the Consolidated statements of financial position in 2011 and 2010 are as follows: Provisions for litigation, indemnity payments and similar costs Provision for CO 2 emissions (Note 4.s) Provision for facility closure costs (Notes 4.t and 6.a) Other provisions for contingencies and expenses Thousands of euros Total other provisions Balance at 1 January , , , ,657 2,870,623 Change in the consolidation scope Charge for the year with a charge to Property, Plant and Equipment (Note 4.g) ,383-81,383 Charge for discount to present value (Note 39) 54,283-27,170 6,365 87,818 Charge for the year to income statement 141, ,074-41, ,373 Reversal due to overprovision (161,344) (4,453) (5,740) (31,735) (203,272) Payments made, translation differences, transfers and other 230,763 (407,952) 22,769 (350,334) (504,754) Balance at 31 December ,111, , , ,159 2,882,171 Charge for the year with a charge to Property, Plant and Equipment (Note 4.g) Charge for discount to present value (Note 39) - - (57,718) - (57,718) 1,709-37,223 7,390 46,322 Charge for the year to income statement 91, ,275-32, ,759 Reversal due to overprovision (254,723) (4,354) - (23,298) (282,375) Payments made, translation differences, transfers and other Change in consolidation method and scope (Notes 18 and 41) (54,413) (332,911) (17,782) (37,908) (443,014) 75, (2,307) 72,947 Balance at 31 December , , , ,236 2,618,092 The IBERDROLA Group records provisions for responsabilities arising from litigation in progress and from indemnity payments, obligations, collateral and other similar guarantees. These provisions include those aimed at covering environmental risks determined on the basis of a case-by-case analysis of the status of the polluted assets and the cost that will have to be incurred in cleaning them. In 2011 the IBERDROLA Group reassessed the allowance it held against an on-going litigation process in the United States in light of the related developments and, as a result, it reversed EUR 169,371 thousand, which was recognised as a reduction to Income tax in the 2011 Consolidated income statement (Note 27). The IBERDROLA Group also maintains allowances to meet a series of costs needed for dismantling work at its nuclear and thermal plants, and its wind farms, and for burying work that it has undertaken to carry out at certain electricity distribution facilities. 109

112 (*) The detail of provision for facility closure costs is as follow: Fossil-fuel plants 140, ,494 Nuclear plants 560, ,316 Wind-powered facilities and other alternative stations 122, ,921 Combined cycle plants 96,392 86,931 Other facilities of property, plants and equipment 10,576 23, , ,341 The estimated dates on which the IBERDROLA Group considers that it will have to meet the payments relating to the provisions and allowances included in this caption of the Consolidated statement of financial position at 31 December 2011 are as follows: Thousands of euros Thousands of euros , , , and subsequent years 1,360,801 2,618, BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES-LOANS AND OTHERS The detail of the bank borrowings at 31 December 2011 and 2010, and the repayment schedules are as follows: Balance at Balance at Current maturity Borrowings at 31 December 2011 Non current maturity 2012 (*) and subsequent years Thousands of euros Total non current Euros Finance leases 192, ,837 10,627 9,645 10,103 10, , ,210 Debentures and bonds 12,373,810 13,159, ,511 1,677,517 1,732,479 2,451,199 7,123,363 12,984,558 Other financing transactions 8,450,760 8,228,194 1,554, , , ,188 5,167,962 6,673,279 Unpaid accrued interest 302, , , ,217 3,217 21,319,660 21,910,033 2,083,769 2,433,100 2,026,773 2,936,604 12,429,787 19,826,264 Foreign currency US dollars 5,122,809 5,314, , , , ,631 3,371,247 4,627,205 Sterling pounds 4,101,147 4,123, ,435 16, ,193 15,664 3,207,569 3,955,893 Brazilian reals 1,093,680 1,666, , , , , ,568 1,462,869 Unpaid accrued interest 181, , , Others ,499,186 11,318,467 1,272, ,190 1,914, ,978 7,110,384 10,045,967 31,818,846 33,228,500 3,356,269 2,970,290 3,941,188 3,420,582 19,540,171 29,872,231 (*) At 31 December 2011, the balance of the bank borrowings includes EUR 993,543 thousand correspond to lines of credit arrangements. 110

113 Annual consolidated financial statements 2011 / Financial statements The IBERDROLA Group considers more representative the presentation of the maturities by year of the financial debt pending of amortization at its present value. The foregoing loan balances correspond to amounts drawn down and not repaid at 31 December 2011 and At 31 December 2011 and 2010, the IBERDROLA Group had undrawn loans and credit facilities amounting to EUR 7,244,459 thousand and EUR 6,510,082 thousand, respectively, maturing between 2012 and 2017 (Note 49). The most significant financing transactions performed by the IBERDROLA Group in 2011 are as follows: - Bond issues in the euromarket: - The first issue of the year was launched in January, for EUR 750 million and maturing in February The second issue of 2011 was launched in April, for EUR 750 million maturing in October Lastly, the third issue was launched in October, for EUR 600 million, maturing in January The final coupons of the three issues were 3.875%, 4.625% and 4.750%, respectively. - Private issues in the United States: - In April 2011, the investees IBERDROLA USA, Central Maine Power (CMP) and Rochester Gas & Electric (RGE) signed two private bond issues (USPP) for USD 250 million (structured in one tranche of USD 150 million at 10 years and another tranche of USD 100 million at 30 years) and USD 125 million at 10 years, respectively. The last of these issues will not be available until early Bond issues in the UK market: - In July Scottish Power Distribution Finance UK, plc. launched its first issue of bonds on the UK market for GBP 350 million, maturing in July 2026 and with a final coupon of 5.875%. - Structured bond issues: - In 2011 six structured bond issues were launched for a total of EUR 135 million, maturing in approximately eight years on average. - Bank market: - In June, IBERDROLA finalised a transaction in the banking market amounting to EUR 3,000 million, which involves 28 financial institutions and is structured in tranches of EUR 1,500 million each, the first of which is a loan to maturity and the second a revolving credit. The repayment period is five years, extendable to a maximum of seven years. In December IBERDROLA agreed the extension of a EUR 2,400 million syndicated loan subscribed on 30 October 2007 and maturing on December 2013, until December 2014, with the participation of leading domestic and foreign banks. - European Investment Bank: - In July and November loans were arranged to finance the upgrade and capacity increase of the electricity transmission and distribution networks in the United Kingdom. The total amount of these loans was EUR 250 million and the repayment period was 10 years as from the arrangement date. - In October a loan was granted to finance part of the programme for research, development and innovation in innovative technologies. It amounts to EUR 200 million and its repayment period is for 10 years as from the arrangement date. - In November a loan was arranged to finance investments earmarked for modernising and bolstering the electricity distribution network in Spain. The loan was structured in two tranches of EUR 100 million each, with repayment periods of 10 and 15 years, respectively. 111

114 - Brazilian market: - In the second quarter of the year, the subsidiaries of the investee NEONERGIA launched several bond issues for BRL 960 million maturing in five to six years, and arranged a BRL 752 million loan with Banco Nacional de Desenvolvimento Econômico e Social (BNDES) with a seven-year repayment period. - In the third quarter of 2011, ELEKTRO launched a BRL 300 million bond issue maturing in seven years. This issue comprises two tranches tied to the CDI and IPCA indices respectively. The most significant financing transactions performed by the IBERDROLA Group during 2010 were as follows: - In January 2010, an issue under the Euromarket bond programme was held, entailing USD 100 million bonds maturing in January In February 2010, the Group drew down the EUR 300 million 10-year loan agreed with the European Investment Bank (EIB) in December 2009 to fund the extension of the San Esteban II, San Pedro II and La Muela II hydroelectric plants. - In March, the Group tapped its EMTN programme again, issuing EUR 500 million of 10-year bonds. - In May 2010, the Group arranged a loan with the EIB to finance the construction and start-up of a 103 MW wind farm in Mexico. The loan was drawn down in November 2010 at 10 years. - In early July, an EUR 2,000 million syndicated loan was arranged, which was subsequently extended by an additional EUR 150 million. The loan, with a syndicate of 16 top-tier domestic and foreign banks, falls due at the end of July During the first half of September, IBERDROLA successfully completed the largest bond swap transaction ever undertaken by a Spanish company, totalling EUR 600 million. A total of EUR million was applied to redeem serie 79 bonds maturing in 2011 and the remaining EUR million to redeeming series 76 bonds maturing in The new issue has a March 2020 maturity date and a 4.125% annual coupon. - In the first half of October, IBERDROLA completed a public placement in the Eurobond market for a total amount of EUR 750 million and October 2016 maturity. The final coupon of this issue was 3.50%. - To diversify its funding sources and tap market opportunities, in December Iberdrola International, B.V. raised a total of EUR 50 million in Schuldschein loans with a 5-year maturity. - Two bank deals were signed in December. The first was with Caja Madrid for a nominal EUR 60 million maturing in 10 years. The second was with German-based bank Landesbank Hessen-Thuringen Girozentrale (Helaba) for a nominal EUR 50 million maturing in Most of the debt borrowed from non-group third parties, is concentrated in Iberdrola International, B.V., Iberdrola Finanzas, S.A. and Iberdrola Finance Ireland, Ltd. An insignificant portion, less than 1%, of these borrowings is subject to financial covenants (relating total debt to equity ratios) that if not met could trigger the early repayment of covenanted borrowings and all other borrowings with a cross default covenant. However, the IBERDROLA Group amply meets the required financial ratios and there is therefore no risk of breach. Some of the Group s investment projects, mainly in the renewable energy segment, have been funded in a very specific manner, i.e. via loans that include covenants with respect to key financial ratios and the obligation to pledge all the shares of the project-companies to creditors. The outstanding balance of loans of this type at 31 December 2011 and 2010 was EUR 1,272 million and EUR 1,383 million, respectively. 112

115 Annual consolidated financial statements 2011 / Financial statements In relation to credit ratings covenants, at 31 December 2011 and 2010 the IBERDROLA Group had arranged funding with the EIB amounting to EUR 2,279 million and EUR 2,230 million, respectively, which may have to be renegotiated or shored up with additional guarantees in the event of a ratings downgrade. In addition, at 31 December 2011 and 2010, the IBERDROLA Group had EUR 3,058 million and EUR 4,216 million, respectively, in drawn borrowings the cost of which would be adjusted in the event of a ratings downgrade. However, the potential increase in cost would not be significant. At 31 December 2011 and 2010, the IBERDROLA Group was fully up to date on all its outstanding financial debt obligations. Therefore, none of the amounts in the table above had contractual maturities before 31 December At the date of preparation of these Consolidated financial statements, neither IBERDROLA nor any of its material subsidiaries were in breach of their financial commitments or of any kind of obligation that could trigger the early redemption of their financial undertakings. The IBERDROLA Group s average cost of debt in 2011 and 2010 was 4.56 % and 4.16 %, respectively. The estimated market value of bank borrowings bearing fixed interest without considering the effect of hedges at 31 December 2011 and 2010 amounted to EUR 21,001,717 thousand and EUR 18,630,602 thousand, respectively. The market value was determined by discounting the future cash flows at market interest rates. The interest rate curve used to make this calculation takes into account the risks associated with the electricity industry and the credit rating of IBERDROLA Group. The sensitivity of the aforementioned market value to exchange and interest rate fluctuations is as follows: Thousands of euros Interest rate fluctuation Interest rate fluctuation +0.25% -0.25% +0.25% -0.25% Change in the value of borrowings (241,632) 247,405 (227,609) 232,

116 25. DERIVATIVE FINANCIAL INSTRUMENTS The detail of the balances at 31 December 2011 and 2010 that includes the valuation of derivative financial instruments is as follows: Thousands of euros Assets Liabilities Assets Liabilities Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term INTEREST RATE HEDGE: (6,474) 86,813 9, ,476 27,769 36,140 (8,013) 166,433 Cash flow hedge , ,058 1,545 3,996 50, ,709 Interest rate swap , , , ,730 Collar ,399 1,535 3,357 1,405 7,979 Others - - 2,090 19, Fair value hedge (6,474) 86,798 (43,899) 4,418 26,224 32,144 (58,804) 3,724 Interest rate swap (6,474) 71,002 (41,431) - 24,319 24,593 (48,466) (153) Others - 15,796 (2,468) 4,418 1,905 7,551 (10,338) 3,877 FOREIGN EXCHANGE HEDGE: 222, , ,921 81, , , , ,290 Cash flow hedge 152,672 (61,438) 118,488 35, ,637 (5,964) 108,452 92,545 Currency swap 20,150 (68,278) (1,708) 8,593 9,082 (15,207) (12,988) 87,654 Foreign exchange hedge 132,522 6, ,196 26,707 96,555 9, ,440 4,891 Fair value hedge 11, ,047 4,205 18,933 8, ,333 14,995 28,979 Currency swap 11, ,860 4,174 20,024 8, ,984 15,238 28,979 Others (1,091) (243) - Hedge of a net investment in a foreign country: 58,347 96,540 93,228 27,248 (4,211) 243,199 62,582 27,766 Currency swap 53,150 96,540 17,680 27,248 (4,211) 243,199 (327) 27,766 Foreign exchange hedge 5,197-75, ,909 - RAW MATERIAL HEDGE: 159,624 27, , , ,740 63, ,105 72,913 Cash flow hedge 159,155 27, , , ,740 63, ,641 73,142 Forward 103,927 27, ,758 99,710 87,191 35, ,134 63,744 Collar , ,849 1,907 Others 55, ,479 9,251 28,296 27, ,658 7,491 Fair value hedge ,098 6, (229) Forward ,098 6, (229) NON-HEDGING DERIVATIVES: 383, , ,891 91, ,643 51, ,197 92,225 derivatives on treasury shares ,046-19,827 - Equity swap ,046-19,827 - derivatives on foreign exchange 9,032 21,539 19,639 8, ,583 3,295 (7,090) 1,126 Currency swap (512) - 4,152 4, ,689 - (3,517) - Foreign exchange hedge 9,544 21,539 15,487 3, ,295 (3,573) 1,126 Derivatives on raw material 374, , ,207 56, ,014 47, ,521 64,186 Forward 278,653 91, ,097 49, ,968 29, ,989 43,915 Others 95,697 10,469 85,110 7, ,046 18, ,532 20,271 Interest rate derivatives - 6,169 (992) 27, (1,061) 755 Interest rate swap - 3,881 (992) (1,061) 755 Others - 2,288-27, Other non-hedging derivatives ,158 Total 758, , , , , ,983 1,035, ,

117 Annual consolidated financial statements 2011 / Financial statements The detail, by maturity, of the notional amounts of the derivative financial instruments arranged by the IBERDROLA Group outstanding at 31 December 2011 is as follows: and beyond Thousands of euros INTEREST RATE HEDGE: 1,696, ,804 1,587, ,915 2,886,926 7,331,711 Cash flow hedge 309, ,804 1,232, ,915 1,874,001 3,919,190 Interest rate swap 305, ,963 77, ,975 1,706,514 2,515,138 Collar 4,714 4,841 1,155,070 54,940 62,487 1,282,052 Others , , ,000 Fair value hedge 1,386, , ,299 7,000 1,012,925 3,412,521 Interest rate swap 1,379, , , ,485 3,265,756 Others 7,000 1,000 4,325 7, , ,765 FOREIGN EXCHANGE HEDGE: 8,959,211 1,049, ,346 1,002, ,983 12,184,033 Cash flow hedge 6,965, , , , ,612 8,761,977 Currency swap 284,006-26, , ,612 1,085,661 Foreign exchange hedge 6,681, , ,640 6,969-7,676,316 Fair value hedge 84, ,520 85,049 9, , ,423 Currency swap 84, ,520 83,031 9, , ,405 Others - - 2,018-21,000 23,018 Hedge of a net investment in a foreign country: Total 1,908,992 73, ,386 93,041 2,568,633 Currency swap 806,837 73, ,386 93,041 1,466,478 Foreign exchange hedge 1,102, ,102,155 RAW MATERIAL HEDGE: 6,118,165 1,239, ,522 45,982 2,324 7,588,089 Cash flow hedge 5,901,107 1,182, ,985 45,982 2,324 7,314,233 Forward 4,091,325 1,041, ,985 45,982 2,324 5,363,059 Others 1,809, , ,951,174 Fair value hedge 217,058 56, ,856 Others 217,058 56, ,856 NON-HEDGING DERIVATIVES: 18,969,853 3,591, , , ,751 23,577,195 Derivatives on treasury shares 11, ,065 Equity swap 11, ,065 Derivatives on foreign exchange 1,967, ,124 15,782 19, ,881 2,657,699 Currency swap - 219, ,800 Foreign exchange hedge 1,967, ,324 15,782 19, ,881 2,437,899 Derivatives on raw material 16,984,178 3,117, , ,616 87,930 20,700,148 Forward 13,507,227 2,444, , ,166 87,930 16,531,156 Others 3,476, ,632 17,959 1,450-4,168,992 Interest rate derivatives 7,000 1,000 6, , ,283 Interest rate swap ,000 50,000 Others 7,000 1,000 6, , ,283 Total 35,743,467 6,770,145 2,423,867 1,498,565 4,244,984 50,681,028 The information presented in the table above includes notional amounts of derivative financial instruments arranged in absolute terms (without offsetting asset and liability or purchase and sale positions) and, therefore, do not constitute the risk assumed by the IBERDROLA Group since this amount only records the basis on which the calculations to settle the derivative are made. 115

118 Finance cost in the 2011 and 2010 Consolidated income statements includes EUR 62,429 thousand and EUR 161,218 thousand, respectively, in connection with derivatives linked to financial indices that fail to meet the conditions to qualify as hedging instruments or, having met the conditions, they are partly ineffective as hedging instruments for cash flows as explained in Notes 4.m and 39. Finance income in the Consolidated income statement for the same years also includes EUR 121,842 thousand and EUR 127,658 thousand, respectively, for the abovementioned items (Note 38). The detail of the nominal value of the main liabilities on which foreign exchange hedges (Note 5) have been arranged is as follows: 2011 Type of hedge Thousands Thousands Thousands Thousands of Thousands of of japanese of norwegian of mexican US dollars swiss francs yen krone pesos Cash Flow 1,056, ,500,000 - Fair Value 606,431 46,000, ,000-27, Type of hedge Thousands Thousands Thousands Thousands of Thousands of of japanese of norwegian of mexican US dollars swiss francs yen krone pesos Cash Flow 412, ,500,000 - Fair Value 1,075,032 31,000, , The nominal value of the most significant liabilities for which interest rate hedges (Note 5) have been arranged is as follows: 2011 Type of hedge Thousands of Thousands of Thousands of US Thousands of euros brazilian reals dollars pounds sterling Fair Value 2,942, ,674 81, ,000 Cash Flow 1,984, , , Type of hedge Thousands of Thousands of Thousands of US Miles de libras euros brazilian reals dollars esterlinas Fair Value 2,320, , ,000 Cash Flow 1,571, , , OTHER NON-CURRENT PAYABLES The detail of Other non-current payables on the liability side of the Consolidated statements of financial position at 31 December 2011 and at 31 December 2010 is as follows: Thousands of euros Long-term guarantees and deposits received (Note 11) 154, ,036 GAMESA Bidelek Sareak, A.I.E. (Note 11.a) 26,001 - Others 213, , , ,

119 Annual consolidated financial statements 2011 / Financial statements 27. DEFERRED TAXES AND INCOME TAX EXPENSE As in 2010, in 2011 IBERDROLA as the parent of Group 2/86 filed a consolidated Income Tax return in Spain. The Group will continue to be taxed under this tax regime indefinitely for as long as the related requirements are met and the Group does not expressly waive application of the regime by filing the related taxpayer registration form. Without prejudice to this special tax regime in Spain applicable to IBERDROLA and certain of its consolidated Spanish subsidiaries, other Spanish and foreign subsidiaries file individual or aggregated Income Tax returns, in accordance with the legislation applicable to them. The difference between the tax charge allocated to 2011 and 2010 and the tax payable for those years, recorded under Deferred tax assets and Deferred tax liabilities, as appropriate, in the Consolidated statements of financial position at 31 December 2011 and 2010, arose as a result of the temporary differences relating to the difference between the carrying amount of certain assets and liabilities and their tax bases. The main temporary differences are the following: - Temporary differences generated by the measurement of available-for-sale investments, assets and liabilities related to derivatives and assets that were measured at their market value in business combinations for which the difference between the tax base and carrying amount is not deductible for tax purposes. - Temporary differences arising from the application of profits from immediate or accelerated depreciation compared to depreciation recognised in the accounts. - Temporary differences arising from the non-deductibility for tax purposes of certain liabilities, including those recognised in relation to pension obligations and to collective redundancy procedures (Notes 4.q, 4.r and 22). - Temporary differences arising from changes in the value of investment securities whose carrying amount is not fully deductible for tax purposes or where deductions are not considered for accounting purposes. - Temporary differences arising from the tax treatment of financial goodwill generated by the acquisition of equity stakes in non-resident entities. The detail of current and deferred Income Tax expense is as follows: Thousands of euros Current tax 751, ,956 Deferred tax (202,199) 193, , ,

120 The detail of the heading Deferred tax assets and Deferred tax liabilities in the Consolidated statements of financial position therein is as follows: Deferred tax assets: Measurement of avalilable-for-sale assets Measurement of derivative financial instruments Pension and similar commitments Allocation of nondeductible negative goodwill arising on consolidation Provision for facility closure costs Tax loss and tax credit carryforwards Credit (charge) to Consolidated income statement Translation differences on foreign currency balance Credit (charge) to asset and liability revaluation reserve Credit to Other reserves Change in consolidation method Credit (charge) to Consolidated income statement Translation differences on foreign currency balance Credit (charge) to asset and liability revaluation reserve Credit to Other reserves Thousands of euros Change in consolidation method (Notes 18 and 41) (433) , , ,462 64,988) 125,966 38, ,858 (49,358) 6, , , ,961 (195,499) 16,662-51,673 (23,688) 363,109 6,676 2, , ,703 96,113 (2,272) ,841 (2,272) ,569 68,342 7,225 2, ,207 (7,501) (54) , , ,143 12, , ,210 18, ,849 1,252,394 Other deferred tax assets 1,601,328 75,051 (197,696) - - (10,861) 1,467, , , ,367 1,929,656 3,142, ,660 (39,490) 37,985 51,673 (34,549) 3,487, , , , ,556 66,216 4,545, Charge (credit) to Consolidated income statement Translation differences on foreign currency balance and others Charge (credit) to asset and liability revaluation reserve Change in consolidation method Charge (credit) to Consolidated income statement Translation differences on foreign currency balance and others Charge (credit) to asset and liability revaluation reserve Thousands of euros Change in consolidation method (Notes 18 and 41) Deferred tax liabilities: Measurement of available-for-sale assets 1,580 - (749) 2,060-2,891 - (426) 4,889-7,354 Measurement of derivative financial instruments 394,831 (52,631) (14,286) 49, ,060 (11,800) 9,403 97, ,447 Accelerated depreciation 2,861, , ,634 - (112,666) 3,410, , ,347 - (35) 4,150,069 Overprice assigned in business combinations 4,187,656 (137,448) 192, ,242,303 (228,241) 12, ,741 4,411,263 Other deferred tax liabilities 435, , , ,827 (48,355) 12,174 - (3,820) 700,826 7,880, , ,630 51,206 (112,666) 8,773, , , , ,886 9,741, At 31 December 2011 and 2010, there were no deferred tax assets or other significant tax credits that had not yet been recognised by the IBERDROLA Group companies. In addition, the headings Other reserves and Unrealised assets and liabilities revaluation reserve in 2011 and 2010 Consolidated statements of financial position include credits of EUR 158,256 thousand and EUR 21,055 thousand, respectively, relating to the tax charge on actuarial variances and on cash flow hedge valuation adjustments and available-for-sale investments. 118

121 Annual consolidated financial statements 2011 / Financial statements The Income Tax expense for 2011 and 2010 is calculated as follows: Consolidated profit before taxes 3,454,411 3,840,985 Thousands of euros Non-deductible expenses and non-computable income: - individual companies (63,311) 91,934 - consolidation adjustments 54,607 (85,156) Offset of tax credit (846) (10,920) Net result of companies accounted for using the equity method 34,543 (27,356) Adjusted accounting profit 3,479,404 3,809,487 Gross tax calculated at the tax rate in force in each country (a) Tax credits deductions due to reinvestment of extraordinary profits and other tax credit 1,052,571 1,144,171 (145,867) (126,575) Adjustment of prior years Income Tax expense (15,381) (14,480) Net movement in provisions for litigation, indemnity payments, similar costs and other provisions (b) Adjustments of deferred tax assets and liabilities due to changes in the tax rates (170,730) (51,030) (200,524) (81,492) Taxes related to non-distributed earnings 32,215 26,217 Others (3,102) 2,459 Income tax expense 549, ,270 (a) The foreign fully and proportionately consolidated subsidiaries calculate the Income Tax expense and the resulting tax charge under the taxes applicable to them in accordance with the legislation applicable to them and on the basis of the tax rates in force in each country. Also, the subsidiaries subject to Basque Country tax legislation apply the tax rate in force there. (b) The main cause of the variation is due to the reestimation in the tax risks provision that arises from financial operations that took place in previous years (see next paragraph). British (HMRC) and US (IRS) tax authorities have reviewed the tax aspects related to some financial operations between subgroups SCOTTISH POWER and Iberdrola Renewable Holding Inc. The IBERDROLA Group considers the liabilities related to this tax risk are correctly provisioned. In general, the IBERDROLA Group companies have all years since 2008 and beyond open for review by the tax inspection authorities for the main taxes applicable to them with the exception to the Income Tax which is open for the years 2007 and beyond. However, this period may differ in the case of the Group companies taxed in different tax jurisdictions. 119

122 28. TAX RECEIVABLES AND PAYABLES The detail of the account of Public Administration and Tax payables and other tax payables to Public Administrations on the asset and liability sides, respectively, of the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows: Thousands of euros Tax receivables Income Tax refundable 566, ,732 VAT refundable 165, ,420 Tax withholdings and prepayments 59,365 40,532 Other tax receivable 66, ,747 Social Security tax receivable - 18, ,245 1,158,093 Tax payables Income tax payable 817, ,724 VAT payable 132, ,335 Tax withholdings and prepayable 45,678 68,325 Other tax payable 261, ,622 Social Security tax payable 22,124 21,907 1,279,762 1,285, TRADE PAYABLES The detail of this heading in the Consolidated statements of financial position at 31 December 2011 and 2010 is as follows: Thousands of euros Suppliers 4,294,978 4,643,794 Suppliers of services provided 1,148,355 1,076,417 Trade payables 224, ,745 Customer advances 376, ,272 6,044,351 6,208,228 The majority of these accounts payable do not bear interest. 120

123 Annual consolidated financial statements 2011 / Financial statements 30. INFORMATION ON DEFERRED PAYMENTS TO SUPPLIERS. THIRD ADDITIONAL PROVISION. DUTY OF INFORMATION OF LAW 15/2010, OF 5 JULY The IBERDROLA Group has analysed the periods of the accounts payable to suppliers in accordance with the criteria contained in the law: Outstanding balances at 31 December 2011 and 2010, related to suppliers and trade payables included under current liabilities in the Consolidated statement of financial position for accounts payable to providers of goods and services. The maximum legal period was calculated from the date the services were provided by the third party or the goods were received by the IBERDROLA Group, or from the date this Law (7 July 2010) came into force, in the event this date is subsequent to the former. In accordance with the transitional regime for the years 2011 and 2010 provided for in Law 15/2010, the deferral period calculated was 85 days. The IBERDROLA Group did not acquire any fresh or perishable food products. The detail of the information required for 2011 and 2010 is as follows: Made and outstanding payments at the balance day in the Consolidated statement of financial position Amount in million of euros % Amount in million of euros Within the maximum legal limit 14, , Others Payments made in the year 15, , APP (days) Deferred payments which exceed the maximum legal limit at the year end % The information included in the table above was prepared in accordance with Resolution 29 of December 2010, of the Institute of Accounting and Auditors of Accounts regarding the information to be included in the Financial statements regarding deferred payments to suppliers in commercial transactions. This information was prepared with the following specifications: Total payments for the year: total amount of payments made to suppliers during the year, where a distinction is made between those that exceed the legal deferral limit and payments within the maximum legal period. Average payment period (APP): amount in days remaining of the coefficient between the sum of the products from each of the payments to suppliers made with a deferral greater than the legal payment period and the number of days the deferral exceeded the respective period, and the denominator of the total amount of the payments made in the year with a deferral greater than the legal payment period. Outstanding amounts to suppliers that at year end accumulate a deferral greater than the legal payment period at 31 December 2011 and Suppliers: trade payables included under current liabilities in the Consolidated statement of financial position for accounts payable to providers of goods and services. Suppliers of tangible assets and obligations under finance leases are outside the scope of information. Items relating to dues, fees, indemnities, etc. are outside the scope of information since they are not commercial transactions. The table only includes information relating to Spanish entities included in the scope of consolidation. This consolidated information relates to payments made by Spanish companies to suppliers once the reciprocal receivables and payables of the subsidiaries and, if applicable, those of jointly controlled companies are removed in accordance to the provisions in the basis of consolidation. 121

124 31. NET REVENUE The detail of this heading in the Consolidated income statements for 2011 and 2010 is as follows: Thousands of euros Deregulated business 21,089,836 19,753,460 Spain and Portugal 11,925,165 10,527,624 UK 7,810,315 7,584,856 Mexico 1,354,356 1,640,980 Renewable business 2,293,752 2,241,077 USA 619, ,160 UK 237, ,746 Spain and rest of the world 1,209,131 1,203,788 Other activities in USA 228, ,383 Network business 5,514,838 6,180,445 Spain Electricity distribution 1,784,561 1,756,756 Gas infrastructure Other sales 237, ,912 UK 1,043, ,219 USA 2,449,260 3,132,026 South America 2,821,374 1,598,131 Generator sales 87,937 63,068 Distributor sales 2,677,293 1,469,429 Other sales 56,144 65,634 Other business 1,086,015 1,746,137 Structure and inter-group adjustments (1,157,780) (1,088,216) Net revenue 31,648,035 30,431, CONSTRUCTION CONTRACTS The accumulated amounts relating to uncompleted contracts at 31 December 2011 and 2010 are as follows: Accumulated revenue recognised by reference to degree of completion since the beginning of the contract Amount billed to clients since the beginning of the contract Work in progress at December 31 Thousands of euros Advances received from clients at December ,620,114 4,387, ,724 98, ,417,997 4,088, , ,191 The amount registered in Consolidated income statements during the years 2011 and 2010 for these contracts totalizes EUR 539,582 thousand and EUR 1,011,282 thousand, respectively. 122

125 Annual consolidated financial statements 2011 / Financial statements 33. PROCUREMENTS The detail of this heading in the Consolidated income statements for 2011 and 2010 is as follows: Thousands of euros Deregulated business 17,102,357 15,772,281 Spain 9,604,778 7,977,713 UK 6,596,678 6,674,464 Mexico 900,901 1,120,104 Other business 664,122 1,379,215 Renewables 175, ,843 Energy and similar purchases 175, ,843 South America 1,600, ,076 Distributor supplies 1,461, ,828 Generator supplies 64,954 54,976 Other supplies 73,728 75,272 Network business 1,191,165 1,611,195 UK 35,279 27,945 USA 1,155,886 1,583,250 Structure and inter-group adjustments (1,111,551) (1,055,775) Total procurements 19,622,228 18,785, STAFF COSTS The detail of this heading in the Consolidated income statements for 2011 and 2010 is as follows: Wages and salaries 1,684,077 1,621,105 Employer Social Security costs 244, ,894 Additional provisions for pensions and similar obligations and defined contributions to the external pension plan (Notes 4.q and 22) 83, ,073 By-law stipulated directors emoluments art ,045 28,709 By-law stipulated directors emoluments art ,362 - Other employee welfare expenses 102, ,942 Capitalised staff costs: Intangible assets and investment property (Notes 8 and 9) 2,151,463 2,158,723 (75,919) (61,306) Property, plant and equipment (Note 4.g) (432,192) (392,652) (508,111) (453,958) 1,643,352 1,704,765 Thousands of euros In 2011 and 2010 the IBERDROLA Group s average workforce totalled 31,885 and 31,344 employees, of which 7,825 and 8,043 were female workers, respectively. 123

126 The average number of employees in the consolidated group is calculated based on the ownership percentage held by IBERDROLA in the jointly controlled entities consolidated using proportionate consolidation and the total number of employees of fully-consolidated subsidiaries. On the other hand, it has been considered that the ELEKTRO employees (Notes 2.c and 41) join the IBERDROLA Group on April 27, OPERATING LEASES The heading Outside services in the Consolidated income statements for 2011 and 2010 includes EUR 136,299 thousand and EUR 138,736 thousand, respectively, relating to operating leases. The detail of the total future minimum lease payments under non-cancellable operating leases at 31 December 2011 is as follows: Thousands of euros , , and subsequent years 525, ,657 The contracts for leasing for most of the lands on which the IBERDROLA Group s wind power facilities are located have renewal on expiry or early termination clauses. The payments detailed in the table above relate to the period of remaining useful life of the facilities as well as the expenditure which the termination of the contract at the end of its term would entail. On the other hand, the IBERDROLA Group acts as a lessor in certain operating leases consisting basically on the assignment of capacity from generating facilities in Mexico (Note 4.j), the rental of investments property (Note 9) and the lease of fibre optics. Net revenue in the Consolidated income statements in 2011 and 2010 includes EUR 287,104 thousand and EUR 301,110 thousand related to this concept and the detail of the estimated future minimum collections under non-cancellable leases at 31 December 2011 is as follows: Thousands of euros , , and subsequent years 3,461,903 4,483,

127 Annual consolidated financial statements 2011 / Financial statements 36. DEPRECIATION AND AMORTISATION CHARGE, ALLOWANCES AND PROVISIONS The detail of this heading in the Consolidated income statements for 2011 and 2010 is as follows: Thousands of euros Property, plant and equipment depreciation charge: Property, plant and equipment (Note 10) 2,333,156 2,278,253 Investment property (Note 9) 4,849 3,920 Intangible asset depreciation charge (Note 8) 586, ,913 Grants related to assets transferred to income for the year (72,450) (48,440) Allowances for impairments and write-downs of nonfinancial assets (Note 4.l) 336,781 35,486 Changes in provisions (43,828) 1, GAINS ON DISPOSAL OF NON-CURRENT ASSETS 3,145,377 2,698,228 The detail of Gains on disposal of non-current assets in the Consolidated income statements for 2011 and 2010 is as follows: Gain on the disposal of land, buildings and other structures Thousands of euros ,254 22,394 Gain on the disposal of equity investments 36, , , ,109 The IBERDROLA Group agreed with Neoenergía, S.A. (over which it exercises joint control) the sale of its whollyowned subsidiary Energyworks do Brasil, S.A. for BRL 150,000,000 million (EUR 69,262 thousand) in total. This agreement could not be implemented until the regulatory authorisations required for this type of transaction had been obtained. These authorisations were issued on 29 March The capital gain, which amounted to EUR 28,774 thousand, was recognised in Gains on disposal of non-current assets in the Consolidated income statement for In October 2010, the IBERDROLA Group signed an agreement to sell to Empresas Públicas de Medellín E.S.P. all its indirect interests in the following Guatemalan companies: 49% of Distribuidora Eléctrica Centroamericana Dos, S.A., which in turn holds interests including 80.88% of Empresa Eléctrica de Guatemala, S.A. 100% of Gestión de Empresas Eléctricas, S.A. 51% of Generadores Hidroeléctricos, S.A. 3.12% of Hidronorte, S.A. This sale, completed prior to 31 December 2010, generated a cash inflow of EUR 232,912 thousand. The gain obtained of EUR 96,556 thousand is recognised under the Gain on disposal of non-current assets caption of the 2010 Consolidated income statement. 125

128 Furthermore, prior to 2010 year end, the IBERDROLA Group completed the sale of its interests in Connecticut Gas Corporation, The Southern Connecticut Gas Company and The Berkshire Gas Company, companies which provide natural gas-related services in the United States of America, for a total selling price of approximately USD 1,250 million. The gain obtained of EUR 62,600 thousand is recognised under the Gain on disposal of non-current assets caption of the 2010 Consolidated income statement. The companies sold through this transaction are not presented as discontinued operations in these Consolidated financial statements, as the IBERDROLA Group considers that they are not sufficiently relevant to be treated as such. The figures contributed by these companies to the 2010 Consolidated income statement are as follows: Thousands of euros México- Guatemala IBERDROLA USA Net revenue 216, ,690 Procurements (158,564) (268,551) Other operating expenses (12,249) (153,527) Operating profit 45,291 48,612 Financial results 1,145 (20,227) Profit before tax 46,436 28,385 Income tax expense (12,765) (9,752) Profit for the period 33,671 18,633 Non controlling interests (5,850) (66) Net profit for the year attributable to the parent 27,821 18,567 Additionally, on 29 December 2010 the IBERDROLA Group sold its stake in NEO-SKY 2002, S.A. The gain obtained of EUR 23,185 thousand is recognised under the Gain on disposal of non-current assets caption of the 2010 Consolidated income statement. Finally, in 2010, the Company disposed of 2.29% of Energías de Portugal, S.A. (Note 11.b). The capital gain, which amounted to EUR 60,464 thousand, was recognised in Gains on disposal of non-current assets in the Consolidated income statement for FINANCE INCOME The detail of Finance income in the Consolidated income statements for 2011 and 2010 is as follows: Thousands of euros Income from equity investments 42,431 38,717 Other interest and finance income 355, ,789 Other interest and finance income due to credits to associates companies 5,532 5,205 Gains on ineffective derivatives not designated as hedging instruments (Note 25) Estimated revaluation of provisions for pension plan (Note 22) 121, , , ,276 Exchange gains for financing activities 235, ,236 Other positive exchange gains 200, ,971 Capitalised finance costs 101, ,402 1,468,787 1,626,

129 Annual consolidated financial statements 2011 / Financial statements 39. FINANCE COST The detail of Finance costs in the Consolidated income statements for 2011 and 2010 is as follows: Finance and similar financing costs 1,480,587 1,352,286 Other finance and similar cost 89, ,740 Equity instruments having the substance of a financial liability (Note 20) Losses on ineffective derivatives not designated as hedging instruments (Note 25) 45,286 53,554 62, ,218 Exchange losses on financing activities 234, ,080 Other negative exchange losses 212, ,641 Discount to present value of other provisions (Note 23) 46,322 87,818 Finance costs attributable to the provisions for pensions and similar obligations (Note 22) 40. SWAPS 358, ,804 2,530,708 2,914,141 Thousands of euros In 2011 and 2010 the IBERDROLA Group did not carry out any material transaction other than through the delivery of cash. 41. BUSINESS COMBINATIONS 2011 On 19 January 2011, the IBERDROLA Group entered into a purchase agreement with AEI to acquire 99.68% of the share capital of ELEKTRO, a Brazilian company that provides electricity distribution services in the state of Sao Paulo and Mato grosso do Sul. The fulfilment of the purchase agreement was contingent upon compliance with certain conditions precedent, the last of which was fulfilled on 27 April 2011, the date on which the IBERDROLA Group acquired control over ELEKTRO (Note 2.c). The fair value of the assets and liabilities of ELEKTRO on 27 April 2011 and the corresponding carrying amounts immediately prior to the acquisition is as follows: Thousands of euros Fair value at 27 April 2011 Carrying amount prior to 27 April 2011 Intangible assets 1,869, ,139 Property, plant and equipment 8,821 8,821 Non-current financial assets 179, ,604 Non-current trade and other receivables 24,138 24,138 Deferred tax assets 74,395 74,395 Inventories 3,722 3,722 Current trade and other receivables 292, ,503 Tax receivables 49,016 49,016 Cash and cash equivalents 166, ,757 2,668,313 1,519,

130 Fair value at 27 April 2011 Thousands of euros Carrying amount prior to 27 April 2011 Non-current provisions 76,676 59,049 Non-current financial debt 346, ,788 Other non-current payables 19,523 19,523 Deferred tax liabilities 384,741 - Current financial debt 155, ,596 Current trade and other payables 271, ,033 1,254, ,989 Net assets 1,413, ,106 Non-controlling interests (2,162) - Goodwill arising from the acquisition 260,417 - Total acquisition cost 1,672,211 - The total cost of the business combination was EUR 1,672,211 thousand. The calculation of the cash outlay arising from the acquisition of ELEKTRO is as follows: Thousands of euros Cash and cash equivalents at ELEKTRO (166,757) Acquisition costs charged to the Consolidated income statement 6,255 Cash paid by IBERDROLA 1,672,211 1,511,709 ELEKTRO s contribution to the net revenue and consolidated net profit of the IBERDROLA Group from 27 April 2011 amounted EUR 1,122,331 thousand and EUR 122,629 thousand, respectively. If the ELEKTRO acquisition would have been at 1 January 2011, the contribution to the 2011 net revenue and consolidated net profit would have amounted EUR 1,671,453 thousand and EUR 176,845 thousand, respectively. This business combination was recognised in the 2011 Consolidated financial statements on a provisional basis, since at the time neither the valuations of the assets acquired and liabilities assumed nor the 12-month period established for such purpose in IFRS 3 Business combinations were concluded In 2010, the IBERDROLA Group did not enter into any business combinations considered material to these Consolidated financial statements. 128

131 Annual consolidated financial statements 2011 / Financial statements 42. CONTINGENT LIABILITIES The IBERDROLA Group companies are party to legal and out-of-court disputes arising as part of their ordinary course of business (ranging from conflicts with suppliers, clients, administrative or tax authorities, individuals, environmental activists, and employees). The IBERDROLA Group s legal advisors believe that these proceedings will not have a material impact on its financial position. The most important proceedings are described below: a) In February 2002 the California Public Utilities Commission and the California Energy Oversight Board, both US-based entities, filed a claim with the Federal Regulatory Energy Commission (FERC) against IRHI (IBERDROLA Group subsidiary). The claim alleges that the tariffs charged in accordance with the contract signed between IRHI and the California Department of Water Resources are unreasonable. In the event the FERC were to consider the tariffs charged to be unfair and unreasonable, IRHI could be ordered to reimburse the corresponding amounts received. However, the chance of losing these claims is considered to be very slight and the related amounts not significant. b) Céntrica Energía, S.L. has taken several legal proceedings against the Royal Decree 1556/2005, establishing the electricity tariff for 2006, as well as against Royal Decree 809/2006, establishing the electricity tariff for 2007 and the subsequent tariff regulation. Through these proceedings, Céntrica Energía, S.L. asked for the nullity of the guarantee of the tariff deficit to the electricity distributors and the repeal of the before mentioned royal decrees. The Supreme Court has rejected these proceedings for several reasons, including the consideration that the tariff shortfall returns to the companies the amounts they paid to their financing. Even though Céntrica Energía, S.L. has appealed to higher courts, no significant harm is expected for the IBERDROLA Group as a result of these further proceeding. c) There are various employments, civil and tax claims imposed on ELEKTRO and on different companies of the Neoenergy Group in Brazil. The IBERDROLA Group considers the chance of losing these claims to be very slight and the related amounts not significant. d) The US Environmental Protection Agency has filed claims against various subsidiaries of IBERDROLA USA for failing to comply with environmental issues. The IBERDROLA Group considers that the possibility of these claims being lost is remote and that the amount involved would not be significant. e) In Greece, a group of claimants (including landowner associations) challenged the licenses for the construction and operation of a 43.7 MW wind farm located in the Akarifnia and Opountii municipalities and owned by Rokas Aeoliki Komito, S.A. (100% owned by C. Rokas, S.A. and therefore 100% owned by the IBERDROLA Group). In response to this claim, in March 2006 the Greek High Administrative Court ordered precautionary measures involving the suspension of construction work on the wind farm. In January 2012, the Court has rejected these proceeding. Building permits must adapt to the new conditions of generation licence. f) The IBERDROLA Group is aware of several legal proceedings in relation to the voluntary tender offer by the IBERDROLA Group for all share capital of C. Rokas, S.A. and the subsequent squeeze out, which the IBERDROLA Group began subsequent to this voluntary tender offer, in which the plaintiffs are demanding a fair price of EUR for each C.Rokas, S.A. ordinary share and EUR for each preference share held, instead of the EUR 16 and EUR 11 for ordinary and preference shares, respectively, offered by the IBERDROLA Group in its voluntary tender offer and subsequently applied to the squeeze out. Both the voluntary tender offer and the squeeze out were authorised by the Greek Capital Markets Commission (CMC). The prices being claimed as fair consideration correspond to the highest prices that the IBERDROLA Group paid for C. Rokas, S.A. ordinary and preference shares, respectively, over the 12 months from the date when, according to the plaintiffs, it reached the threshold to mount the squeeze out offer. The amount of the claims that the IBERDROLA Group is aware of to date totals EUR 13,924 thousand in connection to economic losses and EUR 9,730 thousand for damages. Late payment interest and processing costs must be added to these amounts. 129

132 43. INTERESTS IN JOINT VENTURES The detail of the most significant economic aggregates in 2011 and 2010 relating to the main joint ventures involving the IBERDROLA Group is as follows: Thousands of euros 2011 Almaraz Nuclear and fossil-fuel plant joint property entities Trillo Vandellós Ascó Aceca A.I.E. Almaraz- Trillo A.I.E. Vandellós- Ascó Nuclenor, S.A. Bahía de Bizkaia Electricidad, S.A. Renewables subgroup joint ventures Neoenergía subgroup joint ventures Corporación IBV subgroup joint ventures (Note 18) Torre Iberdrola Intangible assets , , ,397, Property, plant and equipment Technical facilities 1,088,151 1,125,563 1,143, , , ,760 1,082,022 1,275, Other items of property, plant and equipment Non-current financial assets 502 6,780 15,031-1,811 2,606-2,463 36,334 25, , ,180 30,980 21,833 55,606 14,399 2,430 1,232 47,410 24, ,624 1,339,552-26,361 Current assets 240, , , ,693 5,181 65, , ,308 86, ,366 2,910,362-14,850 Total assets 1,359,695 1,275,025 1,346,251 1,041,209 10,410 73, , , ,380 1,550,249 9,074, ,402 Non-current liabilities 221, , , ,130 10,135 52,714 49, ,108 34, ,940 2,704, Current liabilities 554, , , ,768 8,613 20, ,541 29,922 60, ,641 1,412,963-27,959 Income 686, , , ,786 7, , , , , ,119 4,458,480-1,661 Expenses 507, , , ,565 17, , , , , ,450 3,769,103-2,320 Thousands of euros 2010 Almaraz Nuclear and fossil-fuel plant joint property entities Trillo Vandellós Ascó Aceca A.I.E. Almaraz- Trillo A.I.E. Vandellós- Ascó Nuclenor, S.A. Bahía de Renewables Bizkaia subgroup Electricidad, joint ventures S.A. Neoenergía subgroup joint ventures Corporación IBV subgroup joint ventures (Note 18) Torre Iberdrola Intangible assets , , ,274,245 46,396 - Property, plant and equipment Technical facilities 1,108,910 1,157,316 1,163, , , ,622 1,036, , Other items of property, plant and equipment Non-current financial assets 525 7,159 15,098-1,811 2,427-3,013 39,921 4, ,600 35,979-31,292 21,833 62,108 14,420 2, ,730 29, ,795 1,197,736 38,202 - Current assets 191,136 85,086 95,886 75,920 14,467 69, , ,502 72, ,626 2,842, ,444 - Total assets 1,331,863 1,271,394 1,336,417 1,008,104 19,674 76, , , ,157 1,415,644 8,928, ,021 - Non-current liabilities 219, , , ,838 9,698 56, , ,740 34, ,266 2,441,909 92,404 - Current liabilities 1,168,233 1,100,999 1,163, ,743 3,802 19, ,859 36,790 78, ,221 1,330, ,309 - Income 544, , , ,796 28, , , , , ,931 4,212,662 1,182,663 - Expenses 474, , , ,862 23, , , , , ,325 3,439,826 1,162,

133 Annual consolidated financial statements 2011 / Financial statements 44. GUARANTEE COMMITMENTS TO THIRD PARTIES AND OTHER CONTINGENT LIABILITIES 1. Guarantee Commitments to third parties IBERDROLA and its subsidiaries are required to provide the bank or corporate guarantees associated with the customary management of the Group s activities. These include guarantees provided to market operators to enable Iberdrola and its subsidiaries to participate in the energy markets. a) Market guarantees a.1) Bank guarantees Guarantees required by the clearing and settlement bodies of the electricity market, MEFF, OMEL and OMI Clear in which IBERDROLA guarantees mainly Iberdrola Generación, S.A.U. and subsidiaries, Iberdrola Distribución Eléctrica, S.A.U. and Iberdrola Comercializadora de Último Recurso, S.A.U. The most significant are: Counter-guarantees to the Mercado Español de Futuros Financieros Services, S.A. (MEFF), at 31 December 2011 and 2010, total EUR 226,900 thousand and EUR 150,300 thousand, respectively, to operate in that market. Counter-guarantees to the Operador del Mercado Ibérico de Energía, Polo Español, S.A. (OMEL), at 31 December 2011 and 2010, total EUR 153,372 thousand and EUR 135,372 thousand, respectively. Counter-guarantees to OMI Clear-Sociedade de Compensaçao de Mercados de Energía, S.A. at 31 December 2011 and 2010, total EUR 25,000 thousand and EUR 35,000 thousand, respectively. Counter-guarantees to OMEL at 31 December 2011 and 2010 total EUR 85,000 and EUR 80,500 thousand, to participate in CESUR auctions. a.2) Personal guarantees Guarantees from IBERDROLA under framework Guarantee and Support Agreement given to subsidiaries of Renovables Group in USA to third parties to cover risks of buying and trading electricity and gas. b) Guarantees for the exercise of an activity IBERDROLA guarantees other companies to secure fulfilment of obligations of subsidiary entities. These guarantees are for fulfilment of obligations deriving from the exercise of its business activities. b.1) Bank guarantees The most significant are: Guarantees of EUR 88,878 thousand to the CFE (Mexico) to secure electricity supplies and the operation of combined cycle plants (EUR 33,678 thousand at 31 December 2010). IBERDROLA has contracted guarantees for fulfilment of the various obligations deriving from the exercise of its business activities. b.2) Personal guarantees IBERDROLA, under framework Guarantee and Support Agreement, has contracted guarantees for subsidiaries of Renovables Group in USA to third parties to cover risks of buying and trading electricity and gas. c) Financial guarantees At 31 December 2011 and 2010, the IBERDROLA Group had provided guarantees to other companies, as detailed below: Thousands of euros Elcogas, S.A. 21,413 32,502 Tirme, S.A. 11,140 11,

134 IBERDROLA considers that the liabilities that might exceed the amount of the provisions recorded at 31 December 2011 and 2010, in this connection as a result of the guarantees provided at those dates would not be material. d) Real guarantees The IBERDROLA Group in compliance with the contractual obligations associated with loans received from banks, had fully or partially pledged some of its subsidiaries at 31 December 2011 and The detail, by company, of the shares pledged is as follows: Company Desarrollo de Energías Renovables de La Rioja, S.A. Carrying amount (thousands of euros) Percentaje of participation Carrying amount by percentage of IBERDROLA Group ownership (thousands of euros) Carrying amount (thousands of euros) Percentaje of participation Carrying amount by percentage of IBERDROLA Group ownership (thousands of euros) 26, % 10,803 24, % 8,093 Molinos del Cidacos, S.A. 29, % 9,446 27, % 6,975 Sistemas Energéticos Torralba, S.A. Sistemas Energéticos Mas Garullo, S.A. Sistemas Energéticos La Muela, S.A. Sistemas Energéticos del Moncayo, S.A. 6, % 3,942 7, % 3,570 5, % 2,752 5, % 2,165 6, % 3,096 7, % 3,130 5, % 4,074 5, % 3,454 Eólicas de Campollano, S.A. 26, % 6,686 25, % 5,134 Biovent Energía, S.A. 76, % 72,902 77, % 58,528 Energías Renovables de la Región de Murcia, S.A. 71, % 71,369 68, % 54,728 Molinos de La Rioja, S.A. 7, % 3,341 7, % 2,547 Energías Eólicas de Cuenca, S.A. 13, % 13,539 15, % 12,043 Iberdrola Energías Renovables de la Rioja, S.A. Energía de Castilla y León, S.A. Energie eolien Fitou, S.A.S. (shares of Perfect Wind) 91, % 57,935 92, % 47,012 4, % 4,078 4, % 2, % % 27 Eólica 2000, S.L. 4, % 2,071 3, % 1,495 Societá Energie Rinnovabili, S.p.A. Societá Energie Rinnovabili 1, S.p.A. Energías Renovaveis do Brasil, S.A. 7, % 3,775 (1,408) 39.92% (562) 9, % 4, % , % 43,183 45, % 36,121 La Rose des Vents Lorrains, SAS 1, % 829 (8,397) 40.80% (3,426) Ferme Eolienne Welling, SAS (7,791) 49.00% (3,818) (7,862) 39.20% (3,082) 132

135 Annual consolidated financial statements 2011 / Financial statements Company Carrying amount (thousands of euros) Percentaje of participation Carrying amount by percentage of IBERDROLA Group ownership (thousands of euros) Carrying amount (thousands of euros) Percentaje of participation Carrying amount by percentage of IBERDROLA Group ownership (thousands of euros) Iberdrola México, S.A. de C.V. 660, % 660, , % 528,671 Enertek, S.A. de C.V. 73, % 73,953 94, % 94,930 Iberdrola Energía del Golfo, S.A. de C.V. Iberdrola Energía Tamazunchale, S.A. de C.V. Iberdrola Energía Altamira, S.A. de C.V. Iberdrola Energía Monterrey, S.A. de C.V. Iberdrola Energía La Laguna, S.A. de C.V. 189, % 189, , % 213, , % 160, , % 166, , % 283, , % 286, , % 201, , % 210, , % 149, , % 139,374 Tirme, S.A. 52, % 10,463 43, % 8,673 Total 2,202,787 2,045,294 2,083,954 1,889, Commitments assumed In the normal course of its business the Group guarantees the fulfilment of contracts. These are generally personal guarantees and mainly relate to: - Commitments to purchase property, plant and equipment in which IBERDROLA provides guarantees to the subsidiaries of Iberdrola Renewables Holdings, Inc., specifically through the Guarantee and Support Agreement (GSA) for supplying turbines. - Commitments to PEMEX regarding supplies where IBERDROLA acts as guarantor for Iberdrola Energía Monterrey, S.A. de C.V. - The fulfilment of long-term maintenance (GSA) agreements with General Electric. IBERDROLA acts as guarantor for Iberdrola Energía Altamira, S.A. de C.V., Iberdrola Energía del Golfo, S.A de C.V. and Iberdrola Energía La Laguna, S.A de C.V. - The fulfilment of construction contracts by Iberdrola Ingeniería y Construcción, S.A.U. IBERDROLA estimates that any liabilities arising from the guarantees outstanding on commitments acquired at 31 December 2011 would be immaterial. In addition, at 31 December 2011 and 2010 there were items of property, plant and equipment in Iberdrola Inmobiliaria Group amounting EUR 101,380 thousand and EUR 142,764 thousand, respectively, that worked as guarantee for the fulfilment of the obligations arised from mortgage loans. Also, at 31 December 2011 and 2010, there were items of property, plant and equipment in IBERDROLA USA Group amounting EUR 670,995 thousand and EUR 580,369 thousand, respectively, that worked as guarantee for the fulfilment of the obligations arised from bonds issued in USA. 133

136 45. REMUNERATION OF BOARD OF DIRECTORS By-law stipulated remuneration Article 52 of IBERDROLA s By-laws provides that The Company shall assign, as an expense, an amount equal to up to two percent of the profit obtained in the year by the consolidated group, in the case that the profit of the year is enough to cover the needs of the legal reserve and other reserves that are required and after provide to shareholders, at least, a dividend of four percent of share capital for directors remuneration. On the proposal of the Appointments and Remuneration Committee, the Board of Directors has agreed to propose to shareholders at the General Meeting the assignment of by-law stipulated remuneration of EUR 28,045 thousand, equivalent to one percent of 2011 consolidated net profit, which is below the two percent ceiling established in article 52 of IBERDROLA s By-laws. The amounts of EUR 28,045 thousand and EUR 28,709 thousand assigned in this connection in 2011 and 2010, which have been registered under Staff costs in the Consolidated income statements (Note 34), break down as follows: a) Fixed Remuneration The fixed remuneration earned by members of the Board of Directors with a charge to the by-law stipulated remuneration amounted to EUR 4,604 thousand and EUR 4,754 thousand in 2011 and 2010, respectively. The fixed remuneration received by the board members depends on the duties assigned to them in the Board of Directors and its commissions, the detail of which is as follows: Thousands of euros Chairman Vice chairman Committee chairmen Committee members Board members

137 Annual consolidated financial statements 2011 / Financial statements The detailed fixed remuneration to the members of Board of Directors during 2011 and 2010 is detailed as follows: Fixed remuneration 2011 (*) Thousands of euros Fixed remuneration 2010 Chairman Mr. José Ignacio Sánchez Galán Vice-chairman Mr. Juan Luis Arregui Ciarsolo (1) Mr. Víctor de Urrutia Vallejo Committee chairmen Mr. Ricardo Álvarez Isasi Mr. José Ignacio Berroeta Echevarría Mr. Julio de Miguel Aynat (2) Committee members Mr. Sebastián Battaner Arias (3) Mr. Xabier de Irala Estévez Mr. Íñigo Víctor de Oriol Ibarra Ms. Inés Macho Stadler Mr. Braulio Medel Cámara Mr. José Luis Olivas Martínez Ms. Samantha Barber Ms. María Helena Antolín Raybaud Mr. Santiago Martínez Lage Directors that resigned during the year 2010 Mr. José Orbegozo Arroyo (1) - 24 Mr. Lucas María de Oriol López-Montenegro (1) - 24 Total remuneration 4,604 4,754 (*) Amounts accrued in 2011, not satisfied until the approval of 2011 Financial statements by the General Shareholders Meeting (1) Not renewed as a member of the Board of Directors on 26 March (2) Appointed chairman of the Audit and Risk Supervision Committee by the Board of Directors on 21 June 2011 meeting. (3) After completing his four year term as chairman of Audit and Risk Supervision Committee, he will continue being member of that committee, as the agreement adopted by the Board of Directors on 21 June Currently, all members of the Board of Directors of IBERDROLA, assume responsibility for any of the four committees with which the Board has. b) Attendance fees The attendance fees paid to the members of the Board of Directors with a charge to the by-law stipulated remuneration amounted to EUR 1,112 thousand and EUR 850 thousand in 2011 and 2010, respectively. 135

138 The attendance fees paid to the directors in 2011 and 2010 for attending the meetings of the Board of Directors and its commissions, based on the duties discharged in each case, were as follows: Chairman of Board of Directors and committees 4 4 Members of Board of Directors and committees 2 2 Thousands of euros Below are listed the attendance fees received by the members of the Board of Directors during 2011 and 2010, respectively: Thousands of euros Attendance fees 2011 Attendance fees 2010 Chairman Mr. José Ignacio Sánchez Galán Vice chairman Mr. Juan Luis Arregui Ciarsolo - 26 Mr. Víctor de Urrutia Vallejo Committee chairman Mr. Ricardo Álvarez Isasi Mr. José Ignacio Berroeta Echevarría Mr. Julio de Miguel Aynat Committee members Mr. Sebastián Battaner Arias Mr. Xabier de Irala Estévez Mr. Íñigo Víctor de Oriol Ibarra Mr. Inés Macho Stadler Mr. Braulio Medel Cámara Mr. José Luis Olivas Martínez Mr. Samantha Barber Ms. María Helena Antolín Raybaud Mr. Santiago Martínez Lage Directors that resigned during the year 2010 Mr. José Orbegozo Arroyo - 4 Mr. Lucas María de Oriol López-Montenegro - 4 Total attendance fees 1, c) Remuneration of the chief executive officer and chairman for discharging his executive duties The remuneration earned in 2011 and 2010 by the chairman and chief executive officer for his executive duties, and which is also recognised with a charge to the by-law stipulated remuneration for the year, is indicated below: Thousands of euros Fixed remuneration 2,250 2,250 Variable annual remuneration (*) 2,250 2,250 Compensation in kind (*) Amount relates variable remuneration of year 2010 and 2009, received in years 2011 and

139 Annual consolidated financial statements 2011 / Financial statements Annual variable compensation for 2011 may not exceed a maximum of EUR 3,250 thousand, in accordance with the report on director compensation policy approved by the General Shareholders Meeting of 27 May d) Provisions and guarantees provided by the Company for directors This account includes the following items: e) Others The premium incurred to cover benefits payable in the event of the death, disability and other insurance of current directors, amounting to EUR 1,943 thousand and EUR 3,152 thousand in 2011 and 2010, respectively. The aforementioned EUR 3,152 thousand were charged EUR 3,072 thousand to periods prior to 2010 by-law stipulated remuneration and EUR 80 thousand charged to the 2010 by-law stipulated remuneration. The premium paid to cover directors civil liability insurance in the same years, amounting to EUR 136 thousand and EUR 201 thousand in 2011 and 2010, respectively. The premium paid charged to the by-law stipulated remuneration for regularising the insurance policy, covering the vested pensions of retired Directors, amounting to EUR 442 thousand and EUR 228 thousand in 2011 and 2010, respectively. Further, in 1998, the Company externalised the pension system of a group of executives, including the chairman and the chief executive officer, through an insurance policy supplementing the public social security system. Where applicable, all contributions since his appointment as chairman have been charged against the by-law stipulated remuneration of previous years. In 2011, no new contribution was made to the aforementioned pension system. The expenses of the Board of Directors related to external services and other items during 2011 and 2010 amounted to EUR 761 thousand and EUR 923 thousand, respectively. Also, during 2011 there have been attended commitments previously acquired, chargeables under the previous years by-law stipulated remuneration approved by the General Shareholders Meeting, amounting to EUR 2,000 thousand. Therefore, the 2011 by-law stipulated remuneration is not affected. No charge for this concept were made in Within the limits authorized by the General Shareholders Meeting held on 27 May 2011 and on the proposal of the Appointments and Remuneration Committee, the Board of Directors agreed to recognize to the chairman and the chief officer executive, as exceptional and not consolidable, a bonus for the work carried out during 2011 amounting EUR 1,000 thousand, of which EUR 729 thousand have been charged to the by-law stipulated remuneration of prior periods and EUR 271 thousand to the by-law stipulated remuneration of The undistributed by-law stipulated remuneration for 2011 amounted to EUR 14,215 thousand, will be externalized to cover the obligations incurred by the Company to ensure them once the General Shareholders Meeting approves the Financial statement for 2011, in the event they should be materialized. At December 2011 and 2010 there is no loan or advance granted by the IBERDROLA Group to the members of the Board of Directors of IBERDROLA. 2. Remuneration for being in other Group companies Board of Directors The directors of IBERDROLA active on the Board of Directors of IBERDROLA Group subsidiaries accrued a combined total of EUR 65 thousand and EUR 151 thousand in attendance fees in 2011 and 2010, respectively. 3. Remuneration through the delivery of Company shares Section 2 of Article 52 of IBERDROLA s By-laws stipulates that Independently of the provisions of the foregoing paragraph, and subject always to the approval of the shareholders, the compensation of directors may also consist of the delivery of shares or options thereon, as well as a payment which takes as its reference the value of the Company s shares. 137

140 Consequently, compensation in the form of the delivery of Company shares or any other remuneration related to such shares is in addition to and independent of profit sharing. It is an autonomous form of compensation that is compatible with by-law stipulated profit sharing and in addition to the maximum of 2% of profits established in foregoing section 1, article 52 of the By-laws of IBERDROLA. a) Strategic Bonus As set forth in the report on director compensation policy approved by the General Shareholders Meeting of 27 May 2011, the Board of Directors, at the proposal of the Appointments and Remuneration Committee, has resolved to pay the Strategic Bonus, evaluating 74% fulfilment of targets. Accordingly, the chairman and chief executive officer shall receive a total of 1,110,000 shares of IBERDROLA to be distributed in the years 2011, 2012 and 2013, under Board of Directors terms. 4. Termination benefits In the event of termination of a non-executive director prior to the end of the period for which he was appointed not due to non-compliance attributable to such director and not due exclusively to his own will, the Company pays such director a termination benefit subject to the director s obligation to not accept positions on the governing bodies of companies in the energy sector or competing companies and to not participate in the management or advisory of the same in any other form. The amount of this benefit shall be equal to the annual guaranteed income of 90% of the annual compensation the director receives as of the date of termination. The benefit will be revisable on an annual basis by 2% for the period between the termination date and the end date of the term for which the director was appointed a member of the Board of Directors. In no case shall be foregoing period exceed the date of death of the director. The chairman of the Board of Directors and the chief executive officer have the right to receive termination benefit in the event of termination of the contractual relationship with the Company (including in the event they are not re-elected as director by the General Shareholders Meeting) or in the event of a change in control of the same. However, this shall not apply if the termination of the relationship is due to breach attributable to the either the chairman or chief executive officer. The amount of compensation due in such a case would be five annual salary payments charged to the remuneration allowance stipulated under article 52 of the By-Laws, both in the current year and, if applicable, to the funds allocated from remuneration allowance not distributed in prior years. From the year 2000, the Company began to include this type of clauses in contracts with its executives. Specifically, the contract guarantee clause of the chairman and the chief executive officer dates from the year 2001, when he was appointed vice-chairman and chief executive officer; in 2006, the clause was approved upon his appointment as chairman of the Board of Directors and chief executive officer. The objective is to achieve a level of loyalty among top-ranking executives that is effective and sufficient, and thereby avoid loss of experience and skills that could jeopardise achievement of strategic objectives. The limit shall be two years salary for new contracts with executive directors and senior executives. 5. By-law stipulated remuneration in 2012 At the proposal of the Appointments and Remuneration Committee, the Board of Directors unanimously resolved to freeze, for the 2012 fiscal year, directors compensation in the form of fixed annual remuneration based on position and meeting attendance fees, as it has done since INFORMATION REGARDING COMPLIANCE WITH ARTICLE 229 OF THE SPANISH COMPANIES LAW Pursuant to article 229 of the Spanish Companies Law, introduced by Royal Decree-Law 1/2010, of 2 July 2010, any direct or indirect conflicts of interest disclosed by the members of IBERDROLA s Board of Directors which may affect the Company are as follows: 138

141 Annual consolidated financial statements 2011 / Financial statements Directors Description of conflict of interest Mr. José Ignacio Sánchez Galán a. All resolutions related to the compensation of the chairman & chief executive officer have been adopted without his presence. b. The agreements related to the compensation commitments assumed by Iberdrola for the chairman and chief executive officer were adopted without the presence of Mr. José Ignacio Sánchez Galán. c. The resolutions related to the settlements of the Strategic Bonus and the new Strategic Bonus were adopted without the presence of the chairman and chief executive officer. Mr. Ricardo Álvarez Isasi a. The resolution whereby Mr. Ricardo Álvarez Isasi was appointed as chairman of the Corporate Social Responsibility Committee, was adopted without the presence of such director. Mr. Julio de Miguel Aynat a. Mr. Julio de Miguel Aynat left the meeting at which the resolution regarding his take over as chairman of the Audit and Risk Supervision Committee was approved on June 21, Mr. Sebastián Battaner Arias a. Mr. Sebastián Battaner Arias left the meeting at which the resolution regarding his re-election as a member of the Audit and Risk Supervision Committee was approved on June 21, 2011, in which he continues being member. Mr. Xabier de Irala Estévez a. The strategic, confidential and sensitive information related to the renewable energy business area has been exhibited without the presence of the director Mr. Xabier de Irala Estévez, in compliance with agreements adopted by the Board of Directors in May 17, 2011 and June 21, 2011 meetings. Mr. Íñigo Víctor de Oriol Ibarra a. The resolution whereby Mr. Íñigo Víctor de Oriol Ibarra was appointed as a member of the Nominating and Compensation Committee, was adopted without the presence of such director. Ms. Inés Macho Stadler a. The resolution whereby Ms. Inés Macho Stadler was appointed as a member of the Executive Committee was adopted without the presence of such director. Mr. Braulio Medel Cámara a. The resolution whereby Mr. Braulio Medel Cámara was appointed as a member of the Corporate Social Responsibility Committee was adopted without the presence of such director. Mr. José Luis Olivas Martínez a. All information relating to the supply and sale of gas and agreements with Medgaz, S.A. provided at meetings of the Board of Directors and of the Executive Committee of IBERDROLA was submitted without the presence of the proprietary Director Mr. José Luis Olivas Martínez, the individual representative of the Director Caja de Ahorros de Valencia, Castellón y Alicante, Bancaja (member of Banco Financiero y de Ahorros) at Enagás, S.A. b. In his capacity as individual representative proprietary director of Banco Financiero y de Ahorros S.A. (significant shareholder of Bankia S.A.) Mr. José Luis Olivas Martínez abstained from participating in the deliberations on the investment of the Company in the initial public offering (IPO) for the shares of Bankia, S.A. Ms. Samantha Barber a. The resolution whereby Ms. Samantha Barber was appointed as a member of the Corporate Social Responsibility Committee, was adopted without the presence of such director. Ms. María Helena Antolín Raybaud a. The resolution whereby Ms. María Helena Antolín Raybaud was appointed as a member of the Corporate Social Responsibility Committee, was adopted without the presence of such director. Mr. Santiago Martínez Lage a. The resolution whereby Mr. Santiago Martínez Lage was appointed as a member of the Audit and Risk Supervision Committee, was adopted without the presence of Mr. Santiago Martínez Lage. b. Mr. Santiago Martínez Lage left the meeting at which the resolution regarding his re-election as a member of the Audit and Risk Supervision Committee was approved on June 21, Likewise, all directors abstained from taking part in discussions regarding their type of directorships - executive, external proprietary and external independent. The members of the Board of Directors who hold positions as directors or executives in other group companies are as follows: Directors Company % of ownership Position or functions Mr. José Ignacio Sánchez Galán Scottish Power, Ltd. - Chairman 139

142 Additionally, following is a detail of the companies engaging in an activity that is identical, similar or complementary to the activity that constitutes the corporate purpose of IBERDROLA, in which the members of the Board of Directors own equity interests, and of the functions, if any, that they discharge thereat: Directors Company % of ownership Position or functions Mr. Íñigo Víctor de Oriol Ibarra Empresa de Alumbrado Director Eléctrico de Ceuta, S.A. Mr. José Luis Olivas Martínez Fomento de Construcciones y Contratas, S.A None Abertis Infraestructuras, S.A. Martinsa Fadesa, S.A None None Finally, pursuant article of the Spanish Companies Law, members of the Board of Directors reported there are no direct or indirect ownership positions held by them or related persons, in an identical, similar or complementary activity to the corporate purpose of IBERDROLA. 47. REMUNERATION OF SENIOR EXECUTIVES Senior executives are considered those executives who answer directly to the Company s Board of Directors, chairman and chief executive officer and, in all cases, the internal audit director, and any other directors to whom the Board of Directors recognized that status. At 31 December 2011 and 2010, the Company has 7 senior executives, respectively. The staff costs relating to senior executives amounting to EUR 8,363 thousand and EUR 7,681 thousand in 2011 and 2010, respectively, are recognised under Staff costs in the 2011 and 2010 Consolidated income statements. The remuneration and other compensation received by senior executives in 2011 and 2010 is detailed below: Thousands of euros Salary 6,433 5,285 Compensation in kind Payments to account not charged Social Security Pension plans Complementary policy accrued 1,172 1,632 Complementary policy risk Total staff costs 8,363 7,

143 Annual consolidated financial statements 2011 / Financial statements Number of shares Share-based payment plan of Iberdrola Renovables, S.A. (1) - 333,336 Share-based payment plan, strategic bonus (1) (2) 218,914 - (1) The amounts corresponding to the years 2011 and 2010 are both cases provisioned in prior years. (2) Partial settlement corresponding to 2011 of the strategic bonus , described in Note 19, aimed to members of the senior executives who will receive shares of IBERDROLA S.A., during the years 2011, 2012 and At 31 December 2011 and 2010, are provisioned EUR 7,092 thousand and 9,476 thousand, in order to ensure these commitments in subsequent periods. During 2011, EUR 2,354 thousand were contributed to the supplemental policy to the public Social Security system in order to grant benefits for past services. Senior executives who hold positions on the Board of Directors of IBERDROLA Group companies have received attendance fees amounting to EUR 61 thousand and EUR 117 thousand, during the years 2011 and 2010, respectively. The employment contracts of senior executives, including executive directors of the Company and its Group contain golden parachute clauses for cases of termination or changes of control. These contracts have been approved by the IBERDROLA s Board of Directors. IBERDROLA began to include such clause in the contracts of its executives since the 1990s; however, these contracts were signed in October The objective is to achieve a level of loyalty among top-ranking executives that is effective and sufficient for the management of IBERDROLA and thereby avoid the loss of experience and skills that could jeopardise the achievement of strategic objectives. In essence, these clauses recognise termination benefits based on the length of service at the Company of the members of the executive team, with annual salary payments ranging from a minimum of one to a maximum of five years.the new retribution policy for senior executives, approved on 14 December 2010, establishes that for new contracts with senior executives, the maximum will be two annuities. On the other hand, during the years 2011 and 2010 there were no other transactions with executives beyond the normal course of the business. 141

144 48. BALANCES AND TRANSACTIONS WITH OTHER RELATED PARTIES The transactions detailed below are specific to the IBERDROLA ordinary business activity and have been carried out on an arm s-length basis: Transactions carried out by IBERDROLA with major shareholders The most noteworthy transactions in 2011 and 2010 have been as follows: Type of transaction Bilbao Bizkaia Kutxa Banco Financiero y de Ahorros, S.A. Major shareholder Natixis Qatar Investment Authority (***) Grupo ACS Bilbao Bizkaia Kutxa Bancaja Natixis Thousands of euros Qatar Investment Authority (***) Expenses and incomes Financial expenses 21 5, Operating leases Receipt of services , ,240 Purchase of goods (finished or under construction) Financial income Receive dividend Lease income Rendering of services Other transactions Finance arrangements: borrowings and capital contributions (lender) Finance arrangements: borrowings and capital contributions (borrower) (*) Repayment or cancellation of loans and lease arrangements (lessee) Grupo ACS 5,098 3, , , ,890 10, , , ,992 21, Guarantees and deposits given Guarantees and deposits received Acquired Commitments - 381, Commitments/guarantees cancelled Dividends and other earnings distributed (**) ,665 60,076 53,093 1, ,485 70, , ,852 (*) Includes, inter alia, deposits, debt derivatives, promissory notes, current accounts, etc. (**) The amounts indicated as profit distributed or other dividends paid relate to the bonus issue rights arising from the capital increase at no charge to the shareholders, resolved by the General Shareholders Meeting in 2010, which were sold at a guaranteed fixed price in accordance with the conditions of the aforementioned increase. (***) The transactions of Qatar Investment Authority are considered since its entry in the shareholding of IBERDROLA at 30 March

145 Annual consolidated financial statements 2011 / Financial statements Transactions of other IBERDROLA Group companies with major shareholders The most noteworthy transactions in 2011 and 2010 were as follows: Type of transaction Bilbao Bizkaia Kutxa Banco Financiero y de Ahorros, S.A. Major shareholders Natixis Qatar Investment Authority (**) Grupo ACS Bilbao Bizkaia Kutxa Bancaja Natixis Thousands of euros Qatar Investment Authority (**) Expenses and incomes Financial expenses 763 1,794 1, , Operating leases Receipt of services , ,994 Purchase of goods (finished or under construction) , ,606 Financial income Rendering of services Grupo ACS Other transactions Finance arrangements: borrowings and capital contributions (lender) Finance arrangements: borrowings and capital contributions (borrower) (*) Finance arrangements: borrowings and capital contributions (lessor) Repayment or cancellation of loans and lease arrangements (lessee) 35, , , ,951 79,932 16, ,461 54,565 17, , , ,150 7,936 2, ,151 4,400 1, Given guarantees and deposits - 21, ,201 26, Received guarantees and deposits , Acquired commitments - 192, Cancelled Commitments and guarantees - 6, (*) Includes, inter alia, deposits, debt derivatives, promissory notes, current accounts, etc. (**) The transactions of Qatar Investment Authority are considered since its entry in the shareholding of IBERDROLA at 30 March Transactions with associates The detail of the transactions with associates which are related parties and have not been eliminated on consolidation (Note 2.b) is as follows: Purchases of assets Trade payables Trade receivables Sales and provided services Received services Purchases of assets Trade payables Trade receivables Thousands of euros Sales and provided services Received services GAMESA 603, ,600 31, ,985 2,000, ,927 18,772-50,580 Amara, S.A.U. 7,106 5,057 1,775 2,663 16,499 3,932 5,636 1,651 2,088 9,221 Anselmo León, S.A. 1,109 3, ,349-3, Medgaz, S.A. - 2,218 20, , Otras ,937 6,599 4,239 5,491 1,561 11,654 20,393 16,542 7, , ,705 60,909 7, ,598 2,006, ,496 41,053 18,630 67,

146 In 2006, the IBERDROLA Group reached an agreement with GAMESA for the supply of wind turbines with total capacity of 2,700 MW valued at over EUR 2,300 million. GAMESA has installed these turbines in Spain, the rest of Europe, Mexico and the USA. The contract extends to assembly and operational start-up as well as operating and maintenance services during the guarantee period. Also, in the same year, the IBERDROLA Group signed a purchase agreement with GAMESA for the acquisition of wind farms located in the USA with capacity of approximately 1,000 MW, the value of which is expected to range between USD 700 and 1,100 million depending on the total MW actually acquired and on production. In October 2005, the IBERDROLA Group reached an agreement with GAMESA for the acquisition of certain windpowered facilities with an installed capacity of 700 MW. This acquisition had taken place in the period from 2006 to 2009 for an amount of approximately EUR 900,000 thousand. The acquisition period may be extended to Meanwhile, on 13 June 2008, the governing bodies of the IBERDROLA Group and GAMESA entered into a strategic agreement to set up two vehicles to promote, develop and manage wind projects in Spain and abroad. On 23 September 2009, a new agreement was signed with GAMESA establishing the terms and structure for implementing the initial strategic agreement in two phases: - From the signing of the Strategic Agreement until 30 June 2011: the IBERDROLA Group will have preemptive rights on the wind developments without P.L.A. (permits, licenses and authorisations for the start of construction of a wind farm) that GAMESA intends to sell to third parties. - From 1 July 2011 to 31 December 2011: when there will be cross options; i.e., the IBERDROLA Group could potentially acquire GAMESA s wind development businesses. Alternatively, a joint venture may be set up to manage GAMESA s businesses and the IBERDROLA Group s wind projects. On 28 July 2011, IBERDROLA and GAMESA decided to terminate this agreement early and the aforementioned transactions were cancelled. On 21 December 2011, IBERDROLA and GAMESA Eólica, S.L.U (a company belonging to the GAMESA Group) entered into a framework agreement for the supply and maintenance of wind turbines whereby: - IBERDROLA undertakes to acquire from GAMESA a minimum amount of megawatts equal to 50% of the total fleet of on-shore wind turbines acquired by IBERDROLA for its renewables business unit during the term of the framework agreement. - This commitment will remain in force from 1 January 2013 until 31 December 2022 or until the number of megawatts acquired by IBERDROLA from GAMESA under the framework agreement reaches 3,800, whichever occurs first. - IBERDROLA and GAMESA will work closely together on new opportunities relating to the offshore wind power business. - IBERDROLA and GAMESA will work together in the area of maintenance services to enable GAMESA to become the benchmark company in the maintenance of wind farms for IBERDROLA's entire scope of activity. In particular, the two companies agreed: To establish new areas of study and analysis in the provision of maintenance services by GAMESA to IBERDROLA and, in particular, in the provision of maintenance services in the United States, the sale and installation of reliability improvements in wind turbines and the extension of their useful lives, and the conversion and upgrade of wind turbines. The extension of the current maintenance services, in the following terms and conditions: 144

147 Annual consolidated financial statements 2011 / Financial statements - To award GAMESA a maintenance service contract for installed capacity of 503 MW relating to G5X and G4X wind turbines out of warranty for a three-year period, for wind farms located in Albacete and Cuenca. - To commission GAMESA, over a three-year period as from 1 January 2012, the maintenance service for 584 G47 wind turbines (380 MW) and 1,108 G5X wind turbines (865.3 MW), which are currently covered by the operation and maintenance agreement of 1 January 2009, which expires on 31 December To extend the term of the operation and maintenance contract with regard to the maintenance of 1,156 G8X wind turbines (2,312 MW) out or warranty at wind farms in Spain and Portugal for an additional one-year period, until 31 December At 31 December 2011 and 2010, the IBERDROLA Group companies had provided the following guarantees to the related parties indicated in the following table: Related parties Bilbao Bizkaia Kutxa - 3,201 Bancaja 21,202 26,894 21,202 30,095 Transactions with directors and Senior Executives In 2011 and 2010 no amount was included as profit distributed or other dividends paid since they relate to the bonus issue rights arising from the capital increase at no charge to the shareholders, resolved by the General Shareholders Meeting on 27 May 2011 and 26 March 2010, and the amounts received by the members of the Board of Directors and Senior Executives were not sold to the Company at a guaranteed fixed price in accordance with the conditions of the aforementioned increase, these free rights were either converted into bonus shares or sold on the market. 49. FINANCIAL POSITION AND EVENTS AFTER 31 DECEMBER 2011 Financial position In order to finance the investments planned for 2012 and fund the cash needs arising from its financial position at 31 December 2011, the IBERDROLA Group will need to obtain financing of approximately EUR 1,941,000 thousand. As indicated in Note 24, at 31 December 2011 the IBERDROLA Group had undrawn loans and credit facilities of approximately EUR 7,244,459 thousand. As indicated in Note 17, at 31 December 2011 the IBERDROLA Group had EUR 260,996 thousand in cash and equivalents and EUR 1,830,011 thousand in short-term deposits. Subsequent to 2011 year-end and prior to the preparation of these Consolidated financial statements, the IBERDROLA Group agreed to loans of debt issuances of EUR 672,000 thousand. These amounts guarantee to cover the Group s cash needs for In January and February 2012, the Deficit Securitisation Fund of Electric System has issued some bonds amounting to EUR 2,427.1 million each. IBERDROLA has received from these securitizations EUR 732 million. On 17 January 2012 the second scrip issue took place as approved by the IBERDROLA General Shareholders Meeting on 27 May 2011, under agenda item six introducing the Iberdrola Flexible Dividend system. The final number of ordinary shares issued was 90,375,000, equivalent to 1.536% of IBERDROLA s share capital, at a nominal value of EUR 0.75 per share. During the period established, the owners of 2,990,489,954 bonus issue rights also accepted IBERDROLA s irrevocable commitment to buy back these rights. As a result, IBERDROLA bought back rights to a gross total of EUR 436,612 thousand. 145

148 50. FEES FOR SERVICES PROVIDED BY THE statutory AUDITOR The fees paid for financial audit services and other services provided to the various companies comprising the IBERDROLA Group relating to the audit by the statutory auditor and related companies in 2011 and 2010 were EUR 12,143 thousand and EUR 11,413 thousand, respectively. Auditors fees paid to other auditors who contributed to the audit of the various IBERDROLA Group companies in 2011 and 2010 were EUR 3,927 thousand and EUR 3,565 thousand, respectively. The statutory auditor and related companies provided other professional services to the various Group companies in 2011 and 2010 for EUR 156 thousand and EUR 372 thousand, respectively. The fees for other services provided by other auditors at Group companies audited by them in 2011 and 2010 amounted to EUR 347 thousand and EUR 718 thousand, respectively. 51. EARNING PER SHARE The reconciliation at 31 December 2011 and 2010, of the weighted average number of ordinary shares used in the calculation of the earning per share (Note 4.a) is as follows: Average number of shares during the year 5,906,121,395 5,634,512,000 Average number of treasury shares held (90,231,963) (39,098,718) Average number of shares outstanding 5,815,889,432 5,595,413,282 Basic earnings per share for 2011 and 2010 are as follows: Net profit for the year (thousands of euros) 2,804,545 2,870,924 Average number of shares outstanding 5,815,889,432 5,595,413,282 Basic earning per share (euros) As describe in Notes 19 and 49 of these Consolidated financial statements, in June 2011 and January 2012 the two scrip issues took place as the Iberdrola Flexible Dividend programme mentions. According to IAS 33, these scrip issues have had the correction of the earning per share corresponding 2010 year-end included in the Consolidated financial statements and they have been taken into account to calculate the 2011 year share basic and diluted profit. 146

149 Annual consolidated financial statements 2011 / Financial statements 52. PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS The Consolidated financial statements for the year ended 31 December 2011, were formally prepared by the directors of IBERDROLA on 20 February EXPLANATION ADDED FOR TRANSLATION TO ENGLISH These Consolidated financial statements are presented on the basis of IFRSs, as adopted by the European Union. Certain accounting practices applied by the Group that conform to IFRSs may not conform to other generally accepted accounting principles in other countries. 147

150 appendix i Set forth below is the detail of the proportion of direct or indirect ownership that IBERDROLA, S.A. holds in its subsidiaries. The proportion of decision-making votes in the bodies of these companies controlled by IBERDROLA corresponds basically with the proportion of ownership. INFORMATION RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Amara, S.A.U. Spain Services PWC E Anselmo León Distribución, S.L. Spain Energy Ernst & Young E Anselmo León Hidráulica, S.L. Spain Energy E Anselmo León, S.A.U. Spain Energy E Arrendamiento de Viviendas Protegidas Siglo XXI, S.L. Spain Real Estate F Bidelek Sareak, A.I.E. Spain Other Ernst & Young E Camarate Golf, S.A. Spain Real Estate Deloitte P Distribuidora de Energía Eléctrica Enrique García Serrano, S.L. Spain Energy E Eléctrica Conquense Distribución Eléctrica, S.A. Spain Energy Ernst & Young F Eléctrica Conquense, S.A. Spain Energy Ernst & Young F Electrodistribuidora Castellano-Leonesa, S.A. Spain Energy E Empresa Eléctrica del Cabriel, S.L. Spain Energy E Euskaltel, S.A. Spain Telecommunic PWC E Fiuna, S.A. Spain Real Estate PWC F Gamesa Corporación Tecnológica, S.A. Spain Holding PWC E Herederos María Alonso Calzada Venta de Baños, S.L. Spain Energy E Hidroeléctrica de San Cipriano de Rueda, S.L. Spain Energy E Iberdrola Distribución de Gas, S.A.U. Spain Gas Ernst & Young F Iberdrola Distribución Eléctrica, S.A.U. Spain Energy Ernst & Young F Iberdrola Financiación, S.A. Spain Instrumental Finance Ernst & Young F Iberdrola Finanzas, S.A.U. Spain Instrumental Finance Ernst & Young F Iberdrola Inmobiliaria Catalunya, S.A. Spain Real Estate PWC F Iberdrola Inmobiliaria, S.A. Spain Real Estate PWC F Iberdrola Inversiones 2010, S.A.U. Spain Holding F Investigación y Desarrollo de Equipos Avanzados, S.A.U. Spain Services E Las Pedrazas Golf, S.L. Spain Real Estate Deloitte P Norapex, S.A. Spain Real Estate PWC P Oceanic Center, S.L. Spain Real Estate PWC P Promotora la Castellana de Burgos, S.A. Spain Real Estate PWC F Sociedad Distribuidora de Electricidad de Elorrio, S.A. Subgrupo Corporación IBV Participaciones Empresariales Spain Energy E Spain Holding Deloitte P Torre Iberdrola, A.I.E. Spain Real Estate Ernst & Young P (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 148

151 Annual consolidated financial statements 2011 / Financial statements INFORMATION RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Urbanizadora Marina de Cope, S.L Spain Real Estate PWC P Valleverde Promotora Cántabro Leonesa, S.L. Spain Real Estate PWC P Vector M Servicios Marketing, S.A.U. Spain Marketing E Amara Brasil, Ltda. Brazil Marketing PWC F Lanmara, Ltda. Brazil Marketing E Iberdrola Inmobiliaria Real State Investment, EOOD Bulgaria Real Estate F Ergytech Inc. USA Purchase agent PWC F Iberdrola International, B.V. Netherlands Instrumental Finance Ernst & Young F Iberdrola Finance Ireland, Ltd. Ireland Instrumental Finance Ernst & Young F Iberdrola Re, S.A. Luxembourg Insurance Ernst & Young F Amergy Mexicana, S.A. de C.V. Mexico Marketing PWC F Amergy Servicios de México S.A. de C.V. Mexico Services PWC F Desarrollos Inmobiliarias Laguna del Mar, S.A. de C.V. Mexico Real Estate PWC F Promociones La Malinche, S.A. de C.V. Mexico Real Estate P Iberdrola Participaçoes SGPS, S.A. Portugal Holding Ernst & Young F Iberdrola Portugal Electricidade e Gás, S.A. Portugal Energy Ernst & Young F Torre Occidente Inmobiliaria, S.A. Portugal Real Estate Deloitte P Iberdrola Corporate Services Inc. USA Services Iberdrola Corporate Services UK, Ltd. United Kingdom Services

152 ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Iberdrola Generación subgroup Iberdrola Generación, S.A.U. Spain Energy Ernst & Young F Asociación Nuclear Ascó Vandellós II, A.I.E. Spain Energy Ernst & Young P Bahía de Bizkaia Electricidad, S.L. Spain Energy Ernst & Young P Centrales Nucleares Almaraz Trillo, A.I.E. Spain Energy Ernst & Young P Cobane, A.I.E. Spain Energy F Cofrusa Cogeneración, S.A. Spain Energy Others P Cogeneración Gequisa, S.A. Spain Energy PWC P Cogeneración Tierra Atomizada, S.A. Spain Energy Others P Enercrisa, S.A. Spain Energy KPMG P Energía Portátil de Cogeneración, S.A. Spain Energy Others P Energyworks Aranda, S.L. Spain Energy Ernst & Young F Energyworks Carballo, S.L. Spain Energy Ernst & Young F Energyworks Cartagena, S.L. Spain Energy Ernst & Young F Energyworks Fonz, S.L. Spain Energy Ernst & Young F Energyworks Milagros, S.L. Spain Energy Ernst & Young F Energyworks Monzón, S.L. Spain Energy Ernst & Young F Energyworks San Millán, S.L. Spain Energy Ernst & Young F Energyworks Villarrobledo, S.L. Spain Energy Ernst & Young F Energyworks Vit-Vall, S.L. Spain Energy Ernst & Young F Fudepor, S.L. Spain Energy PWC P Fuerzas Eléctricas de Navarra, S.A. Spain Energy Ernst & Young F Hidroeléctrica Ibérica, S.L. Spain Energy Ernst & Young F Hispagen Cogeneración, S.A. Spain Energy Others P Iberdrola Cogeneración, S.L.U. Spain Holding Ernst & Young F Iberdrola Comercialización Último Recurso, S.A. Spain Marketing Ernst & Young F Iberdrola Operación y Mantenimiento, S.A. Spain Services Ernst & Young F Iberdrola Servicios Energéticos, S.A.U. Spain Services Ernst & Young F Iberduero, S.L.U. Spain Energy F Intermalta Energía, S.A. Spain Energy Ernst & Young P Italcogeneración, S.A. Spain Energy P Medgaz, S.A. Spain Gas PWC E Navidul Cogeneración, S.A. Spain Energy P Nuclenor, S.A. Spain Energy Ernst & Young P Peninsular de Cogeneración, S.A. Spain Energy Ernst & Young P Productos y Servicios de Confort, S.A. Spain Services F S.E.D.A. Cogeneración, S.A. Spain Energy Ernst & Young P Tarragona Power, S.L. Spain Energy Ernst & Young F Subgrupo Tirme Spain Energy KPMG P Zirconio Cogeneración, S.A. Spain Energy P Iberdrola Generación-Energia e Serviços Portugal, Unipessoal Ltda. Portugal Services F Energyworks Venezuela, S.A. Venezuela Energy Deloitte E (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 150

153 Annual consolidated financial statements 2011 / Financial statements ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Iberdrola Energía subgroup Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Iberdrola Energía, S.A. Spain Holding Ernst & Young F Compañía Administradora de Empresas Bolivia, S.A. Bolivia Services PWC E Electricidad de La Paz, S.A. Bolivia Energy PWC E Empresa de Luz y Fuerza Eléctrica de Oruro, S.A. Bolivia Energy PWC E Empresa de Servicios, S.A. Bolivia Services PWC E Iberbolivia de Inversiones, S.A. Bolivia Holding PWC E Iberdrola de Inversiones, S.A. Bolivia Holding PWC F Afluente Geraçao de Energía Elétrica, S.A. Brazil Energy Ernst & Young P Afluente Transmissao de Energía Elétrica, S.A. Brazil Energy Ernst & Young P Baguari Geraçao de Energía Eléctrica, S.A. Brazil Energy Ernst & Young P Bahia PCH I, S.A. Brazil Energy Ernst & Young P Belo Monte Participaçoes, S.A. Brazil Energy Ernst & Young P Capuava Energy, Ltda. Brazil Energy Ernst & Young P Companhia de Eletricidade do Estado do Bahia, S.A. Brazil Energy Ernst & Young P Companhia Energética de Pernambuco, S.A. Brazil Energy Ernst & Young P Companhia Energetica do Rio Grande do Norte, S.A. Brazil Energy Ernst & Young P Companhia Hidreletrica Teles Pires, S.A. Brazil Energy Ernst & Young P Elektro Comercializadora de Energía Ltda. Brazil Energy Ernst & Young F Elektro Electricidade e Serviços, S.A. Brazil Energy Ernst & Young F Empresa Paranaense Comercializadora, Ltd. Brazil Holding Ernst & Young F Energetica Aguas da Pedra, S.A. Brazil Energy Ernst & Young P Energética Corumba III, S.A. Brazil Energy Others P Energyworks do Brasil, Ltda. Brazil Energy Ernst & Young F Geraçao Ceu Azul, S.A. Brazil Energy Ernst & Young P Geraçao CIII, S.A. Brazil Energy Ernst & Young P Goias Sul Geraçao de Energía, S.A. Brazil Energy Ernst & Young P Iberdrola Energía do Brasil, Ltda. Brazil Holding Ernst & Young F Itapebí Geraçao de Energía, S.A. Brazil Energy Ernst & Young P Neoenergía Investimentos, S.A. Brazil Services Ernst & Young P Neoenergía, S.A. Brazil Holding-Energy Ernst & Young P PCH Alto do Rio Grande, S.A. Brazil Energy P Rio PCH I, S.A. Brazil Energy Ernst & Young P S.E. Narandiba, S.A. Brazil Energy Ernst & Young P Subgrupo NC Energía Brazil Energy Ernst & Young P Termoaçu, S.A. Brazil Energy KPMG E Termopernambuco, S.A. Brazil Energy Ernst & Young P Empresa Eléctrica Lican, S.A. Chile Energy Ernst & Young F Iberdrola Energía Chile, Ltda. Chile Holding F Garter Properties, Inc. British Virgin Islands Instrumental Finance Ernst & Young P Cinergy, S.R.L. de C.V. Mexico Services Ernst & Young F 151

154 ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Electricidad de Veracruz, S.A. de C.V. Mexico Energy Ernst & Young F Enertek, S.A. de C.V. Mexico Energy Ernst & Young F Grupo Iberdrola Mexico, S.A. de C.V. Mexico Holding Iberdrola Energía Altamira de Servicios, S.A. de C.V. Mexico Services Ernst & Young F Iberdrola Energía Altamira, S.A. de C.V. Mexico Energy Ernst & Young F Iberdrola Energía del Golfo, S.A. de C.V. Mexico Energy Ernst & Young F Iberdrola Energía La Laguna, S.A. de C.V. Mexico Energy Ernst & Young F Iberdrola Energía Monterrey, S.A. de C.V. Mexico Energy Ernst & Young F Iberdrola Energía Tamazunchale, S.A. de C.V. Mexico Energy Ernst & Young F Iberdrola México, S.A. de C.V. Mexico Holding Ernst & Young F Iberdrola Servicios Monterrey, S.A. de C.V. Mexico Services Ernst & Young F Servicios Administrativos Tamazunchale, S.A. de C.V. Mexico Services Ernst & Young F Servicios de Operación Altamira, S.A. de C.V. Mexico Services Ernst & Young F Servicios de Operación La Laguna, S.A. de C.V. Servicios Industriales y Administrativos del Noreste, S.R.L. de C.V. Sistemas de Administración y Servicios, S.A. de C.V. Mexico Services Ernst & Young F Mexico Services Ernst & Young F Mexico Services PWC E Subgrupo Gas Natural México Mexico Gas PWC E (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 152

155 Annual consolidated financial statements 2011 / Financial statements (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Renewable business (**) Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Aerocastilla, S.A. Spain Energy F Biocantaber, S.L. Spain Energy P Bionor Eólica, S.A. Spain Energy P Biovent Energía, S.A. Spain Energy Ernst & Young F Cantaber Generación Eólica, S.L. Spain Energy F Ciener, S.A.U. Spain Energy Ernst & Young F Desarrollo de Energías Renovables de La Rioja, S.A. Spain Energy Ernst & Young P Desarrollos Energéticos del Val, S.L. Spain Energy P Ecobarcial, S.A. Spain Energy Ernst & Young P Elecdey Asturias, S.L. Spain Energy F Eléctra de Layna, S.A. Spain Energy Ernst & Young F Electra de Malvana, S.A. Spain Energy P Electra de Montánchez, S.A. Spain Energy P Electra Sierra de los Castillos, S.A. Spain Energy F Electra Sierra de San Pedro, S.A. Spain Energy F Eléctricas de la Alcarria, S.A. Spain Energy F Eme Hueneja Cuatro, S.L. Spain Energy F Energía de Castilla y León, S.A. Spain Energy Ernst & Young P Energía I Vent, S.A. Spain Energy F Energías Ecológicas de Fuencaliente, S.A. Spain Energy F Energías Ecológicas de La Palma, S.A. Spain Energy F Energías Ecológicas de Tenerife, S.A. Spain Energy F Energías Eólicas de Cuenca, S.A. Spain Energy Ernst & Young F Energías Renovables de la Región de Murcia, S.A. Spain Energy Ernst & Young F Energías Renovables de la Ría Muros, S.A. Spain Energy F Eólica 2000, S.L. Spain Energy Ernst & Young P Eólica de la Manchuela, S.A. Spain Energy F Eólica Montearagón, S.A. Spain Energy F Eólica de Campollano, S.A. Spain Energy KPMG P Eólicas de Euskadi, S.A.U. Spain Energy Ernst & Young F Eólicas Fuente Isabel, S.A. Spain Energy P Eosoria Aire, S.L. Spain Energy P Iberdrola Energía Marinas de Cantabria, S.A.U. Spain Energy F Iberdrola Energía Solar Puertollano, S.A. Spain Energy Ernst & Young F Iberdrola Renovables Galicia, S.A.U. Spain Energy Ernst & Young F Iberdrola Renovables Andalucía, S.A.U. Spain Energy Ernst & Young F Iberdrola Renovables Aragón, S.A.U. Spain Energy Ernst & Young F Iberdrola Renovables Asturias, S.A.U. Spain Energy F Iberdrola Renovables Canarias, S.A.U. Spain Energy Ernst & Young F Iberdrola Renovables Cantabria, S.A.U. Spain Energy F 153

156 (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Iberdrola Renovables Castilla La Mancha, S.A.U. Spain Energy Ernst & Young F Iberdrola Renovables Castilla y León, S.A. Spain Energy Ernst & Young F Iberdrola Renovables de Valencia, S.A.U. Spain Energy F Iberdrola Renovables Energía, S.L.U. (before Hidroelectrica Española, S.L.) Spain Holding Ernst & Young F Iberdrola Renovables La Rioja, S.A. Spain Energy Ernst & Young P Iberenova Promociones, S.A.U. Spain Energy Ernst & Young F Iberjalón, S.A. Spain Energy F Infraestructuras de Medinaceli, S.L. Spain Energy P Minicentrales del Tajo, S.A. Spain Energy Ernst & Young F Subgrupo Inversiones Financieras Perseo Spain Holding F Molinos de La Rioja, S.A. Spain Energy Ernst & Young P Molinos del Cidacos, S.A. Spain Energy Ernst & Young P Operador Logístico Agroenergético de Galicia, S.A. (OLA GALICIA) Spain Energy P Parque Eólico Cruz de Carrutero, S.L. Spain Energy F Parque Eólico Carriles, S.L.U. Spain Energy F Parque Eólico Cerro Mingarrón, S.L.U. Spain Energy F Parque Eólico Fuente Romana, S.L.U. Spain Energy F Parque Eólico La Cava, S.L.U. Spain Energy F Parque Eólico Maraña, S.L.U. Spain Energy F Parque Eólico Montalvo, S.L.U. Spain Energy F Peache Energías Renovables, S.A. Spain Energy P Producciones Energéticas Asturianas, S.L. Spain Energy F Producciones Energéticas de Castilla y León, S.A. Spain Energy Ernst & Young P Productora de Energía Eólica, S.A. Spain Energy F Saltos de Belmontejo, S.L. Spain Energy Ernst & Young P Sistema Eléctrico de Conexión Hueneja, S.L. Spain Energy Ernst & Young P Sistemas Energéticos Altamira, S.A.U. Spain Energy Ernst & Young F Sistemas Energéticos Alto del Abad, S.A.U. Spain Energy F Sistemas Energéticos Chandrexa, S.A. Spain Energy Ernst & Young F Sistemas Energéticos de Cádiz, S.A. Spain Energy F Sistemas Energéticos de Levante, S.A. Spain Energy F Sistemas Energéticos del Moncayo, S.A. Spain Energy Ernst & Young F Sistemas Energéticos La Gomera, S.A.U Spain Energy Ernst & Young F Sistemas Energéticos La Higuera, S.A. Spain Energy Ernst & Young F Sistemas Energéticos La Linera, S.A.U. Spain Energy Ernst & Young F Sistemas Energéticos La Muela, S.A. Spain Energy Ernst & Young F Sistemas Energéticos La Torrecilla, S.A.U. Spain Energy Ernst & Young F Sistemas Energéticos Los Lirios, S.A.U. Spain Energy F Sistemas Energéticos Mas Garullo, S.A. Spain Energy Ernst & Young F Sistemas Energéticos Nacimiento, S.A.U. Spain Energy Ernst & Young F (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 154

157 Annual consolidated financial statements 2011 / Financial statements (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Sistemas Energéticos Tacica de Plata, S.A.U. Spain Energy Ernst & Young F Sistemas Energéticos Torralba, S.A. Spain Energy Ernst & Young F Sistemes Energetics Conesa II, S.A.U. Spain Energy F Sistemes Energetics Savalla del Comtat, S.A.U. Spain Energy F Sociedad Gestora Parques Eólicos Andalucía, S.A. Spain Energy Ernst & Young F Somozas Energías y Recursos Medioambientales, S.A. (SOERMASA) Spain Energy Ernst & Young F Sotavento Galicia, S.A. Spain Energy E Ventolina Energías Renovables, S.L. Spain Energy F Vientos de Castilla y León, S.A. Spain Energy P Iberdrola Renovables Deutschland, Gmbh Germany Energy Ernst & Young F Iberdrola Renovables Offshore Deutschland, Gmbh Germany Energy Ernst & Young F Windpark Julicher Land Germany Energy Ernst & Young F Hazelwood Finance LP Australia Holding Ernst & Young - ScottishPower Hazelwood, Pty. Ltd. Australia Holding Ernst & Young F Energias Renováveis do Brasil, S.A. Brazil Energy Ernst & Young F Iberdrola Energias Renováveis do Brasil, S.A. Brazil Energy F Iberdrola Renewables Bulgaria, EOOD Bulgaria Energy F Iberdrola Renewables Canada, Ltd. Canada Holding F Aeolus Wind Power I, LLC. USA Holding Ernst & Young F Aeolus Wind Power II, LLC. USA Holding Ernst & Young F Aeolus Wind Power III, LLC. USA Holding Ernst & Young F Aeolus Wind Power IV, LLC. USA Holding Ernst & Young F Aeolus Wind Power V, LLC. USA Holding Ernst & Young F Aeolus Wind Power VI, LLC. USA Holding F Atlantic Renewable Projects II, LLC. USA Holding Ernst & Young F Atlantic Renewable Projects, LLC. USA Holding Ernst & Young F Atlantic Renewable Energy Corporation USA Holding Ernst & Young F Atlantic Wind LLC. USA Holding Ernst & Young F Aurora Solar LLC. USA Energy Ernst & Young F Baca Wind, LLC. USA Energy Ernst & Young P Bakeoven Wind LLC. USA Energy Ernst & Young - Barton Chapel Wind, LLC. USA Energy Ernst & Young F Barton Windpower, LLC. USA Energy Ernst & Young F Benson Wind Farm, LLC. USA Energy Ernst & Young F Big Horn II Wind Project LLC. USA Energy Ernst & Young F Big Horn Wind Project LLC. USA Energy Ernst & Young F Blue Creek Wind Farm, LLC. USA Energy Ernst & Young F Blue Northem, LLC. USA Energy Ernst & Young F Buffalo Ridge I, LLC. USA Energy Ernst & Young F 155

158 (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Buffalo Ridge II LLC. USA Energy Ernst & Young F Buffalo Ridge III LLC. USA Energy Ernst & Young F Caledonia Energy Partners, LLC. USA Energy Ernst & Young F Casselman Wind Power USA Energy Ernst & Young F Colorado Green Holdings LLC. USA Holding PWC F Colorado Wind Ventures LLC. USA Energy PWC F Columbia Community Windpower, LLC. USA Energy Ernst & Young F Conestoga Winds, LLC. USA Energy Ernst & Young F Copper Crossing Solar, LLC. USA Energy Ernst & Young F Deerfield Wind, LLC. USA Energy Ernst & Young F Dillon Wind, LLC. USA Energy Ernst & Young F Dry Lake Wind Power, LLC. USA Energy Ernst & Young F Dry Lake Wind Power II, LLC. USA Energy Ernst & Young F E.O. Resources, LLC. USA Energy Ernst & Young F Elk River Wind Farm, LLC. USA Energy Ernst & Young F Elm Creek Wind II, LLC. USA Energy Ernst & Young F Elm Creek Wind, LLC. USA Energy Ernst & Young F Enstor Columbia Gas Storage, LLC. USA Energy Ernst & Young F Enstor Houston Hub Storage and Transportation, Ltd. Enstor Grama Ridge Storage and Transportation, LLC. USA Energy Ernst & Young F USA Energy Ernst & Young F Enstor Inc. USA Holding Ernst & Young F Enstor Katy Storage and Transportation, LP. USA Energy Ernst & Young F Enstor Louisiana, LLC. USA Energy Ernst & Young F Enstor Operating Company, LLC. USA Holding Ernst & Young F Enstor Sundance Storage and Transportation, LLC. USA Energy Ernst & Young F Enstor Waha Storage and Transportation L.P. USA Energy Ernst & Young F Farmers City Wind, LLC. USA Energy Ernst & Young F Flat Rock Windpower, LLC. USA Energy Ernst & Young P Flat Rock Windpower II, LLC. USA Energy Ernst & Young P Flying Cloud Power Partners, LLC. USA Energy Ernst & Young F Freebird Assets, Inc. USA Holding Ernst & Young F Freebird Gas Storage, LLC. USA Energy Ernst & Young F Gemini Capital, LLC. USA Energy Ernst & Young F Goodland Wind, LLC. USA Energy Ernst & Young F Groton Wind, LLC. USA Energy Ernst & Young F Hamlin Wind, LLC. USA Energy Ernst & Young F Hardscrabble Wind Power, LLC. USA Energy Ernst & Young F Hay Canyon Wind, LLC. USA Holding Ernst & Young F (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 156

159 Annual consolidated financial statements 2011 / Financial statements (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Hays Wind, LLC. USA Energy Ernst & Young F Hazelwood Australia, Inc. USA Holding Ernst & Young F Hazelwood Ventures, Inc. USA Holding Ernst & Young F Heartland Wind, LLC. USA Holding Ernst & Young F Helix Wind Power Facility, LLC. USA Energy Ernst & Young F Iberdrola Energy Holdings, LLC. USA Holding Ernst & Young F Iberdrola Energy Service, LLC. USA Holding Ernst & Young F Iberdrola Renewables Holdings Inc. USA Holding Ernst & Young F Iberdrola Renewables, Inc. USA Holding Ernst & Young F Jordanville Wind, LLC. USA Energy Ernst & Young F Juniper Canyon Wind Power II, LLC. USA Energy Ernst & Young F Juniper Canyon Wind Power, LLC. USA Energy Ernst & Young F Kimberly Run Windpower, LLC. USA Energy Ernst & Young F Klamath Energy, LLC. USA Energy Ernst & Young F Klamath Generation, LLC. USA Energy Ernst & Young F Klondike Wind Power II, LLC. USA Energy Ernst & Young F Klondike Wind Power III, LLC. USA Energy Ernst & Young F Klondike Wind Power, LLC. USA Energy Ernst & Young P Lakeview Cogeneration, LLC. USA Energy Ernst & Young F Land Holding Wind, LLC. USA Energy Ernst & Young F Laramie County Wind, LLC. USA Energy Ernst & Young F Leaning Juniper Wind Power II, LLC. USA Energy Ernst & Young F Lempter Wind, LLC. USA Energy Ernst & Young F Locust Ridge II, LLC. USA Energy Ernst & Young F Locust Ridge Wind Farms, LLC. USA Energy Ernst & Young F Manzana Wind, LLC. USA Energy Ernst & Young F Midland Wind, LLC. USA Energy Ernst & Young F Minndakota Wind, LLC. USA Energy Ernst & Young F Montague Wind Power Facility, LLC. USA Energy Ernst & Young F Moraine Wind II, LLC. USA Energy Ernst & Young F Moraine Wind, LLC. USA Energy Ernst & Young F Mount Pleasant Wind, LLC. USA Energy Ernst & Young F Mountain View Power Partners III, LLC. USA Energy Ernst & Young F New England Wind, LLC. USA Energy Ernst & Young F New Harvest Wind Project, LLC. USA Energy Ernst & Young F Northem Iowa WindPower II, LLC. USA Energy Ernst & Young F Nth Power Technologies Fund I L.P. USA Energy Ernst & Young - Otter Creek Wind Farm, LLC. USA Energy Ernst & Young F Pacific Harbor Capital, Inc. USA Others Ernst & Young F Pacific Klamath Energy, Inc. USA Holding Ernst & Young F 157

160 (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Pacific Solar Investments, INC. USA Energy Ernst & Young F Pacific Wind Development, LLC. USA Energy Ernst & Young F Pebble Springs Wind LLC. USA Energy Ernst & Young F Peñascal Wind Power, LLC. USA Energy Ernst & Young F Peñascal II Wind Project, LLC. USA Energy Ernst & Young F Phoenix Wind Power, LLC. USA Energy Ernst & Young F PPM Colorado Wind Ventures, INC. USA Energy Ernst & Young F PPM Roaring Brook, LLC. USA Energy Ernst & Young F PPM Technical Services, LLC. USA Services Ernst & Young F PPM Wind Energy LLC. USA Holding Ernst & Young F PPM Wind Management, LLC. USA Holding Ernst & Young F Providence Heights Wind, LLC. USA Energy Ernst & Young F Rugby Wind, LLC. USA Energy Ernst & Young F San Luis Solar, LLC. USA Energy Ernst & Young F ScottishPower Financial Services, Inc. USA Holding Ernst & Young F ScottishPower Group Holdings Company USA Holding Ernst & Young F ScottishPower International Group Holdings Company USA Energy Ernst & Young F Shiloh I Wind Project LLC. USA Energy Ernst & Young F South Chestnut, LLC. USA Energy Ernst & Young F Spring Creek Wind, LLC. USA Energy Ernst & Young F Start Point Wind Project, LLC. USA Energy Ernst & Young F Streator Cayuga Ridge Wind Power USA Energy Ernst & Young F Streator Deer Run Wind Farmer, LLC. USA Energy Ernst & Young F Trimont Wind I, LLC. USA Energy Ernst & Young F Tule Wind LLC. USA Energy Ernst & Young F Twin Buttes Wind, LLC. USA Holding Ernst & Young F Union County Wind, LLC. USA Energy Ernst & Young F Wauneta Wind, LLC. USA Energy Ernst & Young F West Valley Leasing Company, LLC. USA Energy Ernst & Young F Wilder Wind, LLC. USA Energy Ernst & Young F Winnebago Windpower, II, LLC. USA Energy Ernst & Young F Winnebago Windpower, LLC. USA Energy Ernst & Young F Ousaúhing Raisner, A.S. Estonia Energy F Ailes Marine, S.A.S. France Energy F Energie Éolienne Fitou, S.A.S. France Energy Others F Energie Rose des Vents, S.A.S. France Energy Others F Eolia Mer du Nord, S.A.S. France Energy KPMG F Eoliennes de Pleugriffet, S.A.S. France Energy Others P Ferme Eolienne de Welling, S.A.S. France Energy Ernst & Young P Haute Marne Energies, S.A.S. France Energy Ernst & Young F Iberdrola Renovables France, S.A.S. France Energy Ernst & Young F (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 158

161 Annual consolidated financial statements 2011 / Financial statements (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Jazeneuil Energies, S.A.S. France Energy Others F La Rose des Vents Lorrains, S.A.S. France Energy Others F Le Moulins de la Somme, S.A.R.L. France Energy P Perfect Wind, S.A.S. France Energy Others F Perle Marine, S.A.S. France Energy F Sefeosc, S.A.S. France Energy Ernst & Young P Societe d Explotacion du Parc Eolien Talizat Rezentieres II, S.A.S. France Energy Deloitte P C. Rokas Industrial Commercial Company, S.A. Greece Energy Ernst & Young F PPC Renewables Rokas, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Achladopotopos, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Viotia, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Cyprus, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Evia, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Komito, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Kozani I, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Kriti, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Macedonia I, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Macedonia II, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Peloponnisos I, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Peloponnisos II, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Thraki II, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Thraki III, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Thraki, S.A. Greece Energy Ernst & Young F Rokas Aeoliki Vorios Ellas I, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Vorios Ellas II, Ltd. Greece Energy Ernst & Young F Rokas Aeoliki Zarakes, S.A. Greece Energy Ernst & Young F Rokas Aeoliki,S.A. Greece Energy Ernst & Young F Rokas Aeolos,Ltd. Greece Energy Ernst & Young F Rokas Construction, S.A. Greece Energy Ernst & Young F Rokas Energy, S.A. Greece Energy Ernst & Young F Rokas Hidroelectric, S.A. Greece Energy Ernst & Young F Rokas Iliaki I, S.A. Greece Energy Ernst & Young F Rokas Iliaki II, Ltd. Greece Energy Ernst & Young F Iberdrola Renovables Magyarorszag Megujulo Hungary Energy Ernst & Young F Kaptar Széleromu, KFT. Hungary Energy Ernst & Young F Mistral Energetika Villamosenergia - Termelo, KFT. Hungary Energy Ernst & Young F Vento Energetika Villamosenergia - Termelo, KFT. Hungary Energy Ernst & Young F Eólica Lucana, S.R.L. Italy Energy F Iberdrola Renovables Italia, S.p.A. Italy Energy F 159

162 (**) DATED 8 JULY TOOK PLACE THE ABSORPTION BY IBERDROLA, S.A. OF THE COMPANY IBERDROLA RENOVABLES, S.A., SO THE FOLLOWING COMPANIES ARE AFFILIATED, DIRECTLY O INDIRECTLY, BY IBERDROLA, S.A. Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Societa Energie Rinnovabili I, S.p.A. Italy Energy Ernst & Young P Societa Energie Rinnovabili, S.p.A. Italy Energy Ernst & Young P BII NEE Stipa Energía Eólica, S.A. de C.V. Mexico Energy Ernst & Young F Energías Renovables Venta III, S.A. de C.V. Mexico Energy F Iberdrola Renovables México, S.A. de C.V. Mexico Energy Ernst & Young F Parques Ecológicos de México, S.A. de C.V. Mexico Energy Ernst & Young F Servicios Operación Eoloeléctrica de México, S.A. de C.V. Mexico Services Ernst & Young F Iberdrola Renewable Polska, S.P. ZOO Poland Energy Ernst & Young F Aeolia Produçao de Energía, S.A. Portugal Energy Ernst & Young F Eoenergi Energía Eólica, S.A. Portugal Energy Ernst & Young F Iberdrola Renewable Portugal, S.A. Portugal Energy Ernst & Young F P.E. Serra do Alvao, S.A. Portugal Energy Ernst & Young F Coldham Windfarm, Ltd. United Kingdom Energy Ernst & Young F East Anglia Offshore Wind, Ltd. United Kingdom Energy Ernst & Young P East Anglia One Ltd. United Kingdom Energy P Morecambe Wind Ltd. United Kingdom Energy P Scottish Power Renewable UK, Ltd. United Kingdom Energy F Scottish Power Renewables Woods Ltd. United Kingdom Energy F Scottish Power Renewable Energy Holdings Ltd. United Kingdom Holding Ernst & Young F Scottish Power Renewable Energy, Ltd. United Kingdom Holding Ernst & Young F Eolica Dobrogea One, S.R.L. Romania Energy Ernst & Young F Iberdrola Renewables Romania, S.R.L. Romania Energy F Eolica Dobrogea (Schweiz) I, GmbH. Switzerland Energy F Iberdrola Yenilenebilir Enerji Turkey Energy F (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 160

163 Annual consolidated financial statements 2011 / Financial statements ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Iberdrola Ingeniería y Construcción subgroup Iberdrola Ingeniería y Construcción, S.A.U. Spain Engineering and construction PWC F Adicora Servicios de Ingeniería, S.L. Spain Engineering F Empresarios Agrupados Internacional, S.A. Spain Engineering PWC E Empresarios Agrupados, A.I.E. Spain Engineering PWC E Ghesa Ingeniería y Tecnología, S.A. Spain Engineering PWC E Iberdrola Ingeniería de Explotación, S.A.U. Spain Engineering F Ingeniería, Estudios y Construcciones, S.A. Spain Engineering F Keytech Sistemas Integrales, S.A. Spain Engineering E Iberdrola Engineering and Construction Germany Gmbh. Germany Engineering F Iberdrola Construçao e Serviços, Ltd. Brazil Engineering F Iberdrola Consultoría e Serviços do Brasil, Ltd. Brazil Engineering F Iberdrola Engineering and Construction Bulgaria Iberdrola Engineering and Construction Middle East, Ltd. Iberdrola Energy Proyect, Inc. (before Iberdrola Engineering and Construction US, Inc) Bulgaria Engineering F Dubai Inactive F USA Engineering F IEC California, Inc. USA Engineering F Iberdrola Ingenierie et Construction, S.A.S.U. France Engineering Iberinco Hellas Techniki kai Kataskevastiki EPE Greece Engineering F Iberdrola Magyarország Mernoki es Epitö Korlatolf Hungary Engineering PWC F Iberdrola Ingegnieria e Costruzioni Italia, SRL Italy Engineering F Iberdrola Engineering and Construction Kenya Int. Kenya Inactive F Enermón S.A. de C.V. Mexico Engineering PWC F Iberdrola Ingeniería y Construcción México, S.A. de C.V. Mexico Engineering and construction PWC F Iberservicios, S.A. de C.V. Mexico Engineering PWC F Iberdrola Engineering and Construction Poland, SP. Iberdrola Engenhaaria e Construçao Portugal, Unipessoal Lda. Iberdrola Engeneering and Construction Networks, Ltd. Iberdrola Engineering and Construction UK, Ltd. Iberdrola Engineering and Construction Ro, SRL. Iberdrola Inzhiniring I Stroiteistvo, Ltd. Liability Company Iberdrola Ingeniería y Construcción Venezuela, S.A. Poland Engineering PWC F Portugal Engineering F United Kingdom Engineering PWC F United Kingdom Engineering PWC F Romania Engineering F Russia Engineering PWC F Venezuela Engineering PWC F 161

164 ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Scottish Power subgroup Scottish Power Ltd. United Kingdom Holding Ernst & Young F Iberdrola Canada Energy Services, Ltd. Canada Energy Ernst & Young F ScottishPower Storage Holdings, Ltd. Canada Energy F Damhead Creek Finance, Ltd. Cayman Islands Inactive F ScottishPower Finance (US) Inc. USA Finance Ernst & Young F ScottishPower Inc. USA Inactive F Dornoch International Insurance, Ltd. Ireland Insurance Ernst & Young F ScottishPower Insurance, Ltd. Man Island Insurance Ernst & Young F Caledonian Gas, Ltd. United Kingdom Inactive F Camjar Plc. United Kingdom Inactive F Clubcall Telephone Services, Ltd. United Kingdom Inactive F Clubline Services, Ltd. United Kingdom Inactive F Demon Internet, Ltd. United Kingdom Inactive F Emeral Power Generation, Ltd. United Kingdom Inactive F Genscot, Ltd. United Kingdom Inactive Ernst & Young F Manweb Contracting Services, Ltd. United Kingdom Inactive F Manweb Energy Consultants, Ltd. United Kingdom Inactive F Manweb Gas, Ltd. United Kingdom Inactive F Manweb Generation Holdings, Ltd. United Kingdom Inactive F Manweb Holdings, Ltd. United Kingdom Inactive F Manweb, Ltd. United Kingdom Inactive F Manweb Nominees, Ltd. United Kingdom Inactive F Manweb Pensions Trustee, Ltd. United Kingdom Inactive F Manweb Services, Ltd. United Kingdom Energy Ernst & Young F Manweb Share Scheme Trustees, Ltd. United Kingdom Inactive F N.E.S.T. Makers, Ltd. United Kingdom Energy PWC E NGET/SPT Upgrades, Ltd. United Kingdom Energy E Scotash, Ltd. United Kingdom Others Ernst & Young E Scottish Power Trustees, Ltd. United Kingdom Inactive F Scottish Power UK Group, Ltd. United Kingdom Holding Ernst & Young F Scottish Power UK Holdings, Ltd. United Kingdom Holding Ernst & Young F Scottish Power UK Plc United Kingdom Holding Ernst & Young F ScottishPower (DCL), Ltd. United Kingdom Energy Ernst & Young F ScottishPower (DCOL), Ltd. United Kingdom Operational services Ernst & Young F ScottishPower (SCPL), Ltd. United Kingdom Energy Ernst & Young F ScottishPower (SOCL), Ltd. United Kingdom Operational services Ernst & Young F ScottishPower Energy Management (Agency), Ltd. United Kingdom Services Ernst & Young F ScottishPower Energy Management, Ltd. United Kingdom Energy Ernst & Young F ScottishPower Energy Retail, Ltd. United Kingdom Energy Ernst & Young F ScottishPower Generation Holdings, Ltd. United Kingdom Energy Ernst & Young F (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 162

165 Annual consolidated financial statements 2011 / Financial statements ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) ScottishPower Investments, Ltd. United Kingdom Holding Ernst & Young F ScottishPower NA 1, Ltd. United Kingdom Holding Ernst & Young F ScottishPower NA 2, Ltd. United Kingdom Holding Ernst & Young F ScottishPower Overseas Holdings, Ltd. United Kingdom Holding Ernst & Young F ScottishPower Share Scheme Trustees, Ltd. United Kingdom Inactive F ScottishPower Sharesave Trustees, Ltd. United Kingdom Inactive F SMW, Ltd. United Kingdom Energy Ernst & Young F SP Dataserve, Ltd. United Kingdom Data management Ernst & Young F SP Distribution, Ltd. United Kingdom Energy Ernst & Young F SP Finance, Ltd. United Kingdom Inactive F SP Finance 2, Ltd. United Kingdom Instrumental Finance Ernst & Young F SP Gas, Ltd. United Kingdom Inactive Ernst & Young F SP Gas Transportation Cockenzie, Ltd. United Kingdom Inactive F SP Gas Transportation Hatfield, Ltd. United Kingdom Inactive F SP Manweb Plc. United Kingdom Energy Ernst & Young F SP Network Connections, Ltd. United Kingdom General Use connections F SP Power Systems, Ltd. United Assets management Kingdom services Ernst & Young F SP Transmission, Ltd. United Kingdom Energy Ernst & Young F SPD Finance UK, Plc. United Kingdom Finance F SPPT, Ltd. United Kingdom Inactive F Sterling Collections, Ltd. United Kingdom Inactive F Teledata (Holdings), Ltd. United Kingdom Inactive F Teledata (Outsourcing), Ltd. United Kingdom Inactive F Teledata Scotland, Ltd. United Kingdom Inactive F Telephone Information Services Plc. United Kingdom Inactive F Telephone International Media Holding, Ltd. United Kingdom Inactive F Telephone International Media, Ltd. United Kingdom Inactive F The CallCentre Service Limited United Kingdom Inactive F The Information Service, Ltd. United Kingdom Inactive F TIM, Ltd. United Kingdom Inactive F Scottish Power Generation Holdings Ltd. (SP Wholesale & Retail Holdings Ltd. called before) United Kingdom Energy Scottish Power Energy Networks Holdings United Kingdom Energy

166 ADDITIONAL INFORMATION ON THE YEAR 2011 RELATED TO IBERDROLA S SUBSIDIARIES, MULTIGROUP COMPANIES, ASSOCIATES AND INVESTEES Proportion of direct or indirect ownership Company Location Line of business Auditor Method (*) Iberdrola USA subgroup Iberdrola USA, Inc. USA Holding PWC F Carthage Energy, LLC. USA Generation F Cayuga Energy, Inc. USA Energy PWC F Central Maine Power Company USA Electricity PWC F CMP Group, Inc. USA Holding PWC F CNE Energy Services Group, LLC. USA Services PWC F CNE Peaking, LLC. USA Gas F CNE Power I, LLC. USA Energy F Chester SVC Partnership USA Electricity P Energetix, Inc. USA Marketing PWC F Iberdrola USA Enterprises, Inc. USA Holding PWC F Iberdrola USA Management Corporation USA Services PWC F Iberdrola USA Solutions, Inc. USA Marketing PWC F LNG Marketing Partners USA Holding PWC F LNG Storage Partners USA Holding PWC F Maine Electric Power Company, Inc. USA Energy F Maine Natural Gas Corporation USA Gas PWC F MaineCom Services USA Telecomunic PWC F New Hampshire Gas Corporation USA Gas PWC F New York State Electric & Gas Corporation USA Electricity-Gas PWC F NORVARCO USA Holding F NYSEG Solutions, Inc. USA Marketing F PEI Power II, LLC. USA Energy F RGS Energy Group, Inc. USA Holding PWC F Rochester Gas and Electric Corporation USA Electricity-Gas PWC F Seneca Lake Storage, Inc. USA Gas PWC F South Glens Falls Energy, LLC. USA Energy F TEN Companies, Inc. USA Energy F TEN Transmission Company USA Gas F The Energy Network, LLC. USA Holding PWC F The Hartford Steam Company USA Other lines of business F The Union Water Power Company USA Services PWC F Total Peaking Services, LLC. USA Gas F (*) The consolidation method is detailed as follows: F: Full Consolidation E: Integration by the Equity Method P: Proportional Consolidation 164

167 Annual consolidated financial statements 2011 / Financial statements MOST REPRESENTATIVE GROUP COMPANIES AND ASOCIATED AND INVESTEES IN WHICH IBERDROLA HOLDS PROPORTION OF SHARE CAPITAL OF MORE THAN 3%, CLASSIFIED AS UNRESTRICTED INVESTMENTS FOR SALE IN 2011 AND 2010 Proportion of direct or indirect ownership Company Location Line of business Cartera Nuevo Santa Teresa, S.L. Spain Real Estate Cartera Park, S.A. Spain Energy Ciudad Real Aeropuertos, S.L. Spain Services Corporación Empresarial de Extremadura, S.A. Spain Business development activity Hidrola I, S.L.U. Spain Inactive Iberdrola Corporación, S.A. Spain Services Iberdrola Infraestructuras y Servicios de Redes, S.A. Spain Telecommunic Iberdrola Redes, S.A. Spain Holding Inkolan, A.I.E. Spain Services Ocoval, A.I.E. Spain Services OMEL Spain Energy NNB Development Company Belgium Services Nugeneration, Ltd. United Kingdom Services Iberdrola Generación subgroup Elcogás, S.A. Spain Energy Oficina Cambio de Suministrador, S.A. Spain Services Palencia 3 Investigación, Desarrollo y Explotación, S.L. Spain Services Tecnatom, S.A. Spain Services OMIP, SGPS. Portugal Energy Iberdrola Energie Deutschland, Gmbh Germany Services Iberdrola Energie France, S.A.S. France Services Iberdrola Energía Italia, S.R.L. Italy Services Iberdrola Energía Polska Spolka, Z.O.O. Poland Energy Iberdrola Energie Ceska Republika, S.R.O. Czech Republic Energy Iberdrola Energie Romania, S.R.L. Romania Energy Iberdrola Energía subgroup Energías de Portugal, S.A. Portugal Energy Renewable business Molinos de Linares, S.A. Spain Energy Rioglass Photovoltaica, S.A. Spain Energy Renovables de la Ribera, S.L. Spain Energy Sogecam Industrial, S.A. Spain Services Arizona 1 Energía Renovável, S.A. Brazil Energy Caetité 1 Energía Renovável, S.A. Brazil Energy Caetité 2 Energía Renovável, S.A Brazil Energy Caetité 3 Energía Renovável, S.A Brazil Energy Calango 1 Energía Renovável, S.A. Brazil Energy Calango 2 Energía Renovável, S.A. Brazil Energy Calango 3 Energía Renovável, S.A. Brazil Energy Calango 4 Energía Renovável, S.A. Brazil Energy

168 MOST REPRESENTATIVE GROUP COMPANIES AND ASOCIATED AND INVESTEES IN WHICH IBERDROLA HOLDS PROPORTION OF SHARE CAPITAL OF MORE THAN 3%, CLASSIFIED AS UNRESTRICTED INVESTMENTS FOR SALE IN 2011 AND 2010 Proportion of direct or indirect ownership Company Location Line of business Calango 5 Energía Renovável, S.A. Brazil Energy FE Participaçoes, S.A. Brazil Energy Força Eolica do Brasil, S.A. Brazil Energy Mel 2 Energía Renovável, S.A. Brazil Energy Aviation Investment Fund Company Ltd. United Kingdom Energy Celtpower, Ltd. United Kingdom Energy Iberdrola Ingeniería y Construcción subgroup Iberica del Espacio, S.A. Spain Engineering Scottish Power subgroup DCUSA, Ltd. United Kingdom Energy Electralink, Ltd. United Kingdom Energy Gemserv, Ltd. United Kingdom Energy Selectusonline, Ltd. United Kingdom Holding NFPA Holdings, Ltd. United Kingdom Energy St. Clements Services, Ltd. United Kingdom Energy Iberdrola USA subgroup Connecticut Yankee Atomic Power Company USA Electricity Iroquois Gas Transmission System, LP. USA Gas Maine Yankee Atomic Power Company USA Electricity Nth Power Technologies Fund I, LP. USA Other lines of business Vermon Yankee Nuclear Power Company USA Electricity Yankee Atomic Electric Company USA Electricity

169 Annual consolidated financial statements 2011 / Financial statements GROUP COMPANIES AT 31 DECEMBER 2009 WHICH IN 2010 WERE EXCLUDED FROM CONSOLIDATION BECAUSE THEY WERE DISPOSED, MERGED OR LIQUIDATED Proportion of direct or indirect ownership Company Location Line of business Iberdrola Infraestructuras Gasistas, S.L. Spain Gas Infraestructuras Gasistas de Navarra, S.L. Spain Gas Iberd-Ros, S.L. Spain Real Estate Klimt XXI , S.L. Spain Real Estate Promociones Inmobiliarias Renfapex 2000, S.A. Spain Real Estate Iberdrola Inmobiliaria Investment in Real State, A.E. Greece Real Estate Iberdrola Generación subgroup Energonuclear, S.A. Romania Energy Iberdrola Energía subgroup Controladora LNG Manzanillo, S.A. Mexico Energy Electricidad de Veracruz II, S.A. de C.V. Mexico Energy Renewable business Eme Calahorra Dos, S.L. Spain Energy Eme Calahorra Uno, S.L. Spain Energy Eme Hueneja Dos, S.L. Spain Energy Energías Ecológicas de Fuerteventura, S.A. Spain Energy Energías Renovables de Fisterra, S.A. Spain Energy Generación de Energía Eólica, S.A. Spain Energy Iberdrola Renovables, S.A. Spain Energy Sistemas Energéticos El Centenar, S.A.U. Spain Energy Sistemas Energéticos El Saucito, S.A.U. Spain Energy Sistemas Energéticos La Retuerta, S.AU. Spain Energy Sistemas Energéticos La Tallisca, S.A.U. Spain Energy Sistemas Energéticos Las Cabezas, S.A.U. Spain Energy Sistemas Energéticos Majal Alto, S.A.U. Spain Energy Sistemas Energéticos Valdefuentes, S.A. Spain Energy County Line Wind, LLC. USA Energy Matton Wind Farm, LLC. USA Energy Houck Mountain Wind, LLC. USA Energy Midwest Renewable Energy Proyect II, LLC. USA Holding Wildhorse Mountain Wind, LLC. USA Energy Foye Energies, S.A.S. France Energy Teillay Energies, S.A.S. France Energy Pamproux Energies, S.A.S. France Energy Energiaki Alogorachis, Anonimi Eteria Greece Energy Rokas Aeoliki Kozani II, Ltd. Greece Energy Rokas Aeoliki Thessalia I, S.A. Greece Energy Rokas Iliaki III, S.A. Greece Energy Rokas Hidroelectric II, Ltd. Greece Energy Rokas Hidroelectric III, S.A. Greece Energy Iberdrola Renewables Latvija, S.I.A. Latvia Energy

170 GROUP COMPANIES AT 31 DECEMBER 2009 WHICH IN 2010 WERE EXCLUDED FROM CONSOLIDATION BECAUSE THEY WERE DISPOSED, MERGED OR LIQUIDATED Proportion of direct or indirect ownership Company Location Line of business Energía Wiatrowa Karscina, S.P. ZOO Poland Energy Elektrownie Wiatrowe Podkarpacia Poland Energy ScotPower UK United Kingdom Energy Scottish Power subgroup P Finance 4, Ltd. United Kingdom Holding SP Finance 5, Ltd. United Kingdom Holding Iberdrola USA subgroup Maine Power USA Marketing The Energy Network, Inc. USA Holding CNE Energy Services Group, Inc. USA Services

171 Annual consolidated financial statements 2011 / Financial statements 169

172

173 consolidated management report

174 NOTICE: This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 1. SIGNIFICANT EVENTS IN reasserted Iberdrola s industrial project to produce sustainable long-term growth through a concentration of ordinary business, stable and growth activities (Networks and Renewables) within a balanced business portfolio, leadership of the clean energy market, a strong focus on operating efficiency and financial solvency. Iberdrola s results over the period must be considered against the backdrop of a complicated operating context affected by the difficult macroeconomic environment which has exerted an influence on economies worldwide since the third quarter of Thus lower demand for electricity, energy prices now rising in due consideration of the trajectory taken by commodity markets, and the effect on interest rates of the prevailing tension on fixed-income markets have all influenced results. In this respect, the following should be mentioned in relation to the Group s operating trajectory: - In Spain the year was characterised by much lower water availability in comparison to the previous year (-28.5%) and a 2.9% dip in electricity demand. These factors have affected all segments of the market. Electricity demand fell by 2.8% in the UK, whereas it remained steady in Iberdrola USA s area of influence in the United States. Brazilian demand expanded by 2.6%. Within this context, total production by the IBERDROLA Group in the course of the year fell by 5.5% to 145,126 GWh. By geographical areas, these figures include 63,711 GWh generated in Spain (-11.4%), 22,739 GWh in the United Kingdom (-18.7%), 15,476 GWh in the United States (+13.5%, driven by new wind capacity), 40,971 GWh in Latin America (+7.2%), and 2,230 GWh from renewables in other countries (+22.6%). At year-end 2011, IBERDROLA had an installed capacity of 46,026 MW (+2.7%), of which 58% produces emission-free energy at low variable cost. The average trend of the euro against IBERDROLA s reference currencies was as follows: the Pound Sterling and the US Dollar fell by 1.1% and 5.0% respectively, whereas Brazil s Real moved up slightly by 0.1%. 1.1 Income statement highlights The main results in 2011 were as follows: Millions of euros 31 December 2011 Change against 2010 Revenue 31, % Gross margin 12, % EBITDA 7, % EBIT 4, % Net profit 2, % Gross margin Gross margin rose 3.3% against 2010 to EUR 12,026 million. By business areas, this breaks down as follows: Regulated Business Regulated business increased its contribution by 4.5% to EUR 5,544 million. - In Spain, Gross Margin fell by 1.4% to EUR 2,022 million, due to EUR 135 million of positive retrospective calculations from the previous year. Disregarding this effect, business profits grew thanks to higher regulated remuneration that was finally established following the introduction of the Reference Network Model (RNM). 172

175 Annual Consolidated financial statements 2011 / Management report - In the United Kingdom: a 4% increase to EUR 1,008 million following the increase in the remuneration basis after application of the new DCPR5 distribution regulation from April 2010 to March The contribution by IBERDROLA USA during the year stood at EUR 1,293 million (-16%), as a result of sale of the Connecticut gas companies (EUR -202 million) and devaluation of the dollar (EUR -64 million). If these two items are deducted, growth comes out at EUR 110 million. - Gross margin in Brazil leapt forward by 66% to EUR 1,221 million, spurred on by the addition of Elektro (EUR million), and by positive trends in both electricity demand (+2.8%) and the Brazilian Real. Deregulated Business The contribution of deregulated business to gross margin fell by 0.3% to EUR 3,987 million. - In Spain, gross margin rose by 6.9% to EUR 2,744 million. This was because, in spite of lower production (-13.3%), the unit margin increased (the higher selling price more than offsets higher supply costs). - In the United Kingdom this item fell by 13.2% to EUR 790 million: some mention should be made of lower production and fewer sales during the year in connection with smaller margins and sales of Gas and Electricity (with lower unit prices and lower volumes). - In Mexico, gross margin fell by 12.9% to EUR 453 million, caused by disposal of activities in Guatemala in 2010 (EUR million) and devaluation of the dollar (EUR million). Renewable Business The gross margin on renewables business increased by 4.6% to EUR 2,118 million due to greater wind power production in the United Kingdom (EUR +72 million) and the United States (EUR +25 million). Spanish business was affected by low wind production during the last quarter, and by lower average prices (EUR -50 million). Renewable business in the rest of the world and gas business in the United States increased by EUR 43 million. Other Business Other business contributed EUR 422 million (+15%), chiefly due to improvements in engineering business. Property business contributed less, as did the disposals at Neo Sky and Corporación IBV EBITDA Consolidated EBITDA rose 1.6% to EUR 7,650 million. The 22% increase in Taxes other than income tax offset efficiency gains. Net Operating Expense increased by 1.6%, balancing the increase in Gross Margin, to stand at EUR 3,268 million. The most noteworthy features here were a brake on expenditure and ongoing energy enhancement programmes in regulated UK and US business. Net personnel expenses Net personnel expenses fell by 3.6% to EUR 1,643 million. Net external services Net external services increased by 8% to EUR 1,625 million. 173

176 Taxes other than income tax Taxes other than income tax rose by 21.9% to EUR 1,107 million. The following are the most noteworthy items: - The charge to Enresa in connection with ownership and management of nuclear assets stood at EUR 176 million. - Royal Decree-Law 14/2010 of 23 December establishing urgent electricity tariff deficit correction measures stipulates that producers will be responsible for funding savings and energy efficiency plans for 2011, 2012 and 2013, and in 2011 this entailed an increase of EUR 88 million in these taxes with respect to By business areas, it should be said that deregulated business increased by 50% to EUR 621 million, of which EUR 518 million are accounted for by activities in Spain EBIT EBIT stood at EUR 4,505 million, a 6.7% decrease on the same period in Depreciation/amortisation and provisions Depreciation/amortisation and provisions rose by 16.6% to EUR 3,145 million. The key factors behind this increase were: Depreciation/amortisation rose by 4.8% to EUR 2,617 million. By business areas, the most noteworthy items and the following: - Brazil increased its depreciations/amortisations by EUR 109 million following the purchase of Elektro. - Renewables: as of 1 July wind farms are now amortised in 25 years (as opposed to 20 years previously), and the effect of this is quantified as EUR 66 million in lower amortisation. - Regulated USA business produced lower amortisations of EUR 48 million following the sale of gas companies and devaluation of the dollar. Provisions amounted to EUR million, an increase of more than EUR 344 million. The following are the most noteworthy items: - EUR 286 million in write-offs of thermal assets following cancellation of the CCS project and the carbon price floor reducing spreads and making it more difficult to extend the lifespan of assets. - Renewable business provisioned EUR 46 million as the costs of promoting units which will finally not be implemented Financial results Net financial loss was EUR -1,062 million, 17.5% less than the previous year. The main causes of this were as follows: - Higher earnings of EUR 89 million, mostly due to the positive exchange rate effect on derivatives which more or less cover the results of subsidiaries. - A EUR 31 million increase in interest received on the tariff deficit arising from establishment of the discount rate at 1.057%, as against 0.726% in Interest expense rose by 7.6% due to the higher average cost on the year (4.6%, as against 4.2% in 2010), partially offset by lower average net debt (-3.1%) Results of companies accounted for using the equity method Results of companies accounted for using the Equity Method stood at EUR million, primarily the result of a write-off of the holding in Gamesa following the update of its business plan to the tune of EUR -70 million. 174

177 Annual Consolidated financial statements 2011 / Management report Results of non-current assets Results of non-current assets amounted to EUR 45.8 million. In 2010 disposals were recognised for a total of positive earnings of EUR million Net results As a result of the above, pre-tax profits totalled EUR 3,454.4 million (-10.1%). The resultant taxation rate is 15.9%, lower than the 23.4% rate in Here consideration must be taken of the positive effect of approval of an additional 2% reduction of the UK tax rate, and reversal of tax provisions in previous years, mainly due to tax agreements secured in the US. Thus the recurring net profit, i.e. profit generated before non-current items, increased by 1.2% to EUR 2,614 million. Finally, net profit stood at EUR 2,805 million, 2.3% down on Operating highlights Regulated Business Spain IBERDROLA has more than 10.6 million supply outlets in Spain and total energy distribution is 96,379 GWh, 3% down on the previous year. The installed power equivalent interruption time indicator (TIEPI) showing supply quality in 2011 stood at 0.97 hours, a 19% improvement on 2010, and also another all-time record since it now stands at less than 1 hour for the first time ever. United Kingdom IBERDROLA has more than 3.4 million supply outlets in the United Kingdom. The volume of energy distributed in 2011 was 35,434 GWh, a fall of 2.8% on The trend in regulated business in terms of network reliability exceeds the regulatory requirements and those reached during the same period the previous year. United States Brazil - Electricity IBERDROLA has 1.86 million electricity supply outlets in the United States. The volume of energy distributed in 2011 was 31,201 GWh, steady with respect to the previous year. - Gas The number of gas users in the United States at 31 December was 0.56 million, and supply during the period totalled 30,030 GWh, an increase of 1.1% on the previous year, excluding the contribution by the gas companies in Connecticut and Berkshire, which were sold off in the last quarter of Demand at Brazil s distributors Coelba, Cosern, Celpe and Elektro increased by 2.82% to 41,872 GWh. At year-end the number of managed users totalled million. Purchase of the Elektro distributor was completed on 27 April, and its accounts were subsequently consolidated at Iberdrola. Elektro is one of São Paulo state s largest distributors, with 2.3 million customers and a total of 15,458 GWh of energy supplied in The purchase was carried out through acquisition of 99.6% of the distributor s shares, owned by the Ashmore Energy US group. 175

178 1.2.2 Deregulated Business Spain and Portugal Installed capacity in Spain (excluding renewables) stood at 19,700 MW. In 2011, net output for the regulated regime fell by 13% to 50,026 GWh. Performances during the year by technologies were as follows: - Hydroelectric production stood at 15,040 GWh, a fall of 22% against the same period the previous year. Hydraulic reserves were at 51.4% (equivalent to 5,797 GWh). - Nuclear production totalled 24,290 GWh, down by 7%. - Coal-fired thermal power plants showed an increase of 1,521 GWh to 2,690 GWh. - Finally, combined-cycle production fell by 28% to 8,006 GWh. Electricity production supplied on the deregulated market in 2011 was 41,271 million kwh, a 9% increase on the 37,926 million kwh supplied in IBERDROLA completed 2011 with over 60,000 weekly sales to produce a deregulated portfolio of 6.7 million contracts, of which 55% accounted for electricity supplies (3.7 million contracts). In terms of last-resort supplies, at year-end 2011 IBERDROLA operated 6,695,820 electricity contracts and 3,525 gas contracts. Thanks to a combination of activity on the deregulated market and as a last-resort supplier, the IBERDROLA portfolio at 31 December contained more than million contracts, 0.9 million more than in 2010, and energy supplies (electricity and gas) stood at 71,284 million kwh. In terms of gas sales, IBERDROLA s commercial business during the year brought its portfolio to 781,839 contracts at 31 December 2011, as against 603,149 contracts in December 2010, an increase of 30%. IBERDROLA supplied 10,310 GWh of gas to domestic and industrial customers in 2011, as against 9,828 GWh during the same period in 2010, an increase of 5%. Of this, 4,816 GWh were accounted for by the industrial segment, and 5,494 GWh by the residential segment. The situation of the Group s gas procurements was as follows: - The Spanish system in 2011 showed slightly lower demand for natural gas than in 2010 in the industrial, residential and electricity production segments. - IBERDROLA supplies liquefied natural gas (LNG) to the United Kingdom through its regasification capacity and access to the British gas system at the Isle of Grain terminal near London, and also through its spot purchases and contracts portfolio, supplying gas through the National Balancing Point hub (NBP), where it links up with ScottishPower. All slots during the period have been used in different operations. - In May the Company signed up an LNG sales contract with the BP oil firm for the delivery of 0.5 bcm (thousands of millions of cubic metres) per year over 10 years to Spanish regasification terminals, commencing in IBERDROLA will supply this gas on its long-term supply contract portfolio. - On 1 October IBERDROLA made its first LNG delivery to the Danish company DONG Energy at the regasification terminal in Rotterdam (Netherlands) on the contract signed up last year whereby the Company will sell 1 bcm per year over 10 years. IBERDROLA will supply this gas on its long-term supply contract portfolio. In Portugal, IBERDROLA supplied 5,118 GWh in 2011, compared to 3,927 GWh in 2010, leading the market in terms of medium voltage industrial customers and the second-largest supplier to SMEs. United Kingdom At 31 December 2011, installed capacity in the United Kingdom (excluding renewables capacity) was 6,036 MW. In terms of production from traditional generation, this fell 22% in 2011 to 20,584 GWh against 26,530 GWh the previous year. This was largely due to a fall in coal and gas generation as the result of the difficult economic situation in the United Kingdom (trends in margins) and falling demand (-2.8%). 176

179 Annual Consolidated financial statements 2011 / Management report Market share of the generating business market in the UK in 2011 was 7.6%, compared to 7.9% the previous year. The most noteworthy features by technologies were as follows: - Coal plant production fell by 26% to 10,257 GWh. - Gas combined-cycle production fell by 18% to 9,513 GWh. - Hydroelectric production fell by 20% to 553 GWh. - Combined heat and power production (CHP) fell to 261 GWh, down by 32% on the previous year. In 2011, 22,019 GWh of electricity and 28,392 GWh of gas were sold to customers, as against the 23,268 GWh of electricity (-5%) and 35,149 GWh of gas (-19%) sold during the previous year. ScottishPower had 3.2 million electricity customers and 2 million gas customers at 31 December Mexico IBERDROLA is Mexico s first private electricity producer. Installed capacity totalled 4,968 MW. Electricity demand showed a good performance in 2011, with an estimated increase of 6%. Supplies of electrical power totalled 37,002 GWh, up by 7% on Renewable Business At year-end 2011, renewable business had an installed capacity of 13,690 MW. In year-on-year terms, additional installed power stood at an extra 1,158 MW, an increase of 9.2% on The Renewables division also has construction ongoing for projects representing a total of 579 MW. Of the 1,158 MW installed in 2011, more than 84% were installed outside Spain, thereby boosting the Company s geographic diversification process. At 31 December, 57% of total power output was installed outside Spain. Operating capacity totalled 13,209 MW, with a 10% increase to 1,203 MW, of which 732 MW were installed in the US, which now accounts for 39% of total operating capacity. 1.3 Financial resources The most significant financing transactions performed by the IBERDROLA Group in 2011 are described in Note MAIN RISK FACTORS ASSOCIATED WITH THE ACTIVITIES OF THE IBERDROLA GROUP The IBERDROLA Group is exposed to various inherent risks in the countries, industries and markets in which it operates and the businesses it carries out, which could prevent it from achieving its objectives and implementing its strategies successfully. 2.1 Business risks Business carried on by the IBERDROLA Group is subject to a range of business risks, such as changes in demand, water and wind availability, fuel prices and CO 2 emission rights. In the case of fuels and CO 2 emission rights, these risks are evident in: The Electricity Generation and Retailing business, in which the IBERDROLA group is exposed to variations in the price of CO 2 emission rights and in the selling price of electricity, in addition to variations in fuel costs (mainly gas and coal). The gas Retailing Business, in which a large portion of the IBERDROLA Group s operating expenses relate to the purchase of gas for customer supplies. The IBERDROLA group is therefore exposed to the risk of changes in gas prices. Energy transactions (discretionary trading). 177

180 Exposure to these risks is managed and mitigated by monitoring positions, arranging derivatives, and diversifying the agreements and various clauses in these sale and purchase agreements. Electricity Generation and Retail business In both the Spanish market, IBERDROLA s main market, and the UK, the Group s second largest market, the current generating mix across a range of generating technologies furnishes a substantial natural hedge against the market and business risks associated with supplying, producing and selling energy to end customers. The remaining risk is mitigated through appropriate diversification and management of supply contracts, taking into account: - Indexation of price, as far as possible, against indexes which replicate the changes in revenue on the demand side. - Inclusion of revision and re-opener clauses which help prices keep pace with market changes. - Complementary financial hedging operations, to maintain risk within established global limits, mainly in the short and medium term. - Establishment of thresholds on the size of open positions and their sensitivity to underlier price fluctuations. In the case of the Mexican market, the IBERDROLA Group does not have a significant commodity price risk because the main contracts are instrumented as pass-through. In regulated electricity and gas business, there is a limited risk of price changes since the regulatory systems allow the cost to be passed on to the end customer. Discretionary trading transactions With regard to transactions involving trading of energy or by-products by the IBERDROLA Group on international markets, there are strict limits on volumes of open positions, in terms of the monetary amount and time horizons, and also stop-loss limits. Gas business With regard to the measurement of the risk of changes to the market price of gas, the IBERDROLA Group uses, among other control indicators, value at risk (VaR), establishing limits for each business in proportion to turnover and profits. VaR figures are calculated with a confidence level of 99% and a holding period of five days. Renewable Energy Business Specifically, it should be noted that in wind power business outside Spain and the United Kingdom market risk is mitigated mainly through long-term sales contracts that guarantee predictable revenue and a yield on investment. 2.2 Credit risk The IBERDROLA Group is exposed to credit risk in that counterparties (customers, suppliers, financial institutions, partners etc.) may default on their contractual obligations. Exposure may arise with regard to unsettled amounts, the cost of substituting products not supplied and also, in the case of dedicated plants, amounts on which amortisation is pending. Credit risk is managed and limited in accordance with the type of transaction and the creditworthiness of the counterparty. A specific corporate credit risk policy is operated which establishes criteria for admission, approval systems, authorisation levels, qualification tools, exposure measurement methodologies etc. With regard to credit risk on trade receivables, the historic cost of defaults has remained moderate and stable despite the current difficult economic environment. Regarding other exposure (counterparties in transactions with derivatives, placement of cash surpluses, transactions involving energy and guarantees received from third parties), no significant defaults or losses were incurred in 2011 and Financial risk Information concerning financial risk is set out in Note 5 to the Consolidated financial statements. 178

181 Annual Consolidated financial statements 2011 / Management report Turbulence on world financial markets has affected spreads on Spanish debt, causing a delay in the securitisation of a portion of tariff deficit in Spain. It is, however, hoped that the process will be completed in 2012, spurred on by the new private placement procedure. 2.4 Regulatory risk Companies in the IBERDROLA Group are subject to laws and regulations concerning prices and other aspects of their activities in each of the countries in which they operate. The introduction of new laws and regulations or modifications to those already in existence may have an adverse effect on the company s financial situation and the results of its operations. Risk policies include continuous analysis and monitoring of regulatory changes, together with decision-making based on reasonable assumptions concerning regulatory behaviour, both domestically and internationally. With specific reference to Spain, some mention should be made of considerable uncertainty at present, particularly with regard to a solution for the current tariff deficit and measures that could be introduced for a future solution to the deficit. In the United Kingdom, the ongoing process to review the present energy model could affect future yields of the IBERDROLA Group s business assets in the country. 2.5 Operational risk During all IBERDROLA Group activities, direct or indirect losses may arise as a result of inadequate internal procedures, technical failures, human error or as a result of external events. Specifically, the IBERDROLA group is exposed, among other risks, to malfunctions, explosions, fire, toxic spillages or polluting emissions at its gas and electricity distribution networks and generating plants. It could also be adversely affected by sabotage, adverse meteorological conditions or force majeure. Any of these risks could cause damage or destruction to the IBERDROLA group s facilities, as well as injuries to third parties or damage to the environment, along with the ensuing lawsuits, especially in the event of power outages caused by accidents at our distribution networks and possible penalties imposed by the authorities. Although many of these risks are unpredictable, the IBERDROLA Group mitigates them by carrying out the necessary investment, conducting operation and maintenance procedures and programmes (supported by quality control systems), planning appropriate employee training, and taking out the required insurance covering both material damages and civil liability. However, this insurance does not completely eliminate operational risk, since it is not always possible to transfer it to insurance companies and, in addition, cover is always subject to certain limitations. The IBERDROLA Group s nuclear plants in Spain are also exposed to risks relating to their operations and risks arising from the storage and handling of radioactive materials. Current Spanish law caps the liability of nuclear plant operators in the event of a nuclear accident at EUR 700 million. This liability for a nuclear accident must be insured by the operator of Spanish nuclear power stations. The IBERDROLA Group meets this obligation by taking out Nuclear Civil Liability insurance policies for each plant. However, Law 12/2011 of 27 May concerning civil liability for nuclear damage or damage caused by radioactive materials will increase the operator s liability ceiling and the consequent ceiling on mandatory insurance to EUR 1,200 million for nuclear plants. The Law will be introduced when all signatories of the Paris and Brussels Conventions ratify the 2004 Amendment Protocols. Some mention must likewise be made of the indirect economic risk to which these plants are exposed following a potential serious international incident in relation to such plants, with a possible impact on regular renewals of operating licences and increased outlay on safety investment. It should also be said, however, that the incident at the Fukushima nuclear plant in Japan finally had only a minor effect on our facilities. 2.6 Environmental risk The IBERDROLA Group s risks are subject to risks relating to the existence of wide-ranging environmental regulations and standards, such as the Spanish Environmental Liability Law 26/2007 of 23 October, transposing Directive 2004/35/EC on Environmental Liability. Environmental regulations and standards, among other issues, require the company to conduct environmental impact studies for future projects and obtain licences, permits and other mandatory authorisations and comply with the terms and conditions of the licences, permits and authorisations. In addition, the IBERDROLA Group s activities 179

182 involve inherent environmental risks relating to waste management, emissions, spillages and the land where facilities are based or where biodiversity might be affected, and these could give rise to legal claims for damages, or penalties which might affect the Group s image and reputation. It is important to note that the IBERDROLA Group s facilities fall within the ambit of European Union directives for the trading of CO 2 emission rights and rules governing the emission of certain atmospheric pollutants from Large Combustion Plants. The Group s risk policies take into account of environmental risks, with a view to identifying and controlling these risks. To this end, the IBERDROLA Group is moving forward with appropriate insurance policies and the implementation of environmental management systems for its production and distribution facilities and with continuous cooperation with regulatory bodies and any parties affected. 2.7 Risks related to new investments All new investment is subject to a range of market, credit, business, regulatory, operational and other risks, which might undermine the objectives or profitability of the project. The investment execution phase is subject to considerable and complex risks during the construction of new electricity generation facilities. Risks affecting the Company s ability to construct these plants include, among others: Delays in obtaining permits and authorisations, including environmental permits. Fluctuations in the price of equipment, materials and labour. Opposition from political, social or ethnic groups. Unfavourable changes in the political or regulatory arena during the construction period. Adverse weather conditions that could delay completion of the work. Natural disasters, accidents and other unforeseen events. Inability to obtain funds at an acceptable cost. Non-compliance with commitments by key subcontractors or suppliers. Any of these risks could delay construction of the project or the start of operations and thus increase costs. If we fail to manage these projects properly, any resultant cost overruns may not be recoverable. Risk policies for new investment cover all such risks and establish specific limits on the forecast profitability and expected profitability risk which must be met before a project may be authorised. Furthermore, specific procedures are in place for the approval of major investment, which require an investment dossier to be prepared with a risk analysis before a project can be approved. 2.8 Country risk To a greater or lesser extent, and depending on their nature, all the IBERDROLA Group s activities are exposed to the risks described above and also to other risks inherent to the countries in which they take place. Imposition of monetary and other restrictions on the movement of capital. Economic crises, political instability and social unrest. Public expropriation of assets. Exchange rate fluctuations. The results of our international subsidiaries, their market value and their contribution to the Group may be affected by all such risks. The IBERDROLA Group manages this risk through proper geographical diversification. Therefore, its presence in countries with sovereign ratings below investment grade is not significant. 2.9 Reputational risk The Company s corporate reputation forms part of its value-creation cycle. In this cycle, the perceptions that interest groups have of the company measure the reputational impact of its actions. Every organisation within the IBERDROLA Group is committed to the Group s vision, values and policies. 180

183 Annual Consolidated financial statements 2011 / Management report The framework policy for reputational risk establishes the basic principles for managing this risk within the Group, and also establishes monitoring indicators. Specific risk policies cover the same areas and include courses of action which contribute to limiting or mitigating such effects. 3. ENVIRONMENT AND SUSTAINABILITY IBERDROLA accepts that the environment places constraints on all human activities and is a factor of companies competitiveness, and it is committed to promoting innovation in this field and also eco-efficiency, to gradually reducing the environmental impact of its activities, facilities, products and services, and striving to ensure that its activities are congruent with future generations legitimate right to an appropriate environment. The Group undertakes and promotes this commitment through its policies. IBERDROLA currently has three specific policies in place to manage environmental issues: its Environmental Policy (updated in 2011), its anticlimate change policy and its biodiversity policy, which set forth the principles through which the Company will continue to improve its environmental management. IBERDROLA was also included, for the eleventh consecutive year, on the global Dow Jones Sustainability Index, a worldwide benchmark for recognition of companies contributions to sustainable development and on other prestigious international sustainability indexes. It is the only utility to have earned this distinction since the index since was created in RESEARCH AND DEVELOPMENT ACTIVITIES IBERDROLA deploys research, development and innovation (R&D) as a major tool for continuous improvement of its systems, products and services, with the triple objective of improving its productivity, competitiveness and sustainability. An innovative managerial and technological strategy deployed in recent years was pursued in 2011, a year in which Group R&D activities produced a volume of EUR 136 million in a portfolio containing more than 150 projects. Over the last twelve months, R&D projects have been carried out within various areas of the Company to the open-innovation model prioritising cooperation with businesses, universities, technology centres, industrial organisations and public institutions through a number of programmes and agreements. By way of an example of the commitment to management excellence, the certification scope of R&D has been enhanced pursuant to the UNE standard to cover the main corporate areas: Engineering, Generation, Renewables, Networks and Corporation. The following are a few of the activities that supply reliable electricity and encourage sustainable development, classified in accordance with the major areas: Renewable energies R&D projects to improve the efficiency of our various technologies and development of new generating technologies. Work continues on the European TWENTIES project, with a view to demonstrating that en masse wind power integration in the network is possible as part of a stable process. With regard to offshore activities, some mention should be made of the EMERGE project to develop deep-water floating platform technology. The CENIT AZIMUT project avails itself of technical know-how to optimise the development of offshore wind farms, while we are also involved in the EERA DTOC project for the large-scale design of tools for offshore wind farm facilities. In the field of offshore energies (waves and currents), IBERDROLA s Engineering division has also been active on the CENIT OCEAN LIDER project to develop offshore generation technologies, where some interesting results have been obtained on the planning and installation of offshore generation facilities and their environmental impacts, and on the ORCADIAN project focusing on the construction and deployment of the second generation of wave-energy converters using PELAMIS technology on the Scottish coastline. IBERDROLA s wind farm division is carrying out two projects: the AVANZA SoftComputing project and the INNPACTO OpenFoam project, focusing on improving wind energy forecasts and analyses by optimisation of models and analysis of wind series. Clean generation technologies IBERDROLA s R&D generating work focuses on optimising operating conditions, improving safety and reducing environmental impact by reducing emissions or using more efficient generating plants. The second part of the COEBEN project, the objective of which is to reduce NOx levels using non-catalytic technology, commenced in IBERDROLA Engineering is involved in the CENIT VIDA project investigating active CO 2 capture techniques, along 181

184 with environmental modelling and its application in urban areas. A large number of projects are ongoing in relation to CO 2 capture at the Longannet coal-fired thermal power plant (Scotland). The CALDERE and HOREX projects were brought to a successful conclusion in the course of the year, with positive results in relation to improvements to the lifespan and operability of power plants. The first project developed a methodology to detect failures and assess the remaining lifespan of thermal plants boiler pipes, whereas the second developed methodologies for the diagnosis, monitoring and treatment of chemical expansion in the concrete used on dams. Smart grids The Group s international R&D work in connection with electricity distribution focuses on improving the distribution network, with close attention paid to occupational safety, environmental aspects, and better supply quality. IBERDROLA is tracing out a way forward for smart grids on a number of projects towards the implementation of a modern electricity grid based on remote management, at European level (Open Node, Open meter, Address, Finseny, Grid4EU) and also in Spain, where it is involved in the Network Automation and Telemanagement Systems (STAR), an ambitious initiative to carry out technology transformation in the field of smart grids. The Bidelek-Sareak project is also ongoing in Vizcaya. In Madrid, meanwhile, another project has commenced, known as PRICE, a joint smart grid project in the Henares Corridor. In the United States, work continues on the Advanced Metering Infrastructure AMI project, which will bring 600,000 customers into a smart grid infrastructure. A project to test smart grids with a view to improving the reliability and quality of their electricity supply was launched through the Company s subsidiary ScottishPower in Glasgow. Electric vehicles In 2011 IBERDROLA stepped up its focus on electric vehicles across the entire value chain, entering into agreement with public authorities, with major vehicle manufacturers and recharge system suppliers, and playing an active role in standardisation groups and national and international R+D projects (Green emotion, an initiative which will facilitate the introduction of electric mobility in Europe). Work continues on IBERDROLA s Green Mobility plan, Spain s first integral solution to provide citizens with real access to electric mobility, offering customers the chance to buy vehicles, installation of the charging point, financing and a supply of 100% renewable energy. IBERDROLA has arranged agreements and alliances with other companies such as Opel to facilitate access to and use of electric vehicles for individuals and businesses, and is carrying out projects with public authorities in the autonomous communities of Castilla y León, Valencia, the Basque Country, Murcia, Madrid, Andalusia, Catalonia and Extremadura. IBERDROLA is also working on electric mobility projects in Scotland and the United States. Moreover, IBERDROLA has become the first Spanish company to offer an electric car-sharing service, meaning company employees can use electric cars to go about their commercial business in Madrid, Bilbao, Sevilla, Valencia, Valladolid and Barcelona, where the Group offices have charging points for the vehicles. Energy storage The agreement drawn up with the US Department of Energy formed the basis for the first phase of the CAES (Compressed Air Energy Storage) project. Among other benefits, this system will encourage the integration of renewable energies into the grid. In Spain, IBERDROLA is working on the SAGER project to develop a large-scale energy storage system for the electricity network, and also on the ALIA2 project using a lithium-ion battery for advanced applications. PERSEO - Disruptive innovation in sustainable energy Perseo is IBERDROLA s development capital fund geared towards innovative technology generating renewable electricity and reducing the environmental impact of the existing production systems. To date the facility has been used to channel more than EUR 23 million to encourage research in the energy sector with a view to guaranteeing that the Company is a player in technologies of the future. 182

185 Annual Consolidated financial statements 2011 / Management report The main areas of technology in relation to the PERSEO investment portfolio are as follows: Energy efficiency. Solar energy (photovoltaic and thermoelectric). Sea-based energy. CO 2 capture and clean carbon capture. Other technologies focusing on the production and distribution of clean electrical power saw the second Perseo Awards to drive forward research in the energy sector, with cutting-edge initiatives to provide answers to future challenges in the field. IBERDROLA has established two award categories: new energy efficiency products, won by Wattio with Servitel as runner-up, and innovative biomass technology, awarded to Ingelia. 5. TREASURY SHARES AND CAPITAL REDUCTION The General Shareholders Meeting of 26 March 2010 expressly agreed to delegate powers to the Board of Directors, with powers of substitution, pursuant to the provisions of the Spanish Corporate Enterprise Act, to carry out derivative acquisition of shares in Iberdrola, S.A. Acquisitions may be carried out directly by Iberdrola or indirectly through its subsidiaries. The process excludes any subsidiaries carrying out regulated business pursuant to the provisions of the Electricity Sector Act and the Hydrocarbons Act. Acquisitions may be made up to the maximum legal threshold (i.e., 10% of share capital). The authorisation was granted for a maximum five-year period. On this authorisation, in 2011 the IBERDROLA Group purchased 378,976,411 treasury shares (of which 378,671,541 were purchased by Iberdrola, S.A.) for a total of EUR 2,203,603 thousand, with nominal value EUR 284,004 thousand. Additionally, 369,087,184 treasury shares were sold off (of which 368,899,966 were sold by Iberdrola, S.A.) for the sum of EUR 2,163,941 thousand. Finally, at year-end 2011 treasury stock stood at 37,451,642 shares (35,181,834 shares in Iberdrola, S.A.) and four swaps were outstanding on 26,981,468 treasury shares. 6. SUBSEQUENT EVENTS Events subsequent to year-end are described in Note 49 of the Consolidated financial statements. 183

186 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 184

187 Annual consolidated financial statements 2011 / Corporate governance annual corporate governance report 185

188 A. Ownership structure of the company A.1. Complete the following table about the share capital of the company: Date of last change Share capital (euros) Number of shares Number of voting rights ,411,867,500 5,882,490,000 5,882,490,000 State whether there are different classes of shares with different rights attaching thereto: Yes No X Class Number of shares Nominal value per share Number of voting rights per share Different rights A.2. Breakdown of direct and indirect holders of significant shareholdings in the company as of the end of the fiscal year, excluding directors: Individual or corporate name of shareholder Number of direct voting rights Number of indirect voting rights (*) % of total voting rights ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. 135,050, ,685, QATAR INVESTMENT AUTHORITY 0 496,946, BANCO FINANCIERO Y DE AHORROS, S.A ,887, BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) 0 312,380, (*) Through: Individual or corporate name of indirect holder of the interest ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. Through: Individual or corporate name of direct holder of the interest Number of direct voting rights % of total voting rights RESIDENCIAL MONTE CARMELO, S.A. 360,619, NEXGEN CAPITAL LIMITED 277,971, CORPORATE FUNDING, S.L. 263,538, ROPERFELI, S.L. 70,555, QATAR INVESTMENT AUTHORITY QATAR HOLDING LUXEMBOURG II, S.A.R.L. 368,193, QATAR INVESTMENT AUTHORITY QATAR HOLDING, LLC. 128,752, BANCO FINANCIERO Y DE AHORROS, S.A. BANCAJA INVERSIONES, S.A. 314,887, BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) KARTERA 1, S.L. 312,380, NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 186

189 Annual consolidated financial statements 2011 / Corporate governance Indicate the most significant changes in the shareholding structure that have occurred during the fiscal year: Individual or corporate name of shareholder Date of transaction Description of transaction QATAR INVESTMENT AUTHORITY Increase to above 5% of share capital ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A Decrease to below 20% of share capital ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A Decrease to below 20% of share capital CAJA DE AHORROS DE VALENCIA, CASTELLÓN Y Decrease to below 5% of share capital ALICANTE, BANCAJA BANCAJA DE INVERSIONES, S.A Increase to above 5% of share capital BANCO FINANCIERO Y DE AHORROS, S.A Increase to above 5% of share capital. NATIXIS, S.A Decrease to below 5% of share capital NATIXIS, S.A Increase to above 5% of share capital NATIXIS, S.A Decrease to below 5% of share capital NATIXIS, S.A Increase to above 5% of the share capital NATIXIS, S.A Decrease to below 5% of share capital NATIXIS, S.A Increase to above 5% of share capital A.3. Complete the following tables about members of the Board of Directors of the company who have voting rights attaching to shares of the company: Individual or corporate name of director Number of direct voting rights Number of indirect voting rights (*) % of total voting rights MR. JOSÉ IGNACIO SÁNCHEZ GALÁN 3,902,000 98, MR. VÍCTOR DE URRUTIA VALLEJO 2,398,736 9,006, MR. RICARDO ÁLVAREZ ISASI 230,000 1,530, MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA 30,149 72, MR. JULIO DE MIGUEL AYNAT 186, MR. SEBASTIÁN BATTANER ARIAS 116, MR. XABIER DE IRALA ESTÉVEZ 194, MR. ÍÑIGO VÍCTOR DE ORIOL IBARRA 43, MS. INÉS MACHO STADLER 45, MR. BRAULIO MEDEL CÁMARA 42, MR. JOSÉ LUIS OLIVAS MARTÍNEZ 32, MS. SAMANTHA BARBER MS. MARÍA HELENA ANTOLÍN RAYBAUD MR. SANTIAGO MARTÍNEZ LAGE 12, ,000 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 187

190 (*) Through: Individual or corporate name of indirect holder of the interest Through: Individual or corporate name of direct holder of the interest Number of direct voting rights % of total voting rights MR. JOSÉ IGNACIO SÁNCHEZ GALÁN MS. ISABEL GARCÍA-TABERNERO RAMOS 98, MR. JOSÉ IGNACIO SÁNCHEZ GALÁN MR. JOSÉ IGNACIO SÁNCHEZ GALÁN MR. PABLO IGNACIO SÁNCHEZ-GALÁN GARCÍA-TABERNERO MS. TERESA SÁNCHEZ-GALÁN GARCÍA- TABERNERO MR. VÍCTOR DE URRUTIA VALLEJO LIMA, S.A. 9,006, MR. RICARDO ÁLVAREZ ISASI MS. PILAR BASTERRA ARTAJO 800, MR. RICARDO ÁLVAREZ ISASI DOPISA ALTERRA, S.L. 730, MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA MS. MARÍA JOSEFA AURRECOECHEA ZUBIAUR 112, MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA IGOPER, S.L. 59, Total percentage of voting rights held by the Board of Directors Complete the following tables about members of the company s board of directors who hold rights to shares of the company: Individual or corporate name of director Number of direct option rights Number of indirect option rights Number of share equivalents % of total voting rights A.4. Describe, if applicable, the family, commercial, contractual or corporate relationships between significant shareholders, to the extent known to the company, unless they are immaterial or result from the ordinary course of business: Individual or corporate name of related parties Description of the relationship Type of relationship A.5. Describe, if applicable, the commercial, contractual or corporate relationships between significant shareholders and the company and/or its group, unless they are immaterial or result from the ordinary course of business: NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 188

191 Annual consolidated financial statements 2011 / Corporate governance Individual or corporate name of related parties ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS, S.A. (ACS) Type of relationship Corporate Brief description (1) IBERDROLA and ACS both hold indirect interests in ELECTRA DE MONTÁNCHEZ, S.A, each with a stake of 40%. (2) IBERDROLA and ACS both hold indirect interests in SISTEMA ELÉCTRICO DE CONEXIÓN HUÉNEJA, S.L. with stakes of 47.36% and 24.35%, respectively. (3) IBERDROLA and ACS both hold indirect interests in TIRME, S.A., each with a stake of 20%. (4) IBERDROLA and ACS both hold direct interests in NEOTEC CAPITAL RIESGO SOCIEDAD DE FONDOS, S.A., S.C.R. de régimen simplificado [venture capital company under a simplified system] with stakes of 7.92% and 1.58%, respectively. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) Corporate (1) IBERDROLA and BBK both hold interests in EUSKALTEL, S.A., with stakes of 11.85% and 35.24%, respectively. (2) IBERDROLA and BBK both hold interests in FIUNA, S.A., with stakes of 70% and 30%, respectively. (3) IBERDROLA and BBK both hold interests in OPERADOR DEL MERCADO IBÉRICO DE ENERGÍA-POLO ESPAÑOL, S.A., with stakes of 5,5% and 2.7%, respectively. (4) IBERDROLA and BBK both hold interests in SEED CAPITAL DE BIZKAIA, S.G.E.C.R., S.A., with stakes of 5% and 10%, respectively. (5) IBERDROLA and BBK both hold interests in TORRE IBERDROLA, S.A., with stakes of 68.1% and 31.9%, respectively. BANCO FINANCIERO Y DE AHORROS, S.A. Corporate (1) IBERDROLA and BFA both hold indirect interests in URBANIZADORA MARINA DE COPE, S.L., with stakes of 60% and 20%, respectively. (2) IBERDROLA and BFA both hold indirect interests in SISTEMAS ENERGÉTICOS DE LEVANTE, S.A., with stakes of 60% and 40%, respectively. A.6. Indicate whether any paracorporate (shareholders ) agreements affecting the company pursuant to the provisions of Section 112 of the Securities Market Law (Ley del Mercado de Valores) (LMV) have been reported to the company. If so, briefly describe them and list the shareholders bound by the agreement: Yes No X Individual or corporate name Brief description of the agreement Indicate whether the company is aware of the existence of concerted actions among its shareholders. If so, briefly describe them: Yes No X Individual or corporate name Brief description of the agreement Expressly indicate whether any of such agreements, arrangements or concerted actions have been modified or terminated during the fiscal year. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 189

192 A.7. Indicate whether there is any individual or legal entity that exercises or may exercise control over the company pursuant to Section 4 of the Securities Market Law. If so, identify it: Yes No X Individual or corporate name Comments A.8. Complete the following tables about the company s treasury stock: As of year-end: Number of direct shares Number of indirect shares (*) Total % of share capital 35,181,834 2,269, % (*) Through: Individual or corporate name of direct shareholder Number of direct shares SCOTTISH POWER 2,269,808 Describe any significant changes, pursuant to the provisions of Royal Decree 1362/2007, that have occurred during the fiscal year: Total direct shares Total indirect shares Total % of share Date of notice acquired acquired capital ,987, ,345, ,427, ,790, ,460, ,162, ,176, Gains/(Losses) on the Company s own stock transferred during the period 0 A.9. Describe the terms and conditions and the duration of the powers currently in force given by the shareholders acting at the General Shareholders Meetings to the Board of Directors in order to acquire or transfer shares of the company s own stock: The shareholders acting at the General Shareholders Meeting held on March 26, 2010 resolved to expressly authorize the Board of Directors, with the power of substitution, pursuant to the Companies Law (Ley de Sociedades de Capital), to carry out the derivative acquisition of the stock of Iberdrola, S.A. ( Iberdrola or the Company ) on the following terms: NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 190

193 Annual consolidated financial statements 2011 / Corporate governance a) Purchases may be made by Iberdrola directly, or indirectly through its subsidiaries. Subsidiaries carrying out regulated activities are excluded pursuant to the provisions of the Electricity Industry Law and the Hydrocarbons Law. b) Purchases shall be made by means of a purchase and sale agreement, a swap arrangement or any other transaction whatsoever permitted by law. c) Purchases may be made up to the maximum sum permitted by law (i.e., 10% of the share capital). d) Purchases may not be made at a higher price than that quoted on the Stock Exchange or at a price lower than the share s nominal value. e) The authorization was granted for a period not to exceed five years as from the approval of the resolution. f) In the net worth of the acquiring company there shall be established a restricted reserve equal to the amount of the stock of the controlling company recorded under assets. Such reserve shall be maintained while the stock is not transferred or redeemed, in compliance with the provisions of the Companies Law. The shares, if any, purchased as a result of the aforementioned authorization could be used both for transfer or redemption or could be applied to the compensation systems provided for in the Companies Law; added to the foregoing alternatives was the possible development of programs fostering the acquisition of interests in the Company such as, for example, dividend reinvestment plans, loyalty bonds or similar instruments. A.10. Indicate, if applicable, any legal or by-law restrictions on the exercise of voting rights, and any legal restrictions on the acquisition or transfer of interests in share capital. Indicate whether there are legal restrictions on the exercise of voting rights: Yes X No Maximum percentage of voting rights that a shareholder may exercise due to legal restrictions Indicate whether there are by-law restrictions on the exercise of voting rights: Yes X No Maximum percentage of voting rights that a shareholder may exercise due to by-law restrictions Description of legal and by-law restrictions on the exercise of voting rights 1) Legal restrictions Section 34 of Royal Decree-Law 6/2000, of June 23, on Urgent Measures to Intensify Competition in the Goods and Services Markets, as amended by Law 14/2000, of December 29, by Royal Decree-Law 5/2005, of March 11, and by Law 17/2007, of July 4, provides that individuals or legal entities that have a direct or indirect interest in the share capital or voting rights of two or more companies that qualify as a Principal Operator in the same market or industry among those specified in the aforementioned provision (including electric power generation and supply and natural gas production and supply) in a proportion equal to or greater than 3 percent, may not exercise the voting rights corresponding to the excess over such percentage in more than one entity. The same rule applies in the event that a company that qualifies as Principal Operator holds an interest in the capital or voting rights of another Principal Operator in the same economic industry. However, and in either of both cases, the competent industry regulator (i.e., the National Energy Commission (Comisión Nacional de Energía) in the case of energy markets) may grant an authorization allowing for the free exercise of voting rights in excess of the above-mentioned percentage. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 191

194 Description of legal and by-law restrictions on the exercise of voting rights 2) By-law restrictions As provided in Article 29.3 of the By-Laws, No shareholder may cast a number of votes greater than those corresponding to shares representing ten (10%) percent of share capital, even if the number of shares held exceeds such percentage of the share capital. In addition, pursuant to Article 30.1 of the By-Laws, shareholders in a conflict of interest, and particularly those participating in a merger or split-off with the Company or who are called to subscribe to an increase in capital with the exclusion of pre-emptive rights or to acquire by overall assignment all of the Company s assets, or who are affected by resolutions pursuant to which the Company grants them a right, relieves them of an obligation, excuses them, if a director, from the prohibition against competition, or who approve a transaction in which they are interested, and, in general, merely formal and apparent shareholders who lack an actual and effective interest and do not act in a fully transparent manner vis-à-vis the Company, may not exercise their voting rights at the General Shareholders Meeting, either directly or by proxy, with respect to the matters or proposed resolutions with respect to which the conflict refers. The foregoing restrictions equally apply (i) in the case of an individual shareholder, to the entities or companies controlled by such individual, and (ii) in the case of shareholders which are legal entities, to the entities or companies that belong to the same group pursuant to the provisions of Section 4 of Securities Market Law 24/1988, of July 28, which, in turn, contains a cross-reference to Section 42 of the Commercial Code. Article 56 of the By-Laws provides that the by-law restrictions described above shall have no effect upon the occurrence of the following circumstances: a) when the Company is the target of a public tender offer aimed at the share capital as a whole; and (b) when, as a result of the public tender offer, an individual or a legal entity, or several of them acting jointly, acquire an interest equal to two-thirds (2/3) of the voting share capital of the Company, provided the full consideration thereof consists only of cash; or, alternatively, (c) when, as a result of the public tender offer, an individual or a legal entity, or several of them acting jointly, acquire an interest equal to three-quarters of the voting share capital of the Company, provided the consideration thereof consists, in whole or in part, of securities, without giving the recipient an alternative right to receive such consideration wholly in cash. Indicate if there are legal restrictions on the acquisition or transfer of interests in the share capital: Yes X No Description of the legal restrictions on the acquisition or transfer of interests in the share capital As a consequence of the merger of Energy East Corporation (now Iberdrola USA, Inc.) into the Iberdrola Group, effective as from September 16, 2008, the acquisition of an interest that may give rise to the holding of a percentage equal to or greater than 10% of the share capital of Iberdrola shall be subject to the prior approval of the Federal Energy Regulatory Commission of the United States of America and of the regulatory authorities of the States in which Iberdrola USA, Inc. carries out its activities in the United States of America, without prejudice to any other approvals that might be required of such acquiring party in the United States of America. Specifically, in New York, the Order of the Public Service Commission of the State of New York, issued in case 07-M-0906, whereby Iberdrola, S.A. was authorized to acquire Energy East Corporation (now, Iberdrola USA, Inc.), provides that, pursuant to section 70 of the Public Services Act, any transfer or lease of all or part of the gas or electricity network, infrastructure or system, the execution of any contracts for the operation of such infrastructure or systems, as well as the transfer of an interest resulting in ownership of a percentage greater than 10% of the share capital of Iberdrola, S.A., shall require the prior approval of such Commission. In Maine, the Electric Restructuring Act (Sections 707 and 708) provides that the creation, organization, extension, consolidation, merger, transfer of ownership or control, directly or indirectly, in whole or in part, of an interest or of voting rights in excess of 10% of a public utility is deemed to be a reorganization of such public utility, and subjects the restructuring to the prior authorization of the Public Utilities Commission of the State of Maine. The Resolution of the Public Utilities Commission of the State of Maine issued in docket no , whereby the acquisition of Energy East Corporation (now, Iberdrola USA, Inc.) by Iberdrola, S.A. was authorized, highlighted the effectiveness of such provisions. A.11. Indicate whether the shareholders acting at a General Shareholders Meeting have approved the adoption of breakthrough measures in the event of a public tender offer pursuant to the provisions of Law 6/2007: Yes No X If applicable, describe the approved measures and the terms on which the restrictions will become ineffective. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 192

195 Annual consolidated financial statements 2011 / Corporate governance NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 193

196 B. STRUCTURE OF THE COMPANY S MANAGEMENT B.1. Board of Directors B.1.1. Describe the maximum and minimum number of directors set forth in the by-laws: Maximum number of directors 14 Minimum number of directors 9 Individual or corporate name of director B.1.2. Complete the following table identifying the members of the Board of Directors: Representative Position Date first appointment Date last appointment Election procedure MR. JOSÉ IGNACIO SÁNCHEZ GALÁN - CHAIRMAN - CEO VOTE AT GENERAL SHAREHOLDERS MEETING MR. VÍCTOR DE URRUTIA VALLEJO - VICE-CHAIRMAN VOTE AT GENERAL SHAREHOLDERS MEETING MR. RICARDO ÁLVAREZ ISASI - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. JULIO DE MIGUEL AYNAT - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. SEBASTIÁN BATTANER ARIAS - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. XABIER DE IRALA ESTÉVEZ - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. ÍÑIGO VÍCTOR DE ORIOL IBARRA - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MS. INÉS MACHO STADLER - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. BRAULIO MEDEL CÁMARA - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. JOSÉ LUIS OLIVAS MARTÍNEZ - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MS. SAMANTHA BARBER - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MS. MARÍA HELENA ANTOLÍN RAYBAUD - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING MR. SANTIAGO MARTÍNEZ LAGE - DIRECTOR VOTE AT GENERAL SHAREHOLDERS MEETING Total Number of directors 14 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 194

197 Annual consolidated financial statements 2011 / Corporate governance Indicate vacancies on the Board of Directors during the period: Individual or corporate name of director Status of the director at the time of vacancy Date of vacancy B.1.3. Complete the following table about the members of the Board and each member s status: Executive Directors Individual or corporate name of director MR. JOSÉ IGNACIO SÁNCHEZ GALÁN Committee that has proposed the director s appointment NOMINATING AND COMPENSATION COMMITTEE Position within the Company s structure CHAIRMAN & CEO Total number of executive directors 1 Total % of Board members External Proprietary Directors Individual or corporate name of director MR. XABIER DE IRALA ESTÉVEZ MR. JOSÉ LUIS OLIVAS MARTÍNEZ Committee that has proposed the director s appointment NOMINATING AND COMPENSATION COMMITTEE NOMINATING AND COMPENSATION COMMITTEE Individual or corporate name of the significant shareholder represented by the director or that has proposed the director s appointment BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) BANCO FINANCIERO Y DE AHORROS Total number of proprietary directors 2 Total % of Board members NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 195

198 External Independent Directors Individual or corporate name of director Profile MR. VÍCTOR DE URRUTIA VALLEJO Madrid, Doctorate in Economics from Universidad Complutense de Madrid and degree in Law from Universidad de Oviedo. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors. He served as a member of the Board of Hidroeléctrica Española, S.A. and of Babcock Wilcox Española, S.A. Other industries: He has been a member of the board of Firestone Hispania, S.A., of International Business Machines, S.A. (IBM), of Corporación IBV, Servicios y Tecnologías, S.A.U. and as Chairman of Bebidas Gaseosas del Noroeste, S.A. He is currently Chairman of Compañía Castellana de Bebidas Gaseosas, S.A. (CASBEGA) and of Compañía Vinícola del Norte de España, S.A. (CVNE), and a member of the Board of Barclays Bank, S.A., Vocento, S.A., El Norte de Castilla, S.A., Diario El Correo, S.A. and Viñedos del Contino, S.A. While sitting on the Board of Firestone Hispania, S.A., he was a member of the Executive Committee of the Board of Directors of that company. MR. RICARDO ÁLVAREZ ISASI Bilbao, Doctorate in Industrial Engineering from Escuela Técnica-Superior de Ingenieros Industriales de Bilbao and Professor of Electric Engineering, with extensive teaching and research experience. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He served as member of the Board of Directors of Ente Vasco de la Energía and has as a long track record in the industrial engineering industry. Other industries: In the financial sector, he has been General Director of Caja de Ahorros Municipal de Bilbao. He has been a member of the Board of Directors of Centro para el Ahorro y Desarrollo Energético y Minero (CADEM) and has been a member of various boards of trustees and foundations, including, among others, Fundación Víctor Tapia- Dolores Sainz and Fundación Escuela de Ingenieros de Bilbao. He has been member of the Steering Committee of the Social Board of Universidad del País Vasco. He has held a number of positions with academic and research institutions, such as the position of president of Escuela de Ingeniería de Bilbao. MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA Bilbao, Degree in Economics from Universidad del País Vasco (Sarriko School of Economics and Business Management). Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He is a director of Construcciones y Auxiliar de Ferrocarriles, S.A. (CAF) and part of his career is related to the electricity industry. He has held senior management positions at General Eléctrica Española, S.A. and Fabrelec-Westinghouse. Other industries: He was Executive Chairman of Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea (BBK), Vice-Chairman of the Confederación Española de Cajas de Ahorros (CECA), and a member of the board of other entities in the financial industry. He was Assistant General Manager of Banco Bilbao Vizcaya, S.A. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 196

199 Annual consolidated financial statements 2011 / Corporate governance Individual or corporate name of director Profile MR. JULIO DE MIGUEL AYNAT Valencia, Degree in Law from Universidad de Valencia. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He has been a member of the Board of Directors of Abertis Infraestructuras, S.A., of Autopistas del Mare Nostrum, S.A. (AUMAR), of Enagás, S.A. and of Áurea Concesiones de Infraestructura. Other industries: In the financial industry, he was Chairman of Caja de Ahorros de Valencia, Castellón y Alicante, Bancaja, Banco de Valencia, S.A. and Banco de Murcia, S.A. He was Vice- Chairman of Federación Valenciana de Cajas de Ahorros, as well as a member of the Board of Directors of Confederación Española de Cajas de Ahorros (CECA) and of the Instituto Valenciano de Investigaciones Económicas (IVIE). He has also been a member of the Board of Directors of Metrovacesa, S.A. He has been a member of the Audit and Compliance Committee of the Board of Directors of Enagás, S.A. He is currently a member of the Instituto Español de Analistas Financieros. MR. SEBASTIÁN BATTANER ARIAS Salamanca, Degree in Economics from the School of Economics and Business Administration (La Comercial) of Universidad Comercial de Deusto and Degree in Law from Universidad de Valladolid. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He was the founder and Executive Chairman of Grupo de Negocios Duero, S.A.U., a company with interests in companies within the Spanish energy industry. In the industrial sector, he served as a member of the Board of Directors of Uralita, S.A. It should be noted that he began his professional career at Aceros de Llodio, S.A. and Tubos Especiales Olarra, S.A. Other industries: In the financial industry, he was a member of the Board of Directors and Executive Chairman of Caja de Ahorros de Salamanca y Soria (Caja Duero), and founder and Executive Chairman of companies controlled by Caja Duero, such as Leasing del Duero, S.A., Unión del Duero de Seguros Generales, S.A. and Unión del Duero de Seguros de Vida, S.A. He was founder of Gesduero, S.A., a financial risk analysis company, co-founder and a member of the Board of Asociación Española de Banca de Negocios and a member of the Board of Confederación Española de Cajas de Ahorro (CECA). He was also co-founder of European Group of Financial Institutions EGFI (the first European economic interest grouping). He has also held management positions at other financial institutions such as Banco Atlántico, S.A., Unicaja, and Banco Europeo de Finanzas, of which he was Chairman. He is an economist and a practicing attorney. His professional experience in the management of financial and insurance entities ensures his competence to discharge his duties at the helm of the Audit and Risk Supervision Committee. In addition to his extensive experience in the financial and insurance industries, he has taught at Universidad de Deusto and at the Instituto Internacional de Dirección de Empresas (INSIDE). MR. ÍÑIGO VÍCTOR DE ORIOL IBARRA Madrid, Bachelor of Arts in International Business, graduate of the Executive Corporate Management Program of the Management School of Instituto de Estudios Superiores de la Empresa de la Universidad de Navarra (IESE Business School) and Certified European Financial Analyst (CEFA) from the Instituto Español de Analistas Financieros. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He is currently a director of Empresa de Alumbrado Eléctrico de Ceuta, S.A. He has also been a member of the Board of Directors of Neoenergía, S.A. (Brazil), Electricidad de la Paz, S.A. (Bolivia), Empresa de Luz y Fuerza Eléctrica de Oruro, S.A. (Bolivia) and Empresa Eléctrica de Guatemala, S.A. He has served as director of corporate governance for the Americas and has held the positions of director of management control at Amara, S.A. and of financial analyst at the Financial Division of Iberdrola, S.A., among other positions. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 197

200 Individual or corporate name of director Profile MS. INÉS MACHO STADLER Bilbao, Degree in Economics from Universidad del País Vasco, Masters in Economy from l École des Hautes Études en Sciences Sociales (Paris) and Doctorate in Economics (Ph.D.) from the same academic institution and from l École Nationale de la Statistique et de l Administration Économique (ENSAE). Noteworthy experience for the holding of her positions at Iberdrola: Energy industry: She is a member of the International Scientific Advisory Committee of the Basque Center for Climate Change (bc3) and has served as Chairman of the Scientific Committee of the 2011 Conference of the Asociación Española para la Economía Energética (the Spanish affiliate of the International Association for Energy Economics IAEE). Other industries: She is currently a Professor of Economics in the Economics and Economic History Department of Universidad Autónoma de Barcelona, as well as Professor of the Graduate School of Economics in Barcelona. She has taught and performed research at Universidad del País Vasco and at Universidad Autónoma de Barcelona, and has been a visiting professor in California, Copenhagen, Leuven, Montreal and Munich. She has been a member of the Executive Committee of the European Association for Research in Industrial Economics, an elected member of the Council of the European Economic Association, Honorary Member of the European Economic Association and of the Asociación Española de Economía, and has been a member of the Advisory Council of the Studies Service of Caja de Ahorros y Pensiones de Barcelona la Caixa. She has been President of Asociación Española de Economía, as well as coordinator of Agencia Nacional de Evaluación y Prospectiva and representative at the European Science Foundation. MR. BRAULIO MEDEL CÁMARA Marchena, Sevilla, Degree in Economics and Business Administration from Universidad Complutense de Madrid and Doctorate in Economics and Corporate Sciences from Universidad de Málaga. Professor of Public Finance at Universidad de Málaga. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He is member of the Board of Directors of the listed company Acerinox, S.A. and was a member of the Board of Directors of Abertis Infraestructuras, S.A. Other industries: He is Executive Chairman of Unicaja Banco, S.A. and Chairman of Monte de Piedad y Caja de Ahorros de Ronda, Cádiz, Almería, Málaga, Antequera y Jaén (Unicaja) as well as of Alteria Corporación Unicaja. He is also Chairman of Ahorro Corporación, S.A. and Chairman of Federación de Cajas de Ahorros de Andalucía and Aquagest Sur, S.A. He is Vice-Chairman of Confederación Española de Cajas de Ahorros (CECA), of which he was CEO until 1998, and Vice-Chairman of Ahorro Corporación, S.A., a member of the Board of Directors of Caja de Seguros Reunidos, Compañía de Seguros y Reaseguros, S.A. and of the AZVI, S.L. group of companies. He has been a member of the governance bodies of Agrupación Europea de Cajas de Ahorros, of which he was Vice-President between 1992 and He is a member of the Board of Agencia de Innovación y Desarrollo de Andalucía (IDEA), a member of Fundación CIEDES (Centro de Investigaciones Estratégicas y Desarrollo Económico y Social), of Fundación de Ayuda Contra la Drogadicción, of Fundación Tres Culturas del Mediterráneo, of Fundación El Legado Andalusí, of Fundación IMABIS (Instituto Mediterráneo para el Avance de la Biotecnología y la Investigación Sanitaria) and of Fundación Doñana 21. He was Deputy Minister for Economy and Finance of the Junta de Andalucía and Chairman of Consejo Andaluz de Colegios de Economistas. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 198

201 Annual consolidated financial statements 2011 / Corporate governance Individual or corporate name of director Profile MS. SAMANTHA BARBER Dunfermline, Fife, Scotland, Bachelor of Arts in Applied Foreign Languages and European Politics from the University of Northumbria, Newcastle (England, United Kingdom), with subjects (Value Units) of the University General Studies Diploma (Diplôme d Études Universitaires Générales) in Applied Foreign Languages and Business Economics from the University of Dijon, France and Graduate Course in EC Law from the University of Nancy, France. Noteworthy experience for the holding of her positions at Iberdrola: Currently, she is a non-executive director of the Centre for Scottish Public Policy and a member of the Business Advisory Board of Glasgow Caledonian University. For nine years, she was the chief executive of Scottish Business in the Community (SBC), a non-profit organization that promotes the development of sustainable economy in Scotland. She was also a board member of Business for Scotland. She served as consultant at the European Parliament in Brussels. MS. MARÍA HELENA ANTOLÍN RAYBAUD Toulon, France, 1966 Degree in International Business & Business Administration from Eckerd College, St. Petersburg, Florida (United States of America) and Masters in Business Administration from Anglia University, Cambridge (United Kingdom) and from Escuela Politécnica de Valencia (Spain). Noteworthy experience for the holding of her positions at Iberdrola: Energy and industrial engineering sectors: She was an external independent director of Iberdrola Renovables, S.A. and is a member of the Board of Directors and Corporate Industrial Director of Grupo Antolín. At Grupo Antolín-Irausa, she held the positions of Director of Human Resources Development, Total Quality Manager and Manager of Communications. She has also held other positions within Grupo Antolín, such as Corporate Director of Strategy, Manager of Organization and Methods and Deputy to Management. She has also served as Managing Director of Grupo Antolín-IPV (Valencia). MR. SANTIAGO MARTÍNEZ LAGE Betanzos, A Coruña, 1946 Degree in Law from Universidad de Madrid. He continued his studies at the Escuela de Funcionarios Internacionales de Madrid, the Escuela Diplomática, The Hague Academy of International Law, the Europa Instituut in Amsterdam (The Netherlands) and the INSEAD in Fontainebleau (France). A career diplomat on leave, he was posted to Algiers, Libreville, Sofia and Paris, and has also served at the Office of the Secretary of State for Relations with the European Community. Noteworthy experience for the holding of his positions at Iberdrola: Energy and industrial engineering sectors: He served as external independent director of Iberdrola Renovables, S.A., a member of its Executive Committee and Chairman of the Nominating and Compensation Committee. He is Secretary of the Board of Directors of SKF Española, S.A. In the past, he was a member of the boards of other companies, such as Fujitsu Services and Telettra España, S.A. Other industries: He served as Secretary of the Board of Directors of Empresa Nacional Elcano de la Marina Mercante, S.A. As lawyer and corporate consultant, in 1985 he established the Martínez Lage & Asociados law firm (currently, Martínez Lage, Allendesalazar & Brolkelmann), specialized in European Union and Competition Law and he serves as Chairman thereof. Total number of independent directors 11 Total % of Board members NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 199

202 Other External Directors Individual or corporate name of director Committee that has proposed the director s appointment Total number of other external directors Total % of Board members Describe the reasons why they cannot be considered proprietary or independent directors as well as their ties, whether with the company, its management or its shareholders. Individual or corporate name of director Reasons Company, manager or shareholder with which he has ties Indicate the changes, if any, in the type of director during the period: Individual or corporate name of director Date of change Former status Current status B.1.4. Describe, if applicable, the reasons why proprietary directors have been appointed at the proposal of shareholders whose shareholding interest is less than 5% of share capital. Individual or corporate name of director Reason State whether formal petitions for presence on the Board have been received from shareholders whose shareholding interest is equal to or greater than that of others at whose proposal proprietary directors have been appointed. If so, describe the reasons why such petitions have not been satisfied. Yes No X Individual or corporate name of shareholder Reason B.1.5. State whether any director has withdrawn from his/her position before the expiration of his/her term of office, whether the director has given reasons to the Board and by what means, and in the event that he/she gave reasons in writing to the full Board, describe at least the reasons given by the director: Yes No X Name of the director Reason for withdrawal NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 200

203 Annual consolidated financial statements 2011 / Corporate governance B.1.6. Indicate the powers delegated to the CEO(s), if any: Individual or corporate name of director MR. JOSÉ IGNACIO SÁNCHEZ GALÁN Brief description The Chairman & Chief Executive Officer, as an individual decisionmaking body, has all the powers that may be delegated under the law and the By-Laws. B.1.7. Identify the directors who are managers or directors of companies within the listed company s group, if any: Individual or corporate name of director Corporate name of entity within the group Position MR. JOSÉ IGNACIO SÁNCHEZ GALÁN SCOTTISH POWER LTD. CHAIRMAN B.1.8. Identify the directors of your company, if any, who are members of the Board of Directors of other companies listed on official stock exchanges in Spain other than those of your Group, that have been reported to your company: Individual or corporate name of director Listed company Position MR. VÍCTOR DE URRUTIA VALLEJO COMPAÑÍA VINÍCOLA DEL NORTE DE ESPAÑA, S.A. CHAIRMAN MR. VÍCTOR DE URRUTIA VALLEJO VOCENTO, S.A. DIRECTOR MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA CONSTRUCCIONES Y AUXILIAR DE FERROCARRILES, S.A. DIRECTOR MR. XABIER DE IRALA ESTÉVEZ TUBACEX, S.A. DIRECTOR MR. BRAULIO MEDEL CÁMARA ACERINOX, S.A. DIRECTOR B.1.9. Indicate and, if applicable, explain whether the company has established rules regarding the number of boards of which its directors may be members: Yes X No Description of rules Pursuant to the provisions of Article 13.b) of the Regulations of the Board of Directors, individuals or legal entities serving as directors in more than three companies with shares trading on domestic or foreign securities exchanges may not be appointed as directors or, if applicable, as the individuals to represent a director who is a legal entity. B In connection with recommendation number 8 of the Unified Code, indicate the Company s general policies and strategies reserved for approval by the full Board: The investment and financing policy The definition of the structure of the group of companies The corporate governance policy The corporate social responsibility policy The strategic or business plan, as well as management objectives and annual budgets The policy regarding compensation and evaluation of performance of senior management The risk control and management policy, as well as the periodic monitoring of the internal information and control systems The dividend policy, as well the treasury stock policy and, especially, the limits thereto YES YES YES YES YES YES YES YES NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 201

204 B Complete the following tables regarding the aggregate compensation of directors accrued during the fiscal year: a) At the Company covered by this report: Compensation item Data in thousands of euros Fixed compensation 2,250 Variable compensation 2,250 Daily fees 1,112 Token payments 4,604 Share options and/or other financial instruments 0 Other 429 Total 10,645 Other benefits Data in thousands of euros Advances 0 Loans granted 0 Pension funds and plans: Contributions 0 Pension funds and plans: Obligations incurred 0 Life insurance premiums 2,429 Guarantees given by the company for the benefit of directors 14,351 b) On account of membership by the Company s directors on other boards of directors and/or in the senior management of Group companies: Compensation item Data in thousands of euros Fixed compensation 0 Variable compensation 0 Daily fees 65 Token payments 0 Share options and/or other financial instruments 0 Other 0 Total 65 Other benefits Data in thousands of euros Advances 0 Loans granted 0 Pension funds and plans: Contributions 0 Pension funds and plans: Obligations incurred 0 Life insurance premiums 0 Guarantees given by the company for the benefit of directors 0 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 202

205 Annual consolidated financial statements 2011 / Corporate governance c) Total compensation by type of director: Type of director Per company Per group Executive 5, External Proprietary External Independent 4,506 0 Other External 0 0 Total 10, d) As a percentage of the profits attributable to the controlling company: Total compensation of directors (in thousands of euros) 10,710 Total compensation of directors / profits attributable to the controlling company (as a %) 0.4 B Identify the members of the Company s senior management who are not executive directors and state the total compensation accruing to them during the fiscal year: Individual or corporate name MR. JOSÉ LUIS SAN PEDRO GUERENABARRENA MR. JULIÁN MARTÍNEZ-SIMANCAS SÁNCHEZ MR. JOSÉ SÁINZ ARMADA MR. FERNANDO BECKER ZUAZUA MR. LUIS JAVIER ARANAZ ZUZA MR. PEDRO AZAGRA BLÁZQUEZ MR. JUAN CARLOS REBOLLO LICEAGA Position GENERAL BUSINESS DIRECTOR OF THE GROUP GENERAL SECRETARY AND SECRETARY OF THE BOARD OF DIRECTORS CHIEF FINANCIAL OFFICER CHIEF CORPORATE RESOURCES OFFICER DIRECTOR OF INTERNAL AUDIT DIRECTOR OF DEVELOPMENT DIRECTOR OF ADMINISTRATION AND CONTROL Total senior management compensation (in thousands of euros) 8,363 B Identify, on an aggregate basis, if there are indemnity or golden parachute provisions for the benefit of senior management, including executive directors, of the company or its group in the event of dismissals or changes of control. Indicate whether such agreements must be reported to and/or approved by the decision-making bodies of the company or its group: Number of beneficiaries 8 Decision-making body approving the provisions Board of Directors YES Shareholders (at the General Shareholders Meeting) NO Is information about these provisions provided to the shareholders at the General Shareholders Meeting? YES NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 203

206 B Describe the process to set the compensation of the members of the Board of Directors and the relevant provisions of the by-laws with regard thereto. Process to set the compensation of the members of the Board of Directors and by-law provisions Article 52 of the By-Laws provides that the compensation of the members of the Board of Directors shall not exceed 2% of consolidated group profits for the fiscal year, which are annually submitted for approval by the shareholders at the General Shareholders Meeting. The aforementioned article provides that the compensation of directors may also consist of the delivery of shares or options thereon, as well as a payment which takes as its reference the value of the Company s shares. In this connection, Article 34.5.D.c) of the By-Laws specifically grants the Board the power to set the Director Compensation Policy and the compensation thereof. Additionally, Article 26.6 of the Regulations of the Board of Directors provides that the Nominating and Compensation Committee shall have the following powers, among others: a) Conduct a periodic review of the Director Compensation Policy and the Senior Management Compensation Policy and propose the amendment and update thereof to the Board of Directors. j) Propose to the Board of Directors the system and amount of annual director compensation, as well as the individual compensation of executive directors and other basic terms and conditions of their contracts, including any severance payments or compensation, in any event pursuant to the provisions of the Company s Corporate Governance System. The Director Compensation Policy was updated by resolution of the Board of Directors, adopted at its meeting of December 13, 2011, and is available on the corporate website ( State whether the full Board has reserved the right to approve the following decisions: At the proposal of the Company s chief executive, the appointment and, if applicable, the removal of senior managers, as well as their indemnity provisions. The compensation of directors and, in the case of executive directors, the additional compensation for their executive duties and other terms and conditions that must be included in their contracts. YES YES B State whether the Board of Directors approves a detailed compensation policy and specify the matters covered thereby: Yes X No Amount of fixed components, with a breakdown, if applicable, of fees payable for attendance at meetings of the Board and its Committees and estimated annual fixed compensation arising therefrom. Variable compensation items. Main characteristics of the social security systems, with an estimate of the amount thereof or equivalent annual cost. Terms and conditions that must be included in the contracts with executive directors performing senior management duties, which will include (i) duration, (ii) amount of prior notice, and (iii) any other clauses regarding hiring bonuses as well as indemnification or golden parachute provisions in the event of early termination or dissolution of the contractual relationship between the company and the executive director. YES YES YES YES B State whether the Board submits a report on director compensation policy to the vote of the shareholders at a General Shareholders Meeting for consultative purposes. If so, describe the relevant portions of the report regarding the compensation policy approved by the Board for the following years and the most significant changes experienced by such policies vis-à-vis the policy applied during the fiscal year, and provide an outline of the manner in which the compensation policy was applied during the fiscal year. Describe the role of the Compensation Committee and, if external advice has been provided, state the name of the external advisors that have given such advice: Yes X No NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 204

207 Annual consolidated financial statements 2011 / Corporate governance Issues that the compensation policy report passes upon In compliance with Article 31.6 of the Regulations of the Board, the Board of Directors of Iberdrola approves, on an annual basis, a report on fixed compensation, variable compensation items (describing the parameters and assumptions or objectives taken as a reference), social security systems and the main terms and conditions to be observed by the contracts with executive directors, including the director compensation policy for the current fiscal year and the application of the compensation policy in effect in the previous fiscal year. It also includes itemized information on the compensation of each director. Role of the Compensation Committee Pursuant to Article 7 of its Regulations, the Nominating and Compensation Committee has participated in the approval and application of the Compensation Policy for fiscal year 2011 by performing the following tasks: Report in advance on the proposed Director Compensation Policy to the Board of Directors. Propose to the Board of Directors the compensation of directors for the current fiscal year and for the prior fiscal year. Submit the proposed Report on Director Compensation Policy to the Board of Directors. Has external advice been provided? Yes No X Name of external advisors B Indicate the identity of the members of the Board of Directors, if any, who are also members of the board of directors, managers or employees of companies that hold a significant interest in the listed company and/or in companies within its group: Individual or corporate name of director Individual or corporate name of significant shareholder Position Describe, if applicable, any significant relationships other than the ones contemplated in the prior item, of the members of the Board of Directors linking them to significant shareholders and/or at companies within the group: Individual or corporate name of director MR. XABIER DE IRALA ESTÉVEZ MR. JOSÉ LUIS OLIVAS MARTÍNEZ Individual or corporate name of related significant shareholder BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) BANCO FINANCIERO Y DE AHORROS, S.A. Description of relationship Proprietary director of Iberdrola appointed at the proposal of BBK and member of the Board of Directors of BBK Bank, S.A., a company whollyowned by BBK (now, Kutxabank, S.A.), of which he was Chairman until January 1, Proprietary director of Iberdrola appointed at the proposal of Caja de Ahorros de Valencia, Castellón y Alicante, Bancaja, whose business has been merged into that of BANCO FINANCIERO Y DE AHORROS, S.A., the current holder of a significant interest in Iberdrola, S.A. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 205

208 B State whether the Regulations of the Board of Directors have been amended during the fiscal year: Yes X No Description of amendments On October 26, 2011, the Board of Directors of the Company, within the framework of the amendment of Iberdrola s Corporate Governance System, approved an amended text of the Regulations of the Board of Directors, the main new provisions of which are the following: - The maximum number of members of the Board of Directors has been set at fourteen (14). - One-third of the directors may also call a meeting, establishing the agenda thereof, in order for the meeting to be held at the place where the registered office is located, if a prior petition has been submitted to the Chairman of the Board of Directors and he has failed, without well-founded reasons, to call the meeting within one month. On December 13, 2011, the Board of Directors of Iberdrola approved, within the framework of a new partial revision of Iberdrola s Corporate Governance System, a new amendment of the Regulations of the Board of Directors, in order to align the text with the spelling, grammatical, stylistic and typographical rules laid down in the Company s Style Book and make the following improvements: - Extending to the Counsel to the Board of Directors and to the secretaries of the advisory committees of the Board of Directors who are not directors the duties established in the Regulations of the Board of Directors for the Secretary and the Vice-Secretary of the Board of Directors. - Redistribution of certain responsibilities among the advisory committees. B Indicate the procedures for the appointment, re-election, evaluation and removal of directors. List the competent bodies, the procedures to be followed and the criteria applied in each of such procedures. 1. APPOINTMENT OF DIRECTORS The appointment and removal of directors is the purview of the shareholders at the General Shareholders Meeting (Article 17.1.b of the By-Laws). Vacancies which occur may be filled by the Board of Directors on an interim basis until the next General Shareholders Meeting, whereat the shareholders shall confirm the appointments or elect the persons who should replace directors which are not ratified, or it shall withdraw the vacant positions (Article 51.4 of the By-Laws). The Nominating and Compensation Committee must advise the Board of Directors regarding the most appropriate composition of the Board of Directors and of its committees as regards size and equilibrium among the various classes of directors existing at any time. For such purpose, the Committee shall review the structure of the Board of Directors and of its committees on a regular basis, especially when vacancies occur within such bodies (Article 3.a) of the Regulations of the Nominating and Compensation Committee). For such purpose, this Committee must report on and review the criteria that should be followed in composing the Board of Directors and in selecting candidates, defining their duties and necessary qualifications and assessing the time and dedication required for the proper performance of their duties. In the exercise of this power, the Committee shall take into account, regarding external directors, the relation between the number of proprietary directors and the number of independent directors, such that this relation reflects, as far as possible, the ratio of the Company s voting capital pursuant to the provisions of the By-Laws represented by proprietary directors to the rest of the share capital (Article 3.b) of the Regulations of the Nominating and Compensation Committee). In particular, the Nominating and Compensation Committee, at the request of the Board of Directors, must select potential candidates for appointment as directors of the Company, and must present its proposals or reports, as the case may be, to the Board of Directors through the Chairman thereof, with authority to do the following (Article 4 of the Regulations of the Nominating and Compensation Committee): a) Review the criteria that should be followed for the selection of candidates to serve as directors and assist the Board of Directors in the definition of the desired profiles of such candidates, taking into account the needs of the Board of Directors as well as the areas within the Board that it is deemed appropriate to strengthen, ensuring that there is no implied bias in selection procedures that might entail any discrimination, and, in particular, that may hinder the selection of women directors. b) Select the possible candidates for appointment as directors of the Company, if appropriate, and submit their proposals or reports, as the case may be, to the Board of Directors through the Chairman thereof. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 206

209 Annual consolidated financial statements 2011 / Corporate governance c) Verify that all candidates for director of the Company meet the general requirements in accordance with the provisions of law and the Company s Corporate Governance System. d) Evaluate the qualities of the various candidates and assign them to one of the categories of directors contemplated by the By-Laws of the Company. e) Submit the proposals for appointment of independent directors to the Board of Directors (for appointment on an interim basis or for submission to the shareholders for decision at the General Shareholders Meeting). f) Verify compliance with the specific requirements applicable to independent directors established by law and in the Company s Corporate Governance System and gather adequate information regarding their personal qualities, experience, knowledge and effective availability. g) Report, at the behest of the Chairman of the Board of Directors or of any other member of the Board of Directors, on the proposals for appointment of the other directors (for appointment on an interim basis or for submission to the shareholders for decision at the General Shareholders Meeting). h) Report on the proposals made by the directors who are legal entities of the individuals to act as their representatives. i) Report, in the case of proprietary directors, on the circumstances of the shareholder or shareholders proposing, requesting or determining their appointment, regardless of the method and procedure followed for the appointment, provided it is legally possible. j) Request all information and documentation deemed necessary or appropriate on candidates to serve as directors, on the individuals who are to represent the directors who are legal entities and, in the case of proprietary directors, on the shareholders who nominate, request or decide the appointment thereof, in order to prepare the proposals and reports mentioned in the preceding paragraphs. Pursuant to Article 36.2 of the By-Laws and Article 13 of the Regulations of the Board of Directors, the following may not be appointed as directors or, if applicable, as the individuals who are to represent a director that is a legal entity: a) Domestic or foreign companies competing with the Company in the energy or other industries, or the directors or senior managers thereof or the persons, if any, proposed by them in their capacity as shareholders. b) Individuals or legal entities holding the position of director in more than three companies with shares trading on domestic or foreign securities exchanges. c) Persons who, during the two years prior to their appointment, have occupied high-level positions in the government which are incompatible with the simultaneous performance of the duties of a director of a listed company under national or autonomous community legislation, or positions of responsibility with entities regulating the energy industry, the securities markets or other industries in which the Company or the Group operate. d) Individuals or legal entities who may be subject to any incompatibility or general prohibition, including those who have any interests inconsistent with those of the Company or the Group. In any event, the Board of Directors and the Nominating and Compensation Committee within its area of authority shall endeavor to ensure that the candidates proposed to the shareholders at the General Shareholders Meeting for their appointment or re-election as directors, and the directors directly appointed by the Board to fill vacancies in the exercise of its power to make interim appointments, shall be respectable, qualified persons who are widely recognized for their expertise, competence, experience, qualifications, educational background, availability and commitment to their duties (Article 11.1 of the Regulations of the Board of Directors). When the Board of Directors deviates from the proposals and reports of the Nominating and Compensation Committee, it shall give reasons for so acting and shall record such reasons in the minutes (Article 12.3 of the Regulations of the Board of Directors). 2. RE- ELECTION OF DIRECTORS Pursuant to Article 15.1 of the Regulations of the Board of Directors, the proposals for re-election of directors that the Board of Directors resolves to submit to the decision of the shareholders at the General Shareholders Meeting will be subject to a process of preparation, which shall include a proposal (in the case of independent directors) or a report (in the case of other directors) issued by the Nominating and Compensation Committee. In this regard, Article 5.c) of the Regulations of the Nominating and Compensation Committee provides that, prior to the end of the term for which a director has been appointed, the Committee must examine the advisability of his re-election, as well as his continuance, if applicable, on the committees of the Board of Directors of which he is a member. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 207

210 For the foregoing purposes, the Committee must verify that the director to be re-elected continues to meet the general requirements, to be met by all directors of the Company, pursuant to the provisions of the Law and the Corporate Governance System, as well as evaluate the quality of the work and the dedication to his position of the director in question during his previous term of office and, specifically, his respectability, capability, expertise, competence, experience, qualifications, availability and commitment to his duties. Once the procedure described above has been completed, the Committee must present its proposal (in the case of independent directors) or report (in the case of other directors) regarding the re-election of the directors. 3. EVALUATION OF DIRECTORS Pursuant to Article 7.8 of the Regulations of the Board of Directors, the Board shall annually evaluate (i) Its operation and the quality of its work, (ii) the performance of their duties by the Chairman of the Board of Directors and by the Chief Executive Officer, based on the report submitted thereto by the Nominating and Compensation Committee and (iii) the operation of its committees, in view of the report submitted thereto by such committees. For such purpose, the Chairman of the Board of Directors shall organize and coordinate the aforementioned evaluation process with the Chairman of the committees. Three significant changes in the scope of the evaluation should be highlighted vis-à-vis the evaluation carried out in the prior fiscal year: i) the process now includes the individual evaluation of the directors, ii) pursuant to Article 21 of the Regulations of the Board of Directors, the evaluation of the Chairman of the Board of Directors has been conducted by Ms. Inés Macho Stadler, in the performance of her duties as lead independent director, and such evaluation has been expanded to include the considerations of the external directors, and (iii) the process includes the evaluation of the subholding companies of the Iberdrola group, with a view to the continuous improvement of its Corporate Governance System and even though this is not mandatory, given that such companies are not listed companies. For the evaluation of fiscal year 2011, the Company has decided to rely, once more, on PricewaterhouseCoopers Asesores de Negocios, S.L. (PwC), which prepared the evaluation reports of which the Board of Directors has taken due note, endorsing the conclusions of the evaluation and the opportunities for improvement identified by such consultant. In view of the reports issued by PwC, it may be concluded that the result of the evaluation for fiscal year 2011 is highly positive in all areas subject to evaluation, with four areas having been identified as particularly strong: 1. Transparency in compensation policy. The most remarkable improvements are related to: (i) submission of the compensation policy to a vote of the shareholders at the General Shareholders Meeting, (ii) publication of the individual compensation of directors, and (iii) clarity of the compensation report. 2. Composition of the management-level decision-making bodies. Particularly noteworthy from a structural standpoint are: (i) the existence of a Corporate Social Responsibility Committee, (ii) the existence of a lead independent director, (iii) high proportion of directors compared to surrounding companies, and (iv) a high percentage of independent directors. 3. Limitations designed to ensure adequate dedication by the directors. Especially noteworthy in this regard are: (i) the reduction in the number of companies in which directors may hold director positions, (ii) the high number of meetings held by the Board of Directors and its committees, and (iii) the participation of all directors in a committee. 4. Relationship with the shareholders. Particularly noteworthy here are: (i) the quorum obtained by Iberdrola at the General Shareholders Meeting, which was one of the highest figures among the companies reviewed, (ii) holding an investor s day, and (iii) the conduct of an evaluation of the management-level decision-making bodies and of the individual directors. On the other hand, a number of improvement actions have been identified, the most significant of which are summarily described below: 1. Increase the powers and/or enhance the participation of the lead independent director, through such actions as an enlarged scope or increased frequency of the individual meetings of the lead independent director with the external directors or the participation of such lead independent director in the proposal for compensation of the Chairman, in order to submit the results of the evaluation of the Chairman by the directors. 2. As regards provisions for the return of variable compensation by the recipients thereof: (i) ensure the proper implementation thereof; (ii) extend the scope thereof to cover not only instances of restatement of accounts but also other situations that may potentially occur, such as obtaining a return below that expected in the medium/long term. 3. Ensure the application of processes allowing for a periodic update of the plan for succession. 4. Continue to enhance transparency in the provision to the markets of information on compensation tied to results, by furnishing more detailed explanations, if required, or a breakdown of the information provided. 5. Continue to work towards a future separation of the positions of Chairman and Chief Executive Officer. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 208

211 Annual consolidated financial statements 2011 / Corporate governance Finally, it should be noted that this was the first fiscal year in which Iberdrola carried out an individual evaluation of its directors, thus giving a response in the area for improvement proposed in the prior evaluation. In this regard, it has been concluded that there is a high level of compliance by all of the directors, with the following strengths being particularly noteworthy: (i) compliance with the directors duty of information; (ii) absence of incompatibilities affecting the directors, and (iii) attendance at training and information programs. As in prior evaluations, areas for improvement have been identified in connection with attendance at the highest possible number of meetings and with ensuring the delegation of voting powers in the event of absence. 4. REMOVAL OF DIRECTORS Pursuant to the provisions of Article 51.1 of the By-Laws, the directors shall serve in their position for a term of four (4) years, so long as the shareholders acting at the General Shareholders Meeting do not resolve to remove or dismiss them and they do not resign from their position. The Nominating and Compensation Committee shall exercise the powers granted thereto by the Company s Corporate Governance System in connection with the removal of directors. In this regard, Article 6 of the Regulations thereof provides that the Committee shall report to the Board of Directors regarding proposals for removal due to noncompliance with the duties inherent in the position of director or where a director is affected by supervening circumstances requiring his resignation or mandatory removal. In addition, the Committee may propose the removal of directors in the event of incompatibility, structural conflict of interest or any other grounds for resignation or removal under the Law or pursuant to the Company s Corporate Governance System. The Board of Directors may propose the withdrawal of an independent director before the passage of the period provided for in the By-Laws only upon sufficient grounds, evaluated by the Board of Directors after a report of the Nominating and Compensation Committee, or as a consequence of public tender offers, mergers or other similar corporate transactions resulting in a significant change in the structure of the Company s share capital (Article 16.6 of the Regulations of the Board of Directors), as recommended by the Unified Good Governance Code. B Indicate the circumstances under which the resignation of directors is mandatory. The directors must submit their resignation from the position and formalize their withdrawal upon the occurrence of any of the instances of incompatibility or prohibition against performing the duties of director provided by law or by Iberdrola s Corporate Governance System. In this connection, Article 16.2 of the Regulations of the Board of Directors sets forth that the directors shall tender their resignation to the Board of Directors and formally resign from their position in the following cases: a) When, due to supervening circumstances, they are involved in any circumstance of incompatibility or prohibition governed by provisions of a general nature, the By-Laws or these Regulations. b) When, as a result of any acts or conduct attributable to the director, serious damage is caused to the value or the reputation of the Company or there is a risk of criminal liability to the Company. c) When they cease to deserve the respectability or to have the capability, expertise, competence, availability or commitment to their duties required to be a director of the Company. d) When they are seriously reprimanded by the Board of Directors because they have breached any of their duties as directors, by resolution adopted by a two-thirds majority of the directors. e) When their continuance in office on the Board of Directors may, for any reason, jeopardize directly, indirectly or through their related persons (pursuant to the definition of this term set forth in these Regulations), the faithful and diligent performance of their duties in furtherance of the corporate interest. f) When the reasons why the director was appointed cease to exist and, in particular, in the case of proprietary directors, when the shareholder or shareholders who proposed, requested or decided the appointment thereof totally or partially sell or transfer their equity interest, with the result that such equity interest ceases to be significant or sufficient to justify the appointment. g) When an independent director is affected, at any time following his appointment as such, by any of the prohibitions against holding office provided for in Article 10.2 of these Regulations. h) When the condition of the activities carried out by the director, or the companies directly or indirectly controlled by the director, or the individuals or legal entities that are shareholders or related to any of them, or the individual representing a director that is a legal entity, may compromise the director s capacity to hold office as such. The resignation provisions set forth under f) and g) above shall not apply when the Board of Directors believes that there are reasons which justify the director s continuance in office, following a report of the Nominating and Compensation Committee, without prejudice to the effect that the new supervening circumstances may have on the classification of the director. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 209

212 B Explain whether the powers of the top executive of the company are vested in the chairman of the Board. If so, indicate the measures that have been taken to mitigate the risks of accumulation of powers in a single person: YES X NO Risk mitigation measures It should be noted, first, that Iberdrola has a decentralized management model, established in Section 19 of the General Corporate Governance Policy (available on the Company s corporate website which provides that the Group s corporate and governance structure is an essential part of the Company s Corporate Governance System and entails a separation between two areas of decision and responsibility. On the one hand is the Board of Directors of the Company, as the controlling company within the Group, which is responsible for establishing the overall management policies, strategies and guidelines of the Group, supervising the development of such strategies and guidelines and deciding on matters of strategic significance at the Group level, and on the other, are the Chairman of the Board of Directors, the Chief Executive Officer and the management team, who are responsible for the organization and coordination of the Group and the dissemination and implementation of management policies and guidelines at the Group level. Decentralized executive responsibilities fall upon the subholding companies of the Group, which are in charge of the dayto-day and effective management of each of the business groups as well as of day-do-day control, through their respective boards of directors (which include independent directors) and governing bodies. The Group s subholding companies also have their own audit committees and internal audit areas. The chief executive of each of the subholding companies reports to the General Business Director of the Group, who in turn reports on the progress of the various businesses to the Board of Directors. At Iberdrola, the duties of Chairman of the Board of Directors and of Chief Executive Officer of the Company are performed by the same person, which circumstance is specifically taken into account by the Nominating and Compensation Committee and by the Board of Directors upon evaluating the performance of the Chairman & Chief Executive Officer. Following the reviews carried out, the fact that Mr. José Ignacio Sánchez Galán holds the positions of Chairman of the Board and chief executive of the Company, while not a sine qua non requirement, is of undoubted benefit to the Company, as has been amply demonstrated by the performance of the Iberdrola Group and the achievements obtained in recent years. Boards of Directors are heterogeneous. There is no single operating model that has been proven to deliver better performance and greater benefit for the various stakeholders of the Company. Hence, different leadership structures of the Board of Directors may be equally valid for different companies. In this regard, it is believed that the fact that the same person holds both positions is advantageous because the Company is thus provided with clear leadership both internally and externally, with the Group s management control being handled by the same person and with a broad margin for cooperation and coordination between the management decision-making body and the Company s management being established as a result. This structure, which is particularly effective within the context of the current world crisis, makes it possible to rapidly adjust to instances of change and provides the organization with a greater capacity for response, thus reducing reporting and coordination costs while enhancing the integration of the Company s functions and its operation as a whole. However, the main measures adopted to mitigate the risks of accumulation of powers are as follows: - Eleven of the fourteen directors are independent, and eight of them have served as directors for less than twelve years. - Section 17 of the General Corporate Governance Policy, Article 38 of the By-Laws and Article 21 of the Regulations of the Board of Directors, specifically intended for instances where the same person holds the positions of Chairman and Chief Executive Officer, establish the position of lead independent director, with the following powers: (i) to request that the Chairman of the Board of Directors call a meeting of the Board of Directors whenever he/she deems appropriate, (ii) to request the inclusion of matters on the agenda for the meetings of the Board of Directors, (iii) to coordinate and voice the concerns of external directors, for which purpose he/she may hold informal meetings with them and (iv) to conduct the evaluation of the Chairman of the Board of Directors. On September 22, 2009, the Board of Directors, at the proposal of the Nominating and Compensation Committee, approved the appointment of Ms. Inés Macho Stadler as lead independent director. Ms. Inés Macho Stadler is also a member of the Executive Committee. - The Board shall also meet when so requested by one-fourth of the directors, by a Vice-Chairman, or by the lead independent director, if any. - In the three cases contemplated in the preceding paragraphs, the meeting must be held within ten days of the request. - One-third of the directors may also call a meeting, establishing the agenda thereof, in order for the meeting to be held at the place where the registered office is located, if a prior petition has been submitted to the Chairman of the Board of Directors and he has failed, without well-founded reasons, to call the meeting within one month. - The duties attributed to the Board of Directors, both in the By-Laws and in its own Regulations. - The duties attributed to the Executive Committee (Article 43 of the By-Laws and the delegation resolution adopted by the Board of Directors at its meeting held on July 3, 1991). NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 210

213 Annual consolidated financial statements 2011 / Corporate governance Risk mitigation measures - The duties attributed to the Audit and Risk Supervision Committee, to the Nominating and Compensation Committee and to the Corporate Social Responsibility Committee (Articles 44, 45 and 46 of the By-Laws and 24, 25, 26 and 27 of the Regulations of the Board of Directors). The Nominating and Compensation Committee is responsible for the annual evaluation of the Chairman s performance. Such evaluation is conducted by Ms. Inés Macho Stadler, in the performance of her duties as lead independent director. - The General Risk Control and Management Policy described in section E of this report, developed on the basis of the general duty of supervision assigned to the Board of Directors, which is required to identify the main risks to which the Company is exposed and to organize appropriate internal monitoring and information systems (Article of the By-Laws). - The activities of cooperation and support entrusted to the Operating Committee within the framework of the General Risk Control and Management Policy, as set forth in section E of this Report. Also worth noting are the following powers granted to the directors under the Regulations of the Board of Directors: - Each and every director may contribute to the scheduling of meetings of the Board of Directors, whose schedule of ordinary meetings must be set by the Board of Directors itself prior to the commencement of each fiscal year (Article 28.2). - The Chairman of the Board of Directors shall decide on the agenda for the meeting. Any director may submit a request to the Chairman of the Board of Directors for the inclusion of matters in the agenda and the latter shall be required to include them when such request has been made not less than two days in advance of the date set for the meeting (Article 28.6). - A director has the broadest powers to obtain information regarding any aspect of the Company, to examine its books, records, documents and other records of corporate transactions, to inspect its facilities, and to communicate with the senior managers of the Company. The exercise of such powers shall be previously channeled through the Secretary of the Board of Directors, acting on behalf of the Chairman of the Board of Directors (Article 32). - In order to be assisted in the performance of his duties, any director may request the hiring of legal, accounting, technical, financial, commercial or other expert advisors, whose services shall be paid for by the Company. The engagement shall necessarily deal with specific problems of a certain significance and complexity arising in the performance of the director s duties. The hiring request shall be channeled through the Secretary of the Board of Directors, who may subject it to the prior approval of the Board of Directors (Article 33). Finally, it must also be stressed that no qualified majorities are required to approve the removal of the Chairman & Chief Executive Officer when the Board of Directors deems it necessary. Therefore, the Board of Directors power of censure with respect to such positions could materialize through a resolution for removal adopted upon a simple majority. Indicate and, if applicable, explain whether rules have been established whereby one of the independent directors is authorized to request that a meeting of the Board be called or that other items be included on the agenda, to coordinate and hear the concerns of external directors and to direct the evaluation by the Board of Directors. Yes X No Description of the rules As provided by Article 38.2 of the By-Laws, in the event that the Chairman of the Board of Directors has executive duties, the Board of Directors shall, at the proposal of the Nominating and Compensation Committee, authorize a lead independent director to: a) Request that the Chairman of the Board of Directors call a meeting of the Board when he/she deems it appropriate. b) Request the inclusion of matters on the agenda for the meetings of the Board of Directors as provided in Article 28 of the Regulations of the Board of Directors. c) Coordinate and voice the concerns of external directors. d) Conduct the evaluation of the Chairman of the Board of Directors. B Are qualified majorities, different from the statutory majorities, required to adopt any type of decision? YES X NO NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 211

214 Describe the method used by the Board of Directors to adopt resolutions, including at least the minimum quorum required to hold a valid meeting and the majorities required to adopt resolutions: Description of resolution: Amendment of the Regulations of the Board of Directors (Article 5.1 of the Regulations of the Board of Directors) and serious reprimand of a director for having breached any of his duties (Article 16.2.d) of the Regulations of the Board of Directors). Quórum % A majority of the directors Type of majority % Two-thirds of the directors present in person or by proxy B Explain whether there are specific requirements, other than the requirements relating to directors, to be appointed chairman. YES NO X Description of requirements B Does the Chairman have a tie-breaking vote: YES X NO Matters on which a tie-breaking vote may be cast Pursuant to Article 40 of the By-Laws and Article 30.7 of the Regulations of the Board of Directors, the Chairman shall, in the event of a tie, have a tie-breaking vote on any matter unless he becomes subject to a conflict of interest, in which case he must abstain from participating in the deliberation and voting stages of the respective resolution as provided in Article 37 of the aforementioned Regulations. B Indicate whether the by-laws or the Regulations of the Board of Directors set forth any age limit for directors: YES NO X Age limit for the Chairman Age limit for the CEO Age limit for directors B Indicate whether the by-laws or the Regulations of the Board of Directors establish any limit on the term of office for independent directors: YES NO X Maximum term of office - B If the number of women directors is scant or nil, describe the reasons therefor as well as the initiatives adopted to correct such situation. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 212

215 Annual consolidated financial statements 2011 / Corporate governance Description of reasons and initiatives Section 12 of the General Corporate Governance Policy provides that when new candidates for membership on the Board of Directors are selected, and in order to ensure at all times the pre-eminence of the corporate interest within the Board of Directors, the Nominating and Compensation Committee ensures that nominees are upstanding and qualified persons, widely recognized for their expertise, competence, experience, qualifications, training, availability and commitment to their duties, seeking to ensure that the selection of candidates results in an appropriate equilibrium of the Board of Directors that enriches decision-making and contributes multiple points of view to the debate on the matters within its purview. Moreover, the Board has entrusted the Nominating and Compensation Committee with responsibility for ensuring that when new vacancies are filled or new directors are appointed, the selection procedures are free from any implied bias entailing any kind of discrimination and, in particular, that they do not hinder the selection of women directors. This is expressly provided by Articles 26.6.d) of the Regulations of the Board of Directors and 3.a) of the Regulations of the Nominating and Compensation Committee, as well as in Section 4.a) of the General Corporate Governance Policy, in the Corporate Social Responsibility Policy and in the Policy for the Reconciliation of Personal and Working Life and Equal Opportunity. On June 7, 2006, the Board of Directors appointed the director Ms. Inés Macho Stadler on an interim basis to fill a vacancy; such appointment was ratified by the shareholders at the General Shareholders Meeting held on March 29, 2007, where the shareholders also approved her re-election for a five-year period. It must be noted that on September 22, 2009, Ms. Inés Macho Stadler was appointed as lead independent director, a position governed by the provisions of Article 21 of the Regulations of the Board of Directors. At its meeting of July 31, 2008, the Board resolved to appoint the director Ms. Samantha Barber on an interim basis to fill a vacancy; such appointment was ratified by the shareholders at the General Shareholders Meeting held on March 20, In addition, the shareholders at the General Shareholders Meeting held on March 26, 2010 approved the proposal for appointment of Ms. María Helena Antolín Raybaud, who is classified as an external independent director. Since 2006, Iberdrola has continued to increase the number of women directors on its Board of Directors. It should be noted in this regard that seven of the current fourteen directors were appointed from fiscal year 2006 onwards; of those seven directors, three are women, which shows a proactive approach in selection procedures, aimed at the inclusion of women on the Board of Directors for the first time. In particular, indicate whether the Nominating and Compensation Committee has established procedures to ensure that selection processes are free from any implied bias hindering the selection of women directors, and deliberately searches for women candidates that meet the required profile: YES X NO Describe the main procedures The Nominating and Compensation Committee shall select possible candidates for appointment as directors of the Company and shall present its proposals or reports, as the case may be, to the Board of Directors through the Chairman of such body, for which purpose it shall take the following actions in compliance with the procedure set forth in Article 4 of the Regulations of such Committee: a) Review the criteria for selecting candidates for director and assist the Board of Directors in defining the profiles to be met by such candidates, taking into account the needs of the Board of Directors and based on the areas of the Board that require reinforcement, and ensuring that the selection procedures are free from any implied bias entailing any kind of discrimination and, in particular, from any bias that may hinder the selection of women directors. b) Select possible candidates who might be appointed as directors of the Company and present its proposals or reports, as the case may be, to the Board of Directors through its Chairman. c) Verify that all candidates for director of the Company meet the general requirements provided by law and by the Company s Corporate Governance System. d) Evaluate the qualities of the various candidates and assign them to one of the categories of directors contemplated by the By-Laws. e) Submit proposed nominations (for appointment on an interim basis to fill a vacancy or for submission to a decision by the shareholders at a General Shareholders Meeting) of independent directors. f) Verify compliance with the specific requirements for independent directors provided by law and by the Company s Corporate Governance System, and gather adequate information regarding their personal qualities, experience, knowledge and effective availability. g) At the request of the Chairman of the Board of Directors or any other member of the Board of Directors, report on proposed nominations (for interim appointment to fill a vacancy or for submission to a decision by the shareholders at a General Shareholders Meeting) of the other directors. h) Report on proposals made by directors that are legal entities regarding their individual representatives. i) Report, in the case of proprietary directors, on the situation of the shareholder or shareholders that propose, request or decide upon the appointment of such directors, whatever the method and procedure for appointment, to the extent legally possible. j) Request any information and documentation that it deems necessary or appropriate from the candidates for director, from the individuals that are to represent directors that are legal entities, and in the case of proprietary directors, from the shareholders that propose, request or decide upon the appointment thereof, in order to prepare the proposals and reports referred to in the preceding paragraphs. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 213

216 B Indicate whether there are formal procedures for proxy-voting at meetings of the Board of Directors. If so, briefly describe them. Pursuant to Articles 40.2 of the By-Laws and 30.2 and 34.2.b) of the Regulations of the Board of Directors, directors shall use their best efforts to attend the meetings of the Board of Directors and, when unable to attend in person for well-founded reasons, they shall endeavor to give a proxy to another director, to whom they shall give any appropriate instructions. They may not grant a proxy in connection with any matter in respect of which they are involved in a conflict of interest. The proxy shall be a special proxy for the Board meeting in question, and may be communicated by any means allowing for receipt thereof. B Indicate the number of meetings that the Board of Directors has held during the fiscal year. In addition, specify the number of meetings, if any, at which the chairman was not in attendance: Number of meetings of the Board 18 Number of meetings of the Board at which the Chairman was not in attendance 0 Indicate the number of meetings held by the different committees of the Board of Directors during the fiscal year: Number of meetings of the Executive Committee 25 Number of meetings of the Audit Committee 16 Number of meetings of the Nominating and Compensation Committee 13 Number of meetings of the Nominating Committee 0 Number of meetings of the Compensation Committee 0 B Indicate the number of meetings held by the Board of Directors during the fiscal year at which not all of its members have been in attendance. Proxies granted without specific instructions must be counted as absences: Number of absences of directors during the fiscal year 8 % of absences over total votes during the fiscal year B Indicate whether the annual individual financial statements and the annual consolidated financial statements that are submitted to the Board of Directors for approval have been previously certified: YES X NO Identify, if applicable, the person/persons that has/have certified the annual individual and consolidated financial statements of the company for preparation by the Board: Name MR. JOSÉ IGNACIO SÁNCHEZ GALÁN MR. JOSÉ LUIS SAN PEDRO GUERENABARRENA MR. JUAN CARLOS REBOLLO LICEAGA Position CHAIRMAN & CHIEF EXECUTIVE OFFICER GENERAL BUSINESS DIRECTOR OF THE GROUP DIRECTOR OF ADMINISTRATION AND CONTROL NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 214

217 Annual consolidated financial statements 2011 / Corporate governance B Explain the mechanisms, if any, adopted by the Board of Directors to avoid any qualifications in the audit report on the annual individual and consolidated financial statements prepared by the Board of Directors and submitted to the General Shareholders Meeting. Article 3, sub-sections f), i), j) and k) of the Regulations of the Audit and Risk Supervision Committee, provides that: The Committee shall have the following main duties: f) Supervise the process for preparing and submitting regulated financial information. i) Establish appropriate relationships with the auditors in order to receive information regarding matters that could put their independence at risk, for review thereof by the Committee, as well as regarding any other matters relating to the conduct of audits and all other communications provided for in legislation governing the audit of financial statements and in other auditing regulations. In any event, it shall receive from the auditors, on an annual basis, written confirmation of their independence in respect of the Company or entities directly or indirectly related thereto, as well as information regarding additional services of any kind provided to such entities by the said auditors or by persons or entities related thereto, pursuant to the legislation governing the audit of financial statements. j) Issue, on an annual basis and prior to the issuance of the auditor s report, a report setting forth an opinion on the independence of the auditors. This report shall, in all cases, pass upon the provision of the additional services referred to in the preceding paragraph. k) Report in advance to the Board of Directors regarding the financial information that the Company must disclose on a regular basis because of its status as a listed company; the Committee shall make sure that the interim financial statements are prepared in accordance with the same accounting standards as the annual financial statements and, for such purpose, it shall consider the appropriateness of a limited review by the auditors. For its part, Article 48.5 of the Regulations of the Board of Directors provides that: The Board of Directors shall use its best efforts to prepare the annual financial statements such that there is no room for comments by the auditors. However, when the Board of Directors believes that its opinion must prevail, it shall provide a public explanation of the content and scope of the discrepancy. Moreover, Article 6, sub-sections d) and h) of the Regulations of the Audit and Risk Supervision Committee, establishes the principal duties of such Committee: d) Review the contents of the auditors reports on the financial statements and of the reports on the limited review of interim financial statements, if any, as well as other mandatory reports to be prepared by the auditors, prior to the issuance thereof, in order to avoid qualified reports. h) Act as a channel of communication between the Board of Directors and the auditors. Pursuant to the above-cited articles, the Audit and Risk Supervision Committee reports on the economic and financial information of the Company throughout the fiscal year and prior to the approval thereof by the Board of Directors and its submission to the National Securities Market Commission (Comisión Nacional del Mercado de Valores) (CNMV). The reports of the Committee, which the Chairman thereof presents to the full Board of Directors, are mainly intended to disclose such aspects, if any, as may give rise to qualifications in the audit report of Iberdrola and its consolidated Group, making the appropriate recommendations to avoid any such qualifications. Accordingly, during fiscal year 2011, the Audit and Risk Supervision Committee submitted the following reports to the Board of Directors: - Report dated May 2, 2011 on the interim management statement for the first quarter of Report dated July 18, 2011 on the financial report for the first half of Report dated October 20, 2011 on the interim management statement for the third quarter of Report dated February 20, 2012 on the annual financial statements of Iberdrola and its consolidated Group for fiscal year NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 215

218 As disclosed in the information about Iberdrola posted on the website of the CNMV ( the audit reports on the individual and consolidated annual financial statements prepared by the Board of Directors have historically been issued without qualifications. B Is the secretary of the Board of Directors a director? YES NO X B Describe the procedures for appointment and removal of the Secretary of the Board, stating whether the appointment and removal thereof have been reported upon by the Nominating Committee and approved by the full Board. Procedure for appointment and removal Pursuant to Article 22.1 of the Regulations of the Board of Directors, the Board of Directors shall appoint its Secretary at the proposal of the Chairman and after a report of the Nominating and Compensation Committee. The same procedure must be followed in order to approve the removal of the Secretary. Does the Nominating Committee report on the appointment? Does the Nominating Committee report on the removal? Does the full Board approve the appointment? Does the full Board approve the removal? YES YES YES YES Is the secretary of the Board especially responsible for ensuring compliance with good governance recommendations? YES X NO Comments Under Section 17.d) of the General Corporate Governance Policy, further developed by Article 22.4.b) of the Regulations of the Board of Directors, the Secretary has the duty to ensure the formal and substantive legality of all actions taken by the collective management decision-making bodies and conformity thereof with the Company s Corporate Governance System. To such end, the Secretary of the Board of Directors shall take into account, among other things, the provisions issued by regulatory authorities and their recommendations, if any. Among other duties, he is also responsible for advising on the evaluation and update of the Corporate Governance System and for reporting on new corporate governance initiatives at the domestic and international levels. B Indicate the mechanisms, if any, used by the company to preserve the independence of the auditors, the financial analysts, the investment banks and the rating agencies. 1. MECHANISMS TO PRESERVE THE INDEPENDENCE OF THE AUDITOR The Auditor Hiring Policy, approved by the Audit and Risk Supervision Committee at its meeting of November 23, 2005 and updated by resolutions adopted at its meetings of March 10, 2008, April 20, 2009, December 13, 2010 and December 12, 2011, contains the internal regulations of the Company that have been established in order to preserve the independence of the Company s auditor, namely: Independence of the auditor The Company s Corporate Governance System provides that the Audit and Risk Supervision Committee shall receive information from the auditors regarding matters that might risk the independence thereof. The Audit and Risk Supervision Committee shall not submit a proposal to the Board of Directors, and the Board of Directors shall not submit a proposal to the shareholders acting at a General Shareholders Meeting, for appointment of a firm as auditor when it has evidence that such firm is affected by any circumstance of incompatibility pursuant to applicable legislation or does not satisfy the independence requirements established by the Company s Corporate Governance System. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 216

219 Annual consolidated financial statements 2011 / Corporate governance In addition, the Audit and Risk Supervision Committee shall ensure the de facto and apparent independence of the auditors by means of the authorization, prior to execution, of any contract for services other than the audit of financial statements with the firms conducting audits of financial statements at companies of the Group. The Audit and Risk Supervision Committee shall be informed of the hiring of firms conducting audits of financial statements at companies of the Group for the provision of any audit or non-audit services. The Audit and Risk Supervision Committee shall receive from the auditors, on an annual basis, written confirmation of their independence in respect the Company or entities directly or indirectly related thereto, as well as information regarding additional services of any kind provided to such entities by the said auditors or by persons or entities related thereto, pursuant to the legislation governing the audit of financial statements. The Audit and Risk Supervision Committee shall issue, on an annual basis and prior to the issuance of the auditors report, a report setting forth an opinion on the independence of the auditors. This report shall, in all cases, pass upon the provision of the additional services referred to in the preceding paragraph. Furthermore, the Audit and Risk Supervision Committee shall monitor the quality assurance and independence safeguarding internal procedures implemented by the Group s auditors. The audit firms carrying out audits of financial statements at companies of the Group shall provide to the Audit and Risk Supervision Committee, on an annual basis, information regarding the profiles and the track record of the persons making up the audit teams working for the Company, the Group and the subholding companies, with specific mention of the changes in the composition of such teams compared to the immediately preceding fiscal year. In addition, the Audit and Risk Supervision Committee shall receive information on professionals joining the Group who were formerly employed by the audit firms. In this connection, the audit firms of the Iberdrola Group appeared on a total of 6 occasions before the full Audit and Risk Supervision Committee in 2011 to report on various matters relating to the audit process. In addition, such Committee granted authorization for a total of 9 engagements of such audit firms for nonaudit work. In every such case, the audit partner of the respective firm responsible for liaising with the Committee signed a letter of independence confirming the absence of any independence restrictions prior to accepting the engagement. Moreover, and as part of the process of preparation of the annual financial statements for the fiscal year, the respective audit firms have sent the Chairman of the Audit and Risk Supervision Committee their annual certificate of independence of the firm as a whole and of the members of the team participating in the audit process. Last, the Committee was informed, where applicable, that the Iberdrola Group had hired professionals from the audit firms. 2. MECHANISMS TO PRESERVE THE INDEPENDENCE OF FINANCIAL ANALYSTS, INVESTMENT BANKS AND RATING AGENCIES The principles which form the basis of the relations of the Company with financial analysts, investment banks and rating agencies are transparency, non-discrimination, truthfulness and trustworthiness of the information supplied. The Economy and Finance Division, through the Investor Relations Division, coordinates the relations with them and deals with all their requests for information and with the requests submitted by institutional or retail investors (in the case of retail investors, through the Office of the Shareholder). The Economic and Financial Division grants mandates to investment banks. The Development Division grants the appropriate advisory mandates to investment banks within the scope of its activities and in coordination with the Economic and Financial Division. The independence of financial analysts is protected by the existence of a specific division in charge of dealing with analysts, the Investor Relations Division. This guarantees an objective, fair and non-discriminatory treatment of analysts. To actualize the principles of transparency and non-discrimination, always in strict compliance with regulations regarding the Securities Market, the Company has a number of communication channels: - Personalized assistance for analysts, investors and rating agencies. - Publication of the information relating to quarterly results and other specific events, such as those relating to the submission of the Strategic Plan or to corporate transactions. - through the Company s corporate website ([email protected]) and a toll-free line for shareholders ( ). - Presentations either in person or re-transmitted over the telephone and the Internet. - Release of announcements and news. - Visits to Company facilities. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 217

220 All this information is also available on the Company s corporate website ( There is also a document delivery system available for the shareholders and investors registered in the databases for such purpose. B Indicate whether the company has changed the external auditor during the fiscal year. If so, identify the incoming and the outgoing auditor: YES NO X Outgoing auditor Incoming auditor If there has been any disagreement with the outgoing auditor, describe the content thereof: YES NO X Description of the disagreement B Indicate whether the audit firm performs other non-audit work for the company and/or its group. If so, state the amount of the fees paid for such work and the percentage they represent of the aggregate fees charged to the company and/or its group. YES X NO Company Group Total Amount of other non-audit work (thousands of euros) Amount of non-audit work / Aggregate amount billed by the audit firm (%) B State whether the audit report on the Annual Financial Statements for the prior fiscal year has observations or qualifications. If so, state the reasons given by the chairman of the Audit Committee to explain the content and scope of such observations or qualifications. YES NO X Description of reasons B Indicate the consecutive number of years for which the current audit firm has been auditing the annual financial statements of the company and/or its group. In addition, state the percentage represented by such number of years with respect to the total number of years in which the annual financial statements have been audited: Company Group Number of consecutive years 6 6 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 218

221 Annual consolidated financial statements 2011 / Corporate governance Number of years audited by the current audit firm / Number of years in which the company has been audited (%) Company Group B Indicate the interests of members of the Board of Directors in the share capital of companies that engage in the same, similar or complementary activities, both with respect to the company and its group, and which have been reported to the company. In addition, state the position or duties of such directors in such companies: Individual or corporate name of director MR. ÍÑIGO VÍCTOR DE ORIOL IBARRA Name of company in which shares are held EMPRESA DE ALUMBRADO ELÉCTRICO DE CEUTA, S.A. % interest Position or duties DIRECTOR MR. JOSÉ LUIS OLIVAS MARTÍNEZ ABERTIS INFRAESTRUCTURAS, S.A NONE MR. JOSÉ LUIS OLIVAS MARTÍNEZ FOMENTO DE CONSTRUCCIONES Y CONTRATAS, S.A NONE MR. JOSÉ LUIS OLIVAS MARTÍNEZ MARTINSA FADESA, S.A NONE B Indicate whether there is any procedure for directors to hire external advisory services, and if so, describe it: YES X NO Description of procedure Pursuant to Article 33 of the Regulations of the Board of Directors, any director may, in order to be assisted in the performance of his duties, request the hiring of legal, accounting, technical, financial, commercial or other expert advisors, whose services shall be paid for by the Company. The assignment must deal with specific issues of certain significance and complexity arising during the performance of the director s duties. The request must be channeled through the Secretary of the Board of Directors, who may subject it to the prior approval of the Board of Directors; such approval may be denied in well-founded instances, including the following circumstances: a) That it is not necessary for the proper performance of the duties entrusted to the directors. b) That the cost thereof is not reasonable in light of the significance of the issues and the assets and income of the Company. c) That the technical assistance sought may be adequately provided by the Company s own experts and technical personnel. d) That it may entail a risk to the confidentiality of the information that must be made available to the expert. Furthermore, Article 19.2 of the Regulations of the Nominating and Compensation Committee, Article 25.2 of the Regulations of the Audit and Risk Supervision Committee and Article 16.3 of the Regulations of the Corporate Social Responsibility Committee provide that such committees may obtain advice from outside professionals, who will send their reports directly to the Chairman of the respective committee. B Indicate whether there is any procedure for directors to obtain sufficiently in advance the information required to prepare for meetings of management-level decision-making bodies and, if so, describe it: YES X NO NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 219

222 Description of procedure Section 13 of the General Corporate Governance Policy states that the Company has a program to provide directors with information and updates in response to the need for professionalization, diversification and qualification of the Board of Directors. Furthermore, in order to improve their knowledge of the Group, presentations may be made to the directors in connection with the business of the Group. In addition, at each meeting of the Board of Directors, a specific portion of the meeting may be devoted to a presentation on legal or economic matters of significance to the Group. The directors have access to a specific application, the directors website, that facilitates performance of their duties and the exercise of their right to information. Such information as is deemed appropriate for the preparation of meetings of the Board of Directors and the committees thereof in accordance with the agenda set forth in the respective calls, as well as materials relating to the director training programs and the presentations made to the Board of Directors, shall be posted on such website. In addition, there shall be posted on the directors website, once duly approved, the minutes of meetings of the Board of Directors and of the committees thereof or an abstract or summary thereof, as well as such information as the Board of Directors may decide to include. For its part, Article 28.4 of the Regulations of the Board of Directors, further developing the provisions of Article 39.2 of the By-Laws, provides that together with the call to meeting, which shall always, in the absence of well-founded reasons, include the agenda for the meeting, any information that is deemed necessary shall be sent or made available through the directors website. In addition, Article 34.2.a) of the Regulations of the Board of Directors provides that a director is specifically required to properly prepare the meetings of the Board of Directors and, if applicable, the meetings of the Executive Committee or of the committees of which the director is a member, for which purposes the director must diligently inform himself of the running of the Company and the matters to be discussed at such meetings. In order to facilitate the directors discharge of their duties, the following initiatives have been implemented: - The delivery of the directors Code of Ethics of Iberdrola, which provides the directors with an overall view of the rights and duties inherent in their position and is continuously updated. - The director s website. - The delivery of the information program to the directors of Iberdrola pursuant to Article 12.4 of the Regulations of the Board of Directors, which seeks to achieve the ongoing update of directors and consists of presentations and the delivery of informational notes to the directors at each ordinary meeting of the Board regarding matters of interest to directors because of their status as directors of the Company, information of general interest and specific information on corporate governance and corporate social responsibility. - The conduct of informational meetings led by managers and employees of the Group, at which information is provided regarding activities related to the various business areas of the Company, as well as training presentations delivered by well-known professionals from outside the Company, at which the directors receive information on matters of topical interest. B State whether the company has established any rules requiring directors to inform the company -and, if applicable, resign from their position- in cases in which the credit and reputation of the company may be damaged. If so, describe such rules: YES X NO NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 220

223 Annual consolidated financial statements 2011 / Corporate governance Description of rules Section 14 of the General Corporate Governance Policy sets forth the duties and obligations of the directors. Exhibit I to such policy is devoted to the ethical duties of directors. As provided by sub-sections c) and d) of Article of the Regulations of the Board of Directors, directors must disclose to the Company any judicial, administrative or other proceedings instituted against the director which, because of their significance or characteristics, may seriously reflect upon the reputation of the Company. In particular, in the event that a director becomes subject to an order for further criminal prosecution upon indictment (resultar procesado) or an order for the commencement of an oral trial is issued against him for the commission of any of the crimes contemplated in Section 213 of the Companies Law, such director shall give notice thereof to the Company, in the person of its Chairman. In such instance, the Board of Directors shall review the case as soon as practicable and shall adopt the decisions it deems fit taking into account the corporate interests. Directors must also disclose to the Company any fact or event that may be relevant to the holding of office as directors of the Company. Additionally, directors shall tender their resignation to the Board of Directors and formally resign from their position in the following cases, among others set forth in Article 16.2 of the Regulations of the Board of Directors: a) When, due to supervening circumstances, they are involved in any circumstance of incompatibility or prohibition governed by provisions of a general nature, the By-Laws or these Regulations of the Board of Directors. b) When, as a result of any acts or conduct attributable to the director, serious damage is caused to the value or reputation of the Company or there is a risk to the Company of criminal liability. c) When they cease to deserve the respectability or to have the capability, expertise, competence, availability or commitment to their duties required to be a director of the Company. d) When they are seriously reprimanded by the Board of Directors because they have breached any of their duties as directors, by resolution adopted by a two-thirds majority of the directors. e) When their continuance in office on the Board of Directors may, for any reason, jeopardize directly, indirectly or through their related persons (pursuant to the definition of this term set forth in these Regulations), the faithful and diligent performance of their duties in furtherance of the corporate interest. f) When the reasons why the director was appointed cease to exist and, in particular, in the case of proprietary directors, when the shareholder or shareholders who proposed, requested or decided the appointment thereof totally or partially sell or transfer their equity interest, with the result that such equity interest ceases to be significant or sufficient to justify the appointment. g) When an independent director is affected, at any time following his appointment as such, by any of the prohibitions against holding office provided for in Article 10.2 of the Regulations of the Board of Directors. h) When the condition of the activities carried out by the director, or the companies directly or indirectly controlled by the director, or the individuals or legal entities that are shareholders or related to any of them, may compromise the director s capacity to hold office as such. In any of the instances set forth in section 2 of Article 16 of the Regulations of the Board of Directors, the Board of Directors shall request the director to resign from his position and, if applicable, shall propose his removal from office to the shareholders at the General Shareholders Meeting. By way of exception, the resignation provisions set forth in the above-cited letters f) and g) of Article 16.2 of the Regulations of the Board of Directors shall not apply when the Board of Directors believes that there are reasons which justify the director s continuance in office, following a report of the Nominating and Compensation Committee, without prejudice to the effect that the new supervening circumstances may have on the classification of the director. B State whether any member of the Board of Directors has informed the company that he has become subject to an order for further criminal prosecution upon indictment or that an order for the commencement of an oral trial has been issued against him for the commission of any of the crimes contemplated in Section 124 of the Companies Law: YES NO X Name of director Criminal case Comments NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 221

224 Indicate whether the Board of Directors has analyzed the case. If so, provide a duly substantiated explanation of the decision adopted regarding whether or not the director should remain in office. YES NO X Decision adopted Duly substantiated explanation B.2. Committees of the Board of Directors B.2.1. List all the committees of the Board of Directors and the members thereof: Executive Committee Name Position Class MR. JOSÉ IGNACIO SÁNCHEZ GALÁN CHAIRMAN EXECUTIVE MR. VÍCTOR DE URRUTIA VALLEJO MEMBER INDEPENDENT MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA MEMBER INDEPENDENT MR. XABIER DE IRALA ESTÉVEZ MEMBER PROPRIETARY MR. JOSÉ LUIS OLIVAS MARTÍNEZ MEMBER PROPRIETARY MS. INÉS MACHO STADLER MEMBER INDEPENDENT Audit and Risk Supervision Committee Name Position Class MR. JULIO DE MIGUEL AYNAT CHAIRMAN INDEPENDENT MR. SANTIAGO MARTÍNEZ LAGE SECRETARY-MEMBER INDEPENDENT MR. SEBASTIÁN BATTANER ARIAS MEMBER INDEPENDENT Nominating and Compensation Committee Name Position Class MR. JOSÉ IGNACIO BERROETA ECHEVARRÍA CHAIRMAN INDEPENDENT MS. INÉS MACHO STADLER MEMBER INDEPENDENT MR. ÍÑIGO VÍCTOR DE ORIOL IBARRA MEMBER INDEPENDENT Corporate Social Responsibility Committee Name Position Class MR. RICARDO ÁLVAREZ ISASI CHAIRMAN INDEPENDENT MR. BRAULIO MEDEL CÁMARA MEMBER INDEPENDENT MS. SAMANTHA BARBER MEMBER INDEPENDENT MS. MARÍA HELENA ANTOLÍN RAYBAUD MEMBER INDEPENDENT NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 222

225 Annual consolidated financial statements 2011 / Corporate governance B.2.2. State whether the Audit Committee has the following duties: Supervise the process of preparation and the integrity of the financial information relating to the Company and, if applicable, to the Group, monitoring compliance with legal requirements, the proper delimitation of the scope of consolidation, and the correct application of accounting principles. Periodically review the internal control and risk management systems, in order for the main risks to be properly identified, managed and made known. Ensure the independence and effectiveness of the internal audit area; make proposals regarding the selection, appointment, re-election and withdrawal of the head of the internal audit area; propose the budget for such area; receive periodic information regarding its activities; and verify that senior management takes into account the conclusions and recommendations contained in its reports. Establish and supervise a mechanism whereby the employees may give notice, on a confidential basis and, if deemed appropriate, anonymously, of any potentially significant irregularities, especially of a financial and accounting nature, that they notice at the Company. Submit to the Board proposals for the selection, appointment, re-election and replacement of the external auditor, as well as the contractual terms under which it should be hired. Regularly receive from the external auditor information regarding the audit plan and the results of the implementation thereof, and verify that senior management takes its recommendations into account. Ensure the independence of the external auditor. In the case of groups of companies, favor the auditor of the group as the auditor responsible for audit work at the companies that form part thereof. YES YES YES YES YES YES YES YES B.2.3. Describe the rules of organization and operation of, and the duties assigned to, each of the Board committees. Name of the committee EXECUTIVE COMMITTEE Brief description Pursuant to Article 43 of the By-Laws, the Executive Committee shall be composed of the number of members decided by the Board of Directors, with a minimum of five directors and a maximum of eight. In all cases, members shall include the Chairman of the Board of Directors, who shall preside over meetings of the Executive Committee, the Vice-Chairman or Vice-Chairmen and the Chief Executive Officer, if any. The Secretary of the Board of Directors or, in the absence thereof, the Vice-Secretary of the Board of Directors or, in the absence of both, the member of the Committee appointed from among the members attending the meeting in question, shall act as Secretary of the Committee. The Executive Committee shall meet at the intervals deemed appropriate by the Chairman thereof and at least twenty times a year. Resolutions adopted by the Executive Committee shall be reported to the Board of Directors at its next meeting. Resolutions of the Executive Committee shall be adopted by the majority of its members present at the meeting in person or by proxy. In the event of a tie, the Chairman shall have the tie-breaking vote. The duties of this Committee consist of making proposals or reporting to the Board regarding strategic decisions, investments and divestitures that are significant for the Company or the Group, assessing their conformity to the Budget and the Strategic Plan and analyzing and monitoring business risks. The provisions of the By-Laws regarding the operation of the Board of Directors shall apply to the Executive Committee, to the extent they are not incompatible with the nature thereof. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 223

226 Name of the committee AUDIT AND RISK SUPERVISION COMMITTEE NOMINATING AND COMPENSATION COMMITTEE CORPORATE SOCIAL RESPONSIBILITY COMMITTEE Brief description Pursuant to Article 9 of the Regulations of the Audit and Risk Supervision Committee, the Committee shall be composed of a minimum of three directors and a maximum of five, appointed by the Board of Directors, at the proposal of the Nominating and Compensation Committee, from among the external directors who are not members of the Executive Committee. The Board of Directors shall appoint a Chairman of the Committee from among the independent directors sitting on the Committee and a Secretary, who need not be a director. The members of the Audit and Risk Supervision Committee shall carry out their duties for a maximum term of three years, and may be re-elected one or more times for terms of the same maximum length. The position of Chairman shall be held for a maximum term of three years, after which period such person may not be re-elected until the passage of at least one year from ceasing to act as such, without prejudice to such person continuing or being re-elected as a member of the Committee. The Committee shall meet as many times as needed, in the opinion of its Chairman, and at the request of at least two of its members. The Committee shall validly meet when the majority of its members are present in person or by proxy, and shall adopt its resolutions by majority of the votes of the members present at the meeting in person or by proxy. In the event of a tie, the Chairman of the Audit and Risk Supervision Committee shall have the tie-breaking vote. It should be noted that, at the meeting of May 20, 2008, the Audit and Risk Supervision Committee and the Board of Directors approved a Procedure for Management of the Communication Channel with the Audit and Risk Supervision Committee, in line with the provisions of Recommendation 50.1 d) of the Unified Good Governance Code. No communications were received in this regard during fiscal year Pursuant to Article 45 of the By-Laws, the Nominating and Compensation Committee is an internal informational and consultative body without executive powers, which has the information, advisory and proposal-making powers within its scope of action. The Nominating and Compensation Committee shall be composed of a minimum of three and a maximum of five directors, appointed by the Board of Directors from among the external directors. The Board of Directors also appoints the Chairman thereof from among the members of such Committee, as well as its Secretary, who need not be a director. The members of the Nominating and Compensation Committee shall hold office for a maximum term of three years, and may be re-elected one or more times for terms of the same maximum length. For purposes of operation of the Committee, it shall meet as many times as needed, in the opinion of its Chairman, and when so requested by at least two of its members. The Committee shall be validly convened when the majority of its members are present in person or by proxy, and shall adopt its resolutions by majority vote of the members present at the meeting in person or by proxy. In the case of a tie, the Chairman of the Nominating and Compensation Committee shall have the tie-breaking vote. Pursuant to Article 27 of the Regulations of the Board of Directors, the Corporate Social Responsibility Committee is a permanent internal informational and consultative body without executive powers, with information, advisory and proposal-making powers within its scope of action. The Committee shall be made up of a minimum of three and a maximum of five directors appointed by the Board of Directors, at the proposal of the Nominating and Compensation Committee, from among the external directors, and the majority of such directors shall be independent. The Board of Directors shall appoint a Chairman of the Committee from among the directors sitting thereon, and a Secretary, who need not be a director. The members of the Corporate Social Responsibility Committee shall hold office for a maximum term of three years and may be re-elected one or more times for terms of the same maximum length. The Committee shall meet as many times as needed, in the opinion of its Chairman, and at the request of at least two of its members. The Committee shall be validly convened when the majority of its members are present in person or by proxy, and its resolutions shall be adopted by majority vote of the members present at the meeting in person or by proxy. In the event of a tie, the Chairman of the Corporate Social Responsibility Committee shall have the tie-breaking vote. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 224

227 Annual consolidated financial statements 2011 / Corporate governance B.2.4. Indicate the advisory and consulting powers as well as the delegated powers, if any, of each of the committees: Name of the committee EXECUTIVE COMMITTEE AUDIT AND RISK SUPERVISION COMMITTEE Brief description There are delegated to it all matters within the power of the Board of Directors which, in the sole judgment of the Committee, should be resolved without further delay, excepting only the drawing-up of the financial statements, the presentation of the balance sheets at the General Shareholders Meeting and those powers which are given by the shareholders to the Board of Directors without the power of delegation. The main duties of the Audit and Risk Supervision Committee are the following: a) Periodically review the Risk Policies and propose the amendment and update thereof to the Board of Directors. b) Approve the Auditor Hiring Policy, establishing the procedure for hiring the auditor, the relationship therewith, the circumstances that might affect the independence thereof and the instruments required to ensure the transparency of such relationship. c) Report to the shareholders at the General Shareholders Meeting regarding questions raised therein by shareholders on matters within its area of authority. d) Monitor the effectiveness of internal control at the Company and within its Group, as well as of their risk management systems. e) Analyze, together with the auditors, significant weaknesses detected in the internal control system during the conduct of the audit. f) Supervise the process for preparing and submitting regulated financial information. g) Propose the appointment, re-election or replacement of the auditors to the Board of Directors for submission thereof to the shareholders at the General Shareholders Meeting, pursuant to applicable law. h) Supervise the activities of the Internal Audit Area, which shall be functionally controlled by the Committee. i) Establish appropriate relationships with the auditors in order to receive information regarding matters that could put their independence at risk, for review thereof by the Committee, as well as regarding any other matters relating to the conduct of audits, and all other communications provided for in legislation governing the audit of financial statements and in other auditing regulations. In any event, it shall receive from the auditors, on an annual basis, a written confirmation of their independence in respect of the Company or entities directly or indirectly related thereto, as well as information regarding additional services of any kind provided to such entities by the said auditors or by persons or entities related thereto, pursuant to the legislation governing the audit of financial statements. j) Issue, on an annual basis and prior to the issuance of the auditors report, a report setting forth an opinion on the independence of the auditors. This report shall, in all cases, pass upon the provision of the additional services referred to in the preceding paragraph. k) Report in advance to the Board of Directors regarding the financial information that the Company must disclose on a regular basis because of its status as a listed company; the Committee shall make sure that the interim financial statements are prepared in accordance with the same accounting standards as the annual financial statements and, for such purpose, it shall consider the appropriateness of a limited review by the auditors. l) Report to the Board of Directors, prior to the adoption by it of the corresponding decision, regarding the creation or acquisition of interests in special purpose entities or entities registered in countries or territories regarded as tax havens, as well as regarding any other transactions or operations of a similar nature that, due to the complexity thereof, might detract from the transparency of the Group. By way of exception, such transactions shall not be subject to the prior report of this Committee when they are carried out by listed companies of the Group which have corporate governance regulations similar to those of the Company that provide that such transactions shall fall within the purview of their own corporate decision-making bodies. m) Issue such other reports or carry out such other activities as may fall within its purview pursuant to the Company s Corporate Governance System or as may be requested by the Board of Directors or the Chairman thereof. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 225

228 Name of the committee NOMINATING AND COMPENSATION COMMITTEE Brief description The main duties of the Nominating and Compensation Committee are the following: a) Advise the Board of Directors regarding the most appropriate configuration thereof and of its committees as regards size and equilibrium among the various classes of directors existing at any time. For such purpose, the Committee shall review the structure of the Board of Directors and of its committees on a regular basis, particularly when vacancies occur within such bodies. b) Report on and review the criteria that should be followed in composing the Board of Directors and in selecting candidates, defining their duties and necessary qualifications and assessing the time and dedication required for the proper performance of their work. In exercising this power, the Committee shall take into account, regarding external directors, the relation between the number of proprietary directors and the number of independent directors, such that this relation reflects, as far as possible, the ratio of the Company s voting share capital (pursuant to the provisions of the By-Laws) represented by proprietary directors to the rest of the share capital. c) Ensure that the persons to be appointed to the office of director by means of any procedure meet the requirements of respectability, capability, expertise, competence, experience, qualifications, educational background, availability and commitment to their duties and that they are not affected, directly or indirectly, by any of the instances of incompatibility with or prohibition against holding office or of having interests in conflict with or contrary to the corporate interest set forth in provisions of a general nature or in the Company s Corporate Governance System; in so doing, the Committee shall endeavor to ensure that the selection of candidates provides adequate equilibrium to the Board of Directors as a whole, such that decision-making is enriched and multiple viewpoints are contributed to the discussion of the matters dealt with. d) Ensure that when new vacancies are filled or new directors are appointed, the selection procedures are free from any implied bias entailing any kind of discrimination and, in particular, from any bias that may hinder the selection of women directors. e) Report on and make proposals relating to the appointment or removal of the members that must make up each of the committees, verifying and confirming compliance with the requirements of expertise and experience in connection with the duties of the committee in question and, in particular, those of the Audit and Risk Supervision Committee. f) Report on proposals relating to the appointment or removal of the Chairman of the Board of Directors. g) Report on proposals made by the Chairman of the Board of Directors regarding the appointment or removal of the Chief Executive Officer. h) Examine or organize the succession of the Chairman of the Board of Directors and of the Chief Executive Officer of the Company and, if applicable, make proposals to the Board of Directors for such succession to occur in an orderly and well-planned fashion. i) Report on proposals made by the Chairman of the Board of Directors regarding the appointment or removal of the Vice-Chairman or Vice-Chairmen of the Board of Directors. j) Submit to the Board of Directors a proposal for the appointment of an independent director with special powers in the event that the Chairman of the Board of Directors performs executive duties, and report on the proposal of removal of such director. k) Report on proposals made by the Chairman of the Board of Directors regarding the appointment or removal of the Secretary, and of the Vice-Secretary or Vice-Secretaries, if any, of the Board of Directors, the General Secretary and the Counsel. l) Report on proposals made by the Chairman of the Board of Directors or by the Chief Executive Officer regarding the appointment or removal of senior managers. m) Become familiar with and report, if applicable, to the Board of Directors regarding the selection, appointment and compensation of the directors and senior managers of the main companies within the Group and affiliates thereof, without prejudice to respect for the independence and uniqueness (upon the terms set forth in applicable legal provision) of those that are listed companies and have corporate governance rules that assign such powers to their own nominating and compensation committee or equivalent body. This duty shall be exercised within legal limits and within the framework of coordinating the interests of the Company and the companies within the Group, as well as the main affiliates. n) Collect from the Chairman of the Board of Directors and from the Chief Executive Officer the information required for the exercise of its powers regarding the directors and senior managers at the main companies within the Group and affiliates thereof, without prejudice to respect for the independence and uniqueness of those that are listed companies upon the terms set forth above. o) Issue such other reports or carry out such other as may also fall within its purview, pursuant to the Company s Corporate Governance System or as may be requested by the Board of Directors or the Chairman thereof. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 226

229 Annual consolidated financial statements 2011 / Corporate governance Name of the committee CORPORATE SOCIAL RESPONSIBILITY COMMITTEE Brief description The main duties of the Corporate Social Responsibility Committee are the following: a) Periodically review the Social Responsibility Policies and propose the amendment and update thereof to the Board of Directors. b) Review and analyze the expectations of stakeholders and ensure that they are taken into account in formulating Social Responsibility Policies. c) Report on the annual sustainability report prior to approval thereof by the Board of Directors. d) Know, promote, guide and supervise the Company s actions relating to corporate social responsibility and sustainability and report thereon to the Board of Directors and to the Executive Committee, as the case may be. e) Ensure that the Group is included in the most widely recognized international sustainability indexes. f) Advise, within its area of authority, on matters such as employment, innovation, satisfaction, diversity, integration, non-discrimination, equality, conciliation, accessibility and mobility. g) Propose a co-coordinated strategy for the Group s social action and its sponsorship and patronage plans. h) Channel the relations of the Group with Fundación Iberdrola, which shall implement the corporate social responsibility strategy to the extent that it is in keeping with the purpose for which it was created and is assigned to it by the Board of Directors. i) Assess and review the Company s plans implementing the Social Responsibility Policies and monitor the degree of compliance therewith. j) Assess, on an ongoing basis, the Group s status in connection with corporate social responsibility. k) Advise the Board of Directors regarding compliance with and effects of the public initiatives launched in the various countries where the Group does business to promote corporate social responsibility. l) Assess draft bills on corporate social responsibility and related activities (equality, social and environmental variables in Government agreements, etc.) and their possible effects on the Group s activities. m) Assess the possible influence on the Group of European corporate social responsibility laws and regulations as well as of domestic, Autonomous Community and local laws dealing with corporate social responsibility. n) Evaluate voluntary initiatives and documents with recommendations concerning corporate social responsibility that appear in the market. o) Disseminate internally the latest communication and responsible marketing trends. p) Assess the latest responsible innovation trends. q) Prepare plans designed to review best corporate practices using systematic measurement tools, in order to assess the corporate social responsibility positioning of competitor companies. r) Review the various corporate social responsibility measurement and observation tools implemented at the domestic and international levels and provide recommendations to improve the positioning of the Group. s) Issue the corporate social responsibility and sustainability reports and take such actions as are incumbent upon it under the Company s Corporate Governance System or that it may be requested to take by the Board of Directors or its Chairman. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 227

230 B.2.5. Indicate, if applicable, the existence of regulations of the Board committees, where such regulations may be consulted and the amendments made during the fiscal year. Also indicate if any annual report of the activities performed by each committee has been voluntarily prepared. Name of the committee AUDIT AND RISK SUPERVISION COMMITTEE NOMINATING AND COMPENSATION COMMITTEE CORPORATE SOCIAL RESPONSIBILITY COMMITTEE Brief description The Audit and Risk Supervision Committee has its own Regulations, which may be viewed by interested parties on the Company s website ( Such Regulations were amended by the Board of Directors of the Company by resolution of October 26, 2011, in order to align Article 8, section a, with the changes made in connection with the Communication Channel with the Committee; thus, a mechanism was established whereby shareholders, in addition to professionals, may report potentially significant financial and accounting irregularities. Moreover, the Regulations were amended by the Board of Directors of the Company by resolution adopted on December 13, Prior to such resolution, this Committee performed the duty of reporting on proposed amendments of the Code of Ethics, which is now within the purview of the Corporate Social Responsibility Committee, and the duty of previously reporting to the Board of Directors regarding related-party transactions with directors and significant shareholders, as well as on the matters contemplated in Title VIII of the Regulations of the Board of Directors, which is now within the purview of the Nominating and Compensation Committee. Article 20.2 of the Regulations of the Audit and Risk Supervision Committee provides that within three months following the end of each fiscal year of the Company, the Committee shall submit to the Board of Directors for approval a report describing its work during the fiscal year covered by such report, which shall be made available to the shareholders on occasion of the call to the ordinary General Shareholders Meeting. With respect to fiscal year 2011, the Report was prepared by the Audit and Risk Supervision Committee at its meeting of January 18, The Report will be made available to the shareholders on occasion of the ordinary General Shareholders Meeting. The reports of the Audit and Risk Supervision Committee are also available to the public on the Company s corporate website ( The Nominating and Compensation Committee has its own Regulations, which may be viewed by interested parties on the Company s corporate website ( Article 21.2 of the Regulations of the Nominating and Compensation Committee provides that within three months following the close of the Company s fiscal year, the Committee shall submit to the Board of Directors for approval a report detailing its work for the fiscal period covered by the report. The Corporate Social Responsibility Committee has its own Regulations, which may be viewed by interested parties on the Company s corporate website ( Article 18.2 of the Regulations of the Corporate Social Responsibility Committee provides that within the first three months following the end of each fiscal year of the Company, the Committee shall submit to the Board of Directors for approval a report on its activities during the fiscal year covered by the report. As regards fiscal year 2011, the report was prepared by the Corporate Social Responsibility Committee at its meeting of February 14, B.2.6. Indicate whether the composition of the executive committee reflects the participation of the different directors in the Board of Directors based on their category: YES X NO If no, explain the composition of your Executive Committee NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 228

231 Annual consolidated financial statements 2011 / Corporate governance NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 229

232 C. RELATED-PARTY TRANSACTIONS C.1. State whether the Board as a full body has reserved for itself the power to approve, after a favorable report of the Audit Committee or any other committee entrusted with such duty, transactions carried out by the company with directors, with significant shareholders or shareholders represented on the Board, or with persons related thereto: YES X NO C.2. Describe the relevant transactions that involve a transfer of resources or obligations between the company or entities within its group and the company s significant shareholders: Individual or corporate name of significant shareholder ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS Individual or corporate name of the company or entity within its Group Nature of the relationship Type of transaction Amount (in thousands of euros) IBERDROLA GROUP Contractual Receipt of services 21,604 ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS IBERDROLA GROUP Contractual Purchase of goods (finished or in progress) 5,919 ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS IBERDROLA, S.A. Contractual Provision of services 65 IBERDROLA, S.A. Corporate Dividends received 158,485 ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS IBERDROLA, S.A. Contractual Purchase of goods (finished or in progress) 9 ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS ACS, ACTIVIDADES DE CONSTRUCCIÓN Y SERVICIOS IBERDROLA, S.A. Contractual Receipt of services 3,972 IBERDROLA, S.A. Contractual Leases 25 QATAR INVESTMENT AUTHORITY IBERDROLA, S.A. Corporate Dividends received 1,794 BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA GROUP Contractual Financial income 563 BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA GROUP Contractual Repayment or cancellation of credit facilities and lease agreements (lessee) IBERDROLA GROUP Contractual Financial lease agreements (lessee) IBERDROLA GROUP Contractual Commitments/guarantees cancelled 7, ,713 BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA GROUP Contractual Commitments acquired 192,652 IBERDROLA GROUP Contractual Financial expenses 1,794 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 230

233 Annual consolidated financial statements 2011 / Corporate governance Individual or corporate name of significant shareholder BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. Individual or corporate name of the company or entity within its Group Nature of the relationship Type of transaction IBERDROLA GROUP Contractual Financing agreements: credit facilities and capital contributions (borrower) Amount (in thousands of euros) 79,932 IBERDROLA GROUP Contractual Security and bonds provided 21,201 BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA GROUP Contractual Financing agreements: credit facilities and capital contributions (lender) 121,381 BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA, S.A. Contractual Security and bonds provided 183 IBERDROLA, S.A. Contractual Financial expenses 5,845 BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA, S.A. Contractual Commitments/Guarantees cancelled 715 BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. IBERDROLA, S.A. Contractual Commitments acquired 381,021 IBERDROLA, S.A. Contractual Financial income 348 IBERDROLA, S.A. Corporate Dividends received 60,076 BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. BANCO FINANCIERO Y DE AHORROS, S.A. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) IBERDROLA, S.A. Contractual Financing agreements: credit facilities and capital contributions (borrower) IBERDROLA, S.A. Contractual Financing Agreements: credit facilities and capital contributions (lender) IBERDROLA, S.A. Contractual Repayment or cancellation of credit facilities and lease agreements (borrower) IBERDROLA GROUP Contractual Repayment or cancellation of credit facilities and lease agreements (borrower) IBERDROLA GROUP Contractual Financing agreements: credit facilities and capital contributions (borrower) IBERDROLA GROUP Contractual Financing agreements: credit facilities and capital contributions (lender) 128,750 3, ,126 3,150 20,951 35,979 BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) IBERDROLA GROUP Contractual Financial expenses 763 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 231

234 Individual or corporate name of significant shareholder BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) Individual or corporate name of the company or entity within its Group Nature of the relationship Type of transaction Amount (in thousands of euros) IBERDROLA GROUP Contractual Financial income 88 BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) IBERDROLA, S.A. Contractual Financing agreements: credit facilities and capital contributions (lender) 5,098 BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) IBERDROLA, S.A. Contractual Financial income 124 IBERDROLA, S.A. Corporate Dividends received 59,665 BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) IBERDROLA, S.A. Contractual Financing agreements: credit facilities and capital contributions (borrower) 8,890 BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA (BBK) IBERDROLA, S.A. Contractual Financial expenses 21 NEXGEN CAPITAL LIMITED IBERDROLA GROUP Contractual Financial expenses 1,068 NEXGEN CAPITAL LIMITED IBERDROLA GROUP Contractual Financing agreements: credit facilities and capital contributions (borrower) NEXGEN CAPITAL LIMITED IBERDROLA GROUP Contractual Financing agreements: credit facilities and capital contributions (borrower) NEXGEN CAPITAL LIMITED IBERDROLA GROUP Contractual Financial lease agreements (borrower) 16,918 2,080 6,769 NEXGEN CAPITAL LIMITED IBERDROLA, S.A. Corporate Dividends received 53,093 C.3. Describe the relevant transactions that involve a transfer of resources or obligations between the company or entities within its group and the directors or managers of the company: Individual or corporate name of directors or managers Individual or corporate name of the Company or entity within its Group Nature of transaction Type of transaction Amount (in thousands of euros) NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 232

235 Annual consolidated financial statements 2011 / Corporate governance C.4. Describe the relevant transactions made by the company with other companies belonging to the same group, provided they are not eliminated in the preparation of the consolidated financial statements and they are not part of the ordinary course of business of the company as to their purpose and conditions: Corporate name of the entity within the group Amount (in thousands of euros) Brief description of the transaction AMARA, S.A. 6,678 Purchase of goods (finished or in process) AMARA, S.A. 2,586 Provision of services AMARA, S.A. 174 Leases AMARA, S.A. 8,940 Receipt of services AMARA, S.A. 2 Sale of goods (finished or in process) GAMESA GROUP 61,800 Receipt of services GAMESA GROUP 2,475 Dividends GAMESA GROUP 603,109 Purchase of goods (finished or in process) GAMESA GROUP 374 Provision of services MEDGAZ, S.A. 356 Provision of services C.5. State whether the members of the Board of Directors have been subject to any conflict of interest situation during the fiscal year pursuant to the provisions of Section 127 ter of the Companies Law. YES X NO Individual or corporate name of the director MR. JOSÉ IGNACIO SÁNCHEZ GALÁN MR. RICARDO ÁLVAREZ ISASI MR. JULIO DE MIGUEL AYNAT MR. SEBASTIÁN BATTANER ARIAS MR. XABIER DE IRALA ESTÉVEZ MR. ÍÑIGO VÍCTOR DE ORIOL IBARRA Description of the conflict of interest situation a) All resolutions relating to the compensation of the Chairman & Chief Executive Officer were adopted without his presence. b) The resolutions relating to the indemnity commitments assumed by Iberdrola to the Chairman & Chief Executive Officer were adopted without the presence of Mr. José Ignacio Sánchez Galán. c) The resolutions relating to payment of the Strategic Bonus and to the new Strategic Bonus were adopted without the presence of the Chairman & Chief Executive Officer. a) The resolutions relating to his compensation as Chairman of the Corporate Social Responsibility Committee were adopted without the presence of Mr. Ricardo Álvarez Isasi. a) Mr. Julio de Miguel Aynat left the meeting at which the resolution regarding his appointment as Chairman of the Audit and Risk Supervision Committee was approved on June 21, a) Mr. Sebastián Battaner Arias left the meeting at which the resolution regarding his discharge as Chairman of the Audit and Risk Supervision Committee was approved on June 21, 2011, on which Committee he continues to sit as a member. a) The information of a strategic, confidential and sensitive nature in connection with the renewable energy business area was submitted without the presence of the director Mr. Xabier de Irala Estévez, in compliance with the resolutions adopted by the Board of Directors at its meetings of May 17 and June 21, a) The resolutions relating to his compensation as a member of the Nominating and Compensation Committee were adopted without the presence of Mr. ÍÑIGO Víctor de Oriol Ibarra. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 233

236 Individual or corporate name of the director MS. INÉS MACHO STADLER MR. BRAULIO MEDEL CÁMARA MR. JOSÉ LUIS OLIVAS MARTÍNEZ MS. SAMANTHA BARBER MS. MARÍA HELENA ANTOLÍN RAYBAUD MR. SANTIAGO MARTÍNEZ LAGE Description of the conflict of interest situation a) The resolutions relating to her compensation as a member of the Executive Committee, were adopted without the presence of Ms. Inés Macho Stadler. a) The resolutions relating to his compensation as a member of the Corporate Social Responsibility Committee were adopted without the presence of Mr. Braulio Medel Cámara. a) All information relating to changes in supply and the sale of gas and to agreements with Medgaz, S.A. provided at meetings of the Board of Directors and of the Executive Committee of Iberdrola, S.A. was submitted without the presence of the proprietary director Mr. José Luis Olivas Martínez, the individual representative of the director Caja de Ahorros de Valencia, Castellón y Alicante, Bancaja (a part of Banco Financiero y de Ahorros, S.A.) at Enagás, S.A. b) In his capacity as proprietary director of the significant shareholder Banco Financiero y de Ahorros, S.A. (a significant shareholder of Bankia, S.A.), Mr. José Luis Olivas Martínez left the meeting during deliberations regarding the investment of the Company in the Initial Public Offering (IPO) of the shares of Bankia, S.A. a) The resolutions relating to her compensation as a member of the Corporate Social Responsibility Committee were adopted without the presence of Ms. Samantha Barber. a) The resolutions relating to her compensation as a member of the Corporate Social Responsibility Committee were adopted without the presence of Ms. María Helena Antolín Raybaud. a) The resolutions relating to his compensation as a member of the Audit and Risk Supervision Committee were adopted without the presence of Mr. Santiago Martínez Lage. b) Mr. Santiago Martínez Lage left the meeting at which the resolution regarding his appointment as Secretary of the Audit and Risk Supervision Committee was adopted on June 21, C.6. Describe the mechanisms used to detect, determine and resolve potential conflicts of interest between the company and/or its group, and its directors, managers or significant shareholders. In addition to the provisions of the General Corporate Governance Policy, as explained below, this topic is specifically regulated in the By-Laws, the Regulations of the Board of Directors and the Procedure for Conflicts of Interest and Related-Party Transactions with Directors, Significant Shareholders and Senior Managers. 1. RULES APPLICABLE TO POSSIBLE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE DIRECTORS Articles 13 and 16 of the Regulations of the Board of Directors provide that having interests opposed to those of the Company constitutes grounds for incompatibility for appointment as director and, if applicable, triggers the director s duty to resign from office. Such articles also provide that competence to hold office as director is a requirement for appointment as director of the Company, and expressly lay down the duty of directors to resign when they may jeopardize, for any reason and directly, indirectly or through their related persons, the faithful and diligent performance of their duties in furtherance of the corporate interest. For such purposes, Article 37 of the aforementioned Regulations provides that it shall be deemed that a director lacks or, if applicable, has ceased to possess the competence required to hold office when there is a structural and permanent situation of conflict between the director (or a person related to him or, in the case of a proprietary director, the shareholder or shareholders that proposed or made his appointment, or persons directly or indirectly related thereto) and the Company or the companies forming part of the Group. Independently of the foregoing, Article 37 of the Regulations of the Board of Directors also regulates conflict of interest situations affecting directors and persons related thereto, and in section 1 thereof, it defines the conflict of interest situations to which directors may be subject, as follows: A conflict of interest shall be deemed to exist in those cases in which there is a conflict, whether direct or indirect, between the interests of the Company or of the companies forming part of the Group and the personal interest of the director. A personal interest of the director shall be deemed to exist when a matter affects the director or a person related to him or, in the case of a proprietary NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 234

237 Annual consolidated financial statements 2011 / Corporate governance director, the shareholder or shareholders that proposed or made his appointment or persons directly or indirectly related thereto. For purposes of the Regulations of the Board of Directors, the following shall be deemed related persons: a) The director s spouse or another person related to the director by a like relationship of affection. b) The ascendants, descendants or siblings of the director or of the director s spouse (or another person related to the director by a like relationship of affection). c) The spouses of the director s ascendants, descendants and siblings. d) The companies in which the director or his/her respective related persons, acting personally or through a third party, fall within any of the instances of control established by law. e) The companies or entities in which the director or any of his related persons, acting personally or through a third party, holds a management position or from which he receives compensation for any reason, provided that the director also directly or indirectly exercises a significant influence on the financial and operating decisions of such companies or entities. In the case of a legal entity acting as director, the following shall be deemed to be related persons: a) The shareholders who, in respect of the legal entity acting as director, fall within any of the cases of control established by law. b) The companies that form part of the same group, as such is defined in the law, and the shareholders thereof. c) The individual acting as a representative, the directors (in fact or in law) and the liquidators of, and the representatives holding general powers of attorney granted by, the legal entity acting as director. d) Those persons who, in respect of the representative of the legal entity acting as director, are deemed related persons pursuant to the provisions of the preceding sub-section applicable to individuals acting as directors. Conflicts of interest shall be governed by the following rules, set forth in Article 37.4 of the aforementioned Regulations: a) Communication: the director must give notice to the Board of Directors, in the person of the Chairman or the Secretary of the Board of Directors, of any conflict of interest in which the director is involved. b) Abstention: the director shall leave the meeting during the deliberation and voting on those matters in which the director is affected by a conflict of interest, and shall not be counted in the number of members attending for purposes of the calculation of a quorum and majorities. c) Transparency: in the Annual Corporate Governance Report, the Company shall report any cases of conflict of interest in which the directors have been involved during the fiscal year in question and of which the Company is aware by reason of notice given thereto by the director affected by such conflict or by any other means. Notwithstanding the foregoing, in those instances where the conflict of interest situation is, or may reasonably be expected to be, of a nature such that it constitutes a structural and permanent conflict between the director (or a person related thereto or, in the case of a proprietary director, the shareholder or shareholders that proposed or made his appointment or persons directly or indirectly related thereto) and the Company or the companies forming part of the Group, it shall be deemed that the director lacks, or has ceased to possess, the competence required to hold office for purposes of the provisions of these Regulations. The foregoing rules are supplemented by Article 41 of the Regulations of the Board of Directors, which provides that any transaction between the Company or the companies forming part of the Group with directors, with shareholders that own a shareholding interest that is equal to or greater than that legally regarded as significant at any time or which have proposed the appointment of any of the directors of the Company, or with the respective related persons, shall be subject to the approval of the Board of Directors, or in urgent cases, of the Executive Committee, following a favorable report of the Audit and Risk Supervision Committee, which shall ensure that transactions between the Company or the companies forming part of its Group and the directors, the shareholders mentioned in the preceding paragraph or the respective related persons are carried out under arm s length conditions and with due observance of the principle of equal treatment of shareholders who are in the same situation. In addition, in the event that, due to the urgency of the matter, the approval has been granted by the Executive Committee, the latter shall report thereon at the next meeting of the Board of Directors. However, in the case of customary or recurring transactions in the ordinary course of business, it shall be sufficient for the Board of Directors to give a generic and prior approval of the kind of transaction and of the conditions for performance thereof, upon a prior favorable report from the Nominating and Compensation Committee. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 235

238 The only exception is that no authorization of the Board of Directors shall be required in connection with transactions that simultaneously satisfy the following three conditions: that they are conducted under contracts whose terms and conditions are standardized and apply on an across-the-board basis to a large number of clients; that they are conducted at prices or rates established generally by the party acting as supplier of the goods or services in question; and that the amount thereof does not exceed one percent of the annual income of the Company, as reflected in the audited annual financial statements for the most recent fiscal year closed prior to the date of the transaction in question. 2. RULES APPLICABLE TO POSSIBLE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE MANAGERS The Procedure for Conflicts of Interest and Related-Party Transactions with Directors, Significant Shareholders and Senior Managers subjects conflicts affecting managers who report directly to the Board of Directors, to the Chairman thereof or to the Chief Executive Officer of the Company and, in all cases, the director of the Internal Audit Area, as well as any other manager that the Board of Directors regards as such, to the same rules of communication and abstention that apply to the directors. As regards the other managers and employees, the Code of Ethics applies to all professionals within the Group, regardless of rank, and dedicates a specific section to conflicts of interest. In dealing with this issue, the Code provides that professional decisions must be based on the best defense of the interests of the Group and must not be influenced by personal or family relationships or other personal interests of Group professionals. The Code also includes examples of situations that could give rise to a conflict of interest: a) Being involved, personally or through relatives, in a financial transaction or operation to which any of the companies of the Group is party. b) Negotiating or formalizing contracts on behalf of the Group with individuals who are relatives of the professional or with legal entities in which the Group professional has a relative who holds a management position, is a significant shareholder or director. c) Being a significant shareholder, director, etc. of customers, suppliers or direct or indirect competitors of any of the companies of the Group. The Code of Ethics provides that written notice must be given to an immediate superior of the existence or possible existence of a conflict of interest. The superior shall notify the Corporate Resources Division, which shall have and maintain a register covering this type of situation and may, if it deems it appropriate, forward the notice or refer the inquiry in question to the Regulatory Compliance Unit or to the appropriate body. 3. RULES APPLICABLE TO POSSIBLE CONFLICTS OF INTEREST BETWEEN THE COMPANY AND SIGNIFICANT SHAREHOLDERS Transactions between companies belonging to the Group and shareholders with a shareholding interest equal to or greater than that legally regarded as significant at any time or that have proposed the appointment of any of the directors and their respective related persons are dealt with by Article 41 of the Regulations of the Board of Directors. Such Article 41 provides that the aforementioned transactions shall be subject to the approval of the Board of Directors, or in urgent cases, of the Executive Committee, following a favorable report of the Nominating and Compensation Committee, in order to ensure that such transactions are carried out under arm s length conditions and with due observance of the principle of equal treatment of shareholders who are in the same situation. The Company shall report the transactions mentioned in Article 41 of the Regulations of the Board of Directors in the Semi-annual Financial Report, in the annual financial statements and in the Annual Corporate Governance Report, in those cases and to the extent provided by law. As provided in connection with transactions with directors, the above-mentioned article also states that in the case of customary or recurring transactions in the ordinary course of business, it shall be sufficient for the Board of Directors to give a generic and prior approval of the kind of transaction and of the conditions for performance thereof, upon a prior favorable report from the Nominating and Compensation Committee. It is further provided as follows: However, no authorization of the Board of Directors shall be required in connection with transactions that simultaneously satisfy the following three conditions: that they are conducted under contracts whose terms and conditions are standardized and apply on an across-the-board basis to a large number of clients; that they are conducted at prices or rates established generally by the party acting as supplier of the goods or services in question; and that the amount thereof does not exceed one percent of the annual income of the Company, as reflected in the audited annual financial statements for the most recent fiscal year closed prior to the date of the transaction in question. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 236

239 Annual consolidated financial statements 2011 / Corporate governance Finally, Article 30 of the By-Laws, already mentioned in section A.10 above, also refers to conflicts of interest to which shareholders may become subject, providing that those participating in a merger or split-off with the Company or who are called to subscribe to an increase in capital with the exclusion of pre-emptive rights or to acquire by overall assignment all of the Company s assets, may not exercise their voting rights for the approval of such resolutions at a General Shareholders Meeting. This voting prohibition shall cease to have effect when the Company has been the target of a public tender offer and the circumstances mentioned in section A.10 of this Report are present. C.7. Is more than one company of the group listed in Spain? YES NO X Identify the listed subsidiaries: Listed subsidiary State whether they have publicly and accurately defined their respective areas of activity and any possible business relationships among them, as well as those between the listed dependent company and the other companies within the group: YES NO Describe the possible business relationships between the parent company and the listed subsidiary, and between the subsidiary and the other companies within the Group Describe the mechanisms established to resolve possible conflicts of interest between the listed subsidiary and the other companies within the group: Mechanisms for the resolution of possible conflicts of interest NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 237

240 D. RISK CONTROL SYSTEMS D.1. General description of the risk control policy adopted by the company and/or its group, describing and assessing the risks covered by the system and a justification for the adjustment of such system to the profile of each kind of risk. The Group is subject to various risks inherent in the different countries, industries and markets in which it does business and in the activities it carries out, which may prevent it from achieving its objectives and successfully implementing its strategies. Aware of the significance of this issue, the Board of Directors of the Company promotes the implementation of the mechanisms required in order for the significant risks facing all the activities and businesses of the Group to be adequately identified, measured, managed and controlled, and establishes, through the General Risk Control and Management Policy of the Group, the mechanisms and basic principles for appropriate management of the riskopportunity combination, at a risk level that makes it possible to: a) Attain the strategic objectives established by the Group with controlled volatility, b) Provide the maximum level of assurance to the shareholders, c) Protect the results and the reputation of the Group, d) Defend the interests of the shareholders, customers, other stakeholders interested in the running of the Company, and society in general, and e) Ensure corporate stability and financial strength in a sustained fashion over time. In the implementation of the aforementioned commitment, the Board of Directors and its Executive Committee have the cooperation of the Audit and Risk Supervision Committee, which, as a consultative body, monitors and reports upon the appropriateness of the system for assessment and internal control of significant risks, in coordination with the audit committees existing at other Group companies. Every action aimed at risk control and mitigation must comply with the following basic action principles: a) Integrate the risk-opportunity vision into the Company s management, through a definition of the strategy and the risk profile and the incorporation of this variable into strategic and operating decisions. b) Segregate functions, at the operating level, between risk-taking areas and areas responsible for the analysis, control and monitoring of risks, ensuring an appropriate level of independence. c) Ensure the proper use of risk hedging instruments and the maintenance of records thereof as required by applicable law. d) Inform regulatory agencies and the principal external players, in a transparent fashion, regarding the risks facing the Group and the operation of the systems developed to monitor such risks, maintaining suitable channels that favor communication. e) Align with the General Risk Control and Management Policy all the specific policies that may need to be developed in the area of risks in the various businesses and companies controlled by the Group. f) Ensure adequate knowledge of the corporate governance regulations established by the Company through its Corporate Governance System and the update and continuous improvement of such system within the framework of the best international practices as to transparency and good governance, and implement the monitoring and measurement thereof. g) Act at all times in compliance with the law and with the Company s Corporate Governance System and, in particular, with due observance of the values established in the Code of Ethics. The General Risk Control and Management Policy and the basic principles underpinning it are implemented by means of a comprehensive risk control and management system (which has maintained the ISO 9001:2000 quality certificate by AENOR since December 2005), supported by a Corporate Risk Committee and based upon a proper definition and allocation of functions and responsibilities at the operating level and upon supporting procedures, methodologies and tools, suitable for the various stages and activities within the system, including: a) The identification of significant risks, including corporate governance, market, credit, business, regulatory, operational, environmental, reputational and other risks, by taking into account their possible impact on the key management objectives: new investments and financial statements (including contingent liabilities and other offbalance sheet risks). NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 238

241 Annual consolidated financial statements 2011 / Corporate governance b) The analysis of such risks, both at each corporate business division or function and taking into account their combined effect on the Group as a whole and, in particular, the analysis of risks associated with new investments as an essential component of decision-making in terms of risk/return. c) The establishment of a structure of policies, guidelines and limits, as well as of the corresponding mechanisms for the approval and implementation thereof, which effectively contribute to risk management being performed in accordance with the Company s risk profile. d) The implementation of and monitoring of compliance with the policies, guidelines and limits, by means of appropriate procedures and systems, including the contingency plans needed to mitigate the impact of the materialization of risks. e) The measurement and monitoring of risks, by following homogeneous procedures and standards which are common to the Group as a whole and, in particular, the periodic monitoring and control of income statement risks, in order to control the volatility of the Group s annual income. f) The information and internal control systems allowing for a periodic and transparent evaluation and communication of the results of the monitoring of risk control and management activities, including the observance of policies and limits. g) The continual evaluation of the suitability and efficiency of applying the system and the best practices and recommendations in the area of risks for eventual incorporation thereof into the model. h) The audit of the system by the Internal Audit Division. In addition, the General Risk Control and Management Policy is further developed and supplemented by the Corporate Risk Policies and the Specific Risk Policies, which are established in connection with specific businesses and/or companies of the Group, are also approved by the Company s Board of Directors and are listed below. Structure of the Group s Risk Policies: a) Corporate Risk Policies: Corporate Credit Risk Policy Corporate Market Risk Policy Insurance Policy Investment Policy Financing and Financial Risk Policy Treasury Stock Policy Risk Policy for Equity Interests in Listed Companies Reputational Risk Framework Policy b) Specific Risk Policies for the Various Group Businesses: Risk Policy for the Deregulated Business in Continental Europe (Iberdrola Generación) Risk Policy for the Deregulated Business in the United Kingdom (Scottish Power). Risk Policy for the Deregulated Business in Mexico (Iberdrola México). Risk Policy for the Gas Business in the United States and Canada Risk Policy for the Grid Business in Spain (Iberdrola Distribución Eléctrica) Risk Policy for the Grid Business in the United Kingdom (Scottish Power) Risk Policy for the Business of Iberdrola USA Risk Policy for the Grid Business in Brazil (Elektro) Risk Policy for the Renewable Business Risk Policy for the Business of Iberdrola Ingeniería y Construcción Risk Policy for the Business of Iberdrola Inmobiliaria The General Risk Control and Management Policy, as well as a Summary of the Corporate Risk Policies and a Summary of the Specific Risk Policies of the Various Group Businesses, are available on the corporate website ( NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 239

242 In order to adjust the impact of risks to the established risk appetite, the Executive Committee of the Board of Directors, at the proposal of the affected business or corporate divisions and after a report from the Group s Risk Committee, reviews and approves, on an annual basis, specific guidelines governing the Group s risk limits. In accordance with such guidelines, the appropriate management decision-making body of each Group company reviews and approves, on an annual basis, the specific risk limits applicable to each of them. The companies and corporate functions within the Group are responsible for implementing in their areas of action the control systems needed to comply with the General Risk Control and Management Policy and with the limits thereunder. The risk factors to which the Group is subject are set forth generally below: a) Corporate Governance risks: the Company assumes the need to safeguard the corporate interest and the strategy of sustained maximization of the financial value of the Company and its long-term success, in accordance with the corporate interest, the culture and the corporate vision of the Group, taking into account the lawful public or private interests converging in the performance of all corporate activities and, in particular, the interests of the communities and regions in which the Company operates and those of its employees, among the interests of the various stakeholders. For such purpose, it is essential to comply with the Company s Corporate Governance System, made up of the By-Laws, the Corporate Policies, the internal corporate governance regulations and the other internal codes and procedures approved by the competent bodies of the Company and patterned on good governance recommendations generally recognized in international markets. b) Market risks: defined as exposure of the Group s results of operations to fluctuations in prices and market variables, such as exchange rate, interest rate, prices of raw materials (electricity, gas, CO 2 emission rights, other fuel, etc.), prices of financial assets, among others. c) Credit risks: defined as the possibility that a counterparty fails to perform its contractual obligations, thus causing an economic or financial loss to the Group. Counterparties may be final customers, counterparties in financial markets or in energy markets, partners, suppliers or contractors. d) Business risks: established as uncertainty as to the behavior of key variables inherent in the business, such as characteristics of demand, weather conditions, strategies of the various players, among others. e) Regulatory risks: those resulting from regulatory changes made by the various regulators, such as changes in the compensation of regulated activities or in the required terms of supply, environmental regulations, tax regulations, among others. f) Operational risks: those relating to direct or indirect financial losses caused by inadequate internal processes, technological failures, human error, or as a consequence of external events, including the economic, social, environmental and reputational impact thereof, as well as legal risk. g) Reputational risks: potential negative impact on the Company s value resulting from business performance not living up to the expectations created among various stakeholders: shareholders, customers, media, analysts, Government, employees, and society in general. The section entitled Main risk factors associated with the activities of the Iberdrola Group of the Management Report within the Annual Report for fiscal year 2011 provides additional information in this regard. Owing to its universal and dynamic nature, the system allows for the consideration of new risks that may affect the Group following changes in its operating environment or revisions of objectives and strategies, as well as adjustments resulting from ongoing monitoring, verification, review and supervision activities. The Audit and Risk Supervision Committee of the Board of Directors periodically monitors the evolution of the Company s risks: It reviews the Group s Quarterly Risk Reports, which include monitoring compliance with risk limits and indicators and updated key risk maps, submitted by the Group s corporate director of risks. It also coordinates and reviews the risk reports submitted at least on a semi-annual basis by the audit and compliance committees of the main Group subsidiaries, which, together with the appearances by the Director of Risks, are used to prepare a risk report for submission to the Board of Directors at least on a semi-annual basis. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 240

243 Annual consolidated financial statements 2011 / Corporate governance D.2. Indicate whether any of the various types of risks (operational, technological, financial, legal, reputational, tax-related, etc.) affecting the company and/or its group materialized during the fiscal year. YES X NO If so, indicate the circumstances giving rise to them and whether the established control systems have worked: Risk that occurred during the fiscal year The risks that occurred during fiscal year 2011 are identified in section G. Circumstances giving rise thereto 1) Those inherent in the conduct of the business. 2) The economic and financial crisis. 3) US: The strong development of shale gas. 4) United Kingdom: Establishment of minimum price for CO 2 emission rights and competition in the energy market. Performance of control systems The Company s ordinary Control and Management systems, the Risk Committee, the Operating Committee and, in particular, the Comprehensive Risk System made it possible to identify new threats and risks sufficiently in advance and to establish appropriate mitigation plans. The Comprehensive Risk System, which includes, among other activities: 1) The annual review and approval of Risk Policies by the Board of Directors, 2) The annual review and approval of the guidelines on Risk Limits and Indicators by the Executive Committee of the Board, 3) The continuous monitoring of risks by the Audit and Risk Supervision Committee and, in particular, the review and supervision of the Quarterly Risk Reports, which include monitoring compliance with risk limits and indicators and updated Key Risk Maps, worked properly. D.3. Indicate whether there is any committee or other decision-making body in charge of establishing and supervising these control mechanisms. YES X NO If so, describe its duties: Name of committee or other body BOARD OF DIRECTORS Description of duties Within its area of authority, and with the support of the Audit and Risk Supervision Committee, it promotes the implementation of the mechanisms required to ensure the adequate identification, measurement, management and control of all significant risks, defines the Company s strategy and risk profile and approves the Group s risk policies. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 241

244 Name of committee or other body EXECUTIVE COMMITTEE AUDIT AND RISK SUPERVISION COMMITTEE Description of duties In order to align the impact of the risks with the established risk profile, it approves the specific guidelines regarding the risk limits defined in the policies, at the proposal of the business or corporate divisions involved and after a report of the Group s Risk Committee, with the support of the Audit and Risk Supervision Committee. Pursuant to the guidelines set out in such policies, each Group company approves, at the corresponding management decision-making body, the specific risk limits applicable to each of them and implements the control systems required to ensure compliance with the policy and its limits. The Risk Committee of the Iberdrola Group is a technical body chaired by the Chief Financial Officer, which both performs executive duties in the day-to-day management of risks and provides advice to the Group s Governance bodies. The Committee meets at least once a month with the participation of the Director of Risk Management, the heads of the risk areas in the corporate businesses and areas in which they exist, the Internal Audit Division and the Administration and Control Division. As a consultative body reporting to the Board of Directors, this Committee has the following main duties: a) Continuously review the internal control and risk management systems, such that the principal risks are properly identified, managed and reported. b) Ensure that the Group s risk control and management system identifies at least: i. The different types of risk (operational, technological, financial, legal, reputational, etc.) facing the Company, including, among financial or economic risks, contingent liabilities and other offbalance sheet risks. ii. The establishment and review of the risk map and levels that the Company deems acceptable. iii. The measures planned in order to mitigate the impact of identified risks in the event that they materialize. iv. The information and internal control systems that will be used to monitor and manage the aforementioned risks, including contingent liabilities and other off-balance sheet risks. c) Maintain appropriate relationships with the Risk Division and with the audit and risk supervision committees of the other companies of the Group. d) Report in advance on the risks of the Group to be included in the Company s Annual Corporate Governance Report and give notice thereof to the Board of Directors, through the Corporate Social Responsibility Committee, for an assessment of its conclusions. D.4. Identification and description of the procedures for compliance with the various regulations that affect the company and/or its group. The companies of the Iberdrola Group are present in different countries where they are subject to compliance with different laws and regulations. In particular, the power industry, in which the principal activities of the Group are carried out, is subject to strict regulations that have undergone significant changes in recent years. Each of such Group companies has specific Control, Legal Services and Human Resources divisions which, acting in coordination with the corporate divisions and with the heads of operations of each business unit, are responsible for ensuring compliance with applicable laws in each case. The foregoing entails the assumption that the business units abroad receive local advice in connection with the specific laws and regulations affecting the business and the Group in each country. The Corporate Social Responsibility Committee ensures compliance with legal requirements and the requirements of the codes of ethics and good governance adopted by the Board of Directors. Additionally, the Company has a Regulatory Compliance Unit, a collective body reporting to the Office of the General Secretary with duties in the area of regulatory compliance and the Company s Corporate Governance System, specifically in connection with the following and without prejudice to other duties that may be assigned thereto: the Internal Regulations for Conduct in the Securities Markets, the Code for the Separation of Activities of the Companies of the Iberdrola Group Carrying out Regulated Activities in Spain, the Procedure for Conflicts of Interest and Related-Party Transactions with Directors, Significant Shareholders and Senior Managers, the Action Protocol for the Management of News and Rumors, and the Internal Rules for the Processing of Non-Public Information. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 242

245 Annual consolidated financial statements 2011 / Corporate governance The Regulatory Compliance Unit is chaired by the General Secretary and has a Director of Regulatory Compliance, appointed by the General Secretary, to whom such Director reports and by whom he is functionally controlled. The Director of Regulatory Compliance leads the Regulatory Compliance Unit and is responsible for the proper operation thereof, as well as for implementing any appropriate measures and action plans and for ensuring that the Regulatory Compliance Unit duly discharges the duties assigned thereto within the Corporate Governance System. Acting through the Director of Regulatory Compliance and to the extent allowed by applicable law, the Regulatory Compliance Unit has access to the information, documents and offices of the companies, directors, managers and employees of the Group, including the minutes of meetings of the management, supervision and control bodies, as may be required for the proper discharge of its duties. In this regard, all employees, managers and directors of such companies must provide the Regulatory Compliance Unit with the cooperation requested for the proper fulfillment of its duties. To the extent possible and provided that the effectiveness of its work is not affected thereby, the Regulatory Compliance Unit endeavors to act in a transparent fashion, informing affected directors, managers and employees of the purpose and scope of its activities, whenever possible and appropriate. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 243

246 E. GENERAL SHAREHOLDERS MEETING E.1. Indicate and, if applicable, explain whether there are differences with the minimum requirements set out in the Companies Law in connection with the quorum needed to hold a valid General Shareholders Meeting. YES X NO Quorum % different from that established as a general rule in Section 102 of the Companies Law Quorum % different from that established in Section 103 of the Companies Law for the special cases set forth in such Section 103 Required quorum upon 1 st call Required quorum upon 2 nd call Description of differences As the only exception to the rules provided by the Companies Law (Ley de Sociedades de Capital), Article 21.2 of the By-Laws increases the quorum required to hold a valid meeting in order to adopt resolutions regarding a change in the corporate purpose, transformation, total split-off, dissolution of the Company and amendment of this section 2, in which case "shareholders representing two-thirds of subscribed share capital with voting rights must be in attendance at the first call of the General Shareholders Meeting, and shareholders representing sixty (60%) percent of such share capital must be in attendance at the second call. E.2. Indicate and, if applicable, explain whether there are differences with the rules provided by the Companies Law for the adoption of corporate resolutions. YES X NO Qualified majority other than that established in Section of the Companies Law for the cases set forth in Section % established by the entity for the adoption of resolutions Are there other instances in which a qualified majority is required? YES X NO Instance Value Amendment of the rules set forth in Title III of the By-Laws % Describe the differences with the rules provided by the Companies Law. Describe the differences Article 58 of the By-Laws provides that resolutions intended to eliminate or amend the provisions contained in Title III (governing the neutralization of limitations in the event of tender offers), in paragraphs 3 to 5 of Article 29 (Approval of Resolutions), and in Article 30 (Conflicts of Interest) shall require the affirmative vote of three-fourths of the share capital in attendance at a General Shareholders Meeting. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 244

247 Annual consolidated financial statements 2011 / Corporate governance E.3. Explain the rights of the shareholders regarding general shareholders meetings which are different from the rights provided in the Companies Law. Iberdrola s shareholders are granted the following rights with greater content than the minimum content required by law: 1. RIGHT TO REQUEST THAT A GENERAL SHAREHOLDERS MEETING BE CALLED AND THAT NEW ITEMS BE INCLUDED ON THE AGENDA Iberdrola s By-Laws reduce from 5% to 1% the percentage of share capital required for shareholders to request the inclusion of items on the agenda for the General Shareholders Meeting that the Board of Directors has the duty to call when a public tender offer is made for securities issued by the Company, pursuant to Article 19.2.c) of the By-Laws and Section 4 of the General Corporate Governance Policy. 2. RIGHT TO RECEIVE INFORMATION The internal regulations of Iberdrola provide for the means that the Company must make available to the shareholders for them to exercise their right to receive information prior to and during the course of the General Shareholders Meeting. Section 5 of the General Corporate Governance Policy provides that the Corporate Governance System elaborates on the provisions of applicable law governing information for shareholders as regards the means that the Company must make available to them in order for them to be able to exercise their right to receive information prior to and during the General Shareholders Meeting. As from the date of publication of the call to General Shareholders Meeting, such information as is deemed appropriate to facilitate informed attendance of the shareholders at the General Shareholders Meeting is made available to them on the Company s corporate website (thus avoiding the use of documents in paper form and thereby favoring respect for and protection of the environment). A translation into English of the proposals, reports and documents relating to the General Shareholders Meeting is also made available on such website, although the Spanish text shall in any event prevail in the event of conflict. From the date of publication of the call to the General Shareholders Meeting through and including the seventh day prior to the date set for the meeting to be held on first call, the shareholders may request in writing the information or clarifications that they deem are required, or ask the written questions they deem relevant regarding the matters contained in the agenda for the meeting. In addition, upon the same prior notice and in the same manner, the shareholders may request information or clarifications or ask written questions regarding the information accessible to the public which has been provided by the Company to the National Securities Market Commission since the holding of the last General Shareholders Meeting. In order to facilitate the exercise of such right, information may be requested by delivering the request at the registered office or sending it to the Company by postal or electronic correspondence in the manner established by the Board of Directors when calling each General Shareholders Meeting. It is a priority objective of the Company for all shareholders to be able to exercise their right to receive information through the Company s corporate website, and, with such end in mind, it provides technological means on the website that facilitate access thereto by persons with disabilities. In addition, Article 19 of the Regulations for the General Shareholders Meeting provides for the shareholders right to request information prior to the Meeting via mail or other means of electronic or long-distance data communication, such as the Company s corporate website ( As provided in Section 9 of the General Corporate Governance Policy, the Company has three communication channels to provide information to shareholders and investors: a) The Office of the Shareholder (Oficina del Accionista). From the call to the General Shareholders Meeting to the end thereof, the shareholders can rely on the support of the Office of the Shareholder, which has a specific site for such purpose at the premises where the meeting is held in order to resolve any issues that the attendees may raise prior to the commencement of the meeting, as well as to serve and provide information to the shareholders who wish to use the floor. Furthermore, the Office of the Shareholder is in contact with those shareholders who have voluntarily entered their names in its database, and provides a specific service for the organization of presentations and events prior to the General Shareholders Meeting. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 245

248 b) The Shareholders Club (Club del Accionista). This is an open and permanent communication channel of the Company with the financial community and shareholders who voluntarily join such Club and are interested in monitoring the evolution of the Company on an ongoing basis. c) The Investor Relations Office (Oficina de Relaciones con Inversores). This responds on a regular and personalized basis to the questions of analysts and institutional and qualified investors in equities, fixed-income securities and socially responsible investments. These communication channels and the functions, scope of application and means of contact are further developed in the Policy regarding the Provision of Information to and Relations with Shareholders and the Markets. 3. RIGHT TO ATTEND Every shareholder entitled to vote is granted the possibility of attending the General Shareholders Meeting. In addition, the By-Laws contemplate measures to facilitate the attendance of shareholders at the General Shareholders Meeting, and admit the possibility of such meeting being held at different places that are interconnected through video conference systems. Thus, Article 24.2 of the By-Laws provides that The General Shareholders Meeting may be attended by going to the place where the meeting is to be held or, if applicable, to other places provided by the Company and indicated in the call to meeting, and which are connected therewith by any valid systems that allow recognition and identification of the parties attending, permanent communication among the attendees regardless of their location, and participation and voting, all in real time. The principal place of the meeting must be located in the municipality of the Historical Territory of Biscay indicated in the call to meeting, but supplemental locations need not be so located. For all purposes relating to the General Shareholders Meeting, attendees at any of the sites shall be deemed attendees at the same individual meeting. The meeting shall be deemed to have been held at the principal location thereof. 4. RIGHTS TO BE REPRESENTED AND TO CAST VOTES FROM A DISTANCE Pursuant to Article 23.1 of the By-Laws, all shareholders having the right to attend may be represented at the General Shareholders Meeting by proxy through another person, even though such person is not a shareholder. In addition to traditional means, Iberdrola s regulations grant shareholders the power to appoint proxies and to vote by mail or electronic communication at any General Shareholders Meeting, regardless of the resolutions that may be adopted by the Board of Directors in each case. In this regard, Article 23.2 of the By-Laws provides that Proxies shall be given in writing or by postal or electronic correspondence, in which case the provisions of Article 28 below for the issuance of votes from a distance shall apply to the extent applicable. Furthermore, Article 28 of the By-Laws gives shareholders the possibility to cast their vote regarding proposals relating to the items included in the agenda by mail or by electronic communication, with the rules relating to distance voting being further developed in Article 33 of the Regulations for the General Shareholders Meeting. In addition, Section 7 of the General Corporate Governance Policy governs the right to proxy representation and to vote from a distance. 5. ELECTRONIC SHAREHOLDERS FORUM In addition, pursuant to applicable legal provisions, an Electronic Shareholders Forum is made available on the Company s corporate website on occasion of the call to the General Shareholders Meeting, the use of which is consistent with its legal purpose and with the guarantees and operating rules established by the Company, and to which all duly authorized shareholders or groups of shareholders may have access. 6. SHAREHOLDERS ETHICS MAILBOX By means of this channel of communication (section 4 of the Policy regarding the Provision of Information to and Relations with Shareholders and the Markets), located in the Shareholders Online section of the corporate website, the shareholders of Iberdrola may report:: Conduct that may involve failure to comply with the Company s Corporate Governance System. The commission by any Group professional of any act that is illegal or contrary to the rules of conduct of the Code of Ethics specifically intended for the Group s professionals. 7. ON-LINE SHAREHOLDERS (OLS) In addition, the interactive system On-Line Shareholders (OLS) has been made available on the corporate website, allowing shareholders to direct inquiries, whether confidentially or openly, to other shareholders, with the option to address such inquiries to any of the committees of the Board of Directors, and also to report to the Regulatory NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 246

249 Annual consolidated financial statements 2011 / Corporate governance Compliance Unit any conduct that may entail failure to comply with the Corporate Governance System, using the Shareholders Ethics Mailbox for such purpose. E.4. Indicate, if applicable, the measures adopted to encourage the participation of shareholders at General Shareholders Meetings. Pursuant to Article 22.1 of the By-Laws, all shareholders may attend the General Shareholders Meeting and take part in deliberations thereof, with the right to be heard and to vote. Section 5 of the General Corporate Governance Policy is specifically designed to encourage shareholder participation at the General Shareholders Meeting. In addition to the rights to request that a meeting be called, to receive information, to be present at meetings, to be represented by proxy and to cast votes from a distance mentioned above, Iberdrola develops a policy encouraging the participation of shareholders at the General Shareholders Meeting by means of the following measures: Publication of the call to meeting in numerous media, exceeding the legal requirements and the requirements set forth in the By-Laws, ensuring broad dissemination of the call. Preparation of a shareholder s guide containing practical and specific information regarding the procedures and timelines for the exercise by the shareholders of their rights in connection with each General Shareholders Meeting. Practices followed to encourage the participation of shareholders, such as gifts and even the payment of attendance bonuses. Holding the General Shareholders Meeting at the best possible site that facilitates the development of the meeting, with large capacity and located at the center of the locality where the Company s registered office is located. All shareholders attending the General Shareholders Meeting are given a Program for the Meeting containing detailed information on the conduct thereof: admittance, preparation of the list of attendees and establishment of a quorum, use of the floor by the Chairman and senior managers, requests for information, questions by the shareholders, answers, voting and adoption of resolutions. If necessary, the use is contemplated of accessory locations for attendance at the General Shareholders Meeting which are connected to the primary location by videoconference systems permitting recognition and identification of those in attendance, permanent communication among attendees regardless of the place where they are, and participation and voting. Hiring of financial agencies or brokers for a better distribution of the information about the General Shareholders Meeting among the Company s wide base of institutional and international shareholders and investors. Granting each and every one of the shareholders entitled to vote the right to attend the General Shareholders Meeting, regardless of the number of shares held by them. Personalized assistance and guidance to shareholders who wish to participate, provided through the Office of the Shareholder. The provision to shareholders of means to facilitate access to the premises where the General Shareholders Meeting is held and enabling handicapped persons to follow the proceedings at the Meeting or providing simultaneous translation of the participations at the General Meeting when it is deemed appropriate for any reason. The possibility of accessing the live or time-delayed broadcast of the General Shareholders Meeting through the Company s corporate website ( available to all persons wishing to have such access, even if they are not shareholders. E.5. Indicate whether the chairman of the General Shareholders Meeting is also the chairman of the Board of Directors. Describe, if applicable, the measures adopted to ensure independence and proper operation of the General Shareholders Meeting: YES X NO NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 247

250 Description of measures - On its own initiative, the Board of Directors traditionally requires that a notary public attend the General Shareholders Meeting and prepare the minutes thereof. Therefore, the Chairman of and the Secretary for the General Shareholders Meeting do not prepare the minutes thereof, which task is entrusted to a notary public, thereby guaranteeing neutrality to the shareholders. - Since the General Shareholders Meeting held on March 20, 2009, an independent expert (the last time, Deloitte) has reviewed the procedure of call to meeting, dissemination of the information and preparation of documents, and has verified the proper operation of the attendance and proxy fulfillment control systems, as well as the procedure for counting proxies and votes and for voting on resolutions. - As to the verification of the existence of a quorum to hold a valid meeting, the Company has the necessary means to control and electronically compute the proxies and votes from a distance (by mail or electronic communication), to prepare the list of shareholders present in person or by proxy at the General Shareholders Meeting, which list is electronically recorded and attached to the minutes of the meeting, and to compute the quorum to hold meetings and to adopt resolutions. To this end, the Company prepares and proposes to the entities participating in the Sociedad de Gestión de Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (Iberclear) the form of the attendance, proxy-granting and distance-voting card to be issued to the shareholders, in order to ensure that the cards issued are uniform and include a bar code or other system which allows for the electronic reading thereof in order to facilitate the computerized calculation of attendees (Article 13 of the Regulations for the General Shareholders Meeting). The Regulations for the General Shareholders Meeting and the Shareholder s Guide set forth appropriate principles and rules to resolve or clarify doubts or claims that may arise in connection with the list of attendees, the lawful authority of the shareholders and their representatives, and the validity of proxies and votes cast from a distance. - In addition, from the time they enter the premises where the meeting will be held, the shareholders can rely on the support of the staff from the Office of the Shareholder, which staff is permanently available to resolve any issues and to facilitate shareholders participation at the General Shareholders Meeting. E.6. Indicate the amendments, if any, made to the Regulations for the General Shareholders Meeting during the fiscal year. In 2011, the Company carried out an exhaustive process of revision and update of its Corporate Governance System in order to include widely recognized good governance recommendations. Specifically, the purpose of the amendment of the Regulations for the General Shareholders Meeting approved by the shareholders at the General Shareholders Meeting held on May 27, 2011 was to: (a) update references contained in the Regulations to the now-repealed Companies Law (Ley de Sociedades Anónimas) and to the Securities Market Law, and include the latest statutory developments in the provisions of such Regulations; (b) bring the content of the Regulations into line with that of the Company s By-Laws to be approved, if such be the case, at the same General Shareholders Meeting at which this proposal is voted; (c) make a number of improvements in the operation of the General Shareholders Meeting; and (d) in general, make technical improvements in the text of the provisions and conform the terminology used therein to that used in the rest of the Company s Corporate Governance System. The following amendments are particularly noteworthy: Use of terminology in the provisions of the Regulations for the General Shareholders Meeting consistently with the use in the other documents making up the Corporate Governance System. Distinguishing the Chairman of the Board of Directors from the Chairman of the General Shareholders Meeting, who may or may not be the same person. Inclusion of an express reference to good governance recommendations generally recognized in the international markets. Express mention of the objective of ensuring the equal treatment of all shareholders under identical conditions. Inclusion of a text to the effect that shareholders rights must be exercised in good faith and transparently within the framework of the corporate interest of the Company. Reclassification of the powers of the shareholders acting at a General Shareholders Meeting. Call to meeting by means of an announcement published in the Official Bulletin of the Commercial Registry (Boletín Oficial del Registro Mercantil) and on the Company s corporate website, such that it is not formally necessary for the call to meeting to be published in a newspaper. Regulation of the right of shareholders to present well-founded proposed resolutions regarding matters already included or that should be included in the agenda for the call to the General Shareholders Meeting. Clarification of the cases in which the Board of Directors is relieved from its duty to satisfy the right to receive information when required to prevent any instance of abuse in the exercise of such right. Improved technical expression of the rights of shareholders to attend and be represented at the Meeting. Precise mention of the place where the General Shareholders Meeting may be held, which, pursuant to the new Article 14, may be any municipality belonging to the Historical Territory of Biscay. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 248

251 Annual consolidated financial statements 2011 / Corporate governance Improvement and refinement of the list of powers and duties of the Chairman of the General Shareholders Meeting and of the Secretary for the General Shareholders Meeting. Further development of the manner in which the right to vote from a distance may be exercised, including the possibility of distance voting through means other than postal or electronic correspondence. E.7. Indicate the data on attendance at the general shareholders meetings held during the fiscal year referred to in this report: Attendance data % distance voting Date of General Shareholders Meeting % of shareholders present in person % of shareholders represented by proxy Electronic voting Other Total 05/27/ E.8. Briefly describe the resolutions adopted by the shareholders acting at the general shareholders meetings held during the fiscal year referred to in this report and the percentage of votes by which each resolution was passed. During fiscal year 2011, Iberdrola held one General Shareholders Meeting, which took place on May 27, 2011 and at which the shareholders adopted the following resolutions, all of which were approved by a majority in excess of 79% of the capital present at the Meeting in person and by proxy: ITEMS RELATING TO THE ANNUAL FINANCIAL STATEMENTS, THE MANAGEMENT OF THE COMPANY AND THE RE-ELECTION OF THE COMPANY S AUDITOR: One.- Approval of the individual annual financial statements of the Company and of the annual financial statements consolidated with those of its subsidiaries for the fiscal year ended on December 31, Two.- Approval of the individual management report of the Company and of the consolidated management report of the Company and its subsidiaries for the fiscal year ended on December 31, Three.- Approval of the management and activities of the Board of Directors during the fiscal year ended on December 31, 2010 and the strategic guidelines and foundations for the current fiscal year (2011). Four.- Re-election of the auditor of the Company and of its consolidated group for fiscal year ITEMS RELATING TO SHAREHOLDER COMPENSATION: Five.- Approval of the proposal for the allocation of profits/losses and the distribution of dividends for the fiscal year ended on December 31, Six.- Approval of an increase in share capital by means of a scrip issue at a maximum reference market value of one thousand nine hundred (1,909) million euros for the free-of-charge allocation of new shares to the shareholders of the Company. Offer to the shareholders for the acquisition of their free-of-charge allocation rights at a guaranteed price. Express provision for the possibility of an incomplete allocation. Application for admission of the shares issued to listing on the Bilbao, Madrid, Barcelona and Valencia Stock Exchanges, through the Automated Quotation System (Sistema de Interconexión Bursátil). Possible change in the maximum reference market value of the capital increase and of each installment thereof, all based on the capital increase subject to approval of the shareholders at this General Shareholders Meeting under item fifteen on the agenda thereof. Delegation of powers to the Board of Directors, with the express power of substitution, including the power to implement the capital increase by means of a scrip issue on one or, at most, two occasions and the power to determine the maximum amount of the increase and each installment thereof based on such conditional capital increase and within the limits established in this resolution and the power to amend Article 5 of the By-Laws in each of the installments. ITEMS RELATING TO THE COMPENSATION OF THE CHIEF EXECUTIVE OFFICER, SENIOR MANAGERS AND OTHER MANAGERS THROUGH THE DELIVERY OF SHARES OF THE COMPANY AND EXPRESS AUTHORIZATIONS AND DELEGATIONS REQUESTED FOR THE BOARD OF DIRECTORS: Seven.- Approval of a Strategic Bonus intended for executive directors, senior managers and other management personnel tied to the achievement of strategic goals for the period, and payment by means of the delivery of the Company s shares. Delegation to the Board of Directors of the power to implement, develop, formalize and execute such Strategic Bonus. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 249

252 Eight.- Authorization to the Board of Directors, with the express power of substitution, for a term of five (5) years, to increase the share capital pursuant to the provisions of Section b) of the Companies Law, by up to onehalf of the share capital on the date of the authorization. Delegation of the power to exclude pre-emptive rights in connection with the capital increases that the Board may approve under this authorization, provided, however, that this power, together with the power contemplated in item nine, shall be limited to an aggregate maximum nominal amount equal to 20% of the share capital on the date of the authorization. Nine.- Authorization to the Board of Directors, with the express power of substitution, for a term of five (5) years, of the power to issue debentures or bonds that are exchangeable for and/or convertible into shares of the Company or of other companies within or outside of its Group, and warrants on newly-issued or outstanding shares of the Company or of other companies within or outside of its Group, up to a maximum limit of five (5) billion euros. Establishment of the standards for determining the basis for and terms and conditions applicable to the conversion, exchange or exercise. Delegation to the Board of Directors, with the express power of substitution, of the powers required to establish the basis for and terms and conditions applicable to the conversion, exchange or exercise, as well as, in the case of convertible debentures and bonds and warrants on newly-issued shares, of the power to increase share capital to the extent required to accommodate requests for the conversion of debentures or for the exercise of warrants, with the power in the case of issues of convertible and/or exchangeable securities to exclude the pre-emptive rights of the Company s shareholders, although this power, together with the power set forth in item eight, shall be limited to an aggregate maximum nominal amount equal to 20% of the share capital of the Company as of the date of authorization. Revocation of the authorization granted for such purposes by the shareholders at the General Shareholders Meeting held on March 20, Ten.- Authorization to the Board of Directors, with the express power of substitution, for a term of five (5) years, to issue: a) bonds or simple debentures and other fixed-income securities of a like nature (other than notes), as well as preferred stock, up to a maximum amount of twenty (20) billion euros, and b) notes up to a maximum amount at any given time, independently of the foregoing, of six (6) billion euros. Authorization for the Company to guarantee, within the limits set forth above, new issuances of securities by subsidiaries. Revocation, to the extent of the unused amount, of the delegation granted by the shareholders for such purpose at the General Shareholders Meeting of March 26, Eleven.- Authorization to the Board of Directors, with the express power of substitution, to apply for the listing on and delisting from Spanish or foreign, official or unofficial, organized or other secondary markets of the shares, debentures, bonds, notes, preferred stock or any other securities issued or to be issued, and to adopt such resolutions as may be necessary to ensure the continued listing of the shares, debentures or other securities of the Company that may then be outstanding, for which purpose the authorization granted for such purpose by the shareholders at the General Shareholders Meeting of March 26, 2010 is hereby deprived of effect. Twelve.- Authorization to the Board of Directors, with the express power of substitution, to create and fund associations and foundations, pursuant to applicable legal provisions, for which purpose the authorization granted by the shareholders at the General Shareholders Meeting of March 26, 2010 is hereby deprived of effect to the extent of the unused amount. ITEMS RELATING TO AMENDMENTS OF THE BY-LAWS AND REGULATIONS: Thirteen.- Amendment of the By-Laws and Approval of a Restated Text: Amendment of Article 1 of the By-Laws to include concepts from the Corporate Governance System and in the corporate interest Amendment of Articles 5 to 8, 9 to 15, 52 (which becomes Article 54), 53 (which becomes Article 55) and 57 to 62 (which become Articles 59 to 64) of the By-Laws to conform them to the latest statutory developments and to include technical and textual improvements Amendment of Articles 16 to 20, 22 to 28 and 31 of the By-Laws, to improve the rules for validly holding the General Shareholders Meeting Amendment of Article 21 of the By-Laws to include technical and textual improvements to the rules for validly holding the General Shareholders Meeting. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 250

253 Annual consolidated financial statements 2011 / Corporate governance Amendment of Articles 29, 30 and 54 to 56 (the latter becoming Articles 56 to 58) of the By-Laws to include technical and textual improvements and to round out the rules for exercising voting rights in the event of conflicts of interest Amendment of Articles 32 to 51 (with Articles 46 and 47 becoming Articles 47 and 48, and Articles 48 to 51 becoming Articles 50 to 53) and inclusion of new Articles 46 and 49 of the By-Laws to improve the regulation of the Company s Board of Directors and the Committees thereof and to include the latest statutory developments Approval of a restated text of the By-Laws that includes the approved amendments and consecutively renumbers the titles, chapters, sections and articles into which the By-Laws are divided. Fourteen.- Amendment of the Rules for the General Shareholders Meeting and approval of a new restated text. ITEM RELATING TO THE MERGER BY ABSORPTION OF IBERDROLA RENOVABLES, S.A.: Fifteen.- Information regarding any significant changes in the assets or liabilities of the companies participating in the merger (i.e., Iberdrola, S.A. (as absorbing company) and Iberdrola Renovables, S.A. (as absorbed company)) between the date of the common terms of merger and the holding of the General Shareholders Meeting at which such merger is decided. Approval of the common terms of merger by absorption between Iberdrola, S.A. and Iberdrola Renovables, S.A. Approval as the merger balance sheet of the balance sheet of Iberdrola, S.A. as of December 31, Approval of the merger by absorption between Iberdrola, S.A. and Iberdrola Renovables, S.A. through the absorption of the latter by the former, causing the termination without liquidation of Iberdrola Renovables, S.A. and the transfer en bloc and as a whole of all of its assets to Iberdrola, S.A., with an express provision for the exchange to be covered by the delivery of treasury shares of Iberdrola, S.A. and, if required, by newly-issued shares of Iberdrola, S.A. pursuant to a capital increase subject to the above, all in accordance with the common terms of merger. Conditional increase in the share capital of Iberdrola, S.A. in the nominal amount of one hundred forty-eight million four hundred seventy thousand eleven and twenty-five one-hundredth (148,470,011.25) euros, by means of the issuance of one hundred ninety-seven million nine hundred sixty thousand fifteen (197,960,015) shares with a par value of 0.75 euro each, of the same class and series as those currently outstanding, as a result of the merger by absorption of Iberdrola Renovables, S.A. by Iberdrola S.A. and resulting amendment of Article 5 of the By-Laws. Express provision for incomplete subscription. Request for admission to trading of the shares issued on the Bilbao, Madrid, Barcelona and Valencia Stock Exchanges through the Automated Quotation System (Sistema de Interconexión Bursátil) (Electronic Market). Delegation of powers. Establishment of procedure to facilitate the merger exchange. Adherence of the transaction to the special tax rules provided for in Chapter VIII of Title VII of the restated text of the Corporate Income Tax Law. Delegation of powers. ITEM RELATING TO GENERAL MATTERS: Sixteen.- Delegation of powers to formalize and execute all resolutions adopted by the shareholders at the General Shareholders Meeting, for conversion thereof into a public instrument, and for the interpretation, correction and supplementation thereof or further elaboration thereon until the required registrations are made. ITEM RELATING TO RESOLUTIONS SUBMITTED FOR A CONSULTATIVE VOTE: Seventeen.- Consultative vote regarding the Director compensation policy of the Company for the current fiscal year (2011) and the application of the current compensation policy during the preceding fiscal year (2010). NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 251

254 Below is a breakdown of the vote on each of the above-mentioned proposals: Item on the agenda In favor - total In favor (%) Against - total Against (%) Blank - Total Blank (%) Abstention -Total Abstention (%) 1 4,071,666, ,668, , ,669, ,071,639, ,813, , ,624, ,460,446, ,331, , ,258, ,066,144, ,065, , ,806, ,072,137, ,844, , ,134, ,066,307, ,945, , ,675, ,974,882, ,061, , ,939, ,381,507, ,414, , ,960, ,403,294, ,307, , ,182, ,028,711, ,178, ,015, ,797, ,060,338, ,129, , ,315, ,058,881, ,751, , ,181, ,066,855, ,083, , ,876, ,457,278, ,707, , ,850, ,464,987, ,051, , ,828, ,067,039, ,075, , ,740, ,458,926, ,983, , ,886, ,464,860, ,067, , ,916, ,458,521, ,428, , ,933, ,461,273, ,944, , ,576, ,062,345, ,582, , ,015, ,065,584, ,673, , ,728, ,969,286, ,634, , ,943, E.9. Indicate whether there are any by-law restrictions requiring a minimum number of shares to attend the General Shareholders Meeting. YES NO X Number of shares required to attend the General Shareholders Meeting - E.10. Indicate and justify the policies followed by the company with respect to proxyvoting at the General Shareholders Meeting. It is a policy of the Company to encourage shareholder participation and to facilitate the rights of the shareholders to receive information and to participate at General Shareholders Meetings. Regarding proxy-granting, Article 13 of the Regulations for the General Shareholders Meeting provides that the Company may propose to the entities participating in the Sociedad de Gestión de Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (Iberclear) and, in general, to intermediaries, management entities and depositaries of shares, the form of the attendance, proxy-granting and distance-voting card to be issued to the shareholders, as well as the formula to be recited in such document in order to delegate proxy representation at the meeting in favor of another shareholder, which card may also set forth the way in which the proxy-holder will vote on each of the resolutions proposed by the Board of Directors for each item on the Agenda, as well as the extension of the proxy to items not included on the Agenda, in the absence of specific instructions of the shareholder NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 252

255 Annual consolidated financial statements 2011 / Corporate governance being represented. On occasion of the call to the General Shareholders Meeting, the Company shall publish on its corporate website a form of attendance, proxy-granting and distance-voting card. Proxy-granting or voting instructions from shareholders acting through depositaries may be received by the Company by means of any distance communication system used by such depositaries. In the event that a depositary sends to the Company the attendance and proxy-granting card of a shareholder (duly identified therein) whose shares are deposited at such depositary, bearing the signature, seal and/or handwritten or mechanical stamp of the shareholder, representative entity or depositary, it shall be deemed, unless otherwise expressly indicated by the shareholder, that the shareholder has instructed the depositary to exercise the proxy or the right to vote in the manner or direction set forth in such card, or in the absence thereof, as established in the Company s Corporate Governance System, and the other rules set out in the Regulations for the General Shareholders Meeting shall apply, as appropriate. Pursuant to Article 23 of the By-Laws and Article 12 of the Regulations for the General Shareholders Meeting, shareholders have the following means to prove the validity of the proxy granted: a) By submission of the attendance, proxy-granting and distance-voting card or a validation certificate at the shareholders registration desks at the place and on the date set for the General Shareholders Meeting. b) By postal correspondence, delivering to the Company the attendance, proxy-granting and distance voting card issued or any other means of verifying attendance that is accepted by the Company. c) By electronic correspondence, through notice to the Company setting forth the details of the proxy being granted and the identity of the shareholder being represented, and using a recognized electronic signature of the shareholder or other type of guarantee that the Company deems best ensures the authenticity and identification of the shareholder granting the proxy. Proxy or voting instructions given by shareholders acting through intermediaries, management entities or depositaries may be received by the Company by any valid means of distance communication. In the event that the instructions received do not specify the nature thereof, or in the absence of express or clear instructions, it shall be deemed that the proxy has been granted to the Chairman of the Board of Directors, unless otherwise expressly indicated by the shareholder. All proxies are recorded in a computerized application, which is also used to control and compute proxies and voting instructions, prepare the list of attendees and verify the quorum required to hold valid meetings and the majority required to adopt resolutions, pursuant to Article 16 of the Regulations for the General Shareholders Meeting. The Chairman and the Secretary of the Board of Directors or the Chairman of and the Secretary for the General Shareholders Meeting are authorized by the Board of Directors such that any of them may, from the moment the Meeting is established, verify and recognize the validity of the document or media evidencing the granting of proxies and the casting of votes from a distance, pursuant to the provisions of the Company s Corporate Governance System, as well as the identity and authority of the shareholders and their representatives and the legal validity of the exercise of the rights to attend, to hold and grant a proxy and to vote, with the power to demand maximum transparency from the shareholders and from the holders of rights or interests in the shares regarding the identity of the actual owners thereof. In any event of doubt or conflict as to the interpretation and use of the means for proxy-granting and distance voting or as to the priority among them, the Company shall make such decision as is most appropriate to safeguard the intent of the shareholder and its political and financial rights. The Shareholder s Guide, which shall be approved by the Board of Directors and published on occasion of the call to the General Shareholders Meeting, contains detailed provisions governing the proxy-granting and distance voting procedures. E.11. Indicate whether the Company is aware of any policy of institutional investors as to participating or not in the decisions of the Company: YES NO X Describe the policy E.12. Indicate the address and manner for accessing corporate governance content on your website. > Information for Shareholders and Investors > Corporate Governance NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 253

256 F. DEGREE TO WHICH CORPORATE GOVERNANCE RECOMMENDATIONS ARE FOLLOWED Indicate the company s degree of conformance to the recommendations of the Unified Good Governance Code. If the company does not comply with any of such recommendations, please explain the recommendations, standards, practices or criteria applied by the company. 1. The By-Laws of listed companies do not limit the maximum number of votes that can be cast by a single shareholder, or impose other obstacles to the takeover of the company by means of the acquisition of its shares on the market. See sections: A.9, B.1.22, B.1.23 and E.1, E.2. Explain Article 29.3 of the By-Laws provides that no shareholder may cast a number of votes greater than those corresponding to shares representing ten (10%) percent of share capital, even if the number of shares held exceeds such percentage of capital. This limitation does not affect votes corresponding to shares with respect to which a shareholder is holding a proxy as a result of the provisions of Article 23 above, provided, however, that with respect to the number of votes corresponding to the shares of each shareholder represented by proxy, the limitation set forth above shall apply. The following paragraph 4 of such article adds: The limitation set forth in the foregoing paragraph shall also apply to the maximum number of votes that may be collectively or individually cast by two or more shareholders which are entities or companies belonging to the same group. Such limitation shall also apply to the number of votes that may be cast collectively or individually by an individual and the shareholder entity, entities or companies controlled by such individual. A group shall be deemed to exist under the circumstances provided by Law, and also when a person controls one or more entities or companies. Section 527 of the restated text of the Companies Law (texto refundido de la Ley de Sociedades de Capital), approved by Royal Legislative Decree 1/2010, of July 2, provides, in paragraph one thereof, that at listed corporations (sociedades anónimas cotizadas), all by-law provisions that directly or indirectly establish as a general rule the maximum number of votes that may be cast by the same shareholder or by companies belonging to the same group shall be null and void by operation of law. Notwithstanding the foregoing, Iberdrola, S.A. believes that the limitation of the maximum number of votes that may be cast by a single shareholder, or by several shareholders belonging to the same group or, if applicable, acting in concert, is a measure to protect the many minority shareholders, whose investment is thus protected from any transaction that is contrary to the corporate interest of Iberdrola. In this regard, it should be noted that approximately one-fourth of Iberdrola, S.A. s capital is held by retail investors, who thus have scant maneuverability and responsiveness vis-à-vis a possible shareholder, owner of a non-controlling interest and that does not reach a public tender offer, that seeks influence and whose interest is not totally in line with the corporate interest. It should also be noted that such voting limitation has been in effect since June 16, 1990, the date on which the General Shareholders Meeting was held at which it was resolved, by unanimous vote of the attendees, to bring the By-Laws of the Company (then doing business as Iberduero, S.A.) into line with the restated text of the Companies Law approved by Royal Legislative Decree 1564/1989, of December 22. This shows the level of corporate consensus that has existed on such voting limitation from the very beginning, which has been confirmed by the fact that such limitation has remained unchanged through various by-law amendments passed by the shareholders at General Shareholders Meetings. In turn, it reflects the will of the shareholders to increase their bargaining power in the event of hostile offers or transactions. In any event, Article 56 of the current By-Laws establishes the instances of removal of such voting limitation in the event that the Company is the target of a public tender offer that receives the required shareholder approval. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 254

257 Annual consolidated financial statements 2011 / Corporate governance Based on all of the foregoing, and in view of the fact that the application of Section 527 of the Companies Law would require an amendment of Iberdrola s By-Laws that would not be in line with the will expressed by the majority of the shareholders at the General Shareholders Meeting and would injure the rights of minority shareholders, on September 1, 2010, Iberdrola filed an administrative litigation appeal with the Supreme Court in connection with such section, requesting that it order the suspension of the application of Section 527 of the Companies Law or otherwise resolve that it did not apply to Iberdrola until the judgment was rendered. A new request to the same effect was subsequently filed. This appeal was filed not only on the grounds of the irreparable damage that the application of the aforementioned Section 527 of the Companies Law might cause to Iberdrola and its minority shareholders, considering that it might strengthen the position of shareholders whose interests are not in line with Iberdrola s corporate interest, but also on the grounds of the irregularities that may have occurred during the proceedings followed to approve such section. No judgment has as yet been entered in these proceedings. Nor has a final and non-appealable decision been issued regarding the request for non-application of Section 527 of the Companies Law to Iberdrola. 2. When both the parent company and a company controlled by it are listed companies, they both provide detailed public disclosure on: a) Their respective areas of activity, and any business dealings between them, as well as between the controlled listed company and other companies belonging to the group; b) The mechanisms in place to resolve any conflicts of interest that may arise. See sections: C.4 and C.7 Not applicable 3. Even if not expressly required under applicable commercial Laws, transactions involving a structural change of the company and, in particular, the following, are submitted to the shareholders at the General Shareholders Meeting for approval: a) The transformation of listed companies into holding companies through subsidiarization, i.e., reallocating core activities to controlled entities that were previously carried out by the company itself, even if the latter retains full ownership of the former; b) The acquisition or disposal of key operating assets, when it involves an actual change in the corporate purpose; c) Transactions whose effect is tantamount to the liquidation of the company. Complies 4. Detailed proposals of the resolutions to be adopted at the General Shareholders Meeting, including the information to which recommendation 28 refers, are made public at the time of publication of the notice of call to the General Shareholders Meeting. Complies 5. Matters that are substantially independent are voted on separately at the General Shareholders Meeting, in order to allow the shareholders to express their voting preferences separately. This rule applies, in particular: NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 255

258 a) To the appointment or ratification of directors, which shall be voted on individually; b) In the event of amendments of the By-Laws, to each article or group of articles that are substantially independent of one another. See section: E.8 Complies 6. Companies allow split votes so financial intermediaries who are recorded as having shareholder status but act for the account of different clients can divide their votes in accordance with the instructions given by such clients. See section: E.4 Complies 7. The Board performs its duties with a unity of purpose and independent judgment, affording equal treatment to all shareholders in furtherance of the corporate interests, which shall be understood to mean the optimization, in a sustained fashion, of the financial value of the company. It likewise ensures that in its dealings with stakeholders, the Company abides by the laws and regulations, fulfills its obligations and contracts in good faith, respects the customs and good practices of the industries and territories in which it carries on its business, and upholds any other social responsibility standards to which it has voluntarily adhered. Complies 8. The Board assumes responsibility, as its core mission, for approving the company s strategy and the organization required to put it into practice, and to ensure that Management meets the objectives set while pursuing the company s interest and corporate purpose. As such, the full Board reserves for itself the right to approve: a) The company s policies and general lines of strategy, and in particular: i) The strategic or business plan as well as the management targets and annual budgets; ii) The investment and financing policy; iii) The design of the structure of the corporate group; iv) The corporate governance policy; v) The corporate social responsibility policy; vi) The policy for compensation and assessment of the performance of senior managers; vii) The risk control and management policy, as well as the periodic monitoring of internal information and control systems. viii) The dividend policy and the policy regarding treasury stock and, especially, the limits thereto. See sections: B.1.10, B.1.13, B.1.14 and D.3 b) The following decisions:: i) At the proposal of the chief executive of the Company, the appointment and, if applicable, removal of senior managers, as well as their severance packages. See section: B ii) The compensation of directors and, in the case of executive directors, the additional compensation to be paid for their executive duties and other terms of their contracts. See section: B iii) The financial information that the Company must periodically make public due to its status as listed company. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 256

259 Annual consolidated financial statements 2011 / Corporate governance iv) Investments or transactions of all kinds which are strategic in nature due to the large amount or special characteristics thereof, unless approval thereof falls upon the shareholders at the General Shareholders Meeting. v) The creation or acquisition of interests in special-purpose entities or entities registered in countries or territories regarded as tax havens, as well as any other transactions or operations of a similar nature whose complexity might impair the transparency of the group. c) Transactions made by the company with directors, with significant shareholders or shareholders with Board representation, or with other persons related thereto ( related-party transactions ). However, Board authorization need not be required in connection with related-party transactions that simultaneously meet the following three conditions: 1. They are governed by standard-form agreements applied on an across-the-board basis to a large number of clients; 2. They are conducted at prices or rates generally set by the party acting as supplier of the goods or services in question; 3. The amount thereof is no more than 1% of the Company s annual revenues. It is recommended that related-party transactions only be approved by the Board upon the prior favorable report of the Audit Committee or such other committee handling the same function; and that the directors affected thereby should neither exercise nor delegate their votes, and should withdraw from the meeting room while the Board deliberates and votes on the transaction. It is recommended that the powers granted herein to the Board are conferred without the power of delegation, except for those mentioned under b) and c) above, which may, for urgent reasons, be adopted by the Executive Committee subject to subsequent ratification by the full Board. See sections: C.1 and C.6 Complies 9. In order to operate effectively and in a participatory manner, the Board ideally is comprised of no few than five and no more than fifteen members. See section: B.1.1 Complies 10. External directors, proprietary and independent, occupy an ample majority of the Board and the number of executive directors is the minimum necessary number, bearing in mind the complexity of the corporate group and the percentage interest held by the executive directors in the company s share capital. See sections: A.2, A.3, B.1.3 and B Complies 11. If there is an external director who cannot be deemed either proprietary or independent, the company explains such circumstance and the links such director maintains with the company or its managers or with its shareholders. See section: B.1.3 Not applicable 12. Among external directors, the relation between the number of proprietary directors and independent directors reflects the proportion existing between the share capital of the company represented by proprietary directors and the rest of its capital. This strict proportionality standard can be relaxed so that the weight of proprietary directors is greater than would correspond to the total percentage of the share capital that they represent: NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 257

260 1. In large cap companies where few or no equity stakes attain the legal threshold as significant, but there are shareholders holding interests with a high absolute value. 2. In companies with a plurality of shareholders represented on the Board but not otherwise related. See sections: B.1.3, A.2 and A.3 Complies 13. The number of independent directors represents at least one-third of the total number of directors. See section: B.1.3 Complies 14. The status of each director is explained by the Board at the General Shareholders Meeting at which the shareholders are to make or ratify their appointment and that such status is confirmed or reviewed, as the case may be, annually in the Annual Corporate Governance Report, after verification by the Nominating Committee. Said report also discloses the reasons for the appointment of proprietary directors at the proposal of shareholders controlling less than 5% of the share capital, as well as the reasons for not having accommodated formal petitions, if any, for presence on the Board from shareholders whose equity stake is equal to or greater than that of others at whose proposal proprietary directors have been appointed. See sections: B.1.3 and B.1.4 Complies 15. When the number of women directors is scant or nil, the Board explains the reasons for this situation and the measures taken to correct it; and in particular, the Nominating Committee takes steps to ensure that, when new vacancies are filled: a) Selection procedures do not have an implied bias that hinders the selection of women directors; b) The company deliberately looks for women with the target professional profile and includes them among the potential candidates. See sections: B.1.2, B.1.27 and B.2.3. Complies 16. The Chairman, as the person responsible for the effective operation of the Board, ensures that directors receive adequate information in advance of Board meetings; promotes debate and the active involvement of directors during Board meetings; safeguards their rights to freely take a position and express their opinion; and, working with the chairmen of the appropriate committees, organizes and coordinates regular evaluations of the Board and, where appropriate, the chief executive officer. See section: B.1.42 Complies 17. When the Chairman of the Board is also the chief executive of the company, one of the independent directors is authorized to request the call to a Board meeting or the inclusion of new business on the agenda; to coordinate and hear the concerns of external directors; and to lead the Board s evaluation of the chairman. See section: B.1.21 Complies NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 258

261 Annual consolidated financial statements 2011 / Corporate governance 18. The Secretary of the Board takes particular care to ensure that the Board s actions: a) Adhere to the letter and the spirit of laws and their implementing regulations, including those approved by the regulatory authorities; b) Comply with the company s by-laws and the Regulations for the General Shareholders Meeting, the Regulations of the Board and other regulations of the company; c) Are informed by those good governance recommendations included in this Unified Code as the company has subscribed to. And, in order to safeguard the independence, impartiality and professionalism of the Secretary, his appointment and removal are reported by the Nominating Committee and approved by the full Board; and that such appointment and removal procedures are set forth in the Regulations of the Board. See section: B.1.34 Complies 19. The Board meets with the frequency required to perform its duties efficiently, in accordance with the calendar and agendas set at the beginning of the fiscal year, and that each director is entitled to propose items of the agenda that were not originally included therein. See section: B.1.29 Complies 20. Directors absences are limited to unavoidable cases and quantified in the Annual Corporate Governance Report. And when there is no choice but to grant a proxy, it is granted with instructions. See sections: B.1.28 and B.1.30 Complies 21. When directors or the secretary express concerns about a proposal or, in the case of the directors, regarding the running of the company, and such concerns have not been resolved at a Board meeting, such concerns are recorded in the minutes at the request of the person expressing them. Complies 22. The full Board evaluates the following on a yearly basis: a) The quality and efficiency of the Board s operation; b) On the basis of a report submitted to it by the Nominating Committee, how well the chairman of the Board and the chief executive of the company have carried out their duties; c) The performance of its Committees, on the basis of the reports furnished by them. See section: B.1.19 Complies 23. All directors are able to exercise the right to request any additional information they require on matters within the Board s purview. Unless the By-Laws or the Regulations of the Board provide otherwise, such requests are addressed to the Chairman or the secretary of the Board. See section: B.1.42 Complies 24. All directors are entitled to call on the company for the advice they need to carry out their duties. The company provides suitable channels for the exercise of this right, which, in special circumstances, may include external advice at the company s expense. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 259

262 See section: B.1.41 Complies 25. Companies organize induction programs for new directors to rapidly and adequately acquaint them with the company and its corporate governance rules. Directors are also offered refresher training programs when circumstances so advise. Complies 26. Companies require that directors devote sufficient time and effort to perform their duties efficiently, and, as such: a) Directors apprise the Nominating Committee of their other professional duties, in case they might detract from the necessary dedication; b) Companies lay down rules about the number of boards on which their directors may sit. See sections: B.1.8, B.1.9 and B.1.17 Complies 27. The proposal for the appointment or re-election of directors that the Board submits to the shareholders at the General Shareholders Meeting, as well as the interim appointment of directors to fill vacancies, are approved by the Board: a) On the proposal of the Nominating Committee, in the case of independent directors. b) Subject to a prior report from the Nominating Committee, in the case of other directors. See section: B.1.2 Complies 28. Companies post the following director information on their websites, and keep such information updated: a) Professional and biographical profile; b) Other Boards of Directors of listed or unlisted companies on which they sit; c) Indication of the director s classification, specifying, for proprietary directors, the shareholder they represent or to whom they are related. d) Date of their first and subsequent appointments as a company director; and e) Shares held in the company and options thereon held by them. Complies 29. Independent directors do not hold office as such for a continuous period of more than 12 years. See section: B.1.2 Explain The Board of Directors of Iberdrola does not consider it appropriate to comply with this recommendation, as it would entail calling into question, merely due to the simple passage of a generically-set number of years, the independence of some directors whose judgment, prestige, experience and contribution ensure such classification. Having examined the personal and professional circumstances of the independent directors affected by such time limit, the Board has reached the conclusion that there is no indication that the years served in such position might have detracted from their independence. Rather, the years served have contributed to such directors having an in-depth knowledge of Iberdrola, its areas of activity and its environment, as well as broad experience and training to serve in such positions, which has resulted in them performing their duties with a high level of efficiency and professionalism for the benefit of the Company. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 260

263 Annual consolidated financial statements 2011 / Corporate governance The Unified Good Governance Code itself, in the explanation that precedes recommendation 29, clarifies that the passage of twelve years shall not, in and of itself, cause the director to lose his status as independent director. In view of the foregoing, the Board of Directors of Iberdrola undergoes a continuous renewal process, enabling the periodic and recurring appointment by the shareholders at the General Shareholders Meeting of new independent directors with different and complementary professional profiles, thus ensuring that a balanced structure is preserved within the Board of Directors. It should be noted that eight of the fourteen members of the Board of Directors are independent and have held office as such for less than twelve years. 30. Proprietary directors tender their resignation when the shareholder they represent sells its entire shareholding interest. The appropriate number of them do likewise when such shareholder reduces its interest to a level that requires a reduction in the number of its proprietary directors. See sections: A.2, A.3 and B.1.2 Complies 31. The Board of Directors does not propose the removal of any independent director prior to the expiration of the term set by the By-Laws for which he was appointed, except where good cause is found by the Board upon a prior report of the Nominating Committee. In particular, good cause shall be deemed to exist whenever the director has failed to perform the duties inherent in his position or comes under any of the circumstances described in section III.5 (Definitions) of this Code. The removal of independent directors may also be proposed as a result of Tender Offers, mergers or other similar corporate transactions that entail a change in the equity structure of the Company, when such changes in the structure of the Board follow from the proportionality standard mentioned in Recommendation 12. See sections: B.1.2, B.1.5 and B.1.26 Complies 32. Companies establish rules obliging directors to report and, if appropriate, to resign in those instances as a result of which the credit and reputation of the company might be damaged and, in particular, they require that such directors report to the Board any criminal charges brought against them, and the progress of any subsequent proceedings. If a director is indicted or tried for any of the crimes described in Section 124 of the Companies Law, the Board examines the matter as soon as practicable and, in view of the particular circumstances thereof, decides whether or not it is appropriate for the director to continue to hold office. And the Board provides a substantiated account thereof in the Annual Corporate Governance Report. See sections: B.1.43, B.1.44 Complies 33. All directors clearly express their opposition when they feel that any proposed resolution submitted to the Board might be contrary to the best interests of the company. And in particular, independent directors and the other directors not affected by the potential conflict of interest do likewise in the case of decisions that could be detrimental to the shareholders lacking Board representation. When the Board adopts material or reiterated resolutions about which a director has expressed serious reservations, such director draws the pertinent conclusions and, if he chooses to resign, sets out the reasons in the letter referred to in the next Recommendation. This Recommendation also applies to the Secretary of the Board, even if he is not a director. Complies 34. Directors who give up their place before their tenure expires, through resignation or otherwise, explain the reasons in a letter sent to all members of the Board. Without prejudice to such withdrawal being communicated as a significant event, the reason for the withdrawal is explained in the Annual Corporate Governance Report. See section: B.1.5 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 261

264 Not applicable 35. The compensation policy approved by the Board specifies at least the following points: a) The amount of the fixed components, with a breakdown showing the fees, if any, for attending the meetings of the Board and its Committees and an estimate of the fixed annual fixed compensation they give rise to; b) Variable compensation items, including, in particular: i) The classes of directors to which they apply, as well as an explanation of the relative weight of variable to fixed compensation items. ii) Performance evaluation criteria used to calculate entitlement to compensation in shares, share options or any other variable component; iii) Main parameters and grounds for any system of annual bonuses or other non-cash benefits; and iv) An estimate of the absolute amount of variable compensation arising from the proposed compensation plan, as a function of the degree of compliance with benchmark assumptions or targets. c) The main characteristics of pension systems (for example, supplementary pensions, life insurance and similar systems), with an estimate of the amount thereof or the equivalent annual cost. d) Terms and conditions that must be included in the contracts of executive directors performing senior management duties, which will include: i) Duration; ii) Notice periods; and iii) Any other provisions relating to hiring bonuses, as well as indemnity or golden parachute provisions in the event of early or other termination of the contractual relationship between the company and the executive director. See section: B.1.15 Complies 36. Compensation paid by means of delivery of shares in the company or companies that are members of the group, share options or instruments indexed to the price of the shares, and variable compensation linked to the company s performance or pension schemes is confined to executive directors. This recommendation shall not apply to the delivery of shares when such delivery is subjected to the condition that the directors hold the shares until they cease to hold office as directors. See sections: A.3 and B.1.3 Complies 37. The compensation of external directors is such as is necessary to compensate them for the dedication, qualifications and responsibility required by their position, but is not so high as to compromise their independence. Complies 38. The compensation linked to company earnings takes into account any qualifications included in the external auditor s report that reduce such earnings. Complies 39. In the case of variable compensation, compensation policies include technical safeguards to ensure that such compensation reflects the professional performance of the beneficiaries thereof and not simply the general performance of the markets or of the industry in which the company does business or circumstances of this kind. Complies NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 262

265 Annual consolidated financial statements 2011 / Corporate governance 40. The Board submits a report on director compensation policy to the vote of the shareholders at a General Shareholders Meeting, as a separate item on the agenda and for advisory purposes. This report is made available to the shareholders separately or in any other manner that the Company deems appropriate. Such report shall focus especially on the compensation policy the Board has approved for the current year, as well as on the policy, if any, established for future years. It will emphasize the most significant changes in such policies with respect to the policy applied during the fiscal year prior to that to which the General Shareholders Meeting refers. It shall also include an outline of the manner in which the compensation policy was applied in such prior fiscal year. The Board also reports on the role played by the Compensation Committee in the preparation of the compensation policy and, if external advice was provided, it states the name of the external advisors that have given such advice. See section: B.1.16 Complies 41. The Notes to the Financial Statements list the individual directors compensation during the fiscal year, including: a) A breakdown of the compensation of each director, to include where appropriate: i) Attendance fees or other fixed compensation received as a director; ii) The additional compensation received as chairman or member of a Board committee; iii) Any compensation received under profit-sharing or bonus schemes, and the reason for the accrual thereof; iv) Contributions on the director s behalf to defined-contribution pension plans; or any increase in the director s vested rights, in the case of contributions to defined-benefit plans; v) Any severance package agreed or paid; vi) Any compensation received as a director of other companies in the group; viii) Any item of compensation other than those listed above, of whatever nature and provenance within the group, especially when it is deemed to be a related-party transaction or when the omission thereof detracts from a true and fair view of the total compensation received by the director. b) A breakdown of any delivery to directors of shares, share options or any other instrument indexed to the price of the shares, specifying: i) Number of shares or options awarded during the year, and the terms and conditions for the exercise thereof; ii) Number of options exercised during the year, specifying the number of shares involved and the exercise price; iii) Number of options outstanding at the end of the year, specifying their price, date and other requirements for exercise; iv) Any change during the year in the terms for the exercise of previously-awarded options. c) Information on the relationship, in such past fiscal year, between the compensation received by executive directors and the profits or other measures of performance of the company. Complies 42. When there is an Executive Committee (hereinafter, Executive Committee ), the breakdown of its members by director category is similar to that of the Board, and its secretary is the secretary of the Board. See sections: B.2.1 and B.2.6 Complies in part NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 263

266 The Executive Committee of Iberdrola is made up of six directors, and the Secretary of the Board of Directors serves as Secretary of such Executive Committee. As regards its composition, in view of the fact that the Board of Directors of the Company only has one executive director (the Chairman & Chief Executive Officer) and two proprietary directors sitting thereon, their membership in the Executive Committee causes their relative weight at such Committee to be necessarily greater than that on the Board. However, Iberdrola believes that it is essential for both the Chairman & Chief Executive Officer (who is the ex officio Chairman of the Executive Committee pursuant to Article 43.2 of the By-Laws) and the proprietary directors appointed at the behest of two significant shareholders present on the Board of Directors to be a part of the Executive Committee. In all events, the Executive Committee has three independent directors, including the Vice-Chairman and the lead independent director, which provides adequate equilibrium in the composition thereof, with representation of the various types of directors of the Company, and ensures that their functions may not be exercised along lines different from those reflected by the composition of the Board of Directors. 43. The Board is always kept informed of the matters dealt with and the resolutions adopted by the Executive Committee, and all members of the Board receive a copy of the minutes of the meetings of the Executive Committee. Complies 44. In addition to the Audit Committee mandatory under the Securities Market Law, the Board of Directors forms a single Nominating and Compensation Committee as a separate committee of the Board, or a Nominating Committee and a Compensation Committee. The rules governing the make-up and operation of the Audit Committee and the Nominating and Compensation Committee or committees are set forth in the Regulations of the Board, and include the following: a) The Board appoints the members of such Committees, taking into account the background knowledge, qualifications and experience of the directors and the responsibilities of each Committee, discusses its proposals and reports, and receives a report, at the first meeting of the full Board following the meetings of such committees, on their activities and the work done. b) These Committees are formed exclusively of external directors and have a minimum of three members. The foregoing is without prejudice to the attendance of executive directors or senior managers, when expressly resolved by the members of the Committee. c) Committee Chairmen are independent directors. d) They may receive external advice, whenever they feel this is necessary for the discharge of their duties. e) Minutes are prepared of their meetings, and a copy is sent to all Board members. See sections: B.2.1 and B.2.3 Complies 45. Supervising compliance with internal codes of conduct and corporate governance rules is entrusted to the Audit Committee, the Nominating Committee or, if they exist separately, to the Compliance or Corporate Governance Committee. Complies 46. The members of the Audit Committee and, particularly, the Chairman thereof, are appointed taking into account their background knowledge and experience in accounting, auditing and risk management matters. Complies 47. Listed companies have an internal audit function which, under the supervision of the Audit Committee, ensures the smooth operation of the information and internal control systems. Complies 48. The head of internal audit presents an annual work plan to the Audit Committee; reports to it directly on any issues arising in the execution of such plan; and submits an activities report to it at the end of each fiscal year. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 264

267 Annual consolidated financial statements 2011 / Corporate governance Complies 49. Risk control and management policy specifies at least: a) The different types of risk (operational, technological, financial, legal, reputational, etc.) the company is exposed to, including contingent liabilities and other off-balance sheet risks among financial or economic risks; b) The determination of the risk level the company sees as acceptable; c) Measures in place designed to mitigate the impact of the risks identified, should they materialize; e) The internal reporting and control systems to be used to monitor and manage the above risks, including contingent liabilities and off-balance sheet risks. See section: D Complies 50. The Audit Committee s role is: 1. With respect to the internal control and reporting systems: a) To monitor the preparation and the integrity of the financial information relating to the company and, if appropriate, to the group, checking compliance with legal requirements, the appropriate demarcation of the scope of consolidation and the correct application of accounting standards. b) To periodically review internal control and risk management systems so main risks are properly identified, managed and disclosed. c) To ensure the independence and efficacy of the internal audit function; propose the selection, appointment, reappointment and removal of the head of the internal audit service; propose the department s budget; receive regular reports on its activities; and verify that senior management takes into account the findings and recommendations of its reports. d) To establish and supervise a mechanism whereby staff can report, confidentially and, if appropriate, anonymously, potentially significant irregularities within the company that they detect, in particular financial or accounting irregularities. 2. With respect to the external auditor: a) To make recommendations to the Board for the selection, appointment, reappointment and replacement of the external auditor, and the terms of its engagement. b) To receive regular information from the external auditor on the audit plan and the results of the implementation thereof, and check that senior management takes its recommendations into account. c) To monitor the independence of the external auditor, to which end: i) The company reports a change of auditor to the CNMV as a significant event, accompanied by a statement of any disagreements with the outgoing auditor and the reasons for the same. ii) The Audit Committee ensures that the company and the auditor adhere to current regulations on the provision of non-audit services, the limits on the concentration of the auditor s business and, in general, all other regulations established to safeguard the independence of the auditors. iii) In the event of resignation of the external auditor, the Committee investigates the circumstances that may have given rise thereto. d) In the case of groups, the Audit Committee favors the auditor of the group assuming responsibility for the audits of the companies that form part thereof. See sections: B.1.35, B.2.2, B.2.3 and D.3 Complies 51. The Audit Committee may cause any company employee or manager to appear before it, and even order their appearance without the presence of any other manager. Complies NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 265

268 52. The Audit Committee reports to the Board, prior to the adoption thereby of the corresponding decisions, on the following matters specified in Recommendation 8: a) The financial information that the company must periodically make public due to its status as a listed company. The Committee should ensure that interim financial statements are prepared under the same accounting standards as the annual financial statements and, to this end, consider whether a limited review by the external auditor is appropriate. b) The creation or acquisition of interests in special-purpose entities or entities registered in countries or territories considered as tax havens, and any other transactions or operations of a comparable nature whose complexity might impair the transparency of the group. c) Related-party transactions, unless such prior reporting duty has been assigned to another supervision and control committee. See sections: B.2.2 and B.2.3 Complies 53. The Board of Directors seeks to present the financial statements to the shareholders at the General Shareholders Meeting without reservations or qualifications in the auditor s report and, in the exceptional instances where they do exist, both the chairman of the Audit Committee and the auditors give a clear account to the shareholders of the content and scope of such reservations or qualifications. See section: B.1.38 Complies 54. The majority of the members of the Nominating Committee or of the Nominating and Compensation Committee, if one and the same are independent directors. See section: B.2.1 Complies 55. The Nominating Committee has the following duties, in addition to those stated in the preceding recommendations: a) To assess the qualifications, background knowledge and experience necessary to sit on the Board, defining, accordingly, the duties and qualifications required of the candidates to fill each vacancy, and decide the time and dedication necessary for them to properly perform their duties. b) To examine or organize, in the manner it deems appropriate, the succession of the chairman and the chief executive and, if appropriate, make proposals to the Board for such succession to take place in an orderly and well-planned manner. c) To report on senior manager appointments and removals that the chief executive proposes to the Board. d) To report to the Board on the gender diversity issues discussed in Recommendation 14 of this Code. See section: B.2.3 Complies 56. The Nominating Committee consults with the Company s chairman and the chief executive, especially on matters relating to executive directors. And that any board member may request that the Nominating Committee consider possible candidates to fill vacancies for the position of director, if it finds them suitably qualified. Complies 57. The Compensation Committee is responsible for the following duties, in addition to those set forth in the earlier recommendations: NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 266

269 Annual consolidated financial statements 2011 / Corporate governance a) To propose to the Board of Directors: i) The compensation policy for directors and senior managers; ii) The individual compensation of executive directors and other terms of their contracts. iii) The basic terms and conditions of the contracts with senior managers. b) To ensure compliance with the compensation policy set by the company. See sections: B.1.14 and B.2.3 Complies 58. The Compensation Committee consults with the chairman and the chief executive of the company, especially on matters relating to executive directors and senior managers. Complies NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 267

270 G. OTHER INFORMATION OF INTEREST If you believe that there is any relevant principle or aspect regarding the corporate governance practices applied by your company that has not been discussed in this Report, please mention it and explain it below. 1. SPECIFIC CLARIFICATIONS ON DIFFERENT SECTIONS OF THE REPORT: SECTION A.1 On March 14, 2011, the Board of Directors of the Company, acting under the delegation of powers granted by the shareholders at the General Shareholders Meeting of March 29, 2006, approved a capital increase with the exclusion of pre-emptive rights through the issuance of 338,353,000 new shares, which were subscribed for and paid up by Qatar Holding Luxembourg II, S.á.r.l., a wholly-owned subsidiary of Qatar Holding LLC., with which the Company executed a strategic memorandum of understanding on the same date. In addition, by way of implementation of the resolution adopted by the shareholders at the General Shareholders Meeting held on May 27, 2011, the Board of Directors of Iberdrola carried out one capital increase during fiscal year Under item six on the agenda, the shareholders acting at the General Shareholders Meeting of the Company approved an increase in share capital by means of a scrip issue in order to implement, for the second consecutive year, the shareholder compensation system called Iberdrola Flexible Dividend ( Iberdrola Dividendo Flexible ), which allows the shareholders to decide whether they prefer to receive all or part of their compensation in cash or in Iberdrola bonus shares. The resolution adopted at the General Shareholders Meeting provided that the capital increase could be implemented on one or two occasions. The first implementation of the capital increase took place in June 2011, when the traditional supplemental dividend for fiscal year 2010 would otherwise have been paid, and the number of new shares that were issued and floated came to 60,294,000, par value 0.75 euro each, representing approximately 1.04% of the share capital prior to the increase. Subsequently, on November 22, 2011, the Board of Directors of the Company agreed to conduct the second implementation of the abovementioned paid-up capital increase approved by the General Shareholders Meeting, coinciding with the traditional dividend payment for the year After running this second capital increase, on January 20, 2012 the share capital amounts to 4,479,648, euros, which consists of 5,972,865,000 shares at a par value of 0.75 euros each, totally subscribed and paid up. The shareholders acting at the General Shareholders Meeting held on May 27, 2011 resolved, under item nine of the agenda, to delegate to the Board of Directors, for a term of five years, the power to issue debentures or bonds that are exchangeable for and/or convertible into shares of the Company or of other companies within or outside of its Group, and warrants on newly-issued or outstanding shares of the Company or of other companies within or outside of its Group, up to a maximum limit of five (5) billion euros, with the power to exclude the pre-emptive rights of the shareholders. SECTION A.2 Given that the shares are not registered securities and are represented by book entries, no information is available on a daily basis about the interest of shareholders in the share capital. The sources of the information provided are the notices sent by the shareholders to the CNMV and to the Company itself and their respective annual reports and press releases, as well as the information that the Company obtains from Iberclear upon request. Pursuant to the provisions of Section 23.1 of Royal Decree 1362/2007, of October 19, further developing Law 24/1988, of July 28, on the Securities Market, in connection with the transparency requirements relating to the information on issuers whose securities have been admitted to trading on an official secondary market or other regulated market in the European Union, it is deemed that significant shareholders are the holders of at least 3% of voting rights. After the capital increase carried out to give entry to Qatar Investment Authority into the shareholding of Iberdrola, S.A., Group ACS, Actividades de Construcción y Servicios, S.A. reported, on March 16, 2011, that its interest had decreased from 20% down to %. Furthermore, on June 13, 2011, Group ACS, Actividades de Construcción y Servicios, S.A. reported to the CNMV the reorganization of its equity interests in Iberdrola, such report did not alter the percentage of the interest thereof. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 268

271 Annual consolidated financial statements 2011 / Corporate governance In addition, 4.725% of voting rights are held by ACS, Actividades de Construcción y Servicios, S.A. through a nominee, Nexgen Capital Ltd. Such voting rights attach to the shares underlying the equity swap contract executed by and between such entities, whereby Nexgen Capital Ltd. (a subsidiary of Natixis, S.A.) has undertaken to give a proxy for each General Shareholders Meeting held by Iberdrola in favor of the representative appointed by ACS, Actividades de Construcción y Servicios, S.A., who may vote at his discretion. Therefore, the exercise of the political rights inherent in such underlying Iberdrola shares rests with ACS, Actividades de Construcción y Servicios, S.A. On January 1, 2012, the segregation of the financial business of Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea (BBK), Caja de Ahorros y Monte de Piedad de Gipuzkoa and San Sebastián-Gipuzkoa eta Donostiako Aurrezki Kutxa (Kutxa) and Caja de Ahorros de Vitoria y Álava-Araba eta Gasteizko Aurrezki Kutxa (Vital), respectively, was carried out in favor of Kutxabank, S.A. Accordingly, on January 4, 2012, Kutxabank, S.A. reported to the CNMV that it was the new significant holder of 322,730,655 shares of Iberdrola, S.A., representing 5.486%, which interest was previously held by BBK, Caja Vital and Kutxa. Following the second implementation of the paid-up capital increase approved by the General Shareholders Meeting and as of the date of publication of this Report, the total percentage of voting rights of the shareholders is distributed as follows: Shareholder Number of voting rights % of capital ACS, Actividades de Construcción y Servicios, S.A. 1,107,736, % Banco Financiero y de Ahorros, S.A. 314,887, % Qatar Investment Authority 496,946, % Kutxabank, S.A. 322,730, % According to available information, the approximate breakdown of the interests in the share capital by type of shareholder is as follows: - Foreign entities 40.40% - Domestic entities 36.47% - Retail investors 23.13% Below is a list, for information purposes, of the interest, in some cases approximate, held at year-end 2011 by other shareholders which, though not considered significant shareholders, have a stable presence in the share capital: Shareholder Number of voting rights % of capital Unicaja Banco, S.A. 65,447, % Banco Mare Nostrum, S.A. 31,782, % Sociedad de Desarrollo de Navarra, S.L. (Sodena) 28,849, % Banco de Castilla la Mancha, S.A. 32,115, % Caja España de Inversiones, Salamanca y Soria, Caja de Ahorros y Monte de Piedad 38,442, % Caja de Ahorros de Vitoria y Álava (Caja Vital) 9,442, % NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 269

272 SECTION A.3 As of the date of approval of this Report, the percentage of voting rights held by the Board of Directors amounts to 0.315% and is distributed as follows: Individual or corporate name of director Number of direct voting rights Number of indirect voting rights % of total voting rights Mr. José Ignacio Sánchez Galán 4,338, , Mr. Víctor de Urrutia Vallejo 2,473,696 9,287, Mr. Ricardo Álvarez Isasi 230,000 1,530, Mr. José Ignacio Berroeta Echevarría 31, , Mr. Julio de Miguel Aynat 191, Mr. Sebastián Battaner Arias 120, Mr. Xabier de Irala Estévez 200, Mr. Íñigo Víctor de Oriol Ibarra 43, Ms. Inés Macho Stadler 47, Mr. Braulio Medel Cámara 42, Mr. José Luis Olivas Martínez 33, Ms. Samantha Barber 1, Ms. María Helena Antolín Raybaud Mr. Santiago Martínez Lage 12, SECTION A.4 There is an equity swap contractual relationship, providing for the assignment of voting rights, between Nexgen Capital Limited (the direct shares held by Natixis are apparently not subject to such contract) and ACS, because, although ACS includes it as an indirect holder in its statement of significant interest, Natixis (which does not belong to Grupo ACS) is required to issue (unlike the subsidiaries of ACS, such as Residencial Montecarmelo), and does issue, its own statement of significant interest. SECTION A.8 As of the end of fiscal year 2011, the number of shares of the Company s own stock and derivatives on treasury shares is 64,433,110, representing 1.1% of share capital. Of such amount, 37,451,642 are shares of the Company s own stock and 26,981,468 are four swaps on the Company s own stock. In addition, there are 2,269,808 shares in the Scottish Power Group. Pursuant to the authorizations granted to the Board of Directors by the shareholders at the General Shareholders Meeting, during fiscal year 2011 Iberdrola, S.A. acquired 378,671,541 shares of its own stock for 2,202,579 thousand euros. In addition, 368,899,966 shares of the Company s own stock were sold for 2,162,969 thousand euros. At the General Shareholders Meeting of Iberdrola held on May 27, 2011, the shareholders approved the merger by absorption of Iberdrola Renovables, S.A. pursuant to the provisions of the Common Terms of Merger agreed by both companies. As a consequence of the merger, the shareholders of Iberdrola Renovables other than those holding shares of Iberdrola received shares of Iberdrola in exchange. The exchange rate was set based on the actual value of the shareholders equity of Iberdrola and Iberdrola Renovables, taking into account the distribution of an extraordinary cash dividend of 1.20 euros per share that Iberdrola Renovables agreed to pay prior to the merger and was established at shares of Iberdrola for each share of Iberdrola Renovables. In accordance with the alternatives contemplated in the Common Terms of Merger, the shareholders acting at the General Shareholders Meeting of the Company of May 27, 2011 approved for Iberdrola to cover the exchange with treasury shares and, to the extent that these were not sufficient, with newly-issued shares under a capital increase. For this purpose, at its meeting of March 11, 2011, the Board of Directors approved the commencement of a program for the repurchase of shares under Regulation (EC) number 2,273/2003, of the Commission, of December 22, 2003, the terms of which were reported to the CNMV by means of two notices of significant event of March 14 and March 22, 2011 (official entry numbers 140,130 and 140,498, respectively). The number of shares acquired under the repurchase program came to approximately 4.306% of the share capital of Iberdrola. Such number of shares of the Company s own stock, added to the number of shares of its own NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 270

273 Annual consolidated financial statements 2011 / Corporate governance stock that Iberdrola held prior to the commencement of the aforementioned repurchase program, was sufficient to accommodate the exchange under the merger in its entirety. This circumstance was reported to the CNMV by means of a notice of significant event dated July 4, 2011 (official entry number 146,866). As a consequence of the foregoing, Iberdrola delivered to the shareholders of Iberdrola Renovables 250,834,615 shares of Iberdrola out of the Company s own stock. Following approval of the new General Chart of Accounts, transactions in shares of the Company s own stock are directly reflected in the net worth figure. SECTIONS B.1.2 and B.1.5 Mr. José Luis Olivas Martínez and Ms. Samantha Barber were appointed as directors on an interim basis to fill vacancies on July 24, 2007 and July 31, 2008, respectively. Both appointments were ratified by the shareholders at the ordinary General Shareholders Meetings of Iberdrola, S.A. held on April 17, 2008 and March , respectively. SECTION B.1.3 The original appointment as director of the Vice-Chairman Mr. Víctor de Urrutia Vallejo, as well as of the directors Mr. Ricardo Álvarez Isasi and Mr. José Ignacio Berroeta ECHEVARRÍA, was made at the proposal of the Executive Committee because the Nominating and Compensation Committee had not yet been established. Since its creation in November 1997, all subsequent re-elections and appointments have been proposed by the Nominating and Compensation Committee. The complete professional profiles of all the directors are available on the Company s corporate website The director Mr. José Luis Olivas Martínez was originally appointed as proprietary director by Caja de Ahorros de Valencia, Castellón y Alicante, Bancaja, which company is now a part of Banco Financiero y de Ahorros, S.A., the current holder of a significant interest in Iberdrola, S.A. SECTION B.1.10 The general policies and strategies mentioned in this section have been approved by the Board of Directors and can be viewed on the Company s corporate website ( together with the other corporate policies of Iberdrola. SECTION B.1.11 As provided in the Report on the Directors Compensation Policy approved by the General Shareholders Meeting held on May 27, 2011, the Board of Directors, at the proposal of the Nominating and Compensation Committee, has agreed to settle the Strategic Bonus evaluating the objectives compliance in a 74%. In these circumstances, the Chairman and Chief Executive Officer will receive a total of 1,110,000 shares of Iberdrola, S.A. to distribute between the years 2011, 2012 and 2013, under the conditions established by the Board of Directors. Furthermore, due to the regulated nature of its content, section B.1.11 does not include external services and other items in the amount of 620 thousand euros recorded with a charge to the bylaw-mandated allocation for fiscal year In addition, section B.1.11 does not provide 729 thousand euros chargeable against previous years allocations to bylaw-stipulated remuneration. The information set forth in section B.1.11 of this Report coincides with the information reflected in Note 45 to the consolidated Annual Financial Statements for fiscal year 2011 regarding the compensation of the Board of Directors, although it is classified differently due to the regulated nature of the content of this section B.1.11 pursuant to the provisions of CNMV Circular 1/2004. SECTION B.1.12 In addition to the compensation accrued during the year 2011 contained in section B.1.12, members of senior management have received 218,914 shares of Iberdrola, S.A., according to the Share Delivery Plan of the Strategic Bonus, which is are provisioned from previous years. Fiscal Year 2012 At the proposal of the Nominating and Compensation Committee, the Board of Directors unanimously resolved to freeze for fiscal year 2012, as it has been done since 2008, the directors remuneration as fixed annual compensation by position and bonuses for attendance at each meeting. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 271

274 SECTION B.1.13 In the 1990s, the Company began to include these kinds of clauses in contracts with its managers, although most of the contracts with indemnity clauses were executed in October The purpose is to attain an effective and sufficient degree of loyalty from the senior-level executives required for the management of the Company and thus avoid the loss of experience and knowledge that might jeopardize the achievement of the strategic goals. Essentially, these clauses include severance packages for the members of the management team on the basis of length of service to the Company, with payments ranging from a minimum of one time to a maximum of five times annual salary. As provided in the Director Compensation Policy and in the Senior Management Compensation Policy currently in force, the indemnification limit under the new contracts with executive directors and senior managers will be two times annual salary. The shareholders at the General Shareholders Meeting are informed of these matters through the annual corporate governance report, which is published and made available to the shareholders prior to the announcement of the call to the General Shareholders Meeting, for purposes of approval thereof by the Board of Directors, and in the case of the executive director, also through the annual report on director compensation, which is published on occasion of the call to the General Shareholders Meeting and is submitted to a consultative vote of the shareholders. SECTION B.1.19 The Board of Directors of Iberdrola has a balanced structure, made up of members with different and complementary professional profiles. While it boasts directors with vast experience, it has also included new candidates within a continuous process of renewal. In addition, the process of internationalization of the Group has naturally led to the inclusion of members with different nationalities, thus reflecting the Company s presence in various markets. SECTION B.1.29 During fiscal year 2011, the Corporate Social Responsibility Committee held 11 meetings. SECTION B.1.30 Below is the data on attendance of each and every one of the directors at the meetings of the Board of Directors and its committees during fiscal year 2011: Directors Board Committees EC ARSC NCC CSRC Mr. José Ignacio Sánchez Galán 18/18 25/ Mr. Víctor de Urrutia Vallejo 15/18 22/ Mr. Ricardo Álvarez Isasi 18/ /11 Mr. José Ignacio Berroeta ECHEVARRÍA 18/18 25/ / Mr. Julio de Miguel Aynat 18/ / Mr. Sebastián Battaner Arias 18/ / Mr. Xabier de Irala Estévez 7/18 10/ Mr. ÍÑIGO Víctor de Oriol Ibarra 18/ / Ms. Inés Macho Stadler 18/18 25/ / Mr. Braulio Medel Cámara 14/ /11 Mr. José Luis Olivas Martínez 17/18 22/ Ms. Samantha Barber 18/ /11 Ms. María Helena Antolín Raybaud 17/ /11 Mr. Santiago Martínez Lage 16/ / Notes: - The denominator indicates the number of meetings held during the period of the year in which the director served as such or as a member of the respective Committee. - EC: Executive Committee. - ARSC: Audit and Risk Supervision Committee. - NCC: Nominating and Compensation Committee. - CSRC: Corporate Social Responsibility Committee. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 272

275 Annual consolidated financial statements 2011 / Corporate governance SECTION B.1.31 A pyramid certification system has been established, based on the identification of the persons responsible for each business and corporate function at each subholding company, who certify the information on their respective areas of responsibility prior to the overall certification performed by the Chairman and the General Business Director of the Group and the Director of Administration and Control. The process is carried out by means of electronic signature in a software application which manages the areas of responsibility and time periods and which serves as a repository of all the documentation generated, allowing for periodic review by the supervisory bodies of the Group. SECTION B.1.33 The Secretary of the Board of Directors is a part of the executive team in his capacity as the person responsible for the Office of the General Secretary of the Company. SECTION B.2.4 Pursuant to the provisions of section 2 of the Annex of adherence to the Good Tax Practices Code and of sub-section 1.d) of the Good Tax Practices Policy, the Company reports that it has complied with the provisions of such Code from the moment it was approved. Specifically, it is reported that, during fiscal year 2011, the Audit and Risk Supervision Committee of Iberdrola received information from the Company s head of tax matters at its January 24, 2011 meeting (regarding the tax consequences of the acquisition of the company Elektro Electricidade e Serviços, S.A.), at its February 17, 2011 meeting (regarding tax policies and standards applied during fiscal year 2010), at its September 15, 2011 meeting (significant developments since his appearance at the February 17, 2011 meeting) and at its February 15, 2012 meeting (regarding tax policies and standards applied during fiscal year 2011), all of which was reported to the Board of Directors. SECTION C All the information regarding related-party transactions included in this 2011 annual corporate governance report is also included in the Company s annual financial report for fiscal year Contracts for financial instruments are made in competition with various entities, with the one most beneficial for the Company at any time being selected. The Financing and Financial Risk Policy establishes a number of limits on derivatives contracts with a single financial institution in order to avoid excessive risk concentration, as well as to ensure a minimum creditworthiness below which no contracts could be made. Such limits are complied with in respect of all counterparties, including the significant shareholders of the Company. SECTION C.2 The amounts set forth as profits and other dividends paid correspond to the free-of-charge allocation rights stemming from the increase in share capital by means of a scrip issue approved by the shareholders at the General Shareholders Meeting held on May 27, 2011, which were sold to the Company at a guaranteed fixed price pursuant to the terms and conditions of such increase. This information includes transactions with the significant shareholders ACS, Actividades de Construcción y Servicios, S.A. ( ACS ), Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea ( BBK ) and Banco Financiero y de Ahorros, S.A. ( BFA ) and Natixis, S.A., holders of significant interests at the close of fiscal year All of these transactions were made in the ordinary course of business, were carried out on an arm s-length basis, and the information about them is not needed to give a true and fair view of the assets, the financial condition and the results of operations of the Company. The Iberdrola Group optimizes its banking transactions management by selecting financial institutions based on their solvency, presence in the Group s markets and capacity to provide the best service in terms of costs and quality. The selection of suitable financial institutions for each bank product is supplemented by a balanced allocation based on the financial institution s risk exposure toward the Iberdrola Group and the volume of business granted. BBK and BFA (through its subsidiary Bankia) provide banking services to the Group in the management of the domestic business. There is a relationship of correspondence between BBK and BFA (through its subsidiary Bankia) as to how they rank in terms of profits and risk exposure toward the Iberdrola Group, which shows our commitment to a balanced risk/ business distribution: - BBK ranks 42nd as to risk exposure and 38th in profits. - BFA (through its subsidiary Bankia) ranks 12th as to risk exposure and 16th in profits. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 273

276 Therefore, BBK and BFA (through its subsidiary Bankia) do not hold a significant position as providers of financial services to the Iberdrola Group. SECTION C.4 The transactions made with subsidiaries and affiliated companies that have not been terminated in the consolidation process were made in the ordinary course of business of the Company, were carried out under arm s-length conditions, and are of little significance to accurately reflect the assets, financial condition and results of operations of the Company. SECTION C.5 All of the directors refrained from participating in the review of their respective classifications as executive, external proprietary and external independent. SECTION D.2 During 2011, the activities of the Iberdrola Group were conditioned by various risk factors in the countries and markets in which it does business and which, from a global standpoint, did not have a significant impact on the income for the fiscal year, thanks to the diversification of activities, markets and geographical areas of the Group, which made it possible for the negative effects of some businesses to be offset by a favorable performance in others. The principal risks that materialized are related to the economic crisis and the international financial turmoil, the low prices of gas and electricity in the United States, as well as narrower margins in certain markets and regulatory risks. In the opinion of the Company, some of these risk factors will continue to be present in 2012 and will again condition the conduct of its activities. 1) The financial turmoil on the international front and, in particular, in Spain (whose sovereign rating has been downgraded by leading rating agencies) has brought with it a tightening in the availability and terms of financing, as well as weaker prospects for securitization of the tariff deficit (although this risk was mitigated by the possibility of assigning the deficit through private placements, a number of which were carried out during the last part of 2011). The economic crisis led to a stagnation of demand in Spain and a reduction of demand in the United Kingdom, with dim prospects for recovery in the short term. The delinquency rate is also on the increase in Spain, especially in the Government Agencies segment, although the economic impact has so far not been significant. This scenario also shows a reduction in the mechanisms for support of renewable energy in some of the countries in which the Iberdrola Group operates and, in particular, has required a revision and update of the book value of the interest in Gamesa based on the provisions of the business plan, with an impact of 70 million euros. 2) In the United States, there is a continuing environment of low prices of gas and electricity as a consequence of the strong development of shale gas, which has resulted in narrower margins in the businesses of gas storage and transportation in the United States and Canada, and which also lessens the chances of signing agreements for the long-term sale of electricity at attractive prices for wind farms in those countries. 3) In the United Kingdom, the establishment of a minimum price for CO 2 emission rights has led to a revision and update of the provisions for the utilization of our Longannet coal plant in the United Kingdom through 2018, which has led to a reduction in the book value thereof, with an impact of 265 million euros, and strong competition has made it difficult for the increase in fuel costs to be quickly passed on to customers, thus affecting the margin. SECTION E.7 As regards the data on proxy-granting and distance voting at the General Shareholders Meeting held on May 27, 2011, the holders of a total of 900,681 shares voted and the holders of another 1,746,022 shares carried out the formalities for proxy-voting by electronic means, by using the procedure established for such purpose on the Company s corporate website ( In addition, the holders of a total of 106,116,962 shares cast their vote and the holders of 30,029,332 shares carried out the formalities for proxy-voting by mail. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 274

277 Annual consolidated financial statements 2011 / Corporate governance In this section, you may include any other information, clarification or comment relating to the prior sections of this report. Specifically, indicate whether the company is subject to laws other than Spanish laws regarding corporate governance and, if applicable, include such information as the company is required to provide that is different from the information required in this report Binding definition of independent director: Indicate whether any of the independent directors has or has had any relationship with the company, its significant shareholders or its managers which, had it been sufficiently significant or important, would have resulted in the director not qualifying for consideration as independent pursuant to the definition set forth in section 5 of the Unified Good Governance Code: YES NO X Name of the director Type of relationship Explanation This annual corporate governance report was approved by the Board of Directors of the Company at its meeting of Indicate whether any directors voted against or abstained in connection with the approval of this Report. YES NO X Name or corporate name of the director that did not vote in favor of the approval of this report Reasons (opposed, abstained, absent) Explain the reasons NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 275

278 H. EXHIBIT TO THE ANNUAL CORPORATE GOVERNANCE REPORT OF LISTED COMPANIES 1. Securities that are not traded on a regulated European Community market, specifying the different classes of shares, if any, and the rights and obligations attaching to each class of shares. Iberdrola, S.A. has not issued any securities that are not traded on a regulated market. 2. Restrictions on the transfer of securities and any restriction on voting rights. Section A.10 of the main body of this Report sets forth the statutory and by-law restrictions on the exercise of voting rights as well as the restrictions on acquisition and transfer of equity interests. 3. Rules applicable to the amendment of the by-laws of the company. In addition to the provisions of Section 285 et seq. of the Companies Law (Ley de Sociedades de Capital), Iberdrola s Corporate Governance System establishes the following rules, which have already been mentioned in sections B.1 and B.2 of the main body of this report: a) Article 21.2 of the By-Laws increases the quorum required to hold a valid meeting to adopt resolutions regarding a change in the corporate purpose, transformation, total split-off, dissolution of the Company and the amendment of section two of this article, in which case shareholders representing two-thirds of subscribed share capital with voting rights must be in attendance at the first call of the General Shareholders Meeting, and shareholders representing sixty percent of such share capital must be in attendance at the second call. b) Article 58 of the By-Laws of Iberdrola requires a qualified majority of shareholders representing 75% of the share capital in attendance at the General Shareholders Meeting to adopt resolutions to eliminate or amend the provisions set forth in Title III (Neutralization of Limitations in the event of Tender Offers), in sections 3 through 5 of Article 29 (Adoption of Resolutions) and in Article 30 (Conflicts of Interest). There are no specific rules applicable to the amendment of the By-Laws. Article 29.1 thereof provides that the shareholders acting at the General Shareholders Meeting adopt resolutions with the favorable vote of more than one-half of the voting shares whose holders are present in person or by proxy, except in those cases where the law or the By-Laws require a greater majority. Each voting share that is present at the General Shareholders Meeting in person or by proxy shall give the right to one vote. 4. Significant agreements entered into by the company that go into effect, are amended or terminate in the event of a change in control at the company as a result of a public tender offer, and effects thereof. Iberdrola and its subsidiaries have loans and other agreements with financial institutions, the maturity of which may be affected in the event of a change in control; the most significant of such agreements are the following: i. There are loans that are subject to acceleration or in respect of which additional guarantees may be required in the event of a change in control as a consequence of a tender offer, representing approximately 279 million euros in the aggregate under agreements that will be affected, unless the change of control is not deemed to be detrimental. ii. In addition, approximately million euros under loans and 317 million Brazilian reals issued would be affected, unless Iberdrola s rating is maintained or improved. iii. Similarly, approximately 314 million Brazilian reals issued would be affected by corporate mergers, unless such mergers occur as a result of intra-group reorganizations or the consent of the lenders is obtained. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 276

279 Annual consolidated financial statements 2011 / Corporate governance iv. Approximately 8,868 million euros of securities issued on the Euromarket will be subject to acceleration in the event of a change in control if Iberdrola s rating falls below investment grade or if, being already below investment grade, it falls a notch, and provided that the rating agency states that the downgrade is caused by the change in control. v. Finally, approximately 710 million dollars, 368 million Brazilian reals and 260 million euros under loans would be subject to acceleration in the event of a change in control of the borrower. 5. Agreements between the company and its management level and decision-making positions or employees that provide for compensation upon resignation or termination without cause, or if the labor relationship is terminated as a result of a public tender offer. a) Chairman & Chief Executive Officer Pursuant to the provisions of his contract, the Chairman and Chief Executive Officer is entitled to receive compensation in the event of termination of his relationship with the Company (including in the event that he is not re-elected as a director by the shareholders at the General Shareholders Meeting), or if there is a change in control at the Company, provided the termination of the relationship does not result from an instance of breach attributable to the Chairman & Chief Executive Officer or is not due exclusively to his decision. The amount of such compensation is five times his annual salary. Notwithstanding the foregoing, the Director Compensation Policy approved by the Board of Directors on December 13, 2011 provides that the limit on the amount of such compensation under new contracts with executive directors shall be two times their annual salary. b) Senior managers Contracts with senior managers of Iberdrola include specific compensation clauses. The purpose of such clauses is to obtain an effective and sufficient level of loyalty from senior managers who are necessary for the management of the Company and thus avoid a loss of experience and knowledge that might jeopardize the achievement of strategic objectives. The amount of compensation is set on the basis of length of service in the position and the reasons for termination of senior managers, with a maximum of five times their annual salary. Notwithstanding the foregoing, the Senior Management Compensation Policy, approved by the Board of Directors on December 13, 2011, provides that the limit on the amount of compensation under new contracts with senior managers shall be two times their annual salary. c) Employees The contracts of employees linked to Iberdrola by an ordinary employment relationship do not generally include specific compensation clauses and, accordingly, the general provisions of labor law shall apply in the event of termination of the employment relationship. 6. Description of the main features of internal risk control and management systems in connection with the process of issuance of financial information. Iberdrola, S.A. ( Iberdrola or the Company ) has a Financial Information Internal Control (FIIC) model that, in order to reasonably guarantee the reliability of such information, assigns responsibilities to the various subholding companies and corporate areas, identifies the most significant risks of error in financial information in each area, documents compliance with controls associated with identified risks and provides for a periodic review of the model itself in order to continuously adapt it to the circumstances of the corporate business. It is important to note that the development of this model, which commenced in 2006, was not the product of a legal requirement, but rather derived from the firm belief of both the Board of Directors and the senior management NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 277

280 of the Company that in a context of growth and internationalization as the one that could already be envisaged for the Group, an explicit and auditable internal control system would contribute to maintaining and improving its control environment and the quality of financial information; it would also boost investors trust because of its effects on the transparency, reputation and good governance of Iberdrola and of the subsidiaries making up the Iberdrola Group. Description of the model The financial information internal control model of the Iberdrola Group rests on two main pillars: certification and internal control proper. Certification is a semi-annual process in which those responsible for financial information in the different areas of the Company certify that: (i) the financial information they deliver to Iberdrola for purposes of consolidation does not contain any material errors or omissions and provides a fair view of the results and the financial condition within their area of responsibility, and (ii) they are responsible for establishing the internal control system within their area of responsibility and have found, upon evaluation, that the system is effective. The culmination of this semi-annual process is a joint certification in connection with the financial information of Iberdrola and its subsidiaries that the Chairman & Chief Executive Officer and the Director of Administration and Control submit to the Board of Directors. The other pillar supporting this model, i.e., internal control proper, is patterned on the reference framework described in the report entitled Internal Control Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and is primarily aimed at providing a reasonable level of security in achieving the aim of reliability of the financial information. The methodology used by IBERDROLA for the development and continuous update of internal control consists of the following stages or steps: (i) analysis and selection of significant financial information, (ii) grouping such information into cycles or large processes in which it is generated, (iii) identification, assessment and prioritization of risks of error in financial information within selected cycles, (iv) design of controls in order to mitigate or manage selected risks, and (v) monitoring and update of the previous steps. Relevant Financial Information Monitoring and updating Internal Control Model Controls Cycles Risks One of the salient features of the design of this model is that it seeks to guarantee the quality of financial information during all months of the year, such that it is not limited only to the periods of year-end or semi-annual closings. Another important feature is that it extends the culture of internal control to all of the corporate and business organizations that significantly contribute to generating financial information, by assigning personal responsibility for the implementation and documentation of controls. All relevant documents in connection with the internal control model, both regarding the certification process and internal control proper, are contained in a computer application developed internally by the Group. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 278

281 Annual consolidated financial statements 2011 / Corporate governance Those responsible for implementing the controls enter into the computer application evidence of such controls having been performed, and then evaluate the results obtained, which they rate as satisfactory or non-satisfactory. This allows for the internal control situation to be monitored in real time, and also makes it possible to act promptly on any deficiencies detected. In addition, those responsible for control in the subholding companies and corporate areas carry out an annual review of the design and operation of the internal control model, as a systematic process of update of such model in order to adapt it to the changing circumstances of corporate activities. The annual review is coordinated by the Internal Control Division, which is also responsible for managing the computer application and coordinating the development of the internal control model in the various business units and corporate areas of the Group. Moreover, the Internal Audit Division, which is responsible for supervising internal control as part of its duty of support of the Audit and Risk Supervision Committee, performs an independent review of the design and operation of the internal control system, identifying deficiencies and formulating recommendations for improvement. Such review is carried out in accordance with an established policy of rotation among the different cycles comprising the Internal Control Model over a period of three years. It also performs a semi-annual independent review of the effectiveness 1 of the internal controls established to guarantee the reliability of financial information. Additionally, also on a semi-annual basis, Internal Audit reviews the process for certification of financial information. The conclusions of such reviews are submitted to the Audit and Risk Supervision Committee, which, if appropriate, adopts such conclusions and submits them in turn to the Board of Directors. Scope and significant indicators The current scope of the model is such that, based on materiality standards, it covers the entire Iberdrola Group, except Iberdrola USA and Elektro. Iberdrola USA maintains the internal control model already existing before it was acquired by Iberdrola (which, in compliance with the Sarbanes-Oxley Act, is audited externally), as this was one of the conditions imposed by the New York State regulatory authority to approve the acquisition. It is currently in the process of becoming integrated into the model of Iberdrola, with full integration being expected to occur in Elektro also has an internal control model of its own. It is planned that it will become integrated into Iberdrola s model between 2013 and At present, more than 800 persons within the Group use the internal control computer application, whether to document evidence of performance of more than 1,600 controls (which mitigate or manage more than 800 risks of error in financial information that have been prioritized) or to monitor, analyze, adjust and assess the internal control system. Furthermore, the almost 40 first-tier and second-tier managers who participate in the process of certification of the accuracy of information under their responsibility do so by using an electronic signature directly on the computer application. As a consequence of all of the foregoing, the final result of the certification process, which is based on the situation of internal control proper, can be reviewed by the Board of Directors of Iberdrola as one of the significant guarantees of reliability in connection with the preparation of the Group s annual and interim financial information. 6.1 control environment at the entity Indicate at least the following, specifying the main features thereof: What bodies and/or functions are responsible for: (i) the existence and maintenance of an adequate and effective financial information internal control system; (ii) its implementation; and (iii) oversight thereof. What bodies and/or functions are responsible for: (i) the existence and maintenance of an adequate and effective financial information internal control system; (ii) its implementation; and (iii) oversight thereof 2. The executive managers and persons charged with control at the subholding companies of the Iberdrola Group are responsible for the design and control of the financial information internal control system. Such responsibility is expressly set forth in the certifications signed by such persons on a semi-annual basis in connection with the financial information for their respective areas of responsibility. 1 Internal control is deemed to be effective if there are no deficiencies or combinations of deficiencies giving rise to a reasonable likelihood of a material error not being corrected or detected in good time. 2 Pursuant to Article 34.5.C.b. of the Company s By-Laws: In particular, the Board of Directors, acting upon its own initiative or at the proposal of the corresponding internal decision-making body, shall deal with the matters set forth below (as an example only): C) with respect to information to be provided by the Company: b) Draw up the Company s annual financial statements, management report and proposal for the allocation of profits or losses, as well as the consolidated financial statements and management report, and prepare the financial information that the Company must periodically make public due to its status as a listed company, ensuring that such documents provide a faithful image of the assets, financial position and results of the Company in accordance with the provisions of Law. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 279

282 The Audit and Risk Supervision Committee 3 is responsible for oversight of the financial information internal control system. The Committee draws on the support of the Internal Audit Division to discharge such responsibility Whether any of the following are in place, particularly as regards the process of preparation of financial information: Departments and/or mechanisms in charge of: (i) the design and revision of the organizational structure; (ii) clearly defining the lines of responsibility and authority, with an appropriate distribution of work and duties; and (iii) ensuring that there are sufficient procedures for the proper dissemination thereof at the entity. The Board of Directors of Iberdrola, S.A. defines the top-level organizational structure. The managers of such top-level organizations, together with the Human Resources Division, are responsible for deployment within their respective areas. Each top-level division prepares a proposed organization structure, including a description of the mission, duties and responsibilities of the various organizations deployed, which must then be validated by the Human Resources Division and the Corporate Resources Division. Primary responsibility for the preparation of financial information lies with the Administration and Control corporate Division. Such division establishes the structure of those responsible for Control at the subholding companies and coordinates and supervises their activities. Code of conduct, body that approves it, degree of dissemination and instruction, principles and values included (indicating whether the recording of transactions and the preparation of financial information are specifically mentioned), body in charge of reviewing breaches and of proposing corrective actions and penalties. The Iberdrola Group has a Code of Ethics, approved by the Board of Directors, which, as provided in Article 2.1 thereof, is mandatory for all persons working at the group. The Code of Ethics is communicated to and disseminated among the professionals of the Iberdrola Group in accordance with the Plan designed by the Corporate Resources Division for such purpose, as laid down in Article Article 29.2 of the Code of Ethics expressly provides as follows: The Group shall provide true, proper, useful and consistent information regarding its programs and actions. Transparency of information is a basic principle that must govern the actions of Group professionals. The economic/financial information of the Group, especially the annual financial statements, shall faithfully reflect its economic and financial position and its net worth, in accordance with generally accepted accounting principles and applicable international financial reporting standards. For such purpose, no professional shall conceal or distort the information set forth in the accounting records and reports of the Group, which shall be complete, accurate and truthful. A lack of honesty in the communication of information, whether internally within the Group (to employees, subsidiaries, departments, internal bodies, management decision-making bodies, etc.) or outside the Group (to auditors, shareholders and investors, regulatory entities, the media, etc.) is a breach of this Code of Ethics. This includes the delivery of incorrect information, organizing it in an incorrect manner or seeking to confuse those who receive it. Control of the application of the Code of Ethics and of the disciplinary measures to be adopted is a duty attributed to the Corporate Resources Division. Pursuant to Article 38.1 of the Code, the professionals of the Group expressly accept the entire contents of the Code of Ethics and, in particular, the vision, values and rules of action established therein. In addition, pursuant to Article 38.2, professionals who join or become part of the Group in the future shall expressly accept the entire contents of the Code of Ethics and, in particular, the vision, values and rules of action set forth therein. The Code of Ethics shall be attached to the respective employment agreements. Reporting channel that makes it possible to report any irregularities of a financial or accounting nature to the Audit Committee, as well as any possible breach of the code of conduct and irregular activities at the organization, specifying, if appropriate, whether it is confidential. Iberdrola, S.A. has a procedure in place that must be followed by all employees of the Group who wish to report potentially significant irregularities of a financial and accounting nature and that allows them to report such irregularities, by or regular mail, to the Chairman of the Audit and Risk Supervision Committee. 3 Pursuant to Article 44.4.b of the Company s By-Laws, the Audit and Risk Supervision Committee shall have the powers set forth in the Regulations of the Board of Directors and in its own Regulations and, in any event, the following: b) Supervise the effectiveness of the internal control of the Company and of its Group, as well as the risk management systems. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 280

283 Annual consolidated financial statements 2011 / Corporate governance As established in the procedure itself, the Company s Board of Directors guarantees that the name of the reporting person and the irregularity reported shall be treated in the strictest confidence, both in the reporting process and in any process for the assessment and clarification of the facts conducted by the Audit and Risk Supervision Committee and the organizations of the Company or third parties participating at the request of such Committee. In accordance with the above-mentioned procedure, the Chairman of the Audit and Risk Supervision Committee receives and admits the report for further processing. Such admission is made on the basis of the requirements established in the procedure (name of the sender, sufficiently detailed information on the situation reported, need for the report to fall within the scope of the channel, confidentiality guarantee, personal data protection, etc.). Regular training and update programs for personnel involved in the preparation and review of financial information, as well as in the evaluation of the financial information internal control system, covering at least accounting standards, auditing, internal control and risk management. Personnel involved in the preparation and review of financial information, as well as in the evaluation of the financial information internal control system, receives regular training on accounting standards, auditing, internal control and risk management, according to its specific responsibilities. In accordance with the organizational structure of the Iberdrola Group, the divisions that have a direct relationship with these types of duties are the Internal Audit Division, the Administration and Control Division and the Economic and Financial Division. During fiscal year 2011, the personnel involved in these duties in Spain received 18,213 hours of training, of which 5,721 hours were dedicated to technical training directly related to the responsibilities discharged by such personnel, which accounts for more than 31% of the training received. A total of 61 technical courses were organized, most of them taught by external entities (business schools, universities or specialist consulting firms). 340 attendees participated in these training activities for personnel involved in the preparation and review of financial information and in the evaluation of the financial information internal control system. Among the technical training activities in which these professionals engaged, the following are particularly noteworthy: - Certified European Financial Analyst - Analysis, planning and management control of credit institutions - Training course to become a Certified Internal Auditor - Training course to become a Certified Fraud Examiner - Executive MBA in Management of Energy Companies - Executive Masters Course in Quantitative Finance - Financial Derivatives - Changes in international financial reporting standards 6.2 Risk assessment of financial information Indicate at least the following: What are the main features of the risk identification process, including risks of error or fraud, with respect to: Whether the process exists and is documented. The process for the identification of risks of error is one of the most important steps in the method for the development of internal control of the financial information of Iberdrola, and the goals, implementation and results thereof are documented. The method starts with a review of financial information at the various subholding companies and corporate areas, in order to select the most significant accounts and notes to the financial statements, in accordance with both quantitative (materiality) and qualitative (business risk and visibility to third parties) standards. The selected accounts and notes are grouped into management cycles or large processes in which the selected information is generated. The cycles are analyzed and a description of each is prepared, as a way of identifying possible risks of error in the financial information, in connection with attributes such as completeness, presentation, assessment, cut-off, recording and validity. The identified risks are submitted to a process of prioritization, such that the most significant ones are selected by applying professional judgment on a number of indicators (existence of documented processes and controls, existence of systems that automate the processes, whether there have been any incidents in the past, whether the process is known and mature, or whether judgments need to be made to make estimates). The risks of fraud are identified implicitly, to the extent that they can generate material errors in financial information. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 281

284 Once the most significant risks have been selected, the controls needed to mitigate or manage them are selected and designed; such controls are monitored, documented and systematically reviewed by internal audit. The risks selected are reviewed at least on an annual basis, within the framework of the assessment of the effectiveness of internal control carried out by the persons or divisions responsible therefor. The purpose of such review is to adjust the risks to the changing circumstances in which the Company operates, particularly in the event of changes in the organization, information technology systems, regulations, products or the situation of the markets. Whether the process covers all the objectives of financial information (existence and occurrence; completeness; assessment; presentation, breakdown and comparability, and rights and obligations), whether it is updated and how often. As mentioned above, the cycles or large processes in which financial information is generated are reviewed at least on an annual basis in order to identify possible risks of error, in connection with attributes such as validity (existence and authorization), completeness, assessment, presentation, cut-off and recording. The existence of a process for the identification of the scope of consolidation, taking into account, among other matters, the possible existence of complex corporate structures, holding entities or special purpose entities. The scope of consolidation is identified on a monthly basis, and the result thereof is the updated corporate map, which expressly identifies the changes that occurred in each period. This review covers all companies in which Iberdrola, S.A. or any of its subsidiaries has an interest, no matter how small. Recommendation 8 of the Unified Good Governance Code provides that the Board of Directors must reserve for itself, among other powers, the power to approve the creation or acquisition of interests in special purpose entities or in entities registered in countries or territories regarded as tax havens, as well as any other transactions of a similar nature that, because of their complexity, could detract from the transparency of the Group. Recommendation 52 provides that the Audit Committee must report to the Board of Directors prior to such decisions being adopted. These recommendations have been included in the Regulations of the Board of Directors and in the Regulations of the Audit and Risk Supervision Committee of Iberdrola, S.A. Accordingly, whenever the Company intends to create a special purpose entity or an entity registered in a tax haven, or to acquire an interest in one, the transaction must first be submitted to the Audit and Risk Supervision Committee for it to issue a report and then to the Board of Directors for approval. There is a specific procedure for such purpose, tailored to the current corporate governance model, according to which such initiative is to be taken by the Division or subholding company that intends to create or acquire a special purpose company or a company registered in a tax haven. In the case of subholding companies that have a board of directors and an audit committee, their corporate governance bodies must first review the proposed transaction. Whether the process takes into account the effects of other types of risks (operational, technological, financial, legal, reputational, environmental, etc.) to the extent that they affect the financial statements. The process for the identification of risks of error in financial information takes into account the effects of other types of risks (operational, technological, legal, reputational, environmental, etc.) to the extent that they affect the financial statements; such risks are assessed and managed by different corporate units such as the Risk Division or Legal Services, among others. However, no express identification of such other types of risks is carried out to identify financial information risks. What corporate governance body of the entity supervises the process. The corporate governance body that supervises the process is the Audit and Risk Supervision Committee, which draws on the support of the Internal Audit Division to discharge this responsibility. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 282

285 Annual consolidated financial statements 2011 / Corporate governance 6.3 Control activities Indicate whether the following, at least, are in place and describe their main features: Procedures for review and authorization of financial information, and description of the financial information internal control system to be published in the securities market, indicating the persons or divisions responsible therefor, as well as documentation describing the flows of activities and controls (including those relating to risk of fraud) of the various types of transactions that could materially affect the financial statements, including the closing process and the specific review of significant judgments, estimates, assessments and projections. The process or structure of certification of financial information, conducted formally on a semi-annual basis, on the dates of the year-end and interim closing processes, reflects the manner in which financial information is generated in the Group. In such structure, the heads of the subholding companies, i.e., the Chief Executive Officer (or the General Manager) and the Director of Control, and the managers of the corporate areas certify both the reliability of the financial information in the areas under their responsibility (which is the information they provide for purposes of consolidation at the Group level) and the effectiveness of the internal control system established to reasonably ensure such reliability. Finally, the Chairman & Chief Executive Officer, as the highest executive authority, and the Director of Administration and Control, as the person responsible for the preparation of financial information, certify the reliability of the consolidated financial statements to the Board of Directors. The Audit and Risk Supervision Committee, with the support of the Internal Audit Division, supervises the entire certification process, and submits the conclusions of such review to the Board of Directors at the meetings at which the financial statements are formally approved. As regards the description of the financial information internal control system to be published in the securities markets, the review and authorization procedure is the same as that used for all contents of an economic and financial nature of the Annual Corporate Governance Report. The documentation of the financial information internal control system includes high-level descriptions of the cycles of generation of selected significant financial information, as well as detailed descriptions of the prioritized risks of error and of the controls designed to mitigate or manage them. The description of the controls includes the evidence to be obtained in the implementation thereof, which is necessary for its review. Each of the closing processes performed at the business units is regarded as a cycle, and the same is true of all the closing activities performed at the corporate level, of the global consolidation process and of the process for preparation of the notes to the financial statements. As a result, all such activities are subject to the methodological process described in the section relating to risks. The specific review of critical accounting judgments and significant estimates, assessments and projections is subject to specific controls within the model, since this type of matter entails the identification of risks of error in the different cycles in which they are made. In many cases, the evidence of such specific controls is the media supporting such reviews. Independently of the certification process followed in the business and corporate areas, the Audit and Risk Supervision Committee, again with the support of the Internal Audit Division, performs an overall review of financial information on a quarterly basis, ensuring that the semi-annual financial reports and the quarterly management statements are prepared using the same accounting standards as the annual financial reports, verifying the proper delimitation of the scope of consolidation as well as the proper application of generally accepted accounting principles and international financial reporting standards Policies and procedures of internal control of information systems (including, among others, security of access, control of changes, operation thereof, operational continuity and segregation of duties) that provide support for the significant processes of the entity in connection with the preparation and publication of financial information. The controls used to mitigate or manage the risks of error in financial information include controls relating to the most significant computer applications, such as controls of user access permits or of the integrity of the transfer of information between applications. In addition, the Iberdrola Group has internal control policies and procedures on information systems (patterned on the framework Control Objectives for Information and related Technologies (COBIT) in connection with software acquisition and development, the acquisition of system infrastructure, software installation and testing, change management, service level management, management of the services provided by third parties, system security and access thereto, management of incidents, operation management, continuity of operations and segregation of duties. Such policies and procedures are applied across all information systems, including those supporting significant financial information generation processes and on the infrastructure required for the operation thereof. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 283

286 The Systems Director of Iberdrola certifies the effectiveness of the internal controls established on information systems on an annual basis Internal control policies and procedures designed to supervise the management of activities outsourced to third parties, as well as those aspects of assessment, calculation or valuation entrusted to independent experts, which may materially affect the financial statements. Generally speaking, the Iberdrola Group has no significant duties outsourced to third parties that have a direct impact on financial information. The assessments, calculations or valuations entrusted to third parties that may materially affect the financial statements are regarded as significant financial information generating activities that lead, if appropriate, to the identification of high-priority risks of error, which, in turn, entails the design of associated internal controls. Such controls cover the review and internal approval of the basic assumptions to be used, as well as the review of the assessments, calculations or valuations made by outside parties, by verifying them against calculations made internally. 6.4 Information and communication Indicate whether at least the following are in place and describe the main features thereof: A specific function charged with defining and updating accounting policies (accounting policy area or department) and with resolving questions or conflicts arising from the interpretation thereof, maintaining fluid communications with the managers of operations at the organization, as well as an updated accounting policy manual that has been communicated to the units through which the entity operates. The Accounting Regulations Division, reporting directly to the Director of Administration and Control, is responsible for defining and updating accounting policies, as well as for resolving questions or conflicts stemming from the interpretation thereof. It maintains fluid communications with the operation managers of the organization and, especially, with the managers of accounting functions. It publishes a quarterly newsletter, widely disseminated within the Group, on new accounting developments in connection with IFRS, which includes regulation updates (laws and regulations that come into force, drafts issued, laws and regulations enacted, laws approved and pending approval by the European Union, and expected future laws and regulations) as well as accounting questions asked internally, together with the conclusions in respect thereof. The Accounting Regulations Division is also responsible for publishing the Group s accounting practices manual and for the appropriate dissemination thereof. The accounting manual is updated on an annual basis. During the updating process, the Accounting Regulations Division includes all new accounting laws and regulations, or changes therein, issued during the fiscal year, and prior notice of which was given by such Division to the persons responsible for the preparation of the Group s financial information through the quarterly newsletters mentioned above. Throughout the fiscal year, during the preparation of the quarterly newsletters, a determination is made of whether the new laws or regulations have an effect on the Group s accounting policies, as well as of the effective date of each of such laws or regulations. Those which have been identified as having an effect on the Group s accounting policies are included in the manual at the end of the fiscal year. The latest version, dated December 2011, was distributed to all control divisions of the Group in January Mechanisms to capture and prepare financial information with standardized formats, to be applied and used by all units of the entity or the group, supporting the principal financial statements and the notes thereto, as well as the information provided on the financial information internal control system. The mechanism to capture and prepare the information supporting the principal financial statements of the Iberdrola Group is based primarily on the use of a unified management consolidation tool (known as BPC) accessible from all geographical areas, the deployment of which is currently being completed across the entire Group. In those cases where the new tool has not yet been implemented (the only significant case is Iberdrola USA, although it is expected that it will have been implemented by the time this document is published), standardized spreadsheets are used to capture information, which is subsequently entered in a centralized manner into the consolidation tool for review and consolidation together with the rest of the information. A large portion of the information supporting the breakdowns in and notes to the financial information is included in the consolidation tool, and the rest is captured on standardized spreadsheets known as reporting packages, which are prepared for the semi-annual and year-end closing processes. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 284

287 Annual consolidated financial statements 2011 / Corporate governance 6.5 Supervision of the operation of the system Indicate and describe the main features of, the following, at least: The activities of supervision of the financial information internal control system performed by the Audit Committee, as well as whether the entity has an internal audit function whose duties include providing support to the committee in its work of supervising the internal control system, including the financial information internal control system. Information is also to be provided concerning the scope of the assessment of the financial information internal control system performed during the fiscal year and on the procedure whereby the person or division charged with performing the assessment reports the results thereof, whether the entity has an action plan in place describing possible corrective measures and whether the impact thereof on financial information has been considered. The activities of supervision of the financial information internal control system carried out by the Audit and Risk Supervision Committee include basically: (i) monitoring compliance with the certification process by the various persons or divisions responsible for financial information, (ii) reviewing the design and operation of the internal control system, with the support of the Internal Audit Division, to assess the effectiveness thereof, and (iii) periodic meetings with external auditors, internal auditors and senior management to review, analyze and discuss financial information, the group companies covered and the accounting standards applied, as well as, where appropriate, the significant internal control weaknesses detected. It should be noted that those responsible for the preparation of the financial information of each subholding company and corporate area carry out, on an annual basis, a review of the design and operation of the internal control system within their area of responsibility in order to assess the effectiveness thereof, in a process coordinated by the Internal Control Division. To that end, an analysis is made of whether, as a result of the changing circumstances in which the Group operates (changes in organization, systems, processes, products, regulation, etc.), changes in identified risks need to be included and prioritized. A review is also made of whether the design of the controls to mitigate or manage the risks that may have changed is appropriate, as well as whether the controls have functioned properly, in accordance with their design. The conclusions of this annual review, both as regards the deficiencies detected (which are classified as serious, medium or slight, according precisely to their possible impact on financial information) and with respect to the action plans to correct them, are submitted at an annual seminar session chaired by the Director of Administration and Control, at which the Internal Audit Division is also in attendance. At such meeting, conclusions are reached concerning the effectiveness of the internal control system at each subholding company and corporate area and, overall, at the Group as a whole. The most significant conclusions of the review performed are subsequently submitted to the Audit and Risk Supervision Committee within the framework of the periodic meetings with the Director of Administration and Control. Independently of the foregoing, the Internal Audit Division (which reports to the Chairman & Chief Executive Officer and is functionally controlled by the Audit and Risk Supervision Committee, and which, as provided in the Basic Internal Audit Regulations of Iberdrola, S.A. and the Companies of its Group, has the primary role of facilitating the review, assessment and effective supervision of the internal control and significant risk management systems of the Company and its Group) conducts an independent review of the design and operation of the internal control system in support of the Audit and Risk Supervision Committee, identifies deficiencies and draws up recommendations for improvement. As a result thereof, the Internal Audit Division performs a continuous monitoring of the various action plans agreed with the different organizations to correct the deficiencies detected and to implement the suggestions for improvement agreed with the organizations. The period that the Internal Audit Division plans for an in-depth review of the entire internal control system is three years. Specifically, during fiscal year 2011, various cycles of the companies Iberdrola Generación S.A., Iberdrola Inmobiliaria, S.A., Iberdrola Distribución Eléctrica, S.A., Iberdrola Ingeniería y Construcción, S.A. and Scottish Power were reviewed, as were the corporate areas of Economy and Finance, Legal Services and Administration and Control. In addition, the Internal Audit Division performs a review of the operation of the internal controls regarded as most critical on a semi-annual basis, on the dates of the semi-annual and year-end closing. The combination of the quarterly reviews and the semi-annual reviews of the most critical controls enables the Internal Audit Division to perform an assessment of the internal control system, as regards the design and operation thereof, and to issue an opinion on the effectiveness of the internal controls established to ensure the reliability of financial information, which it submits to the Audit and Risk Supervision Committee within the framework of their periodic meetings. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 285

288 Whether it has a discussion procedure whereby the auditor (as provided in the Technical Auditing Standards), the internal audit function and other experts can inform senior management and the Audit Committee or the directors of the entity of the significant internal control weaknesses detected during the review of the annual financial statements or such other reviews as may have been entrusted to them. Information shall also be provided on whether it has an action plan to seek to correct or mitigate the weaknesses found. Generally speaking, the procedure for discussion of significant internal control weaknesses detected is based on periodic meetings of the various agents. Thus, the Audit and Risk Supervision Committee holds meetings, both at the semi-annual and at the yearend closing, with the external auditors, the internal auditors and the division responsible for preparing financial information, in order to discuss any significant aspect of the preparation process and of the resulting financial information. Specifically, pursuant to the provisions of its Regulations (Scope of Authority), the Audit and Risk Supervision Committee of Iberdrola, S.A. has, among other duties, the duty of reviewing, together with the auditors, the significant weaknesses of the internal control system detected in the course of the audit. To such end, the auditor appears before the Committee on an annual basis to submit recommendations in connection with the internal control weaknesses identified during the review of the financial statements. Any weaknesses described by the auditor are monitored on an ongoing basis by the Committee, with the support of the Internal Audit Division. Furthermore, the division responsible for preparing the consolidated financial statements also holds meetings with the external auditors and with the internal auditors, both at the semi-annual and at the year-end closing, to discuss significant issues relating to financial information. 6.6 Other significant information 6.7 External auditor s report Report on: Whether the information on the financial information internal control system has been reviewed by the external auditor, in which case the entity should include the respective report as an Exhibit. Otherwise, it should provide the reasons therefor. The information on the financial information internal control system sent to the markets has not been reviewed by the external editor for reasons of consistency with the fact that the rest of the information set forth in the Annual Corporate Governance Report is only reviewed by the auditor in connection with the financial information contained in such report. It is also believed that having the information on the financial information internal control system reviewed externally would somehow overlap the internal control review to be performed by the external auditor, according to technical auditing standards, within the context of the audit of the financial statements. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 286

289 Annual consolidated financial statements 2011 / Corporate governance NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 287

290

291 certification

292 NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 290

293 Annual consolidated financial statements 2011 / Certification JULIÁN MARTÍNEZ-SIMANCAS SÁNCHEZ, SECRETARY OF THE BOARD OF DIRECTORS OF IBERDROLA, S.A., HAVING ITS REGISTERED OFFICE IN BILBAO AT PLAZA EUSKADI NUMBER 5, AND HAVING TAX IDENTIFICATION NUMBER A I H E R E B Y C E R T I F Y: That the annual financial statements and the management report (including the proposal for the allocation of profits) of IBERDROLA, S.A., as well as the annual financial statements and management report for IBERDROLA, S.A. and its subsidiaries, were drawn up by the Board of Directors of IBERDROLA, S.A. at its February 20, 2012 meeting, appearing the signature of all of the members thereof, except Mr. Braulio Medel Cámara, who was absent from the meeting due to reasons beyond his control and who gave his proxy to the Chairman of the Board of Directors. It is hereby affirmed that once those documents are approved by the General Shareholders Meeting, the original versions thereof shall be filed with the Commercial Registry of Biscay (Registro Mercantil de Vizcaya). With respect to the Auditor s Reports of IBERDROLA, S.A. as well as IBERDROLA, S.A. and its subsidiaries, it is also hereby certified that such reports have been issued without qualifications. And in witness whereof, I issue this certification in Bilbao, on February 22, NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. NOTICE. This document is a translation of a duly approved Spanish-language document, and is provided for informational purposes only. In the event of any discrepancy between the text of this translation and the text of the original Spanish-language document which this translation is intended to reflect, the text of the original Spanish-language document shall prevail. 291

294 Prepared by: IBERDROLA Design and Layout: IBERDROLA

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