Annual financial report Iberdrola, S.A., and subsidiary companies Year 2019 www.iberdrola.com AUDITOR’S REPORT KPMG Auditores, S.L. Torre Iberdrola Plaza Euskadi, 5 Planta 17 48009 Bilbao Independent Auditor's Report on the Consolidated Annual Accounts (Translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) To the Shareholders of Iberdrola, S.A. REPORT ON THE CONSOLIDATED ANNUAL ACCOUNTS Opinion___________________________________________________________________ We have audited the consolidated annual accounts of Iberdrola, S.A. (the "Parent") and subsidiaries (together the “Group”), which comprise the consolidated statement of financial position at 31 December 2019, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and consolidated notes. In our opinion, the accompanying consolidated annual accounts give a true and fair view, in all material respects, of the consolidated equity and consolidated financial position of the Group at 31 December 2019 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and other provisions of the financial reporting framework applicable in Spain. Basis for Opinion__________________________________________________________ We conducted our audit in accordance with prevailing legislation regulating the audit of accounts in Spain. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Annual Accounts section of our report. We are independent of the Group in accordance with the ethical requirements, including those regarding independence, that are relevant to our audit of the consolidated annual accounts in Spain pursuant to the legislation regulating the audit of accounts. We have not provided any non-audit services, nor have any situations or circumstances arisen which, under the aforementioned regulations, have affected the required independence such that this has been compromised. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters_________________________________________________________ Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the consolidated annual accounts of the current period. These matters were addressed in the context of our audit of the consolidated annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. KPMG Auditores S.L., sociedad española de responsabilidad limitada y firma miembro de la Inscrita en el Registro Oficial de Auditores de Cuentas con el nº.S0702, y en el Registro de red KPMG de firmas independientes afiliadas a KPMG International Cooperative (“KPMG Sociedades del Instituto de Censores Jurados de Cuentas con el nº.10. International”), sociedad suiza. Reg. Mer Madrid, T. 11.961, F. 90, Sec. 8, H. M ‐188.007, Inscrip. 9 Paseo de la Castellana, 259C – Torre de Cristal – 28046 Madrid N.I.F. B‐78510153 2 Recoverability of non-current assets See note 13 to the consolidated annual accounts Key Audit Matter How the Matter was Addressed in Our Audit The principal activities of the different businesses included Our audit procedures included the following: in the consolidated annual accounts of the Group are related to the generation, transmission, distribution and . Assessing the design and implementation of the key supply of electricity, and therefore the balances recognised controls related to the process of determining under other intangible assets and property, plant and recoverable amount. equipment are highly significant. Assessing the reasonableness of the methodology used Furthermore, as a result of the acquisitions made in recent to calculate value in use and the main assumptions years, the consolidated annual accounts include goodwill considered, with the involvement of our specialists. for an amount of Euros 8,153 million. Analysing the consistency of the estimated growth in IFRS-EU determine the need to carry out an analysis of the future cash flows with the business plans approved by recoverable amounts of assets in those cases in which the governing bodies. We also contrasted the cash flow indications of impairment were identified. Goodwill, forecasts estimated in prior years with the actual cash intangible assets with indefinite useful lives and in-process flows obtained. intangible assets are not amortised, but are instead tested . Assessing the sensitivity of the recoverable amount to for impairment at least on an annual basis. changes in certain assumptions that are considered The calculation of the recoverable amount of non-current reasonable. assets indicated in the preceding paragraphs is determined . Assessing whether the disclosures in the consolidated through the use of methodologies based on discounted annual accounts comply with the requirements of the cash flows, the estimation of which requires the use of a applicable financial reporting framework. high degree of judgement. 3 Pension commitments See note 25 to the consolidated annual accounts Key Audit Matter How the Matter was Addressed in Our Audit The Group has important commitments with personnel in Our audit procedures included the following: relation to retirement and other long-term liabilities. These commitments are mainly in Spain, the United States, the . Assessing the design and implementation of controls United Kingdom and Brazil. related to the valuation process. The present value of commitments undertaken is Euros . Reading and understanding of collective agreements 11,198 million, while the fair value of the different plan and other commitments assumed with personnel. assets amounts to Euros 8,750 million, of which Euros . Evaluation of the integrity and accuracy of the databases 1,844 million is classified as level 3 in the fair value used for the beneficiaries of the different commitments. hierarchy. Analysis of the reasonableness of the main actuarial Non-material variations in the main assumptions that assumptions and calculation methods applied by the determine the valuation of the commitments undertaken or Group in the different jurisdictions in which it operates the fair value of the associated assets could have a through the involvement of our specialists. significant impact on the amounts recognised in the consolidated annual accounts. Performance of substantive procedures on a sample of the assets subject to the different plans in order to verify the reasonableness of their valuation. Our procedures included obtaining external confirmations. Analysis of compliance with the disclosure requirements established in IFRS-EU. 4 Provisions for litigation and claims See note 26 to the consolidated annual accounts Key Audit Matter How the Matter was Addressed in Our Audit As a result of the operations carried out by the entities that Our audit procedures included the following: comprise the Group, the consolidated statement of financial position includes provisions for litigation . Assessing the design and implementation of the procedures underway amounting to Euros 1,196 million controls related to the process of recognising and that are shown in the "provisions for litigation, indemnities evaluating litigations and claims. and other items" and “other provisions” columns of note . Obtaining details of litigation prepared by the Group’s 26 to the consolidated annual accounts. Current tax legal services department and analysing the liabilities under non-current liabilities amount to Euros 261 reasonableness of the amounts recognised in the million. consolidated annual accounts. The calculation of amounts to be provided for is subject to . Sending confirmations to the lawyers with whom the significant uncertainties that affect both the determination Group operates. of the probability of an outflow of resources and the quantification thereof.. Reading of the minutes of board of directors' meetings. Selection of a sample of the main litigation procedures and analysis of the reasonableness of provisions, if any, with the involvement of our specialists. Analysis of compliance with the disclosure requirements established in IFRS-EU. Revenue recognition See note 5 to the consolidated annual accounts Key Audit Matter How the Matter was Addressed in Our Audit The Group's businesses that carry out electricity supply Our audit procedures included the following: activities must make estimates of unbilled supplies to end customers in the period between the last meter reading . Analysis of the design, implementation and operating and the end of the fiscal year. effectiveness of the key controls related to the estimation of unbilled revenue. Unbilled electricity supplied is estimated based on internal and external information that is compared with the . Evaluation of the reasonableness of the calculation measurements contained in the management systems model used by comparing the estimates made at the used by the businesses. Revenue is calculated by close of the previous period and actual invoicing data multiplying the volume of estimated unbilled use by the (retrospective analysis). tariff agreed for each customer, a process that is subject to . Verification