Annual Accounts and Director’s Report Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the2017 event of discrepancy, the Spanish-language version prevails.)

Canal de Isabel II, S.A.

Annual Accounts and Directors’ Report 31 December 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Canal de Isabel II, S.A.

Canal de Isabel II, S.A.

CONTENTS

BALANCE SHEETS AT 31 DECEMBER 2017 AND 2016.

INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016.

STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016.

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016.

NOTES TO THE ANNUAL ACCOUNTS FOR 2017

1. NATURE AND ACTIVITIES OF THE COMPANY AND COMPOSITION OF THE GROUP ...... 1 2. BASIS OF PRESENTATION ...... 3 3. NON-MONETARY CONTRIBUTION AND CONTRACT-PROGRAMME ...... 5 4. DISTRIBUTION OF PROFIT ...... 10 5. SIGNIFICANT ACCOUNTING POLICIES ...... 12 6. JOINT VENTURES ...... 28 7. INTANGIBLE ASSETS ...... 29 8. TANGIBLE ASSETS ...... ¡Error! Marcador no definido. 9. INVESTMENT PROPERTY ...... 44 10. FINANCIAL RISK MANAGEMENT POLICY ...... 48 11. CLASSIFICATION OF FINANCIAL ASSETS BY CATEGORY AND INVESTMENTS IN EQUITY INSTRUMENTS OF GROUP COMPANIES AND ASSOCIATES ...... 49 12. INVESTMENTS AND TRADE RECEIVABLES ...... 52 13. INVENTORIES ...... 60 14. PREPAYMENTS ...... 62 15. CASH AND CASH EQUIVALENTS ...... 63 16. EQUITY ...... 63 17. GRANTS, DONATIONS AND BEQUESTS RECEIVED ...... 64 18. PROVISIONS AND CONTINGENT LIABILITIES ...... 68 19. FINANCIAL LIABILITIES BY CATEGORIES ...... 74 20. PAYABLES AND TRADE PAYABLES ...... 77 21. ACCRUALS ...... 84 22. TAXATION ...... 85 23. ENVIRONMENTAL INFORMATION...... 91 24. RELATED PARTY BALANCES AND TRANSACTIONS ...... 92 25. INCOME AND EXPENSES ...... 97 26. EMPLOYEE INFORMATION ...... 100 27. AUDIT FEES ...... 101 28. AVERAGE SUPPLIER PAYMENT PERIOD. “REPORTING REQUIREMENT”, THIRD ADDITIONAL PROVISION OF LAW 15/2010 OF 5 JULY 2010...... 102

Canal de Isabel II, S.A.

29. EVENTS AFTER THE REPORTING PERIOD ...... 102 APPENDIX I.- DETAILS OF JOINT VENTURES AT 31 DECEMBER 2017 AND 2016 ...... 107 APPENDIX II (1) – DETAILS OF GROUP COMPANIES AT 31 DECEMBER 2017 AND 2016 ...... 108 APPENDIX II (2) – DETAILS OF ASSOCIATES AT 31 DECEMBER 2017 AND 2016 ...... 112 APPENDIX III.- DETAILS OF RESERVES AND PROFIT AND MOVEMENT FOR THE YEAR ENDED 31 DECEMBER 2017 AND 2016 ...... 113

DIRECTORS' REPORT FOR 2017

Canal de Isabel II, S.A.

Annual Accounts 2017

Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Anual accounts 2017 (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

BALANCE SHEETS AT 31 DECEMBER 2017 AND 2016. (Expressed in thousands of Euros) Note 2017 2016 ASSETS A) NON-CURRENT ASSETS 4,631,542 4,647,880 I. intangible assets 7 4,210,933 4,230,886 1. Concession arrangements, regulated assets 3,980,102 4,006,250 2. Concession arrangements, capitalisation 64,570 62,561 3. Concession arrangements, regulated assets under construction 166,261 162,075

II. Tangible assets 8 7,320 21,319

1. Land and buildings 7,320 21,079

2. Under construction and advances - 240

III. Investment property 9 14,541 13,954 1. Land 7,537 7,535 2. Buildings 7,004 6,419

IV. Non-current long-term investments in Group companies and associates 11 & 12 247,999 231,496 1. Equity instruments 142,999 142,996 2. Loans to companies 105,000 88,500 V. Non-current investments 11 y 12 65,859 66,474 1. Loans to third parties 54,216 53,848 2. Other financial assets 11,643 12,626

VI. Deferred tax assets 22 126 144

VII. Prepayments for non-current assets 14 84,764 83,607 B) CURRENT ASSETS 323,126 263,501

I. Inventories 13 5,758 4,981

1. Raw materials and other supplies 5,625 4,839

2. Raw materials and other supplies long cycle 133 142

II. Trade and other receivables 11, 12 & 22 161,393 168,360

1. Trade receivables 138,202 138,968

2. Trade receivables from Group companies and associates 1,703 3,303 3. Other receivables 19,897 24,480 4. Public entities, other 22 1,591 1,609

III. Current investments in Group companies and associates 11 & 12 11,287 12,040

1. Loans to companies 4,988 5,531

2. Other financial asset 6,299 6,509 IV. Current investments 11 & 12 12,721 12,808 1. Loans to third parties 12,702 12,789 2. Other financial assets 19 19

V. Prepayments for current assets 14 4,216 4,488

VI. Cash and cash equivalents 15 127,751 60,824 1. Cash 127,751 60,824 TOTAL ASSETS (A+B) 4,954,668 4,911,381 The attached report forms an integral part of the Annual Accounts for the year ended 31 December 2017

Canal de Isabel II, S.A. Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Anual accounts 2017 (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

BALANCE SHEETS AT 31 DECEMBER 2017 AND 2016 (Expressed in thousands of euros) Note 2017 2016

EQUITY AND LIABILITIES

A) EQUITY 3,285,892 3,172,621

A.1) Own capital 16 2,573,401 2,467,132

I. Capital 1,074,032 1,074,032

II. Share premium 1,074,032 1,074,032

III. Reserves 287,201 205,758

1. Legal reserve 102,147 78,878

2. Other reserves 185,054 126,880

IV. Profit for the year 261,886 232,693

V. (Interim dividend) (123,750) (119,383)

A.2) Grants, donations and bequests received 17 712,491 705,489

B) NON-CURRENT LIABILITIES 1,267,784 1,311,172

I. Non-current provisions 18 341,796 300,694

1. Provisions for infrastructure maintenance 334,198 293,477

2. Other provisions 7,598 7,217

II. Non-current payables 19 and 20 598,483 600,254

1. Bonds and other marketable securities 500,000 500,000

2. Other financial liabilities 98,483 100,254

III. Group companies and associates, non-current 19 and 20 298,809 379,857

IV. Deferred tax liabilities 22 1,786 1,768

V. Non-current accruals 21 26,910 28,599

C) CURRENT LIABILITIES 400,992 427,588

I. Current provisions 18 97,040 90,888

1. Provisions for infrastructure maintenance 85,967 76,586

2. Other provisions 11,073 14,302

II. Current payables 19 and 20 80,728 89,271

1. Bonds and other marketable securities 7,111 7,115

2. Other financial liabilities 73,617 82,156

III. Group companies and associates, current 19 and 20 87,222 117,762

19,20 and IV. Trade and other payables 22 131,057 125,000 1. Suppliers 5,995 4,785

2. Suppliers, Group companies and associates 18,971 21,899

3. Other payables 94,323 86,129

4. Personnel (salaries payable) 7,718 8,102

5. Public entities, other 22 4,050 4,085

V. Current accruals 21 4,945 4,667

TOTAL EQUITY AND LIABILITIES (A + B + C) 4,954,668 4,911,381

The accompanying notes form an integral part of the Annual Accounts for the year ended 31 December 2017

Canal de Isabel II, S.A. Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Anual accounts 2017 (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016. (Expressed in thousands of euros) Note 2017 2016

A) CONTINUING OPERATIONS 1. Revenues 25 (a) 885,741 866,779 a) Services rendered 885,741 866,779 2. Self-constructed assets 3,822 5,000 3. Supplies 25 (b) (198,008) (197,654) a) Raw materials and other consumables used (22,299) (23,387) b) Electricity used (49,609) (45,773) c) Subcontracted work (126,196) (128,495) d) Impairment of raw materials and other consumables 13 96 1 4. Other operating income 29,146 30,839 a) Non-trading and other operating income. 25 (e) 28,845 30,546 b) Operating grants taken to income 301 293 5. Personnel expenses 25 (c) (119,306) (113,946) a) Salaries and wages (88,922) (84,644) b) Employee benefits expense (30,256) (29,240) c) Provisions (128) (62) 6. Other operating expenses (240,459) (256,009) a) External services (76,268) (82,680) b) Taxes (26,094) (27,715) c) Fees (13,840) (15,977) d) Losses, impairment and changes in trade provisions 12 (d) (3,915) (7,616) e) Charge to provision for infrastructure 18 (112,714) (113,137) f) Other operating expenses (7,628) (8,884) 7. Amortisation and depreciation 7 ,8 and 9 (110,936) (109,767) 8. Non-financial and other capital grants 17 14,693 14,658 9. Provision surpluses 18 4,782 2,326 10. Impairment and gains/losses on disposal of fixed assets 1,885 (5,333) a) Impairment and losses 7 and 9 991 (4,578) b) Losses on disposal and others. 25(d) 894 (755) RESULTS FROM OPERATING ACTIVITIES 271,360 236,893 (1+2+3+4+5+6+7+8+9+10) 11. Financial income 12,507 12,758 a) From marketable securities and other financial instruments of group companies and associates 12(a) 4,979 4,053 b) From third party marketable securities and other financial instruments 916 3,357 c) Other items 14 6,612 5,348 12. Financial costs (21,360) (23,202) a) Group companies and associates 19 (a) (8,274) (9,210) b) Debts with third parties 19 (a) (7,660) (7,095) c) Provision adjustments 18 (404) (495) d) Other items 12 and 19 (5,022) (6,402) 13. Exchange differences (1) - 14. Impairment and gains/(losses) on disposal of financial instruments 12 (263) (215) a) Impairment and losses (263) (215) A.2) NET FINANCE COST/INCOME (11+12+13) (9,117) (10,659) A.3) PROFIT BEFORE INCOME TAX (A.1 + A.2) 262,243 226,234 15. Income tax 22 (357) 6,459

A.4) PROFIT FROM CONTINUING OPERATIONS (A.3+15) 261,886 232,693

A.5) PROFIT FOR THE YEAR (A.4) 261,886 232,693

The accompanying notes form an integral part of the annual accounts for the year ended 31 December 2017

Canal de Isabel II, S.A. Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Anual accounts 2017 (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016.

A) STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 Notes 2017 2016 DECEMBER 2017 AND 31 DECEMBER 2016 (Expressed in thousands of Euros) A) Profit for the year 261,886 232,693 Income and expense recognised directly in equity 17 I. Grants, donations and bequests received 21,712 23,474 II. Tax effect (54) (59) B) Total income and expense recognised directly in equity 21,658 23,415 Amounts transferred to the income statement 17 I. Grants, donations and bequests received (14,693) (14,658) II. Tax effect 37 37 C) Total amounts transferred to the income statement (14,656) (14,621)

TOTAL RECOGNISED INCOME AND EXPENSE 268,888 241,487

The accompanying notes form an integral part of the annual accounts for the year ended 31 December 2017

Canal de Isabel II, S.A. Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Anual accounts 2017 (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016

B) STATEMENTS OF TOTAL CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2017 AND 31 DECEMBER 2016 (Expressed in thousands of Euros) Grants, Share Profit for the (Interim donations Capital Reserves TOTAL premium year dividend) and bequests received

A) BALANCE AT 1 JANUARY 2016 1,074,032 1,074,032 124,556 232,006 (50,265) 696,695 3,151,056

I. Total recognised income and expense. - - - 232,693 - 8,794 241,487 II. Transactions with shareholders or owners ------Distribution of profit (note 4) ------Reserves - - 81,202 (81,202) - - Dividends - - - (100,539) - - (100,539) Other movements - - - (50,265) 50,265 - - III. Other changes in equity (note 4) - - - - (119,383) - (119,383)

B) BALANCE AT 31 DECEMBER 2016 1,074,032 1,074,032 205,758 232,693 (119,383) 705,489 3,172,621

I. Total recognised income and expense - - - 261,886 - 7,002 268,888 II. Transactions with shareholders or owners ------Distribution of profit (note 4) ------Reserves - - 81,443 (81,443) - - - Dividends - - - (31,867) - - (31,867) Other movements - - - (119,383) 119,383 - - III. Other changes in equity (note 4) - - - - (123,750) - (123,750)

C) BALANCE AT 31 DECEMBER 2017 1,074,032 1,074,032 287,201 261,886 (123,750) 712,491 3,285,892

The accompanying notes form an integral part of the Annual Accounts for the year ended 31 December 2017

Canal de Isabel II, S.A. Anual accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016. 2017 2016 (Expressed in thousands of Euros)

A) CASH FLOW FROM OPERATING ACTIVITIES

1. Profit for the year before tax 262,243 226,234

2. Adjustments for: 222,819 242,421

a) Amortisation and depreciation 110,936 109,767

b) Impairment 3,091 12,282

c) Change in provisions 114,148 124,422

d) Grants recognised in the income statement (14,693) (14,658)

e) Proceeds from disposals of fixed assets (894) 755

f) Capitalised finance income (2,009) (3,156)

g) Finance income (12,507) (12,758)

h) Finance costs 23,369 26,358

i) Other income and expenses 1,378 (591)

3. Changes in operating assets and liabilities (60,589) (100.694) a) Inventories (680) (986) b) b) Trade and other receivables 2,499 (14.463)

c) Other current assets (5) -

d) Trade and other payables 6,172 (15,094)

e) Provisions (67,298) (69,716)

f) Other current liabilities 186 (444)

g) Other non-current assets and liabilities (1,463) 9

4. Other cash flow from operating activities (13,034) 4,496

a) Interest paid (17,890) (19,390)

b) Interest received 4,856 5,780

c) Income tax received (paid) - 18,106

5. Cash flows from operating activities (1+2+3+4) 411,439 372,457

B) CASH FLOW FROM INVESTMENT ACTIVITIES

6. Payments for investments (126,551) (154,745)

a) Group companies and associates (16,542) (28,439)

b) Intangible assets (94,687) (97,030)

c) Tangible assets (4) (7,528)

d) Investment property (2) (6)

e) Other financial assets (15,316) (21,742)

7. Proceeds from sale of investments 34,549 15,301

a) Group companies and associates 1,508 -

b) Intangible assets 103 303

c) Tangible assets 16,750 -

Canal de Isabel II, S.A. Anual accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) d) Investment property - 808

e) Other financial assets 16,188 14.190

8. Cash flow used in investing activities (6+7) (92,002) (139,444)

C) CASH FLOW FROM FINANCING ACTIVITIES

9. Proceeds from and payments for equity instruments 21,712 23,474

a) Grants, donations and bequests received 21,712 23,770

c) Grants, donations and bequests refunded - (296)

10. Proceeds from and payments for financial liability instruments. (112,400) (126,953)

a) Issue 6,046 7,310

1. Other payables 6.046 7,310 b) Redemption and repayment of (118,446) (134,263)

1. Group companies and associates (111,883) (125,881)

2. Other payables (6,563) (8,382)

11. Dividends and interest on other financial instruments paid (161,822) (202,037)

a) Dividends (161,822) (202,037)

12. Cash flow used in financing activities (9+10+11) (252,510) (305,516)

D) NET INCREASE / DECREASE IN CASH OR EQUIVALENTS (5+8+12) 66,927 (72,503)

Cash or cash equivalents at the beginning of the year 60,824 133,327

Cash and cash equivalents at year end 127,751 60,824

The accompanying notes form an integral part of the Annual Accounts for the year ended 31 December 2017

Canal de Isabel II, S.A.

Canal de Isabel II, S.A.

NOTES TO THE ANNUAL ACCOUNTS FOR 2017

Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

1. NATURE AND ACTIVITIES OF THE COMPANY AND COMPOSITION OF THE GROUP

Canal de Isabel II Gestión, S.A. changed its corporate name pursuant to the agreement reached in the Ordinary General Meeting of Shareholders held on 5 July 2017 to Canal de Isabel II, S.A., (hereinafter, the Company). The Company was incorporated pursuant to article 16, clause one of Law 3/2008 of 29 December 2008 (on Tax and Administration Measures), which was amended by Law 6/2011 of 28 December 2011 (on Tax and Administration Measures), which authorised Canal de Isabel II (hereinafter, the Public Entity or Canal) to create a corporation to provide water supply, sanitation and other water- related services and works under the terms of Law 17/1984 of 20 December 1984, which regulates water supply and sanitation in the Community of Madrid, and other applicable legislation.

The Company was incorporated with limited liability under Spanish law on 27 June 2012 for an indefinite period in a deed attested by the Madrid notary public Valerio Pérez de Madrid y Palá, who recorded this deed as entry 1531 in his notarial record book. The Company is the first entry on sheet M-534929 of volume 29,733, page 86, section 8 of the Madrid Companies Registry. Its registered office is located at Calle Santa Engracia, 125, in Madrid. According to its articles of association, the Company's statutory activity consists of the following:

• Comprehensive water cycle management throughout the Madrid region, which involves:

- Managing the supply and recycling of drinking water. - Overseeing the sewerage service. - Controlling materials disposed of through the sewerage system and water-related assets in the public domain. - Running the wastewater treatment service. - Conducting studies and research, whether technical, financial, legal or administrative, where necessary for the services and activities listed above to be carried out satisfactorily. - Carrying out and/or overseeing any work, including civil work, necessary to maintain, replace, upgrade, install or extend the infrastructures used to provide the services listed above.

• Research activities and the provision of advice and assistance in all sectors relating to its statutory activity. • The sale of electricity and all other activities that relate to or are instrumental or complementary to this business. • Property development, construction, sale, rental and other associated activities, both in Spain and abroad, as well as the management of urban and land development projects. • Any other public services or activities that reinforce the services provided by the Company and add value for users. • Telecommunications-, information- and communications-related activities and services and any similar activities that may arise in the future. • The acquisition, subscription, holding, management, exchange, sale or conveyance of all kinds of equity holdings, shares and securities issued by any Spanish or foreign company or entity, irrespective of the legal status of the issuer, directly and without acting as an intermediary. All the activities reserved by Law for Collective Investment Institutions, together with those reserved by the Stock Market Law for Securities Agencies and/or Companies are excluded.

The Company’s principal activity is comprehensive water cycle management throughout the Madrid region.

When commissioned to do so by the corresponding public authority, the Company may also be involved in the process of collecting government revenue, without this entailing the exercise of public authority, whether this is tax or non-tax revenue, during the voluntary or enforcement period.

Canal de Isabel II, S.A. · 1 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

This corporate purpose does not include activities that are subject to special requirements pursuant to law, which cannot be met by the Company.

The Company may carry out its statutory activity, as described above, in any part of Spain or in any other country. It may carry out all or part of these activities indirectly or through shareholdings and/or equity holdings in other companies with the same or similar statutory activities.

Under the terms of article 16.2.4 of Law 3/2008, on 14 June 2012 the Governing Council of the Community of Madrid approved the Contract-Programme between the Public Entity and the Company. The Contract- Programme, which was signed on 1 July 2012, establishes the mutual obligations and commitments assumed by both parties within the framework of the general financial policy and water policy of the regional authorities of the Community of Madrid, in turn within the scope of Law 17/1984 of 20 December 1984, which regulates water supply and sanitation in the Community of Madrid. This management includes running (operation, maintenance and upkeep) the Community of Madrid General Network and providing the corresponding water supply, sanitation and recycling services. The agreement has a 50-year term which cannot be extended.

Pursuant to article 4 of its articles of association, the Company began operating on 1 July 2012.

The Company participates in a joint venture along with other venturers, which has been included in the annual accounts using the criteria explained in note 6. Information on temporary joint ventures is presented in Appendix I.

As described in note 11 b) the Company holds interests in subsidiaries and associates. Consequently, in accordance with the legislation in force, the Company is the parent of a group of companies. The Company presents consolidated annual accounts in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) to give a true and fair view of the financial position of the Group, the results of operations and changes in its equity and cash flows. Details of investments in Group companies and associates are provided in Appendix II.

On 27 March 2018 the directors authorised the issue of the consolidated annual accounts of Canal de Isabel II, S.A. and subsidiaries for the year ended 31 December 2017, which show consolidated profit of 264,006 thousand euros and consolidated equity of 2,525,272 thousand euros (245,647 thousand euros and 2,427,425 thousand euros in 2016).

By Agreement of the Board of Directors of Canal de Isabel II, S.A, on 27 March 2018, it was agreed upon to prepare the individual and consolidated accounts of the same, and to convene an Annual General Meeting of Shareholders of Company, the first call for the 9 May 2018 and the second for the 10 May 2018. The corresponding communications and announcements were made to the Spanish Securities and Investments Board (Important Note) on 27 March 2018, in the Official Gazette of the Commercial Registry on 3 April 2018 and in the newspaper “El Mundo” on 6 April 2018. From that moment forward the documentation regarding the aforementioned Annual General Meeting was available to the shareholders.

On 2 April 2018, the Office of the Attorney General of Colombia sent a statement to the company Triple A de Barranquilla requesting measures regarding the recovery of majority shareholder’s control of the same, as well as the termination of the Technical Consultancy contract entered into between Triple A de Barranquilla and INASSA and the return of the amounts paid as a prerequisite for the filing of a public interest claim.

On 4 May 2018, after having been debated in the Audit Committee of the Company, the Board of Directors of the same agreed to cancel the aforementioned Annual General Meeting, as a result of certain factual circumstances that indeed occurred following the preparation, and that are reflected in the present report.

In accordance with the current regulatory framework of financial information and bearing in mind Article 38 of the Commercial Code, the subsequent events that took place after the date of preparation of the

Canal de Isabel II, S.A. · 2 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) annual accounts were analysed by the Company and examined by the Audit Committee of the Company, identifying the existence of new risks that would significantly affect the true and fair view, giving rise to credits and notes in the Report and the Management Report, with the objective of having the annual accounts reflect the true and fair view of corporate equity, the financial situation and the profits and losses of the Company.

In this case, following the preparation of the individual and consolidated accounts of the Company, knowledge of diverse investigations and processes was taken by particular Colombian control authorities that affect diverse companies integrated in the Latin American Group and that have motivated the reformulation of the same (see note 29).

On 18 December 2018 the Administrators reformulated the consolidated annual accounts of Canal de Isabel II, S.A. and its subsidiary corporations of the fiscal year ending 31 December 2017, which shows some consolidated gains of 254,599 thousands of Euros and a consolidated net equity of 2,516,701 thousands of Euros (245,647 thousands of Euros and 2,427,425 thousands of Euros in 2016 respectively).

The individual and consolidated annual accounts will be filed at the Madrid Companies Registry.

The Company forms part of the Canal de Isabel II Group and its direct parent is the Public Entity Canal de Isabel II (see note 16). The Public Entity’s registered office is located at Calle Santa Engracia, 125, Madrid.

As described in note 3, in 2012 the Public Entity made a non-monetary contribution consisting of the activity, assets and liabilities, and shares and equity holdings in trading companies.

2. BASIS OF PRESENTATION

a) True and fair view

The accompanying annual accounts have been prepared on the basis of the accounting records of the Company (and its temporary joint ventures). The annual accounts for 2017 have been prepared in accordance with the legislation in force, the Spanish General Chart of Accounts and Ministry of Economy and Finance Order EHA/3362/2010 of 23 December 2010, which approved the standards adapting the Spanish General Chart of Accounts for public infrastructure concession holders, to give a true and fair view of the equity and financial position at 31 December 2017 and results of operations, changes in equity, and cash flows for the year then ended.

The directors consider that the annual accounts for the year ended 31 December 2017, authorised for issue on 27 March 2018, will be approved without significant changes by the shareholders at their Annual General Meeting.

b) Comparative information

The balance sheet, income statement, statement of changes in equity, statement of cash flows for 2017 and the notes thereto include comparative figures for 2016, which formed part of the annual accounts approved by shareholders at the annual general meeting held on 5 July 2017.

c) Functional and presentation currency

The figures disclosed in the annual accounts are expressed in thousands of Euros, the Company’s functional and presentation currency, rounded off to the nearest thousand.

Canal de Isabel II, S.A. · 3 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

d) Critical issues regarding the valuation and estimation of relevant uncertainties and judgements used when applying accounting principles

(i) Relevant accounting estimates and assumptions

Relevant accounting estimates and judgements and other estimates and assumptions have to be made when applying the Company’s accounting principles to prepare the annual accounts. A summary of the items requiring a greater degree of judgement or which are more complex, or where the assumptions and estimates made are significant to the preparation of the annual accounts, is as follows:

The Company recognises a “Provision on a systematic basis for the replacement of infrastructure” assigned by third parties based on the best estimate of the annual replacement investment to be made in this infrastructure over the concession term (see note 18 (iii)).

The Company tests investments in Group companies (see note 11 (b)), investment property (see note 9(c) and intangible assets (see note 7 (e) for potential impairment at least annually, irrespective of whether there is any indication that the assets may be impaired, to determine whether the carrying amount of these assets exceeds their recoverable amount. Management and the Company must use estimates to calculate the recoverable amount, which is generally determined using cash flow discounting methods. Discounted cash flow calculations are based projections in the budgets approved by management. The cash flows take into consideration past experience and represent the best estimate of future market performance. The key assumptions employed when determining fair value (less costs to sell, where applicable) and value in use include growth rates, the weighted average cost of capital and tax rates. The estimates, including the methodology used, could have a significant impact on values and impairment.

Valuation allowances for bad debts, the review of individual balances based on customers’ credit ratings, current market trends and historical analysis of bad debts at an aggregated level require a high degree of judgement by management.

The Company’s annual accounts for each reporting period include an estimate of the water supplied but not yet billed at 31 December each year (approximately one month’s supply). Due to the meter-reading procedure, this supply is billed the following year. The estimate is based on the water use invoiced on each contract in the two preceding similar periods according to the estimated consumption method that is included in the Regulations for the distribution service of waters of Canal Isabel II (see notes 12 (d) and 25 (a)).

The Company is subject to regulatory and legal processes and inspections by government bodies in various jurisdictions. It recognises a provision for liabilities (see note 18) if it is probable that an obligation will exist at year end that will give rise to an outflow of resources and this outflow can be measured reliably. Legal processes usually involve complex issues and are subject to substantial uncertainties. As a result, management uses significant judgement when determining whether it is probable that the process will result in an outflow of resources embodying economic benefits and estimating the amount.

The Company has receivables from certain town and city councils for work carried out and work on infrastructures used in the water distribution services and sewerage system. These receivables are recognised at amortised cost considering recovery periods. These periods are estimated by management based on past experience, representing the best estimate of the balance to be recovered in the future (see note 12).

The Company has recognised security deposits placed by customers to guarantee payment for the water they use. These security deposits are recognised at amortised cost considering the average reimbursement period. This period is estimated by the Company based on past experience, which is the best estimate of the amount to be reimbursed in the future (see note 20 (b)).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

(ii) Changes in accounting estimates

Although estimates are calculated based on the best information available at 31 December 2017, future events may require changes to these estimates in subsequent years. Any effect on the annual accounts of adjustments to be made in subsequent years would be recognised prospectively.

e) Going concern basis

Due to the activities conducted by the Company and the investments made, it has negative working capital of 77,866 thousand euros at 31 December 2017 (164,087 thousand euros in 2016). However, the Company’s directors have prepared the annual accounts on a going concern basis considering that the aforementioned circumstances had been foreseen and are in line with the nature of the business, taking into account its cash-generating capacity. At 31 December 2017 the Company also has undrawn credit facilities totalling 138,000 thousand euros, with maturity in December 2018, as indicated in note 20(c).

3. NON-MONETARY CONTRIBUTION AND CONTRACT-PROGRAMME

a) Non-monetary contribution

As provided for in article 16, clause two, point 4.b) of Law 3/2008, which was amended by article 5 of Law 6/2011 of 28 December 2011 (on Tax and Administration Measures), on 14 June 2012 the Governing Council of the Community of Madrid approved the inventory of assets and rights that made up the contributed activity and the values assigned to these assets and rights for the purposes of incorporating the Company.

Pursuant to article 16, clause two, point 3 of Law 3/2008 (on Tax and Administration Measures), the Public Entity also transferred the ownership of all assets that do not form part of the Community of Madrid General Network and its shares and equity holdings in trading companies to the Company.

This valuation and contribution exercise was carried out following the criteria and guarantees stipulated in article 114 of Law 33/2003 of 3 November 2003 (on the Assets of Public Entities), for the purposes foreseen in article 47 of Law 3/2001 of 21 June 2001 (on the Assets of the Community of Madrid). For the contribution of this activity, Canal availed of the tax neutrality scheme regulated in section VII, chapter VIII of Royal Legislative Decree 4/2004 of 5 March 2004, which approved the Revised Spanish Income Tax Law.

The conditions of this non-monetary contribution and the valuation performed by the technical services are described in a valuation report, which was based on the net worth of the contributed activity at 30 June 2012, calculated under prevailing accounting legislation and, specifically, the General Chart of Accounts and Ministry of Economy and Finance Order EHA/3362/2010 of 23 December 2010.

In accordance with Law 3/2008 and the Incorporation Agreement, the Public Entity conveyed all of the rights and obligations that it held as a party to the contracts and agreements arranged with third parties, under the same terms and conditions stipulated in these documents, to the Company (except for the rights and obligations retained by the Public Entity under the terms of the Contract-Programme regulating the relationships involved in running the comprehensive water service entrusted to the Public Entity and the financing contracts between the Entity and its lenders).

The Public Entity also conveyed its position in all ongoing procurement procedures or contracts awarded and all kinds of litigation, contracts, quasi-contracts and legal affairs to the Company. As required by Law 3/2008, all of the Public Entity’s staff necessary to provide the entrusted services were transferred to the Company, maintaining the same terms of employment existing at the transfer date. This transfer is considered as a case of “company succession” under applicable Spanish legislation. Similarly, the

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Company assumed all pension commitments previously existing between the Public Entity and its employees, under the terms of the corresponding Pension Plan Specifications and the legislation in force. As required by article 47 of Law 3/2001 of 21 June 2001 (on the Assets of the Community of Madrid), the valuation was submitted to the General Directorate of Financial Policy, Treasury and Heritage of the Department of Economy and Finance, which gave its approval. The valuation report included a description of the criteria followed to allocate the values to the activity and its components.

The amounts stated in the valuation report, in thousands of Euros, are as follows:

Thousands of Assets Euros 2012 A) Non-current assets 4,284,518 I. Intangible assets 4,020,400 II. Investment property 25,203 III. Non-current investments in Group companies and associates 117,016 1. Equity instruments 115,226 2. Loans to companies 1,790 IV. Non-current investments 40,808 V. Non-current accruals 81,091 B) Current Assets 293,122 I. Inventories 7,682 II. Trade and other receivables 228,885 III. Current investments in group companies and associates 175 IV. Current investments 12,005 V. Prepayments for current assets 1,609 VI. Cash and cash equivalents 42,766

Total Assets (A + B) 4,577,640

Thousands of Euros Equity and Liabilities 2012

A) Equity 2,809,044 A.1) Own Capital 2,148,064 I. Share Capital 1,074,032 II. Share premium 1,074,032 A.2) Grants, donations and bequests received 660,980

B) Non-current liabilities 1,271,636

I. Non-current provisions 92,125 II. Non-current payables 88,323 III. Group companies and associates, non- current 1,040,404

IV. Deferred tax liabilities 2,024

V. Non-current accruals 48,760 C) Current liabilities 496,960 I. Current provisions 81,057 II. Current payables 150,226 III. Group companies and associates, current 127,214

IV. Trade and other payables 135,916

V. Prepayments for current assets 2,547

Total Equity and Liabilities (A + B + C) 4,577,640

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Additional points: (i) Within 90 days from the date of the contribution, the difference between the values estimated for the assets and liabilities following the established valuation criteria (and stated in the valuation report) and the net worth of the assets and liabilities actually transferred on the date of the contribution and commencement of activities by the Company was adjusted by establishing a debit/credit between the Public Entity and the Company; (ii) similarly, given the complexity and diversity of the elements and relationships that make up this activity, the Company and the Public Entity adjusted the different advances, receipts or payments that could not be settled on the activity transfer date due to their nature, frequency, established payment terms or for any other reason; (iii) if any event that occurred prior to the incorporation of the Company leads to an agreement to release any public domain assets assigned to the Company and which, as a result, become part of the assets of the Public Entity, the latter is required to compensate the Company for the loss of the assigned goods, once the formal procedures for the loss of the public domain assets have been completed.

The following assets and liabilities made up the activity transferred in this non-monetary contribution on 1 July 2012:

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Assets Euros

A) Non-current assets 4,364,082 I. Intangible assets 4,074,343 II. Investment property 24.017 III. Non-current investments in Group companies and associates 144,779 1. Equity instruments 142,936 2. Loans to companies 1,843 IV. Non-current investments 37,018 V. Prepayments for non-current assets 83,925 B) Current Assets 206,096 I. Inventories 8,141 II. Trade and other receivables 178,835 III. Current investments in group companies and associates 175 IV. Current investments 11,991 V. Prepayments for current assets 1,742 VI. Cash and cash equivalents 5,212

Total Assets (A + B) 4,570,178

Thousands of Equity and Liabilities Euros

A) Equity 2,820,614 A.1) Own Capital 2,148,064 I. Share Capital 1,074,032 II. Share premium 1,074,032 A.2) Grants, donations and bequests received 672,550 B) Non-current liabilities 1,262,618 I. Non-current provisions 126,740 II. Non-current payables 73,977 III. Group companies and associates, non-current 986,223 IV. Deferred tax liabilities 13,275 V. Non-current accruals 62,403 C) Current liabilities 486,946 I. Current provisions 82,937 II. Current payables 117,776 III. Group companies and associates, current 145,152 IV. Trade and other payables 139,047 V. Current accruals 2,034

TOTAL EQUITY AND LIABILITIES (A + B + C) 4,570,178

The net assets (Own Capital; Share capital and Share premium) contributed to the Company total 2,148,064 euros (see note 16).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) b) Contract-Programme

The Contract-Programme regulating the relationship between the Public Entity and the Company in running the comprehensive water service was approved by the Governing Council on 14 June 2012 and came into force on 1 July 2012.

The Governing Council of the Community of Madrid has authorised the transfer of the water supply, sanitation and recycling services previously entrusted to the Public Entity by any permits, to Canal de Isabel II, S.A. These services include the operation and maintenance of the Community of Madrid General Network and the provision of the supply, sanitation and recycling services relating to this network and, in general, all of the services and activities that were previously carried out by the Public Entity, except those expressly reserved to the Entity under the terms of the Contract-Programme, specifically the capacity to exercise the powers, rights and obligations derived from (i) concessions and authorisations associated with water-related assets in the public domain, (ii) any administrative powers held by the Community of Madrid in relation to the distribution and treatment of water, including the power to impose penalties, (iii) the supply and sanitation services provided under Law 17/1984 and other applicable legislation, (iv) the water-related functions entrusted to it by the Community of Madrid, based on agreements signed with local authorities, and (v) all other water-related functions entrusted to it by the Community of Madrid.

So that it can provide these services, article 16 of Law 3/2008 requires the Community of Madrid and the Public Entity to convey to the Company any assets in the public domain that make up the Community of Madrid General Network and which are necessary for the Company to conduct the activities and functions entrusted to it. The Contract-Programme also provides for the Company’s use and management of energy resources currently operated by the Public Entity, as well as any such activities that may be carried out in the future. Moreover, the Company is entitled to provide any other services entrusted to the Public Entity by the Community of Madrid, particularly Closed User Group mobile communications services. All of these infrastructures are public property as they are used for public services provided by the Company. As such, they may not be disposed of or seized and are not subject to any statute of limitations. These assets may only be sold in the event that they are no longer required, but with the legal obligation to allocate the gains obtained to investments in the Community of Madrid General Network.

The Contract-Programme has a 50-year duration from 1 July 2012 and cannot be renewed. Once this period has elapsed and the Contract-Programme expires, the Public Entity is required to compensate the Company for any investments made to carry out new infrastructure plans and not depreciated while the Contract-Programme was in force, taking into account the condition of such infrastructures and the value of the investment made, deducting any technical depreciation under the terms set out in these plans. On expiry of the Contract-Programme, the Company is required to return the assets and rights that make up the Community of Madrid General Network, and any other goods and installations in the public domain that are required to provide the service, to the public authorities in good working order and perfect condition, as required by the progress clause governing the Contract-Programme, ensuring that these assets are still capable of providing the service based on the depreciation schedules of the different constituent items. Neither the assets that do not form part of the Community of Madrid General Network nor the shares and equity holdings in trading companies previously held by the Public Entity will revert on completion of the Contract-Programme.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

4. DISTRIBUTION OF PROFIT

The distribution of the Company’s profit for the year ended 31 December 2016, approved by the shareholders at their Annual General Meeting held on 5 July 2017, was as follows:

Euros

Basis of distribution Profit for the year 232,693,003.48 Distribution: Legal reserve 23,269,300.35 Voluntary reserve 58,173,250.87 Interim dividend 119,382,952.93 Supplementary dividend 31,867,499.33

TOTAL 232,693,003.48

The Company’s Board of Directors, on 15 December 2017, agreed to distribute an interim dividend of 123,749,967.04 euros for 2017, calculated as 0.115220 euros per share.

It was agreed that this interim dividend will be distributed among the shareholders in proportion to their respective percentage interests and will be payable from the day after the adoption of this agreement until 30 June 2018 to every shareholder who notifies the Company in writing of their wish to receive the payment of all or part of the amount to which they are entitled (see note 20 (b)). If any shareholder fails to request payment of this dividend entitlement from the Company by 30 June 2018, the Company is required to pay the amounts due to the shareholder or shareholders in question within the two (2) following business days. It was also stated for the record that the conditions set forth in articles 273 to 277 of the Spanish Companies Act are to be observed in this distribution.

The amounts distributed did not exceed the Company's profits for the reporting period, after deducting the estimated income tax payable on these profits, as required by article 277 of the Revised Spanish Companies Act.

The provisional accounting statement prepared in accordance with statutory requirements demonstrating that sufficient cash was available for distribution of the aforementioned dividend is as follows:

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017

Forecast distributable profit for 2017 Projected profit after income tax to 31/12/2017 235,981 Less, provision required for Legal Reserve 23,598

Estimated distributable profit for 2017 138,049 Interim dividend 123,750

Forecast cash flow for the period from 1 November 2017 to 1 November 2018 Cash at 1 November 2017 210,348 Projected collections 1,006,319 Projected payments including interim dividends 1,063,940 Projected cash at 1 November 2018 152,727

The proposed distribution of the Company’s profit to be submitted to the shareholders for approval at their Annual General Meeting is as follows:

Euros

Basis of distribution Profit for the year 261,886,212.06 Distribution Legal reserve 26,188,621.20 Voluntary reserve 65,471,553.02 Interim dividend 123,749,967.04 Supplementary dividend 46,476,070.80

TOTAL 261,886.212.06

At 31 December, non-distributable reserves are as follows:

Thousands of Euros

2017 2016 Non-distributable reserves Legal reserve 102,147 78,878

TOTAL 102,147 78,878

Profit recognised directly in equity cannot be distributed, either directly or indirectly.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

5. SIGNIFICANT ACCOUNTING POLICIES

a) Jointly controlled operations and assets

Joint businesses are those in which there is a statutory or contractual agreement to share the control over an economic activity, in such a way that strategic financial and operating decisions relating to the activity require the unanimous consent of the Company and the remaining venturers.

In jointly controlled operations, the Company recognises assets controlled and liabilities incurred in respect of jointly controlled operations, as well as the proportional part of jointly controlled assets and liabilities and of expenses incurred and income earned from the sale of goods or services by the joint venture. The statement of changes in equity and the statement of cash flows also include the proportional part corresponding to the Company by virtue of the agreements reached. Reciprocal transactions, balances, income, expenses and cash flows have been eliminated in proportion to the interest held by the Company in joint ventures. The Company has made the necessary valuation and timing harmonisation adjustments to incorporate its joint ventures in the annual accounts.

The information concerning jointly controlled economic activities, which is a Temporary Joint Venture, is included in Appendix I.

b) Capitalised borrowing costs

The Company includes in the cost of intangible assets, tangible assets, investment property and inventories that will not be available for use or capable of operating for more than one year are included in the cost of the asset. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined as the actual borrowing costs incurred. Capitalised borrowing costs are recognised in the income statement under capitalised borrowing costs.

c) Intangible assets

Intangible assets are measured at cost. Intangible assets are carried at cost, less any accumulated amortisation and accumulated impairment.

Expenditure on activities that contribute to increasing the value of the Company’s business as a whole, such as trademarks and other similar items generated internally, as well as establishment costs, are recognised as expenses when incurred.

Intangible assets received as a non-monetary capital contribution are measured at fair value on the date of contribution.

(i) Research and development

Expenditure on research and development is recognised as an expense when incurred.

Where applicable, the Company capitalises research and development expenses incurred by specific projects for each activity that meets the following conditions:

• The cost is clearly established so that it can be distributed over time. • An exact relationship can be established between the research “project” and the objectives set and met. The assessment of this requirement is carried out generically for each set of activities that are inter-related because they share a common goal.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) (ii) Concessions

Ministry of Economy and Finance Order EHA/3362/2010 requires the use of the recognition and valuation standards described in section (e) of this note, “Assets under concessions”.

(iii) Computer software

Computer software acquired and produced by the Company, including website costs, is recognised when it meets the conditions for consideration as research and development costs. Computer software maintenance costs are charged as expenses when incurred.

(iv) Subsequent costs

Subsequent costs incurred on intangible assets are recorded as an expense unless they increase the expected future economic benefits of the intangible asset.

(v) Useful life and amortisation rates

Intangible assets are amortised by distributing the depreciable amount systematically throughout its useful life.

Development expenditure and computer software are amortised on a straight-line basis over respective periods of five and four years, from the date on which the project is completed. The depreciable amount of intangible assets is measured as the cost of the asset, less any residual value.

The Company considers the residual value of the assets to be null unless:

a) There is a third-party commitment to purchase the asset at the end of its useful life. b) There is an active market for the intangible asset, and: i. The residual value with regard to that market can be established; and ii. The market is likely to continue until the end of the useful life thereof.

The Company reviews the residual value, useful life and amortisation method for intangible assets at each financial year end. Changes to initially established criteria are accounted for as a change in accounting estimates.

(vi) Impairment losses

The Company measures and determines impairment to be recognised or reversed based on the criteria in section (g) entitled “Impairment of non-financial assets subject to amortisation or depreciation”.

d) Tangible assets

(i) Initial recognition

Tangible assets are measured at cost of acquisition or production, using the same criteria as for determining the cost of production of inventories.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Tangible assets are carried at cost less any accumulated depreciation and impairment.

(ii) Depreciation

Tangible assets are depreciated by allocating the depreciable amount of the asset on a systematic basis over its useful life. The depreciable amount is the cost of an asset, less its residual value. The Company determines the depreciation charge separately for each component of an item of Tangible assets with a cost that is significant in relation to the total cost of the asset and with a useful life that differs from the remainder of the asset.

The depreciation of Tangible assets in 2017 and 2016 is determined by the application of the following criteria:

Depreciation rate

Minimum Maximum

Building and civil engineering work of the activity 2.0 % 3.3 %

The Company reviews the residual values, useful lives and depreciation methods at each financial year end. Changes to initially established criteria are accounted for as a change in accounting estimates.

(iii) Subsequent costs

Subsequent to initial recognition of the asset, only the costs incurred which increase capacity or productivity or which lengthen the useful life of the asset are capitalised. The carrying amount of parts that are replaced is derecognised. Costs of day-to-day servicing are recognised in profit and loss as incurred.

Replacements of Tangible assets that qualify for capitalisation are recognised as a reduction in the carrying amount of the items replaced. Where the cost of the replaced items has not been depreciated independently and it has not been practical to determine the respective carrying amount, the replacement cost is used as indicative of the cost of items at the time of acquisition or construction.

(iv) Impairment

The Company measures and determines impairment to be recognised or reversed based on the criteria in section g) (impairment).

e) Assets under concessions

The Company assesses the contractual and legal characteristics of concession arrangements to determine whether they fall within the scope of Ministry of Economy and Finance Order EHA/3362/2010 of 23 December 2010 approving the standards for the adaptation of the Spanish General Chart of Accounts to public infrastructure concessions.

For concession contracts covered by this legislation, services rendered are recognised using the accounting policies described in section (r). The Company’s concession arrangements are operating contracts, as it has no construction contracts.

The Company accounts for the right of access to the infrastructure for the purposes of providing the operating service assigned by the grantor as an intangible asset, in accordance with the valuation standard applicable to intangible assets.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

If the concession is remunerated, the right of use is recognised at the present value of the consideration paid or payable, without taking into account any contingent payments associated with the transaction. Consideration is deemed to exist and is measured at the fair value of the aforementioned right when the transfer of the infrastructure is included in the terms of a tender in which the concession holder undertakes to make an investment or deliver another type of consideration in exchange for the right to operate either only the pre-existing infrastructure or the aforementioned infrastructure together with the newly constructed infrastructure.

If the Company is granted the right of access to the infrastructure in order to render the operating service for no consideration, or for consideration lower than the fair value of the right, the right of use is recognised using the criteria applicable to grants, donations and bequests detailed in section (m).

The intangible asset is amortised on a straight-line basis over the concession term. Borrowing costs accrued during the construction or upgrade period are capitalised under intangible assets.

Borrowing costs accrued during the construction or upgrade period are capitalised under intangible assets. If the infrastructure is acquired from third parties, the borrowing costs are capitalised using the criteria set out in section (b). In both cases the borrowing costs are capitalised under the line item capitalised borrowing costs, forming part of the financial margin.

If the infrastructure comprises items that can be used separately and the date on which they will be ready for use is different for each one, the Company considers this circumstance and ceases to capitalise the portion of the borrowing costs related to the intangible asset corresponding to the aforementioned infrastructure that is available for use.

If the remuneration is in the form of an intangible asset, the Company capitalises the borrowing costs accrued when the infrastructure enters operation provided that:

• They can be identified separately and reliably measured.

• There is reasonable evidence and it is probably that the capitalised costs will be offset against future revenues.

The Company considers that there is reasonable evidence that the aforementioned costs will be recovered through the tariffs for future years provided that, in addition to being included in the Economic Financial Plan, the following two conditions are met:

• The Company could obtain future revenues in an amount at least equal to the borrowing costs capitalised through their inclusion as permitted costs for the purposes of determining the tariff.

• Evidence exists that future revenues will enable the recovery of the costs incurred previously.

The following amounts are determined for the purpose of calculating the borrowing costs to be included under intangible assets, based on the indicators presented in the Economic Financial Plan:

• Total projected revenues for the concession period and the revenues forecast for each year. • Total borrowing costs expected to be incurred during the term of the concession and that of each year.

Operating revenues as a percentage of total revenues are calculated for each year forecast. This percentage is applied to the total amount of borrowing costs forecast for the concession period to determine the balance to be allocated to each financial year as finance costs for the period. If the actual revenues generated during a year exceed forecast revenues, the aforementioned percentage is determined for that year based on the ratio of actual revenues to total forecast revenues, which generally requires an adjustment to the amount recognised for the prior year.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

For each year, the positive difference between forecast borrowing costs and the amount calculated as described in the previous paragraph is reflected under assets and is taken to profit and loss as finance costs for the year, for the resulting amount, from the year in which the aforementioned difference is negative.

If borrowing costs incurred during a year differ from the balance forecast in the Economic Financial Plan, the difference is treated as an increase or decrease in the finance costs to be taken to profit and loss for the year.

The effects of any changes to forecast revenue are recognised without adjusting the borrowing costs already taken to profit and loss in prior years, and applying the criteria specified in the preceding paragraphs for the residual concession period, taking into account that the capitalised amount not yet recognised in profit and loss must form part of the total borrowing costs forecast for the rest of the concession period.

Capitalised borrowing costs are recognised in concession arrangements, capitalisation, under “Intangible assets” in the balance sheet.

The contractual obligations assumed by the Company to maintain the infrastructure during the operating period, or to carry out renovation work prior to returning the infrastructure to the transferor upon expiry of the concession arrangement, are recognised using the accounting policy described for provisions in section (p) of this note.

To the extent that such activity does not generate revenue. Maintenance works are recognised as an expense when incurred. Replacements, major repairs and any other work required to restore the infrastructure to its original state entail the systematic recognition of a charge to the provision. However, if the obligation is similar to a decommissioning obligation it is recognised as such.

Work undertaken to improve or increase the capacity of assets should be considered as a new concession. Nonetheless, if in view of the terms of the arrangement the Company considers that these initiatives will not be offset by the possibility of obtaining higher revenues from the date on which they are carried out, a provision for dismantling or removal is recognised. This provision is equal to the best estimate of the present value of the disbursement required to settle the obligation associated with the aforementioned initiatives that will not be offset. The balancing entry is an increase in the acquisition cost of intangible assets.

In the event that the rights to use assets under a concession are transferred to third parties, this transaction is recognised using the criteria described in section (h) on leases. When all the risks and rewards inherent to ownership of the asset are substantially transferred, the transaction is recognised as a finance lease. Assets acquired or constructed for subsequent sale in the ordinary course of business are recognised as inventories.

Assets under concession received as a non-monetary capital contribution are measured at cost on the date of contribution.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) f) Investment property

Investment property is property earmarked totally or partially to earn rentals, for capital appreciation or both, rather than for use in the Company’s activity or for administrative purposes.

Investment property is measured at cost of acquisition or production, less any accumulated depreciation and impairment.

Property that is being constructed or developed for future use as investment property is classified as Tangible assets under construction until completed. Nevertheless, redevelopment work to extend or improve property is classified as investment property.

Investment property received as a non-monetary capital contribution is measured at cost on the date of contribution.

(i) Depreciation

Investment property is depreciated by allocating the depreciable amount of the asset on a systematic basis over its useful life. The depreciable amount is the cost of an asset, less its residual value. The Company determines the depreciation charge separately for each component of an item of Tangible assets with a cost that is significant in relation to the total cost of the asset and with a useful life that differs from the remainder of the asset.

Investment property is depreciated on a straight-line basis applying the following depreciation rates:

Item Depreciation rate

Minimum Maximum Buildings 1.00 % 3.00 % Housing developments, access routes and sign 5.00 % 11.10 % posts Electricity installations 5.00 % 6.70 % General installations, security and surveillance 6.70 % 11.10 % Equipment and tools 25.00 % 25.00 %

Furniture and fixtures 10.00 % 20.00 %

The Company reviews the residual values, useful lives and depreciation methods at each financial year end. Changes to initially established criteria are accounted for as a change in accounting estimates.

(ii) Subsequent costs

Subsequent to initial recognition of the asset, only the costs incurred which increase capacity or productivity or which lengthen the useful life of the asset are capitalised. The carrying amount of parts that are replaced is derecognised.

(iii) Impairment

The Company measures and determines impairment to be recognised or reversed based on the criteria in section (g) (impairment).

g) Impairment of non-financial assets subject to amortisation or depreciation

The Company tests non-financial assets subject to amortisation or depreciation for potential impairment at least annually, irrespective of whether there is any indication that the assets may be impaired, to

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) determine whether the carrying amount of these assets exceeds their recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use.

Where the Company has reasonable doubts as to the technical success or financial and commercial feasibility of in-progress research and development projects, the amounts in the balance sheet are recognised directly in “Losses on the disposal of intangible assets” in the income statement and may not be reversed.

Impairment losses are recognised in the income statement.

Recoverable amount is determined for each individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs.

Impairment losses for cash-generating units (CGU) are allocated first to reduce the carrying amount of goodwill allocated to the unit and then to the other non-current assets of the unit pro rata with their carrying amounts. The carrying amount of each asset may not be reduced below the highest of its fair value less costs to sell, its value in use and zero.

At the end of each reporting period the Company assesses whether there is any indication that an impairment loss recognised in prior periods may no longer exist or may have decreased. Impairment losses on goodwill are not reversible. Impairment losses on other assets are only reversed if there has been a change in the estimates used to calculate the recoverable amount of the asset.

A reversal of an impairment loss is recognised in the income statement. The increased carrying amount of an asset attributable to a reversal of an impairment loss may not exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised.

After an impairment loss or reversal of an impairment loss is recognised, the depreciation (amortisation) for the asset is adjusted in future periods based on its new carrying amount.

However, if the specific circumstances of the assets indicate an irreversible loss, this is recognised directly in "Losses on the disposal of fixed assets” in the income statement.

h) Leases

(i) Lessor accounting records

As mentioned in notes 9 and 21, the Company has granted the right to use certain assets through lease contracts.

Leases that do not transfer to third parties substantially all the risks and rewards incidental to ownership of the assets are classified as operating leases. Otherwise they are classified as finance leases.

Assets leased to third parties under operating lease contracts are classified according to their nature, applying the accounting policies set out for the corresponding type of asset.

Operating lease income, net of incentives granted, is recognised in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which the benefits deriving from the leased asset are diminished.

Initial direct costs are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.

Canal de Isabel II, S.A. · 18 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Contingent rents are recognised as income when it is probable that they will be obtained, which is generally when the conditions agreed in the contract arise.

i) Financial instruments

(i) Classification and separation of financial instruments

Financial instruments are classified on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the economic substance of the contractual arrangement and the definitions of a financial asset, a financial liability and an equity instrument.

The Company classifies financial instruments into different categories based on the nature of the instruments and the Company's intentions on initial recognition.

(ii) Offsetting principles

A financial asset and a financial liability are offset only when the Company currently has the legally enforceable right to offset the recognised amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

(iii) Loans and receivables

Loans and receivables comprise trade and non-trade receivables with fixed or determinable payments that are not quoted in an active market other than those classified in other financial asset categories. These assets are initially recognised at fair value, including transaction costs, and are subsequently measured at amortised cost using the effective interest method.

Nevertheless, financial assets which have no established interest rate, which mature or are expected to be received in the short term, and for which the effect of discounting is immaterial, are measured at their nominal amount.

Receivables include non-trade balances receivable from certain town and city councils as a result of infrastructure work carried out for water distribution and sewerage services in these towns or cities. These receivables are collected through the bills issued to customers. The difference between the amount receivable for the work carried out and its amortised cost is recognised in the income statement as a prepayment over the estimated period of recovery.

(iv) Investments in group companies and associates

Group companies are those over which the Company, either directly, or indirectly through subsidiaries, exercises control as defined in article 42 of the Spanish Commercial Code, or when the companies are controlled by one or more individuals or entities acting jointly or under the same management through agreements or statutory clauses.

Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. In assessing control, potential voting rights held by the Company or other entities that are exercisable or convertible at the end of each reporting period are considered.

Associates are entities over which the Company, either directly, or indirectly through subsidiaries, exercises significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The existence of potential voting rights that are exercisable or convertible at the end of each reporting period, including potential voting rights held by the Company or other entities, are considered when assessing whether an entity has significant influence.

Canal de Isabel II, S.A. · 19 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Investments in Group companies and associates are initially recognised at cost, which is equivalent to the fair value of the consideration given, including transaction costs in the case of investments in associates, and are subsequently measured at cost net of any accumulated impairment.

Following the 21st Recognition and Valuation Standard of the Spanish General Chart of Accounts, investments in Group companies and associates have been recognised at the amounts at which they appeared in the Public Entity’s consolidated annual accounts at the contribution date. The effect of applying these criteria, rather than using the Public Entity’s individual annual accounts, was a 37,502 thousand euros increase in assets and a 26,252 thousand euros increase in equity in 2012, net of the tax effect.

(v) Interest and dividends

Interest is recognised by using the effective interest method.

Dividends from investments in equity instruments are recognised when the Company is entitled to receive them. If the dividends are clearly derived from profits generated prior to the acquisition date because amounts higher than the profits generated by the investment since acquisition have been distributed, the carrying amount of the investment is reduced.

(vi) Derecognition of financial assets

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.

If, as a result of a transfer, a financial asset is derecognised in its entirety, the new financial asset, financial liability or servicing liability are recognised at fair value.

On derecognition of a financial asset in its entirety, the difference between the carrying amount and the sum of the consideration received, net of transaction costs, including any new asset obtained less any new liability assumed and any cumulative gain or loss deferred in recognised income and expense, is recorded in profit or loss.

If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the consideration received is recognised in liabilities. Transaction costs are recognised in profit and loss using the effective interest method.

(vii) Impairment of financial assets.

A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and the event or events have an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Company recognises impairment of loans and receivables and debt instruments when estimated future cash flows are reduced or delayed due to debtor insolvency.

Financial assets measured at amortised cost

The amount of the impairment loss of financial assets carried at amortised cost is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.

The impairment loss is recognised in profit and loss and may be reversed in subsequent periods if the decrease can be objectively related to an event occurring after the impairment has been recognised.

Canal de Isabel II, S.A. · 20 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

However, the loss can only be reversed to the limit of the amortised cost of the assets had the impairment loss not been recognised.

Investments in group companies, associates and jointly controlled entities.

The Company tests these financial assets for potential impairment at least annually, irrespective of whether there is any indication that the assets may be impaired, to determine whether their carrying amount exceeds their recoverable amount. The recoverable amount of an asset is the higher of fair value less costs to sell and value in use.

Value in use is calculated based on the Company’s share of the present value of future cash flows expected to be derived from ordinary activities and from the disposal of the asset, or the estimated cash flows expected to be received from the distribution of dividends and the final disposal of the investment.

In subsequent years, reversals of impairment losses in the form of increases in the recoverable amount are recognised, up to the limit of the carrying amount that would have been determined for the investment if no impairment loss had been recognised.

The recognition or reversal of an impairment loss is disclosed in the income statement unless it should be recognised in equity.

The uncertain situation mentioned in notes 18 and 29 about the Company’s participation in Canal Extensia, S.A, majority shareholder of INASSA, makes the hypotheses considered in the impairment test that the company periodically and recurrently updates, may not be valid in cases in which the judicial processes currently open are carried out against the interests of the Canal de Isabel S.A Group.

(viii) Financial liabilities

Financial liabilities, including trade and other payables, are initially recognised at fair value less any transaction costs that are directly attributable to the issue of the financial liability. After initial recognition, liabilities classified under this category are measured at amortised cost using the effective interest method.

Nevertheless, financial liabilities which have no established interest rate, which mature or are expected to be settled in the short term, and for which the effect of discounting is immaterial, are measured at their nominal amount.

The Company receives security deposits from customers when contracts are signed to guarantee payment of future supplies. These deposits are recognised as financial liabilities. The difference between the amount received and the amortised cost is recognised under accruals, which is adjusted based on the estimated average reimbursement period.

(ix) Derecognition and modifications of financial liabilities

The Company derecognises all or part of a financial liability when it either discharges the liability by paying the creditor or is legally released from primary responsibility for the liability either by process of law or by the creditor.

j) Inventories

(i) General

Inventories are measured at average cost of purchase. The cost of purchase comprises the amount invoiced by the seller, after deduction of any discounts, rebates or other similar items, such as interest incorporated into the nominal amount, plus any additional costs incurred to bring the goods to a consumable or saleable condition and other costs directly attributable to the acquisition, as well as borrowing costs (see note 5 (b)) and indirect taxes not recoverable from the Spanish taxation authorities.

Canal de Isabel II, S.A. · 21 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Trade discounts are recognised as a reduction in cost of inventories when it is probable that the conditions for discounts to be received will be met. Unallocated discounts are recognised as a reduction in “Supplies”.

Purchase returns are recognised as a reduction in the carrying amount of inventories returned.

When the cost of inventories exceeds net realisable value, materials are written down to net realizable value. This is understood to be their replacement cost.

The previously recognised write-down is reversed against profit and loss when the circumstances that previously caused inventories to be written down no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances. The reversal of the valuation adjustment is limited to the lower of the cost and the revised net realisable value of the inventories.

Write-downs to net realisable value recognised or reversed on inventories are classified under changes in “Inventories of supplies”.

(ii) Emission allowances

Emission allowances, which are recognised when the Company becomes entitled to such allowances, are measured at cost of acquisition or production under raw materials and other provisions on the balance sheet. Emission allowances expected to be consumed within a period exceeding one year, are included in the raw materials and other supplies long cycle in the balance sheet. Emission allowances acquired for valuable consideration are recognised by applying the criteria indicated for inventories. Allowances acquired for no valuable consideration or for a price substantially below their fair value, are recognised at their fair value. The difference between the fair value of the rights and, if applicable, the sum of the consideration received, is recognised as a non-refundable subsidy associated to the emission allowances, with a credit to equity. The subsidy is charged to the profit and loss account as the expenses resulting from gas emissions related to the subsidised emission allowances are recorded, following the same criteria as those established for subsidies.

Emission allowances deriving from a certified emission reduction or an emission reduction unit, generated through clean development mechanisms or joint implementation projects, are carried at cost of production using the same criteria as for inventories.

A provision is systematically made under “Current provisions" for liabilities and charges for expenses related to the emission of greenhouse gases. This provision is maintained until the obligation is cancelled, through the conveyance of the corresponding rights. Provisions released, or surplus provisions reversed, are recognised as other operating income. The provision is determined on the basis that it will be cancelled, as follows:

a) Firstly, through allocated emission allowances, which are then used to cancel actual emissions in proportion to total forecast emissions for the entire period to which they have been allocated. The expense corresponding to this part of the obligation is determined based on the carrying amount of the transferred emission allowances.

b) Secondly, through the remaining emission allowances recorded. Expenditure on this part of the obligation is measured as the average cost or weighted average cost of the emission allowances.

If the emission of gases necessitates the acquisition or production of emission allowances because actual emissions exceed those which can be cancelled through the allocated emission allowances, or through surplus emission allowances, whether acquired or produced, provision is made for the shortfall in allowances. The expense is determined using the best estimate of the amount necessary to cover the shortfall in emission allowances.

Canal de Isabel II, S.A. · 22 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

When the net realisable value of the emission allowances is below their acquisition price or production cost, the Company recognises the relevant value adjustments, applying the criteria indicated for raw materials.

The Company classifies and values emission allowances for subsequent sale as goods.

The Company recognises the sale of emission allowances applying the criteria indicated in section q) (Revenues from the sale of goods).

k) Cash and cash equivalents

Cash and cash equivalents include cash on hand and demand deposits in financial institutions.

The Company recognises cash payments and receipts for financial assets and financial liabilities in which turnover is quick on a net basis in the statement of cash flows. Turnover is considered to be quick when the period between the date of acquisition and maturity does not exceed six months. In the statement of cash flows, drawdowns on credit facilities that form an integral part of the Company’s cash management are included as a component of cash and cash equivalents.

l) Equity

The share capital is represented by ordinary shares. The cost of incorporating the Company has been recognised directly in equity by reducing reserves (see note 16).

m) Grants, donations and bequests received

Grants, donations and bequests received are recorded in recognised income and expense when, where applicable, they have been officially awarded and the conditions attached to them have been met or there is reasonable assurance that they will be received. The Company considers that the conditions of capital grants from European Funds have been met when these grants are actually received.

Grants received reflect the fair value attributed to certain assigned assets, which are taken to the income statement on a straight-line basis in proportion with the depreciation charge on these assets.

Grants also include the amounts received by the Company from new water utility customers for hook-up rights and pipeline adaptation and extension work. As per Decree 2922/1975 of 31 December 1975, which enacted the Regulations for water services and distribution of Canal de Isabel II, any work carried out by the Company to be able to supply water is the Company’s property.

Grants are taken to profit and loss for the year, under non-financial and other capital grants, in proportion with the depreciation charge on the assets they are used to finance.

n) Defined Contribution Plan

D On 3 November 1990 the Public Entity agreed to set up an External Fund for its current staff, availing itself of the Spanish Pension Plan Regulations Act (Law 8/1987 of 8 June 1987). The main features of this agreement are as follows:

The Sponsor makes a monthly contribution comprising a percentage of each unit holder’s salary for Plan purposes for the period. This percentage of salary for Plan purposes is 8.7% for unit holders joining the scheme prior to 3 November 1990 and 6.5% for those who joined since that date. For unit holders joining the scheme prior to 3 November 1990, 7% is allocated to the Capitalisation Fund and the remaining 1.7% to assure death and disability contingencies. For the unit holders joining the scheme after 3 November 1990, 4.8% is allocated to the Capitalisation Fund and the remaining 1.7% to assure death and disability contingencies.

Canal de Isabel II, S.A. · 23 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The Company recognises the contributions payable to this defined contribution plan when the employee has provided the corresponding services. The contributions payable are recognised as an employee benefits expense (see note 25 (c)).

Article 21.6 of the General Budget for the Community of Madrid for 2015 (Law 3/2014 of 22 December 2014) established that in 2015 no contributions could be made to pension plans or collective insurance policies covering retirement. In 2014, 2013 and 2012, in accordance with the respective General Budgets for the Community of Madrid, no contributions were made to pension plans or collective insurance policies covering retirement. Similarly, Article 21.6 of the General Budget for the Community of Madrid (Law 6/2015), establishes that in 2016 the aforementioned contributions cannot be made.

o) Defined benefit plan and other long-term employee benefits

On 15 November 2002 the Public Entity externalised the internal fund it had appropriated for its retired personnel through a policy arranged with an insurance company. The insured commitments relate to those beneficiaries who retired before the pension plan was set up on 3 November 1990 and comprise retirement and disability benefits and widows/widowers’ and orphans’ pensions. These benefits are subject to an estimated revaluation of 2% per year. The following assumptions were employed in the actuarial study used to calculate the insurance premium for the externalisation of the pension plan: technical interest rate of 5.15% until 31 December 2041 and 2.5% as of 1 January 2042, PERM/F 2000P mortality tables and a management fee of 0.23% of the premium. Pensions are updated annually based on the increases in state pensions. The premium required to adjust the externalised commitments being paid to retired personnel is calculated annually by independent actuaries using the Projected Unit Credit Method and recognised in the income statement. However, the policy of recognising the provision needed to cover long-service bonuses for serving personnel on a systematic basis has been maintained. As per the collective bargaining agreement in force, an internal fund has been set up to cover long-service bonuses for employees with 25 or 35 years’ service. Allowances are made to this provision on a straight-line basis from 15 and 25 years, respectively, of service in the Company, based on the year from which the corresponding personnel obligation started to accrue. On 4 January 2011, as a result of the agreement signed with employee representatives on 30 April 2010, the Public Entity took out and paid an insurance policy for the accrual of early settlements of long-service bonuses, making a single payment of 5,833 thousand euros. The insurance company guarantees the payment of a deferred endowment to the beneficiary in the event that he or she is still alive. To receive the insured benefit, the insured party must have worked for the Company for 25 or 35 years. The assumptions used to define the policy and calculate the initial single premium were a technical interest rate of 4.89% until 4 January 2051 and 2.25% thereafter, the PERM/F-2000P mortality tables and management costs of 0.10% of the premium.

In prior years, under the terms of the collective bargaining agreement in force, a seniority supplement was recognised for each three years’ service provided. On 4 January 2011 the Public Entity took out and paid a liability insurance policy for the early settlement of this item, making a single payment of 55,591 thousand euros, having paid, in 2017, the sum of 1,517 thousand euros, pursuant to the sentences issued by the National Court of Spain and the Supreme Court. The insurance company undertakes to pay the insured parties a temporary actuarial annuity without reversal until they retire, or until the termination date of their contract for temporary staff. This annuity is subject to an annual growth rate of 1.2%. In 2017 2,841 thousand euros was paid to employees of Canal de Isabel II, S.A. in this respect. The assumptions employed to determine the single premium were a technical interest rate of 5.33%, the Perm/F 2000P mortality tables and a management fee of 0.45% of the premium (2,188 thousand euros in 2016) (see note 25 c)).

The Company recognises the expenses relating to these plans when the obligation arises, based on the actuarial studies conducted to calculate the commitment at each year end. Any actuarial gains or losses are recognised in the income statement for the period.

Canal de Isabel II, S.A. · 24 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) p) Provisions

(i) General criteria

Provisions are recognised when the Company has a present obligation (legal, contractual, constructive or tacit) as a result of a past event; 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.

The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, taking into account all risks and uncertainties surrounding the amount to be recognised as a provision and, where the time value of money is material, the financial effect of discounting provided that the expenditure to be made each period can be reliably estimated.

Single obligations are measured using the individual most likely outcome. When the provision involves a large group of identical items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used.

The financial effect of provisions is recognised as a finance cost in the income statement. The tax effect and gains on the expected disposal of assets are not taken into account in measuring a provision.

Where a risk is externalised to a third party by means of a legal or contractual agreement, provision is only made for the part of the risk assumed by the Company.

If it is not probable that an outflow of resources will be required to settle an obligation, the provision is reversed.

q) Revenue from the sale of goods

Revenue from the sale of goods is measured at the fair value of the consideration received or receivable. However, the Company includes interest incorporated in trade balances maturing in less than one year that do not have a contractual rate of interest, when the effect of not discounting future receipts is not material.

Income is recognised when the Company has rendered the corresponding service, irrespective of the date of collection.

r) Services rendered

The tariffs paid by users are considered “Public services in respect of infrastructure operated under concession agreements”.

Water supplied to and used by customers but not yet invoiced is estimated in order to recognise the corresponding sale.

Revenue from services rendered is measured at the fair value of the consideration received or receivable.

When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognised only to the extent of costs incurred that are recoverable.

s) Income tax

On 1 January 1996, Law 43/1995 of 27 December 1995 came into force. Article 32.2 of this law provided for tax relief of 99% on income tax payable on revenues from the provision of certain public services,

Canal de Isabel II, S.A. · 25 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) including water supply, sanitation and recycling. The Company applies this tax relief as it has been commissioned to provide these services in the Community of Madrid.

The income tax expense or tax income for the year comprises current tax and deferred tax.

Current tax assets or liabilities are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and tax laws that have been enacted or substantially enacted at the reporting date.

Current and deferred tax are recognised as income or an expense and included in profit or loss for the year, except to the extent that the tax arises from a transaction or event which is recognised, in the same or a different year, directly in equity, or from a business combination.

The Company forms part of the tax group headed by the Public Entity Canal de Isabel II and has filed consolidated tax returns since 2014.

In addition to the factors to be considered for individual taxation, set out previously, the following factors are taken into account when determining the accrued income tax expense for the companies forming the consolidated tax group:

• Temporary and permanent differences arising from the elimination of profits and losses on transactions between Group companies, derived from the process of determining consolidated taxable income.

• Deductions and credits corresponding to each company forming the consolidated tax group. For these purposes, deductions and credits are allocated to the company that carried out the activity or obtained the profit necessary to obtain the right to the deduction or tax credit.

Temporary differences arising from the elimination of profits and losses on transactions between tax group companies are allocated to the company which recognised the profit/loss and are valued using the tax rate of that company.

A reciprocal credit and debit arises between the companies that contribute tax losses to the consolidated Group and the rest of the companies that offset those losses. Where a tax loss cannot be offset by the other consolidated Group companies, these tax credits for loss carryforwards are recognised as deferred tax assets, considering the tax group as a taxable entity for their recovery.

The Parent of the Group records the total consolidated income tax payable (recoverable) with a debit (credit) to receivables (payables) from/to Group companies and associates.

The amount of the debt (credit) relating to the subsidiaries is recognised with a credit (debit) to payables (receivables) to/from Group companies and associates.

Income Tax Law 27/2014 of 27 November 2014 was approved on 28 November 2014. This Law fully revises the previous law regulating this tax and introduces various legislative updates for tax periods beginning on or after 1 January 2015, most notably the change in the general income tax rate, which stood at 30% in 2014 and is reduced to 28% for 2015 and to 25% for 2016 onwards. This Law does not affect the aforementioned tax credit applied by the Company.

(i) Recognition of deferred tax liabilities

The Company recognises all deferred tax liabilities, except where they arise from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable income.

Canal de Isabel II, S.A. · 26 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

(ii) Recognition of deferred tax assets

The Company recognises deferred tax assets provided that it is probable that sufficient taxable income will be available against which they can be utilised or when tax legislation envisages the possibility of converting deferred tax assets into a receivable from public entities in the future.

The Company recognises the conversion of a deferred tax asset into a receivable from public entities when it becomes enforceable in accordance with prevailing tax legislation. For these purposes, the deferred tax asset is derecognised with a charge to the expense for deferred taxes and a credit to current tax is recognised for the account receivable. Likewise, the Company recognises the exchange of a deferred tax asset for government debt securities when it acquires ownership thereof.

The Company recognises the payment obligation derived from the financial contribution as an operating expenses credited to the debt with the Public Administration when it accrues in accordance with Corporate Income Tax.

Nonetheless, assets arising from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable income, are not recognised.

In order to determine future taxable profit, the Company takes into account tax planning opportunities, provided it intends or is likely to adopt them.

(iii) Valuation of deferred tax assets and liabilities

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the years when the asset is realised, or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted. The tax consequences that would follow from the manner in which the Company expects to recover or settle the carrying amount of its assets or liabilities are also reflected in the valuation of deferred tax assets and liabilities. For these purposes, the Company has considered the deduction for reversal of the temporary measures provided in transitional provision thirty-seven of Income Tax Law 27/2014 of 27 November 2014 as an adjustment to the tax rate applicable to the deductible temporary difference associated with the non-deductibility of amortisation and depreciation charges in 2013 and 2014.

(iv) Classification and offset

Deferred tax assets and liabilities are recognised in the balance sheet under non-current assets or liabilities, irrespective of the expected date of recovery or settlement.

The Company only offsets tax assets and liabilities if it has a legally enforceable right to offset the recognised amounts and intends either to settle on a net basis or to realise the assets and settle the liabilities simultaneously.

t) Classification of assets and liabilities as current and non-current

The Company classifies assets and liabilities in the balance sheet as current and non-current. Current assets and liabilities are determined as follows:

• Assets are classified as current when they are expected to be realised or are intended for sale or consumption in the Company’s normal operating cycle, they are held primarily for the purpose of trading, they are expected to be realised within 12 months after the reporting date or are cash or a cash equivalent, unless the assets may not be exchanged or used to settle a liability for at least 12 months after the reporting date.

Canal de Isabel II, S.A. · 27 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

• Liabilities are classified as current when they are expected to be settled in the Company’s normal operating cycle, they are held primarily for the purpose of trading, they are due to be settled within 12 months after the reporting date or the Company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

• Financial liabilities are classified as current when they are due to be settled within 12 months after the reporting date, even if the original term was for a period longer than 12 months, and an agreement to refinance or to reschedule payments on a long-term basis is completed after the reporting date and before the annual accounts are authorised for issue.

u) Environmental issues

The Company takes measures to prevent, reduce or repair the damage caused to the environment by its activities.

Expenses derived from environmental activities are recognised as other operating expenses in the income statement in the period in which they are incurred.

Tangible assets acquired by the Company for long-term use to minimise the environmental impact of its activity and protect and improve the environment, including the reduction and elimination of future pollution from its activities, are recognised as assets applying the valuation, presentation and disclosure criteria described in section (d) of this note.

v) Related party transactions

Transactions between group companies and related parties, except those associated with mergers, spinoffs and non-monetary contributions, are recognised at the fair value of the consideration given or received. The difference between this value and the amount agreed is recognised in line with the underlying economic substance of the transaction.

In mergers, spin-offs or non-monetary contributions, the items comprising the acquired business are measured at the amount at which they would be recognised in the consolidated annual accounts of the Group or subgroup after the transaction.

6. JOINT VENTURES

Information on temporary joint ventures is presented in Appendix I.

Details of the most significant items in the balance sheet and income statement in 2017 and 2016 of the Aguas de Alcalá temporary joint venture, in which the Company holds a 50% stake, are as follows:

Canal de Isabel II, S.A. · 28 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 2016 Non-current assets 23,249 25,027 Current Assets 4,129 5,294 Equity (2,313) (1,920) Current liabilities (25,065) (28,401) Revenues 14,459 14,421 Supplies (5,579) (4,180) Other operating income 13 . Personnel expenses (2,166) (2,106) Other operating expenses (2,053) (3,910) Depreciation and amortisation (1,437) (1,430) Finance costs (1,104) (1,066)

7. INTANGIBLE ASSETS

Details of intangible assets at 31 December and movement during the year, are as follows:

Canal de Isabel II, S.A. · 29 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 Concession Concession Concession arrangements, Development arrangements, arrangements, TOTAL regulated assets regulated assets capitalisation under construction Cost at 1 January 2017 14 6,476,145 162,075 62,561 6,700,795 Additions - 34,798 55,725 4,268 94,791 Disposals - (6,786) - - (6,786) Transfers - 51,539 (51,539) - - Transfer to the income statement - - - (2,259) (2,259) Cost at 31 December 2017 14 6,555,696 166,261 64,570 6,786,541 Accumulated amortisation at 1 January 2017 (14) (2,469,895) - - (2,469,909) Additions - (110,467) - - (110,467) Disposals - 4,768 - - 4,768 Transfers - - - - - Accumulated amortisation at 31 December 2017 (14) (2,575,594) - - (2,575,608)

CARRYING AMOUNT AT 31 DECEMBER 2017 - 3,980,102 166,261 64,570 4,210,933

Canal de Isabel II, S.A. · 30 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2016 Concession Concession Concession arrangements, Development arrangements, arrangements, TOTAL regulated assets regulated assets capitalisation under construction Cost: Opening balance at 1 January 2016 14 6,343,320 203,229 59,405 6,605,968 Additions - 27,124 67,990 5,301 100,415 Capitalised borrowing costs - - (1) - (1) Disposals - (3,440) - - (3,440) Transfers (note 9) - 109,141 (109,143) - (2) Transfer to the income statement - - - (2,145) (2,145) Cost at 31 December 2016 14 6,476,145 162,075 62,561 6,700,795 Accumulated amortisation: Opening balance at 1 January 2016 (14) (2,363,371) - - (2,363,385) Additions - (108,462) - - (108,462) Disposals - 1,938 - - 1,938 Accumulated amortisation at 31 December 2016 (14) (2,469,895) - - (2,469,909) Impairment - Opening balance at 1 January 2016 - (58) - - (58) Reversal of impairment losses - 58 - - 58 Accumulated impairment at 31 December 2016 - - - - - CARRYING AMOUNT AT 31 DECEMBER 2016 - 4,006,250 162,075 62,561 4,230,886

Canal de Isabel II, S.A. · 31 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

In 2017 the following are particularly noteworthy among the most significant additions to “Concession arrangements, regulated assets”:

The sectorisation of the supply networks within the objectives of the Quality Plan, the network extensions and renovations within the network pipeline renovation in the various municipalities of Madrid, together with metering devices and connections in new contracts.

In water supply, the work carried out on the Ramal Este pipeline on the Torrelaguna System to supply all the system’s municipalities are of note. Part of the route for the drain channel on the upper deposit of Torrelaguna has been modified, together with the construction of regulating tanks in the towns of Algete and Cobeña, Valdeolmos-Alalpardo and Fresno de Torote. In the eastern area of the Community of Madrid, particular mention should be given to the execution of a new pumping station and the doubling of the Villalbilla-Anchuelo-Santorcaz Branch to ensure a secure supply in the towns of Villalbilla, Corpa, Anchuelo and Santorcaz. Improvements have been made and wells B-4, B-4 bis and B-6 in the Batres area have been enhanced.

The land survey works have continued on the newly managed peripheral sewerage system, the extension of the TETRA telephony network and the emergency mobile network, the automation and integration of the remote-control system for wastewater treatment stations, wastewater pumping stations, storm deposits, sewerage and sanitation networks, sites for the metropolitan regenerated water network, together with the remote control of water facilities associated to various points of the distribution network and small regulating tanks distributed across the Community of Madrid. Work has continued with the fibre optic supported installation, infrastructures and equipment for remote operations from the Control Centre of tertiary treatments and recycled water tanks.

Particularly noteworthy are the investments made in applications for the management of fixed and mobile telephones, the implementation of the new HMI with SCADA, the maintenance of infrastructures, migration of the cash management system, implementation of SAP GRC in the group's subsidiaries, installation of servers for virtualisation and physical environments, together with other devices for the Corporate Data Network.

The laboratory has been activated in the work centre of Collado Villalba, improvements in the facilities of the Arte Canal Exhibition Centre and the access to the Depósito Elevado exhibition hall.

In terms of sewerage disposal, particularly noteworthy are the extensions in the treatment capacity of the sewerage disposal stations of Villamantilla, Molar-Sur and Miraflores de la Sierra, to adapt their treatment capacity, meet urban development growth expectations and adapt the quality of the effluents in accordance with the National Plan on Water Quality. The optimisation of the dehydration process on the Arroyo Culebro Cuenca Media Alta wastewater treatment station and the energy efficiency improvements with the construction of a Cogeneration facility on the Alcalá West wastewater treatment station. Phase II of the Minerva project has been activated for the supply, installation and maintenance of the continuous monitoring stations for the quality of the wastewater in various wastewater treatment stations.

The construction of the Arroyo Valenoso wastewater treatment station required work to be carried out on the Boadilla del Monte sewerage system, including a new wastewater pumping station and the incorporation and connection of this with the existing network of sewer lines and pipes.

Of note in the network of sewerage collectors and lines in the Community of Madrid, to improve the hydraulic capacity, eliminate flooding and adjust these to the master plans of each sewerage system, are the works carried out on the connection and widening of the Parla pipes to the Cuenca Media wastewater treatment station line, together with the renovation of sections A1 of the Sevilla la Nueva line, section B1 in Brunete on the Guadarrama Medio system, section A3 of the Sevilla la Nueva system, section B3 in Fuenlabrada on the Cuenca Media system and section C5 in Humanes for the Cuenca Media Arroyo Culebro pipe.

Canal de Isabel II, S.A. · 32 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) Pursuant to the agreement entrusting the management of the sewerage services between the Madrid City Council, Community of Madrid and Canal de Isabel II, various activities have been carried out on the Madrid sewerage network to resolve the problems relating to the lack of capacity of the sewerage network. Within the plan for the new construction and renovation in Madrid’s wastewater treatment system, particular mention should be given to the installation of a struvite recovery plant in the Sur wastewater treatment station, the implementation of a biogas treatment system, aero-refrigerators for the compressors and soundproofing the buildings in the Butarque wastewater treatment station, the assembly of a biological sludge thickening facility through centrifugation, agitation and automation of the re-chlorination of the regenerated water in the Gavia wastewater treatment station and the installation of a roof on the spillways in the la China wastewater treatment station to minimise the generation of odours.

In December 2016 the following are particular noteworthy among the most significant additions to “Concession arrangements, regulated assets”:

The sectorisation of the sewerage networks, the network extensions and renovations, on the pipelines of various towns within the Community of Madrid, together with the installation of valuation and connection devices in the new contracts.

In terms of water supply, the extension of the drainage network on the Atazar dam to alleviate the pressures of filtered water and the execution of the relevant pipelines to section 6 Retamares Branch Artery- Getafe Tank Branch on the 2nd Drinking-Water Distribution Ring in the Community of Madrid and the connection of section 3 of the pipeline 2 Ring with the Rivas Artery to supply water to Rivas Vaciamadrid. The work carried out on the Ramal Sur de Torrelaguna pipeline were also significant, together with the work carried out on the water conveyance to Guadalix de la Sierra, the construction of a pump station and renovation of part of the impulse piping line in Fresnedillas and in a section of the water conveyance to Meco. To improve the water supply to towns, new regulating tanks were constructed in Navalagamella, Robledo de Chavela, Valdeolmos-Alalpardo, Fresno de Torote and Zarzalejo. A drinking water treatment plant was also built and a main regulation tank in Pelayos de la Presa and improvements were carried out on the installations of the la Jarosa drinking water treatment plant.

To improve energy efficiency, micro-turbines were installed on the water supply network and the construction works of the cogeneration facilities were completed on the Torrejón de Ardoz wastewater treatment station.

TESEO devices were purchased and installed to transmit data and Trunking digital (TETRA). The purchase and installation of urban cabinets continued, to house the automation devices and transmission of data to the Control Centre in metropolitan areas or those in which it is difficult to install electronic devices to monitor the hydraulic parameters, together with work on the remote-control network, for duplication in the back-up and data control centre in Majadahonda.

In sewerage networks, the Torres de la Alameda wastewater treatment station was built, and improvements were carried out on the treatment capacity and extension in the wastewater treatment stations of Salvanés, Galapagar-Torrelodones, Torremocha de Jarama and Boadilla del Monte. After the construction of the Arroyo Valenoso wastewater treatment station, a new wastewater pumping station was constructed, and various actions were carried out on the systems’ pipes and lines. A storm tank was also constructed in Collado Villalba. Work was carried out to extend the pipelines for the Casaquemada System in section B-12 of the construction project of the south section of the extension of the Ajalvir- Daganzo pipeline.

In terms of actions carried out with recycled water, the supply, storage and distribution system for reusable water was carried out in the town of Torres de la Alameda.

Canal de Isabel II, S.A. · 33 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) a) Concession Arrangements, regulated assets

Details of the most significant concession arrangements are as follows:

Thousands of Euros

2017 Concession Expiry Amortisation Accumulated arrangements, Use Cost Impairment Net date period amortisation regulated assets Community of Madrid General Network Operation 2062 50 5,108,936 (2,124,356) - 2,984,580 Infrastructures Community of Madrid sanitation Operation 2036 31 990,570 (356,000) - 634,570 infrastructures (*) Madrid City Council recycling Operation 2061 50 191,267 (24,617) - 166,650 infrastructures Municipal sewerage Operation 2062 50 132,742 (18,496) - 114,246 infrastructures Technical installations (Aguas de las Cuencas Operation 2039 30 69,780 (19,215) - 50,565 de España) Additional investments, rights to use Madrid Operation 2036 31 52,592 (11,793) - 40,799 City Council sanitation infrastructures Concession – City Operation 2039 24 39,106 (4,481) - 34,625 Council of Cáceres Investments in extension and improvement of the Operation 2029 25 16,863 (8,694) - 8,169 Alcalá de Henares concession Rights to use council- owned land in Operation 2039 30 10,752 (3,196) - 7,556 Guadarrama TOTAL 6,612,608 (2,570,848) - 4,041,760

(*) The concession arrangements regarding the sanitation infrastructure of the Madrid City Council include the capitalised borrowing costs.

Canal de Isabel II, S.A. · 34 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2016 Expiry Concession arrangements, Amortisation Accumulated Use Date Cost Impairment Net regulated assets period amortisation Community of Madrid General Operation 50 5.039.717 (2,062,666) - 2,977,051 Network Infrastructures 2062 Community of Madrid sanitation Operation 31 988,562 (326,000) - 662,561 infrastructures (*) 2036 Madrid City Council recycling Operation 50 189,000 (20,790) - 168,210 infrastructures 2061

Municipal sewerage infrastructures Operation 50 132,742 (15,930) - 116,812 2062 Technical installations (Aguas de las Operation 30 69,780 (16,847) - 52,933 Cuencas de España) 2039 Additional investments, rights to use Madrid City Council sanitation Operation 2036 31 46,187 (9,734) - 36,453 infrastructures Concession – City Council of Operation 24 39,106 (2,851) - 36,255 Cáceres 2039 Investments in extension and improvement of the Alcalá de Operation 2029 25 16,800 (7,975) 8,825 Henares concession Rights to use council-owned land in Operation 30 10,752 (2,837) - 7,915 Guadarrama 2039 TOTAL 6,532,646 (2,465,630) - 4,067,015

(*) The concession arrangements regarding the sanitation infrastructure of the Madrid City Council include the capitalised borrowing costs.

Canal de Isabel II, S.A. · 35 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Details of concession arrangements and the most significant terms and conditions thereof, are as follows:

• The Community of Madrid General Network comprises all of the infrastructures used to provide the public services assigned to the Public Entity by the Community of Madrid. Under the terms of Law 3/2008 and in accordance with the terms and conditions of the Contract-Programme, the management of these infrastructures has been entrusted to the Company. This includes the operation, repair and maintenance of the Network, the provision of the corresponding water supply, sanitation and recycling services, and any other services and activities corresponding to the Public Entity under the mentioned law, except those expressly reserved to the Public Entity by the terms of the Contract-Programme. So that the Company can manage these infrastructures, article 16 of Law 3/2008 required the Community of Madrid and the Public Entity to provide it with as many public-domain assets making up the Community of Madrid General Network as necessary for it to exercise the activities and duties entrusted to it. The Contract- Programme also provides for the Company’s use and management of energy resources currently operated by the Public Entity, as well as any such activities that may be carried out in the future. Moreover, the Company is entitled to provide any other services entrusted to the Public Entity by the Community of Madrid, particularly Closed User Group mobile communications services. All of these infrastructures are public property as they are used for public services provided by the Company. As such, they may not be disposed of or seized and are not subject to any statute of limitations. These assets may only be sold in the event that they are no longer required, but with the legal obligation to allocate the gains obtained to investments in the Community of Madrid General Network.

The Contract-Programme has a 50-year duration from 1 July 2012 and cannot be renewed.

On expiry of the Contract-Programme, the Company is required to return the assets and rights that make up the Network, and any other goods and installations in the public domain that are required to provide the service, to the public authorities in good working order and perfect condition, as required by the progress clause governing the Contract-Programme, ensuring that these assets are still capable of providing the service based on the depreciation schedules of the different constituent items.

Once this period has elapsed and the Contract-Programme expires, the Public Entity is required to compensate the Company for any investments made to carry out new infrastructure plans and not depreciated while the Contract-Programme was in force, taking into account the condition of such infrastructures and the value of the investment made, deducting any technical depreciation under the terms set out in these plans.

In 2017 the Company charged 93,980 thousand euros to the provision for infrastructure replacement relating to the Community of Madrid General Network (94,188 thousand euros in 2016) (see note 18 (iii)).

The consideration received by the Company is the right to collect tariffs from customers for their use of the public services provided.

Tariffs and any amendments thereto are authorised by the Community of Madrid in accordance with the legislation in force.

• The transfer of the right to use Madrid City Council sanitation infrastructure is regulated by the Agreement for the Management of Sanitation Services entered into by Madrid City Council, the Community of Madrid and Canal de Isabel II on 19 December 2005, entrusting to the latter the technical and commercial management of sanitation services (sewerage and water treatment), as well as the wastewater recycling service rendered in the city of Madrid. This agreement is valid for 25 years from 1 January 2006, and consideration of 700 million euros is payable for the right to use the treatment and sewerage infrastructure. In an addendum to this sanitation agreement signed on 26 December 2007, Madrid City Council granted Canal the right to use certain

Canal de Isabel II, S.A. · 36 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) infrastructures for total consideration of 226 million euros and the contract term was extended by a further six years (in addition to the initial 25 years) to 31 December 2036.

The agreement includes a commitment to carry out any maintenance work required on the sanitation infrastructure and any new work required by the annual schedule in place, as well as upgrading existing infrastructure. The work to be carried out by the end of the contractual period totals 613 million euros, of which 456 million euros is considered as investment in replacements. During the period ended 31 December 2017 the Company charged 16,381 thousand euros to the provision for replacements (16,381 thousand euros in 2016) (see note 18 (iii)).

Once this agreement has expired, the rights to use the sewerage and treatment infrastructure will revert from the Company to the City Council. If the agreement is terminated after the initially established duration, under the terms of the agreement Madrid City Council agrees to pay the Company any amortisation/depreciation pending on the new investments made.

Under the terms of the agreement signed between the Community of Madrid, Canal de Isabel II and Madrid City Council on 4 May 2011, relating to the inclusion of the latter in Canal de Isabel II’s management model, the sanitation service agreement which expires on 31 December 2036 must be extended or renewed pursuant to the good faith and loyalty required from both parties by the fifth clause of this inclusion agreement. When this extension is agreed, Madrid City Council will receive financial consideration for the rights of use transferred for the extension period. If the parties do not reach an agreement regarding the calculation, it shall be carried out in proportion to the price and period of the consideration of the original arrangement.

The consideration received by the Company is the right to collect the corresponding tariffs from customers in the city of Madrid for sewerage and treatment services rendered, based on their use of these services. Tariffs and any amendments thereto are authorised by the Community of Madrid in accordance with the legislation in force.

• The transfer of the right to use reclaimed water distribution and supply infrastructure is regulated by the agreement governing management of treated water recycling entered into by Madrid City Council, the Autonomous Community of Madrid and Canal de Isabel II on 4 May 2011, entrusting to the latter management of the service to transport and supply recycled water in the city of Madrid for any of the uses foreseen by the legislation in force, for a period of 50 years from 1 July 2011. The Company manages the maintenance and operation of the infrastructure and facilities included within the scope of this agreement. For all effects and purposes the water recycling infrastructure will be included in the Community of Madrid Network and will be managed by the Company, although ownership of the infrastructure will remain with Madrid City Council. Should the agreement be terminated for any reason, the municipal infrastructure used to render the water recycling service will revert from the Company to Madrid City Council, in good working condition.

The agreement does not include any commitment to perform any maintenance work required with respect to the infrastructure for the transport and supply of reclaimed water.

Total consideration of 189 million euros was paid for the right to use these infrastructures. If the agreement is terminated after the initially established duration, under the terms of the agreement Madrid City Council agrees to pay the Company any amortisation/depreciation pending on the new investments made, pursuant to the provisions of the aforementioned Arrangement. As consideration, the Company is entitled to bill the recycling services rendered, in accordance with the approved tariffs. Tariffs and any amendments thereto are authorised by the Community of Madrid in accordance with the legislation in force. During the period ended 31 December 2017 the Company charged 652 thousand euros to the provision for replacements (652 thousand euros in 2016) (see note 18 (iii)).

Canal de Isabel II, S.A. · 37 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Under the terms of the agreement signed between the Community of Madrid, Canal de Isabel II and Madrid City Council on 4 May 2011, relating to the inclusion of the latter in Canal de Isabel II’s management model, the sanitation service agreement which expires on 4 December 2061 must be extended or renewed pursuant to the good faith and loyalty required from both parties by the fifth clause of this inclusion agreement.

• The conveyance of rights to use municipal sewerage networks is governed by the respective agreements entered into by town and city councils, the Community of Madrid and Canal de Isabel II for the provision of sewerage services in certain areas. These agreements stipulate that the sewerage networks owned by the town and city councils form part of the Madrid Community network and are assigned to Canal. The town and city councils have entrusted the management and operation of the sewerage services, as well as the corresponding infrastructure and facilities, to the Community of Madrid through the Company.

No new sewerage agreements were signed in 2017. At 31 December 2017, 136 towns or cities have signed these sewerage agreements. Agreements and the following 31 towns or cities came into force between 1 July 2012 and 31 December 2017:

Canal de Isabel II, S.A. · 38 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands

of Euros 2017 2016 Sewerage systems Term Expiry Cost Cost Municipality (years) Getafe sewerage system 50 2062 10,148 10,148 Alcobendas sewerage system 50 2062 6,756 6,756 San Sebastián de los Reyes sewerage 50 2062 4,995 4,995 system Boadilla del Monte sewerage system 50 2062 2,683 2,683 San Fernando de Henares sewerage 50 2062 2,483 2,483 system Villaviciosa de Odón sewerage system 50 2062 1,604 1,604 Arroyomolinos sewerage system 50 2062 1,367 1,367 Villanueva Pardillo sewerage system 50 2062 1,009 1,009 Velilla San Antonio sewerage system 50 2062 700 700 Valdemorillo sewerage system 50 2062 673 673 San Martin Valdeiglesias sewerage 50 2062 491 491 system Villarejo de Salvanés sewerage system 50 2062 444 444 Chinchón sewerage system 50 2062 321 321 Moraleja de Enmedio sewerage system 50 2062 317 317 Serranillos del Valle sewerage system 50 2066 268 268 Casarrubuelos sewerage system 50 2062 189 189 Cadalso de los Vidrios sewerage system 50 2062 177 177 Perales de Tajuña sewerage system 50 2062 174 174 Navas del Rey sewerage system 50 2062 157 157 Pelayos de la Presa sewerage system 50 2062 157 157 Fuentidueña Tajo sewerage system 50 2062 126 126 Villanueva de Perales sewerage system 50 2062 92 92 Fresnedillas Oliva sewerage system 50 2062 90 90 Santa María de la Alameda sewerage 50 2062 70 70 system Villamantilla sewerage system 50 2062 57 57 Santorcaz sewerage system 50 2062 49 49 Corpa sewerage system 50 2062 36 36 Ambite sewerage system 50 2062 33 33 Valverde Alcalá sewerage system 50 2062 29 29 Torrelaguna sewerage system 50 2062 - - Rascafría sewerage system 50 2062 - - TOTAL SEWERAGE SYSTEM 35,695 35,695

Canal de Isabel II, S.A. · 39 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

On 6 January 2016, an agreement signed on 25 November 2015 came into force for the provision of the sewerage service in Serranillos del Valle for 50 years at a cost of 268 thousand euros between the Community of Madrid, Canal de Isabel II, Canal de Isabel II, S.A. and the town council of Serranillos del Valle.

These agreements do not stipulate any investment commitments, but rather require Canal to conduct diagnostic studies on the current condition of the sewerage networks so that master plans for the improvement of these installations can be drawn up where necessary. The consideration received by the Company for providing the sewerage service is the right to collect the corresponding tariffs from customers, based on their use of the service rendered. Tariffs and any amendments thereto are authorised by the Community of Madrid, in accordance with the legislation in force. At the end of the established term of the agreements, the town and city councils have agreed to pay the Company the amount outstanding for the investments made.

From all such agreements signed since 1 July 2012, 1,555 thousand euros is outstanding at 31 December 2017 and has been recognised under payables to suppliers of fixed assets (1,644 thousand euros in 2016) (see note 20 (b)).

• An administrative concession arrangement for comprehensive water management services in the city of Cáceres was signed on 18 March 2015 for the supply of domestic drinking water, public drainage and waste water treatment in the city of Cáceres. The duration of the concession is 24 years and the services commenced on 1 April 2015. The concession has a nominal fee of 39,217 thousand euros, of which 4,508 thousand euros where outstanding at 31 December 2017 (4,508 euros at 31 December 2016). A payable of 2,244 thousand euros (net of the finance effect) is recognised under non-current payables to suppliers of fixed assets (4,451 thousand euros at 31 December 2016) and under the heading “non-current payables to suppliers of fixed assets a sum of 2,254 thousand euros (no amount in 2016) (See note 20 (b)). The deferred amount is due in 2019 and the first instalment is payable in 2018 for the sum of 2,254 thousand euros. Additionally, the Company has to pay Cáceres City Council a variable fee of 4% of total billings.

The agreement includes a commitment to carry out any maintenance work required on the sanitation infrastructure and any new work required by the annual schedule in place, as well as upgrading existing infrastructure. The work to be carried out by the end of the contractual period totals 22,919 thousand euros, which has been treated as investment in replacements. During 2017 the Company charged 1,701 thousand euros to the provision for replacements (1,916 thousand euros in 2016) (see note 18 (iii)).

• On 26 July 2017, Hispanagua, S.A.U. assigned all the rights and obligations arising from the “Concession agreement for the management, operation and conservation of the municipal water and sewerage service of town of Monroy (Cáceres) to the Company, by means of the relevant notarised instrument. The Concession agreement was signed by Hispanagua on 21 November 2006 with a duration of 20 years. The Company has recognised a payment obligation for the assignment of the concession agreement to Hispanagua for the sum of 50 thousand euros. The Concession agreement does not establish investment commitments.

Canal de Isabel II, S.A. · 40 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

b) Concession arrangements, regulated assets under construction

The most significant items recognised in this account are as follows:

Thousands of Euros

Description Year 2017 2016

Community of Madrid Network 50 164,445 157,635

TOTAL 164,445 157,635

c) Capitalised borrowing costs

In 2017 the Company has no capitalised borrowing costs (none in 2016) under “Concession arrangements, regulated assets under construction”. These costs were incurred for certain investment projects relating to supply and sanitation works financed using loans from the European Investment Bank.

The Company has recognised borrowing costs of 64,570 thousand euros (62,561 thousand euros in 2016) in relation to the financing of sanitation and recycling agreements entered into with Madrid City Council under “Concession arrangement, capitalised borrowing costs”, in accordance with the standards adapting the Spanish General Chart of Accounts for public infrastructure concession holders (see note 5 (e) and 19 (a)(i)).

d) Disposals

Disposals of intangible assets in 2017 gave rise to gains of 50 thousand euros and a loss of 1,965 thousand euros, which have been recognised in the accompanying income statement (147 and 1,346 thousand euros respectively in 2016) (see note 25 (d)).

e) Impairment

There were no signs of impairment on its concession assets in 2017 and 2016. The Company has not recognised any impairment on its intangible assets. In 2016, the Company reversed impairment of 58 thousand euros.

f) Insurance

The Company has taken out insurance policies to cover the risk of damage to its assets. These policies are reasonably sufficient to cover the carrying amounts of intangible assets.

g) Revertible intangible assets

Intangible assets for which the Company has acquired operating rights, that will revert in the future are detailed in section (a) of this note.

h) Investment commitments

At 31 December 2017 the Company’s budgets for the coming year include investment commitments amounting to 221.4 million euros. Replacements account for approximately 85 million euros of this balance (70-75 million euros in 2016).

Canal de Isabel II, S.A. · 41 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Under the terms of the Agreement for the Management of Sanitation Services entered into by Madrid City Council, the Community of Madrid and Canal de Isabel II, the Company is contractually bound to carry out any work necessary to maintain the sanitation infrastructure, as well as to comply with the annual new work schedule and upgrade existing infrastructure. These investments are expected to total 613 million euros by the end of the agreement term, of which 158 million euros reflects treatment and 455 million euros relates to sewerage. At 31 December 2017, as a result of this commitment work totalling 172 million euros has been carried out (158.5 million euros up to 2016), of which 108.3 million euros came from the application of the replacement provision (see note 18 (iii)) (94.6 million euros in 2016).

Under the terms of the Agreement for the comprehensive water services management in Cáceres the Company is bound to carry out any work necessary to maintain the infrastructures, as well as to carry out the annual new work schedule and upgrade existing infrastructure. These investments are expected to total 22,919 thousand euros by the end of the agreed term. At 31 December 2017 the work carried out as a result of this commitment totalled 957 thousand euros (616 thousand euros at 31 December 2016) (see note 18 (iii)).

i) Individually significant items

Details of individually significant items included in “Concession arrangements, regulated assets”, which relate to the Community of Madrid General Network, are as follows:

Thousands of Euros Carrying amount 2017 2016 Canals and general conduits 918.018 899,314 Distribution Network 633,771 661,981 Waste water treatment plant 358,000 355,731 Tanks 211,134 210,606 Land 201,688 203,493 General buildings 150,735 150,726 Drinking water treatment plant 121,982 123,415 Low-voltage transformation and 95,073 92,379 distribution Recycling networks 82,599 74,152 Underground water collection 18,378 17,810

TOTAL 2,791,378 2,789,607

Canal de Isabel II, S.A. · 42 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

j) Fully amortised assets

The cost of fully amortised intangible assets at 31 December is as follows:

Thousands of Euros 2017 2016 Development 14 14 Concessions 270,345 272,896

TOTAL 270,359 272,910

8. TANGIBLE ASSETS

(a) General

Details of intangible assets and movement during the year, are as follows:

Thousands of Euros 2017 Tangible assets Land and buildings under TOTAL construction Cost Opening balance at 1 January 2017 21.355 240 21,595 Additions 5 - 5 Disposals (14,003) (240) (14,243) Transfers - - - Cost at 31 December 2017 7,357 - 7,357 Accumulated amortisation Opening balance at 1 January 2017 (276) - (276) Additions (63) - (63) Disposals 302 - 302 Accumulated amortisation at 31 (37) - (37) December 2017 CARRYING AMOUNT AT 31 7,320 - 7,320 DECEMBER 2017

Canal de Isabel II, S.A. · 43 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of

Euros 2016 Tangible assets Land and under TOTAL buildings construction Cost Opening balance at 1 January 2016 14,003 64 14,067 Additions 7,352 176 7,528 Cost at 31 December 2016 21,355 240 21,595 Accumulated amortisation Opening balance at 1 January 2016 (118) - (118) Additions (158) - (158) Accumulated amortisation at 31 December 2016 (276) - (276) CARRYING AMOUNT AT 31 DECEMBER 2016 21,079 240 21,319

The addition for 2016 is due to the acquisition on 30 December 2016 through a sale-purchase agreement of ten properties forming part of the building located on Calles José Abascal, 57 and Zurbano, 77 in Madrid for the sum of 7,352 thousand euros, which are used for the Company’s activity.

(b) Insurance

The Company has taken out insurance policies to cover the risk of damage to Tangible assets. The coverage of these policies is considered sufficient.

(c) Disposals

The most significant disposal in 2017, was the disposal, by means of a sale/purchase agreement of the property located in Calle Buen Suceso, 12 in Madrid, for the sum of 16,750 thousand euros via an electronic public auction procedure. This disposal generated profits of 3,049 thousand euros recognised in the accompanying income statement (see note 25 (d)).

9. INVESTMENT PROPERTY

a) General

Details of investment property at 31 December 2017 and movement during the year, are as follows:

Canal de Isabel II, S.A. · 44 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of

Euros 2017 Land Buildings TOTAL Cost Opening balance at 1 January 2017 7,535 24,483 32,018 Additions 2 - 2 Cost at 31 December 2017 7,537 24,483 32,020 Accumulated amortisation Opening balance at 1 January 2017 - (13,429) (13,429) Additions - (406) (406) Accumulated amortisation - (13,835) (13,835) at 31 December 2017 Impairment Opening balance at 1 January 2017 - (4,635) (4,635) Allowance for impairment - 991 991 Accumulated depreciation at - (3,644) (3,644) 31 December 2017 CARRYING AMOUNT 7,537 7,004 14,541 AT 31 December 2017

Thousands of

Euros 2016 Land Buildings TOTAL Cost Opening balance at 1 January 2016 7,891 24,485 32,376 Additions 5 - 5 Disposals (363) (2) (365) Transfers (note 7) 2 - 2 Cost at 31 December 2016 7,535 24,483 32,018 Accumulated depreciation Opening balance at 1 January 2016 - (12,282) (12,282) Additions - (1,147) (1,147) Accumulated depreciation - (13,429) (13,429) at 31 December 2016 Impairment Opening balance at 1 January 2016 - - Allowance for impairment (4,635) (4,635) Accumulated depreciation at (4,635) (4,635) at 31 December 2016 CARRYING AMOUNT 7,535 6,419 13,954 AT 31 December 2016

Canal de Isabel II, S.A. · 45 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Investment property mainly comprises sports facilities located at the third tank of Islas Filipinas and several other properties.

On 12 April 2013 operation of the sports facilities located at the third tank of Islas Filipinas, representing a total investment of 14 million euros, was transferred to a third party for a period of five years and five months, in exchange for a total annual charge of 4,193 thousand euros. On 8 February 2017, a resolution and settlement agreement was signed for this, which must be submitted to bankruptcy court approval. All the activities in the sports facilities were terminated on 16 February 2017. At 31 December 2016, the Company allocated the entire balance receivable for the site, which amounted to 1,237 thousand euros, which, at 31 December 2017, continues to be provisioned for.

On 10 May 2017, the Management Agreement was signed, whereby Canal de Isabel II, S.A. entrusted the Public Entity Ocio y Deporte Canal, S.L.U. to manage and operate the Company’s sports installations located on the third tank of Islas Filipinas for an annual charge in 2017 of 81 thousand euros.

Furthermore, in terms of variations in 2017, particularly noteworthy is the provision made to cover urban planning and management expenses, to the Compensation Board of Sector PP-2 “Portillo Extension” (Leganés), Plot A4-12.

The variations in 2016 included provisions made to cover the payment of urban planning and management expenses to the Compensation Boards of Sector PP-2 “Portillo Extension” (Leganés), Plot A4-12 and to Sector SUS B “Cristo de Rivas” (Rivas Vaciamadrid), plot RC 110-2, and the sale of the plots in PP-5 in Calle Casiopea, Leganés for a carrying amount of 365 thousand euros.

Details of investment property that has not generated any income at 31 December 2017 are as follows:

Canal de Isabel II, S.A. · 46 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 Accumulated Cost Net depreciation

Land 7,537 - 7,537 Properties 2,880 (1,217) 1,663 TOTAL 10,417 (1,217) 9,200

Thousands of Euros 2016 Accumulated Cost Net depreciation

Land 7,535 - 7,535 Properties 2,880 (1,157) 1.723 TOTAL 10,415 (1,157) 9,258

b) Income and expenses from investment property

Details of income and expenses from investment property are as follows:

Thousands of Euros 2017 2016

Lease income 349 917 Operating expenses (406) (1,147) From income-generating investments (346) (1,087) From non-income-generating investments (60) (60)

Net (57) (230)

c) Impairment

In 2016, the Company recognised an impairment for the sum of 4.635 thousand euros, from the investment property corresponding to the sports facilities located on the third tank of the Islas Filipinas. This loss was based on Ruling no. 580/2016 of 26 July 2016, by the Madrid Supreme Court of Justice, declaring the invalidity of the decision of 31 July 2013 of the Community of Madrid publishing the Agreement by the Urban Planning Committee regarding the definitive approval of the Special Plan, promoted by the Company and ordering the implementation of the necessary measures to replace and restore the plot to its original condition before the construction works.

In 2017, the Company partially reversed the impairment for the sum of 991 thousand euros, as a result of Order 287/2017, of 9 February 2017, declaring the urgency and general interest of the uses and activities corresponding to basic open areas and sports areas of the Third Tank, thus legalising these in terms of urban planning, given the compatibility thereof with the Madrid General Plan for Urban Zoning. The impairment at 31 December 2017 stood at 3,644 thousand euros.

Canal de Isabel II, S.A. · 47 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Furthermore, the Company, at 31 December 2016, estimated the demolition and dismantling costs and made the relevant provision for other responsibilities for the sum of 3.835 thousand euros. In 2017, the Company partially reversed this provision by 3,225 thousand euros and applied 31 thousand euros thereto, with the relevant provision for other responsibilities standing at 580 thousand euros at 31 December 2017 (see note 18 (i)).

d) Insurance

The Company has taken out insurance policies to cover the risk of damage to its investment property. The coverage of these policies is considered sufficient.

e) Disposals

There have been no disposals of investment property in 2017. In 2016, profits of 444 thousand euros were generated, recognised in the accompanying income statement (see note 25 (d)).

10. FINANCIAL RISK MANAGEMENT POLICY

The primary objective of the Company's financial risk management policy is to ensure that sufficient funds are available to meet its financial commitments and to protect the value of its cash flows, assets and liabilities. The Company’s policy is to hedge against all significant and unacceptable exposure, provided that appropriate instruments exist, and the cost of the hedging operation is reasonable.

(i) Credit risk

The Company has no significant concentrations of credit risk other than those mentioned in note 12 (d). Valuation allowances for bad debts, the review of individual balances based on customers’ credit ratings and the historical analysis of bad debts at an aggregated level all require a high degree of judgement by management.

Details of financial assets exposed to credit risk are provided in note 11 (a).

(ii) Interest rate risk

Interest rate risk constitutes the impact on profit of a rise in interest rates, which increases the cost of borrowings. The Company endeavours to mitigate this risk through drawdowns on fixed-rate loans and the issue of bonds, which at 31 December 2017 represent 94% of total borrowings (87% in 2016).

The interest rate on variable-rate net debt is pegged to the Euribor. The estimated sensitivity of the finance costs included in the net finance cost for the year due to changes in interest rates, and the structure of net debt, are as follows:

Impact on finance expenses Increase in interest rate (Thousands of Euros) Euribor 2017 + 10 b.p. 35 Euribor 2016 + 10 b.p. 98

(iii) Liquidity risk

The Company applies a prudent policy to cover its liquidity risks, based on having cash and sufficient financing through credit facilities. Given the dynamic nature of its underlying business, the Company’s Finance Department aims to be flexible with regard to financing through drawdowns on credit facilities.

Canal de Isabel II, S.A. · 48 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The term and repayment schedule of financing obtained is established based on the type of financing requirements. In 2015 the Company arranged financing to meet its future investment requirements for the sum of 500 million euros.

Details of financial assets and financial liabilities by contractual maturity date are provided in notes 12 and 20.

(iv) Exchange rate risk

The risk arising from exchange rate volatility is not considered to be significant and relates to fluctuations in the Colombian Peso, the Dominican Peso and the Brazilian Real reflected in the valuation of the Company’s investment in Canal Extensia, S.A.

11. CLASSIFICATION OF FINANCIAL ASSETS BY CATEGORY AND INVESTMENTS IN EQUITY INSTRUMENTS OF GROUP COMPANIES AND ASSOCIATES

a) Classification of financial assets by category

Financial assets, except for investments in equity instruments of Group companies and associates, classified by category are as follows:

Canal de Isabel II, S.A. · 49 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 Non-current Current At amortised cost or At amortised cost or

cost cost Loans and receivables Loans Fixed rate (note 12 (a)) - 9 Variable rate (note 12 (a)) 105,000 - Interest - 4,979 Other 54,216 12,702 Total 159,216 17,690 Deposits and guarantees (note 12 (b)) 11,643 19 Other financial assets - 6,299 Total 11,643 6,318 Trade and other receivables Clients through sales and provision of services - 138,202 Other receivables 21,600 Total - 159,802

TOTAL FINANCIAL ASSETS 170,859 183,810

Thousands of Euros 2016 Non-current Current At amortised cost or At amortised cost or

cost cost Loans and receivables Loans - - Fixed rate (note 12 (a)) - 1,478 Variable rate (note 12 (a)) 88,500 - Interest - 4,053 Others 53,848 12,789 Total 142,348 18,320 Deposits and guarantees (note 12 (b)) 12,626 19 Other financial assets - 6,509 Total 12,626 6,528 Trade and other receivables Clients through sales and provision of services - 138,968 Other receivables - 27,783 Total - 166,751

TOTAL FINANCIAL ASSETS 154,974 191,599

Canal de Isabel II, S.A. · 50 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The carrying amounts of these items do not differ from their fair values.

The only gains and losses on financial assets are finance income due to measuring receivables at amortised cost (see note 12 (b) (i)) and the impairment described in note 12 (b) (ii).

b) Investments in equity instruments of the Group companies and associates

Details of investments in equity instruments of the Group companies and associates are as follows:

Thousands of Euros 2017 2016 Group companies Canal de Comunicaciones Unidas, S.A.U. 7,811 7,811 Canal Extensia, S.A.U. 92,491 92,491 Hidráulica Santillana, S.A.U. 31,577 31,577 Hispanagua, S.A.U. 10,260 10,260 Canal Gestión Lanzarote, S.A.U. 60 60 Canal Energía, S.L.U 293 293 Ocio y Deporte Canal, S.L.U. 3 - Total 142,495 142,492 Associates GSS Venture, S.L. 504 504 Total 504 504

TOTAL 142,999 142,996

None of the preceding companies directly owned by the Company are listed on the stock exchange. Details of investments in Group companies and associates are provided in Appendix II.

On 8 February 2017, the Company formed “Ocio y Deporte Canal Sociedad Limitada Unipersonal”, with its capital subscribed and paid up in full by the company. Its corporate purpose includes carrying out or providing activities that entail the enhancement or use of the networks or infrastructures, which Canal de Isabel II, S.A. is involved in managing and in particular using the infrastructures, which the Company is involved in managing and which represent added value for users, for commercial and sports activities.

At 31 December 2017 and 2016 the Company has tested its investments in equity instruments of Group companies for impairment, concluding that their recoverable amount is higher than the carrying amount recognised at that date. This value was determined by discounting the cash flows generated by the companies as a result of the strategic plans based on management estimates, assuming a WACC (weighted average cost of capital) ranging between 4.15% and 14.0% depending on the investment, country, sector and activity. (between 5.3% and 15.3% in 2016).

Canal de Isabel II, S.A. · 51 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

12. INVESTMENTS AND TRADE RECEIVABLES

a) Investments in group companies and associates

Details of investments in group companies and associates are as follows:

Thousands of Euros 2017 Non-current Current Group Loans (note 11) 105,000 9 Interest - 4,979 Other - 6,299

TOTAL (NOTE 24 (a) 105,000 11,287

Thousands of Euros 2016 Non-current Current Group Loans (note 11) 88,500 1,478 Interest - 4,053 Other - 6,509

TOTAL (NOTE 24 (a)) 88,500 12,040

Non-current loans comprise the participating loan granted by the Company to Canal Gestión Lanzarote, S.A. in 2013 to finance its activities. This loan earns annual interest at market rates. Finance income earned in 2017 amounted to 4,979 thousand euros (4,053 thousand euros in 2016). This loan falls due on 31 December 2029 and at 31 December 2017 105,000 thousand euros was drawn down (88,500 thousand euros in 2016).

“Other” reflects the amounts derived from the tax obligations of the Public Entity resulting from the tax consolidation for the sum of 4,603 thousand euros (4,808 thousand euros in 2016).

Canal de Isabel II, S.A. · 52 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

b) Investments

Details of investments are as follows:

Thousands of Euros 2017 Non-current Current Unrelated parties Loans 57,883 15,424 Impairment (3,667) (2,722) Deposits and guarantees 11,643 19

TOTAL 65,859 12,721

Thousands of Euros 2016 Non-current Current Unrelated parties Loans 57,252 15,511 Impairment (3,404) (2,722) Deposits and guarantees 12,626 19

TOTAL 66,474 12,808

Loans include balances receivable from certain councils for work conducted on water distribution and sewerage infrastructure in the respective municipalities. The main loans granted in 2017 amounted to 14,124 thousand euros (19,772 thousand euros in 2016). These balances are generally settled through customer bills, and a total amount of 11,510 thousand euros was received in 2017 (11,294 thousand euros in 2016).

Current loans include 2,580 thousand euros (1,661 thousand euros and 3,308 thousand, respectively, in 2016) for amounts owed by Alcalá de Henares City Council for the water treatment service provided in prior years, which have been deferred in accordance with the agreement dated 24 January 2014.

Additionally, non-current and current loans include 3,446 and 407 thousand euros respectively (3,680 and 475 thousand euros non-current and current in 2016), the amount net of impairment of 50% of the payable to the J.V. Aguas de Alcalá recognised by the City Council of Alcalá for the concession deficit for the 2005-2015 period (note 6).

As is mentioned in note 2 (d), the majority of these receivables from town and city councils are recognised at amortised cost, considering the period over which each balance is expected to be recovered. The impairment presented in the non-current column reflects unrecoverable receivables from these councils under the terms of the corresponding agreements.

Canal de Isabel II, S.A. · 53 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The balance listed under impairment relates to the sale of Canal’s interest in the share capital of Global Sales Solutions Line, S.L. for 4,234 thousand euros in 2007, at which time the 2,722 thousand euros receivable was recognised under current investments in the balance sheet. Provision has been made for this entire balance as payment was not settled on the agreed date and reasonable doubts exist as to its recovery.

Deposits and guarantees mainly reflect amounts deposited with the General Directorate of the Treasury and Financial Policy of the Ministry of Economy and Finance in relation to compulsory expropriation proceedings. On completion of the compulsory expropriation process, these amounts will be included within the Company’s intangible assets.

(i) Net losses and gains by category of financial asset

Net losses and gains by category of financial assets are as follows:

Thousands of Euros 2017 Loans and receivables Finance income at amortised cost 1,940 Finance costs at amortised cost (2,724) Finance income at amortised cost – other receivables 80

NET LOSSES IN PROFIT AND LOSS (704)

Thousands of Euros 2016 Loans and receivables Finance income at amortised cost 1,320 Finance costs at amortised cost (4,148) Finance income at amortised cost – other receivables 86

NET LOSSES IN PROFIT AND LOSS (2,742)

The amount of finance income and finance costs mainly derives from the revaluation in the year of receivables at amortised cost from certain city and town councils in relation to works carried out on the water distribution and sewerage infrastructure, financed through add-ons to the tariff.

Canal de Isabel II, S.A. · 54 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

(ii) Impairment

Movement in impairment is as follows:

Thousands of Euros 2017 2016 Balance at 1 January 6,126 6,037 Charges 263 89

BALANCE AT 31 DECEMBER 6,389 6,126

In 2017, the Company recognised impairment of 263 thousand euros in relation to receivables from unrelated parties (89 thousand euros in 2016).

c) Other information on investments

(i) Main characteristics of receivables from unrelated parties

Details of the main receivables from unrelated parties, excluding impairment, are as follows:

Thousands of

Euros 2017 Carrying amount Nominal Maturity Non-current Current amount Unrelated parties Works carried out for town councils 2045 90,441 54,227 9,686 Receivables for water treatment 2018 2,581 - 2,581 Alcalá City Council Loan UTE Alcalá City Council 2029 4,260 3,446 407 Disposal of fixed assets 2009 2,722 - 2,722 Regeneration works 2040 331 210 28

TOTAL 100,335 57,883 15,424

Canal de Isabel II, S.A. · 55 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of

Euros 2016 Carrying amount Nominal Maturity Non-current Current amount Unrelated parties Works carried out for town councils 2042 87,891 51,673 8,980 Receivables for water treatment 2018 4,969 1,661 3,308 Alcalá City Council Loan UTE Alcalá City Council 2029 4,630 3,680 475 Disposal of fixed assets 2009 2,722 - 2,722 Regeneration works 2040 369 238 26

TOTAL 100,581 57,252 15,511

d) Trade and other receivables

Details of trade and other receivables are as follows:

Thousands of

Euros 2017 2016 Current Current Group Other receivables (note 24 a) 1,703 3,303 Total 1,703 3,303 Related parties (note 24 a) Other receivables 641 608 Total 641 608 Unrelated parties Customers 171,857 172,518 Other receivables 26,995 31,401 Taxation authorities, income tax (note 21) 1,591 1,609 Impairment (41,394) (41,079) Total 159,049 164,449

TOTAL 161,393 168,360

Other receivables from Group companies mainly comprise the balance receivable from Canal Gestión Lanzarote, S.A.U. for services rendered by the Company, amounting to 1,084 thousand euros (2,811 thousand euros at 31 December 2016).

Canal de Isabel II, S.A. · 56 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Other receivables from related parties reflect the balance receivable from the Aguas de Alcalá temporary joint venture for water treatment services.

Trade receivables from unrelated parties are balances receivable from customers for amounts billed in relation to the Company’s principal activity.

The contractual relationship between Madrid City Council and Canal dates back to 1972. A new agreement was signed on 19 December 2005 that took effect on 1 January 2006. This was automatically extended for a period of 50 years in accordance with the agreement signed on 4 May 2011 for the inclusion of Madrid City Council in Canal de Isabel II’s future management model. This agreement defines the terms of the relationship between Canal and the City Council with regard to water supply to the city of Madrid, based on Law 17/1984 of 20 December 1984, which regulates water supply and sanitation in the Community of Madrid, which entitles Canal to carry out these services. The agreement determines both the financial aspects of this relationship and those relating to the planning, construction, maintenance and renovation of water use networks and the use of the water supply. The financial aspects of the 2005 agreement stipulated that receivables and payables between Canal and the City Council would be settled by offsetting balances.

Movement in impairment is as follows:

Thousands of Euros 2017 2016 Balance at 1 January 41,079 37,054 Charges 4.104 9,342 Applications (3,591) (3,521) Surpluses (198) (1,796)

Balance at 31 December 41,394 41,079

During 2017 the Company recognised losses on bad debts amounting to 9 thousand euros (70 thousand euros in 2016).

Canal de Isabel II, S.A. · 57 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

e) Classification by maturity

The classification of financial assets by maturity is as follows:

Thousands of

Euros 2017 2018 2019 2020 2021 2022 Other Total

Investments 24,008 9,162 8,973 8,985 8,997 134,742 194,867 Group companies and associates 11,287 - - - - 105,000 116,287 Loans to third parties 12,702 7,954 7,765 7,777 7,789 22,931 66,918 Deposits and guarantees 19 1,208 1,208 1,208 1,208 6,811 11,662 Trade and other receivables 159,802 - - - - - 159,802 Trade receivables 138,202 - - - .- - 138,202 Group companies and associates, other 1,703 - - - - - 1,703 Other receivables 19,897 - - - - - 19,897

TOTAL FINANCIAL ASSETS 183,810 9,162 8,973 8,985 8,997 134,742 354,669

Canal de Isabel II, S.A. · 58 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of

Euros 2016 2017 2018 2019 2020 2021 Other Total

Investments 24,848 10,099 8,240 8,242 8,243 120,150 179,822 Group companies and associates 12,040 - - - - 88,500 100,540 Loans to third parties 12,789 9,681 7,822 7,824 7,825 20,696 66,637 Deposits and guarantees 19 418 418 418 418 10,954 12,645 Trade and other receivables 166,751 - - - - - 166,751 Trade receivables 138,968 - - - - - 138,968 Group companies and associates, other 3,303 - - - - - 3,303 Other receivables 24,480 - - - - - 24,480

TOTAL FINANCIAL ASSETS 191,599 10,099 8,240 8,242 8,243 120,150 349,573

Canal de Isabel II, S.A. · 59 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

13. INVENTORIES

a) General

Details of Inventories are as follows:

Thousands of

Euros 2017 2016 Goods for sale 1,732 1,202 Works materials 861 854 Chemical reagents 939 890 Other supplies 1,916 1,878 Long-cycle and short-cycle emission rights 387 330 Impairment (77) (173)

TOTAL 5,758 4,981

Impairment of inventories is due to wastage, defects, deterioration, unauthorised or unregulated materials and prolonged storage of unused items.

In 2017 value adjustments due to impairment reduced by 97 thousand euros compared with the previous year (199 thousand euros in 20146.

The Company has taken out insurance policies to cover the risk of damage to its inventories. The coverage of these policies is considered reasonable.

b) Emission allowances

The sum of emission allowances recognised as raw materials and other supplies is as follows:

Thousands of

Euros 2017 2016 Short-cycle emission rights 254 188 Long-cycle emission rights 133 142 TOTAL 387 330 Impairment - -

TOTAL 387 330

Canal de Isabel II, S.A. · 60 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Movements in emission rights are as follows:

Thousands of

Euros 2017 2016 Cost at 1 January 330 204 Additions through acquisitions for valuable 150 199 consideration Additions through free acquisition (note 17 a)) 90 165 Disposals through application (183) (238) Disposals through transfers - -

TOTAL 387 330

During 2017, rights have been given to the Tax Authorities for the sum of 183 thousand euros (238 thousand euros in 2016) which have been applied and charged to the provision for emission rights (see note 5(j) (ii)). In this regard, at 31 December 2017, the emission rights pending delivery amount to Euros 387 thousand (330 thousand euros in 2016).

The emission rights for the sum of 183 thousand euros (238 thousand euros in 2016) form part of installations relating to the cogeneration of energy.

Details of the emission rights acquired during the validity period of the trade period and the annual distribution thereof, are as follows:

2017

Number of rights Thousands of Euros Free Paid Free Paid 2017 5,970 18,973 90 150

TOTAL 5,970 18,973 90 150

2016

Number of rights Thousands of Euros Free Paid Free Paid 2016 28,093 41,000 165 199 TOTAL 28,093 41,000 165 199

In 2017, the Company was assigned 5,970 free emission rights for the 2017 period (28,093 rights in 2016 for the 2013-2016 period).

Canal de Isabel II, S.A. · 61 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

14. PREPAYMENTS

Details of prepayments are as follows:

Thousands of Euros 2017 Non-current Current Prepayments - 5 Prepayments for loans, supplementary instalment 17,563 1,156 Prepayment for long-service bonus 2,671 289 Prepayments for long-service awards 64,530 2,766

TOTAL 84,764 4,216

Thousands of Euros 2016 Non-current Current Prepayments - 33 Prepayments for loans, supplementary instalment 18,976 1,236 Prepayment for long-service bonus 3,008 224 Prepayments for long-service awards 61,623 2,995

TOTAL 83,607 4,488

The majority of current prepayments are early payments of taxes for 2018.

Prepayments for loans, supplementary instalment reflects the difference between the nominal amount and amortised cost of the supplementary instalment receivable from certain town and city councils in relation to the Master Plans to finance work carried out by the Company for these town or city councils that was conveyed in prior years (see note 12 (b)).

Prepayments for long-service bonuses reflect the deferred premium paid to an insurance company in respect of an insurance policy for the accrual of early settlements of long-service bonuses (see note 5 (o)). These prepayments are taken to income as the premium in question is accrued. An amount of 806 thousand euros was accrued in 2017 (308 thousand euros in 2016) (see note 25 (c)). Additionally, in 2017 an amount of 538 thousand euros was recognised in relation to the discounting of this item (305 thousand euros in 2016).

Prepayments for long-service benefits reflect the deferred premium paid to an insurance company in respect of a risk insurance policy for early settlement of the long-service commitment (see note 5 (o)). These prepayments are taken to income as accrued. An amount of 2,841 thousand euros was accrued in 2017 (2,188thousand euros in 2016) (see note 25 (c)). Additionally, in 2017 an amount of 4,055 thousand euros was recognised in relation to the discounting of this item (3,703 thousand euros in 2016).

Canal de Isabel II, S.A. · 62 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

15. CASH AND CASH EQUIVALENTS

Details of cash and cash equivalents are as follows:

Thousands of Euros 2017 2016 Cash 127,751 60,824

TOTAL 127,751 60,824

The full cash balance is available for use in Company activities.

16. EQUITY

Details of equity and movement during the year are shown in the statement of changes in equity.

(i) Capital

The Company was incorporated on 27 June 2012 through the issue of 1,074,032,000 ordinary shares of Euro 1 par value each, which were subscribed and fully paid in by the Public Entity by way of the nonmonetary contribution of the activity described in note 3.

These shares have the same voting and profit sharing rights and can be freely transferred where permitted by law. None of the Company’s shares are listed on any stock exchange.

On 30 November 2012 the board of directors of the Public Entity, fulfilling the obligation assumed in the Agreements of Inclusion in the Management Model signed with the majority of local councils in the Community of Madrid, authorised the conveyance of the shares in the Company corresponding to each local authority, following the established criteria on this matter. At 31 December 2017 and 2016 these local councils hold 17.60% of the Company’s share capital.

The transferral of these shares is subject to Laws 3/2008 and 6/2011 and to the terms of the Agreements of Inclusion in the Management Model signed with local councils in the Community of Madrid.

The shareholders with direct interests of at least 10% in the share capital of the Company are as follows:

Entity No. of shares Percentage ownership Canal de Isabel II (Public Entity) 884,997,643 82.40 Madrid City Council 107,403,200 10.00

(ii) Share premium

The shares were issued with a share premium of Euro 1 per share, i.e. a total amount of 1,074,032 thousand euros. The Public Entity paid in this share premium when it paid in the share capital through the non-monetary contribution described in note 3. This reserve is freely distributable.

(iii) Reserves

Details of reserves and profit and movement during the period are shown in Appendix III.

Canal de Isabel II, S.A. · 63 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

• Legal reserve

The legal reserve has been appropriated in compliance with article 274 of the Spanish Companies Act, which requires that companies transfer 10% of profits for the year to a legal reserve until this reserve reaches an amount equal to 20% of share capital.

This reserve is not distributable to shareholders and if it is used to offset losses, in the event that no other reserves are available, it must be replenished with future profits.

At 31 December 2017, the Company has appropriated 102,147 thousand euros to this reserve (78,878 thousand euros at 31 December 2016).

• Other reserves

At 31 December 2017, this item includes voluntary reserves of 185,299 thousand euros (127,125 thousand euros at 31 December 2016) and the Company's start-up expenses amount to 245 thousand euros (see Appendix III). These voluntary reserves are freely distributable.

17. GRANTS, DONATIONS AND BEQUESTS RECEIVED

Movement in non-refundable grants, donations and bequest received is as follows:

Thousands of Euros 2017 2016 Balance at 1 January 705,489 696,695 Grants received during the year 21,712 23,770 Repayment of grants - (296) Amounts transferred to income statement (14,693) (14,658) Tax effect (17) (22) BALANCE AT 31 DECEMBER 712,491 705,489

This item mainly comprises the following grants at 31 December 2017:

The 22,816 thousand euros Cohesion Fund contribution to the set of projects entitled “Basin Clean-ups and Extension of Madrid Treatment Plants”, of which 7,377 thousand euros is pending release to profit and loss (7,542 thousand euros in 2016). This Cohesion Fund assistance was approved by the Commission of European Communities on 13 October 1997.

The 14,215 thousand euros Cohesion Fund contribution to the project for the “Tagus Basin Clean-up 2001, Group III”, of which 8,999 thousand euros is pending release to profit and loss (9,201 thousand euros in 2016). This grant was approved by the Commission of European Communities on 18 December 2001.

The Cohesion Fund contribution to the “Tagus Basin Clean-up 2001, Group II” project, totalling 51,102 thousand euros. This grant, of which 27,423 thousand euros is pending release to profit and loss, was approved by the Commission of European Communities on 26 March 2002 (28,040 thousand euros in 2016).

The 12,338 thousand euros Cohesion Fund contribution to the project for the “Tagus Basin Clean-up 2002”, of which 6,841 thousand euros is pending release to profit and loss (6,994 thousand euros in 2016).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The contribution from the European Regional Development Fund under the remit of Single Programming Document objective 2 (2000-2006); measure 2.1 “Improvement of current infrastructures and water supply to the general population and economic and water sanitation and treatment activities” totalling 65,090 thousand euros. This funding was granted on 7 March 2001. 42,909 thousand euros of the total balance has yet to be taken to income (43,874 thousand euros in 2016).

The contributions from the European Regional Development Fund’s CAM 2007-2013 Operational Programme amounting to 862 thousand euros, aimed at ongoing research and innovation or energy efficiency and savings projects. The ERDF’s CAM 2007-2013 Operational Programme was approved on 14 December 2007, 449 thousand euros of this amount has yet to be taken to profit and loss (519 thousand euros in 2016).

The contributions from the European Regional Development Fund’s CAM 2014-2020 Operational Programme amounting to 472 thousand euros, aimed at ongoing initiatives in and renewable energies and in energy efficiency projects. The ERDF’s CAM 2007-2013 Operational Programme was approved on 14 July 2015, 472 thousand euros of this amount has yet to be taken to profit and loss.

Cohesion Fund contributions of Euros 28,386 thousand to the project entitled “Treatment unit for sludge generated by wastewater treatment plants: composting and thermal-drying plant with electrical cogeneration - Loeches-Madrid”. This Cohesion Fund assistance was approved by the Commission of European Communities on 20 December 2006. 22,791 thousand euros is pending transfer to the income statement (23,304 thousand euros in 2016).

Cohesion Fund contributions to the “Clean-up and treatment of the La Reguera river basin” project, totalling 14,611 thousand euros. This Cohesion Fund assistance was approved by the Commission on 19 November 2003. 11,414 thousand euros has yet to be taken to income (11,671 thousand euros in 2016).

Spanish Energy Diversification and Saving Institute (IDAE) has financed five projects through the Community of Madrid, contributing 2,739 thousand euros to the first project, 164 thousand euros to a second project, which is pending release to profit and loss (reimbursed in full in 2013), 831 thousand euros to a third project, 103 thousand euros to a fourth (fully repaid) and 770 thousand euros to a fifth project. The first, third and fifth projects are being repaid and the amount yet to be released to profit and loss is 3,210 thousand euros (3,330 thousand euros in 2016).

The value of 90,018 thousand euros attributed to facilities assigned to the Company by various town councils. At 31 December 2017, 6,352 thousand euros is pending transfer to the income statement (6,498 thousand euros in 2016).

The amounts received from new water utility customers for hook-up rights and pipeline adaptation and extension totalling 859,256 thousand euros (838,016 thousand euros in 2016). At 31 December 2017, 575,713 thousand euros is pending transfer to the income statement (565,951 thousand euros in 2016).

a) Grants

Details of grants received in 2017 are as follows:

Thousands of Euros 2017 Grantor Amount Purpose Grant date Renewable energy and ERDF funds 472 14/07/2015 energy efficiency works Third-party financing 21,240 Supply works Several

TOTAL 21,712

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2016 Grantor Amount Purpose Sewerage and ERDF funds 7,073 18/04/2016 Distribution works European Climate Change Office 165 Co emission allowances 26/04/2016 (note 13 (b) 2 Third-party financing 16,532 Supply works Several

TOTAL 23,770

Details of the amounts recognised in the income statement are as follows:

Thousands of Euros 2017 2016 Other government capital grants 188 293 Cohesion Funds and ERDF 2,882 3,673 Installations assigned by city councils 146 146 Third-party financing 11,477 10,546

TOTAL 14,693 14,658

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

18. PROVISIONS AND CONTINGENT LIABILITIES

Details of provisions are as follows:

Thousands of Euros 2017 Non-current Current Provisions for taxes 5,619 8,214 Provisions for other liabilities 1,979 2,859 Provisions for infrastructure 334,198 85,967

TOTAL 341,796 97,040

Thousands of Euros 2016 Non-current Current Provisions for taxes 5,563 7,926 Provisions for other liabilities 1,654 6,376 Provisions for infrastructure 293,477 76,586

TOTAL 300,694 90,888

Movement in the different provision accounts is as follows:

Thousands of Euros 2017 Provisions for taxes Provisions for other Provisions for Total liabilities infrastructure Opening balance at 13,489 8,030 370,063 391,582 31 December 2016 Allowances 3,912 2,304 112,714 118,930 Provision - - 404 404 adjustments Applications (2,302) (1,980) (63,016) (67,298) Provision surpluses (1,266) (3,516) - (4,782) AT 31 DECEMBER 2017 13,833 4,838 420,165 438,836

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousan ds of Euros 2016 Provisions for Provisions for Provisions for Total taxes other liabilities infrastructure Opening balance at 31 7,968 5,407 321,029 334,404 December 2015 Allowances 7,726 5,885 113,137 126,748 Provision adjustments - - 495 495 Applications (2,230) (2,888) (64,598) (69,716) Transfers 1,868 109 - 1,977 Provision surpluses (1,843) (483) - (2,326)

AT 31 DECEMBER 2016 13,489 8,030 370,063 391 ,582

(i) Provisions for taxes

This provision primarily relates to the public prices payable by the Company for the private and special use made of land and public thoroughfares above and below ground. Allocations to this provision are made based on the best estimates of the amount accrued each year, calculated using land registers and city by-laws.

In addition, based on the taxation system for biogas obtained in the wastewater treatment stations, pursuant to Law 38/1992, on Special Taxes and Law 15/2012 of 27 December on fiscal measures for energy sustainability, the Company recognises a sum of 6,238 thousand euros (5,997 thousand euros in 2016) under the heading of current provisions for estimated obligations, of which, 565 thousand euros have been allocated in 2017.

(ii) Provisions for other liabilities

This provision primarily covers probable or certain liabilities arising from ongoing litigation and outstanding compensation or obligations of an uncertain amount payable to third parties. Based on the legal advice received, the directors do not consider that any liabilities arising from these lawsuits will differ significantly from the amounts provided for at 31 December 2017 and 2016. The provision is estimated using the individual most likely outcome.

In addition, this provision includes 209 thousand euros for greenhouse gas emission expenses (361 thousand euros in 2016) (note 13 (b)). The criterion for estimating these expenses consists of analysing the tonnes of emissions in accordance with the technical specifications of the facilities that generate greenhouse gases.

As mentioned in note 9 (c) the Company has reversed the provision for demolition and dismantling expenses by 3,225 thousand euros, which was established in 2016 for the sum of 3,835 thousand euros. This provision is subject to a high degree of uncertainty due to the methods used in the dismantling and the relevant cost estimation and is based on the Madrid High Court Sentence No. 580/2016, of 26 July 2016 ordering the adoption of the measures required to replace and re-establish the plot on which the sports facilities of the Third Tank of Islas Filipinas is located to its original condition before the works were carried out.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) (iii) Provisions for infrastructure

This provision covers replacement measures for usage periods in excess of one year that can be requested for items that are essential components of the transferred infrastructure so that the corresponding services can be provided satisfactorily.

Thousands of Euros 2017 Provision for Provision for Provision for the Madrid City the Madrid Provision for the Community Council City Council the Cáceres Total of Madrid sanitation recycling concession network agreement Agreement Opening balance at 31 343,753 19,145 4,500 2,665 370,063 December 2016 Allowances (note 7) 93,980 16,381 652 1,701 112,714 Provision adjustments 404 - - - 404 Applications (48,081) (13,734) (244) (957) (63,016) AT 31 DECEMBER 2017 390,056 21,792 4,908 3,409 420,165

Thousands of Euros 2016 Provision for Provision for Provision for the Madrid the Madrid Provision for the Community City Council City Council the Cáceres Total of Madrid sanitation recycling concession network Agreement Agreement Opening balance at 31 300,248 15,152 4,267 1,362 321,029 December 2015 Allowances (note 7) 94,188 16,381 652 1,916 113,137 Provision adjustments 492 - - 3 495 Applications (51,175) (12,388) (419) (616) (64,598) AT 31 DECEMBER 2016 343,753 19,145 4,500 2,665 370,063

Based on the Company’s estimates, the investment plan for replacement initiatives in the Community of Madrid Network over the concession period totals 4,881 million euros.

(iv) Contingent liabilities, guarantees and other commitments

Details of guarantees deposited and received at 31 December are as follows:

Thousands of

Euros 2017 2016 Guarantee deposits received (130,459) (136,526) Guarantees deposited with public entities 28,538 27,417

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The Company has provided guarantees to public entities in relation to the normal course of business amounting to 28,538 thousand euros (27,417 thousand euros in 2016). Of this amount, 8,000 thousand euros correspond to the guarantees provided in relation to compliance with the Public Service Management Agreement for the concession to provide water supply, sanitation and recycling services on the islands of Lanzarote and La Graciosa, dated 23 May 2013. The Company is jointly and severally liable, alongside Canal Gestión Lanzarote, S.A.U., for fulfilling the agreement and for the financial and other obligations arising therefrom. The Company has also extended guarantees to Cáceres City Council totalling 1,000 thousand euros in respect of the concession arrangement in that city. The Company’s directors do not expect any significant liabilities to arise from these guarantees.

In the Board Meeting held by Canal de Isabel II, S.A. on 30 June 2016, in view of the proposal put forward by the Audit Committee, it was agreed to immediately inform the relevant bodies of the Crown Prosecution Service of the events known in relation to the transaction for the purchase of Emissao Engenharia e Construçoes, S.A., which was carried out on 13 July 2016, notwithstanding that the analysis procedure of said operation will continue and be completed by the Company's Internal Audit Department and that the Company may commission a legal review of said operation. Once both actions are completed, the Prosecutor’s Office would be informed of the conclusions thereof. The relevant Internal Audit Department informed the Prosecutor’s Office on 3 February 2017.

Furthermore, the Company, in 2016, hired the consultancy services of an independent third party with the aim of assessing the due diligence in terms of criminal liability of the legal entity and the possible effect thereof on the annual accounts of Canal de Isabel II, S.A. and its group of companies for the year ended on 31 December 2016, with the conclusion being reached that the Company cannot be declared criminally liable for the events regarding the acquisition of Emissao Engenharia e ConstruÇóes, Ltda and that it would not affect the annual accounts of Canal de Isabel II, S.A. and its group of companies for 2016.

Throughout 2017, the Preliminary Investigation 91/2016 has been conducted before Central Court No. 6 of the National Court, based, among others, on the information provided by Canal de Isabel II to the Crown Prosecution Service. Canal de Isabel II, S.A. hired the services, via a public tender process, of a prestigious law firm and appeared in the proceedings as private prosecutor on 2 October 2017, pursuant to article 110 of the Code of Criminal Procedure and was accepted by the Court as such. Therefore, in principle, the Company cannot be considered criminally or civilly liable for the acts being investigated and rather, it would appear that its position as injured party seems to be consolidated as the investigation progresses.

The procedure, which is still partly secret, has been divided, together with the root cause, into six separate parts, to our knowledge to date. The first, second and fifth parts refer, respectively, to the Company’s expansion in Latin America (Inassa and Emissao), the Canal Golf Course, and to money laundering in the various transactions under investigation. The third part (Navalcarnero tram) and fourth (illegal financing of the Spanish Popular Party) are unrelated, in principle, to the interests of Canal de Isabel II, S.A. The sixth part (Mercasa), also unrelated to the Company, has already been referred to another Court investigating related criminal offences.

The investigation is estimated to end in 2018, and the oral proceedings, for those that are finally accused, shall be held in 2019. During the appropriate stage of the proceeding, charges will be filed on behalf of Canal de Isabel II, and the estimated damages for the Company will be quantified and payment thereof shall be claimed.

No negative financial impacts resulting from the procedure are expected. However, the relevant Sentence that is imposed, which will probably not be final before 2020—, will probably determine relevant amounts to be paid as compensation in favour of Canal de Isabel II, S.A. by those who are sentenced. In this regard, it is important to highlight, given the importance thereof and the sum of the verified provisional deposits in the consignment accounts of the Court made by the parties being investigated Mr Edmundo Rodríguez Sobrino for the sum of USD 2,739,003.57 and Mr Diego Fernando García Arias, for the sum of USD 828,547, both in relation to the Emissao Engenharia e Construçoes transactions being investigated. The treatment of these amounts in the Company’s accounts will depend on the criminal rating of the conducts that have led to such repayments, therefore an assignment cannot be made at the moment.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

At the same time, it is known that other judicial and administrative proceedings are being carried out in Colombia, as well as investigations related to the acquisition and subsequent management of the subsidiary Inassa, a Colombian company, majority-owned by the Community of Madrid and Canal de Isabel II through Canal Extensia, S.A.U.

Regardless of the accounting data that subsequent situations may lead to, the Company will study all the relevant legal actions in this regard, including appearing as informant, plaintiff and/or injured party in the procedures conducted before the Colombian courts, directly or via its subsidiaries, in an equivalent mode as verified by Canal de Isabel II, S.A. in the Spanish procedure indicated above.

Already having initiated the Preliminary Investigation 91/2016 in the Central Court No. 6 of the Spanish National Court, in which Mr. Edmundo Rodríguez Sobrino appears from the beginning as being under investigation in conjunction with many others in the case known as "Operación Lezo", and given the presence of new facts intimately linked to those investigated in said proceedings, on 20 June, a complaint was lodged on behalf of CANAL DE ISABEL II, S.A. and Canal Extensia, S.A. before the aforementioned Central Court. This Court initially decided to file the complaint without performing any formal proceedings, arguing that there is already a procedure that is followed in Colombia for the same occurrences. The legal representation of both companies presented an appeal as they understood that the Spanish jurisdiction cannot be subject to the Colombian courts, an appeal that was heard by the Criminal Division of the Spanish National Court, who by Court Order on 26 September 2018 ordered the Court to investigate the allegations, in Preliminary Investigation 51/2018.

Furthermore, on 22 June 2018 notification was received from the Public Interest Claim presented by the Office of the Attorney General before a court in Cundinamarca (The Republic of Colombia). It includes the following provisions:

- Annul the technical assistance agreement entered into by Triple A, S.A. and Inassa, S.A. of 31 March 2000 and later 4 September 2000, as well as ordering the return by Inassa of all money paid on the occasion of said contract, duly updated and the interests of the case applied. It also includes the remaining balance of the profits and losses of Triple A, S.A. in favour of the District of Barranquilla.

- Order Triple A, S.A. to advance the necessary measures for the reimbursement of that money improperly appropriated by the officials currently being investigated, as well as the remaining balance of the profits in favour of the District of Barranquilla.

- Order Triple A, S.A.: i) to adopt the immediate measures of restitution of resources by the order of $ 237,836,823,242, for which it is imperative to impose the formulation of an immediate recovery plan for resources paid to Inassa and ii) that the recovery of resources is made with charge to the shareholding, benefits and other rights and income or assets of Inassa in Colombia and abroad and iii) with the resources the quality of the service is improved and/or the stabilisation or reduction of tariffs.

- Order the Superintendency to adopt and implement the immediate and effective measures for performing effective surveillance and control over the contracting, administration and accounting of Triple A.

- The immediate suspension of the execution and payment of the technical assistance agreement.

- The initiation or immediate response plan is ordered, in which the way that Inassa proceeds to return the money that has been cancelled during the technical assistance agreement is considered.

-

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

- The immediate seizure and confiscation of the shares held by Inassa in Triple A and, in general, the seizure and confiscation of the shareholding, rights, income and assets of Inassa in Colombia and abroad are ordered.

- The seizure and confiscation of the benefits that Inassa should receive within the carrying out of social activities in Triple A.

On 29 June 2018, a written opposition to the interim measures was presented. The main arguments were related to the non-compliance with the requirements set forth in Article 231 of the Code of Administrative Procedure and Administrative Disputes (CPACA) (absolutely all the requirements were not met), in addition to its decree seeking to obtain the result of a judgement of conviction in advance.

On 9 July 2018, the suit was defended. Legal, procedural and substantive arguments were presented.

As of the approval date of these annual accounts, the Administrative Court of Cundinamarca is expected to issue a judgement on the requested interim measures (after analysing the objection arguments presented by Inassa) and to convene a compliance hearing, following the procedure set forth in law 472 of 1998.

The Management and the Directors of the Company, based on the reports and opinions issued by their legal advisors hired to these affects, have taken into account the available information. Given that the evidentiary stage has not yet taken place, they conclude that it is impossible to anticipate i) if the court will not rule on one or more interim measures ii) if the process ends by a compliance agreement and iii) the meaning of a possible judgement. Therefore, they consider that at this time it is not necessary to register provisions or allocation in the equity of the Company or the Group.

However, it cannot reasonably be ruled out that, as the different investigations or judicial or administrative proceedings progress, contingencies will arise that imply new operational and financial risks, which could eventually affect the true and fair view of the equity, the financial situation and the profits and losses of the Company and its Group as of 31 December 2017, as well as its cash flows, which are reflected in the Individual and Consolidated Annual Accounts and in the corresponding Management Reports and Briefs, which shall be duly noted in the relevant accounting documents.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

19. FINANCIAL LIABILITIES BY CATEGORIES

a) Classification of financial liabilities by category

The classification of financial liabilities by category and class is as follows:

Thousands of

Euros 2017 Non-current Current At amortised cost or At amortised cost or

cost cost Carrying amount Carrying amount

Debits and payables Group companies and associates (Note 20 (a)) 298,809 87,222

Bonds and other marketable securities 500,000 7,111

Bonds and debentures 500,000 -

Interest - 7,111

Other financial liabilities (note 20 (b)) 98,483 73,617

Total payables 598,483 80,728 Trade and other payables (note 20 (d)) Suppliers - 5,995 Suppliers, group companies and associates - 18,971 Other payables - 94,323 Personnel (salaries payable) - 7,718 Total - 127,007

TOTAL FINANCIAL LIABILITIES 897,292 294,957

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros

2016

Non-current Current At amortised cost or At amortised cost or

cost cost Carrying amount Carrying amount

Debits and payables

Group companies and associates (note 20 (a)) 379,857 117,762

Bonds and other marketable securities 500,000 7,115

Bonds and debentures 500,000 -

Interest - 7,115

Other financial liabilities (note 20 (b)) 100,254 82,156

Total payables 600,254 89,271

Trade and other payables (note 20 (d))

Suppliers - 4,785

Suppliers, group companies and associates - 21,899

Other payables - 86,129

Personnel (salaries payable) - 8,102

Total - 120,915

TOTAL FINANCIAL LIABILITIES 980,111 327,948

The carrying amounts of these items do not differ from their fair values.

On 26 February 2015 Canal de Isabel II successfully finalised the conditions of a 500 million euros issue of straight non-subordinate bonds maturing in 2025. The bonds will pay an annual coupon of 1.68%. There was substantial demand from national and international investors (orders totalled approximately 3,311 million euros) for this inaugural issue of bonds by the Company. During 2017, accrued interest payable amounted to 8,396 thousand euros, of which, 7,111 thousand euros is pending payment at 31 December 2017 (8,403 and 7,115 thousand euros respectively in 2016). The interest is payable in February 2018.

The arrangement fees for these bonds amounted to 2,025 thousand euros, of which 202 thousand euros (203 thousand euros in 2016) was charged to the income statement in 2017. These arrangement fees are recognised at 1,450 thousand euros under other non-current liabilities (1,652 thousand euros in 2016).

The fair value of the bond reporting date was 519,261 thousand euros (518,289 thousand euros at the 2016 reporting date), based on the quoted price on the Spanish Fixed Income Market (AIAF).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

(i) Net losses and gains by financial liability category

Net losses and gains by financial liability category are as follows:

Thousands of Euros 2017 Debts and payables Finance costs at amortised cost (2,251) Change in fair value of revenue from services rendered 2,251 Interest on bonds and obligations (8,801) Interest on loans from Group companies (8,338) Interest on loans from third parties (804)

NET LOSSES IN PROFIT AND LOSS (17,943)

Thousands of Euros 2016 Debts and payables Finance costs at amortised cost (2,227) Change in fair value of revenue from services rendered 2,227 Interest on bonds and obligations (8,403) Interest on loans from Group companies (9,377) Interest on loans from third parties (1,680)

NET LOSSES IN PROFIT AND LOSS (19,460)

In 2017 the interest on loans from Group companies and third parties in the income statement has been reduced by 2,009 thousand euros (3,156 thousand euros in 2016) as a result of the borrowing costs capitalised under the concession arrangements (see note 7).

Finance costs at amortised cost are those derived from the updating of advances received for the use of water during the year. Similarly, revenues from the rendering of services reflect the proportional distribution of the difference between the nominal amount and amortised cost based on the average estimated years over which the services will be provided (see notes 20 (b) and 21).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

20. PAYABLES AND TRADE PAYABLES

a) Group companies and associates

Details of payables to Group companies and associates are as follows:

2017 Non-current Current Group companies and associates Canal de Isabel II (Public Entity) 298,809 82,875 Suppliers of fixed assets, Group Canal de Comunicaciones Unidas, S.A.U. - 1,621 Hispanagua, S.A.U. - 2,726

TOTAL 298,809 87,222

2016 Non-current Current Group companies and associates Canal de Isabel II (Public Entity) 379,857 113,835 Suppliers of fixed assets, Group Canal de Comunicaciones Unidas, S.A.U. - 1,682 Hispanagua, S.A.U. - 2,245

TOTAL 379,857 117,762

Payables to Group companies primarily reflect the Company’s obligation to repay the 381,546 thousand euros (483,976 thousand euros in 2016) of the financing contracts arranged between the Public Entity and its lender institutions (see note 24 (a)).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) b) Payables

Details of payables are as follows:

Thousands of Euros 2017 Non-current Current Bonds and debentures 500,000 7,111 Bonds and debentures 500,000 - Interest - 7,111 Suppliers of fixed assets (note 7) 2,244 32,759 Dividend payable (notes 4 and 24) - 20,090 Other payables 31,293 17,748 Guarantees and deposits received 64,946 2,810 Other - 210 98,483 73,617

TOTAL 598,483 80,728

Thousands of Euros 2016 Non-current Current Bonds and debentures 500,000 7,115 Bonds and debentures 500,000 - Interest - 7,115 Suppliers of fixed assets (note 7) 4,451 35,090 Dividend payable (notes 4 and 24) - 26,295 Other payables 33,797 18,211 Guarantees and deposits received 62,006 2,533 Other - 27 100,254 82,156

TOTAL 600,254 89,271

Other non-current payables include 20,331 thousand euros payable to the Tagus Water Board for the Picadas Valmayor conduits (20,723 thousand euros in 2016), of which 392 thousand euros is recognised as current (468 thousand euros in 2016), and 15,359 thousand euros payable to Sociedad Estatal Aguas de las Cuencas de España, S.A. (17,733 thousand euros in 2016) for the works carried out in the Guadarrama and the second ring, of which 2,555 thousand euros has been recognised as current (2,539 thousand euros in 2016.

Guarantees and deposits received include advance payments for water use received from customers to guarantee compliance with the financial terms of the supply contract (advances for water use). These amounts fall due when the corresponding contracts are cancelled. The difference between the amount initially received and the amount reimbursed on maturity is recognised under accruals (see note 21).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) c) Other information on payables

Thousands of Euros 2017 Carrying amount Year of Nominal Non-current Current maturity amount Group companies and associates 386,031 298,809 87,222 Group companies and associates 2036 386,031 298,809 87,222 Unrelated parties 707,023 598,483 80,728 Bonds and debentures 2025 507,111 500,000 7,111 Suppliers of fixed assets 2019 35,013 2,244 32,759 Dividend payable 2018 20,090 - 20,090 Payables 2044 50,491 31,293 17,748 Guarantees and deposits received 2037 94,108 64,946 2,810 Other 2018 210 - 210

TOTAL 1,093,054 897,292 167,950

Thousands of Euros 2016 Carrying amount Year of final Nominal amount Non-current Current maturity Group companies and associates 497,619 379,857 117,762 Group companies and associates 2036 497,619 379,857 117,762 Unrelated parties 718,569 600,254 89,271 Bonds and debentures 2025 507,115 500,000 7,115 Suppliers of fixed assets 2019 39,598 4,451 35,090 Dividend payable 2017 26,295 - 26.295 Payables 2044 53,660 33,797 18,211 Guarantees and deposits 2037 91,874 62,006 2,533 received Other 2017 27 - 27

TOTAL 1,216,188 980,111 207,033

Canal de Isabel II, S.A. · 79 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

At 31 December 2017 and 2016, there were no debts with credit institutions.

The average rate of the total debt (including mirror debt) for 2017, is 1.79% (1.66% in 2016).

At 31 December 2017, the Company has credit facilities signed for the sum of 138,000 thousand euros (131,000 thousand euros in 2016), with a balance at 31 December 2017 as follows:

Thousands of

Euros 2017 2016 Amount drawn Amount drawn BANK Credit limit Credit limit down down Santander 15,000 - 15,000 - Bankia 10,000 - 10,000 - Bankinter 6,000 - 6,000 - CaixaBank 6,000 - 6,000 - Sabadell 6,000 - 6,000 - Abanca 20,000 - 20,000 - Popular 6,000 - 6,000 - Kutxabank 6,000 - 6,000 - Liberbank 6,000 - 10,000 - Ibercaja 10,000 - 10,000 - Caja Rural Castilla-La Mancha 10,000 - 10,000 - Banco Mare Noxtrum 6,000 - 6,000 - Cajamar 15,000 - 10,000 - HSBC 10,000 - 10,000 - España Duero 6,000 - - - TOTAL 138,000 131,000

The maturity of these credit facilities is December 2018, since they require annual authorisations from the Board of Directors and from the Regional Ministry of Economy, Employment and Finance of the Community of Madrid.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

d) Trade and other payables

Details of trade and other payables are as follows:

Thousands of Euros 2017 Non-current Current Group (note 24 (a)) Payables - 18,675 Total - 18,675 Associates (note 24 (a)) Payables - 296 Total - 296 Unrelated parties Suppliers - 5,995 Payables - 94,323 Personnel - 7,718 Public entities (note 22) - 4,050 Total - 112,086

Total 131,057

Thousands of Euros 2016 Non-current Current Group (note 24 (a)) Payables - 20,787 Total - 20,787 Associates (note 24 (a)) Payables - 1,112 Total - 1,112 Unrelated parties Suppliers - 4,785 Payables - 86,129 Personnel - 8,102 Public entities (note 22) - 4,085 Total - 103,101

Total 125,000

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

e) Classification by maturity

Thousands of Euros 2017 2018 2019 2020 2021 2022 Other Total Payables 80,728 8,567 7,385 7,431 7,478 567,622 679,211 Bonds and debentures, plus interest 7,111 - - - - 500,000 507,111 Other financial liabilities 73,617 8,567 7,385 7,431 7,478 67,622 172,100 Group companies and associates 87,222 29,048 29,048 29,048 14,762 196,903 386,031 Trade and other payables 127,007 - - - - - 127,007 Suppliers 5,995 - - - - - 5,995 Suppliers, Group companies and associates 18,971 - - - - - 18,971 Other payables, plus advances 94,323 - - - - - 94,323 Personnel 7,718 - - - - - 7,718

TOTAL FINANCIAL LIABILITIES 294,957 37,615 36,433 36,479 22,240 764,525 1,192,249

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2016 2017 2018 2019 2020 2021 Other Total Payables 89,271 8,051 9,348 7,138 7,182 568,535 689,525 Bonds and debentures, plus interest 7,115 - - - - 500,000 507,115 Other financial liabilities 82,156 8,051 9,348 7,138 7,182 68,535 182,410 Group companies and associates 117,762 81,047 29,048 29,048 29,048 211,666 497,619 Trade and other payables 120,915 - - - - - 120,915 Suppliers 4,785 - - - - - 4,785 Suppliers, Group companies and associates 21,899 - - - - - 21,899 Other payables, plus advances 86,129 - - - - - 86,129 Personnel 8,102 - - - - - 8,102

TOTAL FINANCIAL LIABILITIES 327,948 89,098 38,396 36,186 36,230 780,201 1,308,059

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

21. ACCRUALS

Details of accruals are as follows:

Thousands of

Euros 2017 Non-current Current Advances for water use (note 20 (b)) 21,835 4,517 Levy for use of the Lozoya River 4,070 343 Levy on Pedrezuela mini-power station 1,005 85

TOTAL 26,910 4,945

Thousands of Euros 2016 Non-current Current Advances for water use (note 20 (b)) 23,096 4,239 Levy for use of the Lozoya River 4,414 343 Levy on Pedrezuela mini-power station 1,089 85

TOTAL 28,599 4,667

Advances for water use reflect the difference between the advance payments received in relation to supply contracts and their present value based on the estimated date of repayment (see note 5 (i) (viii)). Since 2015 a more detailed information source has been used to calculate the present value of the advance payments and the average reimbursement period was reduced to 20 years for 2017 (21 years in 2016).

The levies for use of the Lozoya River and on Pedrezuela mini-power station reflect the income, 12,020 thousand euros and 2,175 thousand euros, respectively, yet to be transferred to profit or loss for the right to use water from the Guadalix River through the Pedrezuela mini-power station until 2030. At 31 December 2017 the amounts yet to be transferred to profit or loss were 4,413 thousand euros and 1,090 thousand euros respectively (4,757 thousand euros and 1,174 thousand euros in 2016).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) 22. TAXATION

Details of balances with public entities are as follows:

Thousands of Euros 2017 Non-current Current Assets Deferred tax assets 126 - Current tax assets - - Value added tax and similar taxes - 1,350 Public entities, other - 241 TOTAL 126 1,591 Liabilities Deferred tax liabilities (1,786) - Social Security - (2,366) Withholdings - (1,684)

TOTAL (1,786) (4,050)

Thousands of Euros 2016 Non-current Current Assets Deferred tax assets 144 - Value added tax and similar taxes - 1,518 Public entities, other 91 TOTAL 144 1,609 Liabilities Deferred tax liabilities (1,768) - Social Security - (2,326) Withholdings - (1,759)

TOTAL (1,768) (4,085)

As stated in note 3, the Company wrote to the Spanish taxation authorities to inform them of its intention to avail of the tax neutrality scheme regulated in section VII, chapter VIII of Royal Legislative Decree 4/2004 of 5 March 2004, which approved the Revised Spanish Income Tax Law, through the written document submitted to the Tax Authorities on 25 July 2012.

In accordance with article 66 of General Tax Law 34/2015, taxes cannot be considered definitively settled until the returns presented have been inspected by the taxation authorities or the inspection period of four years has elapsed.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Furthermore, article 66 bis 2 of this Law establishes the authorities right to examine the tax years or periods in which the right was generated to offset tax bases or payments or to apply the deductions of years that are going to be inspected.

At 31 December 2017 the Company has open to inspection by the taxation authorities the last four years of the main applicable taxes, as follows:

Years open to inspection

Corporate tax 2013 2014 2015 2016 2017

Value Added Tax 2014 2015 2016 2017

Income Tax 2014 2015 2016 2017

On 19 April 2017, the Company received a communication regarding the start of the inspection, verification and investigation activities by the Tax Inspectorate, with these continuing at 31 December 2017.

The inspection activities refer to the following taxes and periods:

Corporate tax: periods 07/2012 to 12/2015 Value Added Tax: periods 03/2013 to 12/2016 Withholdings or payment on account. Income from Personal/professional work: periods 03/2013 to 12/2016

The Company’s Directors do not think this inspection will lead to significant liabilities and that there are no further contingencies arising from the years open to inspection.

On 23 May 2018 the Court of Investigation No. 6 of the Spanish National Court, in response to the request submitted by the Central Office of High-Income Taxpayers of the Tax Agency, issued an Order that provides for the suspension of ongoing inspection proceedings until the criminal investigation advances and the need to maintain it can be specified in greater detail.

a) Income tax

As mentioned in note 5 (s), since 2014, the Company is subject to the consolidated tax return system.

The Companies forming part of the Fiscal group are as follows:

Parent: • Canal de Isabel II (Public Entity)

Subsidiaries: • Canal de Isabel II, S.A., Hispanagua, S.A.U., Canal de Comunicaciones Unidad, S.A.U., Hidráulica Santillana, S.A.U., Canal Energía, S.L., Canal Energía Generación, S.L.U., Canal Energía Distribución, S.L.U., Canal Energía Comercialización, S.L.U., Canal Gas Distribución, S.L.U., Canal Extensia, S.A.U., Canal Gestión Lanzarote, S.A.U. and Ocio y Deporte Canal, S.L.U.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The reconciliation of net income and expenses for the year and the taxable income is as follows:

Thousands of Euros 2017 Income statement Recognised income and expense Increases Decreases Net Increases Decreases Net Total Income and expenses 261,886 - 261,886 21,658 - 21,658 283,544 for the period Corporate tax 357 - 357 54 - 54 411 Permanent 3,112 (1,111) 2,001 - - - 2,001 differences Temporary 572 (6,160) (5,588) - (21,712) (21,712) (27,301) differences Originating in current 572 - 572 - (21,712) (21,712) (21,141) year Originating in prior - (6,160) (6,160) - - - (6,160) years TAXABLE INCOME 265,927 (7,271) 258,656 21,712 (21,712) - (258,656)

Thousands of Euros 2016 Income statement Recognised income and expense Increases Decreases Net Increases Decreases Net Total Income and expenses for 232,693 - 232,693 23,712 (297) 23,415 256,108 the period Corporate tax - (6,459) (6,459) 60 (1) 59 (6,400) Permanent differences 5,509 (350) 5,159 - - - 5.159 Temporary differences 1,886 (7,780) (5,894) 296 (23,770) (23,474) (29,368) Originating in current year 1,886 - 1,886 296 (23,770) (23,474) (21,588) Originating in prior years - (7,780) (7,780) - - - (7,780)

TAXABLE INCOME 240,088 (14,589) 225,499 24,068 (24,068) - 225,499

In 2017 permanent differences primarily included as increases, the sum of 2,206 thousand euros from the donation given to the Canal de Isabel II Foundation and not considered deductible pursuant to 12.1 and 12.2 of Corporate Income Tax Law 27/2014. “The following shall not be deductible: e) Donations and gifts”. Likewise, as reductions, a sum of 991 thousand euros is recorded, resulting from the surplus impairment from property investments (described in note 9.c)).

During 2016, permanent differences mainly included a sum of 4,635 thousand euros for impairment from property investments (described in note 9.c)) and not considered deductible pursuant to Corporate Income Tax Law 27/2014: “The following shall not be deductible: a) Impairments of Tangible assets, property investments and intangible assets, including goodwill”.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Article 7 of Law 16/2012, of 27 December 2012, for tax years commencing in 2013 and 2014, permits the deduction from taxable income of up to 70% of the amortisation/depreciation that would have been tax deductible had the percentage pursuant to 12.1 and 12.2 of Corporate Income Tax Law 27/2014 not been applied. Non-tax-deductible accounting amortisation and depreciation that was not tax deductible in accordance with the above, shall be deducted on a straight-line basis over a period of 10 years or the useful life of the asset, as of the first tax period beginning in 2015. Therefore, in 2017 the temporary differences originating in prior years amounting to 6,160 thousand euros (7,780 thousand euros in 2016) include deductions of 5,998 thousand euros in respect of the reversal of part of the amortisation/depreciation not considered as tax deductible in 2013 and 2014. As a result of this adjustment, in 2017 the deferred tax asset recognised was lower by 18 thousand euros, bringing cumulative deferred tax assets recognised at 31 December 2017 for this item to 126 thousand euros.

The relationship between the tax expense and accounting profit for the year is as follows:

Thousands of Euros 2017 Recognised income Profit and loss Total and expense Income and expenses for the 262,243 21,712 283,955 period Increases 3,684 3,684 Charge to non-deductible 572 572 provisions Other non-deductible 3,112 3,112 expenses Decreases (7,271) (21,712) (28,983) Reversal of non-deductible (5,998) - (5,998) amortisation Grants - (21,712) (21,712) Other non-deductible (119) (119) expenses Application of non-deductible (1,154) (1,154) provisions TOTAL 258,656 258,656 Tax at 25% 64.664 64,664 Deductions and credits for the (62.008) (62,008) year Income tax expense 2.656 2,656 Continuing operations 2.656 2,656

Canal de Isabel II, S.A. · 88 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2016 Recognised income Profit and loss Total and expense Income and expenses for the 226,234 23,474 249,708 period Increases 7,395 - 7,395 Charge to non-deductible 6,522 - 6,522 provisions Other non-deductible 873 - 873 expenses Decreases (8,130) (23,474) (31,604) Reversal of non-deductible (5,998) - (5,998) amortisation Grants - (23,474) (23,474) Other non-deductible (350) - (350) expenses Application of non-deductible (1,782) - (1,782) provisions TOTAL 225,499 - 225,499 Tax at 25% 56,372 - 56,372 Deductions and credits for the (53,902) - (53,902) year Income tax expense 2,470 - 2,470 Continuing operations 2,470 - 2,470

Details of the income tax expense are as follows:

Thousands of Euros 2017 2016 Present year 2,656 2,470 Deferred tax 18 60 Adjustment in the final return - 336 Other adjustments - (9,375) Adjustment in the final return for prior years (2,317) 50

TOTAL 357 (6,459)

The sum to be received from the Public Entity for the consolidated Corporate Income Tax is 2,536 thousand euros. This sum is included under the heading “Financial investments in group companies and associates” (Note 12 a)).

Details of deferred tax assets and liabilities at 31 December 2017 and 2016 are as follows:

Canal de Isabel II, S.A. · 89 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 Assets Liabilities Net Due to grants - (1,786) (1,786) Amortisation and depreciation 126 - 126

NET ASSETS AND LIABILITIES 126 (1,786) (1,660) Thousands of Euros 2016 Assets Liabilities Net Due to grants - (1,768) (1,768) Amortisation and depreciation 144 - 144

NET ASSETS AND LIABILITIES 144 (1,768) (1,624)

The deferred tax liability arising on non-current investments in Group companies and associates is the result of measuring these investments at the values shown in the consolidated annual accounts of the contributor, as required by prevailing accounting regulations (see note 3). During 2016 this liability was adjusted in the income statement pursuant to the resolution of the Accounting and Auditing Institute of 9 February 2016 and Corporate Income Law 27/2014.

On 28 November 2014 new Corporate Income Tax Law 27/2014 applicable for tax periods beginning on or after 1 January 2015 was published in the Official State Gazette. The most significant change in the tax is the reduction in the general rate from 30% to 28% for tax periods from 1 January 2015 and to 25% for tax periods from 1 January 2016.

At 31 December details of deferred tax assets and liabilities that are expected to be realised or reversed in periods exceeding 12 months are as follows:

Thousands of Euros 2017 2016 Deferred tax assets 108 126 Deferred tax liabilities 1,768 1,746

The amount of deferred tax assets and liabilities that have not been recognised is not significant.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) 23. ENVIRONMENTAL INFORMATION

Details of the assets classified under Concessions and used to minimise the impact on the environment are as follows:

Thousands of Euros 2017 Accumulated Cost Net depreciation Treatment plant facilities 595,527 (212,551) 382,976 Sewerage network 26,465 (7,181) 19,284 Recycling network 93,261 (10,662) 82,599

TOTAL 715,253 (230,394) 484,859

Thousands of

Euros 2016 Accumulated Cost Net depreciation Treatment plant facilities 581,968 (206,253) 375,715 Sewerage network 25,138 (6,303) 18,835 23Recycling network 83,541 (9,389) 74,152

TOTAL 690,647 (221,945) 468,702

Details of environmental investments made by the Company in 2016 are as follows:

Thousands of Euros 2017 2016 Water treatment 13,559 13,581 Sewerage network 1,327 953 Recycling network 9,720 12,249

TOTAL 24,606 26,783

Details of environmental costs incurred by the Company are as follows:

Thousands of Euros 2017 2016 Water treatment 143,763 141,728 Sewerage system 67,185 66,179 Recycling 7,202 6,753 Other (green areas, environmental costs, etc.) 1,864 2,251

TOTAL 220,014 216,811

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Company management integrates all its activities through an Environmental Management System, which has been duly certified in accordance with the UNE-EN-ISO-14001:2004 environmental management standard. The follow-up audit for this certificate was carried out in 2017, with favourable results for the permanent development and improvement of this Management System.

The Company has 37 cases open for a breach of environmental regulations (25 in 2016). These cases are in various phases of the procedure and appeals have already been filed against a number of these through administrative proceedings or even through actions under contentious-administrative jurisdiction. However, based on experience and the expected success of these appeals, the Company considers that no significant contingencies exist concerning possible litigation, indemnities or other items and, accordingly, no provision has been made in this regard.

The Company has insurance policies that reasonably assure the coverage of any possible contingency that could arise from its environmental activities.

In addition to its public liability cover, since June 2010 the Company, as the affected operator, has held an insurance policy to cover the potential risks deriving from the entry into force of Law 26/2007 on environmental responsibility and Royal Decree 2090/2008, which implements that Law. This policy was arranged for the maximum financial guarantee stipulated in the Law, i.e. 25 million euros.

24. RELATED PARTY BALANCES AND TRANSACTIONS

a) Related party balances

Details of the Company’s balances with Group companies, associates and joint ventures are as follows:

Thousands of Euros 2017 Receivable Payable Parent Canal de Isabel II (Public Entity) 7,383 (383,835) Group companies Hispanagua, S.A.U. 22 (7,607) Hidráulica Santillana, S.A.U. 169 (2,945) Canal de Comunicaciones Unidas, S.A.U. 130 (10,119) Canal Energía Comercialización, S.L. - (200) Canal Gestión Lanzarote, S.A.U. 110,177 - Emissao 10 - Aguas de Alcalá UTE 641 - Ocio y Deporte, S.L.U. 99 Associates GSS Venture, S.L. - (296)

TOTAL (Notes 12 (a, d) and 20 (a, d)) 118,631 (405,002)

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2016 Receivable Payable Parent Canal de Isabel II (Public Entity) 9,320 (496,133) Group companies Hispanagua, S.A.U. 21 (8,487) Hidráulica Santillana, S.A.U. 1,712 (3,449) Canal de Comunicaciones Unidas, S.A.U. 40 (10,137) Canal Energía Comercialización, S.L. - (200) Canal Gestión Lanzarote, S.A.U. 92,740 - Emissao 10 - Aguas de Alcalá UTE 608 - Associates GSS Venture, S.L. - (1,112)

TOTAL (Notes 12 (a, d) and 20 (a, d)) 104,451 (519,518)

The 381,546 thousand euros payable to the Public Entity (483,976 thousand euros in 2016) reflects the Company’s obligation to pay the Public Entity the amounts necessary to fulfil its obligations arising on financing contracts as required by the Contract-Programme (mirror debt).

The origin of this payable was the non-monetary contribution made in 2012, as described in note 3, whereby the debt of the contributed activity was transferred from the Public Entity to the Company. Both parties recognised the initial debt and the terms of future repayment, as well as the procedure to be followed to settle interest and repay the debt. Although the Public Entity is still the named party in the financing contracts with the lender institutions, the Company assumed all of the obligations originally agreed in these contracts at the corresponding amounts. The maturities and interest rates applicable to the balances payable by the Company to the Public Entity are those specified in the contracts between the latter and the financial institutions (see note 20 (e)). In 2017, the weighted average interest rate of the mirror debt was 1.92% (1.64% in 2016).

Details of the Public Entity's balances with financial institutions at 31 December 2017 in thousands of Euros, excluding accrued interest payable, as a result of the loan transactions from the mirror debt are as follows:

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 ORIGINAL ANNUAL NON- BANK TYPE MATURITY CURRENT TOTAL AMOUNT INTEREST RATE CURRENT EIB (1) 150,000 Loan 1 Dec 21 Fixed (3.894%) 14,286 42,857 57,143 EIB (2) 100,000 Loan 15 Oct 35 Fixed (3.268%) 4,762 80,952 85,714 EIB (3) 200,000 Loan 21 Feb 36 Fixed (1.342%) 10,000 175,000 185,000 ICO – LA CAIXA (4) 130,000 Syndicated 25 Nov 18 Euribor + 0.7% 52,000 - 52,000

TOTAL 81,048 298,809 379,857

(1) Fixed-rate loan from the European Investment Bank. (2) Fixed-rate loan from the European Investment Bank. (3) Fixed-rate loan from the European Investment Bank (4) Bilateral loan from ICO (Spain’s Official Credit Institute)

Balances at 31 December 2016 were as follows:

Thousands of Euros 2016 ORIGINAL ANNUAL NON- BANK TYPE MATURITY CURRENT TOTAL AMOUNT INTEREST RATE CURRENT EIB (1) 150,000 Loan 1 Dec 21 Fixed (3.894%) 14,286 57,143 71,429 EIB (2) 100,000 Loan 15 Oct 35 Fixed (3.268%) 4,762 85,714 90,476 EIB (3) 200,000 Loan 21 Feb 36 Fixed (1,342%) 10,000 185,000 195,000 ICO (4) 170,000 Bilateral 20 Jun 17 Euribor + 0.04% 21,250 - 21,250 ICO – LA CAIXA (5) 130,000 Syndicated 25 Nov 18 Euribor + 0.7% 52,000 52,000 104,000

TOTAL 102,298 379,857 482,155

(1) Fixed-rate loan from the European Investment Bank. (2) Fixed-rate loan from the European Investment Bank. (3) Fixed-rate loan from the European Investment Bank (4) Bilateral loan from ICO (5) Syndicated loan from ICO – La Caixa

Accrued interest payable relating to the mirror debt at 31 December 2017 amounted to Euros 1,689 thousand (1,821 thousand euros in 2016).

Likewise, at 31 December 2017, the line item on loans to third parties, clients for services rendered and creditors (see notes 12 (b), 12 (d) and 20 (d)) include the sums of 66,460 thousand euros, 62,071 thousand euros and 43,615 thousand euros, respectively, for balances with shareholder City Councils (65,296 thousand euros, 65,785 thousand euros and 46,616 thousand euros respectively in 2016). In addition, dividends payable (see note 20 (b)) include 20,090 thousand euros (26,295 thousand euros in 2016) payable to these same shareholders.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

b) Related party transactions

Details of the Company’s transactions with Group companies, associates and joint ventures are as follows:

Thousands

of Euros 2017 Canal Canal Ocio y de Canal de Gestió Deporte Hidráulica GSS Isabel Comunica. Hispanagua, n Canal, Joint Santillana, Venture, Emissao II Unidas, S.A.U. Lanzar S.L.U. Ventures S.A.U. S.L. (Public S.A.U. ote, Entity) S.A.U. Revenue

Water sales - - - 4 - - - - -

Materials sales 2 ------Compensation for - - - - 18 - - - - breakdowns Levy for concession - 428 - - - - 81 -

Finance income - - - - 4,978 - - 1 552 Other operating - 207 559 78 182 832 - - 548 income Expenses

Water purchases ------(3)

Energy - (1,689) ------

Telephone helpline - - - - - (2,885) - - - Operation of - - - - (3,015) - - - - treatment plants Sales offices - - - - - (718) - - -

Other operations - - - (9,134) - - - - -

Other rentals - - (60) ------Repairs on technical - - (3,470) (2,953) - - - - installations - Technical assistance (2,841) - (343) (992) - - - - - Other operating - (1,071) ------expenses Finance costs (8,344) ------

Investments - - (759) (14,156) - - - - -

As a result of town councils gaining stakes in its share capital, in 2017 the Company carried out transactions with shareholders primarily in the form of services and tax settlements totalling 53,083 thousand euros and 23,152 thousand euros, respectively (50,357 thousand euros and 28,674 thousand euros, respectively, in 2016).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of

Euros 2016 Canal de Canal de Canal Hidráulica GSS Isabel II Comunica. Hispanagua, Gestión Santillana, Venture, Joint Ventures (Public Unidas, S.A.U. Lanzarote, Emissao S.A.U. S.L. Entity) S.A.U. S.A.U. Revenue .

Water sales . - - 5 - . - .

Materials sales 1 - - - - . - . Compensation for - . - - 9 - . . breakdowns Levy for concession . 428 - - - . - .

Finance income . - - - 4,053 . - 545

Other operating income 276 557 78 107 782 . 536 10 Expenses

Water purchases . - - - . . - (3)

Energy . (1,703) - - . . - .

Telephone helpline . - (24) - . (3,541) - . Operation of treatment - . - - (3,552) . . . plants Sales offices . - - - . (796) - .

Other operating works . - - (11,654) . . - .

Other rentals . - (24) (111) . . - . Repairs on technical - . - (3,378) (3,543) . . . installations Technical assistance (2,841) - (419) (453) . . - .

Other operating expenses (1,478) - - - . . - .

Finance costs (9,386) - - - . . - .

Investments - - (687) (14,569) . . - .

Goods are sold, services are rendered, supplies are purchased, and other expenses are incurred on an arm’s length basis.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

c) Information on the members of the Board of Directors and Senior Management Personnel

Pursuant to the Company's articles of association, during 2017 the members of the board of directors received allowances of 31.8 thousand euros for attendance at board meetings and its committees (37.8 thousand in 2016). Neither the members of the board of directors nor senior management personnel have received any advances or loans, and the Company has not extended any guarantees on their behalf. The Company has a civil liability insurance policy in place for damages caused by acts or omissions while carrying out its functions, with a premium of 69 thousand euros. The Company has no pension plan or life insurance obligations with former or current members of its board of directors in 2017 and 2016.

Senior management personnel are the members of the Company’s Management Committee. In 2017, the Company's senior management received total remuneration of 894 thousand euros (805 thousand euros in 2016). Neither the members of the board of directors nor senior management personnel have received any advances or loans, and the Company has not extended any guarantees on their behalf. The amount reserved for remunerations pending payment for targets and productivity at 31 December 2017 is 149 thousand euros (108 thousand euros at 31 December 2016). the Company does have pension and life insurance obligations with its senior management personnel (see note 5 (n)). Furthermore, in 2017 they received 10 thousand euros (10 thousand euros in 2016) for the seniority policy (see note 5 (o)).

d) Conflicts of interest concerning the directors

During 2017 and 2016, the Directors of the Company and their related parties have had no conflicts of interest requiring disclosure in accordance with article 229 of the Revised Spanish Companies Act.

e) Transactions unrelated to normal business or under different market conditions carried out by the Board of Directors

During 2017 and 2016, the Company Directors did not carry out any transactions unrelated to normal business or under different market conditions with the Company or with Group companies.

25. INCOME AND EXPENSES

a) Revenues

The breakdown of revenues reflects the operation of infrastructure to provide water supply, sanitation and recycling services.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros 2017 2016 Revenue from the rendering of infrastructure operating 882,695 859,359 services Revenue from the rendering of services 7,046 7,420

TOTAL 885,741 866,779 All revenues from services rendered and water sales were made in Spain and in Euros.

b) Supplies

Details of supplies are as follows:

Thousands of

Euros 2017 2016 Supplies Raw materials and other consumables used 22,299 23,387 Electricity and gas used 49,609 45,773 Subcontracted work 126,196 128,495 Impairment of raw materials and other consumables (96) (1)

TOTAL 198,008 197,654

Details of raw materials and other consumables are as follows:

Thousands of

Euros 2017 2016 Raw materials and other consumables used Domestic purchases 22,883 24,106 Purchases within the European Union 97 141 Change in inventories (681) (860)

TOTAL 22,299 23,387

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

c) Personnel expenses

Details of the personnel expenses are as follows:

Thousands of

Euros 2017 2016 Salaries and wages 88,922 84,644 Employee benefits expense 30,256 29,240 Social Security payable by the company 24,503 24,232 Contributions to defined contribution plans - repaid (297) (222) Long-service bonuses (note 14) 806 308 Length of service (note 14) 2,841 2,188 Other employee benefits expenses 2,403 2,734 Provisions 128 62

TOTAL 119,306 113,946

d) Gains/losses on disposal of fixed assets

Details of gains and losses on the disposal of fixed assets are as follows:

Thousands of Euros 2017 2016 Gains Tangible assets (note 8) 3,049 - Intangible assets (note 7) 50 147 Investment property (note 9) - 444 Losses Tangible assets (note 8) (240) - Intangible assets (note 7) (1,965) (1,346) Investment property (note 9) - -

TOTAL 894 (755)

e) Non-trading income

Non-trading income is primarily from energy sales and other income derived from the lease of certain properties and from levies for the assignment of hydropower generation rights (see note 20).

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

26. EMPLOYEE INFORMATION

The average headcount, broken down by standardised categories in accordance with the 4th national collective bargaining agreement for the drinking water and waste water sourcing, elevation, conveyance, treatment, distribution, sanitation and purification industries, effective from 5 July 2013, is as follows:

Number Category 2017 2016 Senior management personnel 8 7 G.6 (Structure and Structure Support) 401 400 G.5 (University graduates) 323 224 G.4 (Middle management) 168 114 G.3 (Technical Personnel) 210 348 G.2 (Administrative staff and skilled workers) 1,335 1,317 G.1 (Support staff) 37 48 OVERALL TOTAL 2,482 2,458 Partially retired 110 114

At the 2017 reporting date, the distribution by gender of the Company’s personnel, members of the board of directors and senior management personnel, is as follows:

Number 2017 Category Female Male Board Members 4 6 Senior management personnel 1 6 G.6 (Structure and Structure Support) 135 267 G.5 (University graduates) 182 162 G.4 (Middle management) 29 117 G.3 (Technical Personnel) 70 144 G.2 (Administrative staff and skilled 389 959 workers) G.1 (Support staff) 12 27 OVERALL TOTAL 822 1,688 Semi-retired personnel 35 75

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Number 2016 Category Female Male Board Members 1 9 Senior management personnel 3 6 G.6 (Structure and Structure Support) 140 263 G.5 (University graduates) 118 104 G.4 (Middle management) 49 66 G.3 (Technical Personnel) 98 253 G.2 (Administrative staff and skilled 359 980 workers) G.1 (Support staff) 11 25 OVERALL TOTAL 779 1,706 Semi-retired personnel 38 76

The average number of employees in the Company with a disability equal to or higher than 33% (or equivalent local grading) during 2017 and 2016, itemised by categories is as follows:

Number 2017 2016 Technicians 5 3 Administrative personnel 14 11 Labourers and subordinates 3 8

OVERALL TOTAL 22 22

27. AUDIT FEES

KPMG Auditores, S.L., the auditors of the individual and consolidated annual accounts of the Company, have invoiced the following fees for professional services during the years ended 31 December 2017 and 2016:

Thousands of Euros 2017 2016 Audit services 310 310 Other services 27 30

TOTAL 337 340

Other services refer to the limited reviews of the financial statements for the sum of 4.5 thousand euros, agreed procedure report "Ecoembes” for 3 thousand euros, the review of the information from the Internal Control Over Financial Reporting (ICFR) for 5 thousand euros and the advice regarding the adjustment of the consolidated financial statements to International financial reporting standards (IFRS) for 14 thousand euros.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Other KPMG Group companies have invoiced the following fees for professional services during the year ended 31 December 2015:

Thousands of Euros 2017 2016 Tax advisory services - 18 Other services 37 156

TOTAL 37 174

Other services refer to the review of the non-financial information in the annual report for the Canal de Isabel II for the sum of 36 thousand euros.

The amounts detailed in the above tables include the total fees for services rendered in 2017 and 2016, irrespective of the date of invoice.

28. AVERAGE SUPPLIER PAYMENT PERIOD. “REPORTING REQUIREMENT”, THIRD ADDITIONAL PROVISION OF LAW 15/2010 OF 5 JULY 2010.

Details of the average supplier payment period are as follows:

Thousands of Euros 2017 2016 Average payment period for suppliers 38.68 33.51 Transactions paid ratio 39.82 35.12 Transactions payable ratio 27.31 17.43 Total payments made 278,360 288,513 Total payments outstanding 28,068 28,831

29. EVENTS AFTER THE REPORTING PERIOD

During the first quarter of 2018, a forensic audit was completed in Emissao, with the aim of identifying possible irregularities in the management of the company by ex-executives that could have an impact on the financial statements of Emissao or on its future business plan and to determine the potential criminal liability of Emissao arising from the actions concerning Prior Proceedings 91/2016 before Central Court No. 6 of the National Court and it judicial ramification in Brazil.

In terms of the potential criminal liability, the conclusion of the external adviser, is that Emissao will not be held criminally liable to the extent that it could compromise the company’s activity or have an impact on its annual accounts. Likewise, based on the information analysed by the independent experts in the forensic analysis, the Company’s Directors do not expect any additional liabilities other than those already recognised in the consolidated annual accounts.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Regarding the analysis of potential irregularities in the management of the company by former directors, no elements have been found that indicate that any manager or employee of Emissão committed acts of corruption or other similar malfeasance. Nor has there been any concrete or sufficient evidence to indicate irregularities in the management of former directors that could have a significant impact on the company.

By means of official written notice presented to the Court of Investigation No. 6 of the Spanish National Court, the Central Office of High-Income Taxpayers of the Tax Agency requested that the inspection procedures followed with the Company for Corporate Taxes 2012 to 2015, VAT and Withholdings 3/2013 to 12/2016 be suspended or stayed. As it was determined that the result of these actions depends on the facts proven in the criminal proceedings, the Court on 23 May 2018 issued an Order that stipulates the suspension of the ongoing inspections until the criminal investigation moves forward and the need to maintain it can be specified in greater detail.

Already having initiated the Preliminary Investigation 91/2016 in the Central Court No. 6 of the Spanish National Court, in which Mr. Edmundo Rodríguez Sobrino appears from the beginning as being under investigation in conjunction with many others in the case known as "Operación Lezo", and given the presence of new facts intimately linked to those investigated in said proceedings, on 20 June 2018, a complaint was lodged on behalf of CANAL DE ISABEL II, S.A. and Canal Extensia, S.A.U. before the aforementioned Central Court. This Court initially decided to file the complaint without performing any formal proceedings, arguing that there is already a procedure that is followed in Colombia for the same occurrences. The legal representation of both companies presented an appeal as they understood that the Spanish jurisdiction cannot be subject to the Colombian courts. The judgement is pending before the Criminal Court.

Furthermore, on 22 June 2018 notification was received from the Public Interest Claim presented by the Office of the Attorney General before a court in Cundinamarca (The Republic of Colombia). It includes the following provisions:

- Annul the technical assistance agreement entered into by Triple A, S.A. and Inassa, S.A. of 31 March 2000 and later, on 4 September 2000, as well as ordering the return by Inassa of all money paid on the occasion of said contract, duly updated and the interests of the case applied. It also includes the remaining balance of the profits and losses of Triple A, S.A. in favour of the District of Barranquilla.

- Order Triple A, S.A. to advance the necessary measures for the reimbursement of that money improperly appropriated by the officials currently being investigated, as well as the remaining balance of the profits in favour of the District of Barranquilla.

- Order Triple A, S.A.: i) to adopt the immediate measures of restitution of resources by the order of $ 237,836,823,242, for which it is imperative that it impose the formulation of an immediate recovery plan for resources paid to Inassa and ii) that the recovery of resources is made with charge to the shareholding, benefits and other rights and income or assets of Inassa in Colombia and abroad and iii) with the resources the quality of the service is improved and/or the stabilisation or reduction of tariffs.

- Order the Superintendency to adopt and implement the immediate and effective measures for performing effective surveillance and control over the contracting, administration and accounting of Triple A.

Furthermore, the following were sought as interim measures:

- The immediate suspension of the execution and payment of the technical assistance agreement.

- The initiation or immediate response plan is ordered, in which the way that Inassa proceeds to return the money that has been cancelled during the technical assistance agreement is considered.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

- The immediate seizure and confiscation of the shares held by Inassa in Triple A and, in general, the seizure and confiscation of the shareholding, rights, income and assets of Inassa in Colombia and abroad are ordered.

- The seizure and confiscation of the benefits that Inassa should receive within the carrying out of social activities in Triple A.

On 29 June 2018, a written opposition to the interim measures was presented. The main arguments were related to the non-compliance with the requirements set forth in Article 231 of the Code of Administrative Procedure and Administrative Disputes (CPACA) (absolutely all the requirements were not met), in addition to its decree seeking to obtain the result of a judgement of conviction in advance.

On 9 July 2018, the suit was defended. Legal, procedural and substantive arguments were presented. As of the approval date of these annual accounts, the Administrative Court of Cundinamarca is expected to issue a judgement on the requested interim measures (after analysing the objection arguments presented by Inassa) and to convene a compliance hearing, following the procedure set forth in law 472 of 1998.

The Management and the Directors of the Company, based on the reports and opinions issued by their legal advisors hired to these affects, have taken into account the available information. Given that the evidentiary stage has not yet taken place, they conclude that it is impossible to anticipate i) if the court will not rule on one or more interim measures ii) if the process ends by a compliance agreement and iii) the meaning of a possible judgement. Therefore, they consider that at this date it is not necessary to register provisions or allocation in the equity of the Company or the Group.

However, it cannot reasonably be ruled out that, as the different investigations or judicial or administrative proceedings progress, contingencies will arise that imply new operational and financial risks, which could eventually affect the true and fair view of the equity, the financial situation and the profits and losses of the Company and its Group as of 31 December 2017, as well as its cash flows, which are reflected in the Individual and Consolidated Annual Accounts and in the corresponding Management Reports and Briefs, which shall be duly noted in the relevant accounting documents.

The Board of Directors of CANAL DE ISABEL II, S.A., at the meeting held on 26 June 2018, agreed in accordance with Article 18 of the Articles of Association to appoint Mr. Pedro Manuel Rollán Ojeda as new Chairman of the Board of Directors, replacing Mr. Ángel Garrido García.

During the 2017 fiscal year, the Accounts Chamber of the Community of Madrid completed the comprehensive inspection of the Canal de Isabel II Group for the 2008 to 2015 period. In the month of July 2018, the definitive report was published, which includes a series of recommendations that will not affect the present annual accounts and that the Group will consider for its future planning.

The Board of Directors, at its meeting held on 19 September 2018, approved declaring the real estate properties (plots, commercial premises) unnecessary and alienable, and their disposal through the processing of an electronic public auction record, in accordance with the provisions of Article 50.4 of Law 3/2001, of 21 June, of the Assets of the Community of Madrid, respecting the principles of advertising and concurrence. The Management and the Administrators of the Company estimate that the recoverable value of this property will be greater than its book value.

On 3 October 2018, the Office of the Prosecutor General of Colombia resolved to order the interim measures to suspend the power of disposal, seizure and confiscation concerning eighty-two percent (82%) of the share capital of Triple A de Barranquilla, of which Inassa, S.A. is the holder.

The interim measures imposed by the Office of the Prosecutor General of Colombia are governed by the provisions established in Article 89 of the law 1708 of 2014. These interim measures shall not be extended for more than six (6) months, a term within which the Office of the Prosecutor must define whether the actions must be filed or if, on the contrary, it is appropriate to file a claim for asset forfeiture.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

At the time of this reformulation of Accounts, the Office of the Prosecutor has not yet filed the claim for asset forfeiture before the corresponding judicial body.

Canal de Isabel II, S.A. plans to appear before the Guarantee Control Judge, through its representatives in Inassa, to defend the interests of this entity and preserve its economic and property rights.

The ordered interim measures imply, among other aspects, that Inassa cannot carry out the exercise of the rights that correspond to the activities affected by those measures or that derive from said activities.

The Special Assets Company (SAE) assumes the management of Inassa’s involvement while the effectiveness of the interim measures remains. Although the interim measures do not affect the ownership of the repeated shares, which continue to be the property of Inassa and the asset forfeiture has not been carried out, in accordance with the International Financial Reporting Standards, dated 3 October 2018, the Canal de Isabel II Group loses the indirect control it held until then over Triple A de Barranquilla.

Furthermore, in accordance with the applicable accounting legal framework, the Group will recognise as of 3 October 2018 the investment retained in Triple A de Barranquilla due to its fair value. Given the legal uncertainty and the lack of sufficient information derived from the preliminary situation the process is in, it is not possible to determine it. However, depending on the clarification of the status of the legal proceedings, work will continue on the determination of fair value and, where appropriate, the impacts on the Group's accounting records will be recognized. Likewise, this uncertain situation means that the hypotheses considered in the impairment test that the company periodically and recurrently updates may not be valid in cases in which the currently open legal proceedings are carried out against the interests of the Canal de Isabel S.A. Group.

The Canal de Isabel II Group S.A. contracted the services of an independent expert in order to determine the accounting impact of this event in the annual accounts. For the purposes of the reformulation of annual accounts, a subsequent type II event is considered. In accordance with the General Accounting Plan (RD 1514/2007), this is a subsequent event that did not exist at the close of the fiscal year but that must include information in the annual accounts, regarding the nature of the said event together with an estimate of its effect or, where appropriate, a statement about the impossibility of making such an estimate. Furthermore, the subsidiary Canal Extensia, S.A.U., dated 3 October 2018, must derecognise the investment in the equity of Group companies and register a financial asset available for sale appraised at fair value.

Due to the legal uncertainty and the lack of existing information derived from the preliminary situation in which the aforementioned process is at the date of final formulation of the attached annual accounts for the 2017 fiscal year, the management and administrators of the company have not been able to determine the fair value by which the investment in Triple A de Barranquilla will be valued in the annual accounts of INASSA once the loss of control over it is registered. However, depending on the status of the legal proceedings, work will continue on the determination of fair value and, where appropriate, the impacts on the corresponding accounting records will be recognised. Likewise, this uncertain situation means that the hypotheses considered in the impairment test that the company periodically and recurrently updates may not be valid in cases in which the currently open legal proceedings are carried out against the interests of the Canal de Isabel S.A. Group.

However, it cannot reasonably be ruled out that, as the different investigations or judicial or administrative proceedings progress, contingencies will arise that imply new operational and financial risks, which could eventually affect the true and fair view of the equity, the financial situation and the profits and losses of the Company and its Group as of 31 December 2017, as well as its cash flows, which are reflected in the Individual and Consolidated Annual Accounts and in the corresponding Management Reports and Briefs, which shall be duly noted in the relevant accounting documents.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Due to the lack of liquidity of Inassa to take care of their obligations, on 23 November the Board of Directors of Canal de Isabel II, S.A authorised an Intercompany operation to Canal Extensia, S.A.U - Inassa, for an amount of 38 million dollars, including in this figure the amounts owed by Inassa to Canal Extensia, S.A.U.

Likewise, the aforementioned Board of Directors approved the concession by Canal de Isabel II, S.A. of an Intercompany loan to Canal Extensia S.A.U for an amount of 4 million euros.

Except for the foregoing, there have been no subsequent events since the close of the 2017 fiscal year and until the date of reformulation of these annual accounts.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

APPENDIX I.- DETAILS OF JOINT VENTURES AT 31 DECEMBER 2017 AND 2016

Details of joint ventures at 31 December 2017 Appendix I 2017 Thousands of Euros % ownership

Name Registered office Activity Type Direct Indirect Total Net sales

c/ Federico Salmón, 13 Management of water cycle supply and sanitation for Aguas de Alcalá UTE 50% - 50% 14,459 – Madrid the city of Alcalá de Henares (province of Madrid)

Details of joint ventures at 31 December 2016 Appendix I 2016 Thousands of Euros % ownership

Name Registered office Activity Type Direct Indirect Total Net sales

c/ Federico Salmón, 13 Management of water cycle supply and sanitation for Aguas de Alcalá UTE 50 % - 50 % 14,421 – Madrid the city of Alcalá de Henares (province of Madrid)

This Appendix forms an integral part of notes 1 and 6 to the annual accounts, in conjunction with which it should be read.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) APPENDIX II (1) – DETAILS OF GROUP COMPANIES AT 31 DECEMBER 2017 AND 2016

Details of group companies at 31 December 2017 Appendix II (1)

2017

% ownership Thousands of Euros

Total Company Registered address Activity Auditor Direct Indirect Total Capital Reserves Other equity Profit/loss Own Total equity Capital

Canal Extensia, S.A.U. Santa Engracia, 125 - Madrid Share-holding company KPMG 100.00% - 100.00% 80,600 59,651 - (945) 139,306 139,306

Water-related maintenance, operation, Hispanagua, S.A.U. (1) San Enrique, 3 – Madrid KPMG 100.00% - 100.00% 1,188 3,042 165 447 4,842 4,842 distribution and sanitation services

Public service operation of terrestrial mobile Canal de Comunicaciones Unidas, S.A.U. Santa Engracia, 125 – Madrid KPMG 100.00% - 100.00% 4,620 4,282 - 939 9,841 9,841 radio-communications in the Madrid area

Hidráulica Santillana, S.A.U. San Enrique, 3 – Madrid Production of electricity KPMG 100.00% - 100.00% 4,753 14,567 334 (4) (41) 19,278 19,613 (5) Ctra. Arrecife-Las Caletas Km. 3,5 – Canal Gestión Lanzarote, S.A.U. Comprehensive water cycle management KPMG 100.00% - 100.00% 60 (1) (15,001) (1,544) (16,486) (16,486) Lanzarote Development or provision of activities that entail the enhancement or use of networks and infrastructures in which Canal de Isabel II, Ocio y Deporte Canal, S.L. Santa Engracia 125-Madrid KPMG 100.00% - 100.00% 3 (1) - 221 223 223 S.A. takes part in the management and in particular in carrying out commercial and sports exploitation activities Canal Energía, S.L. José Abascal, 10 - Madrid Holding company KPMG 80.00% 20.00% 100.00% 4 11 16 (6) 25 25

Canal Energía Comercialización, S.L. José Abascal, 10 – Madrid Sale of electricity KPMG - 100,00% 100.00% 4 189 31 - 224 224

Canal Energía Generación, S.L. José Abascal, 10 – Madrid Production and transformation of electricity KPMG - 100,00% 100.00% 4 (7) 8 - 5 5

Canal Energía Distribución, S.L. José Abascal, 10 – Madrid Distribution of electricity KPMG - 100,00% 100.00% 4 24 (3) - 25 25

Canal Gas Distribución, S.L. José Abascal, 10 – Madrid Distribution of hydrocarbons KPMG - 100,00% 100.00% 4 (1) - - 3 3

Sociedad Interamericana de Aguas y Servicios, Barranquilla (Colombia) Comprehensive water cycle management KPMG - 81.24% 81.24% 32,347 38,749 (24,822) (2,770) 33,504 33,504 S.A.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) Details of group companies at 31 December 2017 Appendix II (1)

2017

% ownership Thousands of Euros

Total Company Registered address Activity Auditor Direct Indirect Total Capital Reserves Other equity Profit/loss Own Total equity Capital

Sociedad Acueducto, Alcantarillado y Aseo de Barranquilla (Colombia) Comprehensive water cycle operator KPMG - 67.91% 80.46% 20,534 29,923 894 13,904 65,255 65,255 Barranquilla, S.A. ESP Gestus Gestión &Servicios S.A.S. Barranquilla (Colombia) Tax management KPMG 80.46% 773 1,387 (1,107) 239 1,291 1,291

Acueducto, Alcantarillado y Aseo Dominicana, Santo Domingo (República Comprehensive water cycle operator KPMG - 52.81% 52.81% 846 85 3,903 185 5,019 5,019 S.A. Dominicana)

Santo Domingo (República Informaciones Remotas, S.R.L. Comprehensive water cycle operator KPMG - 52.80% 52.80% 17 - (52) - (35) (35) Dominicana)

Acueducto, Alcantarillado y Aseo Ecuador, S.A. Samborondón (Ecuador) Management of public resources KPMG - 81.43% 81.43% 315 - (448) 226 93 93

Amagua, CEM Samborondón (Ecuador) Comprehensive water cycle operator KPMG - 57.00% 57.00% 3,286 466 1,541(4) 826 4,768 6,119 (5) Design, maintenance, development, support Amerika Tecnologías de la información, S.A.S. Barranquilla (Colombia) KPMG - 81.24% 65.73% 168 290 (27) 252 683 683 and management Soluciones Andinas de Aguas, S.R.L. Montevideo (Uruguay) Asset investment and holding KPMG - 90.62% 90.62% 4 (1,800) (14,015) (3,791) (19,602) (19,602)

Interamericana de Aguas de México, S.A. Veracruz (México) Comprehensive water cycle operator - - 79.61% 79.61% 70 - (3) (38) 29 29

Mexaqua Veracruz (México) Comprehensive water cycle operator - - 55.73% 55.73% 93 - 29 (78) 44 44 Acueducto, Alcantarillado y Aseo Venezuela, Caracas (Venezuela) Comprehensive water cycle operator - - 80.43% 80.43% 1 - 3 - 4 4 S.A. Maintenance, operation, distribution and Emissao (2) Brazil KPMG - 67.96% 67.96% 8,758 - (423) 258 8,593 8,593 treatment of water

Fontes da Serra Saneamiento de Guapimirim, Brazil Comprehensive water cycle operator KPMG - 66.61% 66.61% 13 - 141 8 162 162 Ltda. (1) Includes joint ventures (Z.V Mejost). See appendix IV. (2) Changes corporate name (3) Includes joint ventures (Consortiums) See appendix IV. (4) Grants, donations and bequests received (5) Includes grants, donations and bequests received This Appendix forms an integral part of notes 1 and 6 to the annual accounts, in conjunction with which it should be read.

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Details of group companies at 31 December 2016 Appendix II (1)

2016

% ownership Thousands of Euros

Total Company Registered address Activity Auditor Direct Indirect Total Capital Reserves Other equity Profit/loss Own Total equity Capital

Canal Extensia, S.A.U. Santa Engracia, 125 - Madrid Share-holding company KPMG 100.00% - 100.00% 80,600 54,987 - 4,663 140,250 140.250

Water-related maintenance, operation, Hispanagua, S.A.U. (1) San Enrique, 3 – Madrid KPMG 100.00% - 100.00% 1,188 2,402 165 658 4,413 4.413 distribution and sanitation services

Public service operation of terrestrial mobile Canal de Comunicaciones Unidas, S.A.U. Santa Engracia, 125 – Madrid KPMG 100.00% - 100.00% 4,620 3,282 - 1,000 8,902 8.902 radio-communications in the Madrid area

Hidráulica Santillana, S.A.U. San Enrique, 3 – Madrid Production of electricity KPMG 100.00% - 100.00% 4,753 14,461 362(3) 105 19,319 19.681 (4) Ctra. Arrecife-Las Caletas Km. 3,5 – Canal Gestión Lanzarote, S.A.U. Comprehensive water cycle management KPMG 100.00% - 100.00% 60 (1) (12,798) (2,203) (14,942) (14.942) Lanzarote Canal Energía, S.L. José Abascal, 10 - Madrid Holding company KPMG 80.00% 20.00% 100.00% 4 - 16 11 31 31

Canal Energía Comercialización, S.L. José Abascal, 10 – Madrid Sale of electricity KPMG - 100.00% 100.00% 4 189 31 - 224 224

Canal Energía Generación, S.L. José Abascal, 10 – Madrid Production and transformation of electricity KPMG - 100.00% 100.00% 4 (7) 8 - 5 5

Canal Energía Distribución, S.L. José Abascal, 10 – Madrid Distribution of electricity KPMG - 100.00% 100.00% 4 24 (3) - 25 25

Canal Gas Distribución, S.L. José Abascal, 10 – Madrid Distribution of hydrocarbons KPMG - 100.00% 100.00% 4 (1) - - 3 3

Sociedad Interamericana de Aguas y Servicios, Barranquilla (Colombia) Comprehensive water cycle management KPMG - 81.24% 81.24% 36,598 32,527 (22,722) (3,838) 42,565 42.565 S.A.

Sociedad Acueducto, Alcantarillado y Aseo de Barranquilla (Colombia) Comprehensive water cycle management KPMG - 67.91% 67.91% 23,232 27,733 1,012 12,452 64,429 64.429 Barranquilla, S.A. ESP

Gestión Integral de Suministros Ltda. Colombia Supply of goods KPMG - 81.24% 81.24% 63 278 - (147) 194 194

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(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) Details of Group companies at 31 December 2016 Anexo II (1)

2016

% ownership Miles de euros

Total Company Registered address Activity Auditor Direct Indirect Total Capital Reserves Other equity Profit/loss Own Total, equity Capital

Recaudos y Tributos, S.A. Barranquilla (Colombia) Tax management KPMG - 80.46% 80.46% 875 1,569 (169) (1,084) 1,191 1,191

Acueducto, Alcantarillado y Aseo Dominicana, Santo Domingo (República Comprehensive water cycle operator KPMG - 52.81% 52.81% 995 100 4,524 68 5,687 5,687 S.A. Dominicana)

Santo Domingo (República Informaciones Remotas, S.R.L. Comprehensive water cycle operator KPMG - 52.80% 52.80% 20 - (61) - (41) (41) Dominicana)

Acueducto, Alcantarillado y Aseo Ecuador Samborondón (Ecuador) Management of public resources KPMG - 81.43% 81.43% 359 - (415) 168 112 112 Agacase, S.A.

Amagua, CEM Samborondón (Ecuador) Comprehensive water cycle operator KPMG - 57.00% 57.00% 3,281 433 1,751(3) 962 4,845 6,427 (4)

Design, maintenance, development, Amerika Tecnologías de la información, S.A.S. Barranquilla (Colombia) KPMG - 65.73% 65.73% 190 328 - (31) 487 487 support and management

Soluciones Andinas de Aguas, S.R.L. Montevideo (Uruguay) Asset investment and holding KPMG - 90.62% 90.62% 5 - (11,104) (17,229) (28,328) (28,328)

Interamericana de Aguas de México, S.A. Veracruz (México) Comprehensive water cycle operator - - 79.61% 79.61% 76 - (111) (18) (53) (53)

Mexaqua Veracruz (México) Comprehensive water cycle operator - - 55.73% 55.73% 101 - 569 - 670 670

Acueducto, Alcantarillado y Aseo Venezuela, Caracas (Venezuela) Comprehensive water cycle operator - - 80.43% 80.43% 1 - 3 - 4 4 S.A.

Maintenance, operation, distribution Emissao, S.A) (2) Brazil KPMG - 67.96% 67.96% 10,110 - (17,045) 16,606 9,671 9,671 and treatment of water

Fontes da Serra Saneamiento de Guapimirim, Brazil Comprehensive water cycle operator KPMG - 66.61% 66.61% 15 - 95 68 178 178 Ltda.

(1) Includes joint ventures (Z.V Mejost). (2) Includes joint ventures (Consortiums) (3) Grants, donations and bequests received (4) Includes grants, donations and bequests received This Appendix forms an integral part of notes 1 and 6 to the annual accounts, in conjunction with which it should be read.

Canal de Isabel II, S.A. · 111 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) APPENDIX II (2) – DETAILS OF ASSOCIATES AT 31 DECEMBER 2017 AND 2016

Details of associates at 31 December 2017 Appendix II (2)

2017

% ownership Thousands of Euros

Total Company Registered address Activity Auditor Direct Indirect Total Capital Reserves Other equity Result Own Total equity Capital

Mazars Communication and telemarketing GSS Venture, S.L. c/ Guzmán el Bueno, 133 – Madrid Auditores 25.00% - 25.00% 60 2,106 (401) (745) 1,020 1,020 services SLP Metroagua, S.A. E.S.P. (1) Santa Marta (Colombia) Comprehensive water cycle operator KPMG - 29.13% 29.13% ------

Avanzadas soluciones de Acueducto y Sourcing, treatment and distribution of Riohacha (Colombia) KPMG - 32.50% 32.50% 559 709 (2,304) (735) (1,771) (1,771) Alcantarillado, S.A. ESP water (1) Information not available. IN the process of liquidation

Details of associates at 31 December 2016 Appendix II (2)

2016

% ownership Thousands of Euros

Total Company Registered address Activity Auditor Direct Indirect Total Capital Reserves Other equity Result Own Total equity Capital

Mazars Communications and telemarketing GSS Venture, S.L. c/ Guzmán el Bueno, 133 – Madrid Auditores 25.00% - 25.00% 60 2,106 - (414) 1,752 1,752 services SLP Metroagua, S.A. E.S.P. Santa Marta (Colombia) Comprehensive water cycle operator KPMG - 29.13% 29.13% 10,730 3,047 65 (26,442) (12,600) (12,600)

Avanzadas soluciones de Acueducto y Sourcing, treatment and distribution of Riohacha (Colombia) KPMG - 32.34% 32.34% 632 802 (3,380) 774 (1,172) (1,172) Alcantarillado, S.A. ESP water

This Appendix forms an integral part of notes 1 and 11 to the annual accounts, in conjunction with which it should be read.

Canal de Isabel II, S.A. · 112 (continúa) Annual Accounts and Directors’ Report Canal de Isabel II, S.A. Annual accounts 2017

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) APPENDIX III.- DETAILS OF RESERVES AND PROFIT AND MOVEMENT FOR THE YEAR ENDED 31 DECEMBER 2017 AND 2016

Appendix III.- details of reserves and profit and movement for the year ended 31 December 2017 Appendix III

Thousands of Euros 2017 Legal reserve Other reserves Total Balance at 1 January 2017 78,878 126,880 205,758 Distribution of profit/(application of loss) for 2016 - - - Appropriation to legal reserve 23,269 - 23,269 Other movements - 58,174 58,174 Balance at 31 December 2017 102,147 185,054 287,201

Details of reserves and profit and movement for the year ended 31 December 2016 Appendix III

Thousands of Euros 2016 Legal reserve Other reserves Total Balance at 1 January 2016 55,677 68,879 124,556 Distribution of profit/(application of loss) for 2015 - - - Appropriation to legal reserve 23,201 - 23,201 Other movements - 58,001 58,001 Balance at 31 December 2016 78,878 126,880 205,758

This Appendix forms an integral part of note 16 to the annual accounts, in conjunction with which it should be read.

Canal de Isabel II, S.A. · 113 (continúa)

DIRECTORS’ REPORT 2017

Canal de Isabel II, S.A. · 114 (continúa)

Canal de Isabel II, S.A. · 115 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

1. Business model

In accordance with its articles of association and the Contract-Programme signed with the Public Entity Canal de Isabel II, Canal de Isabel II, S.A. (hereinafter, the Company) is responsible for running (operation, maintenance and upkeep) the Community of Madrid General Network and provides the water supply, sanitation and reuse services for this network, which until 30 June 2012 were rendered by the Public Entity Canal de Isabel II.

The Company’s strategy throughout 2017 focused on three essential areas: to confirm that water cycle management is a public service; develop the comprehensive water cycle bearing in mind long-term technical, economic, social and environmental aspects; and to offer users in the Community of Madrid, under the principle of territorial solidarity, quality water at a fair price, guaranteeing the perpetuality and high performance level of the water, hydro-electric, energy and technological assets and infrastructures that are owned by the company or for which they have been entrusted the management thereof.

Accordingly, the targets throughout the year have been: - To guarantee the comprehensive water cycle management, implementing investments and policies that guarantee the supply coverage, quality thereof and sustainability and compliance with environmental requirements. - To strengthen the efficient use of the resource, carrying out specific measures such a recycling water, searching for new sources and reducing losses through technical reasons and through fraud. - To boost the efficiency and transparency of support processes: information technologies and control, R&D&i, HR, infrastructure safety, quality and environmental management systems, financial and risk management, etc. - Ensure compliance with occupational health and safety policies and develop a framework of socio- occupational relationships that strengthen the company-collaborator relationship. - Optimise corporate management processes, together with the company’s commercial policies, making users the focus of the service.

1.1 Strategic map

The Company has presented its new Strategic Plan for 2018 to 2030 as the starting point for redefining its medium and long-term position. The new plan establishes the company’s objectives, using and extending those previously mentioned, outlining the strategies needed to achieve these.

The aim of this strategic plan is to strengthen the pubic nature of the company and focus on providing an excellent service for the community of Madrid. In this regard, the company has established the following objectives: to promote the company’s leadership in the comprehensive water cycle management and to include all the towns of Madrid in its management model. At the end of 2017, 111 towns form part of the shareholder structure of Canal de Isabel II out of the 179 in the region.

Likewise, the aim of the Plan is to address the following key challenges for the water sector: to maintain fair and accessible rates as a public and essential service, tackle the consequences of population growth and climate change, incorporate new regulations and new technologies, increase customer and user satisfaction and develop skills and manage the talent of its professionals. The last significant aspect of this Plan is to strengthen corporate values of commitment, accessibility, transparency, innovation, talent and economic and environmental sustainability.

Canal de Isabel II, S.A. · 1 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The Plan is based on 10 strategic lines:

1) To guarantee the supply, establishing a reduction of 25% of the volume of diverted water for consumption in 2030.

2) To guarantee the quality of drinking water.

3) To strengthen service continuity.

4) To boost environmental quality and energy efficiency. The company hopes to achieve a level of self- consumption of 100% through renewable energies by 2030.

5) To develop cooperation with the towns of Madrid.

6) To strengthen the commitment to and relationship with users.

7) To foster transparency, good governance and commitment to society. Accordingly, among other measures, a Water Observatory shall be created to integrate all the stakeholders of the community of Madrid.

8) To foster talent, commitment and health of workers. In this regard, the challenge faced by the company to retain talent will be addressed. Furthermore, the Company will create the new advanced water Study Centre to train future sector professionals.

9) To spearhead innovation and development. Innovating in its activities to be a leader in the water sector and develop technologies and services demanded by customers in the future.

10) To ensure sustainability and efficiency in management. This strategic line includes the targets of reducing debt, establishing accessible and supportive rates and to be an economic growth instrument in the region.

This is an ambitious plan, involving an investment of over 1,500 million euros in the next 5 years. Likewise, the company will freeze its rates until 2019 and extend the social rate to social housing and flats managed by non-profit public and private institutions.

Its activities include the Plan Sanea to modernise and improve sewerage systems and to develop the most efficient sanitation system in Spain, the Plan Red to standardise the materials used in its pipelines and the Plan Smart Region to install smart meters.

In short, this Plan aims to establish the bases for enabling Canal de Isabel II to achieve its mission: “look after our Community by managing the water of everyone with transparency, efficiency and sustainability". This will enable the Company to be a European leader in terms of quality and technology and establish the Community of Madrid as a centre of international excellence in the area of water and circular economy.

In order to maintain its long-term position, the Company plans to grow in all areas, but without investing capital in other regions, limiting the international presence to consultancy and technical assistance tasks. Accordingly, this strategic plan includes the sale of all the companies in Latin America through an orderly and transparent procedure that ensures maximum profitability will be obtained.

Canal de Isabel II, S.A. · 2 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

2. Business progress

Business indicators 2017 2016 2015 Number of customers (thousands) 1,466.89 1,448.93 1,429.81 Population supplied (thousands) 6,298.73 6,254.41 6,210.51 Diverted water for consumption (Hm3) 504.29 491.48 497.67 Reservoir supply index (months) 11.59 16.18 13.20 Index of breakages per 1000Km on the distribution network 111.07 113.86 137.28 Average collection period (days) 51.92 54.23 54.42 Average payment period (days) 38.68 33.50 31.01 * The indicators do not include information about the Caceres Concession or the Alcalá de Henares temporary joint venture.

Throughout 2017, the Group continued with the lines of action aimed at meeting the aforementioned targets, seeking an increasingly more efficient management system for available water resources, taking into account the lack of water in the region of Madrid and the foreseeable consumption progress in the future.

Therefore, as part of the continuous improvement process, throughout the year the systematic incorporation of the most advanced technologies available have continued to be boosted to be used in different processes, with the aim of always offering the best product quality and in the services rendered, trying to also minimise the impact on the environment.

The important work carried out by the Parent to fulfil its targets are testament to the commitment to, and involvement in, the wellbeing of the people of the Community of Madrid and with sustainable development, optimising the consumption of natural energy resources and raw materials.

Specifically, in 2017, the volume of diverted water for consumption in the Community of Madrid rose by 2.61% compared with the preceding year. Beyond the general trend of consumption containment, the annual variations, are more dramatic due to meteorological reasons, particularly with regard to the variation between years in terms of rainfall and temperature the middle of the year. Specifically, 2017 was a particularly dry year, therefore it ended with the lowest water reserves in Spain since 1995. Despite this, the water reserves managed by the Company are 50.8% higher than the average in the Tajo Hydrographic Demarcation (37.6%) and above the national average (38.9%).

Therefore, as a result of the drought and the high temperatures this year, the population consumed more water and the hm3 invoiced increased by 2.47% compared with those invoiced in 2016. Likewise, the network performance optimisation measures and invoicing, detection and fraud prevention measures also contributed to the increased turnover.

Particularly noteworthy in the set of Plans concerning Supplies, are the actions aimed at reducing uncontrolled water, through greater metering precision, efficient planning in the network renewal, pre- locating leaks, fraud inspection and detection campaigns, etc. The operating efficiency ratio in terms of percentages of diverted and invoiced water remained constant with regard to 2016 and improved by 1.29% with regard to 2015.

Likewise, the distribution system sectorisation works enable improvements in pressure management which, together with the other aforementioned actions, are resulting in a significant drop in the number of system breakages. More than a 43% accumulated reduction in the last 8 years in the number of general pipe breakages and 42% in connections.

Canal de Isabel II, S.A. · 3 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

In this regard, the resources used for maintaining and conserving the network, detecting and preventing leaks, and, in general to improve efficiency in the system management processes, are obtaining, not only operational improvements and reductions in the loss of water, but they are also aimed at improving customer service, insisting on the reduction of the average interruption time through breakdowns and the frequency indices and interruption impact per contract.

In terms of water for consumption, the Company has intensified actions aimed at reducing customer complaints regarding the quality of water. Therefore, the % of samples that comply with regulatory requirements is 97.3% in 2017, a ratio in line with that of 2016. The information regarding the actions and measures established by the company to guarantee the quality of the water in section 6. Certifications and quality of this report has been extended.

In terms of Sanitation, in 2017, the Company continued to carry out actions established in the National Water Quality Plan, to comply with Framework Water Directive 2000/60/CEE, water treatment plants must have the necessary processes to eliminate phosphorous and nitrogen. This obligation entails carrying out a series of investments with the aim of equipping the treatment plants with advanced processes for eliminating nutrients. In 2017, the investment associated to this programme amounted to 43.5 million euros.

Another Plan that has been carried out for a number of years is the extension of the supply of recycled water for irrigating parks and gardens, cleaning streets and for use in industrial processes. Details are extended in section 7. Environment.

Accordingly, the commitment to optimise efficiency in the use of water, as a resource, not only focuses on reducing water losses but also on carrying out specific recycling initiatives and seeking new sources to obtain it because water recycling is an essential component in the comprehensive management of water resources in accordance with environmental sustainability, contributing to the net increase thereof.

With the main aim of increasing the availability of water resources in the region of Madrid, as well as the aforementioned plans regarding the reduction of the loss of drinking water and the use of recycled water, in recent years, a plan has been underway to optimise the volume of water transferred from the Guadarrama River to the Valmayor Reservoir. Thanks to this plan, greater knowledge has been obtained regarding the quality of water from the Guadarrama River, improvements have been made to the sanitation system and water treatment plants that discharge into the river, resulting in environmental improvements and in the quality of the river water.

The result of all these optimisation activities and measures is reflected in the progress made in recent years regarding diverted water for consumption, which has maintained similar levels, or even lower, than those of 1990. This consumption containment in recent years is particularly significant bearing in mind the population increase of the Community of Madrid, more than 1.4 million (28%) since 1998, greater pressure through the seasonal population and that in recent years, there has been no form of use limitation due to drought. All of this reflects the high degree of efficiency of the water supply system in the Community of Madrid.

Lastly, from the company's operating cash flow point of view, the average payment period and the average collection period remained stable in recent years.

Furthermore, as a result of the legal action initiated in Spain in relation to possible cases of corruption and irregularities in the purchase of Emissão, mentioned in Point 7.2 of this report, the Colombian control entities began requesting information in 2017 from INASSA and all the companies forming the corporate group, with the aim of obtaining information about transactions between related companies,

Canal de Isabel II, S.A. · 4 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) capitalisations and technical assistance agreements. For its possible impact on the business, it must be noted:

Office of the Attorney General:

On 22 June 2018, as is detailed in Point 10 “Subsequent events”, notification was received from the Public Interest Claim presented by the Office of the Attorney General before a court in Cundinamarca. The claims and interim measures included in the Public Interest Claim, if materialised, would have a significant impact on the business of the Inassa Group.

Inassa presented a written opposition to the interim measures and defended the suit on 29 June and 9 July 2018 respectively. As of the approval date of these annual accounts, the Administrative Court of Cundinamarca is expected to issue a judgement on the requested interim measures (after analysing the objection arguments presented by Inassa) and to convene a compliance hearing, following the procedure set forth in law 472 of 1998.

The administration of the company, based on the reports and opinions issued by their legal advisors, taking into account the available information and given that the evidentiary stage has not yet taken place, conclude that it is impossible to anticipate i) if the court will not rule on one or more interim measures ii) if the process ends by a compliance agreement and iii) the meaning of a possible judgement.

Office of the Prosecutor General:

On 20 March 2018, the Office of the Prosecutor General of Colombia issued a press release informing of the development of Phase I of "Operación Acordeón" with the arrest of a former manager of Triple A de Barranquilla, accused embezzling 27.88 billion Colombian pesos (7,790 thousand Euros) of operations allegedly not carried out in Triple A de Barranquilla. The same press release refers to the summons to answer to charges submitted to the managers and historical chairpersons of Triple A de Barranquilla and Inassa in relation to the technical assistance agreement between the two companies.

On 3 October 2018, the Office of the Prosecutor General of Colombia resolved to order the interim measures to suspend the power of disposal, seizure and confiscation concerning eighty-two percent (82%) of the share capital of Triple A de Barranquilla, of which Inassa, S.A. is the holder.

At the time of this reformulation of Accounts, the Office of the Prosecutor has not yet filed the claim for asset forfeiture before the corresponding judicial body.

Canal de Isabel II S.A. plans to appear before the Guarantee Control Judge, through its representatives in Inassa, to defend the interests of this entity and preserve its economic and property rights.

Canal de Isabel II, S.A. · 5 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

3. Business turnover

Business turnover (millions of Euros) 2017 2016 Variation % Net sales 885.74 866.78 2.19% EBITDA 367.60 332.00 10.72% Depreciation (110.94) (109.77) 1.06% Operating profit 271.36 236.89 14.55% Financial result (9.12) (10.66) (14.46%) Net income 261.89 232.69 12.55% Other financial indicators 2017 2016 Variation % Other net financial debt (millions of Euros) 752.11 921.33 (18.37%) EBITDA/Business turnover 41.50% 38,30% 3.20% Net financial debt / EBITDA 2.05 2.78 (26.27%)

Turnover increased by 2% with regard to the preceding year despite the tariff remaining constant. This increase is directly related to the increased number of customers and the volume of water billed.

Despite the increased activity, operating costs reduced compared with the preceding year thanks to the optimisation of resources and operating efficiency improvements, which have enabled the company’s operating profitability to improve, reaching an EBITDA/Business turnover of 41.5%, with the EBITDA increasing by 11% compared with 2016.

Particular mention should be given to the complete cycle management and to the supra-municipal nature thereof, enabling not only costs to be covered but also to obtain a much higher margin thanks mainly to the economies of scale and synergies in the activity.

The following significant exceptional events occurred during the year:

- New Collective Agreement: In 2017 the Collective Agreement for Canal de Isabel II, S.A. has begun to be applied, which standardises salaries and conditions of the various groups within the company. The impact will gradually continue in 2018 and 2019. - Impairment reversal and provision of facilities Third Water Tank: During 2017, the impairment has been partially reversed by a sum of 991 thousand euros, for the tank three sports facilities on calle Islas Filipinas in Madrid and as a result of Order 287/2017, of 9 February 2017, declaring the urgency and general interest of the use and activities regarding open spaces and basic sports areas of the Third Water Tank, therefore they are legal in terms of urban planning given the compatibility thereof with the General Plan for Urban Zoning for Madrid. Furthermore, the Company partially reversed the allocation of demolition and dismantling costs by 3,225 thousand euros. The interannual variation is higher, since it was in 2016 when the impairment was recognised for the sports facilities located in the Third Water Tank of Islas Filipinas, and as a provision for estimated dismantling costs.

The financial result improved with regard to the preceding year as a result of the reduction of average debt and the subsequent financial costs.

Canal de Isabel II, S.A. · 6 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The Tax expense is higher than the preceding year due to the reversal carried out in 2016 of deferred liabilities from non-current investments in group companies and associates pursuant to the resolution of the Accounts and Accounting and Auditing Institute of 9 February 2016 and Corporate Income Law 27/2014.

Net income increased by 29.1 million euros compared with 2016 as a result of the aforementioned operating improvements.

Despite the significant investments made during 2017 and that a pay-out of 65% has been maintained, the same as in previous years, the company has continued to reduce its level of debt. The net financial debt dropped by 169.2 million euros, with the net financial debt /EBITDA ratio reaching 2.05 at the end of 2017, compared with 2.78 at the end of 2016.

4. Investments

The cashflow generated in operating activities were mainly used to address the significant volume of investment carried out in 2017, which amounts to 153.5 million euros in construction works and projects (compared with 167.3 million euros in 2016), placing the Company among the companies with the highest investment made in the Community of Madrid.

It should be pointed out that this figure includes investments considered replacement investments, pursuant to the standard to adapt to the General Accounting Plan for public infrastructure concessionaire companies and that pursuant to this standard, they have not been activated by the Company as a greater value of Assets, instead, they have been applied to the provision for replacement actions for a sum of 63 million euros (64.6 million euros in 2016).

The most significant investments made by the Company are the result of the aforementioned targets of guaranteeing a satisfactory level of operation, maintaining the levels of productive efficiency and competitiveness, the extension and improvement of the transport and distribution network and the storage capacity, the upgrading and modernisation of the sewerage treatment system and the expansion of recycling infrastructures. The following table illustrates the volume of investment for each of the different categories:

Investment by categories (Millions of euros) 2017 2016 2015 Supply guarantee 55.65 73.72 66.65 Quality assurance 3.60 5.11 12.63 Environmental commitment 56.67 52.95 59.15 Technological innovation 18.39 15.07 15.92 Upgrading the general services of Canal de Isabel II 12.03 3.78 18.93 Other investments 7.20 16.62 40.78 TOTAL 153.54 167.25 214.06

As part of the investments aimed at guaranteeing the supply, particularly noteworthy are investments aimed at the renovation of the distribution network. In terms of those aimed at environmental commitments, the most significant investments are related to the upgrade plan for the sewerage treatment system and the extension of the supply of recycled water. Other investments mainly include technical compliances, in 2015 an additional 39 million euros were included for the Cáceres City Council Concession.

Canal de Isabel II, S.A. · 7 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

During 2017, in water supply the work carried out on the Ramal Este pipeline on the Torrelaguna System to supply all the system’s municipalities have begun. Part of the route for the drain channel on the upper deposit of Torrelaguna has been modified, together with the construction of regulating tanks in the towns of Algete and Cobeña, Valdeolmos-Alalpardo and Fresno de Torote. In the east of the Community of In the eastern area of the Community of Madrid, particular mention should be given to the execution of a new pumping station and the doubling of the Villalbilla-Anchuelo-Santorcaz Branch to guarantee the supply in the towns of Villalbilla, Corpa, Anchuelo and Santorcaz. Improvements have been made and wells B-4, B-4 bis and B-6 of the Batres area have been upgraded.

In the area of sewerage disposal, particularly noteworthy are the extensions in the treatment capacity of the sewerage disposal stations of Villamantilla, Molar-Sur and Miraflores de la Sierra, to adapt their treatment capacity, meet urban development growth expectations and adapt the quality of the effluents in accordance with the National Plan on Water Quality. The optimisation of the dehydration process on the Arroyo Culebro Cuenca Media Alta wastewater treatment station and the energy efficiency improvements with the construction of a Cogeneration facility on the Alcalá West wastewater treatment station. Phase II of the Minerva project has been activated for the supply, installation and maintenance of the continuous monitoring stations for the quality of the wastewater in various wastewater treatment stations.

The most significant ongoing projects at the end of 2017, are the extension of the El plantío wastewater treatment station, the construction of a new sludge line in the Casaquemada wastewater treatment station, Construction Works required in the Arroyo de la Vega and Aranjuez wastewater treatment stations to comply with the National Water Quality Plan, the construction of recycling plants in Algete and Rivas-Vaciamadrid and reinforcing the east branch of the Torrelaguna system in its 1st phase, the works on the collectors and the wastewater treatment station of Algete II.

To preserve its benchmark strategic position in the integrated water cycle sector, throughout 2017 the Company maintained its policy of developing projects for the ongoing improvement of its management information systems in different areas, striving to improve the effectiveness and efficiency of operating and support processes by equipping them with the latest technologies for data handling and telecontrol.

Canal de Isabel II’s general communication system covers all the geographical area where it operates, with a network that integrates all the company's communication services (telecontrol and remote control, landlines, mobile telephony and data communication between computers), enabling it to improve the efficiency of its water resources and commercial management, its administration and the services offered to users.

Through its complete telecontrol system it can know, in real time, the water situation in a large number of supply and sanitation infrastructures, the water quality, underground water collections and other similar parameters.

In this respect, in recent years significant progress has been made in the development of a telecontrol system for treatment plants, which in the short term will mean these can be monitored entirely by remote control, optimising facility management, as is already the case in the supply infrastructure. Furthermore, progress is also being made in energy monitoring, with the aim of obtaining data that enable maximum energy efficiency in the entire water cycle.

The Company has also contributed actively to innovative research and studies to increase scientific and technical knowledge in the sector. These initiatives are carried out through the R&D&i plan intended to promote, organise and publicise the Company's efforts and undertakings in this area and through collaborations with different research institutes and universities, focusing on the following lines of work:

Canal de Isabel II, S.A. · 8 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

-Promoting a culture of shared innovation -Improving the company’s internal efficiency and process through R&D&i -Improving service quality and customer involvement -Strengthening the company’s positioning within the sector -Contributing to the improvement of the sector and fostering an understanding and alliances with science and the industry. -Efficiency in R&D&i activities -Contributing to environmental improvements and sustainability Building and maintaining an innovative culture within the company, is one of the essential pillars of the R&D&i strategy, since innovation must come from all areas of the company to obtain results that are sustainable over time.

Canal de Isabel II is one of the companies in the sector in Spain with the highest investment in R&D&i. The new R&D&i Strategy (2017-2020), in line with the Community of Madrid plans (PRICIT), has an economic target of investing 2 per cent of the business turnover in innovation in 2020.

The company takes part and heads international scientific teams aimed at improving water and sanitation services. Therefore, at a European and international level, it takes part in work groups and platforms such as IWA (International Water Association) or WSSTP (Water Supply and Sanitation Technology Platform). In 2017, the Company took part in first Innovative Solutions for Water Management Trade Fair, in which around one hundred companies from 14 countries took part. The Company focused its attention on the following lines of action: extension of the social rate, innovations applied to the distribution network, new solutions for the management of wastewater and obtaining clean water and detecting emerging substances in the treatment of drinking water. The Company also systematically publishes the R&D&i notebooks on its website to present its main projects and studies carried out.

Therefore, in general terms, in all operational and management aspects, the Company maintains its aim of continuing to optimise its operational plans in order to achieve maximum efficiency in the comprehensive water cycle. It therefore incorporates latest updates and technical and management knowledge, including obtaining and managing water resources, the treatment and distribution thereof, wastewater treatment and water recycling, together with commercial and support activities, achieving an integrated planning, management and control system for the comprehensive water cycle, with a commitment to service for customers and preserving the environment.

5. Risk Factors

The Company’s activities are subject mainly to: operational risks (arising from the economic legal and political conditions of the environment in which it operates, together with those inherent to its business) and financial risks (as a result of the volatility in interest and exchange rates).

- Operational risks

The Company's main operating risks arise from the management of a limited resource, water. The availability thereof is directly affected by external weather factors, mainly rainfall and temperatures, beyond the control of the company. Therefore, efficiency in managing this resource is one of its main objectives. In order to mitigate this risk, Canal de Isabel II works on improving its infrastructure to reduce losses, on the amount of recycled water and in awareness-raising campaigns.

Canal de Isabel II, S.A. · 9 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

As it is a company that manages the comprehensive water cycle, it requires a considerable investment in infrastructures and, therefore, it is exposed to possible damages caused to its assets due to external factors. To mitigate these risks, the Company has various insurance policies in place. These policies are reasonably sufficient to cover the carrying amounts of the Company’s tangible and intangible assets.

Given its activity, management of an essential resource, high energy consumptions and large investments, the company'’ operations have a considerable environmental impact. Incorrect management could have a negative impact for the company from a legal and social point of view. The actions and measures carried out by the company to mitigate these risks are outlined in section 7 of this report.

In recent years, the Spanish public sector has been affected by numerous restrictive regulations that have limited the Company’s management capacity in terms of human resources, reducing the possibility of hiring permanent staff and having a negative impact on employment conditions, which has significantly increased staff turnover. This has led to a new operating risk for the company in terms of retaining talent. The mitigating measures and factors implemented by the company in this regard are outlined in section 9 of this report.

Given the 100% public nature of the Company's shareholding structure, and its close relationship with the Government of the Community of Madrid, there is risk of political influence that could result in pressures on the company’s regulatory, operational and/or economic aspects. To mitigate this risk and disassociate the Company’s activities from possible interferences, a Strategic Plan has been established with clearly defined objectives and strategic lines of action that will enable the Company to focus on its mission and achieve its long-term objectives.

The IT security risk has gradually acquired greater relevance give the general use of IT resources and the growing investment in IT and telecontrol systems, to the point of becoming a key element in the company’s activity, from an operational and legal point of view.

From a functional security point of view, an IT security management system has been developed which is transferred to employees via the Terms of Use of IT and Communications Systems. Furthermore, as part of the ICOFR, IT controls have been implemented to monitor and correct, among others, the correct functioning of the security management, availability and continuity of the IT systems and to mitigate the risks inherent to the inappropriate use of such resources.

With regard to data protection, the company has implemented an improvement system in processes related to personal data protection with the aim of guaranteeing the privacy of customers and the protection of their personal data pursuant to the provisions established in applicable regulations, therefore this aspect has been included as part of the quality system.

During the first six months of 2017, a considerable number of large-scale cyber-attacks were recorded, which did not affect the company’s operations or information. However, in 2017, an Outsourced Security Operations Center (SOC) has been implemented to not only strengthen preventive security, but also to improve the capacity of response in the event of a cyber-attack.

Lastly, there is a risk of corruption and bribery, which, if it were to materialise, would have negative legal and reputational consequences. The mitigating measures and factors implemented by the company in this regard are outlined in section 8 of this report.

- Financial risks

After issuing 500 million euros straight non-subordinate bonds in 2015, Canal de Isabel II increased the percentage of fixed-rate debt, standing at 94% at the end of 2017, which reduces the Company's exposure to the risk through interest rate variation.

Canal de Isabel II, S.A. · 10 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

With the aim of controlling the liquidity risk, Canal de Isabel II constantly monitors and controls its cashflows. The Company also has credit facilities for the sum of 138 million euros maturing in December 2018, from which it has not had to draw down any amounts at the end of the year. The company’s cash at the end of 2017 was 127.8 million euros, more than double that of the preceding year (60.8 million euros in 2016). When there is excess liquidity, investments are sought in attractive financial products given their profitability and with the least possible associated risk.

Due to the lack of liquidity of Inassa to take care of their obligations, on 23 November the Board of Directors of Canal de Isabel II, S.A authorised an Intercompany operation Canal Extensia, S.A.U - Inassa, for an amount of 38 million dollars, including in this figure the past amounts owed by Inassa to Canal Extensia, S.A.U.

Likewise, the aforementioned Board of Directors approved the concession by Canal de Isabel II, S.A. of an Intercompany loan to Canal Extensia S.A.U for the amount of 4 million Euros.

The group’s main company in Latin America, Triple A Barranquilla, is undergoing a debt restructuring phase with the aim of having a more suitable financial structure, that can meet current and future financial requirements. The company is negotiating with various credit entities to obtain long-term financing. This credit would enable the company to meet its financial needs to efficiently resolve the normal development of its recurrent operations.

In any event, Canal de Isabel II, S.A. undertakes to provide Triple A Barranquilla with the financial support needed to guarantee the continuity of its operations for a period of fifteen months from the date of formalising these annual accounts.

Specifically, this support, if necessary, will consist in the direct or indirect concession, via Canal de Isabel II, S.A. or via one of its group companies, of financing that ensures the normal development of this company’s activities.

Another risk factor inherent to the group’s activities is possible price pressures, as a result of providing an essential service as is comprehensive water cycle management. Exposure to this risk is clear in the freezing of the tariff programmed in the services provided by the Company since 2016 until 2019. Despite this, improved efficiency in operating and management processes have enabled EBITDA to be increased and profits in recent years.

Despite the Company having an extremely scattered customer population, credit risk is not a significant factor.

- Risk Management

In the risk management area, the Company has established a system for identification, analysis and control of the risks to which its business could be exposed, and which could affect the organisation’s ability to meet its strategic objectives.

This leads to the Company having to consider in ever-greater detail the variety of operational, financial, strategic, fulfilment and reporting risks that could hinder achievement of its objectives, following the internationally accepted COSO methodology. In this regard, the Internal Audit department has been reinforced in recent years in light of its key role in ensuring these targets are met.

The Internal Audit Department carries out its function in accordance with International Standards for Internal Auditing and its internal audits including the Certified Internal Auditor (CIA) and since 2017 it has the first certified Internal Control COSO in Spain, endorsing the excellence in the provision of these types

Canal de Isabel II, S.A. · 11 (continúa)

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of services. Likewise, the Internal Audit Department holds the Quality Certificate, issued by the Internal Quality Assurance Review Auditors Institute (QA).

To strengthen this function since the end of 2014 the Company has an audit committee, to support the board of directors in their supervisory duties. The committee's key responsibilities are monitoring the effectiveness of the Company's internal controls, internal audits and risk management systems, supervising the preparation and presentation of regulated financial information, as well as the independence of the external auditor.

The Company, since 2015, has also implemented a system Policy for internal control for Financial Reporting (ICFR) aimed at managing risks regarding financial reporting identified and assessed by the Financial Management and Business Development.

Apart from the internal control and internal auditing activities, there are also external fiscal control mechanisms in place. The Audit Chamber controls the fiscal activity of the Public Sector in the Community of Madrid, the external Auditor issues a report on the image of the financial statements. The NSMC demands increased control and transparency in the Company’s activities and verifications and inspections are conducted by the Tax Agency, the European Court of Auditors in fund projects among others.

During the 2017 fiscal year, the Accounts Chamber of the Community of Madrid completed the comprehensive inspection of the Canal de Isabel II Group for the 2008 to 2015 period. In the month of July 2018, the definitive report was published, which includes a series of recommendations that the Group will consider for its future planning.

During 2017, the Audit Chamber completed the comprehensive inspection of the Canal de Isabel II Group for the 2008 to 2015 period. Despite the Audit Chamber not issuing its conclusions yet, significant impacts are not expected.

Furthermore, on 19 April 2017, the Company received a communication regarding the start of inspection, verification and investigation actions for Corporate Income Tax, Value Added Tax and Withholdings/Payments towards/against Earned Income for the 07/2012 to 12/2015, 03/2013 to 12/2016 and 03/2013 to 12/2016 periods respectively. In any event, the Company’s

Directors believe that these liabilities, should they occur, shall not have a significant effect on the Annual Accounts.

On 23 May 2018 the Court of Investigation No. 6 of the Spanish National Court, in response to the request submitted by the Central Office of High-Income Taxpayers of the Tax Agency, issued an Order that provides for the suspension of ongoing inspection proceedings until the criminal investigation advances and the need to maintain it can be specified in greater detail.

6. Certifications and Quality

The Company has implemented and certified a Quality, Environmental and Occupational Health and Safety Management System in accordance with standards ISO 9001:2015, ISO 14001:2015 and standard BS OHSAS 18001:2007, the scope of application of which includes, apart from the analytical control of the water supply specifically established in the quality certificate, the collection, treatment, sale, bottling, distribution and quality control of drinking water in the Autonomous Community of Madrid, together with the treatment of wastewater in the same area with the exception of the municipality of Madrid.

Canal de Isabel II, S.A. · 12 (continúa)

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In May 2017, the Quality and Environmental certification audits were conducted, pursuant to the new standards ISO 9001:2015 and ISO 14001:2015, with favourable results for the development and permanent improvement of the Management System. At the same time, the first monitoring audit for the Occupational Health and Safety certification was conducted in accordance with standard BS OHSAS 18001:2007, with the same result.

The established Management System enables the optimisation of processes related to the management of the comprehensive water cycle and continuous improvement thereof. In particular, consideration of environmental factors in all its decisions is pivotal in terms of actively contributing to environmental conservation and improvement.

In March 2017, the National Accreditation Agency ENAC granted accreditation for technical inspection of the Canal de Isabel II valuation complex, in accordance with Standard UNE-EN-ISO/IEC 17020:2012, as a pioneering accreditation in the sector, culminating a project carried out since the middle of 2016 by the relevant departments.

In 2017, the company took part in the plenary session held in Madrid, for the International Normalisation Committee ISO/TC 282 on recycling of water and their work groups, offering a technical visit to the Arroyo Culebro wastewater treatment station. It also actively took part in the activities and work groups of the International Normalisation Committee ISO/TC 224 on activities relating to drinking water and wastewater services, service quality criteria and implementing indicators.

Since the end of 2017, the Company has formed part of the Spanish Executive Quality Commission (AEC) and the AEC’s Center of Registration and Certification of People (CERPER).

The company plans to continue working on maintaining existing certifications in their respective areas of application, notwithstanding that, for specific actions being carried out by the relevant departments, the guidelines set forth in other International standards are being used as a reference (39001:2015 on road safety, 27001:2013 on information security and 22000:2005 on food safety), gradually integrating these into the Management System.

The Company has a network of 40 automatic surveillance stations (ASSs), for drinking water quality, equipped with 300 sensors, enabling a series of parameters to be measured and sent in real-time to the Control Centre to maintain a permanent alert system.

In 2017, the Canal de Isabel II Meter Laboratory was appointed collaborator of the Spanish Metrology Centre (CEM). It is therefore the National Laboratory of Reference in meter and flowmeter testing and calibrations.

The company also has 21 laboratories (16 for consumption water and 5 for treated water) for water quality where an analysis of water for human consumption is carried out every three and a half seconds (over 9.5 million analyses per year) to guarantee quality excellence.

In 2017, Canal de Isabel began the activities in the new Collado Villalba Laboratory. The new facility enables samples and analyses of water for human consumption for all the towns in the northeast area of the Community of Madrid to be taken.

Canal de Isabel II, S.A. · 13 (continúa)

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7. Non-financial information

Environment

Canal de Isabel II understands that, since it manages an essential resource for life such as water, it should be a reference model in terms of environmental protection. Therefore, as a company in charge of wastewater treatment and appropriate disposal, the Company goes one step further in legally complying with its obligations, because apart from producing high quality water and managing its wastes, it strives to achieve sustainable development and to foster the circular economy, addressing the challenges associated with climate change.

In this regard, the Company is firmly committed to environmental protection by using resources in a sustainable manner, preventing contamination of water ecosystems and soil, continuously improving company – environment interrelations, complying with environmental requirements, generating trust, image and positioning with regard to the relevant community, by optimising processes in operations, environmental culture and human talent, maximising value invested in the environment and strengthening relationships with control bodies.

The Company has 37 cases open for a breach of environmental regulations (25 in 2016). These cases are in various phases of the procedure and appeals have already been filed against a number of these through administrative proceedings or even through actions under contentious-administrative jurisdiction. However, based on past experience and the estimated success of these resources, the Company has not felt the need to recognise any provision for environmental risks and expenses.

The Company has insurance policies that reasonably assure the coverage of any possible contingency that could arise from its environmental activities. Since June 2010 the Company, as the affected operator, has held an insurance policy to cover the potential risks deriving from the entry into force of Law 26/2007 on environmental responsibility and Royal Decree 2090/2008, which implements that Law. This policy was arranged for the maximum financial guarantee stipulated in the Law, i.e. 25 million euros.

Since 2012, Canal de Isabel II has had a Water Safety Plan in place (hereinafter, WSP) to guarantee the safety of the water supplied, which consists of a comprehensive risk assessment and management system via all the stages of supply, from the collection basins to distribution to consumers.

The outline proposed by the World Health Organisation (WHO) and by the International Water Association (IWA), have been used as a model and the adaptation developed by the Risk Management workgroup of the European Federation of National Associations of Water and Wastewater Services (EUREAU).

As a result of the WSP, a series of improvement initiatives have been planned for the installations, to be carried out over various years, which should contribute to the fulfilment of the system's objectives and reduce the identified critical points. These include the implementation of new collection towers in the Navacerrada, La Jarosa and Pozo de los Ramos Dams for a total estimated sum of 4.1 million euros, treatment of nutrients in wastewater treatment stations, installation of an alternative power supply in drinking water treatment plants and alternative the supply of water to ejectors in drinking water treatment plants.

During 2017, the Company’s 157 wastewater treatment plants treated over 459 hm3 of wastewater (500 hm3 in 2016). This enabled the Community of Madrid to be one of the regions that treats all the urban wastewater it generates. These activities are included in line 4 of the Strategic Plan, the aim of which is to boost environmental quality and energy efficiency. This line includes the Plan for waste treatment excellence to contribute to the improvement of river conditions and develop improvement plans for the quality of discharges, wastewater treatment station modelling and control of industrial discharges to the network.

Canal de Isabel II, S.A. · 14 (continúa)

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- Waste management

In terms of hazardous and non-hazardous wastes associated with the Company’s processes, particularly noteworthy in terms of volume is the sludge generated in the generation of drinking water in the drinking water treatment plants, a total of 30,792 tonnes (26,636 tonnes in 2016), and the sludge generated in the wastewater treatment stations, 188,445 tonnes (186,839 tonnes in 2016) (not including those from the Madrid City Council Wastewater treatment plants, which are currently managed by the city council).

As part of the plan to boost the circular economy of strategic line 4, the dehydrated sludge from the wastewater treatment stations are mostly used in agricultural activities and for thermal drying. Those that cannot be used for farming given the nature thereof are used, partly for energy recovery in cement plants and, to a lesser degree, for landfill. The following table illustrates how this sludge has been used in the last 3 years, with a commitment to increasing the thermal drying of sludge, contributing to the environment and reducing landfill disposals:

Destination of % of sludge generated in wastewater treatment stations 2017 2016 2015 Landfill disposal 0.00% 0.46% 0.30% Ceramic recovery 0.00% 1.46% 5.60% Farming use 67.45% 67.42% 69.99% Composting 7.19% 10.13% 7.62% Thermal drying 25.07% 20.53% 16.49% Other treatments 0.29% 0.00% 0.00%

The use of the sludge generated in drinking water treatment plants, after being treated, is practically 100% for agricultural use.

- Consumption, emissions and emissions prevented

Electricity consumption and production 2017 2016 2015 Electricity consumption per activity (GWh) 487.10 419.30 412.28 Electricity consumption in Supply 186.16 124.16 118.79 Electricity consumption in Sanitation 276.74 269.98 271.00 Electricity consumption in Other areas 24.19 25.16 22.49 Electricity production (GWh) 242.70 261.41 243.34 Self-production (%) 49.83% 62.35% 59.02% Details referring to the end of 2017 are estimated.

Canal de Isabel II has to consume vast amounts of energy for all its processes. This energy comes from various sources, but it is mainly electric. Therefore, given the importance of this consumption, in recent years initiatives have been conducted to improve efficiency in processes and to generate clean energy.

These actions entail operational efficiencies in terms of electricity consumption, since they enable one of the company’s main costs to be reduced, reducing energy demand and exposure to the risk of price increases.

Canal de Isabel II, S.A. · 15 (continúa)

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Electricity consumption in supply increased compared with 2016, as a result of the increase in pumping from the Alberche River, going from 55.6 hm3 to 114.65 hm3, as a result of the lack of rainfall.

Consumption in sanitation has reduced in recent years thanks to the company’s Plan to improve energy efficiency and investments made. The increase in 2017 is related to various aspects, but the homogenisation of the conditions with 2016 led to savings of 3 GWh. This has been a dry year and the decision was made to produce recycled water in all the sectors to discharge into the river all year round, with the aim of improving the quality of wastewater and reduce the environmental impact thereof, both of which have resulted in an increased production of recycled water and therefore greater electricity consumption.

Furthermore, to comply with the nitrogen limits established in the National Water Plan, works to adapt various wastewater treatment plants have been carried out, resulting in more intensive processes in terms of energy consumption.

In terms of the generation of electricity, the Company has managed to reduce one of its main operating expenses, significantly decreasing demand for energy and exposure to the risk of Price hikes. In addition, in recent years generation of electricity through the processes related to comprehensive water cycle management, including biogas from treatment plants, cogeneration in thermal drying of sludge and wastewater headworks, as well as in the power stations managed by Hidraúlica Santillana, has gained importance.

Canal de Isabel II is currently the company with the largest installed capacity for the production of electricity in the Community of Madrid, with a total of 81.56 megawatts. Electricity production dropped in 2017 compared with the preceding year as a result in the drop-in production in the power stations managed by Hidráulica Santillana as a result of the reduced rainfall and lower quantity of stored water. The percentage of electricity production used for self-consumption was 50.9% (46% in 2016), with the rest being sold to the market.

In 2017, the Company, through its foundation, published the study “Energy footprint in the comprehensive water cycle in the Community of Madrid” with the aim of developing lines of action designed to reduce the impact of energy costs in the comprehensive management of water. The conclusion reached from the following study was that, given that the highest percentage of energy consumption is from wastewater treatment facilities (59%), efforts to reduce the energy footprint in the comprehensive water cycle must focus on the optimisation of wastewater treatment stations.

Other energy consumption 2017* 2016 2015 Fuel consumption heating: buildings and facilities Natural gas in building furnaces (m3/year) 127,000 121,536 103,600 Gasoil in building furnaces (litres/year) 135,000 123,155 140,000 Fuel consumption in processes (litres/year) 18,825 42,820 90,320 Fuel consumption in automobiles Gasoil consumption in vehicles and machinery (litres) 647,299 669,436 676,981 Petrol consumption in vehicles (litres) 22,032 22,638 25,985 LPG consumption in vehicles (litres) 0 0 296 Natural gas in thermal drying of sludge in Loeches (GWh PCS/year) 198,893,397 180,862,708 175,913,794 Details referring to the end of 2017 are estimated.

Canal de Isabel II, S.A. · 16 (continúa)

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Particularly noteworthy in other energy consumption is the increase in natural gas consumption in the Loeches plant, directly related to the increased activity in this plant. The tonnes of dry matter used for thermal drying has increased by 18% compared with 2016 and 50% compared with 2015, with 10,488 tonnes dried during the year.

Canal de Isabel II plans to increase the production capacity of the Plant in Loeches in 2018 to be able to dry 105,000 tonnes of sludge per year and generate 158,400 megawatts hour of electricity per year. In the coming years, the Strategic Plan 2018-2030 intends to use practically 100% of the sludge to generate energy through thermal drying.

Consumption in other categories is also worth noting, such as fuels in automobiles in other processes.

Emission sources (in thousands of tonnes C02) 2017 2016 2015 Direct greenhouse gas emissions associated with Canal’s processes (scope 1) 39.80 36.09 35.50 Emissions from sludge heating furnaces, cogeneration and flares 70.58 66.16 64.50 Emissions from sludge composting processes in wastewater treatment stations 2.40 3.35 2.50 Emissions from natural gas furnaces in buildings 0.28 0.27 0.23 Emissions from gasoil furnaces in buildings and processes 0.45 0.48 0.57 Greenhouse gas emissions from mobile sources (vehicles and machinery) 1.75 1.81 1.83 Indirect emissions related to electricity consumption (scope 2) 98.19 65.61 78.65 Indirect emissions associated with electricity generation 98.19 65.61 78.65 Indirect emissions from supplies, services and other activities (scope 3) 105.56 104.10 107.10 Emissions from employees travelling to their work centres 3.58 3.75 4.08 Emissions through waste transportation services from sand removal and filtering 0.10 0.10 0.09 Emissions from transport services for other non-hazardous wastes 0.01 0.01 0.01 Emissions from transport services for other hazardous wastes 0.00 0.00 0.00 Emissions from transport service for sludge from wastewater treatment stations and sludge from drinking water treatment plants 0.45 0.43 0.44 Emissions related to agricultural use of sludge from wastewater treatment station, carried out by third parties 37.77 35.08 36.52 Emissions from the production of reactive agents used in supply and sanitation 14.57 13.87 14.72

Emissions from supplies of paper used and invoices sent by Canal. 49.10 50.86 51.25

TOTAL GREENHOUSE GAS EMISSIONS (scopes 1, 2 and 3) 243.55 205.80 221.26

Details referring to the end of 2017 are estimated. ** When calculating the emissions of Scope 1 and the total greenhouse gas emissions, biogenic emissions are not included (biogas consumption in wastewater treatment station and sludge composting emissions in wastewater treatment station

Canal de Isabel II, S.A. · 17 (continúa)

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C02 emissions prevented (tonnes) 2017* 2016 2015 Emissions prevented electricity consumption Through self-consumption Hydroelectric 5,383.79 4.302.84 6,014.23 Wastewater treatment station biogas 25,104.53 19.771.68 24,232.63 Cogeneration 21,419.81 15.941.56 19,242.06 Purified waterfall WASTEWATER TREATMENT STATION 154.77 113.36 128.84 Solar Photovoltaics 7.19 5.73 Micro-turbines in Supply 0.03 161.15 415.39 For electricity sold Hydroelectric 13,215.39 16.952.79 15,911.76 Emissions prevented with hybrid vehicles 32.42 33.57 31.95 Emissions prevented with electric vehicles 3.69 4.97 5.37 TOTAL CO2 EMISSIONS PREVENTED 65,321.62 57.287.64 65,982.24 *Details referring to the end of 2017 are estimated.

The strategic line to boost environmental quality and energy efficiency also includes the Plan to adapt to climate change, which focuses on generating clean energy, reducing emission sources and mitigating the carbon footprint. An example of this commitment is that, in 2017, the emission of 65,286 tonnes of CO2 was prevented thanks to the production of renewable energy.

- Water consumption

Water consumption 2017 2016 2015 Total Volume Recycled Water produced (hm3) 15.89 12.41 12.89 Volume recycled Water/Derivative water for consumption (%) 3.2% 2.5% 2.6% Self-consumption of water (hm3) 4.32 4.98 5.38

Canal de Isabel II believes wastewater recycling constitutes an essential component of the comprehensive management of water resources, in line with environmental sustainability, and contributes to the net increase in these resources. Accordingly, in recent years, the Company has increased its activities relating to the distribution of recycled water for facilities that do not require drinking water, particularly for hosing streets, irrigating public parks, golf courses, and even for industrial uses.

During the year, the wastewater treatment improvement plan has continued with the construction of new wastewater treatment plants, the extension of existing ones and the installation of tertiary treatment systems. Likewise, the expansion of existing plants and the installation of tertiary treatment systems remained in force during the year in the towns of Arganda del Rey, Colmenar Viejo, Getafe, Majadahonda, Meco, Móstoles, Parla, Torrejón de Ardoz and Torres de la Alameda.

2017 was a drier year than 2016 and therefore the production of recycled water increased in the Company’s 25 stations, reaching 15.89 hm3, and exceeding last year's volume by 3.48 hm3. At present, recycled water is supplied to 22 towns/cities in the Community of Madrid, resulting in irrigation for more than 2,699 hectares, thus helping to conserve drinking water from the reservoirs for human consumption.

Canal de Isabel II, S.A. · 18 (continúa)

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Issues concerning anti-corruption and bribery

Canal de Isabel II pursues transparency and efficiency in all its actions. Accordingly, in 2015 the Board of Directors approved the Code of Conduct and Internal Regulations of Conduct in the area of Securities Market.

The aim of the Code of Conduct is to establish behaviours that are honest, safe, responsible and transparent, which the company expects from all its employees, directors and administrators. The contents thereof are reviewed periodically and policies, processes and the necessary controls are developed for the fulfilment thereof. Below are the main ethical and compliance principles:

- The obligation to know and comply with the standards - Comply with internal processes - Decisions must be traceable - Report irregularities - Set an example in terms of conduct - Act in a diligent manner in compliance and in relationships with third parties - Respond rapidly

The Code also includes a series of the company’s public commitments: commitment to people and the safety thereof, responsible use of information, integrity, trust, responsible use of the company’s assets and environmental protection.

The Board of Directors is responsible for monitoring and controlling compliance therewith. In this regard, the Ethics and Compliance Committee has been created to promote the dissemination thereof and to supervise the manner in which the ethics and compliance model works to prevent, identify and respond to potential irregularities. In 2017, the Ethics and Compliance Committee met on 3 occasions.

At the beginning of 2017, a series of training initiatives were carried out to increase the dissemination and knowledge of this Code for all the company’s employees. A whistleblowing email address has been created, which allows any possible irregularities to be reported ([email protected]).

Canal de Isabel II also has an Internal Regulation of Conduct for issues relating to Securities Markets, which was also approved by the Board of Directors in the meeting held on 8 January 2015. This regulation includes, among others, the following aspects related to financial reporting:

- Codes of conduct relating to personal transactions of liable persons - Codes of conduct in relation to privileged information - Codes of conduct in relation to relevant information - Codes of conduct in relation to handling trading

This Regulation is applicable, among others, to persons that may have regular and recurring access to privileged information, with the Registry of liable parties created in 2015, which is periodically updated or when any of the persons included in the scope of said Regulation are incorporated or replaced.

In 2017, work continued on the project to implement the compliance function of Canal de Isabel II.

After identifying, analysing and reviewing the organisation’s most relevant regulations, work began on the implementation of a crime prevention model as a result of the changes to the Criminal Code in 2015, which establishes the criminal liability of legal entities.

Canal de Isabel II, S.A. · 19 (continúa)

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Throughout 2017, the Preliminary Investigation 91/2016 has been conducted before Central Court No. 6 of the National Court, based, among others, on the information provided by Canal de Isabel II to the Crown Prosecution Service. Canal de Isabel II, S.A. hired the services, via a public tender process, of a prestigious law firm and appeared in the proceedings as private prosecutor on 2 October 2017, pursuant to article 110 of the Code of Criminal Procedure and was accepted by the Court as such. Therefore, in principle, the Company cannot be considered criminally or civilly liable for the acts being investigated and rather, it would appear that its position as injured party seems to be consolidated as the investigation progresses.

The procedure, which is still partly secret, has been divided, together with the root cause, into six separate parts, to our knowledge to date. The first, second and fifth parts refer, respectively, to the Company’s expansion in Latin America (Inassa and Emissao), the Canal Golf Course, and to money laundering in the various transactions under investigation. The third part (Navalcarnero tram) and fourth (illegal financing of the Spanish Popular Party) are unrelated, in principle, to the interests of Canal de Isabel II, S.A. The sixth part (Mercasa), also unrelated to the Company, has already been referred to another Court investigating related criminal offences.

The investigation is estimated to end in 2018, and the oral proceedings, for those that are finally accused, shall be held in 2019. During the appropriate stage of the proceeding, charges will be filed on behalf of Canal de Isabel II, and the estimated damages for the Company will be quantified and payment thereof shall be claimed.

No negative financial impacts resulting from the procedure are expected. However, the relevant Sentence that is imposed, which will probably not be final before 2020, will probably determine relevant amounts to be paid as compensation in favour of Canal de Isabel II, S.A. by those who are sentenced. In this regard, it is important to highlight, given the importance thereof and the sum of the verified provisional deposits in the consignment accounts of the Court made by the parties being investigated Mr Edmundo Rodríguez Sobrino for the sum of USD 2,739,003.57 and Mr Diego Fernando García Arias, for the sum of USD 828,547, both in relation to the Emissao Engenharia e Construçoes transactions being investigated.

The management of these amounts in the Company’s accounts will depend on the criminal classification of the practices that have led to such repayments, therefore an assignment cannot be made at the moment.

Furthermore, we are aware of another legal case and/or investigation by the prosecutor in Colombia, in relation to the acquisition and subsequent management of the subsidiary Inassa.

Already having initiated the Preliminary Investigation 91/2016 in the Central Court No. 6 of the Spanish National Court, in which Mr. Edmundo Rodríguez Sobrino appears from the beginning as being under investigation in conjunction with many others in the case known as "Operación Lezo", and given the presence of new facts intimately linked to those investigated in said proceedings, on 20 June, a complaint was lodged on behalf of CANAL DE ISABEL II, S.A. and Canal Extensia, S.A. before the aforementioned Central Court. This Court initially decided to file the complaint without performing any formal proceedings, arguing that there is already a procedure that is followed in Colombia for the same occurrences. The legal representation of both companies presented an appeal as they understood that the Spanish jurisdiction cannot be subject to the Colombian courts, an appeal that was heard by the Criminal Division of the Spanish National Court, who by Court Order on 26 September 2018 ordered the Court to investigate the allegations, in Preliminary Investigation 51/2018.

Regardless of the accounting data that subsequent situations may lead to, the Company will study all the relevant legal actions in this regard, including appearing as informant, plaintiff and/or injured party in the procedures conducted before the Colombian courts, directly or via its subsidiaries, in an equivalent mode as verified by Canal de Isabel II, S.A. in the Spanish procedure indicated above.

Canal de Isabel II, S.A. · 20 (continúa)

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7.3 Social matters and human rights issues

- Own and subcontracted personnel:

In December 2016, the Company and union representatives reached an agreement to approve the first Collective Agreement of the public company.

On 31 January 2017, the Decision of 18 January of 2017 of the Directorate General of Employment was published in the Official State Gazette (BOE), registering and publishing the first Collective Agreement of Canal de Isabel II, S.A. which entered into force on 1 January 2017, for application purposes.

The company’s new Collective Agreement includes a salary and employment condition standardisation process for full-time and part-time personnel from 2017, improving the integration of all the groups. It also includes an Equality Plan and an Action Protocol to combat Psychological Harassment.

On 7 February 2018, the Association for Excellence in Public Services, granted an award to the Workers’ Committee and Canal de Isabel II, for the negotiation of the 1st Collective Agreement, with this understood to be the restoration of the employment rights of the employees of Canal de Isabel II.

Breakdown by collective agreement and union representative 2017 2016 2015 Personnel covered by company’s own collective agreement 2,609 0 0 Personnel covered by sectoral collective agreement 0 2,588 2,515 Personnel not covered by agreement 2 2 2 Employees adhered to union organisations 454 453 458

Non-discrimination and equal opportunities are also fundamental policies in the management of the Group's human resources. Furthermore, the recruitment regulations in Canal de Isabel II expressly state the principles of equality, merit and capacity to guarantee the absence of any form of discrimination. As a result of these policies, in 2017, women represented 27,2% of the Group’s total and they occupied 41,1% of the senior management positions (27,1% and 39,7% respectively in 2016).

Breakdown by gender 2017 2016 2015 Female 853 816 774 Male 1,758 1,774 1,743 TOTAL 2,611 2,590 2,517 *Details at end of year

The average number of employees in the Company with a disability equivalent to or greater than 33% was 22 employees in 2017, the same figure as in 2016.

The total number of employees in the company has not varied much in recent years given the recruitment restrictions imposed by the laws of the State Budget for the Community of Madrid, preventing indefinite contracts. This situation has led to the percentage of personnel under temporary contracts standing at 38.4% of the total workforce, with this trend increasing over the years:

Breakdown by type of contract 2017 2016 2015 Personnel with indefinite contracts 1,540 1,581 1,594 Personnel with temporary contracts 961 895 805 *The preceding figures do not include employees with reduced working time.

Canal de Isabel II, S.A. · 21 (continúa)

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The various regulatory restrictions have limited the Company’s management capacity in terms of human resources in recent years, but the company hopes this legal framework will change in the coming years to be able to reduce the temporary nature of contracts to the levels required to cover specific situations. The plans relating to the reduction of temporary contracts and talent retention are include in strategic line 8 of the company's new Strategic Plan.

Likewise, the Company believes it is an absolute priority to prevent occupational risks and to ensure the health and safety of all its employees in the workplace. In 2017, a reduction of accidents in the workplace has been incorporated into the Corporate Plan 9, which in 2018, will fall within line 8 of the new Strategic Plan. The time horizon of this Plan goes from 2017 to 2021 and the aim is to reduce the number of work- related accidents, together with the severity thereof and to increase a preventive culture among all employees.

The following table shows the main indicators regarding occupational safety:

Workplace accident rates 2017 2016 2015 Accidents with time off (excluding “in itinere”) 54 67 69 Deaths (Number) 0 0 0 No. of cases of work-related illnesses 0 0 0 Accident Frequency Index with time off (excl. “in itinere”) 13 16 17 Total Accident Frequency Index (excl. “in itinere”) 27 30 31

Canal de Isabel II also guarantees the rights of workers to be informed and consulted via instruments such as intranet Canal&tú, which is updated daily and includes a Suggestions Portal for all collaborators to send their requests, opinions and ideas.

In relation to human rights, Canal de Isabel II is a signatory of the United Nations World Pact and is one of the founding partners of the Spanish World Pact Network since March 2016. The World Pact which includes 13,000 entities in over 145 countries worldwide, aims to implement 10 universally-accepted principles to promote corporate social responsibility. These principles are grouped into four areas; human rights, work, the environment and anti-corruption.

The Company has also established, as a mandatory requirement, to only and exclusively enter into contracts with companies that support and respect the project of human rights.

As a result of these policies, in recent years, the company has not recorded any claims regarding human rights.

The company’s activity not only generated direct employment but has also generated 5,689 indirect jobs (5,156 in 2016). In order to access the company’s procurement procedures, bidders must have the capacity to enter into contracts with the public sector, and not be involved in any prohibitions to enter into contract and be able to prove their economic-financial, professional and technical solvency conditions, as established. The environmental requirements established for providers, include compliance with applicable environmental regulations and compliance with the environmental policy established in Canal de Isabel II. Likewise, contractors must comply with occupational risk prevention regulations. Furthermore, in order to foster diversity and the incorporation into the labour market of persons with disabilities, contractors with more than 50 workers employed are required, while the contract is in force, for at least 2 per cent of these to have a disability pursuant to the provisions established in Royal Legislative Decree 1/2013, of 29 November, approving the amended text of the General Law on the rights of people with disabilities and the social inclusion thereof.

Canal de Isabel II, S.A. · 22 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Law 9/2017, of 8 November on Public sector contracts shall enter into force on 9 March 2018. The aim of the new law is to achieve greater transparency in public procurement and achieve better value for money.

The new law seeks greater legal security and aims for public procurement to be used as an instrument for implementing European and national policies in social, environmental, innovation and development matters and the promotion of SME’s and the defence of competition.

The procurement bodies must implement the necessary measures to ensure that in the execution of the contracts, contractors comply with obligations applicable to environmental, social or labour matters established in EU laws, national laws, collective agreements or provisions established in international environmental, social or labour laws to which the State is liable.

- Customer satisfaction

Customer and user satisfaction is one of the company’s main objectives. This satisfaction is obtained by providing reliable, quality services with fair tariffs, but appropriate care is also important.

The Company is in contact practically on a daily basis, with its customers. Apart from sending invoices every two months, it stays in touch via various sales offices and telephone campaigns. Furthermore, it has a customer satisfaction survey in which it contacts customers to find out their opinions regarding the services rendered.

Customer service 2017 2016 2015 Complaints received regarding management per every 1,000 contracts 5.07 4.41 4.16 % of claims received regarding invoices issued 0.26% 0.25% 0.24% No. of permanent sales offices (units) 10 11 11 No. of phone calls taken (units) 950,360 1,032,732 1,171,581 Contact via the Virtual office 3,186,031 2,646,008 2,167,891 Average compliance with the service charter (%) 98.19% 99.22% 98.57%

The main reason for the claims received via the Ombudsman’s office was related to invoices. As a result, Canal de Isabel II seeks to always ensure absolute precision in its invoices issued to its customers. Therefore, it tries to reduce the percentage of estimated bills by reading the meters, conducting consumption analyses and carrying out thorough maintenance works and verification of metering devices.

Canal de Isabel II has a customer satisfaction and experience model that enables the quality of the service provided to the public to be assessed. In 2017, the methodology of the metering model was altered, with the latest available grade (third quarter of 2017) being 8.19 for domestic customers and 7.80 for companies. The Company is the most highly valued utility company, compared with electricity, gas, telephone and internet companies.

- Transparency

Given the public nature of the Parent, it has the obligation to respond to information and fiscal requests submitted by all the political groups with a representation in the Madrid Assembly. The responses to these requests are carried out via the Directorate General to the Ministry of the Presidency, of the Judiciary and Media Representative of the regional government of the Autonomous Community of Madrid, from where they are sent to the Madrid Assembly

Canal de Isabel II, S.A. · 23 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Furthermore, Canal de Isabel II has established an electronic communication channel on the website for receiving and answering citizens' queries. On this platform, and in compliance with the provisions of Law 19/2013 of 9 December on transparency, access to public information and good governance, in 2015, the transparency portal was created, which contains all the information established by law regarding active publicity, together with the means for guaranteeing that citizens can exercise the right to access public information.

- Corporate Social Responsibility

Given that an essential service is provided and with the aim of the tariffs being affordable, the sum of discounts (per household and large family and for social exemption) increased by almost 31% compared with 2016. Likewise, the price of water in the Community of Madrid is around 20% below the average in Spain, according to the report issued by Spanish Association of Water Supply and Sanitation (AEAS) in September 2016.

Lastly, the work carried out by the Company directly or via the Canal de Isabel II Foundation should also be noted, in order to develop social policies and activities, via, among other initiatives, the organisation of exhibitions, the success of which is reflected in the thousands of visitors received in the Arte Canal Exhibitions Centre, the initiatives carried out by the Canal Volunteers programme to help in emergency situations and to cooperate in the development of underprivileged countries. In 2017, the company used 2,835 euros for CSR initiatives (4,220 euros in 2016). CSR expenses dropped with regard to 2016, due mainly to the delay in 2017 of the presentation of the Auschwitz exhibition, commencing on 1 December 2017.

Likewise, with the aim of contributing to the enhancement of water resources and to caring for the environment with the help of young people, Canal de Isabel II, via the educational programme “CanalEduca”, has developed a wide variety of attendance-based and online activities aimed at students, teachers and the general public. This programme has been running for over two decades, endorsed by various national and international awards. During the most recent academic years, 2016-2017 and 2017- 2018, Canal Educa showed a firm commitment to virtual contents and, accordingly, has designed new activities for its virtual classroom (in Spanish and in English) in which students can learn about concepts related to the world of water in an entertaining way. The list of activities includes attendance-based activities, such as workshops about water and the environment, sporting activities and guided tours of facilities.

The Company is committed to promoting sporting activities, due to their health benefits, discipline, perseverance, ambition, teamwork, camaraderie and solidarity they encourage. As well as the activities organised by the Club Deportivo Canal, leisure and sport is promoted for all citizens through the recreational areas of the Valmayor, El Atazar and Riosequillo reservoirs and in the Sports and Leisure Centre of the Third Water Tank.

On 10 May 2017, the Company formed the Canal Leisure and Sports Society, as a result of Order 287/2017, issued by the Regional Ministry of Presidency, Judicial and Spokesperson office, declaring the urgency and general interest of the project on uses and activities for free spaces and sports areas of the Third Water Tank of Canal de Isabel II.

The United Nations Global Pact granted, for the seventh consecutive year, the “Advanced” rating for the Canal de Isabel II group’s Annual Corporate Report, the highest rating granted by the most important voluntary corporate social responsibility initiative in the world. This distinction recognises the quality of the information provided by the companies in their annual reports, as a recognition of their efforts to be transparent and to declare and publicly communicate the adoption of good practices in the area of sustainability and responsible management.

Canal de Isabel II, S.A. · 24 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

8. Own shares

During the year ended 31 December 2017 the Company has not acquired any own shares.

9. Financial instruments

The Company has not arranged any financial instruments during the year that are relevant to the valuation of its assets, liabilities, financial position or results.

10. Subsequent events

During the first quarter of 2018, a forensic audit was completed in Emissao, with the aim of identifying possible irregularities in the management of the company by ex-executives that could have an impact on the financial statements of Emissao or on its future business plan and to determine the potential criminal liability of Emissao arising from the actions concerning Prior Proceedings 91/2016 before Central Court No. 6 of the National Court and it judicial ramification in Brazil.

In terms of the potential criminal liability, the conclusion of the external adviser, is that Emissao will not be held criminally liable to the extent that it could compromise the company’s activity or have an impact on its annual accounts. Likewise, based on the information analysed by the independent experts in the forensic analysis, the Company’s Directors do not expect any additional liabilities other than those already recognised in the consolidated annual accounts.

Regarding the analysis of potential irregularities in the management of the company by former directors, no elements have been found that indicate that any manager or employee of Emissão committed acts of corruption or other similar malfeasance. Nor has there been any concrete or sufficient evidence to indicate irregularities in the management of former directors that could have a significant impact on the company.

By means of official written notice presented to the Court of Investigation No. 6 of the Spanish National Court, the Central Office of High-Income Taxpayers of the Tax Agency requested that the inspection procedures followed with the Company for Corporate Taxes 2012 to 2015, VAT and Withholdings 3/2013 to 12/2016 be suspended or stayed. As it was determined that the result of these actions depends on the facts proven in the criminal proceedings, the Court on 23 May 2018 issued an Order that stipulates the suspension of the ongoing inspections until the criminal investigation moves forward and the need to maintain it can be specified in greater detail.

Already having initiated the Preliminary Investigation 91/2016 in the Central Court No. 6 of the Spanish National Court, in which Mr. Edmundo Rodríguez Sobrino appears from the beginning as being under investigation in conjunction with many others in the case known as "Operación Lezo", and given the presence of new facts intimately linked to those investigated in said proceedings, on 20 June 2018, a complaint was lodged on behalf of CANAL DE ISABEL II, S.A. and Canal Extensia, S.A.U. before the aforementioned Central Court. This Court initially decided to file the complaint without performing any formal proceedings, arguing that there is already a procedure that is followed in Colombia for the same occurrences. The legal representation of both companies presented an appeal as they understood that the Spanish jurisdiction cannot be subject to the Colombian courts. The judgement is pending before the Criminal Court.

Furthermore, on 22 June 2018 notification was received from the Public Interest Claim presented by the Office of the Attorney General before a court in Cundinamarca (The Republic of Colombia). It includes the following provisions:

Canal de Isabel II, S.A. · 25 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

- Annul the technical assistance agreement entered into by Triple A, S.A. and Inassa, S.A. of 31 March 2000 and later, on 4 September 2000, as well as ordering the return by Inassa of all money paid on the occasion of said contract, duly updated and the interests of the case applied. It also includes the remaining balance of the profits and losses of Triple A, S.A. in favour of the District of Barranquilla.

- Order Triple A, S.A. to advance the necessary measures for the reimbursement of that money improperly appropriated by the officials currently being investigated, as well as the remaining balance of the profits in favour of the District of Barranquilla.

- Order Triple A, S.A. to: i) to adopt the immediate measures of restitution of resources by the order of $ 237,836,823,242, for which it is imperative that it impose the formulation of an immediate recovery plan for resources paid to Inassa and ii) that the recovery of resources

is made with charge to the shareholding, benefits and other rights and income or assets of Inassa in Colombia and abroad and iii) with the resources the quality of the service is improved and/or the stabilisation or reduction of tariffs.

- Order the Superintendency to adopt and implement the immediate and effective measures for performing effective surveillance and control over the contracting, administration and accounting of Triple A.

Furthermore, the following were sought as interim measures:

- The immediate suspension of the execution and payment of the technical assistance agreement.

- The initiation or immediate response plan is ordered, in which the way that Inassa proceeds to return the money that has been cancelled during the technical assistance agreement is considered.

- The immediate seizure and confiscation of the shares held by Inassa in Triple A and, in general, the seizure and confiscation of the shareholding, rights, income and assets of Inassa in Colombia and abroad are ordered.

- The seizure and confiscation of the benefits that Inassa should receive within the carrying out of social activities in Triple A.

On 29 June 2018 a written opposition to the interim measures was presented. The main arguments were related to the non-compliance with the requirements set forth in Article 231 of the Code of Administrative Procedure and Administrative Disputes (CPACA) (absolutely all the requirements were not met), in addition to its decree seeking to obtain the result of a judgement of conviction in advance.

On 9 July 2018, the suit was defended. Legal, procedural and substantive arguments were presented.

As of the approval date of these annual accounts, the Administrative Court of Cundinamarca is expected to issue a judgement on the requested interim measures (after analysing the objection arguments presented by Inassa) and to convene a compliance hearing, following the procedure set forth in law 472 of 1998.

Canal de Isabel II, S.A. · 26 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The Management and the Directors of the Company, based on the reports and opinions issued by their legal advisors hired to these affects, have taken into account the available information. Given that the evidentiary stage has not yet taken place, they conclude that it is impossible to anticipate i) whether the court will rule on one or more interim measures ii) if the process ends by a compliance agreement and iii) the meaning of a possible judgement. Therefore, they consider that at this date it is not necessary to register provisions or allocation in the equity of the Company or the Group.

However, it cannot reasonably be ruled out that, as the different investigations or judicial or administrative proceedings progress, contingencies will arise that imply new operational and financial risks, which could eventually affect the true and fair view of the equity, the financial situation and the profits and losses of the Company and its Group as of 31 December 2017, as well as its cash flows, which are reflected in the Individual and Consolidated Annual Accounts and in the corresponding Management Reports and Briefs, which shall be duly noted in the relevant accounting documents.

The Board of Directors of CANAL DE ISABEL II, S.A., at the meeting held on 26 June 2018, agreed in accordance with Article 18 of the Articles of Association to appoint Mr. Pedro Manuel Rollán Ojeda as new Chairman of the Board of Directors, replacing Mr. Ángel Garrido García.

During the 2017 fiscal year, the Accounts Chamber of the Community of Madrid completed the comprehensive inspection of the Canal de Isabel II Group for the 2008 to 2015 period. In the month of July 2018, the definitive report was published which includes a series of recommendations that will not affect the present annual accounts and that the Group will consider for its future planning.

The Board of Directors, at its meeting held on 19 September 2018, approved declaring the real estate properties (plots, commercial premises) unnecessary and alienable, and their disposal through the processing of an electronic public auction record, in accordance with the provisions of Article 50.4 of Law 3/2001, of 21 June, of the Assets of the Community of Madrid, respecting the principles of advertising and concurrence. The Management and the Administrators of the Company estimate that the recoverable value of this property will be greater than its book value.

On 3 October 2018, the Office of the Prosecutor General of Colombia resolved to order the interim measures to suspend the power of disposal, seizure and confiscation concerning eighty-two percent (82%) of the share capital of Triple A de Barranquilla, of which Inassa, S.A. is the holder.

The interim measures imposed by the Office of the Prosecutor General of Colombia are governed by the provisions of Article 89 of the law 1708 of 2014. These interim measures shall not be extended for more than six (6) months, a term within which the Office of the Prosecutor must define whether the actions must be filed or if, on the contrary, it is appropriate to file a claim for asset forfeiture.

At the time of this reformulation of Accounts, the Office of the Prosecutor has not yet filed the claim for asset forfeiture before the corresponding judicial body.

Canal de Isabel II S.A. plans to appear before the Guarantee Control Judge, through its representatives in Inassa, to defend the interests of this entity and preserve its economic and property rights.

The ordered interim measures imply, among other aspects, that Inassa cannot carry out the exercise of the rights that correspond to the activities affected by those measures or that derive from said activities. The Special Assets Company (SAE) assumes the management of Inassa’s involvement while the effectiveness of the interim measures remains. Although the interim measures do not affect the ownership of the repeated shares, which continue to be the property of Inassa and the asset forfeiture has not been carried out, in accordance with the International Financial Reporting Standards, dated 3 October 2018, the Canal de Isabel II Group loses the indirect control it held until then over Triple A de Barranquilla.

Canal de Isabel II, S.A. · 27 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Furthermore, in accordance with the applicable accounting legal framework, the Group will recognise as of 3 October 2018 the investment retained in Triple A de Barranquilla at its fair value. Given the legal uncertainty and the lack of sufficient information derived from the preliminary situation the process is in, it is not possible to determine it. However, depending on the clarification of the status of the legal proceedings, work will continue on the determination of fair value and, where appropriate, the impacts on the Group's accounting records will be recognized. Likewise, this uncertain situation means that the hypotheses considered in the impairment test that the company periodically and recurrently updates may not be valid in cases in which the currently open legal proceedings are carried out against the interests of the Canal de Isabel S.A. Group.

Due to the lack of liquidity of Inassa to take care of their obligations, on 23 November the Board of Directors of Canal de Isabel II, S.A authorised an Intercompany operation to Canal Extensia, S.A.U - Inassa, for an amount of 38 million dollars, including in this figure the amounts owed by Inassa to Canal Extensia, S.A.U.

Likewise, the aforementioned Board of Directors approved the concession by Canal de Isabel II, S.A. of an Intercompany loan to Canal Extensia S.A.U for an amount of 4 million euros.

Except for the foregoing, there have been no subsequent events since the close of the 2017 fiscal year and until the date of reformulation of these annual accounts.

11. About this Report

To draw up this Governance Report, the provisions established in Royal Decree Law 18/2017 on the dissemination of non-financial information and diversity have been taken into account, and environmental, social and good governance indicators have been included pursuant to Guide G4 Global Reporting Initiative (GRI). The recommendations of the guide have also been taken into account when drawing up the directors’ report for the listed companies on the National Securities Market Commission and the guidelines on the presentation of non-financial reports by the European Commission.

Canal de Isabel II publishes a more detailed annual report for the year which shall be published after this report has been issued. In the event of differences between the information referring to the Company in the two reports, the provisions of the annual report shall prevail.

This report includes as an integral part of it the Annual Corporate Governance Report for 2017, as required by article 538 of the Spanish Companies Act.

Canal de Isabel II, S.A. · 28 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Annual Corporate Governance Repor

Canal de Isabel II, S.A. · 29 (continúa)

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

APPENDIX II

ANNUAL CORPORATE GOVERNANCE REPORT FOR ENTITIES OTHER THAN SAVINGS BANKS ISSUING

SECURITIES TRADED ON OFFICIAL MARKETS PL VALORES QUE SE NEGOCIEN MERCADOS OFICIALES PL VALORES QUE SE NEGOCIEN MERCADOS PL VALORES QUE SE NEGOCIEN PL VALORES QUE SE PL VALORES QUE PL VALORES

PARTICULARS OF ISSUER

YEAR END 31/12/2017

TAX ID NO: A86488087

COMPANY CANAL DE ISABEL II, S.A.

REGISTERED OFFICE C/ SANTA ENGRACIA, 125 MADRID

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

ANNUAL CORPORATE GOVERNANCE REPORT FOR ENTITIES OTHER THAN SAVINGS BANKS ISSUING SECURITIES TRADED ON OFFICIAL MARKETS

A OWNERSHIP STRUCTURE

A.1 List the most significant shareholders of your entity at year-end:

Taxpayer Name or company name of shareholder % stake

Q2817017C Canal de Isabel II (Public Entity) 82.4 % P2807900B Madrid City Council 10.0%

A.2 If applicable, please specify any family, commercial, contractual or corporate relationships that exist among significant shareholders to the extent that they are known to the Company, unless they are insignificant or arise in the ordinary course of business.

Name or company names and Taxpayer related parties Type of relationship Brief description

A.3 If applicable, please specify any commercial, contractual or corporate relationships that exist among significant shareholders and the Company, unless they are insignificant or arise in the ordinary course of business.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Name or company names and Taxpayer related parties Type of Brief description relationship

Q2817017C Canal de Isabel II (Public Entity) Contractual Framework Agreement of 27 June 2012, between Canal de Isabel II and Canal de Isabel II, S.A. (currently Canal de Isabel II, S.A. or the “Company”)

P2807900B Madrid City Council Contractual Agreement dated 4 May 2011, between the Madrid Autonomous Community, Canal de Isabel II and the Madrid City Council, relating to the incorporation of the Madrid City Council within the future Management Model of Canal de Isabel II.

Agreement dated 19 December 2005, on relations between the Madrid City Council and Canal de Isabel II with respect to water supply for the city of Madrid.

Agreement dated 19 December 2005, engaging sewerage management services, between the Madrid City Council, the Madrid Autonomous Community and Canal de Isabel II.

Agreement dated 4 May 2011, relating to the management of the purified water reuse service, between the Madrid City Council, the Autonomous Community of Madrid and Canal de Isabel II.

The contractual relations with the Madrid City Council described in the table originate from the agreements previously entered into by the public entity Canal de Isabel II and the Madrid City Council before the latter became a shareholder of the Company. Reference is made to such agreements since, pursuant to Law 3/2008 of 29 December 2008, on Tax and Administrative Measures, as amended by Law 6/2011 of 28 December 2011, on Tax and Administrative Measures, the Company shall continue providing, on the terms laid down in the Framework Agreement, the water supply, sewerage and reuse services that may under any arrangement correspond to Canal de Isabel II.

A.4 If applicable, please specify any limitations on the exercise of voting rights, as well as any restrictions on the acquisition or transfer of shares.

YES X NO

Description of the restrictions Share transfer

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

General

The provisions of this article shall apply to all transfers of shares or pre-emptive share acquisition rights at the Company (the “Shares”) and, in general, the transfer of other rights that grant or may grant their holder the right to vote at the Company’s Annual Shareholders’ Meeting, by any means, including, without limitation, any type of structural modification arising at the Company. The various scenarios shall be referred to generally in the context of this article as “Share Transfers”.

Any Share Transfers not in line with the provisions of this article 6 shall not be valid or give rise to any effects in dealings with the Company, which shall not recognise the shareholder status of anyone acquiring Shares in breach of the provisions of this Article. Similarly, any voting rights corresponding to Shares transferred in breach of the provisions of this article shall automatically be suspended.

Share transfer authorisation

Share Transfers shall be subject to the authorisation of the Company’s board of directors, which may only reject a transfer where it entails a breach of the obligations relating to title to and ownership of the Shares provided for in clause 4 of each of the Accession Agreements to the new management model, which have been signed by all of the shareholders and published in the Official Gazette of the Madrid Autonomous Community on 23 August 2012 (the “Accession Agreements”).

Any shareholder seeking to transfer their Shares in whole or in part (the “Transferor Shareholder”) must inform the potential acquirer, during the course of the negotiations, of: (i) the Share Transfer authorisation procedure; and (ii) the existence of a pre-emptive acquisition right in favour of the remaining Company shareholders (the “Non-Transferor Shareholders”) on a pro rata basis with respect to their stake in the share capital. The Transferor Shareholder may not accept any offer for its Shares where the acquirer is in any way unaware of the above rights and authorisation.

Any Transferor Shareholder that has reached an agreement with a third party for the transfer of its Shares (the “Agreement”) must serve written notice of such circumstance on the Company’s board of directors, attaching the text of the Agreement, within fifteen (15) days of the date on which the Agreement was executed and, in any event, prior to the date of formalisation envisaged, seeking the mandatory authorisation from the board of directors in order to perform the Share Transfer (the “Request for Authorisation”).

The Agreement must be final and irrevocable in nature, notwithstanding the potential denial of authorisation and the potential exercise of the pre-emptive acquisition right by the Non-Transferor Shareholders. For the purposes of the provisions of this article 6, indicative and non-binding offers, memorandums of understanding and letters of intent, inter alia, shall not constitute an Agreement.

The Request for Authorisation must fully indicate the Shares affected, the acquirer and the chain of title to which it belongs and the terms and conditions of the Share Transfer (including the price, term and method of payment). In the event of a transfer for no consideration, only the personal particulars of the proposed beneficiary shall be required.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Within not more than two (2) months as from the receipt of the Request for Authorisation by the board of directors, it must announce whether or not it authorises or rejects the Share Transfer and notify the Transferor Shareholder of such circumstance. Any refusal to grant authorisation must be reasoned, expressly indicating the obligations that would be breached by the Transferor Shareholder under the Accession Agreements in the event that authorisation were granted by the board of directors, notwithstanding the fact that, if the board of directors refuses to grant authorisation, the Transferor Shareholder may exercise such legal action as it deems fit should it consider no such breach to have taken place.

In the event that the above Share Transfer is authorised, the board of directors must serve notice of such circumstance on the Non-Transferor Shareholders, attaching the text of the Agreement (the “Notice of Authorisation to the Non-Transferor Shareholders”) so that they may decide whether or not they wish to exercise their pre-emptive acquisition right on the terms provided for in article 6.3 below.

Pre-emptive acquisition right of the Non-Transferor Shareholders

Within not more than thirty (30) days of the receipt of the last Notice of Authorisation to the Non- Transferor Shareholders, each Non-Transferor Shareholder must inform the board of directors (with a copy to the Transferor Shareholder) of whether or not it wishes to exercise its pre-emptive acquisition right (the “Notice of Pre-Emptive Acquisition”).

Where one or more Non-Transferor Shareholders opt to exercise their pre-emptive acquisition right, such Non- Transferor Shareholder(s) and the Transferor Shareholder shall be duty-bound to transfer the Shares offered within not more than fifteen (15) days as from the last Notice of Pre-Emptive Acquisition, and the acquisition shall be subject to the terms and conditions described in the Notice of Authorisation to the Non-Transferor Shareholders. Where there are several Non-Transferor Shareholders exercising their pre- emptive acquisition right, the transfer shall be divided among them on a pro rata basis in respect of their stake in the share capital, allocating, where applicable, any excess to the Non-Transferor Shareholder holding the most Shares and, in the event of a tie, by the drawing of lots.

In the event of: (a) discrepancy regarding the price offered by the third party between the Transferor Shareholder and one or more of the Non-Transferor Shareholders wishing to exercise their pre-emptive acquisition right; (b) a transfer for consideration other than a sale and purchase; or (c) a transfer for no consideration, the acquisition price shall be the arm’s length value determined by the investment bank appointed for such purposes by the Company (the “Investment Bank”), in line with the valuation criteria and procedures generally applied to the valuation of companies, on the first date on which any of the Non- Transferor Shareholders receives the Notice of Authorisation to the Non-Transferor Shareholders. The fees of the Investment Bank shall be borne equally by the Transferor Shareholder and the Non- Transferor Shareholders exercising their pre-emptive acquisition right.

Where none of the Non-Transferor Shareholders exercise their pre-emptive acquisition right within thirty (30) days of receipt of the last Notice of Authorisation to the Non-Transferor Shareholders, the Transferor Shareholder shall be free to transfer its Shares to the acquiring third party.

The transfer must be performed within thirty (30) days of the date of finalisation of the period in which the Non-Transferor Shareholders may serve notice as to whether or not they intend to exercise their pre- emptive acquisition right on the terms and conditions set forth in the Notice of Authorisation to the Non- Transferor Shareholders.

The Non-Transferor Shareholders’ pre-emptive acquisition right provided for in this article 6.3 shall not apply in the event that the Share Transfer takes place in the future as a result of the Company opening to

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) private capital, pursuant to the provisions of article 16.3 of Law 3/2008 of 29 December 2008, on Tax and Administrative Measures, or other such legislation as may supersede or amend it.

Ancillary obligations linked to Share Transfers

a) Obligation not to pledge the Shares

As an ancillary obligation for no consideration, the shareholders undertake not to pledge the Company Shares. As a preventative mechanism in favour of the Company and potential third-party creditors (in addition to the public protection of such parties deriving from the registration of the articles of association at the Companies Registry).

Any shareholder may serve a written request on the Company (with a copy to the board of directors) for an individual exemption from the obligation to observe the ancillary obligation provided for in this article 6.4.a) (the “Request for Exemption”). The shareholders assembled at a Shareholders’ Meeting, with the quorum and majorities required by the articles of association and the law for the amendment of the articles of association, may authorise the Request for Exemption for one or more shareholders, and the provisions of section d) below shall not apply in such cases.

b) Prohibition of changes of control

(i) Any shareholders that are companies belonging to the local or regional public sector (hereinafter, the “Public Companies”) must meet the following obligations:

1. 1. Maintaining the Company’s board of directors informed at all times of the identity of the Ultimate Holder that holds, via the Public Company, Indirect Shares in the Company.

“Indirect Shares” include shares, participation units, subscription or assumption rights, convertible debentures, interests or other like rights granting the right to hold a stake in the share capital of any Public Company that is, directly or indirectly, a shareholder of the Company.

“Ultimate Holder” means the Local Entities holding Indirect Shares in the Company.

The duty to identify shall include the communication of all of the particulars detailed in article 38 of the Companies Registry Regulations. The board of directors shall keep a Register of Indirect Shares and Ultimate Holders in which all of the particulars referred to above shall be transcribed.

2. 2. Obtaining from all of the Ultimate Holders the written undertaking to act in line with the provisions contained in article 6 of the articles of association where they propose transferring all or some of their Indirect Shares in the Company.

The Ultimate Holders shall sign the relevant transcription of their particulars in the Register of Indirect Shares and Ultimate Holders. By signing the above Register, they shall be deemed to have assumed the above obligations.

(ii) The Public Companies undertake, as an ancillary obligation for no consideration, to comply and ensure compliance with the regime provided for in this article 6.4 in respect of all Indirect Share Transfers affecting the Shares they hold in the Company.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The aim of this ancillary obligation is to ensure that the Ultimate Holders observe the provisions governing Share Transfers set forth in this article 6, thereby ensuring that the holding of an indirect stake in the Company via the Public Companies does not enable them to sidestep the Share Transfer restrictions. The Public Companies obliged to observe this ancillary obligation shall take the measures required to ensure that the regime provided for in this article is fully observed by the Ultimate Holders in all Indirect Share Transfers. In this connection, the Public Companies undertake to take the steps required to ensure that any alternations caused by the Indirect Share Transfers to the composition and identity of the Ultimate Holders are in line with the provisions under this article 6.4.

(iii) Change of control prohibition.

Where an Ultimate Holder proposes a Transfer of an Indirect Share (the “Indirect Transferor”), it must inform the Company’s board of directors of such circumstance. The above communication must fully indicate the Indirect Shares affected, the acquirer and the chain of title to which it belongs and the terms and conditions of the Indirect Share Transfer (including the price, term and method of payment) (the “Notice of Indirect Transfer”).

Within not more than thirty (30) days of the date on which it receives the Notice of Indirect Transfer, the board of directors must serve written notice on the Indirect Transferor as to whether or not the Transfer of Indirect Shares proposed implies a change of control (the “Notification to the Indirect Transferor”):

a) Where the Transfer of Indirect Shares proposed does not entail a change of control at the Public Company in question, the Indirect Transferor may freely perform the Transfer of Indirect Shares.

b) Where the Transfer of Indirect Shares entails a change of control at the Public Company in question, said transfer shall be subject to the authorisation of the board of directors on the terms and conditions provided for in article 6. 2. The two (2) month period provided for in article 6.2 shall start running as from the date on which the Notification to the Indirect Transferor is sent.

(i) Where the board of directors authorises the Transfer of Indirect Shares per the provisions of article 6.2 of these articles of association, the procedures, terms, deadlines and conditions provided for in article 6.3 with respect to the pre-emptive acquisition right of the Transferor Shareholders shall apply in order to acquire the Public Company’s Shares in the Company. In such a case, on Transfer of the Indirect Shares, the board of directors shall ensure that the particulars required under section b) (i) above are transcribed in the Register of Indirect Shares and Ultimate Holders.

ii) Where the board of directors does not authorise the Transfer of Indirect Shares pursuant to the provisions of article 6.2 of these articles of association, the provisions of section 6.4 d) below shall apply.

For the purposes of these articles of association, “control” shall have the meaning provided for in article 42 of the Commercial Code.

Public Companies are obliged to announce that no change of control has taken place at each Shareholders’ Meeting. All of the shareholders are entitled to require that each Public Company furnish sufficient evidence that no change of control has taken place.

c) Elimination of ancillary obligations

In the event that the Shareholders’ Meeting, in line with the majorities required by the law and the articles of association for the amendment of the articles of association, resolves on the creation, modification or early termination of any duty to perform ancillary obligations, no shareholders’ right of withdrawal shall exist.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The provisions of this article 6.4 shall automatically be rendered null and void in the event of any future Transfer of Shares resulting from the opening of the Company to private capital, pursuant to the provisions of article 16.3 of Law 3/2008 of 29 December 2008, on Tax and Administrative Measures, or other such legislation as may supersede or amend it.

d) Breach of ancillary obligations

1. A failure on the part of any shareholder (the “Shareholder at Breach”) to comply with the ancillary obligations provided for in this article 6.4 shall be determined in line with the procedure detailed below:

(i) Where any member of the board of directors, shareholder or Ultimate Holder becomes aware or suspects that any of the ancillary obligations provided for in these articles of association has been breached, it shall inform the board of directors of such circumstance immediately.

(ii) On receipt of such communication, the board of directors shall serve notice on the Shareholder at Breach so that, within fifteen (15) days of the date on which such requirement is sent, it may furnish the board of directors with its submissions in a public document executed by the Shareholder at Breach itself and, as the case may be, by its Ultimate Holder, including a clear, specific statement regarding:

a) In the event of a breach of the ancillary obligation provided for in article 6.4 a): the identity of the pledgee or definitive proof of the non-existence of the purported pledge over its Shares; and

b) In the event of a breach of the ancillary obligation provided for in article 6.4 b): the identity of the Ultimate Holder or definitive proof of the non-existence of the purported Transfer of Indirect Shares.

(iii) Following the reply from the Shareholder at Breach or where no such reply is received within the fifteen (15) day period, the board of directors, where it deems a breach of the ancillary obligations provided for in this article 6.4 by the Shareholder at Breach exists, must notify the Shareholder at Breach of such circumstance within ten (10) days of the receipt of the submissions. The grounds on which the board of directors may base its decisions are as follows:

a) Where it transpires from statements made by the Shareholder at Breach that: (a) a pledge has been arranged over the Shares it holds in the Company; or (b) a Transfer of Indirect Shares has taken place, in breach of the provisions of these articles of association; or

b) Where no reply is received to the request made by the board of directors within the period provided for, or where the statements in the communication contain imprecise terms, ambiguity, limitations on its scope or restrictions on the accuracy of its statements that make it reasonable to presume that a breach of the ancillary obligations has taken place.

d) 2. In the event that, in line with the procedure described in section d) 1. above, the board of directors deems the Shareholder at Breach to have infringed the ancillary obligations provided for in this article 6.4, in whole or in part, on any grounds, even involuntarily, the following provisions shall apply to the Shareholder at Breach:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

(i) Suspension of voting and dividend rights

The voting rights corresponding to the Shares held by the Shareholder at Breach shall automatically be suspended, and such Shares shall not count either for quorums for the convening of meetings or voting quorums. Moreover, the dividend rights corresponding to the Shares held by the Shareholder at Breach shall accrue to the other shareholders on a pro rata basis in respect of their stake in the share capital.

(ii) Call option

In order to secure compliance with the ancillary obligations provided for in article 6.4., each shareholder – with respect to the ancillary obligation provided for in section 6.4 a) – and the Public Companies – with respect to the ancillary obligation provided for in article 6.4 b) – grant the other shareholders a call option (the “Call Option”) on an indefinite basis and subject to the conditions detailed below, over all of the Shares they hold in the Company.

Requirement for the exercise of the Call Option. The Call Option may be exercised where it emerges, in the manner provided for in section d) 1. of this article, that the Shareholder at Breach has infringed any of the ancillary obligations provided for in these articles of association.

Exercise of the Call Option Once the board of directors has declared a breach, it shall offer all of the Shares held by the Shareholder at Breach for purchase to each and every one of the other Shareholders (the “Shareholders not at Breach”) at the address recorded in the Share Register, who, within the following fifteen (15) days, may serve notice of their decision to exercise their Call Option with respect to some or all of the Shares of the Shareholder at Breach on the terms detailed below. Where there are several Non-Transferor Shareholders exercising their pre-emptive acquisition right, the transfer shall be divided among them on a pro rata basis in respect of their stake in the share capital, allocating, where applicable, any excess to the Non-Transferor Shareholder holding the most Shares and, in the event of a tie, by the drawing of lots.

Neither the Company nor its shareholders shall under any circumstance bear any liability for such damage as may be caused by the application of the provisions of the articles of association to the pledgees and/or acquirers in good faith of the Indirect Shares.

Price. The price of the Shares in the event of exercise of the Call Option shall be their arm’s length value on the date on which an infringement has been declared by the board of directors, calculated in line with article 124.2 of the Spanish Companies Act.

(iii) Penalty clause

Pursuant to article 86.1 of the Spanish Companies Act, article 127 of the Companies Registry Regulations and other legislative provisions, the total or partial breach of the ancillary obligations provided for in this article shall in any event give rise to a penalty (in addition to any indemnification for damage or loss) to be paid by the Shareholder at Breach to the Company (even where the breach is deemed partial in nature). The amount of the penalty shall be equal to the difference between the arm’s length value of the Shares calculated in line with article 124.2 of the Spanish Companies Act and the par value thereof.

Mandatory transfers

The same pre-emptive acquisition right provided for in article 6.3 above shall apply in the event of attachment or mandatory enforcement at the instance of a third party, or as a result of any court or

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) administrative enforcement procedure over Company Shares or rights specific thereto, on any grounds, and the provisions of article 125 of the Spanish Companies Act shall apply in such cases. Calculation of periods shall start running as from the date on which the successful bidder or awardee notifies the Company of the acquisition.

B. SHAREHOLDERS’ MEETING OR EQUIVALENT BODY

B.1 Indicate the quorum for the convening of the shareholders’ meeting or like body provided for in the articles of association. Describe how it differs from the regime governing minimums in the Spanish Companies Act (SCA) or other applicable legislation.

The regime under the Company’s articles of association replicates the existing statutory regime at the time of approval of the articles of association in force at the date of approval of this Annual Corporate Governance Report.

Per the provisions of the Company’s articles of association, unless other quorums for the convening of meetings are established by law, the Shareholders’ Meeting shall be validly convened, on first call, where the shareholders present in person or by proxy hold at least twenty-five (25) percent of the voting share capital. On second call, the Shareholders’ Meeting shall be validly convened regardless of the share capital present.

Nevertheless, in order that the Shareholders’ Meeting may validly resolve on the items referred to in article 194 of the Law, shareholders holding at least fifty (50) percent of the voting share capital must be present in person or by proxy on first call. On second call, only 25% of share capital is required to be present.

B.2 Indicate the regime for adopting corporate resolutions. Describe how it differs from the regime provided for in the SCA or other applicable legislation.

The Company’s statutory regime replicates the statutory regime in force at the date of approval of this Annual Corporate Governance Report.

Per the provisions of the Company’s articles of association, unless other majorities are established by law, Shareholders’ Meeting resolutions shall be adopted by a simple majority of the votes of the shareholders present in person or by proxy, considering an agreement to have been adopted following the affirmative vote of half plus one of the share capital present in person or by proxy. The affirmative vote of more than fifty (50) percent of the share capital present in person or by proxy shall be sufficient to adopt the resolutions referred to in article 194 of the Law. However, the affirmative vote of two thirds of the share capital present in person or by proxy at the Shareholders’ Meeting shall be necessary where, on second call, the shareholders present represent twenty-five (25) percent of the subscribed voting share capital without reaching fifty (50) percent.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

B.3 Briefly state the resolutions adopted by shareholders’ meetings and like bodies during the financial year to which this report refers and the percentage of votes with which each resolution was adopted.

Annual General Meeting:

Held on 5 July 2017:

Definitive details of the attendance list (quorum): Eighty (80) shareholders whose shares represent ninety- nine point three four percent (99.34%) of the Company’s share capital, of which forty shareholders (40) representing ninety-four point ninety per cent (94.90%) appeared in person and forty shareholders (40), representing four point four four percent 4.44%), were present by proxy.

Resolutions adopted:

One.- Examination and approval of the individual annual accounts of the Company (balance sheet, income statement, statement of changes in equity, statement of cash flows and notes to the annual accounts) and the directors' report for 2016. Approved with the affirmative vote of 923,983,821 shares representing 86.60% of the share capital present at the Meeting and the abstention of 141,721,640 shares, representing 13.28% of the share capital present at the Meeting and the abstention of 1,250,495 shares, representing 0.12% of the share capital present at the Meeting.

Two.- Examination and approval of the consolidated annual accounts of the Group of which the Company is the Parent (consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity, consolidated statement of cash flows and notes to the consolidated annual accounts) and the consolidated directors' report for 2016. Approved with the affirmative vote of 923,983,821 shares representing 86.60% of the share capital present at the Meeting and the abstention of 141,721,640 shares, representing 13.28% of the share capital present at the Meeting and the abstention of 1,250,495 shares, representing 0.12% of the share capital present at the Meeting.

Three.- To approve without any reservation whatsoever the conduct of business by the managing body during the past year, thanking it for showing interest in the performance of its duties. Approved with the affirmative vote of 924,306,031 shares representing 86.60% of the share capital present at the Meeting and the abstention of 2,837,271 shares, representing 0.27% of the share capital present at the Meeting and the abstention of 139,812,654 shares, representing 13.10% of the share capital present at the Meeting.

Four.- To approve the proposed distribution of profit for the year ended 31 December 2016. Approved with the affirmative vote of all the shareholders present and represented in the Meeting.

Five.- Amendment to article 18 bis of the article of association concerning the competencies of the Audit Committee to adapt this to the amendments introduced by the Auditing Law in article 529 quaterdecies of the Spanish Companies Act.

Approved with the affirmative vote of all the shareholders present and represented in the Meeting.

Six: Amendment to corporate name. Approved with the affirmative vote of all the shareholders present and represented in the Meeting.

Seven: Granting of powers to execute the above resolutions.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Approved with the affirmative vote of all the shareholders present and represented in the Meeting.

Special Shareholders’ Meeting:

Held on 13 November 2017:

Definitive details of the attendance list (quorum): Fifty-two (52) shareholders whose shares represent ninety-eight point one nine percent (98.19%) of the Company’s share capital, of which twenty-four shareholders (24) representing ninety-four point five six per cent (94.56%) appeared in person and twenty-eight shareholders (28), representing three point six three percent (3.63%), were present by proxy.

Resolutions adopted:

One.- Determining the number of members of the Board of Directors. No resolutions relating this point on the agenda were submitted to approval.

Two.- Appointment of the Directors.

2.1 Appointment of Ms Rita Maestre Fernández to the board of directors of the Company as a proprietary director for the statutory six (6) year term. Approved with the affirmative vote of all the shareholders present and represented in the Meeting. 2.2 Appointment of Ms Rosalía Gonzalo López to the board of directors of the Company as a proprietary director for the statutory term six (6) year term. Approved with the affirmative vote of all the shareholders present and represented in the Meeting. 2.3 Appointment of Ms María Antonia Otero Quintas to the board of directors of the Company as an independent director for the statutory six (6) year term. Approved with the affirmative vote of 1,052,272,005 shares representing 99.78% of the share capital present at the Meeting and the abstention of 2,324,527 shares, representing 0.22% of the share capital present at the Meeting. There were no dissenting votes. 2.4 Appointment of Mr Antonio Javier Cordero Ferrero to the board of directors of the Company as an independent director for the statutory six (6) year term. Approved with the affirmative vote of 1,052,272,005 shares representing 99.78% of the share capital present at the Meeting and the abstention of 2,324,527 shares, representing 0.22% of the share capital present at the Meeting. There were no dissenting votes.

Three.- Approval of divestiture of assets. Sale of non-strategic assets Approved with the affirmative vote of all the shareholders present and represented in the Meeting.

Four.- Report on the Company Strategic Plan 2018-2030. This point is for the information of the shareholders and is therefore not submitted to approval.

Five.- Granting of powers to execute the above resolutions. Approved with the affirmative vote of all the shareholders present and represented in the Meeting.

B.4 Indicate the address and means of accessing the Company’s website as regards information on corporate governance.

Although not required to, because it is not a listed company, the Company has a corporate website, http://www.canalgestion.es, which contains information on corporate governance in the section on "Shareholders' information", under "Corporate governance". Furthermore, the section "Shareholders' information" of the aforementioned website provides direct access, through a link, to the website of the Spanish National Securities Market Commission, URL CNMV - Hechos relevantes

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

http://www.cnmv.es/Portal/HR/ResultadoBusquedaHR.aspx?division=1&nif=A86488087, which contains “Relevant facts” on Canal de Isabel II, S.A.

B.5 Indicate whether any meetings have been held of the various syndicates, if any, of holders of securities issued by the company, the purpose of the meetings held in the year to which this report refers, and the main resolutions adopted.

No meetings of the syndicate of securities holders have been held in 2017.

C COMPANY MANAGEMENT STRUCTURE

C.1 Board or managing body

C1.1 Detail the maximum and minimum number of board or managing body members established in the articles of association:

Maximum number of directors/board members 12 members

Minimum number of directors/board members 3 members

C.1.2. Please complete the following tables with details of the board members and their different capacities:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

DIRECTORS/MEMBERS OF THE MANAGING BODY

Name or company name of the Representative Last date of appointment director / member of the managing body

Ángel Garrido García 09/09/2015

Engracia Hidalgo Tena 09/09/2015

From 09/09/2015 Jaime González Taboada to 13/11/2017

Pedro Rollán Ojeda 09/09/2015 From 09/09/2015 José Antonio Díaz Lázaro-Carrasco to 01/08/2017 From 09/09/2015 Raúl Canosa Usera to 13/11/2017 Jacobo Martínez Pérez de Espinosa 09/09/2015

From 09/09/2015 José Conesa López to 13/11/2017

Guillermo Hita Téllez 27/04/2016

Rafael Prieto Martín 27/04/2016

Rosalía Gonzalo López 13/11/2017

Rita Maestre Fernández 13/11/2017

María Antonia Otero Quintas 13/11/2017

Antonio Javier Cordero Ferrero 13/11/2017 C.1.3. Please identify any board members who hold positions as directors or executives at other companies forming part of the company’s group:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Name or company name of the Name of Group director / member of the managing company Taxpayer ID of body Group company Position

Ángel Garrido García Canal de Isabel II (Public Q2817017C Chairman Entity)1 Engracia Hidalgo Tena Canal de Isabel II (Public Q2817017C Board Member Entity)

Pedro Rollán Ojeda Canal de Isabel II (Public Q2817017C Board Member Entity)

Guillermo Hita Téllez Canal de Isabel II (Public Q2817017C Board Member Entity)

Rosalía Gonzalo López Canal de Isabel II (Public Q2817017C Board member Entity) (since 17/10/2017)

Jaime González Taboada Canal de Isabel II (Public Q2817017C Board member (until Entity) 17/10/2017)

Rafael Prieto Martín Hispanagua, S.A.U. A81196743 Sole Director

Rafael Prieto Martín Hidráulica Santillana, A28005072 Sole Director S.A.U. Rafael Prieto Martín Canal Extensia, S.A.U. A83151985 Chairman and Managing Director

Rafael Prieto Martín Canal Energía, S.L. B83410530 Sole Director

Rafael Prieto Martín Canal Energía B83410563 Sole Director Comercialización, S.L.U. Rafael Prieto Martín Canal Energía Distribución, B83410597 Sole Director S.L.U. Rafael Prieto Martín Canal Energía Generación, B83410605 Sole Director S.L.U.

Rafael Prieto Martín Canal Gas Distribución, B83410621 Sole Director S.L.U. Rafael Prieto Martín Canal de Comunicaciones A80915705 Sole Director Unidas, S.A.U.

Rafael Prieto Martín Canal Gestión Lanzarote, A76157551 Sole Director S.A.U.

(1) Includes positions occupied by the directors in Canal de Isabel II (Public Entity), however it is not a business corporation but an entity under public Law.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

C.1.4 Complete the following table on the number of female directors on the board of directors and its committees over the past four years:

Number of female directors

2017 2016 2015 2014 Number % Number % Number % Number % Board of 4 40% 1 10% 1 11.11% 0 0.00% Directors

Audit Committee 1 33.33% 1 33.33% 1 33.33% N/A

Appointments and 1 25.00% 0 0.00% 0 0.00% N/A remuneration committee

C.1.5 Complete the following table on the aggregate compensation accrued by directors or members of the managing body over the year:

(in thousands of euros) Remuneration item Individual Group

Fixed remuneration

Variable remuneration

Allowances 32

Other remuneration

TOTAL: 32

C.1.6 Please identify the senior managers who are not in turn members of the board or the managing body, and indicate the total remuneration paid to them during the year:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Name Position Period in office in 2017 Juan Ignacio Commercial Complete year Zubizarreta Pariente Director María Belén Benito Director of Complete year Martínez Operations Juan Sánchez García Director of Complete year Innovation and Engineering Manuel Beltrán Director of the Complete year Pedreira General Technical Secretariat Luis Gonzalo González Director of Complete year García Finance and Business Development Pablo Galán González Director of Complete year Resources Javier Marino González Security Director From 31/01/2017

Total senior management remuneration (in 780 thousands of Euros)

The management team is made up of the General Manager and the Directors, all appointed directly by the board of directors.

C.1.7 Please specify whether the articles of association or board regulations set any limit on the mandate of members of the board of directors:

YES X NO

Maximum term of office 6 years with possibility of re-election

C.1.8 Specify whether the individual and consolidated annual accounts submitted to the board for approval have been previously certified:

YES NO X

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Identify the person(s) that certified the individual and consolidated annual accounts of the Company for authorisation for issue by the board of directors:

Taxpayer Name Position

C.1.9. Please explain any mechanisms established by the board of directors to prevent the individual and consolidated annual accounts prepared by the board from being submitted to the shareholders at their General Meeting with a qualified audit report.

The individual and consolidated annual accounts submitted for authorisation for issue by the board or managing body include a draft audit report issued by the auditor that will be definitive on completion of certain formal aspects, expressing an opinion as to whether the aforementioned annual accounts, taken as a whole, give a true and fair view, in all material respects, of the equity and financial position of Canal de Isabel II, S.A., as well as its financial performance and cash flows for the year ended, in line with the applicable financial reporting framework and, in particular, with the accounting principles and criteria contained therein.

The draft audit report issued by the auditor in the preparation of the individual and consolidated annual accounts anticipates any audit problems that may arise and, as a result, the potential remedy thereof prior to the Shareholders’ Meeting at which such accounts are to be approved.

Moreover, the Special Shareholders’ Meeting held on 3 December 2014 resolved to amend the Company’s articles of association in order to set in place an Audit and Control Committee (the name of which was subsequently changed to Audit Committee, as approved at the general Shareholders Meeting held on 23 April 2015), which was effectively created under the Board resolution of 17 December 2014 and held its preliminary meeting on 15 January 2015.

The Committee will serve to support the board of directors in its oversight functions, by periodically reviewing the process to prepare the financial and economic information, internal controls at the Company and the independence of the external auditor.

The Audit Committee will have, inter alia, the following competences:

a) Responding to any questions raised by shareholders at their general meeting on matters which fall within its remit and, in particular, regarding the result of the audit, explaining how this has contributed to the integrity of the financial reporting and the committee’s function in such process. b) Supervising the effectiveness of internal control at the Company, internal auditing, as the case may be, and the risk management systems, as well as discussing any significant weaknesses in the internal control system detected during the course of the audit with the auditors or audit firms. Accordingly, and, if applicable, recommendations and proposals may be submitted to the governing body and within the relevant deadline for monitoring thereof. c) To supervise the process for preparation and presentation of the financial reporting required and to present recommendations or proposals to the Board of Directors aiming to safeguard its integrity.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

d) Proposing to the managing body, to be submitted to the Shareholders’ Meeting, the appointment of auditors or audit firms in line with articles 16, sections 2, 3 and 5 and 17.5 of Regulation (EU) No. 537/2014, of 16 April and the terms of the appointment and obtain information on a regular basis regarding the audit plan and the execution thereof and maintain independence while exercising its functions. e) Establishing the appropriate relationships with auditors or audit firms in order to receive information regarding any such issues as may compromise their independence, for examination by the Committee, and those of anyone else involved in the process of auditing accounts, and, when applicable, the authorisation of services other than those prohibited, in the terms set forth in articles 4 IV, title I of Law 22/2015, of 16 April on accounts auditing, on the independence such other communications as may be contemplated in the legislation governing auditing and audit standards. The Audit Committee shall, in any event, receive annual written confirmation from the auditors or audit firms with respect to their Independence procedure and such other communications as may be contemplated in the legislation governing auditing and audit standards. In any case, it will annually receive from the external auditors the statement on his independence with regard to the entity or entities directly or indirectly linked to it, together with the information on any type of additional service provided and the corresponding fees received from such entities by the external auditor or by the persons or entities linked to this in accordance with that established in the legislation on account auditing. f) Issuing an annual report expressing an opinion on the independence of the auditors or audit firms. In any case, this report will include an opinion on the provision of additional services referred to in the previous point, considered individually and as a whole, other than the legal audit and regarding the rule for independence or the account auditing regulatory policy. g) To previously inform the Board of Directors on all the issues envisaged by the Law, the Articles of Association and these Regulations, and in particular regarding:

1. Financial reporting that must be made public periodically by the Company; 2. The creation or acquisition of shares in entities with a special purpose or domiciled in countries or territories considered to be tax havens; and 3. Operations with related parties.

the Audit Committee shall not carry out the functions set forth in this letter when these are legally attributed to another committee.

The Audit Committee shall meet with the frequency determined and whenever the Chairman or two of its members call(s) a meeting.

C.1.10 Is the secretary of the board or of the managing body a director?

SI NO X

C.1.11 Please specify any mechanisms established by the Company to ensure the independence of its auditors, financial analysts, investment banks and rating agencies.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

In order to engage the annual account audit services for the companies of the Canal de Isabel II group, the relevant tender process is staged, and the resulting contract is subject to Law 31/2007 of 30 October 2007, on procurement procedures in the water, energy, transport and postal services industries, and, failing that, to private law.

The Audit Committee, pursuant to the provisions of article 18bis.e) of the Articles of Association, received a declaration of independence from the external auditors on 28 March 2017, in relation to the entities directly or indirectly related thereto, and information regarding the provision of additional services of any sort and the relevant fees received from these entities by the external auditor or by the persons or entities related thereto pursuant to the provisions set forth in auditing regulations.

On 24 April 2017, the Audit Committee prior to the auditor’s report, issued an annual report expressing an opinion on the independence of the auditors or audit firms, also containing an opinion on the rendering of the additional services mentioned in the previous point.

With respect to financial analysts and investment banks, bids are sought from first-rate national and international financial institutions, and the decision to contract is taken on the basis of the bids submitted.

As far as ratings agencies are concerned, Canal de Isabel II works with Moody’s and Fitch, two of the most renowned agencies worldwide. Independence is guaranteed by their own methodology and the responsibility they assume in line with the applicable legislation.

C.2. Board or managing body committees

C.2.1 List the committees of the board of directors or managing body:

Name of the committee No. of members Audit committee 3 members

Appointments and Remuneration Committee 4 members

C.2.2 Please provide details of all committees of the board of directors or managing body, the members thereof and the proportion of executive, proprietary, independent and other external directors thereon (entities that do not have the legal form of a capital company should not indicate the category of the directors in the respective table but should provide an explanation in the text section describing the legal regime governing them and how they fulfil the requirements on the composition of the audit and appointments and remuneration committees):

EXECUTIVE OR DELEGATE COMMITTEE

Name Position Category

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

% of executive directors

% of proprietary directors % of independent directors % of other external directors Number of meetings

Explain the functions entrusted to this committee, describe the procedures and rules for the organisation and operation thereof and summarise its most important activities during the year.

AUDIT COMMITTEE

Name Positi Category Jacobo Martínez Pérez de Board onmember Independent Espinosa (from 09/09/2015)

Antonio Javier Cordero Ferrero Chairman (from Independent (from 29/11/2017) 13/12/2017)

María Antonia Otero Quintas Board member Independent (from 13/11/2017)

% of executive directors % of proprietary directors % of independent directors 100% % of other external directors Number of meetings 13

Explain the functions entrusted to this committee, describe the procedures and rules for the organisation and operation thereof and summarise its most important activities during the year.

Functions of the Audit Committee per the articles of association in force at 31 December 2017, with these being the legal functions set forth in article 259 quaterdecies of the Spanish Companies Act and indicated in the preceding section C.1.9. the articles of association have been adapted to the amendments introduced by the Accounts Auditing Law in the Annual General Meeting of Shareholders held on 5 July 2017.

The Audit Committee shall comprise a minimum of three non-executive directors appointed by the board of directors, of which at least two must be independent directors and one must be appointed considering his or her knowledge and experience of accountancy and/or auditing.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The Audit Committee shall meet with the frequency determined and whenever the Chairman or two of its members call(s) a meeting. Any member of the management team or Company personnel shall attend meetings of the Audit Committee and provide cooperation and access to the information available to them whenever required. The Committee shall have the necessary means to discharge its duties and operate independently. The decisions or recommendations of the Audit Committee shall be adopted by a majority vote.

In 2017 the Audit Committee rigorously discharged the duties entrusted to it by law and the articles of association. Foremost amongst these are the presentation to the board of directors of the annual accounts of the Company and the group of which it forms part, the Company's 2016 annual corporate governance report, the Company’s budget for 2018. The Annual Report on the Committee’s Activities was also approved for the year ended 31 December 2016.

The Audit Committee together with Company Management and the actual Board of Directors, if applicable, throughout 2017, adopted various decisions regarding the Brazilian company Emissão Engenharia e Construçốes, Ltda. (currently, Emissão), including commissioning a mandatory audit of its annual accounts, a report on the assessment of Emissao's interest by an independent third party, the completion of a forensic study on the sale/purchase transaction for the shares of said company, etc., some of which were reflected in the approved annual accounts for the year ended 31 December 2016; as well as other matters such as the interjection of an arbitration against the seller of said company’s shares, in relation to contingencies that could have an impact on the evaluation of the acquired shares, as well Sociedad Canal de Isabel II, S.A. and the subsidiary company, Canal Extensia, S.A.U., appearing as the injured party, in the Preliminary Proceedings 91/2016, of the Central Court of the Investigating Judge No. 6 of the National Court.

Name the member of the Audit Committee appointed with regard to his or her knowledge and experience in accounting, auditing or both, and indicate the number of years that the Chairman of the Committee has held that office.

Name of director with Antonio Javier Cordero María Antonia Otero experience Ferrero (from Quintas (from 29/11/2017) 13/11/2017) Number of years in office as Chairman

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

APPOINTMENTS AND REMUNERATION COMMITTEE

Name Position Category

Raúl Canosa Usera (from Chairman Independent 09/09/2015 to 13/11/2017)

Jacobo Martínez Pérez de Board member Independent Espinosa (from 09/09/2015)

Pedro Rollán Ojeda (from Board member Proprietary 16/03/2016) María Antonia Otero Chairman (since 12/12/2017) Independent Quintas (from 13/11/2017) Antonio Javier Cordero Board member Independent Ferrero (from 29/11/2017)

% of executive directors % of proprietary directors 25% % of independent directors 75% % of other external directors Number of meetings 7

Explain the functions entrusted to this committee, describe the procedures and rules for the organisation and operation thereof and summarise its most important activities during the year.

Functions of the Appointments and Remuneration Committee as per the articles of association in force at 31 December 2015 are the functions currently attributed by the Spanish Companies Act in article 529 quindecies. The Company has an Appointments and Remuneration Committee comprising a minimum of three nonexecutive directors appointed by the board of directors, of which at least two must be independent directors. Without prejudice to any other functions assigned by law, the Appointments and Remuneration Committee shall, at a minimum, perform the following functions: a) evaluating the skills, knowledge and experience required of members of the board of directors; defining, to this end, the roles and capabilities required of the candidates to fill each vacancy, and deciding the time and dedication necessary for them to properly perform their duties b) establishing a target representation rate for the less-represented gender on the board of directors, proposing ideas on how to achieve this target rate. c) making proposals to the board of directors of independent directors to be appointed by co-option or, if applicable, for submission to decision by the general Shareholders' Meeting, and proposals for re- election and removal of those directors by the general Shareholders' Meeting; d) reporting on proposals of the board of directors for appointment of other directors to be appointed by co-option or, if applicable, for submission to decision by the general Shareholders' Meeting, and proposals for re-election and removal of those directors by the general Shareholders' Meeting; e) reporting on proposals for senior officer appointments and removals and the standard terms of their contracts.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) f) examining and organising the succession of the chairman of the board of directors and of the Company's chief executive and, where applicable, making recommendations to the board of directors to ensure a well-planned and orderly succession. g) making recommendations to the board of directors on remuneration policy for directors and general managers or other members of senior directors’ reporting directly to the board of directors, for executive committees or managing directors, and for individual remuneration and other contractual conditions of executive directors and ensuring compliance with this policy. The Appointments and Remuneration Committee shall meet with the frequency determined and whenever the Chairman or two of its members call(s) a meeting. Any member of the management team or Company personnel shall attend meetings of the Appointments and Remuneration Committee and provide cooperation and access to the information available to them whenever so required. The Committee shall have the necessary means to discharge its duties and operate independently. The decisions or recommendations of the Appointments and Remuneration Committee shall be adopted by a majority vote.

In 2017 the Appointments and Remuneration Committee rigorously discharged the duties entrusted to it by law and the articles of association. In this regard, special mention should be given to the submission to the Board of Directors of the proposals to appoint independent Directors and the submission thereof to the decision of the annual meeting of shareholders, the preparation of the report for the proposal of appointing non-independent Directors or proprietary directors, drawing up the report on the proposals to appoint Directors and the approval of the Committee’s Annual Activities Report for 2016.

In terms of the diversity policy in relation to the Board of Directors and in compliance with one of the main objectives established by the Appointments and Remuneration Committee for 2017, aware of the importance of fostering the diverse composition of the Board of Directors and the presence of women on the board, the aforementioned Committee agreed in its meeting on 18 September 2017 to submit to the company’s managing body the proposals and favourable reports for the appointment of new female board members, thus increasing number of female members on the board with the lowest representation to 40%.

APPOINTMENTS COMMITTEE

Name Position Category

% of executive directors % of proprietary directors % of independent directors % of other external directors Number of meetings

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Explain the functions entrusted to this committee, describe the procedures and rules for the organisation and operation thereof and summarise its most important activities during the year.

REMUNERATION COMMITTEE

Name Position Category

% of executive directors % of proprietary directors % of independent directors % of other external directors Number of meetings

Explain the functions entrusted to this committee, describe the procedures and rules for the organisation and operation thereof and summarise its most important activities during the year.

COMMITTEE

Name Position Category

% of executive directors

% of proprietary directors % of independent directors % of other external directors Number of meetings

Explain the functions entrusted to this committee, describe the procedures and rules for the organisation and operation thereof and summarise its most important activities during the year.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

D RELATED-PARTY AND INTRA-GROUP TRANSACTIONS

Canal de Isabel II, S.A. (the Company) was set up pursuant to the provisions of Law 3/2008 of 29 December 2008, on Tax and Administrative Measures in the Autonomous Community of Madrid, amended by Law 6/2011 of 28 December 2011, on Tax and Administrative Measures, governing the pursuit of activities relating to water supply, sanitation, hydraulic services and hydraulic works, pursuant to Law 17/1984 of 20 December 1984, regulating water supply and sanitation in the Autonomous Community of Madrid and other applicable legislation. Article 2 of the revised articles of association describes the Company's objects on the terms set forth in the preceding legislation. The Company forms part of the Canal de Isabel II Group, the direct parent company of which is the Public Entity Canal de Isabel II (the Public Entity), which holds a stake in the Company’s share capital of 82.40%. There are no other shareholders that may exercise, directly or indirectly or under agreements between shareholders, control of the Company (in the scenarios envisaged in article 4 of Securities Market Law 24/1988, of 28 July 1988) or any significant influence over the taking of financial and operational decisions at the Company.

D.1 Provide details of transactions between the entity or group entities and shareholders, cooperative members and holders of proprietary or equivalent rights.

In line with the definition of related party provided for in Order EHA/3050/2004, of 15 September 2004, Canal de Isabel II (Public Entity) and the Madrid City Council have been deemed related parties with stakes of 82.4% and 10%, respectively. The relationship between the Company and the Public Entity is established under the Framework Agreement, which describes in detail the reciprocal undertakings and consideration during the term thereof, quantifying and specifying the services to be rendered by the Company and guaranteeing the sufficiency and balance of the financial resources assigned to managing the water supply.

Details of transactions with the Public Entity in 2017 are as follows:

Nature of Type of transaction Amount without VAT relationship (thousands of Euros) (1) Framework Provision of services-technical 2.841 Agreement assistance Framework Fees for regulation, spillage 1.978 Agreement and others paid to the Entity Framework Dividends distributed 128.228 Agreement Framework Debt repayment – mirror Agreement debt- 102.298 Framework Finance cost of debt -mirror Agreement debt- and others 8.344 Framework Tax obligations - VAT Self- Agreement supply theatre assignment - 1.071 Framework Penalty management services Agreement rendered 4 Framework Other services rendered Agreement 205 (1) Amounts accrued in 2017

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Relations between the Company and Madrid City Council are established under the Management Agreements referred to in point A.3, the provision of services as an institutional client and the tax obligations for which the Company is liable in line with the legislation in force.

Details of transactions with Madrid City Council in 2017 are as follows:

Nature of relationship Type of transaction Amount without VAT (thousands of Euros) (1) Contract Services rendered -integrated 22,367 water cycle- Tax Municipal taxes 11,407 Contractual Discharge fees 4,290 Contractual Operating work 2,599 Corporate Dividend distribution 15,562

(1) Amounts accrued in 2017

Each year the Company draws up a Transfer Pricing Report in the Canal de Isabel II Group with the aim of complying with obligations in terms of reporting and documentation regarding entities and related transactions established by the Corporate Income Tax Law and the relevant Regulations on Corporate Income Tax.

D.2 Provide details of transactions between the entity or group entities and the directors, management or members of the governing body of the entity.

N/A

D.3 Provide details of intragroup transactions.

The amounts of the Company’s transactions with Group companies, associated companies and joint ventures in 2017 are as follows, as detailed in note 24 of the Company’s individual annual accounts:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Thousands of Euros Canal de Hidráulica Canal de Hispanagua, Lanzarote GSS Emissao Ocio y Joint Isabel II Santillana Comunic. S.A.U. ,S.A.U Venture, Deporte Ventures (Public S.A.U. Unidas S.L. S.L.U. Entity) S.A.U. INCOME Dividends ------Water sales - - - 4 - - - - - Materials sales 2 ------Compensation for - - - 18 - - - - - breakdowns Levy for concession - 428 - - - - - 81 - Finance income - - - - 4,978 - - 1 552 Other operating income 207 559 78 182 832 - - - 548 EXPENSES Water purchases ------(3) Energy - (1,689) ------Telephone helpline - - - (2,885) - - - Operation of - - - (3,015) - - - - - treatment plants Sales Offices - - - - - (718) - - - Other operations - - - (9,134) - - - - - Other leases - - (60) ------Repairs of technical installations - - (3,470) (2,953) - - - - - Technical assistance (2,841) - (343) (992) - - - - - Other operating expenses (1,071) ------Finance costs (8,344)

INVESTMENTS - - (759) (14,156) - - - - -

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

In 2017, transactions between Group companies in which Canal de Isabel II Gestion, S.A. did not hold a stake were as follows:

Thousands of Euros Company Income Expense Item s Canal Energía Generación 1 Canal Energía, S.L. 1 Notary and audit fees Canal Energía Distribución, S.L. 1 Canal Energía, S.L. 1 Notary and audit fees Canal Energía Comercialización, S.L. 2 Canal Energía, S.L. 2 Canal Gas Distribución, S.L. 1 Canal Energía, S.L. 1 Notary and audit fees Canal de Comunicaciones Unidas, S.A.U. 50 Hispanagua, S.A.U. 50 Communication services Canal Extensia. S.A.U. 5,181 Inassa, S.A. 4,997 Technical assistance Amerika Tecnologías de la información 184 Technical assistance Inassa, S.A. 8,637 Tripe de Barranquilla, S.A. 6,192 Technical assistance AAA Dominicana 593 Technical assistance Amagua, CEM 1,748 Technical assistance Amerika Tecnologías de la información, 62 Lease, Back Office Gestus Gestión & Servicios 42 Technical assistance Amerika Tecnologías de la información, S.A. S 1,655 Inassa, S.A. 16 Software services Tiple A de Barranquilla, S.A. 1,079 Software services AAA Dominicana 281 Software services Amagua, CEM 247 Software services Gestus Gestión & Servicios 32 Software services . Gestus Gestión & Servicios 3,974

Triple A de Barranquilla, S.A. 3,974 Meter reading, water supply, connections, bad debt collection

Canal Extensia, S.A. 1,159 Inassa, S.A. 469 Interest on loans Soluciones Andinas de Aguas, S.R.L. 690 Interest on loans Inassa, S.A. 2,590 Canal Extensia, S.A.. 1,482 Interest amortised cost AAA Dominicana 255 Interest on loans Amerika Tecnologías de la información 0,5 Interest on loans Soluciones Andinas del Agua 689 Interest on loans Emissao 48 Interest on loans Gestus Gestión & Servicios 115 Interest on loans Amerika Tecnologías de la información 2 Gestus Gestión & Servicios 2

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

In relation to related transactions with financing agreements formalised in 2017:

- On 27 October 2017, Canal Extensia, S.A. granted Inassa, S.A. a short-term credit facility with a limit of 12,507 thousand euros. The amount drawn down at 31 December 2017 was 9,089 thousand euros.

- At 31 December 2017 and 2016, Canal Extensia, S.A. has granted Inassa S.A. and Soluciones Andinas de Aguas, S.A. loans for the sum of USD 7,820,000 and USD 14,500,000 respectively. On 20 November 2017, a new addendum was signed granting an exclusion period of five years, in terms of principal and interest, therefore the first and sole amount, shall be paid before the end of November 2019.

- On 7 September 2017, Inassa, S.A. granted a long-term loan to AAA Dominicana for the sum of 4,169 thousand euros.

- On 28 September 2017, Inassa, S.A. granted a long-term loan to Emissao for the sum of 2,777 thousand euros.

Related-party transactions with guarantees at 31 December 2017, in which Inassa S.A. is guarantor are as follows:

Thousands of Company Euros Guarantee to cover bank loans Banco Davivienda ASAA 512 Banco Davivienda Gestus 65 Banco Davivienda Inassa Panamá 163 Banco Occidente ASAA 558 Banco Occidente Barbados AAA Dominicana 278 Guarantee to cover Leasing Bancolombia Amerika T.I. 20 Banco de Occidente ASAA 18 Banco Davivienda ASAA 33 Guarantee to cover contract fulfilment Banco de Bogotá Aguas de Tumbes 1,459 TOTAL 3,107

D.4 List the mechanisms established to detect, determine and resolve any possible conflicts of interest between the company or its group, and its directors or members of the managing body or executives.

Pursuant to the provisions of article 229 of the revised Spanish Companies Act, the members of the board of directors and the Company’s executives must notify the board of directors of the existence of any situation of conflict, whether direct or indirect, they may have with the Company’s interests. The board members and Company executives have informed the board of directors that neither they nor

the related parties

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

referred to in article 231 have any conflict of interest or hold any direct or indirect stake in the capital of any company pursuing the same or an analogous or supplementary type of activity as that comprising the Company’s objects.

E CONTROL SYSTEM AND RISK MANAGEMENT

With a view to demonstrating the utmost transparency in the pursuit of its activity, Canal de Isabel II releases an Annual Corporate Governance Report (hereinafter, the ACGR). To this end, the entire organisation has been involved in preparing the information required by the National Securities Market Commission for the above document, thus ensuring that it is reliable and relevant and affording control over the activities guaranteeing that the organisation’s goals are met.

This report centres on a description of the Company’s situation with a view to drafting Section E of the ACGR.

Canal de Isabel II has an Internal Audit area, under the auspices of the General Management. The functions performed by the Internal Audit area include audit, internal control and risk management.

The Internal Audit area conducts its affairs in line with the International Standards on Auditing and has on its in-house audit staff a Certified Internal Auditor (CIA) who can attest to the excellence of the internal Audit services provided. The Internal Audit area also has the Quality Certificate issued by the Institute of Internal Auditors Quality Assurance Review (QA).

E.1 Explain the scope of the entity’s Risk Management System.

Risk Management is a monitoring activity that seeks to keep permanently abreast of any risks that may have a bearing on the strategic targets to be met by the organisation. Canal de Isabel II is bound by this risk management policy and all the Company's personnel are responsible for its correct application. It is based on the following principles: 1. Understanding risk to mean any threat, event, action or omission that might prevent from achieving its objectives, successfully implementing its strategies or properly conducting its operations, or that might lead to a loss of opportunities. 2. Setting in place the mechanisms for proper risk management, having regard to the identification, evaluation, response to, monitoring and reporting of such risks. 3. Promoting and implementing the strategy, culture, resources and processes comprising integrated risk management, to be reviewed periodically in order to adapt it to the situation of the organisation and its environment. 4. Assigning responsibility for identifying, analysing, evaluating and supervising the Risk Management System to the various levels of the organisation. 5. Encouraging the creation and implementation of guidelines, limits and mechanisms that help to ensure that risk management is performed in line with the risk threshold accepted by the organisation.

6. Promoting, developing and raising awareness, via training and communication, of the Risk Management System, guaranteeing awareness of this policy, together with its implementing documentation.

All of the Risk Management activity is managed via the SAP GRC application, which adds value by offering management characteristics such as:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

• Global overview • Traceability • Historical records

• Possibility of joint risk management by various areas • Monitoring automatic controls and conducting tests • Common repository • Integrated workflow (notification and monitoring of events) • Scorecards • Information security

The application gathers information from a range of management applications used at the Company and applies them in line with monitoring needs. Capitalising on the advantages yielded by the tool, Canal de Isabel II is currently making considerable progress in automating indicators and controls.

Over the coming years, the Risk Management function is set to expand in order to include the Group’s subsidiaries.

Thus, there is now an Operational Risk Map showing the three levels of consolidation (Deputy Managers, Senior Management, Company) and a Strategic Risk Map showing a breakdown of management-related risks.

E.2 Identify the bodies tasked with preparing and implementing the Risk Management System.

The following bodies are in charge of the creation and implementation of the Risk Management System: • Board of Directors: establishes the existence of a corporate risk management system. • Audit Committee. This body reports to the board of directors. It is tasked with supervising the effectiveness of internal control, internal audit and the Risk Management System. • Management Committee. It is made up of the directors of Canal de Isabel II and any deputy managers deemed appropriate and headed by the General Manager. Its functions include designing and promoting the Risk Management model ultimately implemented and, since 2015, assessing strategic risks • Corporate Risk Manager. This function is performed by the Internal Audit area. It consists of supervising, coordinating, supporting and/or advising on the internal risk management system across the entire organisation. • Global Risk Manager. Those directly in charge at the organisation of day-to-day risk management at the Company. Their functions can be summed up as involving the supervision and coordination of risk management of each department. • Risk Manager by Organisational Unit. Those at the Company tasked with identifying and assessing the risks of their respective Organisational Unit, monitoring the action plans on the key risks affecting them, as well as reporting to their hierarchical superiors. • Persons in charge of Risk by Organisational Unit. The Company personnel who evaluate, respond to and monitor the risks deemed key risks in their area, as well as implementing the action plans previously designed to • control such risks. They also report to their managers on all matters relating to the management of such risks.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Risks managed by category are as follows:

• Compliance: relating to compliance with laws and regulations • Strategy risks: pertaining to high-level objectives in line with the company’s mission • Information risks: pertaining to the reliability of the information provided • Operational risks: related to the effective and efficient use of resources

Causes: the events that may cause a risk to materialise:

• Security • Customers/Providers: main causes related to provider or customer demands • Communication • Natural conditioning factors • External factors; external conditions that cause the risk, such as market risks, competition, regulations • Personnel loss/Lack of qualified employees: loss of employees in key positions/reduction of the number of qualified employees in the local talent pool • Technology: technology conditions that cause the risk, from IT to manufacturing technologies • Effect: the consequence should the risk materialise • Reputation: damage to reputation. • Legal/Regulation: breach of regulations, including fines and penalties. • Customer satisfaction: impact on relationship with customer- • Operating efficiency: loss of operating efficiency. • Financial: financial loss.

Company plan. Risks can be grouped together according to the company plan they may affect. Risks can affect one or more of the ten company plans the company has established. Roles and responsibilities Risk Management is promoted by General Management, delegating the function of Internal Control and Corporate Risk Management to the Internal Audit Department and reviewed by the Audit Committee. Risk Managers 9, Persons in charge of Risks 35, Evaluators 32. Of all the risks managed, 98% have indicators, 84% have controls and 20% have measures.

E.3 Indicate the main risks that may prevent the company from achieving its targets.

Canal de Isabel II is affected by a range of different risks depending on the areas in which it operates and the activities it pursues, which may prevent it from successfully meeting its goals if not duly controlled. With this in mind it has set in place a dynamic Risk Management System, enabling any new risks that might affect the Company and which are identified over the course of the year to be brought within the risk management Furthermore, it ensures that all risks are reviewed at least once a year.

The risks that may affect the fulfilment of the Company’s goals are classified based on the categories used in COSO III (Committee of Sponsoring Organization of the Treadway Commission):

• Information Risks. Those pertaining to information of a financial, non-financial, internal and external nature at the Company, the materialisation of which could affect

• Canal de Isabel II. These risks include risks relating to the quality of the financial information issued to the markets (ICOFR), tax consolidation and reporting systems.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

• Compliance risks Those pertaining to regulatory compliance. These risks relate to the aim of ensuring that the regulator and society as a whole have the utmost trust in the Company’s activity. The materialisation of such risks could lead to the imposition of coercive measures by the regulatory authorities. Compliance risks relate, inter alia, to ethical action and the legislative framework governing the activity of Canal de Isabel II. • Operational Risks. Those pertaining to operational processes at the organisation. They relate to processes, persons and services rendered. The materialisation of such risks could call into question the fulfilment of the objectives of the Company’s organisational units. Operational risks are related to: legislative and contractual compliance, control systems, employee productivity, quality management, etc. • Strategy Risks. Those pertaining to the set of decisions taken by the Company in order to fulfil its remit. He materialisation of such risks could prevent the Company from meeting its goals or reduce its growth. Such risks include: those specific to the economic cycle, those deriving from the regulatory framework, competitive threats, organisational changes, investment, divestment and new technologies, to name but a few examples.

Category No Risks % of total • Information 12 (9%) • Compliance 18 (14%) • Strategy 27 (20%) • Operations 64 (49%) • Senior Management 11 (8%) • TOTAL 132

The Company has assessed the relationship between the risks identified in its risk map and the Business Plans in order to be able to monitor the fulfilment of its goals.

During 2018, the catalogued risks in the organisation shall be related to the ten strategic lines included in the Strategic Plan 2018-2030, which was submitted to the Annual Meeting of Shareholders in its special meeting held on 13 November 2017.

E.4 Indicate whether the entity has a risk tolerance level.

The Risk Management at Canal de Isabel II performed by the Corporate Risk Manager has given rise to the process to identify, evaluate, handle and control potential events and situations with a view to providing reasonable assurance with respect to the scope of the organisation’s objectives.

Canal de Isabel II conducts its risk management based on the COSO III methodology, adapted to suit the organisation’s characteristics. This methodology enables the Company to identify, create, capture and sustain the value of risk management.

The risk assessment process starts with identification and continues as follows: Risks are assessed at the level of impact and likelihood based on scales that factor in various risk impact aspects (information, compliance, strategy, operations). A list is drawn up of the potential risks at based on the categories used in COSO.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The entity’s risk map is updated periodically (the map was updated twice in 2017 It is consolidated automatically using the information stored on SAP GRC and the risk map is drawn up by department and for Canal de Isabel II as a whole. Each area in question, depending on the nature of its activity, has its own risk map and assesses the risks that directly or indirectly affect the fulfilment of its goals. Those in charge of assessment at each organisational unit are tasked with updating the risks for which they are responsible. There is also another high-level risk map that consolidates management-level risks and Canal de Isabel II; it comprises 56 strategic risks (which arise from grouping all operational risks) and 11 risks pertaining to senior management. There were two updates in 2017, one in June and another in December. Once the most relevant risks have been identified, risk management gets underway on a joint basis between the Organisational Unit, the person responsible for management and the Corporate Risk Manager, who facilitates the process. The two decide on the person in charge of the risk and the tools to be provided to them to fulfil their remit. As from that moment and using the application, the risk in question will be controlled and monitored. For each risk, the response may be to: Transfer. Sharing the impact of a potential contingency with third parties. Mitigate. Reducing the likelihood of risks arising. Accept the risk with its impact and likelihood. Avoid. Avoiding the activities that cause the risk.

E.5 Indicate any risks arising during the year.

Certain risks relating to the Company’s activity have arisen during the year. However, none of these risks have had a material impact on the business of Canal de Isabel II, since the prevention and/or mitigation measures functioned adequately.

The risks that did materialise are due to the lack of speed in the procurement process, excessive personnel rotation, and reputational risks, as informed by Senior Management and regarding which, mitigation plans have been put in place.

Throughout 2017, the Preliminary Investigation 91/2016 has been conducted before Central Court No. 6 of the National Court, based, among others, on the information provided by Canal de Isabel II to the Crown Prosecution Service. Canal de Isabel II, S.A. hired the services, via a public tender process, of a prestigious law firm and appeared in the proceedings as private prosecutor on 2 October 2017, pursuant to article 110 of the Code of Criminal Procedure and was accepted by the Court as such. Therefore, in principle, the Company cannot be considered criminally or civilly liable for the acts being investigated and rather, it would appear that its position as injured party seems to be consolidated as the investigation progresses.

The procedure, which is still partly secret, has been divided, together with the root cause, into six separate parts, to our knowledge to date. The first, second and fifth parts refer, respectively, to the Company’s expansion in Latin America (Inassa and Emissao), the Canal Golf Course, and to money laundering in the various transactions under investigation. The third part (Navalcarnero tram) and fourth (illegal financing of the Spanish Popular Party) are unrelated, in principle, to the interests of Canal de Isabel II, S.A. The sixth part (Mercasa), also unrelated to the Company, has already been referred to another Court investigating related criminal offences.

The investigation is estimated to end in 2018, and the oral proceedings, for those that are finally accused, shall be held in 2019. During the appropriate stage of the proceeding, charges will be filed on behalf of Canal de Isabel II, and the estimated damages for the Company will be quantified and payment thereof shall be claimed.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

No negative financial impacts resulting from the procedure are expected. However, the relevant Sentence that is imposed, which will probably not be final before 2020, will probably determine relevant amounts to be paid as compensation in favour of Canal de Isabel II, S.A. by those who are sentenced. In this regard, it is important to highlight, given the importance thereof and the sum of the verified provisional deposits in the consignment accounts of the Court made by the parties being investigated Mr Edmundo Rodríguez Sobrino for the sum of USD 2,739,003.57 and Mr Diego Fernando García Arias, for the sum of USD 828,547, both in relation to the Emissao Engenharia e Construçoes transactions being investigated.

Furthermore, we are aware of another legal case and/or investigation by the prosecutor in Colombia, in relation to the acquisition and subsequent management of the subsidiary Inassa, the result of which may lead, as these investigations progress, to additional contingencies arising that entail new operational and financial risks, which could potentially affect the Company’s financial position which is shown in the annual accounts and the report, in which case, it shall be immediately reflected in the relevant accounting documents.

Regardless of the accounting data that subsequent situations may lead to, the Company will study all the relevant legal actions in this regard, including appearing as informant, plaintiff and/or injured party in the procedures conducted before the Colombian courts, directly or via its subsidiaries, in an equivalent mode as verified by Canal de Isabel II, S.A. in the Spanish procedure indicated above.

E.6 Explain the response and monitoring plans for the main risks to which the entity is exposed.

The Company’s Risk Management System, together with the policies, executive body and personnel involved in its implementation, have enabled the risks under management to be identified sufficiently in advance to ensure that the organisation’s goals can be met. The Audit Committee performs the task of supervising the Risk Management System. In 2017, The Internal Audit Department informed the Audit Committee in the following meetings: • 27 January • 2 March • 24 April • 25 July • 26 September • 23 October

The Management Committee is kept permanently abreast of the risk management situation via the SAP GRC tool, while updates to the Company’s risk map and any progress and modifications in this area are also submitted to this Committee. Every month, the Risk Managers meet systematically with the Corporate Risk Manager, who supervises their functions. The following activities, inter alia, take place at the meetings with the managers: Presentation of any updates to the risk map 1. Proposals for modifications or combinations of risks 2. Proposals for management of indicators, controls and measures associated with the risks managed 3. Shared risk management 4. Analysis, assessment and monitoring of the risk management system.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Methodology for managing the key risks. Once the key risks affecting the business have been identified, the management process proceeds as follows: Where, given its nature and circumstances, a risk reaches a certain position in the classification of risks at the Company (risk map), risk management gets underway and a person is assigned to manage the risk. Moreover, the status of the risk is monitored, and a special plan is set in place with a view to mitigating it. Canal de Isabel II has the following management tools in place for this purpose: • Indicators: enabling the person in charge to measure the risks objectively. This rating is obtained based on the information contained on other applications, which, when subjected to the established, measuring standards, brings them into line with the standard rating with which all risks are assessed, making it possible to check it against such ratings and observe the progression over time. • Controls and measures: elements used to cut down on the likelihood and impact of the risks. First, those in charge of the risk design a series of actions they deem sufficient to bring the risk to its target rating. Once the controls and measures have been defined, they are implemented, and their effectiveness is periodically checked. Consolidation method. Currently, 45 risks are being managed at Canal de Isabel II, 96% of which have indicators and 84% controls and/or measures. With a view to ensuring that the risks are as objective as possible and bringing management into line with the characteristics of Canal de Isabel II, a system has been set in place to consolidate the risks at management and Company level, which has been approved by the Management Committee. Consolidation factors in the key activities of the Company, the budgets it deals with and their relation to the Company’s plans. Special consolidation is carried out at the level of in the case of global, transversal risks, in order to ensure that such factors are taken into account. Values are reviewed annually to ensure that they are up to date with the annual budgets and organisational situation of the Company. Both internal controls and ICOFR controls have been assessed from a design perspective (whether they are correctly defined for their purpose) and from the point of view of effectiveness (whether they perform the function for which they have been designed), providing, in the latter case, evidence of their functioning.

F INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS RELATED TO FINANCIAL REPORTING (ICOFR)

Describe the mechanisms which comprise the internal control over financial reporting (ICOFR) risk control and management systems at the entity.

F.1 Control environment at the entity Indicate at least the following, specifying the main features thereof:

F.1.3. Bodies and/or functions responsible for: ( i) the existence and maintenance of an adequate ICOFR system; (ii) its implementation; and (iii) monitoring thereof. In its Internal Control over Financial Reporting Policy (hereinafter, ICOFR), approved by the Board of Directors in its meeting held on 27 May 2015, Canal de Isabel II has defined the related roles and responsibilities, establishing that the board of directors is ultimately responsible for the existence and maintenance of an adequate and effective system of internal control over financial reporting (ICOFR).

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Furthermore, Canal de Isabel II, S.A. use the General Organisation Manual on ICOFR which was last updated and approved by the Finance and Business Development Department on 26 October 2017, which provides more details of the organisational structure of the finance area and other areas directly linked to ICOFR, assigning to each of the positions of responsibility, the mission they are charged with and the tasks and functions to be carried out to fulfil this mission. The Finance and Business Development Department, as part of the Management Committee, is assigned the responsibility of designing, implementing and maintaining ICOFR. In 2017, both the relevant processes of the ICOFR and the controls in each of these have been established in Triple A de Barranquilla, with the training of those responsible for the controls planned for 2018. Lastly, the Audit Committee, in support of the board of directors in their supervisory role, has amongst its duties, in accordance with the Company's articles of association (article 18. 18. bis), the following: to supervise the effectiveness of the Company's internal controls, internal audits and risk management systems and to oversee the preparation and presentation of regulated financial information. The Audit Committee relies on the Internal Audit area to perform part of these duties. Its mandate is to supervise the effectiveness of the internal control and risk management systems for ICOFR. This includes the following responsibilities: as part of the annual audit plan, to prepare and perform an assessment of the effectiveness of ICOFR, focusing on the financial reporting risks identified and evaluated by the Finance and Business Development Department and inform the Management Committee of possible weaknesses detected during the audits performed, as well as the timeline assigned to implement the proposed recommendations.

F.1.2. Whether the following exist, in particular with respect to the financial information preparation process:

• Departments and/or mechanisms responsible for: (i) designing and reviewing the organisational structure; (ii) clearly defining the lines of responsibility and authority with an adequate distribution of tasks and functions; and (iii) ensuring that there are sufficient procedures in place to correctly disseminate them throughout the entity.

The board of directors of Canal de Isabel II, at the chairman's proposal, appoints the general manager and other directors and determines the Company's organisational structure. As described in F.1.3, the General Organisation Manual on ICOFR provides more details of the organisational structure of the Finance and Business Development Department and other areas directly linked to ICOFR. This Organisation Manual focuses more specifically on ICOFR-related duties and responsibilities and is aligned with the Duties and Responsibilities Manual of Canal de Isabel II. The periodic update of this manual is coordinated by the Resources Department, reviewed by the different area directors and approved by general management. The periodic review of the Organisation Manual makes it possible to maintain an adequate segregation of duties, avoid duplications and guarantee the coordination of the various departments, which leads to greater efficiency in the Company's operations. In the definition and assignment of responsibilities and tasks to the different sub-departments and the areas that report to them, the duties are identified and segregated with a view to ensuring that the preparation of financial information is managed appropriately. ICOFR documentation includes a risk and control matrix which clearly defines the organisational structures and/or job functions that own each control mechanism in relation to the preparation of financial information. These responsibilities have been validated by the sub-departments of these structures through a formal approval process in SAP GRC.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

• Code of conduct, approval body, level of distribution and instruction, principles and values included (indicating any specific mention of the recognition of transactions and the preparation of financial information), and the body responsible for analysing breaches and proposing corrective measures or penalties.

To provide guidance and foster ethical professional practices, having assumed the new legislation on integrity and transparency, senior management has prepared a mandatory Code of Conduct, applicable to all personnel of Canal de Isabel II, which states the Company's values and principles.

This Code of Conduct was approved by the board of directors at its meeting held on 8 January 2015.

The Code of Conduct presents the general ethical principles for the whole organisation, specified as the values to be followed by the Company, which include the following:

• Mandatory for all Company personnel • Commitment to an ethical and compliance culture. Conduct guidelines. • Acceptance of and compliance with the Code of Conduct. • Integrity and professional responsibility are the general criteria that govern the conduct of Canal de Isabel II • Several principles, which to a greater or lesser extent are related to the reliability of the financial information and compliance with applicable legislation, are established, in particular: • The obligation to know and comply with the standards, as well as internal procedures and processes. • Decisions must be traceable. • Monitoring that all the information, including financial information, is prepared rigorously and is reliable.

In 2016, training was given to the Management Committee, Deputy Directors and Heads of Departments and in relation to the Code of Conduct (107 participants). Likewise, in 2017, training in relation to the Code of Conduct continued with the rest of the organisation (2,621 participants).

Once these practices in ethics and integrity, which are being implemented in the organisation, are mature, the aim is to extend them to other group companies.

Canal de Isabel II also has an Internal Regulation of Conduct for issues relating to Securities Markets, which was also approved by the Board of Directors in the meeting held on 8 January 2015. This regulation includes, among others, the following aspects related to financial reporting:

• Codes of conduct relating to personal transactions of liable persons • Codes of conduct in relation to privileged information • Codes of conduct in relation to relevant information • Codes of conduct in relation to handling trading

This Regulation is applicable, among others, to persons that may have regular and recurring access to privileged information, with the Registry of liable parties created in 2015, which is periodically updated or when any of the persons included in the scope of said Regulation are incorporated or replaced.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

• Whistle-blowing hotline, which allows the Audit Committee to be informed of any financial and accounting irregularities, in addition to any breaches of the Code of Conduct and irregular activities within the organisation, stating whether this channel is confidential in nature.

As indicated in the Code of Conduct, Canal de Isabel II has a notification and consultation procedure in place (ethical line) which enables people within the company, together with providers and contractors, to submit any queries or notify any irregularities or breaches by email [email protected]

The Ethics and Compliance Committee is an essential safeguarding element of the Code, it has its own Regulation whose functions include:

• Ensuring that the approved Code of Conduct is known throughout the organisation. • Developing materials for classroom-based training seminars. • Designing and developing online training courses. • Raising awareness among senior management. • Implementing the whistle-blowing hotline and the corresponding Response Protocol.

In 2017, the Ethics and Compliance Committee met on 3 occasions.

The Ethics and Compliance Committee is responsible for processing notifications and queries received via the ethical line, pursuant to the Response Protocol, and may use the help of the departments within the company as required in order to resolve each communication. This Response Protocol establishes codes of conduct that must be followed in relation to responding to complaints, or concerns relating to irregular activities in view of the Code of Conduct.

In 2017, none of the notifications received via the ethical line were related to irregularities that could affect the financial reporting.

• Training programmes and regular refresher courses for personnel involved in the preparation and review of financial information and the assessment of ICOFR, covering at least accounting standards, audit, internal control and risk management.

Training programmes and regular refresher courses for personnel involved in the preparation and review of financial information and the assessment of ICOFR, covering at least accounting standards, audit, internal control and risk management.

The 2017 Training Programme included a block course of training aimed at personnel from the financial department with the aim of extending and updating their knowledge in fiscal and accounting matters and code of conduct.

In 2017, personnel from Financial Management and Business Development that take part in preparing and reviewing the financial information, received a total of 500.41 hours of training. Eleven courses were held and attended by 17 employees. Most of the courses were on accounting, consolidation and taxation and code of conduct.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

New internal sessions were held throughout the year on the use of the SAP GRC Process Control tool used for management of the ICOFR system, with nine application users taking part, with a total of four sessions, totalling twelve hours.

Lastly, with a view to extending financial and accounting knowledge to other areas of the Company, 13 participants from other Company departments received a total of 208 hours of training on finance for nonfinancial professionals.

F.2 Assessment of financial reporting risks

Report, at least on:

F.2.1. What are the main features of the risk identification process, including the process of identifying the risks of error or fraud, with respect to:

• Whether the process exists and is documented

Apart from the integrated risk management system in Canal and described in section E, Control Systems and Risk Management of this Corporate Governance Report, the Internal Control System of Financial Information also includes a specific process for identifying risks regarding financial information in the parent company.

• Whether the process covers all financial reporting objectives (existence and occurrence; completeness; valuation; presentation, disclosures and comparability; rights and obligations), whether it is updated and, if so, how frequently.

With regard to specific ICOFR risks, the purpose of the financial reporting scope matrix is to identify the accounts and disclosures that carry significant associated risk and have a potential impact on the financial information, thus requiring special attention.

Financial risk management consists of identifying risks in respect of the reliability of the financial information and establishing controls to mitigate these risks. This financial risk management is a separate section in the SAP GRC IT application, which in turn contains the documentation of the processes that affect internal control over financial reporting as well as the risks and controls that have been established for each process. The units responsible for performing sub-processes, tasks and control activities are identified in the approved processes structure. The starting point for the management of financial reporting risks is the analysis of the information contained in the Company's financial statements, selecting the most significant accounting items based on quantitative criteria (materiality) and qualitative criteria (transaction complexity, volume of transactions, difficulty of calculations, use of judgements, estimates or projections, if subject to fraud, etc.). The selected items are associated with processes and/or sub-processes where the information is generated. As a result of this analysis the financial reporting risks are identified.

At the same time, other risks from any of the established categories are identified that, although they may not exceed the established quantitative and qualitative thresholds, might still compromise the reliability of the financial information. Fraud-related risks and the risk of errors in financial reporting are of particular relevance and are specifically identified.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Once the risks and the related processes have been identified, the controls to mitigate them are designed and implemented. These controls are periodically monitored; the Internal Audit Department is responsible for the review.

Risk assessment is performed annually and fulfils the objectives that ensure the reliability of the financial information published: existence and occurrence, completeness, valuation, presentation, disclosures and comparability, rights and obligations. The purpose of this risk management is to update the risks to the changing circumstances of the organisation, i.e. changes in the structure, IT systems, regulation, market, etc.

In 2015 the focus was on implementing the ICOFR system both in Canal Gestión, and in two subsidiaries, Hispanagua, S.A.U. and Canal Gestión Lanzarote, S.A.

In 2017, once the key processes have been identified and reviewed together with their respective managers, the internal control system for financial reporting is carried out in both Hispanagua, S.A.U. and in Canal Gestión Lanzarote, S.A.U.

In Triple A de Barranquilla once the processes, control and managers have been defined, this control system is expected to be functioning after the relevant training has been given as planned for 2018.

To this end and once the key processes have been identified in these two companies together with their respective managers and the relevant training has been given, pursuant to Internal Control and Risk Management SAP-GRC, this control system will be implemented.

This will enable this internal control system to be extended to the rest of the group companies as agreed.

• Whether a specific process is in place to define the consolidated group, taking into account among other aspects, the possible existence of complex corporate structures, special purpose entities, etc.

The Finance and Business Development Department of Canal Gestión has approved the consolidation process of the financial statements, which regulates the calculations and the updating of the consolidated group. The consolidated group remains unchanged while there are no changes to the investments in consolidated companies However, should any change occur in the percentages of direct, indirect or crossed ownership in the investees, the consolidated group is recalculated. The ownership percentages are reviewed at each monthly close.

The map of Group companies is updated on a regular basis and whenever there is a change in the interest held in a company. All changes occurring in a given period are specifically identified.

• Whether the process considers the impact of other risk types (operational, technological, financial, legal, reputational, environmental, etc.) that may affect the financial statements.

The risks identified in the Internal Control System over Financial Reporting form part as financial risks of the company’s overall corporate risk management system, with the latter incorporated in the risk management application, SAP – GRC.

• Which governing body within the entity supervises the process.

The Canal de Isabel II Audit Committee is responsible for ensuring the control and supervision of the effectiveness of the ICFR. This Committee is helped by the internal audit, which reviews the control system.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

The ICOFR is integrated in the SAP-GRC.

This application identifies the critical processes, associated risks, control activities to mitigate these recognised in the relevant risk matrix and controls and the process structure is identified and integrated in this application, together with the units responsible for executing the control activity.

The following are among the benefits provided by this system:

• It centralises all of 's documentation and ICOFR management in a standard format. • It integrates internal control over financial reporting as part of business and corporate processes, thus each organisational unit responsible can periodically assess its controls, providing the necessary evidence and, annually, can perform the internal ICOFR certification process. • It uses workflows and formulas to manage control activities and to document evidence of their execution and that of the action plans. • It facilitates access to documented evidence of process controls and a rapid, immediate visualisation of the result of the assessment. • It constitutes a support tool for the ICOFR monitoring process by Internal Audit. • It makes it easier to obtain and support the information required for both external and internal reporting on ICOFR.

F.3 Control activities

Indicate at least the following, specifying the main features thereof:

F.3.1. Procedures to review and authorise financial information and the ICOFR system description to be published on the securities markets, indicating those responsible for execution, as well as documentation describing the flow of activities and controls (including those relating to fraud risk) for the different kinds of transactions that may have a material impact on the financial statements, including the procedure for the accounting close and the specific review of relevant judgements, estimates, valuations and projections.

The review process and authorisation of the Company's financial information, as well as the description of ICOFR, are formally carried out every year. Also, monthly reviews are performed, with the main objective of guaranteeing the quality of the financial information reflected in the financial statements.

In this process, those in charge of the Consolidation and Investees area, the Sub- department of Financial Administration, the Sub-department of Management Control, the Sub-department of Finance and the Sub department of IT systems, as well as the corresponding areas within each sub-department, review and validate the reliability of the financial information prepared on their areas of responsibility as well as the description of ICOFR using the SAP BPC tool.

The financial information approval process starts with the preparation and monthly presentation to Canal de Isabel II's Management Committee of the monthly financial close information and ends with the preparation and annual presentation of the "Canal

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

Gestión Group's Consolidation Report" by the Consolidation and Investees Area for the Finance and Business Development Department. All information is validated through

SAP BPC. Once reviewed, the report is sent to management for review and approval.

In line with the ICOFR scope matrix, the Finance and Business Development Department launched the internal control documentation commencing with the processes/sub- processes that cover different types of transactions that could have a material impact on the financial statements, which have been identified as key processes in Spain and cover more than 70% of the line items in the consolidated financial statements.

In 2017, a total of 347 tests were launched in Hispanagua, S. A. U. (95 design tests and 252 effectiveness tests) of the 95 controls it has and in Canal Gestión Lanzarote, S. A. U. a total of 505 tests were launched (131 design tests and 374 effectiveness tests) of the 132 controls it has. A total of 141 controls were identified in Triple A Barranquilla, S. A. of which, 88 are key.

This information includes high-level descriptions of key processes/sub-processes for financial reporting:

• Accounting close, which includes the key controls related to relevant judgements, estimates and projections. • Consolidation • Budgets • Asset management • Treasury • Tax management • Invoicing and collection • Contracting, supplies and payments • Salaries and social securities • Preparation of Annual Accounts

The documentation for each process comprises:

• Departments involved • Related internal policies and procedures • Related technological systems • Accounts, relevant associated attributes and significant disclosures • Process-related risks affecting financial reporting • Key sub-processes and activities • Descriptions of each sub-process associated with each process. • For each key control the following were identified: • Control objective • Organisational structures and/or job functions of the owners of each of the controls identified. • Frequency of controls • Degree of automation (manual, automatic, semi-automatic) • Type of control (detective, preventative) • Evidence of execution

During the process of implementing the ICOFR, Financial Management and Business Development conducted an analysis of the coverage of fraud risk associated with ICOFR. For this purpose, the areas where fraud could occur were identified, indicating the process and sub-process where these are found

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) and the related controls to mitigate this risk, as well as the action plans to cover possible gaps, which were implemented in 2015.

Furthermore, as part of the project to implement the Compliance Function, a crime prevention module is to be drawn up pursuant to the 2015 amendment to the Criminal Code regarding criminal liability of legal entities.

With the aim of carrying out continuous updating of internal control, Canal Gestión has implemented the internal control management tool (SAP GRC) which serves to report and store the documentation, with a view to improving process effectiveness. His tool makes it easier to obtain, evaluate and review the information, as well as improving the organisation's control environment. SAP GRC will contribute to a more robust control environment at all levels of the organisation, facilitating the review and updating of documentation, the self-assessment of control effectiveness and the follow up of the stage of completion of action plans, through a more efficient assignment of responsibilities for performing controls.

F.3.5. Internal control over financial reporting system policies and procedures (including access security, monitoring changes, how changes are made, operating continuity and segregation of duties) which support the entity’s relevant processes for the preparation and publication of financial information.

The control activities operating in the IT systems for the critical processes associated with the preparation and publication of the financial information of Canal de Isabel II, S.A., as defined in the Company's ICOFR, have been identified. Specifically, a series of policies and actions that focus on the following aspects have been designed and implemented:

• Information Security - policy and function • Management of weaknesses and security incidents • Security of access to information systems • Segregation of duties • Management of software and infrastructure modifications • Project Management • Secure software development • Operations management

• Operating continuity

A set of controls aimed at providing reasonable assurance as to the reliability of the financial information has been defined as part of these activities. Design and effectiveness tests have been carried out throughout the year.

Information Security - policy and function: Canal de Isabel II, S.A. has an Information Security and Business Continuity Policy, signed by the Company's general manager and distributed throughout the organisation, which is published on the corporate Intranet. It also has an Organisational Manual of the Information Security Management System, which states the duties and responsibilities in this area. These are mostly performed by the Information Security Coordinating Committee, the Company's top-level information security body, which is chaired by the Security Director and has representatives from all of the areas involved in information security.

Furthermore, for raising awareness among employees and for these to put this into practice regarding cyber-security, security recommendations have been issued, together with information alerts during well- known campaign periods for distributing harmful programmes.

As in 2017, an in-depth update has been conducted on the Regulations of Use of the Information and Communication Systems, which will be published during the first quarter of 2018.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

In 2017, as part of the definition of the company’s Strategic Plan for 2018-2030, within strategic line 3 to boost service continuity, 6 actions have been included directly related to cyber-security which will be developed in the coming years:

• Implement and continuously improve security management processes (proactive security) • Incorporate surveillance mechanisms as required to anticipate possible security incidents and apply corrective measures (preventive security) • Improve the control and level of general security of the corporate IT systems (reactive security) • Master Plan for Operational Technology Security • Operational Support System for Control systems, Systems and Security • Training programme regarding culture of security

Management of weaknesses and security incidents:

The IT systems are updated periodically whenever the software manufacturers issue notifications that software patches and security updates are available. Weaknesses reported by these manufacturers or official or non-official lists are taken into account. In 2014 a collaboration agreement was signed with INCIBE (the Spanish National Institute of Cybersecurity) and CNPIC (the Spanish National Centre for Critical Infrastructure Protection) to manage cyber incidents. To protect its systems, Canal de Isabel II, S.A. has a complete antivirus system in place with various protection levels, from email level and internet browsing to PC level and servers with centralised administration console and a control system for accessing the network (NAC). It also has next-generation firewalls. Throughout 2017 the relevant actions for implementing the Security Operations Centre (SOC) are now fully operational for managing security incidents and the external assistance works by the Technical Office for Security have begun, with the first tasks including support for risk assessment and action protocol in the event of cyber-attacks. Throughout 2018 the centralised collection and events analysis will be fully implemented and system logs in order to strengthen the detection capacity in the event of security incidents.

At the end of 2017, the risk of cyber-attacks was included in the Company’s risk map and throughout 2018, the existing measures and controls to reduce it will be included in the risk management system (RMS).

In 2018, a risk analysis of assets and tele-control service processes will be conducted, which will enable a master security plan to be established in this regard.

As backup measures in terms of security to combat new threats, in 2017, a pilot study was conducted of new endpoint protection tools, which will probably be implemented at the end of 2018. Likewise, to protect against potential ransomware threats, monitors have been implemented that alert about massive ransomware cyber-attacks, in order to act by containing this activity, minimising any possible impacts thereof.

Security of access to information systems:

Several measures at different levels have been defined to prevent unauthorised access to data and software.

Canal de Isabel II, S.A. has its main DPC in Madrid and a back-up centre in Majadahonda to ensure that IT systems would be available in the event of any contingency. The Company's Physical Security area has

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) installed access control systems at these facilities that only allow access by authorised personnel and record all entries.

On a logical level, the Company has authorisation procedures for access to software and systems which are managed by business managers, for both internal and external personnel, implemented via the Access requests and permissions management tool. Authentication is carried out by applying a policy of complex passwords. Remote access is controlled by OTP (One Time Password) remote access authentication systems.

There is a project planned to strengthen access security based on the implementation of an identity management system that has already been designed which, for various reasons has been postponed until 2019.

Separation of functions:

Prior authorisations and periodic reviews are used to monitor super users.

The implementation of the identity management project will also make these aspects more robust.

Management of software and infrastructure modifications:

Canal de Isabel II, as part of the project to introduce a Service Desk system, a procedure was defined for the Management of Modifications, implemented in the tool, to minimise risks that could have a negative impact on the stability or integrity of the production environment. The following are among the main features of this procedure:

• Approval of all software modifications by the Business managers. • Generation of documents of the transfer to production to guarantee that all the modifications approved are implemented as planned. • Generation of the Modification Plan for infrastructure changes. • Creation of specific test environments where Business areas can perform tests. • Assessment of the impact and the priority of the modifications to the production environment through the Modifications Committee. • Performance of post-implementation reviews (PIRs).

Project Management:

With the objective of ensuring the value and quality of project deliverables and correctly assigning Project priorities and coordination of all the projects, Canal de Isabel II has developed and introduced a Project management methodology based on the PMBOK standard of the PMI and a project portfolio management methodology based on COBIT 5, specifically the VAL IT standard. It has also set up a program and Project management office that monitors compliance with the management methodologies and procedures in these areas. Through their representatives on the projects and the Information Security Committee for the approval of business cases and the investment portfolio (annual operating plans), the Business areas actively participate in these processes.

In 2017, a review of the management methodology of the project portfolio was carried out, with the main aim of focusing it on projects that carry out the initiatives in the Company's 2018-2030 Strategic Plan.

Secure software development:

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

As part of the Information Security Management System a general procedure of Secure Development has been drawn up, which contains a set of good practices in codification and secure development that are included in the life cycle of software development as codification requirements. As a result of their implementation the most common software weaknesses can be mitigated. This procedure

contemplates performing security assessments in the design and audit stage of the finished product. The Company also has a Continuous Integration System based on rules to control the quality of software that is to be delivered to production.

Likewise, a Continuous Integration system is in place based on standards to control the quality of software that is to be delivered to production.

Operations management:

Various initiatives have been carried out to ensure that information systems are operated correctly:

• A Planner and Operations Manual provide support to the planned execution of processes. • Systems are monitored at various levels: services and network availability, performance, user experience, process execution. • Back-up systems and procedures are in place to guarantee the availability of information. Additionally, the safekeeping of the information is ensured through the storage of back-up tapes in an external bunker. • Technical training on Capacity Management has been developed as a guide to the correct execution of the Capacity Management process with regard to present and future requirements. • System users can contact a 24x7 User Service Centre if they detect any incidents.

Operating continuity:

In recent years the Company's IT Infrastructure area has been developing several disaster recovery plans (DRPs) for the main IT systems, which focus on the strategy of recovery through the back-up centre. Unit recovery tests are carried out systematically as part of these plans.

Additionally, Canal de Isabel II has a Business Continuity Plan, which is focused on all critical processes performed at Company headquarters and the back-up centre. This Plan includes scenarios where systems (based on the various DRPs), buildings, personnel and suppliers are not available. It includes all the documents and procedures (governance model, recovery strategies and procedures, crisis management, training plans, updating and tests) necessary to guarantee a minimum impact on critical business processes in the event of disaster. Also, the Information Security Committee has been assigned Business Continuity Management duties and responsibilities, making it the maximum governing body for continuity in the organisation.

In 2017 business continuity information tests were conducted in various contingency scenarios of loss of buildings and critical providers, including the redundant system test of the supply operation control systems. In 2018, the Business Impact Analysis (BIA) will be updated and the subsequent Business Continuity Plan.

In 2017, a review of the IT management processes was carried out and a comparison analysis for the definition of a new IT management process improvement project and support models for these (ITSM).

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

F.3.6. Internal control policies and procedures to supervise management of activities outsourced to third parties, as well as issues related to evaluation, calculation or valuation which are entrusted to independent experts and which may have a material impact on the financial statements.

Canal de Isabel II, S.A. is a public company whose contracts, depending on the amount and purpose thereof, are subject to the Revised Public-Sector Contracts Law or to Law 31/2007 of 30 October 2007 on procurement procedures in the water, energy, transport and postal services industries. The administrative conditions of tender procedures include the agreements and conditions that define the rights and obligations of the parties to the agreement and other mentions required by the Law and related provisions. The technical specifications include the specific technical requirements that govern the provision of the service and define its qualities. Activities entrusted to third parties that could have a material impact on the financial statements are considered relevant to the generation of financial information, which lead to, if applicable, the identification of risks of errors, which involves designing the associated internal controls. These controls cover the analysis and internal approval of the basic assumptions to be used, as well as the review of the assessments, calculations or valuations of the activities performed by external personnel, by comparing these with calculations performed internally.

In 2017, one of the significant activities outsourced to third parties in Spain with an impact on the financial statements, was meter reading, an activity carried out in periods established throughout the year by the Canal de Isabel II, S.A. Invoicing Department.

Canal de Isabel II ensures the technical capacity and competence of the subcontractor and the Company has introduced controls to validate the reasonableness of readings:

• Consistency controls on the meter reading terminals based on historical consumption. • Control reports of the integrity of readings through mechanisms that make it possible to follow the traceability of the data, making it possible to identify and resolve possible errors or anomalies. • Supervision of reading activity by internal personnel: the Company has a team of people within the Reading unit of the Invoicing area that verifies that the work carried out is correct (sampling of readings, confirmation of anomalies reported, etc.). • Also, pursuant to the conditions of the reading agreement, the subcontractors are required to have a certain number of field supervisors to monitor the activity carried out by meter readers.

Valuations entrusted to third parties that could have a material impact on the financial statements are considered relevant activities of the generation of financial information, which lead to, if applicable, the identification of risks of errors, which involves the design of associated internal controls. These controls cover the analysis and internal approval of the basic assumptions to be used, as well as the review of the assessments, calculations or valuations performed by external personnel, by comparing these with calculations performed internally.

F.4 Information and communication

Indicate at least the following, specifying the main features thereof:

F.4.1. A specific area responsible for defining and updating accounting policies (accounting policies area or department) and resolving queries or disputes arising from their interpretation, maintaining fluid communications with those responsible for

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

operations in the organisation, and an up-to-date accounting policies manual that is distributed to the units through which the entity operates.

The Sub-department of Financial Administration, which reports directly to the Finance and Business Development Director, is responsible for defining and updating accounting policies, as well as resolving queries or disputes arising from their interpretation The Sub-department maintains fluid communications with the organisation's operations managers and, particularly, with those in charge of accounting duties.

The Sub-department of Financial Administration is also responsible for editing and distributing appropriately the Group's accounting practices manual. The purpose of this manual is to establish the principles, bases, conventions, rules and specific practices in relation to the recognition of certain specific financial transactions carried out as part of the Group's activity.

The accounting practices manual is updated every year. When updating the manual, the Sub- department of Financial Administration includes all relevant new or amended legislation in the accounting area that have occurred during the year.

Throughout the year new legislation is analysed to ascertain whether it has an impact on the Group's accounting practices and also the date each new standard will come into effect. Any standards identified as having an impact on the Group's accounting policies are included in the manual at the end of the year.

The latest version from December 2017 was distributed to all the Group's control departments in February 2018.

F.4.2. Mechanisms to capture and prepare financial information in standard formats, applied and used in all units within the entity or group, which support the main financial statements and accompanying notes as well as disclosures concerning ICOFR.

The mechanism to capture and prepare the information that supports the Canal de Isabel II Group's principal financial statements is mainly based on use of the SAP Business Planning and Consolidation (BPC) tool, which can be accessed from anywhere in the world and has been rolled out to the entire Group.

A large part of the information that supports the disclosures in and notes to the financial statements is included in the consolidation tool. The remainder is captured from standard format worksheets that are prepared for the yearly closes.

The capture and preparation of the information provided on ICOFR is centralised by the Finance and Business Development Director who, through the financial sub-departments, conducts interviews with the various Directors of departments involved in compiling the information that supports and justifies the ICOFR description.

F.5 Supervision of system operation

Indicate the main characteristics of at least:

F.5.1. ICOFR supervisory activities conducted by the Audit Committee and whether the entity has an internal audit department whose competences include supporting the committee in its oversight of the internal control system, including ICOFR. Also report on the scope of the assessment of ICOFR in the year and the process by which the person responsible for conducting the evaluation reports the results, whether the entity has an action plan detailing any corrective measures, and whether the impact on financial reporting has been considered.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

As established in article 18 bis of the articles of association "the Company shall have an Audit Committee formed by at least three directors, appointed by the board of directors, who will have the necessary capacity, experience and dedication to carry out their duties". All Committee members must be external or non-executive directors The Audit Committee meets with the frequency determined and whenever the Chairman or two of its members call(s) a meeting. During 2017, 15 meetings were held by the Audit Committee. Any member of the management team or Company personnel shall attend meetings of the Committee and provide cooperation and access to the information available to them whenever required. At least one must be an external independent director, and his or her knowledge of and experience in accounting and/or audit matters shall be considered at the time of appointment. The Audit Committee, which at the beginning of 2017 was made independent directors, one of which was Chairman and one a proprietary director and as a result of the appointment of new members of the Audit Committee by the Board of Directors in the meeting held on 13 November 2017, it is now made up of three independent directors. The Committee provides support to the board of directors with regard to their oversight duties, by periodically reviewing the process for preparing financial/economic information, the Company's internal control procedures and the independence of the external auditor. The duties of the Audit Committee are set forth in article 18 bis of the Company's articles of association and are described in section C.1.9. of this report. The first meeting of the Audit Committee was held on Thursday, 27 January 2017, and the last on 13 December 2017. To fulfil its role the Audit Committee relies on the information and documentation provided by the Finance and Business Development Department and the Internal Audit area, General Secretary Technical Department, among others. In Canal de Isabel II the Internal Audit area has been established as undertaking an objective, independent assessment activity and therefore reports to the Audit Committee. Canal de Isabel II has the Statute of the Internal Audit function, approved by the Audit Committee and by the Board of Directors, as a document that defines the purpose, continuity and responsibility of the function. Its mission is to ensure continuous supervision and assessment of the effectiveness of ICOFR, contributing a rigorous and methodological approach to the assessment of risks and controls associated therewith. With regard to ICOFR the Internal Audit area is specifically responsible for: - Reviewing Internal Control over Financial Reporting - Assessing the key controls of the Internal Control over Financial Reporting System On 10 March 2016, the Audit Committee approved the 2016-2018 Audit Plan with projects that include the audit of the Internal Control System over Financial Reporting. The 2016-2018 Audit Plan was altered and adapted by the Audit Committee in the meetings held on 25 July 2017, 23 October 2017 and 13 December 2017. The Internal Audit Area, pursuant to the approved Audit Plan, submitted the conclusions and recommendations of the audit ("Review of the System for the Internal Control over Financial Reporting in Canal de Isabel II (ICOFR) to the Audit Committee in the meeting held on 25 July 2017. Based on the constitution of the Audit Committee and the meetings thereof, a matter is included on the agenda of the Board of Directors, informing of the various points and agreements addressed in each of

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) its meetings.

F.5.2. Whether a discussion process is in place whereby the auditor (in accordance with the provisions of the Technical Standards on Auditing), the Internal Audit Department and other experts may inform senior management and the Audit Committee or directors of the entity of significant internal control weaknesses identified during the review of the annual accounts or any other processes assigned to them. State also whether the entity has an action plan to correct or mitigate the weaknesses found.

The internal Audit area periodically presents to the Audit Committee:

• Internal Audit's Strategic Plan for the Committee's information and approval, if appropriate. • The stage of completion of the Audit Strategic Plan, together with the main conclusions and recommendations included in Internal Audit reports. • The evaluation of the Company's internal control and risk assessment system. • The level of implementation of the corrective measures stated in the audit reports by the audited units.

The Finance and Business Development Department reports financial information to the Audit Committee, ensuring the transparency and accuracy of the information and describing the internal control systems and accounting criteria applied.

It also informs on the main accounting procedures and processes used in the preparation of the economic/financial information and the financial statements with regard to the main risks and contingencies and the provisions that cover these.

Lastly, the external auditor communicates any control weaknesses found during the audit to the Audit Committee and attends an Audit Committee meeting at least once a year and whenever his/her presence is required.

Specifically, the external auditor appeared before the Audit Committee eight times during 2017.

F.6 Other relevant information

In 2017, work continued on the project to implement Canal de Isabel II, S.A.'s compliance function, as referred to in Section F.3.4. After identifying, analysing and reviewing the organisation’s most relevant regulations, work began on the implementation of a crime prevention model as a result of the changes to the Criminal Code in 2015, which establishes the criminal liability of legal entities. As part of this project, at 31 December 2017, the Board of Directors was expected to approve the “Compliance Policy” and the “Crime Prevention Policy”, which took place on 28 February 2018.

Canal de Isabel II, S.A.

(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)

F.7 External auditor’s report

F.7.2. Whether ICOFR information reported to the markets has been reviewed by the external auditor, in which case the entity should include the corresponding report as an Appendix. Otherwise, explain the reasons for the absence of this review.

The external auditor may issue the report referring to the Canal de Isabel II, S.A. “Information regarding the Internal Control over Financial Reporting” when the annual accounts and the directors’ report for 2017 are approved. The report shall be issued solely in the context of the requirements established in article 540 of the consolidated text of the Spanish Companies Act and Circular 7/2015, of 22 December 2015, of the National Securities Market Commission for the purposes set forth in the ICOFR in the Annual Corporate Governance Reports.

Despite not being mandatory to do so, the Company submits the description of the ICOFR, which includes this ACGR to the review of the external audit, on the basis of the “Guidelines for action and auditor report model referring to information concerning the internal control over financial reporting of listed entities”, which is published on the NSMC Website.

During 2017, a review was conducted with the same scope as in 2016. For future years, and at the proposal of the Audit Committee, once the ICOFR implemented process has been completed, the auditor may also be requested to conduct a review in order to issue a specific opinion regarding the effectiveness, design and functioning of the Internal Control System over Financial Reporting.

G OTHER INFORMATION OF INTEREST

Briefly explain any significant aspect of corporate governance in the entity or group companies that is not contained in the other sections of this report, but which should be included to provide more complete and reasoned information on the structure and governance practices of the entity or its group. This section may also include any other information, clarification or details related to previous sections of the report insofar as they are relevant and not repeated. The CEO, Mr Rafael Prieto Martín, is also a member of the Board of Directors. As director, he does not receive a salary and his salary as CEO this year was 114 thousand euros. Specifically, indicate whether the entity is subject to legislation other than Spanish law in the area of corporate governance and, where applicable, include any mandatory information that is not required in this report.

The entity may also indicate any voluntary adherence to other codes of ethics or principles or best practices, at an international, sector or other level. Where appropriate, the entity should identify the code in question and the date of adherence.

This annual corporate governance report was approved by the Entity's board of directors in its meeting held on 27 March 2018.

Indicate the directors or members of the governing body who voted against or abstained with respect to the approval of this report.

No directors dissented or abstained.

Canal de Isabel II, S.A.

Santa Engracia, 125. 28003 Madrid www.canaldeisabelsegunda.es