2013 SUSTAINABILITY REPORT “A comprehensive focus on Iberdrola’s economic, environmental, social, and corporate governance performance” 2 SUSTAINABILITY REPORT 2013 EXTERNAL EVALUATIONS OF THE IBERDROLA GROUP 86 points. Carbon Disclosure First utility with Leadership Index nuclear assets to be (CDLI) selected on the index. 99 points. Iberdrola among the First Spanish utility. Iberdrola participants. selected. Sustainability Leadership in new Yearbook 2013: “Gold energy. Honourable Mention Class” in the electricity in Environment and sector. Sustainability. Leading company in Classified as “Prime”. Spain in the utilities sector: electricity, gas, and water. 4 SUSTAINABILITY REPORT 2013 | PRESENTATION 5 TaBLE OF CONTENTS PRESENTATION Presentation |09 6 SUSTAINABILITY REPORT 2013 | PRESENTATION PART I PART II ANNEXES PART I. STANDARD PART II. SPECIFIC STANDARD ANNEX 1: DISCLOSURES DISCLOSURES GRI Content Index |190 ANNEX 2: 1 Strategy and analysis|12 General management approach|64 Content Index in relation to the Principles of the Global Compact|196 2 Organisational profile|17 a Economic dimension|68 ANNEX 3: 3 Material aspects and b Environmental dimension|84 External Independent Assurance boundaries|32 Report |198 c Social dimension|124 4 Stakeholder engagement|42 1 Labour practices and 5 Report profile|45 decent work|124 6 Governance|46 2 Human rights|144 7 Ethics and integrity|60 3 Society|152 4 Product responsibility|174 7 Iberdrola Tower (Bilbao, España). 8 SUSTAINABILITY REPORT 2013 | PRESENTATION PRESENTATION Iberdrola hereby presents this Sustainability Report 2013, which was approved by its Board of Directors at its meeting of 18 February 2014, after a report from the Corporate Social Responsibility Committee of the Board of Directors. This report has been prepared in accordance with the recommendations of the Sustainability Reporting Guidelines of the Global Reporting Initiative (GRI Guidelines), version G4, also including aspects and indicators from the Electric Utilities Sector Supplement published by GRI in 2014. Pursuant to the commitments made in the Company’s Corporate Social Responsibility Policy, Iberdrola publishes this report in order to give its stakeholders a true and accurate view of its performance during financial year 2013. Readers of this Sustainability Report 2013 may also view the Annual Corporate Governance Report 2013, the Annual Financial Report 2013, and the Information Supplementary to the Sustainability Report 2013, all of which are accessible at www.iberdrola.com, and which contain additional useful information for a complete understanding of Iberdrola’s activities. Note: The figures included in this translation follow the customary English convention, with figures in thousands separated by a comma (,) and decimals indicated by a full stop (.). €M = thousands of euros; €MM = millions of euros. 9 10 PART I 11 I GENERAL STANDARD DISCLOSURES 1. STRATEGY AND ANALYSIS G4-1 Statement from the most senior decision-maker Iberdrola continued during 2013 to carry out its activities in a manner faithful to the principle of sustainability that has historically guided the Company. It has continued to offer society the essential service of electricity supply in a responsible and reliable manner, contributing to the well-being and development of the countries in which it operates. Economic recovery strengthened in our American markets in 2013, and we have seen the first signs of an upsurge in the European markets, especially in the United Kingdom. In Spain, the trend has changed during the last quarter, indicating that economic recovery has already started in 2014. However, the year has been complex from the regulatory standpoint, with significant changes in regulations in some of the countries in which we have a presence, as well as a significant increase in energy taxes, which in the case of Spain have doubled. To mitigate the consequences of these measures, Iberdrola made great efforts throughout 2013 to optimise the operational and financial management of the entire Group. For that reason, and also due to our increasingly international profile, at year-end 2013 Gross Margin stayed at 2012 levels, reaching 12,577 million euros. Similarly, efficiency measures and cost savings allowed us to contain Net Operating Expenses. Based on all of the foregoing, EBITDA was 7,205 million euros and Net Profit was 2,572 million euros. Operating Cash Flow reached 5,619 million euros. As a result of efforts in financial management, liquidity exceeded 10,800 million euros at year-end (covering financial needs for more than two years) and debt decreased by more than 2,250 million euros to 28,053 million euros, which puts leverage at 44.2 % compared to 47.7 % for 2012. In this environment, Iberdrola has continued to strengthen its role as an engine of growth, trying to maximise positive impacts on its principal stakeholders and on society as a whole: • On its shareholders, with a total shareholder return of 19.1 % for the year. • On its customers, providing safe and high-quality supply through increasingly efficient equipment and technology. • On its employees, encouraging even more training (which has now reached 1.2 million hours and covers 90 % of the workforce) and promotions (almost 2,400 in 2013), while promoting the reconciliation of work and family life and mobility within the Group. • On its suppliers, with a responsible supply chain management policy, and by making purchases that reached approximately 4,400 million euros in 2013. The Company has also recently approved a sustainability policy that puts special emphasis on the environmental impact of its operations, among other things. This is a priority for Iberdrola, which is shown by its emission-free installed capacity, already exceeding 60 %, as well as CO2 emissions that are 30 % below the average for the European electric utility sector. As a result of all of the foregoing, Iberdrola leads the Dow Jones Sustainability Index, the FTSE4GOOD, and the Two Tomorrows ranking, which recognises the most environmentally friendly utilities at the global level. Another pillar of the sustainability policy is the significance of the social dimension of the Group’s activities. Along these lines, major efforts are being made in the area of R&D, 12 SUSTAINABILITY REPORT 2013 | PART I. GENERAL STANDARD DISCLOSURES Inside Iberdrola Tower (Bilbao, Spain). allocating 160 million euros during 2013 to the areas of smart grids, clean generation, and As a result of the new technologies and business models. efforts in financial Also noteworthy is Iberdrola’s commitment to the skill levels and employability of younger persons, which is shown by the more than 650 scholarship recipients and management, apprentices receiving training at the Company in 2013 and the more than 70 new liquidity exceeded scholarships provided by Fundación Iberdrola, used mainly for Masters’ and postgraduate study in energy and the environment at universities in Spain, the United Kingdom, and 10,800 million euros the United States of America. at year-end Together with all of the above, Iberdrola has continued to promote a corporate governance system that is at the leading edge of domestic and international best practices, and which has received numerous acknowledgments such as the Best Corporate Governance in Spain award from the prestigious publication World Finance. In future years, we will continue to apply our business model based on geographic diversification and to focus on regulated activities, the quality of our activities, operational efficiency, and financial strength. On this basis, the 2014-2016 projections of our Company contemplate: • Investments of 9,600 million euros, 85 % of which will be applied to the international area, where our businesses have greater regulatory predictability and stability. • Implementation of new cost-saving and cost-reduction measures in order to further improve efficiency. • The generation of positive cash flow in all of the businesses. • A reduction in debt to 25,000 million euros, thus improving financial ratios and further increasing the strength of the balance sheet. 13 Iberdrola Tower (Bilbao, Spain). With all of the foregoing, we expect an average growth in the Company’s EBITDA and Net Profit to exceed 4 % annually during the period, which will allow us to maintain a sustainable shareholder compensation policy of at least 0.27 euro per share. Towards the future, we hope to continue creating value for our shareholders, employees, customers, suppliers, and all the regions in which we operate, conscious of our Company’s fundamental role as an engine for development, especially at a time when society requires a new boost to the economy and industrial activity, with the priority goal of creating employment. G4-2 Key impacts, risks and opportunities 1. Iberdrola’s key impacts on sustainability The Group’s commitment to sustainability is articulated through five operating principles: • Competitiveness of energy products supplied. • Safety in the supply of energy products. • Reduction in the environmental impact of operations. • Creation of value for shareholders, customers and suppliers, attending to corporate profits as one of the foundations for the future sustainability of the Company and the Group. • The social dimension of the Group’s activities. Competitiveness Iberdrola seeks competitiveness in the energy products supplied through efficiency in the energy generation, transmission, and distribution processes. This priority allows us to offer products at