Other technologies

The Renewable business has facilities of other renewable technologies in various countries making a total of 413 MW, which breakdown is presented in the following table:

MW installed 2014 2013 Country

Minihydraulic special regime 130 130 Spain

Minihydraulic ordinary regime 176 176 Spain

Solar thermal hybrid 50 50 Spain

Photovoltaic 56 56 USA (50MW) Greece (6MW)

Waves 1 1 UK

Other Renewables 413 413

3. LIQUIDITY AND EQUITY RESOURCES

Adjusted net financial debt at 31 December 2014 dropped by EUR 1,218 million to EUR 25,618 million compared to the EUR 26,836 million at 31 December 2013, as a result of the containment in investment and positive performance of the divestment plan. Financial leverage stood at 41.7% compared to 43.2% in the same period of the previous year.

Excluding financing of the tariff deficit, which in the case of IBERDROLA amounted to EUR 386 million at 31 December 2014 adjusted net financial debt would be EUR 25.232 million and adjusted leverage would be 41.3% compared to the EUR 25,265 million and 41.7% at 31 December 2013, respectively.

Dec. 2014 Dec. 2013

Equity 35,791 35,289

Gross Debt 28,191 28,496

Cash 1,806 1,332

Asset Derivatives and others 767 328

Adjusted net debt 25,618 26,836

Leverage 41.7% 43.2%

Tariff Deficit 436 1,571

Adjusted net debt (excl. Deficit) 25,182 25,265

Leverage (excl. Deficit) 41.3% 41.7%

3.1 Credit rating of IBERDROLA senior debt

Agency Rating⁽¹⁾ Outlook Date

Standard & Poors BBB Stable 9 May 2014

Moody´s Baa1 Negative 9 November 2012

Fitch BBB+ Stable 25 March 2014

(1)Warning: The above ratings may be revised suspended or withdrawn by the rating agency at any time.

3.2 Debt structure

Regarding the evolution of the financing cost of the Company on 31 December 2014 stood at 4.14% compared to 4.35% in the same period of the previous year (Note 25 of the Consolidated financial statements).

The structure of the debt by interest rate and currency can be seen in Notes 5 and 25 of the Consolidated financial statements.

In accordance with the policy of minimizing the financial risks of the Company, foreign currency risk has continued to be mitigated through the financing of international businesses in local currencies (British pound, Brazilian real, US dollar, etc.) or in their functional currencies (US dollar, in the case of Mexico).

IBERDROLA has a strong liquidity position at the end of 2013 exceeding EUR 10.000 million equivalent to more than 32 months of the company’s financing needs (Note 50 of the Consolidated financial statements).

(Millions of Euros) Credit line maturities Available

2015 813

2016 820

2017 and onwards 7,098

Total credit lines 8,731

Cash and Short Term Fin. Invest. 1,806

Total adjusted liquidity 10,537

IBERDROLA has a varied debt maturity profile, with an average maturity of approximately six years, as a result, among other factors, of the active management of liabilities carried out during this financial year. IBERDROLA’s debt maturity profile at the end of 2014 can be seen in Note 25 of the Consolidated financial statements.

3.3 Working capital

Working capital shows a decrease of EUR 881 million since December 2013 as a result mainly due to several different effects partially offsetting one another:

 An increase of “Current Financial Investments” mainly due to the inclusion under this item of the regulatory assets in Brazil, that amount to EUR 154 million.

 Asset and liability balances with Public Administrations amount to, all together, a reduction of working capital of EUR 352 million.

 The increase in both the Commercial Debtors and Creditors result, all together, in a decrease of working capital of EUR 747 million.

Dec. 2014 Dec. 2013 Change

Assets held for sale - 104 (104)

Nuclear fuel 320 370 (50)

Inventories 2,039 2,026 13

Current trade and other receivables 4,819 4,300 519

Current financial assets 1,123 877 246

Asset derivative financial instruments (1) 314 170 144

Public Administrations 700 940 (240)

CURRENT ASSETS (1): 9,315 8,787 528

Provisions 221 294 (73)

Liability derivative financial instruments 349 245 104

Trades and other payables (2) 6,760 5,494 1,266

Public Administrations 1,415 1,303 112

CURRENT LIABILITIES (2): 8,745 7,336 1,409

NETWORKING CAPITAL 570 1,451 (881)

(1) Does not include cash or debt asset derivatives.

(2) Does not include financial debt and debt liabilities derivatives.

4. INDUSTRY REGULATION AND FUNCTIONING OF THE ELECTRICITY AND GAS SYSTEM

Both IBERDROLA and some of the fully or proportionately consolidated subsidiaries engage in electricity business activities in Spain and abroad (see the Appendix to these Consolidated financial statements) that are heavily affected by the respective regulatory frameworks.

Following is a description of the main regulations affecting the IBERDROLA Group.

4.1 European Union

In the member states of the European Union in which IBERDROLA is present, particularly in the UK and Spain, it should comply with EU regulations.

The first legislation that was published was aimed at constituting internal gas and electricity markets, in order to facilitate the exchange of this type of energy and allow any consumer in the European Union to deal freely with any supplier in the EU. In this respect, there are two types of legislation, the Directives, which set out common criteria to be observed in internal markets and which the member states should transpose into national legislation, and the Regulations, which establish norms for the supranational issues, especially those related to the transit of gas and electricity, and are applicable directly.

Another set of regulations that indirectly affects the energy sector are those arising from the energy and climate policy agreed in 2007. They include a strategic aim of reducing greenhouse gases emissions (GGE) by 20% by 2020 and led to a triple target that included, in addition to the reduction of emissions, the targets of a renewable share of 20% and a 20% reduction in consumption, all to be achieved by 2020. To meet these objectives, a different set of regulations has been developed to meet these targets by 2020.

In October 2014, the European Council agreed new targets for 2030: a 40% reduction in GGE compared to 1990, a share of 27% for renewable energy and a reduction in consumption, also of 27%. It also agreed to ensure that in 2020 the electricity exchange capacity among countries was at least 10% of the installed capacity. The legislation arising from these agreements has yet to be developed.

The legislation on infrastructures is also relevant. The European Union has powers with regards to trans-European networks, specifically those of energy. Various regulations and programs have been created to promote a greater connectivity among the member states. Specifically, programs like the TEN-E, the EEPR and the Connecting Europe facility. Lastly, in December 2014, the European Council approved the creation of a Strategic Investment Plan for the European Union, to mobilize EUR 315,000 million in 2015 – 2017. It will be structured as a European Fund for Strategic Investments destined to investments in infrastructure, including energy and renewable energy networks. The regulations implementing the Plan will be developed during 2015.

4.2 Industry regulation in Spain

The Law 3/2013 on the creation of the National Commission for Market and Competition (CNMC) was published on 5 June 2013, which groups the functions of the different supervisory and regulatory bodies, including the National Energy Commission (CNE) and the National Competition Commission (CNC). The CNMC has been created as a public body attached to the Ministry of Economy and Competitiveness and subjected to parliamentary scrutiny.

Subsequently, the Order ECC/1796/2013 fixed its implementation on 7 October 2013. The former market regulation and supervision functions carried by the CNE and the CNC are assumed by this new regulator and both CNE and CNC have consequently disappeared.