Consolidated management report

1.- Entity´s position

1.1. Organizational structure

Abengoa, S.A. is a technology company, and the head of a group of companies, which at the end of 2014 comprised the following:

• The holding parent company itself.
• 607 subsidiaries.
• 17 associates and 28 joint businesses as well as certain companies of the Group being involved in 244 temporary joint ventures. Furthermore, the Group’s companies have shareholdings of less than 20% in other entities.

Independent of the legal structure, Abengoa is managed as outlined below.

Abengoa is an international company that applies innovative technology solutions for sustainability in the energy and environment sectors, generating electricity from renewable resources, converting biomass into biofuels and producing drinking water from sea water. The Company supplies engineering projects under the ‘turnkey’ contract modality and operates assets that generate renewable energy, produce biofuel, manage water resources, desalinate sea water and treat sewage.

Abengoa’s activities are focused on the energy and environmental sectors, and integrate operations throughout the value chain including R&D+i, project development, engineering and construction, and operations and maintenance of its own assets and for third parties.

Abengoa’s business is organized into the following three activities:

• Engineering and construction: includes our traditional engineering activities in the energy and water sectors, with more than 70 years of experience in the market. Abengoa is specialized in carrying out complex turn-key projects for thermo-solar plants, solar-gas hybrid plants, conventional generation plants, biofuels plants and water infrastructures, as well as large-scale desalination plants and transmission lines, among others.
• Concession-type infrastructures: groups together the company’s extensive portfolio of proprietary concession assets that generate revenues governed by long term sales agreements, such as take-or-pay contracts, tariff contracts or power purchase agreements. This activity includes the operation of electric (solar, cogeneration or wind) energy generation plants and transmission lines. These assets generate low demand risk and we focus on operating them as efficiently as possible.
• Industrial production: covers Abengoa’s businesses with a high tehnological component, such as development of biofuels technology. The Company holds an important leadership position in these activities in the geographical markets in which it operates.

Abengoa’s Chief Operating Decision Maker (‘CODM’) assesses the performance and assignment of resources according to the above identified segments. The CODM in Abengoa considers the revenues as a measure of the activity and the EBITDA (Earnings before interest, tax, depreciation and amortization) as measure of the performance of each segment. In order to assess performance of the business, the CODM receives reports of each reportable segment using revenues and EBITDA. Net interest expense evolution is assessed on a consolidated basis given that the majority of the corporate financing is incurred at the holding level and that most investments in assets are held at project companies which are financed through project debt. The depreciation, amortization and impairment charges are assessed on a consolidated basis in order to analyze the evolution of net income and to determine the dividend pay-out ratio. These charges are not taken into consideration by CODM for the allocation of resources because they are non-cash charges.

The process to allocate resources by the CODM takes place prior to the award of a new project. Prior to presenting a bid, the company must ensure that the project debt for the new project has been obtained. These efforts are taken on a project by project basis. Once the project has been awarded, its evolution is monitored at a lower level and the CODM receives periodic information (revenues and EBITDA) on each operating segment’s performance.

1.2. Operation

a) Information by activities

Abengoa’s activity is grouped under the following three activities which are in turn composed of six operating segments:

• Engineering and construction; includes our traditional engineering business in the energy and water sectors, with more than 70 years of experience in the market. Since the beginning of 2014, this activity comprises one operating segment Engineering and Construction (previously, the operating segment of Technology and Other was also included in the operating segment of Engineering and Construction, in accordance with IFRS8 ‘Operating Segment’).

Abengoa specializes in carrying out complex turn-key projects for thermo-solar plants, solar-gas hybrid plants, conventional generation plants, biofuels plants and water infrastructures, as well as large-scale desalination plants and transmission lines, among others. In addition, this segment includes activities related to the development of thermo-solar technology, water management technology and innovative technology businesses such as hydrogen energy or the management of energy crops.

• Concession-type infrastructures; groups together the company’s proprietary concession assets that generate revenues governed by long term sales agreements, such as take-or-pay contracts or power purchase agreements. This activity includes the operating segment of Abengoa Yield (ABY), the operation of electric (solar, cogeneration or wind) energy generation plants, desalination plants and transmission lines. These assets generate low demand risk and we focus on operating them as efficiently as possible.
  During June 2014, the Company listed one of its subsidiaries, Abengoa Yield Plc. in the US (ABY). ABY groups ten assets previously reported in different operating segments within the Concession-type infrastructures activity. As such, ABY became a new operating segment within the activity of Concessionsfrom its IPO and so it has been reported at the quarterly financial information.
  At the end of 2014 the operating segment Abengoa Yield was considered as discontinued operations (see Note 7). As a result, the Concession-type infrastructures activity again comprises four operating segment as it was reported until the first half of 2014:
  • Solar – Operation and maintenance of solar energy plants, mainly using thermo-solar technology.
  • Transmission – Operation and maintenance of high-voltage transmission power line infrastructures.
  • Water – Operation and maintenance of facilities aimed at generating, transporting, treating and managing water, including desalination and water treatment and purification plants.
  • Cogeneration and other – Operation and maintenance of conventional cogeneration electricity plants.

• Industrial production; covers Abengoa’s businesses with a high technological component, such as development of biofuels technology. The company holds an important leadership position in these activities in the geographical markets in which it operates.

This activity is comprised of one operating segment:

• Biofuels – Production and development of biofuels, mainly bioethanol for transport, which uses cellulosic plant fiber cereals, sugar cane and oil seeds (soya, rape and palm) as raw materials.

b) Competitive position

Over the course of our 70-year history, we have developed a unique and integrated business model that applies our accumulated engineering expertise to promoting sustainable development solutions, including delivering new methods for generating power from the sun, developing biofuels, producing potable water from seawater, efficiently transporting electricity. A cornerstone of our business model has been investment in proprietary technologies, particularly in areas with relatively high barriers to entry. Thanks to it, ee have a developed portfolio of businesses focused on EPC and concession project opportunities, many of which are based on customer contracts or long-term concession projects attractive and growing energy and environmental markets.

We have developed a leadership position in the energy sector in recent years, as highlighted by the following:

• We have been recognized for the eight consecutive year by the prestigious magazine Engineering News-Record (ENR) as the leading ‘International contractor in transmission and distribution’ in 2014. Moreover, we have been also recognized as the top international contractor for solar energy for the fourth consecutive year and we ranked second position in both the cogeneration power sector and the water treatment and desalination sector.
• In the field of solar power, Abengoa is an international leader for solar-thermal plants, with innovative projects such as Atacama-1, which has 18 hours of energy storage and will be the first solar-thermal plant in Latin America; Solana, in the USA, which is the world’s largest parabolic-trough plant; or Khi Solar One in South Africa, which will be the first plant to use tower technology in Africa. The company has a global capacity of 2,200 MW with a further 300 MW under construction in solar plants around the world.
• We are a global leader in the biofuels industry, with plants in Europe, the United States and Brazil. We ranked first in Europe and seventh in the United States in first-generation bioethanol in terms of installed capacity (source: Ethanol Producer Magazine and ePURE) and enjoy a global leadership position in the development of technology for the production of second-generation bioethanol on a commercial scale.

Abengoa has also been recognized internationally for its achievements in the water desalination sector, winning awards such as “Company of the Year 2012 in the desalination sector”, “Desalination Project of the Year 2010” or “Company of the Year 2009 in the desalination sector” in the Global Water Awards presented by Global Water Intelligence (GWI) to our desalination plant in Nungua (Ghana); our water desalination project in Qingdao (China); and the desalination plant projects in Tenes, Honaine and Skikda in Algeria, respectively.

These desalination plants have been developed using the latest advances in desalination technology based on reverse osmosis and the BOT model. According to a report by Bluefield Research, Abengoa’s success in these types of projects between 2009 and 2013 ranks it as the world’s leading privately-owned company, in terms of ownership of desalination plants (by installed capacity).

Furthermore, Abengoa recently rose to second place in the ranking of water treatment and desalination contractors, by the magazine Engineering News-Record. Our business therefore continues to grow in the sector for constructing and managing water and sanitation infrastructures for municipal and industrial clients. For example, in the municipal sector in 2014 Abengoa was awarded the drinking water supply project for the City of San Antonio (Texas, USA) under a BOT format; the smart network project for drinking water distribution and sewerage for the city of Denizli in Turkey, as well as being awarded the Agadir desalination plant in Morocco, for which it has also completed the financing. In the industrial sector, it was awarded the water supply contract for the AES Gener power plant in Chile and the water treatment plants for a combined cycle plant in Carty (Oregon, USA).

Abengoa continues to expand its presence in the environment sector through these activities, producing, treating and regenerating water for a more sustainable world.

 

2.- Evolution and business results

2.1. Financial situation

a) Plan to further optimize Abengoa Financial Structure

On December 15, 2014, Abengoa´s Board of Directors approved a plan to further improve its financial structure through three main initiatives:

• Reduce its stake in Abengoa Yield
• Accelerate the sale of assets to Abengoa Yield
• The creation of a joint venture with external equity partners that will invest in a portfolio of contracted assets under construction as well as in new contracted assets under development.

The impacts of these initiatives and their main effects in relation to the reclassification to heading ‘Assets held for sale and discontinued operations’ as of December 31, 2014 are described below.

Reduce its stake in Abengoa Yield

The plan to reduce the stake in Abengoa Yield was initiated at year end 2014 with the approval of the Abengoas’s Board of Directors and is expected to be completed within one year, through the completion of following steps:

• An initial stage to divest a 13% stake ended on January 16, 2015, via the sale in an underwritten public offering of 10,580,000 ordinary shares in Abengoa Yield (including 1,380,000 shares sold pursuant to the exercise in full of the underwritters’ over-allotment option) at a price of USD31 per share, bringing the holding in Abengoa Yield to 51%. This sale generated USD 328 million for Abengoa, before fees.
• The second step will consist of the divestment of an additional shareholding in Abengoa Yield and the strengthening of the Right Of First Offer (ROFO) agreement between the two companies, as well as a review of the corporate governance of Abengoa Yield to reinforce the role of the independent directors so that control is effectively transferred when the second sale takes place.

Taking into account that Abengoa Yield was presented as an operating segment within the Concession-Type Infrastructures activity during part of the year 2014 and due to the significance that the activities carried out by Abengoa Yield have for Abengoa, the sale of this shareholding is considered as a discontinued operation in accordance with the stipulations and requirements of IFRS 5, ‘Non-Current Assets Held for Sale and Discontinued Operations’.

In accordance with this standard, the results of Abengoa Yield for the year 2014 are included under a single heading in Abengoa’s Consolidated Financial Statements for the year ended December 31, 2014.

Likewise, the Consolidated Income Statement for the year, 2013, which is included for comparison purposes in Abengoa’s Consolidated Financial Statements for the year ended December 31, 2014 also includes the results generated by Abengoa Yield recorded under a single heading (‘Profit (loss) from discontinued operations, net of tax’), for the activities which are now considered discontinued.

Accelerate the sale of assets to Abengoa Yield

The plan to accelerate the sale of assets to Abengoa Yield under the Right of First Offer (ROFO) agreement was launched at the start of 2014 with the approval of Abengoa’s board of directors, with the aim of divesting certain concession project companies that own desalination plants in Algeria (Skikda and Honnaine), transmission lines in Peru (ATN2) and an STE plant in Abu Dhabi (Shams). Given that as of December 31, 2014, the previous companies are available for immediate sale and the sale is highly probable, the Company has classified the associated assets and liabilities as held for sale in the Consolidated Statement of Financial Position as of December 31, 2014. Until closing of the sale transaction, the assets will be classified as held for sale in accordance with the stipulations and requirements of IFRS 5, ‘Non-Current Assets Held for Sale and Discontinued Operations’.

A definitive agreement was reached with Abengoa Yield on February 9, 2015 for a total of USD142 million following approval by Abengoa’s board of directors. It includes the divestment of the aforementioned assets (classified as assets held for sale at the end of 2014) and 30% of the stake held in Helioenergy 1 and 2 (a thermo-solar assets in Spain) at the end of the year. Since the agreement to divest Helioenergy 1 and 2 was performed during January 2015, such assets have not been classified as assets held for sale. Related to desalination plants in Argeria, we also entered into a two year call and put option agreement with Abengoa Yield by which they have put option rights to require Abengoa to purchase back these assets at the same price paid by them and Abengoa has call option rights to require them to sell back these assets if certain indemnities and guarantees provided by Abengoa related to past circumstances reach a certain threshold.

The creation of a joint venture with external equity partners that will invest in a portfolio of contracted assets under construction and development.

On December 11, 2014, the company reached a non-binding agreement with the infrastructure fund EIG Global Energy Partners to jointly invest in a new company (Newco) to which Abengoa will contribute its shareholdings in a series of companies. These project companies own concessions for conventional generation and renewable energy assets and transmission lines in different regions, including the USA, Mexico, Brazil and Chile. The new company will be jointly managed, although EIG will hold a majority stake in the new company. Once the agreement has been completed and the projects have been transferred to Newco, Abengoa will no longer have a controlling interest in these assets. Given that as of December 31, 2014, the companies associated with previous projects are available for immediate sale and the sale is highly probable, the Company has classified the associated assets and liabilities as held for sale in the Consolidated Statement of Financial Position as of December 31, 2014. Until closing of the sale transaction, the assets will be reported as held for sale in accordance with the stipulations and requirements of IFRS 5, ‘Non-Current Assets Held for Sale and Discontinued Operations’.

b) Main figures

Financial Data

• Revenues of €7,151 million, a decrease of 1% compared to 2013.
• Ebitda of €1,408 million, an increase of 11% compared to 2013.

Operating Data

• 88% of our revenues from international markets outside of Spain.
• North America (USA and Mexico) became the first country in revenues with 32% of total revenues.
• Engineering and Construction backlog up to €7,953 million, as of December 31, 2014.

c) Consolidated income statement

Revenues

Abengoa’s consolidated revenues in the year 2014 have reached €7,151 million, representing a 1.3% decrease from the previous year. The decrease is mainly due to the revenue increase in Engineering and Construction, where we can highlight the construction of co-generation plants in Mexico, the transmission lines in Brazil and the Atacama thermo-solar plants in Chile. This decrease was partially offset by an increase in our Concessions-Type Infrastructure and Industrial Production activities in 2014 compared to 2013.

Ebitda

Ebitda for the year ended December 31, 2014 reached €1,408 million, an 11% increase from the previous year. This increase was mainly due to the contribution of new concessions assets in operation (attributable to the solar plants in Spain that entered into operation in the fourth quarter of 2013 -Solaben 1 and 6- and to the entry into operation of the Norte Brazil power transmission line), as well as the margin recovery in the Bioenergy business.

Net Finance Cost

Net financial expenses increased in €216 million, mainly due to an increase in the financial expenses, a lower interest capitalization due to the entry into operation of new concessions and our new notes issued, and mainly due to the decrease of the negative valuation of the embedded derivative in the convertible bonds and related options with respect to the previous year.

Income Tax Expense

Corporate income tax benefit reached €59 million in 2014, from €26million from previous year. This figure was affected by various incentives for exporting goods and services from Spain, for investment and commitments to R&D+i activities, the contribution to Abengoa’s profit from results from other countries, as well as prevailing tax legislation.

Profit for the year from continuing operations

Given the above, Abengoa’s income from continuing operations increased by 8% from €133 million in 2013 to €144 million in 2014.

Profit from discontinued operations, net of tax

As indicated in Note 7.1., the results generated by Abengoa Yield for the years 2014 and 2013 are recorded under the heading ‘Profit (loss) from discontinued operations, net of tax’. As well, the sale of Befesa is considered as a discontinued operation in 2013.

Profit for the year attributable to the parent company

As a result of the above, the profit attributable to Abengoa’s parent company increased by 24% from €101 million achieved in 2013, to €125 million in 2014.

d) Results by activities

The Segment revenues, EBIDTA and margins for the years 2014 and 2013 is as follows:

Engineering and Construction

Revenues in Engineering and Construction decreased by 7% compared to the previous year, to €4,515 million (€4,832 million in 2013), while Ebitda was flat amounting to €806 million. The decrease in revenues was mainly driven by:

• Lower activity of construction resulting from the completion of the Mojave and Solana thermo-solar plants, as well as thermo-solar plants Solaben 1 and Solaben 6 (Spain),
• Lower construction activity on the Kaxu and Khi thermo-solar plants in South Africa.
• Lower construction activity on the transmission lines in Brazil and the execution of combined-cycle plants in Poland and Mexico.

This effect was partially offset by:

• Higher construction activity related to the co-generation plants in Mexico
• Higher construction activity related to the Atacama thermo-solar plants in Chile.

Concession-type Infrastructures

Revenues in the Concession-type Infrastructures area increased by 30% compared to the previous year, to €499 million (€384 million in 2013), while Ebitda rose by 50% to €330 million compared to €220 million in 2013. The increase in revenue was primarily attributable to the entry into operation of new assets (attributable to the solar plants in Spain that entered into operation in the fourth quarter of 2013 -Solaben 1 and 6- and to the entry into operation of the Norte Brazil power transmission line) and the strong performance of assets already in operation.

Industrial Production

Revenues in Bioenergy Business increased by 5% compared to the previous year, to €2,137 million (€2,029 million in 2013), while Ebitda rose by 13% to €271 million compared to €241 million in 2013. The increase was mainly due to an increase in the volume of ethanol sold in Europe and in the United States and an increase in the volume of sugar sold in Brazil.

e) Consolidated statement of financial position

Consolidated statements of financial position

A summary of Abengoa’s consolidated balance sheet for 2014 and 2013 is given below, with main variations:

• Reduction in non-current assets of 23% primarily due to the transfer of all the assets included in the financial structure optimization plan to “Assets held for sale” (see Note 2.1.a). This reduction was partially offset by the increase in transmission assets under construction in Brazil and control and consolidation of the Hugoton project.
• Increase in current assets of 119% mainly attributable to the transfer of the aforementioned assets to “Assets held for sale”. The unavailability of €500 million relating to Tranche A of the syndicated loan should be taken into account in the lower figure for Cash and cash equivalents.

• Increase in equity of 40% primarily caused by the positive variation in translation differences due to the appreciation of the US Dollar, capital contributions from minority shareholders in certain projects, the positive result for the period, and the increase in minority shareholders following the IPO of the Abengoa Yield subsidiary, all of which was partially offset by the negative variation in the reserves for derivative instrument hedging.
• Reduction of 25% in non-current liabilities, mainly due to the transfer of all the liabilities included in the financial structure optimization plan to “Liabilities held for sale” (see Note 2.1.a) as well as a net reduction in corporate financing, mainly attributable to the lower syndicated loan amount; the reclassification of the €300 million note issue maturing in 2015 as short-term and the reclassification of the convertible bond maturing in 2017, for which the “put” option has been exercised in 2015.
• Net increase in current liabilities of 85%, mainly as a result of the transfer of the aforementioned liabilities to “Liabilities held for sale” and the net increase in corporate financing due to the reclassification of Abengoa’s ordinary note maturing in February 2015 and the convertible note maturing in 2017, from long-term to short-term.

Net Debt Composition

f) Consolidated cash flow statements

A summary of the Consolidated Cash Flow Statements of Abengoa for the years ended December 31, 2014 and 2013 with the main variations per item, are given below:

• Net cash flows from operations reached €9 million, mainly achieved by higher profit for the period from continuing operations adjusted by non-monetary items, which was offset by the consumption of working capital and by larger net interest paid.
• In terms of net cash flows from investing activities €2,500 million, the most significant investments were in the construction of co-generation projects in Mexico, various transmission lines in Brazil and Peru, the thermo-solar and PV plants in Chile and Hospital de Manaus in Brazil.
• In terms of net cash flows from financing activities, it is worth noting the net generation of cash as a concequence basically of the new corporate financing (bonds issuance, Euro Commercial Paper program and the new project bridge loan obtained by Abengoa Greenbridge through the 2014 Syndicated Loan Facility Agreement) and new non-recourse financing projects (Solar, Transmission Lines, Desalinations and Cogenerations), as well as the Abengoa Yield IPO carried out during the year.

2.2. Financial and non-financial key indicators

The main operational and financial indicators for the years ended December 31, 2014 and 2013 are as follows:

The key performance indicators for each activity is detailed below for the years 2014 and 2013:

2.3. Matters relating to the environment and human resources

a) Environment

The principles of the environmental policies of Abengoa are based on compliance with the current legal regulations applicable, preventing or minimizing damaging or negative environmental consequences, reducing the consumption of energy and natural resources, and achieving ongoing improvement in environmental conduct.

In response to this commitment to the sustainable use of energy and natural resources, Abengoa, in its Management Rules and Guidelines for the entire Group, explicitly establishes the obligation to implement and certify environmental management systems in accordance with the ISO 14001 International Standard.

Consequently, by year-end 2014, the percentage of Companies with Environment Management Systems certified according to the ISO 14001 Standard per sales volume is 89.56% (92.92% in 2013).

The table below lists the percentage of distribution of the Companies with Certified Environmental Management Systems, broken down by business unit:

 

b) Human resources

During 2014, Abengoa’s workforce decreased by 1.8% to 24,322 people of December 31, comparted to the previous year (24,763).

Geographical distribution of the workforce

The distribution of the average number of employees was 25 % in Spain and 75 % abroad.

lDistribution by professional groups

The average number of employees during 2014 and 2013 was:

 

3.- Liquidity and capital resources

Abengoa’s liquidity and financing policy is intended to ensure that the company keeps sufficient funds available to meet its financial obligations as they fall due. Abengoa uses two main sources of financing:

• Project debt (Non-recourse project financing), which is typically used to finance any significant investment. The repayment profile of each project is established on the basis of the projected cash flow generation of the business, allowing for variability depending on whether the cash flows of the transaction or project can be forecast accurately. This ensures that sufficient financing is available to meet deadlines and maturities, which mitigates the liquidity risk significantly. Despite having a commitment from a financial institution during the awarding phase of the project and since the financing is usually completed in the latter stages of a construction project –mainly because these projects require a significant amount of technical and legal documentation to be prepared and delivered that is specific to the project (licenses, authorizations, etc.)– bridge loan (Non-recourse project financing) needs to be available at the start of the construction period in order to begin construction activities as soon as possible and to be able to meet the deadlines specified in the concession agreements (see Note 19.2).
• Corporate Financing, used to finance the activities of the remaining companies which are not financed under the aforementioned financing model. This means of financing is managed through Abengoa S.A., which pools cash held by the rest of the companies so as to be able to re-distribute funds in accordance with the needs of the Group and to ensure that the necessary resources are obtained from the bank and capital markets.

To ensure there are sufficient funds available for debt repayment in relation to its cash-generating capacity, the Corporate Financial Department annually prepares and the Board of Directors reviews a Financial Plan that details all the financing needs and how such financing will be provided. We fund in advance disbursements for major cash requirements, such as capital expenditures, debt repayments and working capital requirements. In addition, as a general rule, we do not commit our own equity in projects until the associated long term financing is feasible.

During 2014, Abengoa covered its financing needs through the following financial transactions:

• The refinancing of its syndicated loans upon Abengoa, S.A. signed a long term revolving financing agreement, as well as new financing transactions in subsidiaries which have the support of export credit agencies.
• Initial Public Offering of Abenga Yield Plc., in June 2014. This company completed the capital increase for a total amount of €611 million.
• Financing of certain projects through project debt.
• Ordinary notes issue for a total amount of €1,000 million.

Abengoa aims to maintain its strong liquidity position, extend the debt maturities of its existing corporate loans and bonds, continue to access the capital markets from time to time, as appropriate, and further diversify its funding sources. The Company aims to continue to raise equity funding at the project company level through partnerships.

In accordance with the foregoing, the sources of financing are diversified, in an attempt to prevent concentrations that may affect our liquidity risk.

 

a) Contractual obligations and off-balance sheet

The following table shows the breakdown of the third-party commitments and contractual obligations as of December 31, 2014 and 2013 (in thousands of Euros):

b) Investment plan

The nature and maturity of future investment commitments are detailed as follows:

 

4.- Principal risks and uncertainties

4.1. Operational risks

4.1.1. Regulatory risk

Risks derived from reductions in government budgets, subsidies and adverse changes in the law that could affect the company’s business and development of its current and future projects

The economic instability and difficult economic conditions in Spain have led to lower tax revenues among the company’s public administration clients at a time when the budget deficit is rising. These unfavorable conditions affecting government budgets threaten the continuity of public subsidies for activities that benefit the company, especially those related to renewable energy. These conditions may also give rise to adverse changes in legislation.

Furthermore, in the last few years a large part of the revenues generated by the company’s water infrastructures division has come from public sector contracts. Many of the public sector institutions that Abengoa works with are municipalities with limited budgets that are susceptible to annual fluctuations and in many cases rely on the collection of municipal taxes or those distributed by central government. Consequently, the funding available to municipalities for these types of projects can suddenly dry up. Moreover, the measures taken to correct the current financial situation in many of these public entities, have increased their budget deficits and there is no certainty that these types of projects will be funded again at the same levels as we have seen to date.

Risks derived from a high degree of dependency on certain regulations, subsidies and tax incentives that could be modified or opposed

The company’s industrial activities have a certain degree of reliance on environmental and other types of legislation, including regulations that require reductions in carbon emissions and other greenhouse gases, a minimum biofuels content in fuels and the use of energy from renewable sources, among other constraints.

In some jurisdictions, renewable energy subsidies have been retracted on constitutional grounds (including claims that they represent state aid that is not allowed by the European Union). Similarly, some guarantee programs in the USA have been retracted on the basis that they breach certain federal laws.

Renewable energy production benefits from specific measures and tax incentives in some of the jurisdictions in which the company operates. These measures play an important role in the profitability of these projects. In the future, it is possible that part or all of these measures are cancelled, modified or not renewed.

Risks derived from compliance with strict environmental regulations

The company is subject to environmental regulations that require it to obtain environmental impact studies for future projects or changes to existing projects; licenses and permits; as well as to comply with the conditions that these impose, among other factors. Consequently, it is impossible to guarantee that the authorities will approve these environmental impact studies or that public opposition will not lead to delays, modifications or cancellations of licenses, or that laws will not be modified or interpreted in a way that increases the costs of the company’s operations.

Breaches of these regulations may, in some cases, give rise to significant liabilities with the imposition of fines and even closure of the plant. In general, government authorities are empowered to correct and mitigate the consequences of environmental damages, forcing the entity responsible to assume the cost of these actions.

In Brazil, environmental liability applies to private individuals and legal entities that directly or indirectly cause environmental damage via their actions or negligence. The courts can even ‘pierce the corporate veil’ in those cases in which a company tries to avoid paying compensation for damages.

Environmental regulations have changed rapidly in recent years and it is possible that there will be more changes in the future, including even stricter requirements. Consequently, the company cannot rule out the need to make additional investments in the future to comply with environmental regulations and such costs are difficult to predict.

Risk derived from a reliance on favorable regulation of the renewable energy business and bioethanol production

a) Solar power generation

Renewable energy is rapidly maturing but its cost of generating electricity is still significantly higher than conventional energy production (nuclear, coal, gas, hydroelectric). Governments have established support mechanisms to make renewable generation projects economically viable, in the form of subsidized tariffs (mainly in Spain), supplemented in specific cases with direct support for investment (mainly in the USA). These tariffs vary depending on the technology (wind, photovoltaic, STE, biomass) since they are at different stages of maturity and the regulator wants to promote the development of each type by giving developers sufficient economic incentive in the form of a reasonable return on their investment. Without this support, any renewable energy project would currently be unfeasible, although as the technology matures, the need for this support will diminish or even completely disappear over the long term.

b) Bioenergy consumption

The consumption of bioenergy for transport –one of the company’s activity areas– is also subject to regulation via specific public support policies both nationally and internationally. Biofuels cost more to produce than gasoline or diesel and therefore requires government support to incentivize their use. Biofuels offer a series of environmental and energy advantages compared to oil-based fuels, making them potentially useful tools for implementing European policies to combat climate change and reduce oil dependency.

Nevertheless, despite major support in the biofuels sector from governments and regulatory authorities in the jurisdictions in which Abengoa operates, and the fact that authorities have reiterated their intention to continue this support, it is still possible that certain existing policies may change over time.

Furthermore, biofuels are not the only alternative to oil-based fuels for use in transport, as shown by the recent development of electric vehicle technology. It is possible for different alternatives that have the potential to progressively substitute fossil fuels in transport to coexist. Future demand for all forms of transport could be covered with a combination of electricity (fuel cells) and biofuels as the main options; synthetic fuels (increasingly produced from renewable sources) as an intermediate solution; and methane as an additional fuel supplemented by liquid petroleum gas. Many of these alternative sources receive or will receive government support in the form of different types of incentives, which may reduce the amount of support available to biofuels. Furthermore, the level of public support can be influenced by external factors, such as public criticism in some countries of the alleged effect of biofuels on increasing food prices.

Abengoa’s activities are subject to multiple jurisdictions with varying degrees of regulation, which require significant effort by the company to ensure compliance

Abengoa’s business is subject to strict regulation in the USA, Mexico, Spain, Peru and Brazil, and in every other country in which it operates. These laws and regulations require licenses, permits and other authorizations in relation to the company’s operations. This regulatory framework currently imposes a significant amount of daily limits, costs and risks on the company. In particular, the power plants and transmission lines that we operate in our Concession-type Infrastructures and Industrial Production activities are subject to strict international, national, state and local regulation in terms of their development, construction and operation. A breach of any of these numerous requirements could result in licenses being revoked, fines being imposed or penalties that prevent Abengoa from contracting with various public institutions. Compliance with these regulations, which could give rise to greater exposure to capital market regulations in the future, could result in significant costs for our operations that may not be recoverable.

The company could be affected by breaches of the US Foreign Corrupt Practices Act and similar anticorruption laws around the world

These laws usually prohibit a company and its intermediaries from making improper payments to public officials or other people in order to obtain new business. Abengoa’s internal policies comply with these regulations. The company operates in many parts of the world where political corruption exists and, in some circumstances, strict compliance with anticorruption laws is at odds with local customs and practices. The company trains its employees in anticorruption matters and informs its partners, subcontractors, suppliers, agents and other entities that it works with, that they must also comply with anticorruption laws. The company also has internal control mechanisms to ensure compliance with these regulations. However, it is impossible to guarantee that these internal rules and mechanisms will always protect the company from criminal actions carried out by its employees or agents.

Risks associated with concession-type infrastructure projects that operate under regulated tariffs or very long term concession agreements

Revenues obtained from concession-type infrastructure projects are highly dependent on regulated tariffs or, if applicable, long term price agreements. Abengoa has very little flexibility with regards to amending these tariffs or prices when faced with adverse operating situations, such as fluctuations in commodity prices, exchange rates, and labor and subcontractor costs, during the construction and operating phases of these projects. These projects are normally calculated with tariffs or prices that are higher than the operating and maintenance cost. In some cases, if certain pre-established conditions are breached, the government or client may be able to reduce the tariff, depending on the case in question. Similarly, the relevant authorities may unilaterally impose additional tariff restrictions during the life of a concession, subject to the regulatory framework that applies in each jurisdiction. Governments may also postpone tariff increases until a new tariff structure is approved, without compensating operators for lost revenues. Lastly, in certain cases regulatory changes may be made retroactively and expose the company to additional costs and cause financial planning problems.

4.1.2. Operational risk

Abengoa operates in an activity sector that is closely linked to the economic cycle

The global economic and financial situation, the ‘credit crunch’, the sovereign debt crisis, tax deficits and other macroeconomic factors may negatively affect demand from existing or potential clients.

Specifically, the reduction in national infrastructure expenditure is impacting Abengoa’s results, since a proportion of its projects are developed by the public sector, generating a volume of revenues for the company that would be difficult to replace with private investment, especially in the current economic environment.

As mentioned, although the economic cycle affects all of the company’s businesses, some activities are more dependent on the economic outlook than others.

The demand for bioenergy –like the demand for gasoline or diesel– is relatively inelastic and has not decreased in a significant way despite the high fuel prices.

However, Abengoa’s Concession-type Infrastructures activity is much less dependent on the economic outlook, since revenues from this activity primarily come from long-term agreements, which neutralize fluctuations associated with the economic situation. However, it is a capex intensive activity, like the Engineering and Construction activity, and could be affected by difficulties in accessing financing.

The products and services of the renewable energy sector are part of a market that is subject to strict competition rules

Abengoa’s STE (solar thermal electricity) business operates in a competitive environment. In general, renewable energy competes with conventional energy that is cheaper and more competitive. Renewable energy is currently subsidized in order to bridge the difference in cost and various specific implementation targets have been set. Consequently, as generation and production costs come down, the level of government support will probably also decrease for many projects, although those that are already operational should continue to benefit from tariffs and incentives. Nevertheless, a gradual but significant reduction in tariffs, premiums and incentives for renewable energy is expected to occur in the medium to long-term.

The company is also facing considerable competition from other renewable energy suppliers. In the solar industry, competition will increase due to new suppliers entering the market as well as the existence of alternative renewable energy sources. It is possible that some of the company’s current competitors or new participants in the market could respond more quickly to regulatory changes or develop technology with significantly different production costs. Furthermore, existing or future competitors may be able to dedicate more financial, technical and management resources to developing, promoting and selling their electricity.

The results of the Engineering and Construction activity significantly depend on the growth of the company’s Concession-type Infrastructures and Industrial Production activities.

The Engineering and Construction business is Abengoa’s most important activity in terms of revenues. A significant part of this business depends on the construction of new assets for the Concession-type Infrastructures activity (especially power plants, transmission lines and water infrastructures) and the Industrial Production activity (bioenergy plants).

If Abengoa is unsuccessful in winning new contracts in its Concession-type Infrastructures activity, the revenues and profitability of the Engineering and Construction activity will suffer.

Risks derived from a shift in public opinion about Abengoa’s activities

Certain people, associations or groups may oppose Abengoa’s projects, such as the construction of renewable energy plants, recycling plants (this activity was performed by Abengoa until it sold Befesa), etc. Regulations may also restrict the development of renewable energy plants in some regions.

Although carrying out these types of projects generally requires an environmental impact study and a public consultation process prior to granting the corresponding administrative authorizations, the company cannot guarantee that a specific project will be accepted by the local population. Moreover, in those areas in which facilities are located next to residential areas, opposition from local residents could lead to the adoption of restrictive rules or measures regarding the facilities.

If part of the population or a particular company decides to oppose the construction of a project or takes legal action, this could make it difficult to obtain the corresponding administrative authorizations. In addition, legal action may give rise to the adoption of precautionary measures that force construction to stop, which could cause problems for commissioning the project within the planned time frame or for achieving Abengoa’s business objectives.

Furthermore, hostile public opinion about the use of grain and sugar cane should not be readily dismissed either (albeit to a lesser extent in bioethanol production) since these are basic consumer goods that are significantly associated with shortages in the food market. In response to public pressure, governments may adopt measures to ensure that grain and sugar is diverted into food production instead of bioethanol, causing problems for existing production activities and Abengoa’s future expansion plans.

Internationalization and country risk

Abengoa operates in a series of locations around the world, including Australia, Latin America (including Brazil), China, India, North America, the Middle East and Africa, and it hopes to expand its operations into new locations in the future. The company therefore faces a series of risks associated with operating in different countries, which include but are not limited to risks derived from the need to adapt to the regulatory requirements of different countries; to adapt to changes in the laws and regulations applicable to foreign companies; the uncertainty of judicial processes; the loss or non-renewal of favorable treaties or agreements with local institutions or policies; as well as political, economic and social instability which can result in disproportionate demands being made on the company’s managers and employees. It is therefore impossible to guarantee the success of future international operations.

Abengoa also has businesses in various emerging countries around the world. Operations in these countries involve risks that are less common in more developed markets, such as political, economic and social instability, changes to laws and regulations, nationalization or expropriation of private property, payment difficulties, social problems, fluctuations in interest rates and exchange rates, changes to the tax system, the unpredictability of enforcing contractual agreements, currency control measures that limit the repatriation of funds and other restrictions and interventions imposed by public authorities.

Latin American governments frequently intervene in the economies of their respective countries and occasionally make major changes to their regulatory framework. Government action in some Latin American countries to control inflation often involves price controls, currency devaluations, capital controls and import restrictions. Furthermore, in recent months political instability, social unrest and –in some cases– regime changes and armed conflicts have taken place in countries of the Middle East and Africa, including Egypt, Iraqi, Syria, Libya and Tunisia, which has increased political and economic instability in some of the Middle Eastern and African countries in which we operate.

Abengoa’s policy is to cover country risk using insurance policies and to transfer risk to financial institutions by means of the corresponding financing agreements and other mechanisms.

Risks derived from the difficulty of winning new projects or extending existing ones

The company’s capacity to maintain its competitive position and achieve its growth objectives largely depends on its ability to update its existing plants and to acquire or lease new plants in strategic locations. The company’s capacity to win new plants or expand existing ones is limited by regulatory and geographical considerations. All kinds of governmental restrictions can limit the potential locations for plants. The development, construction and operation of traditional power plants, renewable energy plants, desalination plants, water treatment plants, power transmission lines, as well as other projects that Abengoa carries out, involve a highly complex process that depends on a large number of variables. The company may be unable to obtain all of the authorizations and licenses required or it may have to agree to stricter conditions in order to obtain them. Public opposition may also delay or even prevent expansions or new projects.

Solar plants, for example, can only be constructed in specific locations with high levels of solar radiation, access to water and suitable geographic characteristics. There are a limited number of suitable locations for these types of facilities and the recent rise in the number of market operators has increased competition for potential sites. Moreover, regardless of the fact that we carry out studies to determine the performance of plants in specific locations, they do not necessarily perform as expected.

The development, construction and operation of new projects may be affected by factors commonly associated with those projects

The development, construction and operation of conventional power plants, renewable energy plants, water infrastructure plants, transmission lines and other types of projects can take long periods of time and be extremely complex. When developing and funding a project, government authorizations and sufficient financing must be obtained as well as signing agreements for land use, the design and execution of the project, supplies, etc. Factors that can impact the company’s ability to construct new projects include delays in obtaining licenses, shortages or changes in the price of equipment and materials as well as cost overruns, adverse changes in the political and regulatory framework in different jurisdictions, adverse weather conditions and problems obtaining financing under favorable terms, among many others.

Risks derived from associations with third parties when executing certain projects

When Abengoa decides to make acquisitions or financial investments to expand or diversify its business, the necessary financing may come from borrowing. It is impossible to guarantee that the company will be capable of completing all or part of the expansion or diversification operations that it carries out in the future. These operations expose the company to risks inherent in integrating an acquired business and its personnel; problems in achieving the expected synergies; difficulties in maintaining uniform standards, controls, procedures and policies; recognition of unforeseen liabilities and costs, and regulatory complications that can arise in these types of operations. Similarly, the terms and conditions of the financing of these operations may restrict the way the business is managed.

Abengoa has made investments in certain projects in collaboration with third parties that include both public institutions and private organizations. In some cases these projects take the form of joint ventures in which the company has only partial or joint control. These types of projects are subject to the risk that the company’s partner may block decisions that may be crucial to the success of the project or about investment in the project, and it runs the risk that these third parties may in some way implement strategies that are contrary to Abengoa’s economic interests, resulting in a lower return.

Operations with third parties expose the company to credit risk

The company is exposed to credit risk derived from a counterparty default. Despite the fact that the company actively manages these risks using non-recourse factoring and credit insurance, these measures may not cover the whole risk.

The delivery of products and the provision of services to clients, and compliance with the obligations assumed with these clients, can all be affected by problems related to third-parties and suppliers

In some contracts, the provision of the company’s products and services depends on subcontracting them from third parties. Failures or delays by the company’s subcontractors could cause Abengoa to breach its obligations with its clients.

The unauthorized use of our products by third parties may reduce their value and prevent the company from competing efficiently

The company bases its business on a combination of industrial secrecy and intellectual property laws (which in some countries do not offer sufficient protection), non-disclosure agreements and other types of agreements designed to protect the company’s property rights. These measures may be insufficient to protect its technology from third-party breaches and, regardless of the solutions that may be put in place, the company may become less competitive and potentially lose market share.

Similarly, the company is exposed to the risk of claims from third parties for intellectual property infringements.

Risks derived from the company’s inability to effectively defend itself against third-party claims

Abengoa’s projects involve complex engineering, procurement and construction works. The company may encounter difficulties during these processes –some of which will be beyond its control– which could affect its ability to fulfil the contract under the agreed terms and conditions. The company also collaborates with third parties that help it to fulfil these contracts. The company may have to deal with claims against third-parties –and vice versa– in relation to these contracts. These claims may give rise to long and costly legal proceedings if they are not resolved during the negotiation phase.

Revenues from long term agreements: risks derived from the existence of termination and/or renewal clauses of the concession agreements managed by Abengoa; cancellation of pending projects in Engineering and Construction; and the non-renewal of distribution agreements in Bioenergy

• Concessions

Some of Abengoa’s activities are performed under concession agreements with different government entities. They are responsible for regulating the services provided in this way and they have extensive powers to supervise compliance with concession agreements, including demanding technical, financial and administrative information. These government entities can therefore demand compliance with various requirements that these same entities may change at a later date. A breach of concession agreements or the requirements established by these government entities may result in the concession not being awarded, revoked or not renewed.

• Bioenergy distribution agreements

Abengoa sells bioenergy through medium and long term agreements, mainly in Europe. However, it cannot guarantee that these agreements will be renewed.

• Backlog in the Engineering and Construction activity

It is important to note that the term ‘backlog’ usually refers to projects, operations and services for which the company has commitments, but also includes projects, operations and services for which it does not have firm commitments. Some new project contracts are conditional upon other factors, usually the process of obtaining third party financing.

Abengoa’s backlog is the management’s estimate of the amount of awarded contracts that are expected to be converted into future revenues. A project for which a contract has been signed will be included in the backlog calculation. A signed contract implies a legally binding agreement, which represents a secure source of revenues in the future. Nevertheless, taking into account the method of calculating the backlog, it is impossible to guarantee that planned revenues in the backlog will ultimately materialize or, if they do, that they will generate a profit. It is not possible to predict with certainty when or if the backlog will materialize, due to project terminations, cancellations and modifications to their scope. It is impossible to guarantee that additional cancellations will not occur. Moreover, even when revenues are expected, it is possible that the client pays late or does not pay at all.

Risks arising from delays or cost overruns in the Engineering and Construction activity due to the technical difficulty of projects and the long term nature of their implementation

In the Engineering and Construction activity, it is important to note that –with few exceptions– all of the agreements that Abengoa has entered into are ‘turnkey’ construction agreements (also known as EPC agreements). Under the terms of these agreements the client receives a completed facility in exchange for a fixed price. These projects are subject to very long construction periods of between one and three years. This type of agreement involves a certain amount of risk since the price offered prior to beginning the project is based on cost estimates that can change over the course of the construction period, which can make certain projects unprofitable or even cause significant losses. Furthermore, in most EPC contracts Abengoa is responsible for every aspect of the project, from the engineering through to the construction, including the commissioning of the project. In addition to the general responsibilities for each project, Abengoa must also assume the technical risk and the associated guarantee commitments. Delays can result in cost overruns, deadlines being missed or penalty payments to the client, depending on what has been negotiated.

Risks derived from lawsuits and other legal proceedings

In the ordinary course of its business, the company is exposed to the risk of legal claims and enforceable demands, as well as all types of regulatory proceedings. The outcomes of these demands and proceedings cannot be accurately predicted.

The nature of the Engineering and Construction business exposes the company to potential liability claims

This business involves carrying out operations in which design, construction or systems failures may cause damages to third parties. In addition, the nature of this activity often involves claims from clients and subcontractors for costs incurred above the budgeted amount. These types of claims arise in the ordinary course of the company’s business.

Risks derived from variations in the cost of energy

Some of Abengoa’s activities, especially ethanol production and recycling (the latter was performed by Abengoa until it sold Befesa) require significant energy consumption.

The profitability of activities that are highly reliant on these inputs is therefore sensitive to fluctuations in their prices. Despite the fact that agreements to purchase gas and other sources of energy normally include adjustment or hedging mechanisms against a rise in prices, the company cannot guarantee that these mechanisms will cover all of the additional costs that could be incurred from a rise in the price of gas or its other energy inputs (especially in long term agreements signed with clients and in agreements that do not include these adjustment clauses).

Risks derived from the exposure of power generation revenues to electricity market prices

In addition to relying on regulatory incentives, revenues from some of Abengoa’s projects partially rely on electricity market prices that can be volatile and affected by various factors, including commodities prices, and on the demand and price of greenhouse gas emission rights.

In some of the jurisdictions in which the company operates, it is exposed to remuneration schemes that combine regulatory and market components, in which the regulatory element does not offset fluctuations in market prices, making the overall remuneration highly volatile.

Risks derived from a lack of available power transmission capacity, potential increases in transmission network access costs and restrictions in other systems

Power plants need to be connected to the transmission network to be able to deliver the power they generate to the company’s clients. A lack of capacity in these transmission systems could limit the size of projects, cause delays in their implementation or increase the cost.

Insurance policies taken out by Abengoa may be insufficient to cover the risks arising from projects and the cost of insurance premiums may rise

Abengoa’s projects are exposed to various types of risk that require appropriate coverage in order to mitigate their potential effects. Despite Abengoa’s attempts to obtain the correct coverage for the main risks associated with each project, it is impossible to guarantee that it is sufficient for every type of potential loss.

Abengoa’s projects are insured with policies that comply with sector standards in relation to various types of risk, such as risks caused by nature; incidents during assembly, construction or transport; and loss of earnings associated with such events. All of the insurance policies taken out by Abengoa comply with the requirements demanded by the institutions that finance the company’s projects and the coverage is verified by independent experts for each project.

Furthermore the insurance policies taken out are reviewed by the insurance companies. If insurance premiums increase in the future and cannot be passed on to the client, these additional costs could have a negative impact for Abengoa. However, no significant increases have occurred in the cost of premiums in the last 12 months.

The company’s activities may be negatively affected by catastrophes, natural disasters, adverse weather conditions, unexpected geological conditions or other environmental circumstances, as well as by acts of terrorism at any of its sites

In the event that an Abengoa site is affected by a fire, flood, adverse weather conditions or any other type of natural disaster, acts of terrorism, power outages and other catastrophes, or in the event of unexpected geological conditions or other unexpected environmental circumstances, the company may be unable or only partially able to continue operating these facilities. This could result in lower revenues from the affected site while the problem exists and lead to higher repair costs.

Abengoa has taken out insurance against natural risks or acts of terrorism and the loss of earnings that may arise from stoppages.

The analysis of whether the IFRIC 12 ruling applies to certain contracts and activities, and determination of the appropriate accounting treatment in the event that it is applicable, involves various complex factors and is influenced by diverse legal and accounting interpretations

The company recognizes some of its concession-type assets as concession arrangements in accordance with IFRIC 12. The analysis of whether IFRIC 12 does or does not apply is influenced by a wide range of legal and accounting interpretations of certain arrangements with public entities. The application of the IFRIC 12 rule requires an in-depth interpretation of the following, among other issues, (i) identification of certain infrastructures and agreements within the scope of IFRIC 12; (ii) an understanding of the nature of the payments in order to classify the infrastructure as a financial asset or an intangible asset; and (iii) the schedule and recognition of income from the construction and concession activity.

The recovery of tax losses depends on obtaining profits in the future, which in turn depends on uncertain estimates

The management assesses the recovery of tax losses on the basis of future profit estimates. These estimates are derived from the forecasts included in the 5 and 10 year strategic plan that is prepared every year and reviewed every two years. According to its current estimates, the company expects to generate sufficient profits to be able to benefit from its tax credits. Nevertheless, income may be affected by circumstances that arise during the ordinary course of its business.

Tax evasion and product tampering in the fuel distribution market in Brazil could distort market prices

In recent years, tax evasion and product tampering have been one of the main problems for fuel distributors in Brazil. In general, such practices combine both tax evasion and fuel tampering by mixing gasoline with solvents or adding anhydrous ethanol in quantities greater than the 25% allowable by law (taxes on anhydrous ethanol are lower than those for hydrated ethanol and gasoline). Taxes account for a very significant proportion of the cost of fuel sold in Brazil.

Risks derived from turnover in the senior management team and among key employees or from an inability to hire highly qualified personnel

The company’s future success relies on the involvement of the senior management team and key employees, who have extensive experience in every business area. The company’s ability to retain these people and attract qualified personnel will affect its capacity to manage its business and expand in the future.

Construction projects related to the Engineering and Construction activity and the facilities of the Concession-type Infrastructures and Industrial Production activities are hazardous workplaces

Employees and other personnel that work on Abengoa’s construction projects for the Engineering and Construction activity and at the facilities of the Concession-type Infrastructures and Industrial Production activities are usually surrounded by large scale mechanical equipment, moving vehicles, manufacturing processes or hazardous materials, which are subject to wide-ranging regulations when they are used (for example, occupational health and safety legislation and other applicable regulations). At most projects and facilities, the company is responsible for safety and must therefore implement safety procedures. A failure to implement these procedures, or if they are implemented inefficiently, could give rise to injuries and increase the costs of a project.

Projects may involve the use of hazardous or highly regulated materials that, if not handled correctly or spilt, could expose the company to claims that result in all types of civil, criminal and administrative liabilities (fines or Social Security benefits surcharges).

Despite the fact that the company has functional groups that are exclusively responsible for monitoring the implementation of the necessary health and safety measures, as well as working procedures that are compatible with protecting the environment, throughout the organization (including at construction and maintenance sites), any failure to comply with these regulations could result in liability for the company. Similarly, Abengoa may be unaware or unable to ensure compliance with occupational health and safety regulations in the companies that it subcontracts. In the event of non-compliance Abengoa could be found liable.

Historical safety levels are a critical part of Abengoa’s reputation. Many of its clients expressly require the company to comply with specific safety criteria in order to be able to submit bids, and many contracts include automatic termination clauses or withdrawal of all or part of the contractual fees or profits in the event that the company fails to comply with certain criteria. Consequently, Abengoa’s inability to maintain adequate safety standards could result in lower profitability or the loss of clients or projects.

As at the date of these Consolidated Financial Statements, no agreements have been terminated, no penalties have been imposed and no material decreases in earnings have occurred due to failures to comply with safety-related obligations.

Abengoa operates with high levels of debt and could take on additional borrowing

Abengoa’s operations are capital intensive and the company therefore operates with a high level of indebtedness.

The main ratio that Abengoa must observe is the ratio of its net debt over EBITDA, excluding the debt and EBITDA of projects financed under project debt formats, as defined in its main corporate finance agreements. As at December 31, 2014, this ratio was 2.11x with the maximum limit being 2.5x until December 30, 2015.

At the end of 2014 the covenant ratio for Net Debt and corporate EBITDA, according to the clauses of the syndicated loan, was 2.11x. This ratio is obtained by calculating the total liquidity of the companies with project debt; the amount of the reserve account for debt servicing is included as debt; and R&D+i expenses for the period are not included in corporate EBITDA.

In relation to the project debt of project companies, it should be noted that the majority of the company’s projects are developed in regulated environments, in which the debt is repaid over a long time frame according to the concession agreement, a regulated tariff or, if appropriate, power or water purchase agreements, so that the degree of leverage (meaning the proportion of debt to capital) of these projects is higher than in financing with recourse to the parent company or other group companies (corporate financing). Since project debt is used for most projects, it makes sense to analyze debt on two separate levels (non-recourse and corporate, since the parent company is only liable for corporate debt).

As a result of implementing the new accounting standards in IFRS 10, companies that do not meet the conditions of effective control during the construction phase are excluded from the consolidation scope of Abengoa’s financial statements, in accordance with the capital method. However, these projects are expected to be included in the consolidation once they come into operation and control over them is returned, which will mean significant increases in long-term project debt, among other issues.

Notwithstanding the above, a breach of the payment obligations assumed by borrowers (usually the project companies) could have major consequences for the company and its group, including but not limited to lower dividends, lower interest or payments to be received by Abengoa (which Abengoa then uses to repay corporate debt) or even losses in the event that guarantees provided by project companies under project debt agreements are enforced.

In addition, the current high level of borrowing could increase in the future due to capex investments, fluctuations in operating results and potential acquisitions or joint ventures, among other possibilities. This high level of debt could divert a significant part of the company’s operational cash flow in order to repay the debt, thereby reducing the capacity to finance working capital, future capex, investment in R&D+i or other general corporate objectives, as well as limiting the company’s capacity to obtain additional financing. Similarly, the high level of debt could make it difficult for the company to meet its obligations or refinance its debt; it could increase its vulnerability to downturns in the economy or the sector; restrict its ability to pay dividends on its own shares and its subsidiaries; limit its flexibility to plan and react to changes in the business and the market in which it operates; and put it at a disadvantage in relation to other companies that operate with less debt.

If debt should increase in the future as a result of developing multiple new projects (including the interest payments associated with this), operating cash flow, cash and other resources may be insufficient to cover the company’s payment obligations when they fall due or to finance its liquidity needs.

In addition to the current high degree of leverage, the terms of the agreements for issuing debt and other financing agreements that regulate debt issuance, permit both Abengoa and its subsidiaries, joint ventures and associated entities to access a significant amount of additional debt in the future, including secured debt, which could increase the aforementioned risks.

As at the date of these Consolidated Financial Statements, Abengoa has not breached any of its corporate financing agreements, which could give rise to the early cancellation of these agreements.

Nevertheless, it should be noted that a breach of these obligations (for example, the requirement to maintain certain financial ratios, restrictions on dividend payments, restrictions on granting loans and guarantees, and restrictions on the availability of assets) agreed by the company with various financial institutions that have provided third party financing, could lead to the early cancellation of payment obligations under the corresponding finance agreements (and other associated agreements) and, if applicable, the enforcement of guarantees that may have been granted in their favor. Likewise, such a breach could give rise to the early termination not only of the aforementioned agreements, but also those that have specific cross-default clauses (which the majority of corporate borrowing agreements have) caused by a payment default.

It should also be remembered that Abengoa could be forced to repay the debt borrowed under financing agreements early or to redeem convertible notes and bonds (should the note and bondholders demand it) in the event of a change of control in the company.

Lastly, the company also depends on short-term credit lines to finance its working capital needs. If these lines are reduced or cancelled in some way, the company would be required to look for alternative sources of financing which could increase its level of borrowing.

Risks derived from the need to make significant levels of investment in fixed assets (CAPEX)

The company has to invest significant amounts in fixed assets (CAPEX), which require continuous access to the global capital markets, as well as in R&D+i and major construction projects. The amounts invested in fixed assets (CAPEX) and R&D+i depend on the number and type of projects that will be contracted in the future. The company is committed to make specific investments in fixed assets (CAPEX) in the future, pursuant to concession and other agreements. These investments in fixed assets (CAPEX) and R&D+i will be recovered over a relatively long period of time. The company may also be unable to recover the investments in these projects as a result of delays, cost overruns or timing issues related to the investment recovery schedule.

The perception of the market in relation to the instability of the euro, a potential return to national currencies in the Eurozone or the complete disappearance of the euro could affect the company’s business

Following the credit crisis in Europe, the European Commission created the European Financial Stability Facility and the European Financial Stabilization Mechanism to provide funds to Eurozone countries experiencing financial difficulties. The measures adopted helped to stabilize the euro between late 2012 and 2014. Nevertheless, the recent market instability in Europe related to sovereign debt could occur again and additional stabilization measures could be necessary in the future.

There is still uncertainty about the debt of certain Eurozone countries and certain regional governments, and the solvency of some financial institutions and their respective capacity to meet their future financial obligations. The difficult market conditions have raised doubts about the stability of the euro and its suitability as a single currency considering the diverse range of economic and political circumstances of its member states. This and other circumstances could lead to a return to national currencies and, in extreme circumstances, the disappearance of the euro. The consequences of this disappearance for holders of euro denominated notes would be defined by laws specifically passed for this purpose.

Risks derived from a cut in the company’s credit rating

Credit ratings affect the cost and the terms under which the company can obtain financing. Credit rating agencies regularly assess the company and its ratings depend on a series of factors, including the credit rating of the Kingdom of Spain. Any fall in the credit rating of Spain, the group or its non-convertible notes could affect the company’s ability to obtain financing under reasonable terms.

The evolution of interest rates and the company’s hedging may affect its results

In the normal course of its business, the company is exposed to various types of market risk, including the impact of interest rate movements. Part of its borrowing accrues interest at variable interest rates, normally linked to benchmarks such as EURIBOR and LIBOR. However none of its corporate debt is exposed to interest rate changes until 2014 (fixed rate debt and debt with interest rate hedges). Any increase in interest rates would increase the financial costs associated with the variable interest rate, and would increase the cost of refinancing existing borrowing and issuing new debt.

The evolution of exchange rates and the company’s hedging could affect its results

Abengoa is exposed to exchange rate risk in transactions denominated in a currency that is not the functional currency of each of the companies in its group.

As the group’s international activities grow, a significant part of its transactions may be carried out in currencies other than the functional currency of each company.

Abengoa’s strategy to reduce its exposure to exchange rate movements in situations in which there is no natural hedge (by adjusting future cash flows from revenues denominated in different currencies to match principal and interest payments in the same currencies) consists of using foreign exchange futures contracts and exchange rate swaps.

Risk of obtaining less net profit from asset rotations

Abengoa applies a selective rotation strategy to its concession assets (mainly solar plants, electricity transmission lines, desalination plants and cogeneration plants), through which the company occasionally divests certain assets in order to maximize the expected return depending on market conditions, asset maturity and Abengoa’s strategy in relation to these assets, while monetizing the value of these projects ahead of schedule in order to maximize shareholder return.

However, Abengoa cannot guarantee that it will be able to obtain the same level of net profit in the future as it has to date, since the company’s capacity to generate new business opportunities or opportunities with similar returns to those that it currently obtains will depend on market conditions and other factors beyond Abengoa’s control.

Risks derived from inefficiently managing the company’s exposure to commodities prices using hedging contracts and other strategies

Abengoa is exposed to fluctuations in the price and supply of commodities in its biofuels division. This business area competes with the food market for the supply of commodities such as wheat, corn and sugar. Consequently, any increase in the cost of these products pushes up the cost of ethanol production. The company uses hedging contracts, including futures and options contracts on organized markets, as well as OTC contracts in order to manage these risks.

Risks derived from the correlation between the prices of sugar, oil and sugar cane.

In general, the price of ethanol is closely related to the price of sugar and, to a certain degree, to the price of oil. A significant proportion of ethanol production in Brazil takes place in sugar cane mills, which produce ethanol and sugar. Since these sugar cane mills can vary the proportion of their production depending on the relative prices of ethanol and sugar, the prices of these products are directly related. Moreover, sugar prices in Brazil are determined by global prices so there is a strong correlation between Brazilian ethanol prices and global sugar prices.

In addition, since flexible-fuel vehicles currently enable consumers to choose between gasoline and ethanol, prices of the latter are becoming directly correlated to gasoline prices and consequently to the oil price.

Risks derived from sensitivity in the demand for raw materials for bioenergy production and volatility in the price of the end product

The results of the bioenergy area of our Industrial Production activity are highly reliant on commodity prices, including the difference between the cost at which the company purchases its raw materials and the price at which it sells the end product. Prices and supplies depend on and are determined by market forces that are beyond the company’s control, such as the weather, domestic and global demand, supply shortages and export prices as well as different public policies in the USA, Europe, Brazil and around the world. As a result of this price volatility, operating results in the bioenergy area of the Industrial Production activity can fluctuate significantly. In the last quarter of 2011, 2012 and 2013, the bioenergy area was affected by an increase in grain and sugar prices caused by droughts in the USA and heavy rains in Brazil, respectively, as well as lower demand for gasoline that depressed ethanol prices. Today, ethane prices are under pressure in Europe as a result of low gasoline demand. The company cannot guarantee that it will be able to purchase corn and natural gas at favorable prices nor that it will be able to sell ethanol, sugar or grain at those prices.

To offset the risk associated with these prices as much as possible, Abengoa has a policy of not committing its production and sale of biofuels until it has ensured its supply of the necessary raw materials.

The company has a controlling shareholder

As at the date of the Consolidated Financial Statements, Inversión Corporativa I.C., S.A. holds 57.819% of the voting rights in Abengoa.

Consequently, this company controls Abengoa under the terms of Article 42 of the Code of Commerce and can therefore exert a controlling influence over certain issues that require the shareholders’ approval, notwithstanding the protective measures and the separate voting rights corresponding to Class B shares in certain cases, pursuant to the company’s bylaws.

Conflicts could arise from differences between the interests of Inversión Corporativa I.C., S.A. and the remaining shareholders, which may be resolved by the controlling shareholder in a way that does not suit the interests of the other shareholders.

Nevertheless, Inversión Corporativa IC, S.A. has signed a shareholder agreement with the company, in which it agrees to the following, among other issues, (i) only exercise its voting rights up to a maximum of 55.93% (the percentage of votes that it had at the date of signing the shareholder agreement) in cases in which, as a result of exercising the right to convert Class A shares into Class B shares, as stated in the company’s bylaws, the total voting rights that it holds as a percentage of the total voting rights of the company increases; and (ii) that the percentage represented at any given time by the number of shares that it holds with the right to vote (whether these are Class A shares or Class B shares) of the total number of company shares, will not be less than one quarter of the percentage represented by the voting rights that these shares attribute to Inversión Corporativa IC, S.A. at any given time, in relation to the company’s total voting rights (in other words, that its voting rights will not be greater than four times its financial rights); and that, should this situation arise, it will sell the necessary amount of Class A shares or will convert them into Class B shares in order to maintain this ratio.

Similarly, through the shareholder agreement with First Reserve Corporation (another shareholder in the company), Inversión Corporativa IC, S.A. has agreed that while FRC or any of its related companies owns Abengoa Class B shares or any other instrument that is convertible or exchangeable for Abengoa Class B shares, they will not propose or request the Board of Directors to recommend to shareholders any modification to the company’s bylaws that adversely affects the equal rights between Class B and Class A shares in relation to the distribution of dividends or similar distributions as established in the bylaws and that if this proposal were to be submitted by another shareholder, or by the Board of Directors, they will vote against it.

The existence of two share classes, Class A and Class B, with different voting rights, could deter third parties from carrying out transactions to take control of the company

There are two main factors that could deter third parties from carrying out certain corporate transactions, such as a merger or acquisition, or any other transaction involving a change of control in the company, which shareholders of Class B shares could consider as beneficial, which in turn could negatively affect the price of Class B shares, which are the following:

(i)    The existence of two share classes with different voting rights and the concentration of voting rights in a single shareholder, Inversión Corporativa IC, S.A., and in the Class A shares; and

(ii)   The right of redemption. Abengoa’s bylaws grant a right of redemption to Class B shares in the event that a takeover bid is made and completed for all of the company’s shares with voting rights, through which the offeror gains control of the company and the price offered for Class B shares is not the same as Class A shares. This right of redemption enables Class B shareholders that have not been offered the same price, to request the company to redeem their shares at the price offered for Class A shares in the tender offer, with the exceptions and limitations established in the company’s bylaws. This right of redemption does not apply in the event of partial and voluntary tender offers.

Class B share price volatility

The price of the new shares when admitted to trading shall be determined by the Madrid stock exchange as the lead exchange, based on the closing price of Abengoa’s Class B shares on the day prior to the start of their listing.

The future price of Class B shares may fluctuate significantly. Factors such as the evolution of the company’s operating results, negative publicity, changes in equity analysts’ recommendations about the company, changes in the global conditions of the financial markets, securities markets or the sectors in which the company operates, could all have a significant negative impact on the price of the company’s Class B shares.

Risk of significant sales of shares

The sale of a significant number of Abengoa Class B shares in the market after they are admitted for trading, or the perception in the market that such sales may take place, could damage the price of the Class B shares or the company’s ability to raise capital through future issues.

Possibility of differences in the listed prices of Class A shares and Class B shares despite the fact that both share classes have similar financial rights

Despite the fact that both share classes have equivalent financial rights and there is a controlling shareholder, Class A shares and Class B shares may be listed with different prices due to the difference in voting and other non-financial rights, among other reasons.

In particular, there is a risk that a third party may launch a takeover for 100% of the company’s shares, offering a different price for Class A and Class B shares. To mitigate this risk, Article 8 of Abengoa’s bylaws includes a right of redemption for Class B shares under the terms and conditions established therein. This right of redemption does not apply in the event of partial and voluntary tender offers.

Shareholders in countries with non-euro currencies may incur additional risk associated with variations in the exchange rate in relation to holding the company’s shares

The company has requested admission to trading of the Class B shares on the US stock market through ADSs denominated in US dollars. With regards to holding the company’s new shares, shareholders in countries with non-euro currencies incur additional risk due to variations in the exchange rate. Therefore, the price of the ADSs and the dividends paid may be unfavorably affected by fluctuations in the Euro-US Dollar exchange rate.

4.1.3. Client concentration

During the years 2014 and 2013 there is no client that contributes more than 10% of revenue

4.2. Financial risk

4.2.1. Market risk

Market risk arises when group activities are exposed fundamentally to financial risk derived from changes in foreign exchange rates, interest rates and changes in the fair values of certain raw materials.

To hedge such exposure, Abengoa uses currency forward contracts, options and interest rate swaps as well as future contracts for commodities. The Group does not generally use derivatives for speculative purposes.

• Foreign exchange rate risk: the international activity of the Group generates exposure to foreign exchange rate risk. Foreign exchange rate risk arises when future commercial transactions and assets and liabilities recognized are not denominated in the functional currency of the group company that undertakes the transaction or records the asset or liability. The main exchange rate exposure for the Group relates to the US Dollar against the Euro.

To control foreign exchange risk, the Group purchases forward exchange contracts. Such contracts are designated as fair-value or cash-flow hedges, as appropriate.

In the event that the exchange rate of the US Dollar had risen by 10% against the Euro as of December 31, 2014, with the rest of the variables remaining constant, the effect in the Consolidated Income Statement would have been a loss of €1,103 thousand (loss of €8,496 thousand in 2013) mainly due to the US Dollar net liability position of the Group in companies with Euro functional currency and an increase of € 36,315 thousand (increase of €1,192 in 2013) in other reserves as a result of the cash flow hedging effects on highly probable future transactions.

Details of the financial hedging instruments and foreign currency payments as of December 31, 2014 and 2013 are included in Note 14 of Notes to Consolidated Financial Statements. ales Consolidadas.

• Interest rate risk: arises mainly from financial liabilities at variable interest rates.

Abengoa actively manages its risks exposure to variations in interest rates associated with its variable interest debt.

In project debt, as a general rule, the Company enters into hedging arrangements for at least 80% of the amount and the timeframe of the relevant financing.

In corporate financing, as general rule, 80% of the debt is covered throughout the term of the debt; in addition, in 2009, 2010, 2013 and 2014, Abengoa issued notes at a fixed interest rate.

The main interest rate exposure for the Group relates to the variable interest rate with reference to the Euribor.

To control the interest rate risk, the Group primarily uses interest rate swaps and interest rate options (caps and collars), which, in exchange for a fee, offer protection against an increase in interest rates.

In the event that Euribor had risen by 25 basic points as of December 31, 2014, with the rest of the variables remaining constant, the effect in the Consolidated Income Statement would have been a profit of €9,182 thousand (profit of €13,669 thousand in 2013) mainly due to the increase in time value of hedge interest rate options (caps and collars) and an increase of € 35,591 thousand in other reserves (increase of €48,050 thousand in 2013) mainly due to the increase in value of hedging interest derivatives (swaps, caps and collars).

A breakdown of the interest rate derivatives as of December 31, 2014 and 2013 is provided in Note 14 of Notes to the Consolidated Financial Statements..

• Risk of change in commodities prices: arises both through the sale of the Group’s products and the purchase of commodities for production processes. The main risk of change in commodities prices for the Group is related to the price of grain, ethanol, sugar, gas, and steel.

In general, the Group uses futures and options listed on organized markets, as well as OTC (over-the-counter) contracts with financial institutions, to mitigate the risk of market price fluctuations.

At December 31, 2014, if the price of grain had increased by 10%, with the rest of the variables remaining constant, the effect in the Consolidated Income Statement would have been null (null in 2013) and an increase in other reserves of € 50,164 thousand (increase of €4,567 thousand in 2013) due to open derivative contracts primarily on grain purchases held by the Group.

At December 31, 2014, if the price of ethanol had increased by 10%, with the rest of the variables remaining constant, the effect in the Consolidated Income Statement would have been null (null in 2013) and an increase in other reserves of € 8,673 thousand (increase of €60,040 in 2013) due to open derivative contracts primarily on ethanol purchases held by the Group.

A breakdown of the commodity derivative instruments as of December 31, 2014 ad 2013 is included in Note 14 to Consolidated Financial Statements.

In addition, certain Bioenergy Business Group companies engage in purchase and sale transactions in the grain and ethanol markets, in accordance with a management policy for trading transactions.

Management has approved and supplemented trading strategies to control the purchase and sale of forward and swap contracts, mainly for sugar, grain and ethanol, which are reported on a daily basis, following the internal procedures established in the Transactions Policy. As a risk-mitigation element, the company sets daily limits or ‘stop losses’ for each strategy, depending on the markets in which it operates, the financial instruments purchased and the risks defined in the transaction.

These transactions are measured monthly at fair value through the Consolidated Income Statement. In 2014, Abengoa recorded a profit of €3,992 thousand (profit of €15 thousand in 2013), corresponding to settled transactions in both years.

4.2.2. Credit risk

The main financial assets exposed to credit risk derived from the failure of the counterparty to meet its obligations are trade and other receivables, current financial investments and cash:

a) Clients and other receivables.

b) Current financial investments and cash.

• Clients and other receivables: Most receivables relate to clients operating in a range of industries and countries with contracts that require ongoing payments as the project advances, the service is rendered or upon delivery of the product. It is a common practice for the company to reserve the right to cancel the work in the event of a material breach, especially non-payment.

In general, and to mitigate the credit risk, prior to any commercial contract or business agreement, the company generally holds a firm commitment from a leading financial institution to purchase the receivables through a non-recourse factoring arrangement. Under these agreements, the company pays the bank for assuming the credit risk and also pays interest for the discounted amounts. The company always assumes the responsibility that the receivables are valid.

Abengoa derecognizes the factored receivables from the Consolidated Statement of Financial Position when all the conditions of IAS 39 for derecognition of assets are met. In other words, an analysis is made to determine whether all risks and rewards of the financial assets have been transferred, comparing the company’s exposure, before and after the transfer, to the variability in the amounts and the calendar of net cash flows from the transferred asset. Once the company’s exposure to this variability has been eliminated or substantially reduced, the financial asset has been transferred

In general, Abengoa considers that the most significant risk related to Clients and other receivables is the risk of non-collection, since: a) trade receivables may be quantitatively significant during the progress of work performed for a project or service rendered; b) it is not under the company’s control. However, the risk of delays in payment typically relates to technical problems, i.e. associated with the technical risk of the service provided and, therefore, within the company’s control.

If the company concludes that the risk associated to the contract has been transferred to the financial institution, the receivable is derecognized in the Consolidated Statement of Financial Position at the time it is transferred, in accordance with IAS 39.20.

An ageing of trade receivables as of December 31, 2014 and 2013 is included in Note 15 ‘Clients and other receivable accounts’. The same note also discloses the credit quality of the clients as well as the movement on provisions for receivables for the years ended December 31, 2014 and 2013.

• Financial investments: to control credit risk in financial investments, the Group has established corporate criteria which require that counterparties are always highly rated financial entities and government debt, as well as establishing investing limits with periodic review.

4.2.3. Liquidity risk

See Section 3. Liquidity and capital resources.

4.2.4. Capital risk

The Group manages capital risk to ensure the continuity of the activities of its subsidiaries from an equity standpoint by maximizing the return for the shareholders and optimizing the structure of equity and debt in the respective companies or projects.

Since the admission of its shares to trade on the stock market, the company has grown in the following ways:

• cash flows generated by conventional businesses;
• financing of new investments through non-recourse financing (project finance and bridge loan), which also generates induced business for conventional businesses;
• corporate financing, either through banks or capitals markets;
• issuance of new shares of subsidiaries through organized markets;
• assets rotation or divestitures, such as divestiture of Befesa, the sale of mature concessional assets, the sale of a transmission line concession activity in Brazil and a water concession activity in China;
• capital increases carried out for €300 million in 2011 and for €517.5 million in 2013.

The leverage objective of the activities of the company is not measured based on the level of debt on own resources, but on the nature of the activities:

• for activities financed through project debt each project is assigned a leverage objective based on the cash and cash flow generating capacity, generally, of contracts that provide these projects with highly recurrent and predictable levels of cash flow generation;
• for activities financed with Corporate Financing, the objective is to maintain reasonable leverage, defined as 2.0 times corporate Ebitda over Net Corporate Debt in 2014.

4.3. Risk management and internal control

During 2014, Abengoa continued to grow, carrying on activities in more than 70 countries. To deal with this growth in a safe and controlled manner, Abengoa has a common business management system that allows it to work on an efficient, coordinated and consistent basis.

In forthcoming years, and principally with the consideration of being a company registered in NASDAQ, we will be faced with an environment characterized by greater regulatory requirements. In order to deal with this scenario, Abengoa considers risk management an indispensable activity and function for strategic decision making.

Abengoa is aware of the importance of managing its risks in order to carry out appropriate strategic planning and attain the defined business objectives. To do this, it applies a philosophy formed by a set of shared beliefs and attitudes, which define how risk is considered, starting with the development and implementation of the strategy and ending with the day-to-day activities.

• Identify
• Evaluate
• Respond
• Monitor
• Report

In each phase, regular and consistent communication is necessary in order to achieve good results. Since it is a continuous cycle, permanent feedback is necessary in order to achieve a constant improvement in the risk management system. These processes are addressed to all the company’s risks.

Abengoa’s risk management model comprises three core elements:

Those elements combine to form an integrated system that enables the company to manage risks and controls suitably throughout all levels of the organization.

a) Common management systems

The common management systems are the internal rules for Abengoa and its business groups and are used to assess and control risk. They represent a common culture for managing Abengoa’s businesses, sharing the accumulated knowledge while defining specific criteria and guidelines.

The common management systems include specific procedures for any type of action that could give rise to a risk for the organization, whether financial or non-financial. Furthermore, they are available to all employees in electronic format regardless of their geographical location or role.

The functional heads of each division must verify and certify compliance with these procedures. This annual certification is issued by the Audit Commission in January of the following year.

The systems cover the whole organization at three levels:

• All the business groups and areas of activity.
• All levels of responsibility.
• All kinds of operations.

Common management systems represent a common culture for Abengoa’s different businesses and are composed of eleven rules defining how each of the potential risks included in Abengoa’s risk model should be managed. Through these systems, the risks and the appropriate way of hedging against them are identified and the control mechanisms defined.

Over recent years, the common management systems have evolved to adapt to the new situations and environments in which Abengoa operates, with the overriding aim of reinforcing risk identification, covering risks and establishing control activities.

b) Compulsory procedures (SOX)

The compulsory procedures are used to mitigate risks relating to the reliability of the financial information, employing a combined system of procedures and control activities in key areas of the company, which are intended to ensure the reliability of the financial information and prevent fraud.

SOX is a compulsory law for all listed companies operating in the United States and is intended to ensure the reliability of the financial reporting of these companies and protect the interests of their shareholders and investors by establishing an appropriate internal control system. Thus, although none of the business groups is required to meet SOX requirements, Abengoa deems it necessary to comply with these requirements throughout all of its component companies, since these requirements complement the risk control model used by the company.

The company has implemented an appropriate internal control system that relies on three tools:

• A description of the company’s relevant processes that could impact the financial information to be prepared. In this regard, 55 management processes have been defined and grouped into corporate cycles and common cycles used throughout all the business groups.
• A series of flow charts that provide a visual description of the processes.
• An inventory of the control activities in each process to ensure attainment of the control objectives.

At Abengoa, we have viewed this legal requirement as an opportunity for improvement and, far from being satisfied with the rules included in the Act, we have tried to develop and improve our own internal control structures, control procedures and the evaluation procedures in place.

This initiative arose in response to the swift expansion experienced by the group in recent years and projected future growth, the aim for us to continue preparing accurate, timely and complete financial reports for our investors.

In order to meet the requirements of section 404 of the SOX, Abengoa’s internal control structure has been redefined following a ‘Top-Down’ approach based on risk analysis.

This risk analysis encompasses a preliminary identification of significant risk areas and an assessment of the company’s controls over them, starting with top-level executives – corporate and supervisory controls – then dropping to the operational controls present in each process.

c) The universal risk model

The universal risk model is the company’s chosen methodology for quantifying the risks that compose the risk management system.

Abengoa’s universal risk model is made up of 20 categories and a total of 56 principal risks for the business. Each categories are agrupated in four big areas (financial risks, strategic risks, compliance risks and operations risks).

Furthermore, the model is checked of periodic form. These updates are a joint responsibility of the department of internal audit, the management of risks and the people in charge of every indicator in every area. During the exercise 2014, two reviews of the model have been realized based on:

• Probability of occurrence: Degree of frequency wich is possible to ensure that a particular cause will result an event with negative impact on Abengoa.
• Impact on the Company: Set of negative effects on Abengoa´s strategic objectives.

 

5.- Anticipated future trends of the group

In 2015, environmental concerns will continue to be at the center of attention worldwide in a climate of progressive recovery from the economic and financial crisis. This will contribute to continued growth of Abengoa’s potential markets and opportunities. According to the International Energy Agency, the global demand for energy will rise by 37 % to 2040, and this year’s global energy supply will come in equal proportions from oil, gas, coal and low-carbon sources. In the midst of serious tensions affecting the international energy system as the result of conflicts in the Middle East, Russia and the Ukraine, the electrical power generation sector will lead the transformation of the world energy map, where renewables will prove the drivers of change. Renewable energy sources will represent nearly half of the increase in electricity generation until 2040 and biofuel use will triple. The water sector will continue to be characterized by shortages and the need for major improvements in water infrastructure and management. The report published by Global Water Intelligence indicates an anticipated 3.9% increase per annum until 2018.

The environmental challenges facing the world today remain pressing. Putting the brakes on rising temperatures and cutting greenhouse gas emissions continue to be prevailing objectives, as described in the latest report from the IPCC (Intergovernmental Panel on Climate Change). This is a huge responsibility that is shared by all of the world’s economies. At the Conference of the Parties (COP-20) held in Lima, a draft agreement was drawn up for signing in 2015 at the decisive Paris conference: an international gathering that will set out a new Kyoto Protocol, which should emerge as a momentous milestone in the struggle against climate change.

All of these trends are fully in concert with the Abengoa philosophy and facilitate the forward-looking prospects of the portfolio of opportunities which the company has been making the most of as the product of its commitment to technology and solid position in the markets.

Over the course of 2014, Abengoa succeeded in executing the envisaged strategic plan, and the company’s technological advancements led to the completion of highly innovative projects such as the Solana solar plant with energy storage capability located in the Arizona desert and the KaXu facility in South Africa, and new contracts that include the Atacama molten salt tower in Chile. At the same time, we have expanded the project map to include new regions like Costa Rica and Colombia, while maintaining our position of leadership in the U.S., Brazil, South Africa, Chile, Peru and Uruguay.

Providing fundamental support to Abengoa’s momentum is the quality of its team of people and the ongoing efforts dedicated to the training they engage in to stay on the cutting edge of knowledge and in developing and implementing the most advanced technical resources. Proof of this can be found in Campus Palmas Altas, where the laboratories for research into materials, thermal and chemical processes, biotechnology and power systems are now running at full capacity.

Progress in executing projects and exploitation of new opportunities took place simultaneously with reinforcement of the company’s financial structure and advancement in the commitments undertaken involving balance sheet deleveraging and appropriate transparency. In 2014, we carried out operations in the capital market with two bond issuances for a total of € 1,000 M and we successfully refinanced the syndicated loan in the amount of € 1,400 M.

Along these lines, worthy of special mention is the admittance to trading on the U.S. NASDAQ stock exchange of Abengoa Yield through a capital increase of € 611 M. In order to bolster our financial structure and boost Abengoa Yield’s opportunities for growth, this operation was complemented by the commitments reached to reduce our stake in the company and the creation of a joint venture with a leading international fund in the energy and infrastructure sectors to invest in the construction of present and future concession-type projects. With the investment totaling more than € 8,000 M, this will facilitate the anticipated decrease of more than € 600 M of debt.

Although sales stabilized this year, with figures totaling € 7,151 M, EBITDA saw an increase of 11 % for a total of € 1,408 M. Corporate net debt as of year-end 2014 is 2.4 times the corporate EBITDA figure, which totals € 964 M. This year, although sales have remained stable at €7,151 million, EBITDA has risen by 11% to €1,408 million. At the end of 2014, corporate net debt was 2.4 times corporate EBITDA, which totaled €964 million. This ratio falls to 2.0 times corporate EBITDA taking into account the cash proceeds from the sales of the 13% stake in Abengoa Yield and the assets in the second ROFO agreement. For 2015, our best estimates show that we could achieve a corporate net debt ratio of approximately 1.2 times corporate EBITDA if the divestments included in the financial structure optimization plan launched at the end of 2014 are successfully executed. Lastly, it is worth noting that we ended the year with a cash position of more than €3,100 million, which will allow us to meet our investment and debt commitments planned for 2015.

Engineering and construction

The project portfolio at end-year totals € 7,953 M. In the U.S., we inaugurated our second solar thermal power plant, one of the largest in the world, in the Mojave Desert, which now brings us to a total of 1,200 MW installed and under construction in conventional power generation, photovoltaic, solar thermal and Waste to Energy plants. Noteworthy among the projects awarded over the year is the contract for developing a unique water project, including the delivery system and a water treatment facility that is going to provide 168,970 m3 of water per day to the city of San Antonio, Texas.

We were also selected to build wind power, cogeneration, combinedcycle and water projects in Mexico; power transmission lines in a variety of geographical regions; construction and management of singular buildings; and execution of the first solar thermal plant for direct production of electricity in Latin America, located in the Atacama Desert.

Asset operation and maintenance

Abengoa has a wide-ranging portfolio of assets which the company is in charge of operating and maintaining. The portfolio is composed of concession-type assets, as well as free-market businesses that are highly technology-driven, such as biofuels.

In 2014, we generated more than 6,900 GWh of solar plants, wind farms, hybrid and cogeneration plants, and we brought new plants on line in the U.S. (Mojave), South Africa (KaXu Solar One) and in Uruguay (the Palmatir Wind Farm). We also produced 118 Mm3 of desalinated water out of our desalination plants in Africa, Asia and Europe.

Total installed and under-construction capacity in the power plants we operate and maintain in the U.S., Abu Dhabi, South Africa, Algeria, Israel, Mexico, Brazil, Uruguay, Spain, India and Holland amounts to 4,474 MW.

We continue to operate more than 5,100 km of power transmission lines in Brazil, India, Peru and Chile.

In 2014, Abengoa continued to work on the Waste to Biofuels (W2B) project in Salamanca (Spain). And, joining the 14 existing plants, is a new facility that will produce cellulosic ethanol from agricultural waste on a commercial scale in the U.S. Furthermore, in Brazil efforts are focused on developing second-generation ethanol from sugar cane pulp and chaff.

Growth and diversification

Our growth model is grounded in simultaneous management of businesses with different profiles and characteristics. Cash flow from our traditional activities is reinvested in the growth of emerging businesses. Noteworthy here are Abengoa Hydrogen and Abengoa Energy Crops, in conjunction with other technological options which Abengoa Research and the company’s business units obtain through their research.

The company’s international activity accounts for 88 % of overall sales, with prominent shares coming from the North America at 32 % and South America with 30 %.

Human capital and employment

The essential role Abengoa attributes to the team of people who make up the company was recognized with the awarding of the +500 EFQM Gold Seal for European Excellence for our management of human resources. We obtained a score of over 600 points.

We know that the future depends on the creativity of the present, which in turn depends on the training and engagement of the people that are part of the company. Keenly aware of this, we carried out more than two million hours of training this year. Many of these training instruction hours took place in collaboration with some of the most prestigious universities in the world.

Constant concern for the safety and security of our teams and operations around the world is part of our corporate culture, which results in a demanding system of quality and occupational risk control and prevention on all company levels.

Auditing and transparency

In keeping with our commitment to transparency and rigor, the Annual Report incorporates seven components of independent verification. Some are groundbreakers and attest to our desire to be a point of reference in transparency and ensure the reliability of both financial and non-financial information. These components encompass the following areas: annual accounts, the internal control system for preparing financial information in accordance with U.S. SOX (Sarbanes-Oxley) requirements, the Corporate Social Responsibility Report, the Corporate Governance Report, design and application of the company’s Risk Management System in line with ISO 31000 specifications, design and implementation of the compliance system for the prevention of corruption, regulations and fulfillment of the criteria for use of funds obtained through Green Bond issuance.

Corporate social responsibility and sustainability

As a product of our commitment to responsible business management, we have drawn up a new Strategic Plan for Corporate Social Responsibility (CSR), with an outlook to 2020 and including impact reduction targets.

In relation to the struggle against climate change, this year we were one of the first twenty businesses to commit to setting an internal carbon price within the United Nations Caring for Climate framework with the aim of gearing company activity toward a low-carbon economy. In addition, through the Focus-Abengoa Foundation, we carried out the initiative of launching the Energy Transition and Climate Change Forum, a platform for observation, analysis and debate regarding the energy transition process within the context of combating climate change.

In 2014, we became a component of the London Benchmarking Group in order to continue to improve return on our social engagement efforts and increase the value generated in the communities where we operate. This year, our investment in social action totaled € 9.5 M.

Abengoa’s CSR Report was prepared for the first time in accordance with the G4 guidelines of the Global Reporting Initiative and was verified by an independent third party to a reasonable level of assurance.

With these intentions, you will find the following at your disposal: the Corporate Social Responsibility mailbox (rsc@abengoa.com), our website (www.abengoa.com), the Energy Transition and Climate Change Forum website (www.transicionenergeticaycc.org), our profile on Twitter, LinkedIn, Instagram, Facebook, Google +, Youtube, Pinterest and Slideshare and our corporate blog (www.laenergiadelcambio.com).

 

6.- Information on research and development (R&D) activities

6.1. Abengoa has continued to increase its efforts in R&D+i (research, development and innovation) throughout 20124 (despite the ongoing global technology crisis), in the belief that these efforts require continuity which should not be compromised by crises or economic cycles if it is to achieve results.

Furthermore, the Group has strengthened its presence and in some cases its leadership, in various institutions and public and private forums which encourage cooperation between large technology companies, in which the short and long term future of the R&D+i activity is decided.

6.2. The established program for these types of activities has been largely achieved. Abengoa, thanks to those responsible for this strategy in each business area, has strived every day to innovate its technology as demanded by its activities, primarily focusing on the following objectives:

• Continuously and closely following the technologies which could affect each area of the business.
• Selection of a portfolio of technologies that will maximize the competitive advantages of the Group.
• The assimilation and implementation of technology available through transfer agreements.
• Selecting the optimum path for the development of technologies.
• Determining the marketing programs for the technology developed.
• Support for innovation and technology from institutions/governments.

During 2014, Abengoa made significant Research, Development and Innovation (R&D&i) investment efforts, investing a total of €597,784 thousand (€426,358 thousand in 2013) through the development of new technologies in different areas of business (solar technology, biotechnology, desalination, water treatment and reuse, hydrogen, energy storage and new renewable energies).

6.3. In 2014 Abengoa continued its strategy of developing proprietary technology to give it a competitive advantage and as a vector for growing its business. Thanks to this commitment to R&D and innovation, the Abengoa Research laboratories at Campus Palmas Altas become fully operational during the year with facilities for the different technology areas of Abengoa’s business segments:

• Biological laboratory
• Electrical laboratory
• Materials laboratory
• Thermal fluids laboratory
• Chemistry laboratory
• Biomolecular and biochemistry laboratory

The main development assets are based on technologies that enable Abengoa’s strategic R&D areas to continue progressing, such as technologies for solar-thermal plants, energy storage systems, bio-refining, treating municipal solid waste for energy production, and plants for treating and reusing water.

In thermo-solar technology it is worth noting the construction of Khi Solar One, the world’s first commercial plant using tower technology and superheated steam, in South Africa. The 50 MW plant is expected to come into operation in 2015.

Additionally, in the field of solar-thermal power, it is worth noting the construction of the solar plant project in the Atacama Desert (Chile), which combines tower technology based on molten salts (110 MW) and photovoltaics (100 MW) with energy storage systems that use molten salts and batteries. This plant will enable renewable power to be continually produced 24 hours a day, supplying demand from the network at any given time.

The R&D and innovation carried out by Abengoa also resulted in the enzymatic cocktail that converts non-food organic material into biofuels, which led to the opening of Abengoa’s first 2G bioethanol plant located in Hugoton (USA) in October 2014, where up to 95 million liters of bioethanol are produced annually from almost 350,000 tons of biomass, specifically agricultural waste. In Brazil the company is developing second-generation ethanol production from sugar cane straw and bagasse, while one of the world’s largest commercial biomass plants that will generate 215 MW of power will be constructed in Gante.

Work also continues on developing the Waste to Biofuels (W2B) project in Salamanca, to produce biofuels from municipal solid waste (MSW), solving the issue of how to manage this waste while generating a high value added product.

In the field of R&D+i for integral water management, nanotechnology is being developed for water treatment processes. Projects include a desalination plant being developed in Ténes (Algeria) using reverse osmosis technology to desalinate 200,000 m3 of water per day, while in the city of San Antonio, Texas (USA) a drinking water treatment and water supply project is underway that will supply 168,970 m3 of water per day and includes an agreement to manage the plant for a 30 year period.

As a technology company, Abengoa is committed to using R&D to develop new businesses that enable it to grow. In 2014 the main focus has been on developing the company’s emerging businesses related to hydrogen and energy.

 

7.- Adquisition and disposal of treasury shares

7.1. Abengoa, S.A. and its subsidiaries have complied with all legal requirements regarding companies and treasury stock (see Note 8 of this report).

7.2. The parent company has not pledged its shares in any type of mercantile transaction or legal business, nor are any Abengoa, S.A. shares held by third parties which could act on its behalf or on behalf of group companies.

7.3. Finally, it should be noted that potential reciprocal shareholdings established with Group companies are temporary and comply with the requirements of the consolidated text of the Spanish Capital Companies Act.

7.4. As of December 31, 2014 treasury stock amounted to 41,624,265 shares (40,009,307 shares in 2013), which 5,550,532 are class A shares and 36,073,733 are class B shares.

Regarding the operations carried out during the year, the number of treasury stock purchased amounted to 14,237,018 class A shares and 169,126,263 2 class B shares and treasury stock transferred amounted to 14,069,382 class A shares and 167,678,941 class B shares, with a net result of €-2,217 thousand recognized in equity (€-89,618 thousand in 2013).

 

8.- Corporate governance

8.1. Shareholding structure of the company

Significant shareholdings

The share capital of Abengoa, S.A. is represented by book entries, managed by Iberclear (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S. A.) and totals €91,798,901 represented by 839,769,720 shares fully subscribed and paid up, with two separate classes:

• 84,243,640 class A shares with a nominal value of 1 Euro each, all in the same class and series, each of which grants the holder a total of 100 voting rights (‘Class A Shares’).
• 755,526,080 class B shares with a nominal value of 0.01 Euros each, all in the same class and series, each of which grants One (1) voting right and which afford its holder economic rights identical to the economic rights of Class A shares(‘Class B Shares’ and, together with class A shares, ‘Shares with Voting Rights’).

The shares are represented by book entries and governed by the Stock Market Act and other applicable provisions.

Abengoa’s Class A and B shares are officially listed for trading on the Madrid and Barcelona Stock Exchanges and on the Spanish Stock Exchange Interconnection System (Continuous Market). Class A shares have been listed since 29 November 1996 and Class B shares since 25 October 2012. The company files mandatory financial information on a quarterly and half-yearly basis.

Abengoa’s Board of Directors, exercising the powers delegated to it by the resolution adopted by the Ordinary General Shareholders’ Meeting held at second call on April 7, 2013, under point five of its agenda, agreed to carry out a capital increase by means of issuing and circulating new Class B shares in the company (hereafter, the ‘New Shares’) charged against monetary contributions (hereafter, the ‘Capital Increase’), in order to raise funds to reduce its debt and strengthen the Company’s balance sheet, thereby enhancing and optimizing its capital structure. The issue was carried out excluding the preferential subscription rights of the Company’s existing shareholders, so that the New Shares were exclusively subscribed by qualified investors, as well as by the general public in the USA. An application to admit the New Shares for trading on the Madrid and Barcelona stock exchanges was subsequently made; and approval for admission to trading on the NASDAQ Global Select Market (through ‘American Depositary Shares’, hereafter ‘ADSs’ – represented by ‘American Depositary Receipts’) was obtained. After completion of the process of demand the issue price (including the nominal value and the share premium) was set at one euro and eighty cents (€1.80) per new Class B share with the total issue valued at four hundred and fifty million Euros (€450,000,000), meaning that a total of two hundred and fifty thousand (250,000,000) shares were issued in the Capital Increase.

The underwriters of the Capital Increase subsequently exercised the greenshoe option granted by the Company. Specifically, they decided to exercise the greenshoe option for the maximum amount of shares subject to the option, meaning thirty-seven million five hundred thousand (37,500,000) Class B shares at the price set for the Capital Increase, in other words one euro and eighty cents (€1.80). Consequently, the Company issued the new Class B shares required to settle the greenshoe option and will carry out the procedures to list them on the Madrid and Barcelona stock exchanges.

Furthermore, the proposed dividend for 2013 approved by the General Shareholders’ Meeting of April 6, 2014 was €0.111 per share, equivalent to a total dividend of €91,637 (€38,741 thousand in 2013). The same General Shareholders’ Meeting agreed to pay the dividend by means of a capital increase carried out via a bonus share issue known as a scrip dividend.

April 23, 2014 marked the end of the period for trading the bonus allocation rights corresponding to this capital increase, in which the holders of 351,867,124 bonus allocation rights (52,193,313 corresponding to Class A shares and 299,673,811 corresponding to Class B shares) accepted the irrevocable purchase commitment offered by Abengoa. Consequently, on April 22, 2014, Abengoa purchased the aforementioned rights for a gross amount of €39,057 thousand. The capital increase was carried out on April 23, 2014 with the issue of 810,582 Class A shares and 13,396,448 Class B shares, at their respective par values, in other words 1 euro for Class A shares and 0.01 euro for Class B shares. The total amount of the increase was therefore €944,546.48, of which €810,582 corresponded to the Class A shares issued and €133,964.48 to the Class B shares.

The Extraordinary General Shareholders’ Meeting held on September 30, 2012, approved a voluntary conversion right of Class A shares into Class B shares during various pre-established ‘conversion windows’ until December 31, 2017. When this right is exercised, a capital reduction will occur due to the reduction in the par value of the converted shares by 0.99 Euros per share, with a corresponding increase in the company’s restricted reserves. As a result of the voluntary conversion right established in Article 8 of the company’s bylaws, four capital reductions took place during 2014, through which 1,012,661 Class A shares were converted into Class B shares, producing a capital decrease of €1,003 thousand.

On January 15, 2014, following the end of the twelfth conversion period, Abengoa’s share capital is ninety one million seven hundred and seventeen thousand and twenty one Euros and eighty six cents (€91,717,021.86) represented by 839,769,720 shares, fully subscribed and paid up, belonging to two different share classes: Eighty four million one hundred and sixty thousand nine hundred and thirty four (84,160,934) Class A shares and seven hundred and fifty five million six hundred and eight thousand seven hundred and eighty six (755,608,786) Class B shares.

The number of registered shareholders according to the latest list provided by Iberclear (Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.) on April 1, 2014 is 11,055 shareholders in class A shares and 14,956 shareholders in class B shares.

With regards to shareholder agreements, Inversión Corporativa IC and Finarpisa, as shareholders of Abengoa, signed an agreement on 10 October 2011, which governs the exercising of their respective rights to vote in Abengoa’s general meetings in relation with the proposal, appointment, ratification, reelection or substitution of a director to represent First Reserve Corporation.

Under the terms of this agreement, Inversión Corporativa I.C., S.A. and Finarpisa, S.A. jointly and severally agree to:

(i)    vote in favor of the following, through their respective shareholder directors on Abengoa’s Board of Directors:

(a)   to appoint as a member of the Board, the candidate proposed to be the investor’s nominee pursuant to the co-optation procedure established under the Spanish Capital Companies Act; and

(b)   the proposal to recommend to Abengoa’s shareholders the election of any replacement director as the investor’s nominee on the Board of Directors, at Abengoa’s next general shareholders’ meeting;

(ii)   vote, at the corresponding general shareholders’ meeting of Abengoa, in favor of the appointment of the candidate proposed by the investor to be its nominee on the Board of Directors; and

(iii)  while the investor or any of its related companies owns Abengoa Class B shares or any other instrument that is convertible or exchangeable into Abengoa Class B shares issued in accordance with the investment agreement or any other document of the transaction, they may not propose nor request the Board of Directors to recommend to shareholders any modification to the company’s bylaws that adversely affects the equality of rights of Class B shares and Class A shares in relation to the distribution of dividends or similar distributions as established in bylaws.

On 27 August 2012, Inversión Corporativa, I.C., S.A. and its subsidiary Finarpisa, S.A. modified the shareholder agreement with the Abengoa shareholder, First Reserve Corporation (which was subject to disclosure to the CNMV by means of the significant event filed on 9 November 2011).

The modification consisted of including a commitment while FRC or any of its related companies own Abengoa Class B shares or any other instrument that is convertible or exchangeable for Abengoa Class B shares issued in accordance with the investment agreement or any other document of the transaction, they may not propose nor request the Board of Directors to recommend to shareholders any modification to the company’s bylaws that adversely affects the equal rights of Class B and Class A shares in relation to the distribution of dividends or similar distributions as established in the bylaws’. If this proposal were to be presented by another shareholder, or by the Board of Directors, they will vote against it.

On that date, 27 August 2012, Abengoa, S.A. signed a shareholder agreement with its significant shareholder, Inversión Corporativa, I.C., S.A., through which the latter agreed to the following, directly or indirectly through its subsidiary Finarpisa S.A.:

(i)    To vote in favor of the resolutions relating to points 2, 3, 4, 5, 6 and 7 of the agenda of the General Shareholders’ Meeting held on 30 September 2012, provided that it had previously verified that these resolutions were approved by the majority of Class A shareholders, excluding Inversión Corporativa;

(ii)   Not to exercise its voting rights, except up to a maximum of 55.93% in cases in which, as a result of the exercising of the conversion right of Class A shares into Class B shares that is expected to be included in the company’s bylaws, the total percentage of voting rights that it holds of the total voting rights of the company is increased;

(iii) That the percentage represented at any given time by the number of shares with the right to vote that it owns (whether Class A or Class B shares) of the total shares of the company, will not at any time be less than one quarter of the percentage represented by the voting rights that these shares attribute to Inversión Corporativa, in relation to the total voting rights of the company (in other words, that its voting rights cannot exceed four times its financial rights); and that, should this occur, it shall dispose of sufficient Class A shares or shall convert them into Class B shares in order to maintain this ratio.

In accordance with Article 19 and following articles of the company’s bylaws, there are no limits on the voting rights of shareholders in relation to the number of shares which they hold. The right to attend the shareholders’ meeting is limited however to those shareholders that hold 375 Class A or Class B shares.

Meeting quorum: 25% of the share capital at first call. Any percentage at second call. These are the same percentages as the Capital Companies Act. In those cases stated in Article 194 of the Act (hereinafter the ‘LSC’), the quorum is as stated in the Act.

Resolution quorum: by a simple majority vote by those present or represented at the meeting. In those cases stated in Article 194 of the LSC, the quorum is as stated in the Act.

Shareholders’ rights: Shareholders have the right to information, in accordance with the applicable legislation; the right to receive the documentation related to the shareholders’ meeting, free of charge; the right to vote in proportion to their shareholding, with no maximum limit; the right to attend shareholders’ meetings if they hold a minimum of 375 shares; financial rights (to dividends, as and when paid, and their share of company’s reserves); the right to representation and delegation, grouping and the right to undertake legal actions attributable to shareholders. The Extraordinary General Shareholders’ Meeting approved a series of amendments to the bylaws in order to ensure that the ‘rights of minority interests’ are not infringed by the existence of two different share classes with different par values in which the lower nominal value of the Class B shares would make it more difficult to achieve the percentages of share capital required to exercise some of the voting and other non-financial rights. The General Meeting therefore agreed to amend Abengoa’s bylaws as explained below in order to ensure that all these rights can be exercised based on the number of shares and not the amount of share capital. These rights, such as the right to call a general meeting or to request a shareholder derivative action, require a certain percentage of the share capital to be held in nominal terms (in these cases, 5%).

Measures to promote shareholder participation: making the documentation related to the Shareholders’ Meeting available to shareholders free of charge, as well as publishing announcements of Shareholders’ Meetings on the company’s website. The option to grant a proxy vote or to vote on an absentee basis is possible by completing accredited attendance cards. In accordance with Article 539.2 of the Capital Companies Act, Abengoa has approved the Regulation on the Shareholders’ Electronic Forum in order to facilitate communication between shareholders regarding the calling and holding of each General Shareholders’ Meeting. Prior to each general meeting, shareholders:

• Representing at least 5 percent of the share capital or 5 percent of the voting shares, may send proposals that they intend to submit as supplementary points to the agenda published in the notice of the general meeting.
• May send initiatives to achieve the required percentage to exercise a minority right.
• May send requests for voluntary representation

The bylaws do not limit the maximum number of votes of an individual shareholder or include restrictions to make it more difficult to gain control of the company through the acquisition of shares.

Proposals of resolutions to be submitted to the Shareholders’ Meeting are published along with notice of the meeting on the websites of the company and the CNMV.

Points on the agenda that are significantly independent are voted upon separately by the Shareholders’ Meeting, so that voters may exercise their voting preferences separately especially when it concerns the appointment or ratification of directors or amendments to the bylaws.

The company allows votes cast by shareholders’ appointed financial representatives that are acting on behalf of more than one shareholder, to be split, so that they may vote in accordance with the instructions of each individual shareholder whom they represent.

There are currently no agreements in effect between the company and its directors, managers or employees that entitle them to severance pay or benefits if they resign or are wrongfully dismissed, or if the employment relationship comes to an end due to a public tender offer.

Treasury stock

At the Ordinary General Shareholders’ Meeting on April 6, 2014, it was agreed to authorize the Board of Directors to acquire the company’s treasury stock in the secondary market, directly or through subsidiaries or investee companies, up to the limit stipulated in the current provisions, at a price of between one euro cent (0.01 Euros) and twenty Euros (20 Euros) per share, and with express authority to appoint any of its members, being able to do so during a period of 18 months as of the above date and subject to Article 144 and subsequent articles of the Capital Companies Act.

The authorization granted to the Board of Directors for these purposes by the resolution adopted by the General Shareholders’ Meeting of April 7, 2013 is hereby expressly annulled. On 19 November 2007, the company entered into a liquidity agreement for Class A shares with Santander Investment Bolsa, S.V. On 8 January 2013, the company entered into a liquidity agreement for Class A shares with Santander Investment Bolsa, S.V., replacing the initial agreement, in compliance with the conditions established in CNMV Circular 3/2007 of 19 December. On November 10, 2012, the company entered into a liquidity agreement for Class B shares with Santander Investment Bolsa, S.V. in compliance with the conditions established in CNMV Circular 3/2007 of 19 December.

All the purchases and sales of the company’s treasury stock were carried out under the aforementioned liquidity agreements.

Details of the latest Shareholders’ Meetings

Abengoa’s Ordinary General Shareholders’ Meeting was held at second call on April 6, 2014, with a total of 577 shareholders present or represented, representing 6,585,016,359 votes and 72.185% of the company’s share capital. The following resolutions were passed by the meeting:

Resolution One.- Examination and approval, if given, of the Annual Financial Statements and the Directors’ Report corresponding to the 2013 fiscal year for the Company and its Consolidated Group, along with the management and remuneration of the Board of Directors during the aforementioned company fiscal year.:

Resolution Two.- Examination and approval, if given, of the Proposed Application of Results for the 2013 fiscal year.

Three.- A capital increase for the amount determined under the terms of the resolution, by issuing new ordinary Class A and/or Class B shares with a nominal value of one Euro and one Euro cent each, respectively, without share premium, of the same class and series as the shares currently in circulation, charged against voluntary reserves set aside from undistributed profits, with the express possibility that the allotment will be incomplete. Delegation of authority to the Board of Directors to set the conditions of the capital increase for all aspects not agreed by this General Shareholders’ Meeting; to perform the necessary actions to implement the capital increase; to redraft the text of Article 6 of the company’s bylaws for the new amount of share capital, and to formalize any public and private documents that may be necessary to implement the capital increase. Request the competent national and foreign organizations to admit the new shares for trading on the Madrid and Barcelona stock exchanges, through the Spanish Stock Market Interconnection System (commonly referred to as the ‘Continuous Market’), and on the foreign stock exchanges on which Abengoa’s shares are listed, by means of ADSs on the NASDAQ Global Select Market, in the format required in each case.

Four.- Ratification, appointment and re-election of directors, as appropriate.

Resolution Five.- Special report on Company Director Remuneration Policy for presentation before the General Shareholders’ Meeting on a consultative basis.

Resolution Six.- Delegation of powers on the Board of Directors to increase the capital stock by issuing new shares of any of share classes A and/or B and/or C, pursuant to the terms of Article 297.1(b), within the limits laid down in the Act, with express empowerment to delegate exclusion of preferential subscription rights pursuant to the terms of Article 506 of the Capital Companies Act, revoking and rescinding the sum pending resulting from previous powers delegated by the General Meeting. Delegation of powers on the Board of Directors and each of its members to establish the conditions for the capital increase, to perform all actions required for execution thereof, to adapt the text of the corresponding articles of the Company Bylaws in accordance with the new figure of the capital stock and to execute any public and private instruments required for execution of the capital increase. Application before the competent national and foreign bodies for the new shares to be listed for trading on any securities market.

Resolution Seven.- Delegation of powers on the Board of Directors to issue debentures or other similar fixed or variable income securities, simple or guaranteed, convertible into shares or otherwise, with express delegation of the power to exclude preferential subscription rights pursuant to the terms of Article 511 of the Capital Companies Act, either directly or through Group Companies, in accordance with the regulations in force, rescinding the sum pending resulting from previous powers delegated by the General Meeting.

Resolution Eight.- Delegation of powers on the Board Directors for the derivative acquisition of treasury stock either directly or through group companies, in accordance with the regulations in force, rescinding all previous authorizations granted for the same purpose by the General Meeting.

Nine.- Delegation to the Board of Directors of the authority to interpret, correct, execute, formalize and register the adopted resolutions.

Ten.- Approval of the minutes in any of the formats established by law.

In relation to the votes of the aforementioned resolutions:

• In the First resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,826,409,234 votes in favor, 1,295,853 against and 757,312,072 abstaining.
• In the Second resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,827,154,129 votes in favor, 547,908 against and 757,315,122 abstaining.
• In the Third resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,827,251,284 votes in favor, 450,903 against and 757,314,972 abstaining.
• In resolution Four A, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,754,165,079 votes in favor, 64,761,428 against and 766,090,652 abstaining.
• In resolution Four B, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,754,165,079 votes in favor, 64,761,428 against and 766,090,652 abstaining.
• In resolution Four C, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,754,165,079 votes in favor, 64,761,428 against and 766,090,652 abstaining.
• In the Fifth resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,288,312,907 votes in favor, 539,386,830 against and 757,317,422 abstaining.
• In the Sixth resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,261,171,057 votes in favor, 562,293,261 against and 761,552,841 abstaining.
• In the Seventh resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,279,508,858 votes in favor, 543,955,410 against and 761,552,891 abstaining.
• In the Eighth resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,826,332,427 votes in favor, 1,367,310 against and 757,317,422 abstaining.
• In the Ninth resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,827,160,854 votes in favor, 541,883 against and 757,314,422 abstaining.
• In the Tenth resolution, a total of 6,585,017,159 valid votes were cast, corresponding to 61,383,893 Class A shares and 446,627,859 Class B shares, which represent 72.185% of the share capital, with a total of 5,827,162,904 votes in favor, 536,833 against and 757,317,422 abstaining..

No directors are board members of other listed companies.

In accordance with the register of significant shareholdings that the company maintains, pursuant to the internal code of conduct in relation to the stock market, the percentage shareholdings of the directors in the capital of the company as at December 31, 2014 were as follows:

8.2. Company Management Structure

The Board of Directors

• Composition: number and identity

Following changes to Article 39 the company’s bylaws, as agreed by the Ordinary Shareholders’ Meeting held on 15 April 2007, the maximum number of members of the Board of Directors was set at fifteen, compared to nine established until that time. The Ordinary General Shareholders’ Meeting of April 6, 2014, also agreed to once again amend Article 39 of the bylaws, setting the maximum number of members of the board of directors at 16. These modifications reinforced the structure of the Board with a number of directors that allows a more diversified composition as well as facilitating the delegation and adoption of resolutions with minimal attendance, thereby ensuring a multiple and plural presence in the Board of Directors.

In accordance with the recommendations established in the Unified Code of Good Governance of Listed Companies, which have been already subject to regulation by Law 31/2014, December 3, the composition of the Board reflects the capital structure. This enables the Board to represent the highest possible percentage of the capital in a stable way and ensures protection of the general interests of the company and its shareholders. The Board is provided, moreover, with a degree of independence in accordance with the practices and professional needs of any company. Its current composition as of December 31, 2014 was the following:

The total number of directors is considered to be appropriate to ensure the necessary representation and the effective functioning of the Board of Directors.

Notwithstanding the fact that independence is a condition that must be common to any director, irrespective of the director’s origin or appointment, based on the reliability, integrity and professionalism of his or her role, in accordance with the guidelines included under Law 26/2003, in Ministerial Order 3722/2003 and in the Unified Code of Good Governance of Listed Companies and more recently in Law 31/2014, the classification of current directors is as follows:

As may be seen in the table above, the Board is made up of a majority of external, non-executive directors.

• Organizational and functional rules
  The Board of Directors is governed by the Regulations of the Board, the company’s bylaws and by the Internal Code of Conduct on Stock Exchange Matters. The Regulations of the Board were initially approved by the Board at a meeting on 18 January 1998, clearly in anticipation of the current rules of good governance and efficient internal control. The most recent update of note took place October 20, 2014, but is expected to change soon to be adapted to the requirements or the Law 31/2014.
  • Structure:
    The Board of Directors is currently made up of 16 members. The Regulations of the Board cover the composition of the Board, the functions and its internal organization; additionally, there is the Internal Code of Conduct on Stock Exchange Matters, the scope of which covers the Board of Directors, senior management and all those employees who, due to their skills or roles, are also impacted by its content. The Regulations of the Functioning of Shareholders’ Meetings cover the formal aspects and other aspects of Shareholders’ Meetings. Finally, the Board is supported by the Audit Committee and the Appointments and Remuneration Committee, which in turn are subject to their own respective internal regulations, as well as the Strategy and Technology Commission. All these regulations, included within the revised Internal Regulations on Corporate Governance are available on the company’s website, www.abengoa.es/com.
    Since its inception, the Appointments and Remuneration Committee has been analyzing the structure of the company’s governing bodies and has worked to align such bodies with regulations in force regarding governance, focusing in particular on the historical and current configuration of such ruling bodies within Abengoa. Consequently, in February 2007 the committee recommended the creation of a Coordination Director, as well as the dissolution of the Advisory Committee to the Board of Directors. The first recommendation was to align the company with the latest corporate governance recommendations in Spain in 2006; the second recommendation reflected that the advisory board had completed the role for which it was established in the first place, and that its coexistence with the remaining company bodies could create a potential conflict of roles. Both proposals were approved by the Board of Directors in February 2007 as well as by the shareholders at the Ordinary General Meeting on 15 April of the same year.
    Finally, in October 2007 the Committee proposed to the Board to accept the resignation of Mr. Javier Benjumea Llorente as Vice-chairman, along with the revoking of any powers which had been granted in those entities or companies in which he held a position of responsibility, and the naming of a new representative of Abengoa and the Focus-Abengoa Foundation.
    On the basis of the foregoing, the committee decided that it would be opportune to repeat the study on numbers and conditions of the Vice-chairman to the Board of Directors within the current structure of the company’s governing bodies.
    As a result, the Committee considered it necessary that the Vice-chairman of Abengoa hold the powers as per the Spanish Public Limited Companies Act so that, on the one hand, he or she is granted full representation of the company and to counter-balance the functions of the chairman of the board. On this basis it was considered that the Coordination Director – in accordance with the responsibilities as assigned to the role by the Board of Directors (February 2007) and at the Shareholders’ Meeting (April 2007) – was ideal for the role, in addressing the corporate governance recommendations and the structure of the company, as well as the composition and diversity of the directors. The Coordination Director already has the duty to take into account the concerns and goals of the board members and, to achieve this, has the power to call Board meetings and to add items to the agenda. As this role was more in substance than in title, considering the interests of the directors, and conveyed a certain representation of the Board, it was considered appropriate to expand and recognize this representation making it institutional and organic.
    For the reasons mentioned, the Committee deemed it appropriate to propose Aplidig, S.L. (represented by Mr. José B. Terceiro Lomba), the current Coordination Director, as the new Vice-Chairman of the Board. Additionally, within the representative duties, it was proposed that the Vice-chairman, in conjunction with the chairman, would represent Abengoa as chairman of the Focus-Abengoa Foundation, as well as for other foundations and institutions in which the company is or should be represented.
    In light of the above, on 10 December 2007 the Board of Directors approved the appointment of Aplidig, S. L. (represented by Mr. José B. Terceiro Lomba), the current Coordination Director, as the new Vice-Chairman of the Board, with the unanimous agreement of the independent directors regarding the retention of his role as Coordination Director despite being promoted to an executive board member role. Additionally, within the representative duties, on 23 July 2007 the Board approved that the Vice-chairman, in conjunction with the Chairman, would also represent Abengoa as Chairman of the Focus-Abengoa Foundation Board, as well as for other foundations and institutions in which the company is or should be represented.
    The Chairman of the Board, as the leading executive of the company is granted full powers excluding those which by law cannot be assigned by the Board of Directors, notwithstanding the powers and competences of the Board itself. With regards to the Vice-chairman, also an executive role, he or she is granted the same powers as above.
    At the proposal of the meeting of the Appointments and Remuneration Committee of 25 October 2010, and due to the resignation as a director of Mr Miguel Martín Fernández due to other professional commitments, the Committee agreed to appoint Mr Manuel Sánchez Ortega as CEO for a period of four years, by co-optation and was ratified by the General Meeting on April 10, 2011. Mr Manuel Sánchez Ortega shares the executive functions of the company with Mr Felipe Benjumea Llorente.
  • Functions:
    The role of the Board of Directors is to undertake the necessary actions so as to achieve the corporate objectives of the company. It is empowered to determine the financial goals of the company, agree upon the strategies necessary as proposed by senior management so as to achieve such goals, assure the future viability of the company and its competitiveness, as well as adequate leadership and management, supervising the development of the company’s business.
  • Appointments:
    The Shareholders’ Meeting, or when applicable the Board of Directors, within the established rules and regulations, is the competent body for appointing members of the Board a proposal, if any, of the Appointments and Remuneration Committee. Only those people that fulil the legally established requirements may be appointed, as well as being trustworthy and holding the knowledge, prestige and sufficient professional references to undertake the functions of director.
    Directors are appointed for a maximum of 4 years, although they may be re-elected.
  • Dismissals:
    Directors will be removed from their position at the end of their tenure or under any other circumstances in accordance with the appropriate laws. Furthermore, they should relinquish their role as directors in the event of any incompatibility, prohibition, serious sanctions or failure to fulfill their obligations as directors.
  • Meetings:
    In accordance with Article 42 of the company bylaws, the Board of Directors will meet as deemed necessary given the demands of the company or, as a minimum requirement, three times annually, with the first meeting during the first quarter of the year. During 2014, the Board met a total of 18 times, of which four meetings took place via a meeting by circular resolution, in addition to one meeting between the Board of Directors and senior management.
  • Duties of the Directors:
    The function of the director is to participate in the direction and control of management of the company for the purposes of and with the aim of maximizing its value for shareholders. Each director operates with the diligence and care of a loyal and dedicated professional, guided by the company’s interests, as a representative with complete independence to defend and protect the interests of the shareholders.
    By virtue of their appointment, the directors are required to:
    • Be informed and appropriately prepare for each working session.
    • Attend and actively participate in meetings and decision making.
    • Carry out any specific task entrusted by the board of directors.
    • Encourage people with the authority to call meetings, to call extraordinary meetings of the board or include the issues that they deem relevant on the agenda of the next meeting to be held.
    • Avoid conflicts of interest from arising and, if appropriate, report their existence to the board via its secretary.
    • Do not hold positions in competing companies.
    • Do not use company information for personal ends.
    • Do not use company assets inappropriately.
    • Do not use company business opportunities for personal ends.
    • Keep all information that results from your position confidential.
    • Abstain from voting on budget issues that affect you.
    • Disclose any direct or indirect interests in the company’s securities or derivatives.
    • Actively participate and be committed to the issues being discussed by the board, as well as following up these issues and obtaining the necessary information.
    • Do not support resolutions that break the law, the company’s bylaws or go against the company’s interests. Request the corresponding legal and technical reports, as appropriate.
    • Notify the company of any significant changes in your professional circumstances which could affect the characteristics or conditions under which you were appointed as a director, or which may give rise to a conflict of interest.
    • Notify the company of all legal or administrative claims, or any other type of claim, which could seriously impact the company’s reputation due to their significance.
    • The Chairman:
  • The Chairman, in addition to the company bylaws and legal requirements, is the senior-most executive of the company, and as such is effectively responsible for the management of the company, always in accordance with the criteria and decisions of the Board of Directors and the General Shareholders’ Meeting. The Chairman is responsible for implementing the decisions made by the company’s management bodies, through application of the powers as permanently granted to him by the Board of Directors, which he represents in all aspects. The Chairman also casts the deciding vote in the Board of Directors
    The Chairman is also the Chief Executive Officer. The following measures are in place to prevent an accumulation of power.
    Under Article 44 bis of the company bylaws, on 2 December 2002 and 24 February 2003 the Board of Directors agreed to appoint the Audit Committee and the Appointments and Remuneration Committee.
    These committees have the powers, which may not be delegated, as per the Law, the company bylaws and internal regulations, acting as regulatory body and supervisory body associate with the matters over which they chair.
    Both are chaired by a non-executive independent director and are comprised exclusively of non-executive directors.
  • The Secretary:
    The Secretary to the Board of Directors undertakes those responsibilities as required by law. Currently the role of Secretary and that of Legal Counsel to the Board is not undertaken by the same person, being responsible for the correct calling of meetings and that resolutions are properly implemented by the Board. In particular, he will advise the Board as to the legality of proposed deliberations and decisions and upon compliance with the company’s internal corporate governance regulations, making him responsible as guarantor of the legality, both in law and in substance, of the actions of the Board.
    The Secretary, as a specialized role, guarantees the legality in law and in substance of the actions of the Board, with the full support of the board to perform their duties with independent judgment and substance. He or she is also responsible for safeguarding the internal rules of corporate governance.
  • Resolutions:
    Decisions are made by a simple majority of those directors present at the meeting (present of represented) in each meeting, with the exception of legal matters as previously set out.

• Remuneration and other benefits
  • Remuneration:

Directors are remunerated as established in article 39 of the Bylaws. The remuneration of Directors is made up of a fixed amount as agreed upon at the General Shareholders’ Meeting, and is not necessarily equal for all directors. Additionally, they may participate in profit sharing programs, for a percentage between 5% and 10% (maximum) of the net income of the Company after the declaration of the dividends for the year. Travel expenses related to work undertaken by the board are reimbursed to Directors.

Salary (both fixed and variable) and allowances paid to the members of the Board of Abengoa S.A. in 2014 were €15,833 thousand (€15,421 thousand in 2013).

Detail of individual remuneration and benefits in 2014 paid to the Board of Directors (in thousands of Euros):

Additionally, in 2014 overall remuneration for key management of the company (Senior Management which are not executive directors), including both fixed and variable components, amounted to €11,351 thousand (€14,656 thousand in 2013).

For more information on the Corporate Governance Report, the appendix of this Management Report contains the complete version which has been subjected to independent verification by our auditors who have issued opinion of reasonable assurance based on the ISAE 3000 standard ‘Assurance Engagements other than Audits or Reviews of Historical Financial Information’ issued by the International Auditing and Assurance Standard Board (IAASB) of the International Federation of Accountants (IFAC).

 

9.- Appointments and Remuneration Committee

The Appointments and Remuneration Committee was created by the board of directors of Abengoa, S.A. (hereinafter, the ‘Company’) on February 24, 2003, under Article 28 of the board of directors regulations, in order to incorporate the recommendations relating to appointments and remuneration committees in Law 44/2002 of November 22 on financial system reform measures. This meeting of the board of directors also approved the Committee’s internal regulations.

At present the Appointments and Remuneration Committee is governed by the consolidated text of the Capital Companies Act, approved by Legislative Royal Decree 1/2010 of July 2 (hereinafter, the ‘Capital Companies Act’), which are reflected in Abengoa’s bylaws, the board of directors regulations and the internal regulations of the Appointments and Remuneration Committee.

Composition

The Committee currently has the following composition:

Mr Borrell Fontelles was appointed as a member of the Committee by the meeting of the board of directors of Abengoa, S.A. held on February 23, 2012 and elected as its chairman at the meeting of the Appointments and Remuneration Committee held on July 23, 2012. The secretary of the Committee was appointed by the meeting of the Appointments and Remuneration Committee held on June 23, 2014.

Mr Fornieles Melero was co-opted and appointed as an independent director of Abengoa by resolution of its board of directors on January 19, 2015, in order to cover the vacancy resulting from the resignation of Aplidig, S.L. He was also appointed as second vice-chairman, lead director, a member of the Audit Committee and a member of this Appointments and Remuneration Committee on the same date.

As a result, the Appointments and Remuneration Committee comprises four independent directors with the chairman of the Committee appointed from among them, in accordance with the requirements of the Capital Companies Act. Article 2 of the Committee’s internal regulations also requires the chairman to be an independent director.

Duties and responsibilities

The Appointments and Remuneration Committee is responsible for the following:

1. Evaluate the skills, knowledge and experience required to be a member of Abengoa’s board of directors. The Committee will define the functions and skills required by candidates for each vacancy and assess the time and dedication required for the role to be performed correctly.
2. Establish a representation target for the under-represented gender on the board of directors and prepare guidelines on how to achieve this goal.
3. Submit proposals to the board of directors to appoint independent directors so that they may be appointed by co-optation or for the decision to be submitted to the General Shareholders’ Meeting, as well as proposals for re-elections or departures also to be submitted to the General Shareholders’ Meeting.
4. Propose appointments of the remaining directors so that they may be appointed by co-optation or for the decision to be submitted to the General Shareholders’ Meeting, as well as proposals for re-elections or departures also to be submitted to the General Shareholders’ Meeting.
5. Annually verify that the original conditions underlying the appointment of directors continue to apply, including the characteristics and type of directorship applicable to each board member, all of which should be included in the annual report.
6. Report any proposals to appoint or dismiss senior management members and the basic conditions of their contracts.
7. Analyze and organize the succession of the chairman of the board of directors and the Company’s CEO, and make proposals to the board of directors so that this succession occurs in an organized and planned way, as appropriate.
8. Propose to the board of directors the remuneration policy for directors and general managers or those people that perform the senior management functions reporting directly to the Board; members of executive committees; and CEOs, as well as the individual remuneration and other contractual conditions of executive directors, ensuring that these conditions are fulfilled.
9. Organize and supervise the annual performance appraisal of the board of directors and its committees, and propose an action plan to correct any deficiencies identified depending on the results obtained.
10. Prepare an annual report on the activities of the Appointments and Remuneration Committee, which must be included in the management report.

Meetings and calling of meetings

To fulfil the aforementioned duties, the Appointments and Remuneration Committee will meet when necessary and at least once every six months. It will also meet whenever the chairman calls a meeting, although a valid meeting may also be called when all of its members are present and they agree to hold a meeting.

During 2014 the Committee met six times. Important issues discussed at these meetings included proposals to appoint or re-appoint members of the board of directors, as well as checking that the original conditions underlying the appointment of directors continue to apply, including the characteristics and type of directorship applicable to each member.

Quorum

Meetings of the Committee shall be considered as valid when the majority of its members are present. Attendance may only be delegated to other non-executive directors.

The resolutions adopted shall be valid when the majority of the Committee’s members, present or represented, vote in favor. In the case of a tie, the chairman shall have the casting vote.

The Company’s remuneration manager shall act as Secretary of the Committee at its meetings.

Analysis, reports and proposals made by the Committee

During 2014:

• Monitoring and evolution of the remuneration of the members of the Company’s board of directors and senior management.
• Proposals for the remuneration of members of the Company’s board of directors and senior management.
• Preparation of the corresponding information to be included in the financial statements.
• Proposal to the board of directors to re-elect Ms. Mercedes Gracia Díez as a director, following the end of her previous term.
• Proposal to the board of directors to appoint Mr Daniel Alaminos Echarri as general secretary and as secretary of the board.
• Report to verify that the original conditions for appointing directors continue to apply, including the characteristics and type of directorship applicable to each member.
• Reports on market studies carried out by independent experts and remuneration comparisons.

During the period between the end of 2014 and the calling of the General Shareholders’ Meeting for 2015:

• Proposal to the board of directors to appoint, by co-optation, Mr Antonio Fornieles Melero, as an independent director to fill the vacancy left by the resignation of the director for the company Aplidig, S.L.
• Report to the board of directors on the appointment of Mr Antonio Fornieles Melero as second vice-chairman, lead director and member of the Company’s Audit Committee and the Appointments and Remuneration Committee.
• Report to the board of directors on the appointment of Mr Manuel Sánchez Ortega, CEO of the Company, as first vice-chairman of the Company’s board of directors.
• Report to the board of directors on the appointment of Mr Ignacio García Alvear as the Company’s new investor relations manager, replacing Ms. Bárbara Sofía Zubiria Furest.
• Proposal to the board of directors, for its approval, of the individual remuneration and other contractual conditions of the executive directors.
• Proposal to the board of directors, for its approval, of the annual remuneration report of the directors, including the remuneration policy for the Company’s directors and senior management.
• Submission of the results of the annual performance appraisal of the board of directors and its committees to the board of directors, for its approval.

 

10.- Other relevant information

10.1. Stock exchange information

According to the figures supplied to the company by Bolsas y Mercados Españoles, 205,303,399 shares A and 3,615,121,098 shares B were traded in 2013, equivalent to an average daily volume of 805,111 and 14,176,945 for A and B shares, respectively; and an average traded cash value of €2.9 million and €43.4 million per day, respectively.

The final listed prices of Abengoa’s shares in 2014 was €2.123 (A-shares), which is a 7% decrease on the closing price for the previous year, and €1.832 (B-shares), a 11% decrease on the closing price for the previous year.

As a historical reference, since Abengoa’s Initial Public Offering on November 29, 1996, the company’s value has increased by 366% which is more than 4.7 times the initial price. During this same period, the select IBEX-35 has increased by 120%.

10.2 Dividend policy

The dividend policy of Abengoa with respect to ordinary shares (Class A) and Class B shares and Class C (values under bylaws issued but not today) is subject to investment requirements and capital expenditures, possible future acquisitions, expected future results of operations, cash flows, debt limits and other factors. Under the terms of the debt instruments, the Company is subject to certain restrictions on the distribution of dividends.

The existing dividend protection clause in the convertible bonds allows for dividends that will be declared in the following years until the year 2017, increase the dividend per share for each year 0.002 Euros per share with respect to the previous year without affecting the conversion price of those bonds.

Non-convertible bonds restrict the payment of dividends in excess of the sum of (i) 50% of consolidated net income for the year plus (ii) the amount of payments received by taxable capital increases through ordinary shares. The usual exceptions (such as buyback, repurchase managers under incentive plans, make dividend payments with the proceeds from a sale, etc.) and a maximum distribution of 20 million per year for Allowed distributions out of (i) and (ii).

The distribution of dividends made in the years 2014, 2013 and 2012 represent a payout ratio of 38.5, 70.0%, and 10.1% respectively over the previous year’s result, which represented a payment of 39, 39, and 38 million respectively.

The General Shareholders’ meeting held on April 6, 2014 approved a dividend of €0.111 per share, which totals €91,637 thousand, compared to €38,741 thousand in the previous year. On April 6, 2014, the Ordinary General Shareholders’ Meeting approved the paidup capital increase with the purpose of implementing the payment of the dividend for the fiscal year 2013 means of a ‘scrip dividend’.

On April 23, 2014 the period for trading the free allotment rights corresponding to the aforementioned capital increase ended. During the period established for such purpose, the holders of 351,867,124 free allotment rights (52,193,313 of which corresponding to Class A shares and 299,673,811 corresponding to Class B shares) entitled to accept the irrevocable commitment to purchase the referred rights made by Abengoa have done so. As such, On 22 April 2014, Abengoa proceed to acquire such rights in the total gross amount of €39,057 thousand, representing a payout ratio of 38.5% on the profit for the year 2013.

On April 9, 2013 to pay for the outcome of 2012 dividend, corresponding to 0.072 Euros per share on the number of shares (Class A and B) then issued (538,062,690) for a total of €38,740,513 representing a payout ratio of 70.0% on the profit for the year 2012. Additionally a cash amount equivalent to the dividends on the warrants issued on the B shares (20,100,620), corresponding to €1,447,244.

On April 11, 2012 the first payment of the corresponding dividend for the year 2011, corresponding to 0.15 Euros per share and the second additional payment of EUR 0.20 per share was made on July 4, 2012 was performed, payment was made to the number of shares (Class A and B) then issued (107,612,538) totaling €37,664,388 and represents a payout ratio of 10.1% on the outcome of 2011. Additionally a cash amount equivalent to the dividends on the warrants issued on the B shares (4,020,124), corresponding to €1,407,043.

On April 10, 2011, the Ordinary Shareholders General Meeting resolved to increase capital by increasing the nominal value of Class A shares out of reserves, so that the Class A shares only outstanding at the date of adoption of this agreement, increased from 0.25 Euros par value 1 par value per share.

The Class B shares carry the same economic rights as the Class A common shares Issuance of Class B shares do not carry any additional restriction on payment of dividends.

Meanwhile, according to the bylaws, each Class C shall entitle its holder to receive a minimum annual preferred dividend for ordinary distributable profits for concerned action to be completed class C exists, equal to a euro cent (€ 0.01) per share of the additional C class to the ordinary dividend.

At the date of presentation of the consolidated financial statements have not been issued shares of class C although the possibility of issue is provided in statutes.

Abengoa’s shareholders have not received any remuneration other than those referred to here.

 

10.3 Management of credit quality

Credit ratings affect the cost and other terms upon which we are able to obtain financing (or refinancing). Rating agencies regularly evaluate us and their ratings of our default rate and existing capital markets debt are based on a number of factors. On March 19, 2013, Standard & Poor’s (‘‘S&P’’) Rating Services reaffirmed our corporate family rating and probability of default rating of ‘B’ but with a possitve outlook and on December 3, 2014 they reaffirmed the rating of the corporate family and of our high-yield notes. On October 21, 2014 Fitch Ratings, Inc. (‘Fitch’) reaffirmed our corporate family rating and probability of default rating from ‘B+’ but with a negative outlook. In addition, Moody´s Investors Service, Inc. (‘Moody´s) has maintained stable the rating ‘B2’ with a stable outlook during 2014, reaffirming it on November 24, 2014.

 

10.4 Average supplier payment time

The coming into force of Law 31/2014 of December 3, which amends Law 15/2010 of July 5, which in turn amended Law 3/2004 of December 29, which establishes measures to combat late payment in commercial transactions, also establishes the obligation for mercantile companies to specifically publish their average supplier payment time in the report to their financial statements, their management report and on their website.

With regards to this obligation, supplier payments to companies based in Spain during 2014 exceeded the legally established period by 71 days. The company’s directors will take the appropriate measures during the coming year to reduce the average supplier payment time to the levels permitted by the aforementioned law.

 

10.5 Furher information

To correctly measure and value the business and the results obtained by Abengoa, it is necessary to draw out the business trends from the consolidated figures.

In addition to the accounting information, as provided within the financial accounts and within this management report, Abengoa also publishes an ‘Annual Report’ which sets out the key events of 2014. This report is available in Spanish, English and French. The Annual Report, which is published prior to the Shareholders’ Meeting at which the financial statements of 2014 will be approved, includes not only the consolidated accounts of Abengoa, as well as the strategic objectives of the business and the key events of the three Business Units into which Abengoa is structured as of 31 December 2014.

The annual report is available on the company’s website at www.abengoa.com.

The requirement to provide the market with information which is useful, truthful, complete, comparable and up-to-date would not be of such value to the user if the means of communicating such information were insufficient, as it would result in such information not being as effective, timely and useful. As such, the Aldama Report, the Financial System Reform Law and the Transparency Law recommend and enforce, in the light of recent technologies, the use of a website by listed companies as an information tool (including historical, qualitative and quantitative data on the company) and a means of disseminating information (on a timely or real-time basis, making such information available to investors).

Abengoa has a website, which was recently renewed and updated, that features far-reaching and comprehensive content, including information and documentation made available to the public and, in particular to shareholders. This website offers periodic information (quarterly and half-yearly) as well as other relevant information and facts upon which it is mandatory that Abengoa report to the CNMV to comply with the rules of the stock exchange. Through this website, it is also possible to request a copy of the Annual Report.

 

11.- Events after the end of the year

Since December 31, 2014, apart from what is detailed above, no other events have occurred that might significantly influence the information reflected in the Consolidated Financial Statements, nor has there been any event of significance to the Group as a whole.