Iberdrola : Publication of the Company's Annual Director Remuneration Report for year 2016

ANNUAL REPORT ON THE REMUNERATION OF DIRECTORS OF LISTED COMPANIES

Data identifying issuer

1. REMUNERATION POLICY OF THE COMPANY FOR THE CURRENT FINANCIAL YEAR

2. Explain the company's remuneration policy. This section will include information regarding:

   • General principles and foundations of the remuneration policy.

   • Most significant changes made to the remuneration policy from the policy applied during the prior financial year, as well as changes made during the year to the terms for exercising options already granted.

   • Standards used and composition of groups of comparable companies whose remuneration policies have been examined to establish the company's remuneration policy.

   • Relative significance of the variable items of remuneration as compared to fixed items and standards used to determine the various components of the director remuneration package (remunerative mix).

     Explain the remuneration policy

     Pursuant to article 48.1 of the By-Laws, the overall limit to the amounts allocated by Iberdrola, S.A. ("Iberdrola" or the "Company") to the directors each year as remuneration, including, in the case of executive directors, remuneration payable for performing executive duties, as well as the funding of a reserve to meet the liabilities assumed by the Company in connection with pensions, payment of life insurance premiums, payment of severance to former and current directors, and the operating expenses of the Board of Directors, is a maximum of 2% of the consolidated group's profit for the financial year, after allocations to cover the legal and other mandatory reserves and after declaring a dividend to the shareholders of not less than 4% of the share capital. This amount was 17,000 thousand euros in 2016 (it was 17,000 thousand euros in 2015). The price of the shares or options thereon, or any remuneration indexed to the listing price, which in any event must be approved by the shareholders at the General Shareholders' Meeting, is not included in the calculation for the purposes of such limit. As regards external directors, the Director Remuneration Policy seeks to remunerate the directors appropriately in recognition of their dedication and the responsibility they assume, in line with the market remuneration paid at companies of a similar nature. As far as executive directors are concerned, the Remuneration Policy follows the same standards as those of the Senior Officer Remuneration Policy and shares the same principles and guidelines as those of the Company's personnel remuneration policy, i.e. commitment to personal and corporate ethics, excellence in the selection process, constant training, gender equality, meritocracy and talent recognition, reconciliation, and significance of the variable remuneration component. All of the foregoing is intended to align the Company's remuneration policy with the corporate interest and shareholder return, within the framework of IBERDROLA's commitment to all stakeholders with which it interacts. In this regard, the Board of Directors believes that one of the key factors that make the difference in the performance of utilities is, specifically, the success or failure of strategic decisions made by the Company's management team. All utilities can choose the same businesses, markets, and technologies. However, their individual performance may be different. The Board of Directors believes that such difference depends upon the talent, effort, creativity, leadership, and management skills of each company. Therefore, IBERDROLA's Remuneration Policy seeks to retain, reward, and attract the most competent professionals. The investment in remuneration has a major impact on the creation of sustainable value for its shareholders and stakeholders. In this regard, Iberdrola has shown consistently better performance than comparable companies. The Integrated Report 2016 (section 2.8) includes the conclusions from a comparative analysis performed by PricewaterhouseCoopers. This Report also reflects external recognition of the good performance of the Company and its executives in various areas. The remuneration payable to the directors is structured in accordance with the provisions of the Director Remuneration Policy appearing as an Annex to this report. The final structure of the "remunerative mix" of executive directors is based on performance with respect to pre-determined parameters as a benchmark in order to pay the variable remuneration, as well as the

     value of any shares to be delivered in payment of the medium- and long-term variable remuneration, and ultimately on the Board of Directors' assessment of the performance of such directors.

     There have been no major changes in the remuneration policy as compared to the policy applied during prior financial years.

3. Information regarding preparatory work and the decision-making process followed to determine the remuneration policy, and any role played by the Remuneration Committee and other control bodies in the configuration of the remuneration policy. This information shall include, if appropriate, the mandate and composition of the Remuneration Committee and the identity of external advisers whose services have been used to determine the remuneration policy. There shall also be a statement of the nature of any directors who have participated in the determination of the remuneration policy.

   Explain the process for determining the remuneration policy

   As provided in the By-Laws and in the internal regulations of Iberdrola, the Board of Directors, upon a proposal of the Remuneration Committee, is the body with power to set the remuneration of directors, except for the remuneration consisting of the delivery of shares of Iberdrola or of options thereon or which is indexed to the price of the shares of Iberdrola, which must be approved by the shareholders acting at a General Shareholders' Meeting. Iberdrola's Board of Directors formulates the Company's Director Remuneration Policy, which forms part of the Corporate Governance System. Said Director Remuneration Policy, which is available on the corporate website (www.iberdrola.com), implements, among other things, the structure for the remuneration of the directors for their activities as such and the structure of the executive directors' remuneration for the performance of their executive duties. The Remuneration Committee, which met on 7 occasions during 2016, is comprised of the following: In all of their decision-making processes, this Committee and the Board of Directors have received information and advice from the internal services of the Company and from expert external consultants in this area, taking into consideration the most demanding remuneration recommendations and policies at the international level. This particularly includes the advice of PricewaterhouseCoopers. This Committee also periodically compares the relevant data to information corresponding to comparable markets and entities, taking into account the size and international scope of Iberdrola. In this regard, Willis Towers Watson, a consultant specialising in compensation matters, was requested to prepare a comparative study of the remuneration package of the executive directors in 2016. The annex to this report shows the standards used to create the comparison group, the list of companies selected based thereon, and the conclusions of the study. In summary, the conclusion is that the remuneration policy for Iberdrola's executive directors is in line with the market practices analysed by said study and with good governance recommendations. As stated in the preceding section, the remuneration package for the executive directors and senior officers reflects the quality of their performance and the goal of the Board of Directors to retain, reward, and attract talent and management skills, as this is one of the key and distinctive factors contributing to the better performance of a company like IBERDROLA.

   • Ms Inés Macho Stadler (chair, independent)

   • Mr Íñigo Víctor de Oriol Ibarra (member, other external)

   • Mr Santiago Martínez Lage (member, independent)

   • Mr Rafael Mateu de Ros Cerezo (secretary, non-member)

4. State the amount and nature of the fixed components, with a breakdown, if applicable, of remuneration for the performance by the executive directors of the duties of senior management, of additional remuneration as chair or member of a committee of the board, of attendance fees for participation on the board and the committees thereof, or other fixed remuneration as director, and an estimate of the annual fixed remuneration to which they give rise. Identify other benefits that

   are not paid in cash and the basic parameters upon which such benefits are provided.

   Explain the fixed components of remuneration

   For financial year 2017, at the proposal of the Remuneration Committee, the Board of Directors has unanimously resolved to maintain the fixed remuneration and attendance fee amounts. These amounts have been frozen since 2008. Fixed remuneration of the directors for belonging to the Board of Directors and to the committees thereof based on the position held in each case was as follows: Currently, all members of the Board of Directors take on responsibilities on one of the four committees of the Board. Attendance fees of the directors for belonging to the Board of Directors and to the committees thereof based on the position held in each case were as follows: The Board of Directors has resolved to maintain the fixed remuneration for the performance of executive duties of the chairman & chief executive officer for financial year 2017 at 2,250 thousand euros.

   • Chairman of the Board of Directors: 567 thousand euros

   • Chairs of the consultative committees: 440 thousand euros

   • Members of the consultative committees: 253 thousand euros

   • Members of the Board of Directors: 165 thousand euros

   • Chairman of the Board of Directors and chairs of the consultative committees: 4 thousand euros

   • Members of the Board of Directors and of the consultative committees: 2 thousand euros

5. Explain the amount, nature, and main features of the variable components of the remuneration systems.

   In particular:

   • Identify each of the remuneration plans of which the directors are beneficiaries, including the scope, date of approval, date of implementation, date of effectiveness, and main features thereof.

     In the case of share option plans and other financial instruments, the general features of the plan shall include information on the conditions for the exercise of such options or financial instruments for each plan.

   • State any remuneration received under profit-sharing or bonus schemes, and the reason for the accrual thereof.

   • Explain the fundamental parameters and rationale for any annual bonus plan.

   • The classes of directors (executive directors, external proprietary directors, external independent directors, or other external directors) that are beneficiaries of remuneration systems or plans that include variable remuneration.

   • The rationale for such remuneration systems or plans, the chosen standards for evaluating performance, and the components and methods of evaluation to determine whether or not such evaluation standards have been met, as well as an estimate of the absolute amount of variable remuneration to which the current remuneration plan would give rise, based on the level of compliance with the assumptions or goals used as a benchmark.