2013 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 2013 comprised the following

• The holding parent company itself.
• 534 subsidiaries.
• 19 associates and 24 joint businesses as well as certain companies of the Group being involved in 219 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 and the development of thermo-solar technology. 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 commodity component, such as biofuels and industrial waste recycling (until the sale of shareholding in Befesa Medio Ambiente, S.L.U. (Befesa), see Note 7.1). 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 of the related assets are held at project companies which are financed through non-recourse project finance. 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 non-recourse financing 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.

Abengoa structure

 

 

1.2. Operation

a) Information by activities

Abengoa’s activity is grouped under the following three activities which are in turn composed of seven operating segments (eight operating segments until the sale of shareholding in Befesa):

• Engineering and construction; includes our traditional engineering activities in the energy and water sectors, with more than 70 years of experience in the market as well as the development of solar technology.
  This activity comprises two operating segments:
  
  • Engineering and construction – 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. This activity covers the operating segment.
  • Technology and other – This segment includes those 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, 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.
  This activity currently comprises four operating segments:
  
  • 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 commodity component, such as biofuels (industrial waste recycling was part of this activity until the sale of shareholding in Befesa). The company holds an important leadership position in these activities in the geographical markets in which it operates.
  This activity comprises one operating segment:
  
  • Biofuels – Production and development of biofuels, mainly bioethanol for transport, which uses 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 seventh consecutive year by the prestigious magazine Engineering News-Record (ENR) as a leading ‘International contractor in transmission and distribution’ in 2013. We have also regained the first place in the ‘Power’ category and for the third consecutive year we have been recognized the number one international contractor for solar power.
• We are a global leader in solar CSP technology, having developed and built the first two comercial tower technology plants (PS10 and PS20) in Seville (Spain), the first integrated solar combined cycle (‘‘ISCC’’) plant in the world in Ain-Beni-Mathar (Morocco), the second ISCC plant in Hassi-R’Mel (Algeria) and the world´s largest parabolic trough plant with a total installed capacity of 280 MW (also being the first solar plant in the United States with thermal energy storage) in Arizona (the Solana project), while we continue working in the 280 MW Mojave plant in California, the 50 MW CSP solar tower plant and the 100 MW parabolic trough plant with 3 hour storage capacity in South Africa. Additionally, in the recent months we have also been awarded several CSP projects in Israel, South Africa and Chile.
• 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.

In addition, Abengoa has been internationally recognized for its accomplishments in the desalination industry, such as the Global Water Intelligence's (GWI) awards ‘2012 Desalination Company of the Year,’ ‘2010 Desalination Deal of the Year,’ and ‘2009 Desalination Company of the Year.’ These awards have been awarded respectively for the Nungua desalination plant, in Ghana, the Qingdao desalination project in China, and the Algerian desalination projects of Ténès, Honaine and Skikda. All plants were developed with the latest available advances in reverse osmosis (RO) desalination technology.

We are currently ranked as the 12th desalination plant supplier according to GWI's Global Water Markets 2014 report. Supporting our activities in RO desalination, we continue to expand our business into construction and management of water and wastewater infrastructures for municipal and industrial clients. For example, we have just completed the construction of a water treatment facility to supply drinking water in southern Angola for more than 250,000 people. Through these activities Abengoa continues its path in the environmental sector; producing, treating, and regenerating water for a sustainable world.

 

2.- Evolution and business results

2.1.  Financial situation

a) Changes in consolidation and/or in accounting policies

New accounting standards

The Company has applied IFRS 10, 11 & 12 as well as the amendments to IAS 27 and 28 beginning on January 1, 2013. The main impacts of the application of the new standards relate to:

• The de-consolidation of projects that do not fulfill the conditions of effective control in terms of decision making and their integration in the consolidated financial statements according to the equity method. In the case of Abengoa, it affects the Solana and Mojave solar-thermal projects in the USA, the Kaxu and Khi solar projects in South Africa and our second-generation ethanol plant in Hugoton, which will be carried under the equity method during their construction phases.
• The elimination of the proportional consolidation method for joint ventures, replaced with the equity method. In Abengoa’s case, the most significant assets that will change from proportional consolidation to the equity method are the Helioenergy 1 and 2 solar-thermal plants and the Honaine desalination plant in Algeria.

The standars referred to above have been applied retrospectively for comparative porposes, as required by IAS 8 Accounting policies, changes in accounting estimates and errors. Based on the foregoing the effect of the de-consolidation of the affected companies and their integration according to the equity method on the consolidated statements of financial position as of December 31, 2012 is shown below:

 

 

IFRIC 12 – Service concession arrangements

After the change in accounting policy in relation to the first application of IFRIC 12 Service Concession Agreements’ to the solar-thermal plants in Spain described in the Consolidated Financial Statements as of December 31, 2013 and based on the provisions of IAS 8.14 for Accounting Policies, Changes in Accounting Estimates and Errors, IFRIC 12 has been applied by recasting the comparative information presented, to make it comparable with the information as of December 31, 2013. The impact of this recasting on the consolidated statements of the financial position as of December, 31 2012 and December 31, 2011 has been as follows:

 

 

In addition, the effect of this recasting on the consolidated income statements for the years 2012 and 2011 has been as follows:

 

 

Discontinued operations

On June 13, 2013, Abengoa S.A. signed an agreement with funds managed by Triton Partners to wholly transfer Abengoa's shareholding in Befesa Medio Ambiente (Befesa). The agreed sale price was €1,075 million. Considering the net debt adjustments, total consideration to Abengoa amounts to €620 million. Of this amount, €331 million was received on 15 July, when the transaction was definitively completed. The remaining amount is a deferred compensation of €17 million, a €48 million credit note with a five-year maturity and a €225 million subordinated convertible instrument with a 15-year maturity (subject to two five-year extensions), with interest rate of 6-month Euribor in effect at closing date plus a differential of 6%. Upon the occurrence of certain triggering events including, but not limited to, Befesa’s failure to meet certain financial targets or the exit of the Triton Funds from Befesa, may be converted into approximately 14% of the shares of Befesa. Abengoa has recorded the sale transaction, recognizing a gain of €0.4 million.

Taking into account the significance of the activities carried out by Befesa to Abengoa, the sale of this shareholding is considered as a discontinued operation and is reported as such, in accordance with the stipulations and requirements of IFRS 5. In accordance with this standard, the results generated by Befesa until the close of the sale and the result of this sale are considered in a single heading, Profit (loss) from discontinued operations. Likewise, the Consolidated Income Statement for the year 2013, which is included for comparison purposes, also includes the reclassification of the results generated by the activities that are now considered to be discontinued, under a single heading.

Held for sale

As of December 31, 2013, the Company has started a process of negociations to sell its 92.6% interest in Qingdao BCTA Desalination Co., Ltd., (‘Qingdao’) a desalination plant in China. Given that as of that date the subsidiary is available for inmediate sale and the sale is highly probable, the Company has classified the assets and liabilities of Qingdao as held for sale in the Consolidated Statement of Financial Position as of December 31, 2013. 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 €7,356 million, an increase of 17% compared to 2012.
• Ebitda of €1,365 million, an increase of 44% compared to 2012.

 

Operating Data

• 84% of our revenues from international markets outside of Spain.
• United States became the first country in revenues with 28% of total revenues.
• Engineering and Construction backlog up to €6,796 million, as of December 31, 2013.

 

c) Consolidated income statement

 

 

Revenues

Abengoa’s consolidated revenues in the year 2013 have reached €7,356 million, representing a 17% increase from the previous year. The increase is mainly due to the revenues increase in Engineering and Construction, where we can highlight the construction of thermo-solar plant in the in the United States and South Africa, a combined-cycle plant in Poland and a significant progress in the Eolic Proyects in Uruguay.

Ebitda

Ebitda the year ended December, 31 2013 reached €1,365 million, a 44% increase from the previous year. This increase was mainly due to contribution of the aforementioned revenues increase in Engineering and Construction business, new concessions assets in operation (Qingdao´s desalination in China, transmission lines in Brazil and the cogeneration plant for Pemex in Mexico), as well as the margin recovery in Bioenergy business.

Finance cost net

Net financial expenses increased in €67 million, mainly due to financial expenses increase, lower interest capitalization due to the entry into operation of Solana, Solaben 1 and 6 projects, which was partially offset by the increase of positive 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 €44 million in 2013, from €172 million 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 82% from €61 million in 2012 to €111 million in 2013.

Profit from discontinued operations, net of tax

As indicated in Note 2.1.a, the sale of Befesa is considered as a discontinued operation in both periods.

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 84% from €55 million achieved in 2012, to €111 million in 2013.

d) Results by activities

The Segment reveneus, EBIDTA and margins for the years 2013 and 2012 is as follows:

 

 

Engineering and Construction

Revenues in Engineering and Construction increased by 27% compared to the previous year, to €4,808 million (€3,781 million in 2012), while Ebitda increased by 29% to €806 million compared to the figure recorded in 2012 (€624 million). This growth was mainly driven by:

• Execution of the Mojave solar plant in California (USA), Imperial Valley Plat (USA) as well as solar plants Khi and KaXu (South Africa).
• Execution of combined-cycle plants in Poland and Mexico.
• Execution of eolic projects in Uruguay.
• Progress in Quadras transmission lines for Sierra Gorda in Chile.
• Progress in the execution of high speed train Meca-Medina.
• Construction of Cogeneration Plants in Mexico.

Concession-type Infrastructures

Revenues in the Concession-type Infrastructures area increased by 32% compared to the previous year, to €519 million (€393 million in 2012), while Ebitda rose by 36% to €318 million compared to €234 million in 2012. These increases were mainly due to start-up of various concessions (Desalination plant of Qingdao in China, transmission lines of Brazil of Manaus and the cogeneration plant for Pemex in Mexico) that balanced out lower Ebitda generated by Solar business as consequence of consecutive government reforms in Spain, as well as poor weather conditions registered during the first quarter of 2013.

Industrial Production

Revenues level in Bioenergy Business decreased by 5% compared to the previous year, to €2,029 million (€2,138 million in 2012) due to reduction in Etanol price, while Ebitda reached €241 million compared to €91 million registered in 2012, mainly driven by  a favorable resolution from  the Court of Arbitration of the International Chamber of Commerce in relation with the arbitration against Adriano Gianetti Dedini Ometto and Adriano Ometto Agrícola Ltda by an amount of €141.8 million (Note 15.10 of the Consolidated Financial Statements) and also by a significant margin increase in Europe and specially in USA.

e) Consolidated statement of financial position

Consolidated statements of financial position

A summary of Abengoa’s consolidated balance sheet for 2013 and 2012 is given below, with main variations:

 

 

• Non-current assets increased primarily due to the start-up and fully consolidation of Solana (€1,136 million), execution of Solaben 1 and 6 (reclassified to projects) and the assets under construction related to Cogeneration activity, Eolic and Transmissions Lines, partially balanced out by differeces in foreign exchange (Brazilian Real and US Dollar) and reclassification of Qingdao´s short-term discontinued assets. In addition, the decrease in Investments in Associates due to the full consolidation of Solana is partially offset by the equity contributions made by Solar and Bioenergy in companies consolidated via the equity method (Mojave, Khi, Kaxu and Hugoton) and due to the capitalization of interest, as well as an increase in financial investments for the convertible loan and credit notes generated by the sale of Befesa (224 million euros).
• Net increase in current assets, mainly due to the reclassification of the discontinued assets of Qingdao from long term assets to assets held for sale, and due to the net increase in cash and and cash equivalents following the issue of ordinary and convertible bonds, asset rotations and the capital increase with listing in  Nasdaq.

 

• Shareholders’ equity increased by 2%, primarily due to the positive results for the year, the capital increase by going public in the Nasdaq and reduction in negative cash flow hedge derivatives and the dividends distribution policy, partially offset by the negative effect of translation difference arising mainly from the depreciation of the Brazilian real with respect to the Euro.
• Non-current liabilities increased by 17%, mainly due to the ordinary bonds issuance by Abengoa Finance of €873 million, convertible bonds issuance by Abengoa S.A. of €400 million with partial recovery of convertible bonds of €100 million during 2014 and the non-recourse financing projects (Traansmission Lines, Cogeneration, Desalatios and Solana´s debt integration). Partially balanced out by non current liabilities decrease of Befesa, the short-term reclassifications of maturities in 2014 (Syndicated Financing Loan, BEI, ICO, BID, and Convertible Bonds), the downgrade in derivatives valuation and the foreign exchange depreciation (Brazilian Real and US Dollar).
• Current liabilities keep stable during 2013, with an increase by 1%, driven mainly by the reclassification from the Qingdao´s long-term discontinued liabilities to liabiliaties held for sale and reclassification of corporate debt maturities in 2014 (PS, BEI, ICO, BIC and Convertible Bond) partially balanced out by non current liabilities decrease of Befesa and the maturity payment of the Syndicated Loan in July 2013.

Net Debt Composition

f) Consolidated cash flow statements

A summary of the Consolidated Cash Flow Statements of Abengoa for the years ended December 31, 2013 and 2012 with the main variations per item, are given below:

 

 

• Net cash flows from operations reached €741 million, mainly achieved by financial result from activities during the year, as well as the positive evolution of working capital.
• In terms of net cash flows from investing activities €1,887 million, the most significant investments were in the construction of Solar thermal plants (Spain, US and South Africa), Traansmission Lines (Brazil and Peru), Cogeneration (Mexico), Bioenergy (US) and in the construction of an Eolic plant in Uruguay. Regarding disposals, it is worth noting the cash generated by the sale of Befesa to a Private Equity Fund.
• 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) and new non recourse financing projects (Solar, Traansmission Lines, Desalinations and Cogenerations), as well as the capital increase 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, 2013 and 2012 are as follows:

 

 

The key performance indicators for each activity is detailed below for the years 2013 and 2012:

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 2013, the percentage of Companies with Environment Management Systems certified according to the ISO 14001 Standard per sales volume is 93.92% (91.98% in 2012).

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 2013, Abengoa’s workforce decreased by 6.3% to 24,748 people at December 31, compared to the previous year (26,402).

Geographical distribution of the workforce

The distribution of the average number of employees was 27% in Spain and 73% abroad.

 

Distribution by professional groups

The average number of employees during 2013 and 2012 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:

• 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.
• 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 obtained.

During 2013, Abengoa covered its financing needs through the following financial transactions:

• In 2012, the Company completed the refinancing of its syndicated loans as well as new financing transactions in subsidiaries which have the support of export credit agencies.
• During 2013 the Company successfully extended the maturity profile of its debt maturities through access to capital markets.
• In January 2013 the Company issued € 400 million convertible notes due in 2019. In addition, in February 2013 the Company issued € 250 million ordinary notes due in 2018 (the ‘February notes’) and in October and November 2013, additional notes fungible with the February notes were issued for an amount of €50 and €250 million, respectively.
• Furthermore, the Company completed a capital increase for a total amount of € 517.5 million in October 2013.
• Finally, in November 2013 Abengoa issued USD 450 million ordinary notes due in 2020. We aim to maintain our strong liquidity position, extend the debt maturities of our existing corporate loans and bonds, continue to access the capital markets from time to time, as appropriate, and further diversify our funding sources. We aim to continue to raise equity funding at the project company level through partnerships.

We aim to maintain our strong liquidity position, extend the debt maturities of our existing corporate loans and bonds, continue to access the capital markets from time to time, as appropriate, and further diversify our funding sources. We aim 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, 2013 and 2012 (in thousands of Euros):

 

 

b) Investment plan

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

Main projects in execution and under development (indicated in light grey)

Capex 2014-2016

 

 

1 Uncommitted project (financing and/or partner’s contribution still pending to be secured
2 This project falls under the scope of IFRS 10 and is therefore consolidated through equity method until entry into operation.

4.- Principal risks and uncertainties

4.1. Operational risks

4.1.1. Regulatory risk

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

• a) Solar electricity generation
  Renewable energy is rapidly maturing but its cost of generating electricity is still significantly higher than conventional energy (nuclear, coal, gas, hydroelectric). Governments have established support mechanisms to make renewable generation projects economically viable, mainly in the form of subsidized tariffs (in Spain), supplemented in specific cases with direct support for investment (mainly in the USA). These tariffs vary depending on the technology (wind, photovoltaic, solar-thermal, biomass) since they are in different stages of maturity and the regulator seeks 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 diminishes or even completely disappears 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 its use. The use of biofuels offers 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.
  
  Notwithstanding the above, despite major support in the field of biofuels from governments and regulatory authorities in the jurisdictions in which Abengoa operates, and despite the fact that authorities have reiterated their intention to maintain this support, it is possible that 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. Different alternative sources with the potential to progressively substitute fossil fuels in transport can coexist. The future demand for all forms of transport could be covered via a combination of electricity (fuel cells) and biofuels as the main options; synthetic fuels (increasingly produced from renewable sources) as an intermediate solution; methane as an additional fuel; and 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 support specifically given to biofuels. The level of public support can be influenced by external factors, such as public criticism in some countries at the alleged effect of biofuels on an increase in food prices.

Abengoa’s activities are subject to multiple jurisdictions with varying degrees of regulatory compliance, which require significant effort by the Company to comply with them

Abengoa’s internationalization means that its activities are subject to multiple jurisdictions with varying degrees of regulatory compliance, especially in intensively regulated sectors. This multi-jurisdictional regulatory environment requires considerable effort in order to comply with all legal requirements, which represents a significant risk since non-compliance with any of the numerous precepts could result in licenses being revoked, fines being imposed or penalties that prevent Abengoa from contracting with various public entities.

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

Revenues obtained through concession-type infrastructure projects are highly dependent on regulated tariffs or, if applicable, long term price agreements that can last between 25 and 30 years depending on the asset. Abengoa has very little room for maneuver in terms of amending tariffs or prices when faced with adverse operating situations, such as fluctuations in commodity prices, exchange rates, costs of labor and subcontractors, during the construction phase and the operating phase of these projects. These projects are normally calculated with tariffs or prices that are higher than the operations and maintenance cost. The Company’s experience of operating concession-type assets is relatively recent, with three years’ experience in the case of CSP plants (solar-thermal technology) and nine years in the case of electricity transmission lines for proprietary assets. Nevertheless, the Company has extensive experience in providing maintenance services for electricity transmission lines for third parties.

 

4.1.2. Operational risk

Risks from developing, constructing and operating new projects

The development, construction and operation of traditional power plants, renewable energy plants, desalination plants, water treatment plants, electricity transmission lines, as well as other projects that Abengoa carries out, involves a highly complex process that depends on a large number of variables.

To correctly develop and finance each project, Abengoa must obtain licenses and sufficient financing, as well as sign agreements to purchase or lease land, procure equipment and for the construction, for operations and maintenance, transport and fuel supply, and agreements to sell all or the majority of the production. Furthermore, these factors may significantly affect its capacity to develop and complete new infrastructure projects.

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

Projects that involve operating concessions are governed by public agreements, in which the corresponding public body defines certain entitlements. However, these agreements are subject to cancellation or termination clauses that can be applied in the event of non-compliance with the commitments established in the agreements. The average remaining term of the concessions managed by Abengoa is 26 years.

Bioenergy distribution agreements

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

Backlog of projects 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, and includes projects, operations and services for which it does not have firm commitments. Some of the contracted projects are subject to some type of contingency, usually the requirement to obtain external financing.

All backlog projects are subject to unexpected changes and cancellations, since the projects may be part of the backlog for a long period of time. The engineering and construction agreements that Abengoa signs in order to develop its projects are usually implemented over a period that may exceed two years until the construction phase is complete. This situation increases the possibility of these agreements being prematurely terminated. Such cancellations are governed legally and contractually with established compensation procedures. However, if Abengoa itself is in breach or at fault, the Company may not have the right to receive the compensation that applies in the case of early termination.

Variations in energy costs may negatively impact the Company’s results

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

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 Abengoa’s other sources of energy normally include adjustment or hedging mechanisms against a rise in prices, the Company cannot guarantee that these mechanisms cover all of the additional costs that could be incurred from a rise in the price of gas or other energy inputs (especially in long term agreements signed with clients and in agreements that do not include these adjustment clauses).

Risks derived from associations with third parties to execute certain projects

Abengoa has made investments in certain projects with third parties, which contribute their technical expertise. In some cases, these collaborations are conducted through agreements to create joint ventures in which Abengoa only has partial control. These types of projects are subject to the risk that decisions that may be crucial to the success of the project or about investment in the project, are blocked, or are subject to the risk that the third parties may in some way implement strategies that are contrary to Abengoa’s economic interests, resulting in a lower return.

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

In the Engineering and Construction activity, it is important to note that, apart from exceptions, all of the agreements that Abengoa has entered into are “turnkey” construction agreements (also called EPC agreements). Under these agreements the client receives a completed facility in exchange for a fixed price. These projects are subject to very long construction periods that range 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 may change over the course of the construction period, which can affect the profitability of certain projects, or even cause significant losses. As well as causing cost overruns, delays can result in deadlines being missed or the need to pay a penalty to the client, depending on what has been negotiated. 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.

Risks derived from the requirement for a high degree of investment in fixed assets (Capex), which increases the need for third party financing in order to develop pending projects

To carry out its operations, the Company requires a high level of investment in fixed assets, mainly in the Concessions-type Infrastructures activity. The Company is going through an expansion phase for proprietary assets and plants for the Concessions-type Infrastructures activity. Investment, especially in concessions, is recovered over the long term.

The significant need for investment means that the Company is reliant on access to the capital markets and bank funding to finance new projects and to manage its general corporate funding requirements. Difficulties in accessing financing caused by a high level of existing indebtedness, among other factors, could increase the cost of financing, which may even be impossible to obtain, with the subsequent reduction in the internal rate of return of projects that partially depend on the Company’s level of borrowing. Nevertheless, Abengoa is committed to carrying out only those projects that fulfil certain internal requirements (yield, strategic fit, limited investment by the group) and for which financing has been obtained. Consequently, Abengoa’s growth in this area is related to the availability of funding in the financial environment in which it operates.

Abengoa operates with high levels of debt

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 its net debt over EBITDA, excluding the debt and EBITDA from projects financed under non-recourse formats, as defined in its main corporate finance agreements. As at December 31, 2013, this ratio was 1.69x with the maximum limit being 3.0x until December 30, 2014.

At the end of 2013 the covenant ratio for Net Debt and corporate EBITDA, according to the clauses of the syndicated loan, was 1.69x. This ratio is obtained by calculating the total liquidity of the companies with non-recourse financing; debt is calculated as the amount of the reserve account for debt servicing; and R&D+i expenses for the period are excluded from EBITDA.

In relation to the non-recourse 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 gearing (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 non-recourse financing is used for most projects, it makes sense to analyze debt at two separate levels (non-recourse and corporate, since the parent company is only liable for corporate debt).

Notwithstanding the above, a breach of the payment obligations assumed by borrowing companies (usually 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 losses incurred in the event that guarantees provided by project companies under non-recourse financing agreements are enforced.

Likewise, the current high level of indebtedness could increase in the future due to Capex investments in projects using project finance formats, in which the associated debt will be drawn down as the project is implemented and for which the financing is already committed. This high level of debt could require the use of a significant part of the operational cash flow in order to pay 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.

Abengoa estimates that the cash flows generated by its projects and the level of cash and credit available under their financing agreements, will be sufficient to meet the Company’s future liquidity requirements for at least 12 months. Nevertheless, if debt should increase in the future as a result of developing multiple new projects and the interest payments associated with this, operating cash flow, cash and other resources may not be sufficient to cover the Company’s payment obligations when they fall due or to finance its liquidity needs.

In addition to the current high level of gearing, the terms of the agreements for issuing debt and other financing agreements that regulate debt issuance, enable 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 cancellation 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 payment default.

In addition, it should be remembered that Abengoa could be forced into early repayment of the debt in financing agreements 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.

Risk of obtaining less net profit from asset rotation

Abengoa implements a selective rotation strategy of its concession assets (mainly solar plants, electricity transmission lines, desalination 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 as it has to date, in the future, since the Company’s capacity to generate new business opportunities or opportunities with similar returns to those it currently obtains will depend on market conditions and other factors beyond Abengoa’s control.

The Company has a controlling shareholder

As at the date of the Consolidated Financial Statements, Inversión Corporativa I.C., S.A. owns 58.18% of the voting rights in Abengoa.

Consequently, this company controls Abengoa under the terms established in Article 42 of the Code of Commerce, and may therefore exercise influence over certain subjects that require shareholders’ approval, notwithstanding the protection and separate voting rights of the Company’s Class B shares in certain situations, according 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 shareholders’ agreement with the Company through which it agrees, among other things, to (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 shareholders’ agreement) in cases in which, as a result of exercising the right to convert Class A shares into Class B shares, which is included 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 products and services of the renewable energy sector are part of a market that is subject to strict competition rules

Abengoa operates in a competitive environment in its solar-thermal business. In general, renewable energy competes with conventional energies that are cheaper and more competitive. Renewable energy is currently subsidized in order to bridge the difference in cost and it has various specific implementation targets. This support for renewable energy may not continue in the future.

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 a 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 activity depends on the construction of new assets by the Concession-type Infrastructures activity (especially power generation plants, transmission lines and water infrastructures) and the Industrial Production activity (bioenergy plants).

If Abengoa is not successful in winning new contracts in its Concession-type Infrastructures activity, the revenues and profitability of the Engineering and Construction activity will suffer.

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 exchange rate movements. Part of its borrowing accrues interest at variable rates, normally referenced to indicators 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 that comprise 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.

The main exposure to exchange rate risk is US dollar-Euro.

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.

Internationalization and country risk

Abengoa has projects on five continents, some of them in emerging countries. Abengoa’s different operations and investments may be affected by different types of risk related to the economic, political and social conditions of the different countries in which it operates, especially countries with a higher degree of instability in the aforementioned factors (Algeria, Angola, China, India, Morocco, Ghana and other Latin American countries). These types of risk are usually jointly referred to as “country risk” and include:

• The effects of inflation and/or possible devaluation of local currencies;
• Possible restrictions on capital movements;
• The possibility of expropriation, asset nationalization or increased intervention by governments in the economy and the management of companies, as well as not granting or revoking previously held licenses;
• The possible imposition of new and higher taxes or levies;
• The possibility of economic crises occurring, or situations of political instability or public disorder.

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

The 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 the effects should they occur. Despite Abengoa’s attempts to obtain the correct coverage for the main risks associated with each project, it is not possible to verify that this is sufficient for every type of loss that could arise.

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 these occurrences. All of the insurance policies taken out by Abengoa comply with the requirements demanded by the institutions that finance the projects and the coverage is verified by independent experts for each project.

Furthermore the insurance policies taken out are subject to review by the insurance companies. In the event that insurance premiums increase in the future and these increases cannot be passed on to clients, 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 at this. This could result in lower revenues from the affected site while the problems exist 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.

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 25% allowable by the law (taxes on anhydrous ethanol are lower than those for hydrated ethanol and gasoline). Taxes account for a highly significant proportion of the cost of fuel sold in Brazil.

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

The global economic and financial situation and difficulties in accessing financing, the sovereign debt crisis, fiscal deficits and other macroeconomic factors may negatively affect demand from existing or potential clients.

Specifically, the reduction in national infrastructure budgets is impacting Abengoa’s results, since a proportion of the projects are promoted by governmental bodies, which provide the Company with a volume of revenues that would be difficult to substitute with private investment, especially in the current economic environment.

As mentioned, although the economic cycle affects all of the Company’s business, 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 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 the fluctuations associated with the economic situation. However, as in Engineering and Construction, it is a Capex intensive activity and could be affected by difficulties in access to financing.

Risks derived from sensitivity in procuring the necessary raw materials for producing bioenergy and volatility of the end product price

Raw materials account for approximately 60 to 70% of bioenergy production costs. The increase in commodity prices (mainly grain and gas) or a decrease in end product prices (ethanol) could mean that operating Abengoa’s production plants becomes unprofitable. To mitigate 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.

Abengoa’s activities could be negatively affected in the event of adverse public opinion about them

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.

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 is going to be accepted by the affected population. Moreover, in those areas in which the corresponding 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 obtaining the corresponding administrative authorizations difficult. 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 scheduled time frame or achieving Abengoa’s business objectives.

Furthermore, adverse public opinion about the use of grain and sugarcane cannot be ruled out, and to a lesser extent regarding the production of bioethanol, 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 the grain and sugar is diverted to the food market instead of bioethanol production, causing problems for existing production activities and Abengoa’s future expansion plans.

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). 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 could result in all types of civil, criminal, 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 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 in complying with these regulations could result in liability for the Company. Similarly, Abengoa may be unaware or unable to control 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 aspect for 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 significant decreases in earnings have occurred due to failures to comply with safety-related obligations.

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-party entities 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 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.

Abengoa, Inversión Corporativa IC, S.A., Finarpisa, S.A. and the members of the Board of Directors and managers of the Company (with the exception of Mr Claudio Santiago Ponsa), have agreed not to offer, sell, agree to sell, pledge or in any way dispose of (or formalize any transaction designed to dispose of or by means of its execution could reasonably result in the disposal [by means of a real disposal or effective financial disposal derived from a financial agreement, or in any other way] by the Company or a Company subsidiary or any person with a mutual interest in the Company or a Company subsidiary) shares in the Company (whether Class A shares, Class B shares or ADSs that represent the latter), directly or indirectly, or securities convertible into the Company’s shares, nor establish or increase an equivalent short position, nor settle or decrease an equivalent long position, and to publically announce their intention not to carry out any of the aforementioned transactions, from the date of that the format of the capital increase is defined until 180 days have passed from the date that the Class B shares are admitted to trading on the NASDAQ Global Select Market in the USA through ADSs represented by ADRs, which occurred on October 17, 2013. This period could be extended by up to 18 additional days from the end of the period in the event that the Company publishes results or announces their publication during the last 17 days of the originally agreed period.

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 an 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. Concentraciones de clientes

During the years 2013 and 2012 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, 2013, with the rest of the variables remaining constant, the effect in the Consolidated Income Statement would have been a loss of €8,496 thousand (loss of €10,602 thousand in 2012) mainly due to the US Dollar net liability position of the Group in companies with Euro functional currency and an increase of €1,192 thousand (decrease of €2,440 in 2012) 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, 2013 and 2012 are included in Note 14 of these Notes to these Consolidated Financial Statements.

• 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 non-recourse financing (see Note 19), 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 (see Note 20), as general rule, 80% of the debt is covered throughout the term of the debt; in addition, in 2009, 2010 and 2013, 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, 2013, with the rest of the variables remaining constant, the effect in the Consolidated Income Statement would have been a profit of €13,669 thousand (profit of €4,004 thousand in 2012) mainly due to the increase in time value of hedge interest rate options (caps and collars) and an increase of € 48,050 thousand in other reserves (increase of €52,163 thousand in 2012) 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, 2013 and 2012 is provided in Note 14 of these 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 aluminum (and zinc until the sale of the Company’s shareholding in Befesa).
  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, 2013, 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 (loss of €35,092 thousand in 2012) and an increase in other reserves of € 4,567 thousand (decrease of €16,391 thousand in 2012) due to open derivative contracts primarily on grain purchases held by the Group.
  
  At December 31, 2013, 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 (profit of €11,035 thousand in 2012) and an increase in other reserves of €60,040 thousand (null in 2012) due to open derivative contracts primarily on ethanol purchases held by the Group.
  
  A breakdown of the commodity derivative instruments as of December 31, 2013 ad 2012 is included in Note 14 to these 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 2013, Abengoa recorded a profit of €15 thousand (profit of €11,768 thousand in 2012), €15 thousand of which related to profit on settled transactions (€11,768 thousand in 2012) and €0 thousand to open derivative contracts valued at the year ended (€0 thousand in 2012).

 

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, 2013 and 2012 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, 2013 and 2012.
• 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, 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 or the sale of mature concessional shares, the sale of a transmission line concession activity in Brazil and a water concession activity in China;
• capital increase carried out 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 Non-recourse Financing 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 2.5 times corporate Ebitda over Net Corporate Debt (excluding the Ebitda and the non-recourse financing) in 2013.

4.3. Risk management and internal control

During 2013, 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.

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.

 

These elements constitute an integrated system that allows for proper risk management and controls at all levels of the organization.

Business risk

Common management systems represent Abengoa's internal rules and all its business units and its methodology for assessing and controlling risks. They also represent a common culture for the various businesses of Abengoa and comprise 11 standards that define how management has each of the potential risks included in the risk model of Abengoa. Through these systems risks are identified and appropriate hedging and control mechanisms are defined.

Common management systems include specific procedures covering any action that may be a risk to the organization, both financial and non-financial. They are available to all employees on computer regardless of geographical location and job title.

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.

Risks relating to the reliability of financial information

Abengoa began in 2004 an internal process of aligning its internal control structure over financial reporting with the requirements imposed by Section 404 of the SOX Act (‘Sarbanes Oxley Act’).

The purpose of SOX is to ensure transparency in the management, accuracy and reliability of the financial information published by companies listed on the U.S. market (‘SEC registrants’). This law requires these companies to submit their internal control system to a formal audit by its financial auditor who, in addition, will provide an independent opinion on it. According to instructions of the ‘Securities and Exchange Comission’ (SEC), this law is mandatory for companies and groups listed in the U.S. market.

Abengoa considers this legal requirement as an opportunity for improvement and far from satisfied with the conditions set out in the law, we have tried to develop the most of our internal control structures, control procedures and assessment procedures applied.

The initiative comes in response to the quick expansion of the group in recent years, and expectations of future growth, and to continue to provide investors with accurate, timely and complete finantial information.

During 2012 Abengoa completed the implementation of SAP GRC Process Module Control. This tool provides a technology solution with the purpose of automating our internal control system and compliance monitoring, facilitating compliance and increasing security for the Company's operations.

The universal risk model

In 2011, Abengoa finished integrating its universal risk model, the company's chosen methodology for quantifying the risks that compose the risk management system. The goal is to obtain a comprehensive view of them, designing an efficient response system and aligned with business goals of the company.

Abengoa’s universal risk model is made up of four categories, 20 sub-categories and a total of 57 principal risks for the business. Each these risks has an associated series of indicators that allow its probability and impact to be measured and the degree of tolerance to the risk to be defined, thus allowing for subsequent risk assessment and monitoring.

The risks identified in this model are evaluated considering two parameters:

• Likelihood of happening: Degree of frequency with which you can ensure that a particular cause will cause a negative impact event with Abengoa.
• Impact on Abengoa: Set of potential negative effects on Abengoa's strategic objectives.

Pursuant to the allocation probability and impact indicators for all the risks in the risk model Abengoa universal risks are qualified in 4 types (lower risk, tolerable risk, severe risk and critic risk). Each of these categories is treated with a risk management different strategy.

Abengoa has completed the implementation of Archer eGRC, technology solution that automates the process of identification, assessment, response, monitoring and reporting of risks that make up the universal risk model to keep all activities and sectors in which Abengoa operates.

During 2012, this application has been consolidated as a tool for calculation and reporting of identified risks. Since its introduction, Abengoa has been working on the application synchronization with other tools within the group with the aim of increasing process automation.

 

5.-  Anticipated future trends of the group

To estimate the outlook for the Group, it is important to take into account the evolution and development achieved in recent years, which forms the basis of the company’s growth prospects in the medium term. The Group’s strategy in the medium term is based on the growing contribution of the activities linked to the markets for the environment, renewable fuels (bioenergy), solar power and the ongoing development of the engineering and construction activities.

Furthermore, the strengthening of Abengoa’s capacity in the environmental services market through Befesa Medio Ambiente, S.A.; a greater bioethanol production capacity, as well as the development of the solar business will all contribute to boosting the company’s long-term outlook. In so far as it achieves its current forecasts, Abengoa has new activity base that will offer stability and continuity in the coming years.

With its current reserves, taking into account the improved flexibility of the organizational structure, the specialization and diversification of activities, and the investment opportunities identified in the domestic market and the company’s competitiveness in the international market, as well as the exposure of part f its activities to the sale of commodities and non-Euro currencies, the Group is clearly in a position to continue making positive progress in the future.

Strategy

Last year, 2013, was better than expected, offering glimpses of growth possibilities that will help to put the financial crisis behind us. However, climate change continues to lie at the heart of the problems facing mankind. The UN’s Intergovernmental Panel on Climate Change is warning that the planet’s average temperature is increasing while glaciers melt, sea levels rise and CO2 emissions grow, all of which are attributed to humankind with 95 % certainty. The Stern Report states that there is still no trend towards a reduction in emissions, so global warming will continue, forcing hundreds of millions of people from their current homes by the year 2100.

According to the World Energy Outlook for 2013, the decision facing the world requires greater emphasis on energy efficiency. Our sector will play a fundamental role in whether climate change targets are achieved or not. The current trend is taking us towards a 3.5ºC long-term rise in the planet’s temperature. To avoid this we have to accelerate the rate of renewable energy growth, currently around 2.5 % per annum.

Our company has viable solutions to these challenges. Knowledge creation and a commitment to technology form the basis of our competitive advantage in the energy and environment sectors, enabling Abengoa to become a scientific and technological leader in our business areas and a privileged place for training professionals in R&D and innovation.

Abengoa Research (AR), the research institute launched in 2011, is making highly significant progress in producing and storing solar power at competitive prices, transforming municipal solid waste into bioethanol (W2B), promoting energy vectors such as hydrogen or second-generation bioethanol, the desalination and reuse of industrial water and water from other sources, and developments related to enzymes and biomass.

Abengoa has also increased the number of technology patents it holds to 261 and is acknowledged as the leading Spanish company in the international patent applications ranking. These achievements are the result of the work carried out by the company’s team of 781 researchers, as well as investment in R&D and innovation projects totaling € 426 million during the year.

We are implementing the scheduled investments in our strategic plan, arranging financing for the corresponding projects and working with partners that can make our investments sustainable. Abengoa’s projects map has expanded this year to include countries such as Israel, Sri Lanka, Ukraine and Angola, while we have consolidated our leadership position in countries like Brazil, USA, South Africa, Chile, Mexico, Peru and Uruguay.

Abengoa’s global presence enables us to make the most of our opportunities for growth. This year revenues have grown by 17% to € 7,356 million compared to 2012, and this growth is also reflected in our results, with an 44 % increase in EBITDA to € 1,365 million.

At the financial level, this year we have successfully completed our listing on the NASDAQ stock exchange in the USA through a capital increase of € 517.5 million, we have raised € 1,280 million from five bond issues and made divestments totaling € 804 million, all of which have enabled us to cover the company’s financing requirements for 2014, reduce our dependency on the banking market following the partial repayment of the syndicated loan, and to extend the maturity profile of our debt.

Corporate net debt at the end of 2013 was 2.2 times corporate EBITDA, totaling € 2,124 million. We ended the year with a cash position of € 3,877 million, which will allow us to meet our investment and debt commitments scheduled for 2014.

We believe that Abengoa will continue to grow in 2014, strengthening its financial structure and consolidating a sustainable asset rotation program.

Engineering and construction

Revenues have grown by 27 % to € 4,808 million, bringing the backlog at the end of the year to € 6,796 million. In the USA we have commissioned the world’s largest solar-thermal plant, Solana, in Arizona, which uses a pioneering system that provides six hours of energy storage for when there is no sun. Work also continues on construction of the solar-thermal plant in California, which has the same capacity. Furthermore, the US power company Portland General Electric (PGE) has selected Abengoa to develop a 440 MW combined cycle plant.

We have also been selected to construct the largest combined cycle plant in Poland, transmission lines in Europe, Latin  America, Africa and Australia, and new desalination plants in the Middle East and North Africa.

Concession-type infrastructures

We have generated more than 5,700 GWh of power in solar, hybrid and cogeneration plants during 2013, as well as commissioned three new plants in Abu Dhabi (Shams 1), USA (Solana) and Spain (the Extremadura Platform) with a total installed capacity of 480 MW. We have also produced 102.1 ML of desalinated water.

The total capacity (installed and under construction) of our power plants in the USA, Abu Dhabi, South Africa, Algeria, Israel, Mexico, Brazil, Uruguay, Spain, India and the Netherlands is 2,912 MW. At present, we are also constructing new desalination plants in Algeria and Ghana, and electricity transmission lines in Brazil, Peru and Chile.

Industrial production

The construction in Hugoton, Kansas (USA), of the first industrial plant to produce second-generation ethanol using Abengoa’s proprietary technology and the development of the first Waste to Biofuels pilot plant in Salamanca (Spain) are two examples of our research and innovation work from recent years becoming a reality.

Growth and diversification

The growth model is based on simultaneously managing businesses with different profiles and characteristics. The cash flows from our traditional activities are reinvested in growing our emerging businesses. Rotating our investments is part of our business model and we have numerous options for the future that will evolve through to maturity. Abengoa Hydrogen and Abengoa Energy Crops are two such possibilities, in addition to other technological opportunities that Abengoa Research and the business groups are obtaining from their research.

The company’s international activities account for 84 % of total revenues, including our businesses in USA with 28 %, Latin America that represent 29 %, Asia 4 %, Europa 12 % and Africa 11 %.

Human capital, employment and safety

At Abengoa we know that the future depends on the creativity of the present, which in turn relies on the training and performance of the people that are part of the company. We are well aware of this fact and place special emphasis on our employees’ professional development and training. In 2013 we carried out more than 1.8 M hours of training, many in collaboration with some of the world’ most prestigious universities.

It is also important to highlight the constant preoccupation in our corporate culture for the safety of our teams and operations around the world, which is managed through a strict system of quality and occupational health and safety at every level of the organization.

Audit

In line with our commitment to transparency and diligence, we have subjected our internal control system to an independent valuation process, in accordance with PCAOB auditing principles. The Annual Report therefore includes five independently verified reports on the following areas: financial statements, SOX (Sarbanes Oxley) internal control system, Corporate Social Responsibility Report, Corporate Governance Report and the design and application of the company’s risk management system in accordance with the specifications of the ISO 31000 standard.

Corporate social responsibility and sustainable development

In a future defined by innovation and the challenges associated with sustainable development, Abengoa is committed to responsible management to reduce the negative impacts of its activities, contribute to developing the communities where we are present and building trusted partnerships with stakeholders. As a result of this commitment, in 2008 Abengoa designed a strategic corporate social responsibility plan and in 2013 we invested more than € 9.1 million in social actions through the Focus-Abengoa Foundation.

During 2013 we have intensified our partnerships with suppliers to reduce their impact and improve operations across the whole value chain.

Once again we have used the Corporate Social Responsibility Report, prepared in accordance with the principles of the Global Reporting Initiative (GRI) and the AA1000 sustainability assurance standard, to report on our social, environmental and financial performance during 2013, as well as the objectives, challenges and areas for improvements for the coming years.

We offer and use the Corporate Social Responsibility e-mail address (rsc@abengoa.com), our website (www.abengoa.com), our Twitter and LinkedIn profiles and our corporate blog (blog.abengoa.com) for this purpose.

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 2012 (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 2013, Abengoa made significant Research, Development and Innovation (R&D&i) investment efforts, investing a total of €426,358 thousand (€91,260 thousand in 2012) 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.  Last year, 2013, demonstrated Abengoa’s strategic commitment to technology as a vector for growth and a source of competitive advantage in its energy and environment sectors. In order to strengthen its R&D model, Abengoa Research (AR), the company that heads Abengoa’s technological development, has been structured into five scientific-technological areas aligned with the businesses in which the company applies its technology, consisting of biotechnology, bioenergy, waste; processes, water and hydrogen; and electrical systems and power electronics. Through these areas, Abengoa develops and strengthens the company’s existing and future technologies.

The main development assets come from technologies that enable progress to be made in Abengoa’s strategic R&D areas; technologies for high-performance thermo-electric solar plants, bio-refineries, treating municipal solid waste for energy production, and water treatment plants.

To increase its technological capacity, Abengoa has added two research laboratories to its existing assets. The Soland laboratory specializes in solar technology, while the Abengoa Research laboratory is equipped with experimental facilities and covers the majority of the company’s scientific areas. Furthermore, this year the Technology Surveillance and Patents Office, which was created in 2012 and manages all the intellectual property activities, has consolidated its position. To date, Abengoa has filed 261 patent applications, of which 106 have been granted, with the number of patent applications rising by more than 20% compared to 2012.

In solar-thermal technology it is worth noting the start of 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 at the end of 2014.

In the area of biofuels, Abengoa has continued to construct the commercial bio-refinery plant in Hugoton, which will come into operation in the second quarter of next year. The technology used in this plant has been developed and proven by Abengoa over the last ten years at the second generation (2G) demonstration plant in Salamanca, Spain. A waste to biofuels (W2B) demonstration plant has also been operated at the same complex, which is capable of obtaining second-generation biofuels from recovered municipal solid waste (MSW). In addition to this progress, Abengoa continues to develop various processes to obtain high value-added bio-products from biomass, such as a catalyst that has been patented that enables biobutanol to be produced from ethanol using a catalytic process. This technology offers an additional advantage since it can be applied at the company’s existing conventional biofuels facilities.

Taking into account the investment in Khi Solar One, Hugoton and the waste to biofuels demonstration plant and the rest of our activities expensed or capitalized, total investment in R&D during the year has amounted to € 426,358 thousand (€91,260 thousand in 2012).

Progress also continues in developing and optimizing various technologies related to desalination, treating drinking water and other water treatments and reuse, all based on improvements in the operating conditions of ultra-filtration membranes, which are fundamental for achieving high levels of water purity and quality..

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, 2013 treasury stock amounted to 40,009,307 shares (14,681,667 shares in 2012), which 5,382,896 are class A shares and 34,626,411 are class B shares.
Regarding the operations carried out during the year, the number of treasury stock purchased amounted to 8,125,581 class A shares and 62,025,632 class B shares and treasury stock transferred amounted to 5,681,820 class A shares and 39,141,753 class B shares, with a net result of €-89,618 thousand recognized in equity (€-961 thousand in 2012).

 

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 91,856,888.71 Euros represented by 825,562,690 shares fully subscribed and paid up, with two separate classes:

• 84,445,719 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’).
• 741,116,971 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 will be 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. 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 will issue 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.
The Extraordinary General Shareholders' Meeting therefore approved a voluntary conversion right of Class A shares into Class B shares, which will end on 31 December 2017. As a result of the execution of the voluntary conversion right established in Article 8 of the bylaws, Abengoa carried out a capital reduction of six hundred and thirty thousand eight hundred and seventy nine euros and forty eight cents (€630,879.48) on 22 January 2013, by reducing the par value of six hundred and thirty seven thousand two hundred and fifty two (637,252) Class A shares from one (1) euro per share to one euro cent (€0.01) per share, by creating a restricted reserve in accordance with Article 335 c) of the Spanish Capital Companies Act (LSC).

Since the capital is represented by book entry, there is no shareholder register other than the disclosures of significant shareholdings and the X-25 list. According to the latest information received, the situation is as follows:

 

 

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 December 23, 2013is 12,268 shareholders in class A shares and 16,944 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, within the framework of the investment agreement between Abengoa and First Reserve Corporation, effective from 7 November 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:

• vote in favor of the following, through their respective shareholder directors on Abengoa’s Board of Directors:
  • 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
  • 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;
• 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
• 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 the following: To the current obligation that, ‘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’, it was added that, ‘If this proposal were to be presented by another shareholder, or by the Board of Directors, they will vote against it’.

On 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.:

• 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;
• 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;
• 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 may send:

• Proposals that they intend to submit as supplementary points to the agenda published in the notice of the general meeting.
• Requests to second these proposals.
• Initiatives to achieve the required percentage to exercise a minority right.
• 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 7, 2013, 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 1, 2012 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 8 November 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.

As of 31 December 2012, treasury stock totaled 14,681,667 shares, which represents 3.39% of the share capital of Abengoa, S.A. (2,913,435 shares in 2011), of which 2,939,135 are Class A shares and 11,742,532 are Class B shares.

With regards to transactions carried out during the year, the amount of treasury stock purchased amounted to 8,201,391 Class A shares and 15,458,056 Class B shares, which represents 9.27% of the share capital of Abenoga, S.A. while treasury stock sold totaled 8,175,691 Class A shares and 3,715,524 Class B shares, equivalent to 4.66% of the share capital of Abengoa, S.A. with a net result of €961,000 recognized in equity of the parent company (decrease of €2,144,000 compared to 2011).

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

Resolution One.- Examination and approval, if given, of the Annual Financial Statements and the Directors' Report corresponding to the 2012 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 2012 fiscal year.

Resolution Three.-  Ratification, appointment and re-election, as applicable, of directors (separate proposals).

1º To resolve the re-election as a director, proposed by the Appointments and Remunerations Committee, following expiration of the four-year mandate conferred by the General Shareholders' Meeting of 2009, and for a further period of four years, of Mr. José Luis Aya Abaurre.

2º To resolve the re-election as a director, proposed by the Appointments and Remunerations Committee, following expiration of the four-year mandate conferred by the General Shareholders' Meeting of 2009, and for a further period of four years, of Mr. José Joaquín Abaurre.

3º To resolve the re-election as a director, proposed by the Appointments and Remunerations Committee, following expiration of the four-year mandate conferred by the General Shareholders' Meeting of 2009, and for a further period of four years, of Mr. Francisco Javier Benjumea Llorente.

4º To resolve the re-election as a director, proposed by the Appointments and Remunerations Committee, following expiration of the four-year mandate conferred by the General Shareholders' Meeting of 2009, and for a further period of four years, of Mr. Felipe Benjumea Llorente.

5º Likewise, to resolve the re-election as independent director, proposed by the Appointments and Remunerations Committee, for a further period of four years, of Mr. José Borrell Fontelles.

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

Resolution Five.- 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 Six.- 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 Seven.- 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.

Resolution Eight.- Delegation of powers on the Board of Directors for the interpretation, rectification, execution, formalization and registration of the resolutions passed.

In relation to the votes of the aforementioned resolutions:

• In the First resolution, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,720,707,995 votes in favor, 248,040 against and 408,628,451 abstaining.
• In the Second resolution, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,720,614,357 votes in favor, 249,600 against and 408,720,529 abstaining.
• In the Third resolution, paragraph 1, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,674,769,455 votes in favor, 40,209,620 against and 414,605,411abstaining.
• In the Third resolution, paragraph 2, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,680,423,501 votes in favor, 40,085,878 against and 409,075,107 abstaining.
• In the Third resolution, paragraph 3, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,639,229,349 votes in favor, 76,418,550 against and 413,936,587 abstaining.
• In the Third resolution, paragraph 4, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,580,031,726 votes in favor, 56,074,109 against and 493,478,651 abstaining.
• In the Third resolution, paragraph 5, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,719,782,218 votes in favor, 993,817 against and 408,808,451 abstaining.
• In the Fourth resolution, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,680,273,775 votes in favor, 40,682,260 against and 408,628,451 abstaining.
• In the Fifth resolution, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,633,664,057 votes in favor, 86,789,578 against and 409,130,851 abstaining.
• In the Sixth resolution, a total of 6,129,584,486 valid votes were cast, corresponding to 58,891,078 Class A shares and 240,476,686 Class B shares, which represent 68.477% of the share capital, with a total of 5,638,724,669 votes in favor, 76,798,647 against and 414,061,170 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, 2012 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 has been set at fifteen, compared to nine established until that time. This modification 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, 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 is 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, 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 December 16, 2013.
  • Structure:
    
    The Board of Directors is currently made up of 15 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. 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 Aplicaciones Digitales, S.L. (Aplidig, 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 Aplicaciones Digitales, 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. 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. 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 2013, the Board met a total of 16 times, of which five 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:
    • Prepare and be sufficiently and properly informed for each meeting.
    • Actively assist and participate in meetings and decisions.
    • Avoid conflicts of interest and, in the event that they arise, to report such conflicts to the company through the Board of Directors’ Secretary.
    • Not to undertake duties for competing entities.
    • Not to use company information for personal purposes.
    • Not to use the company’s business opportunities for their own interest.
    • Maintain full confidentiality regarding information received within their role as Director of the company.
    • Abstain from voting on proposals that may have an effect on them.
      
      
  • 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 of a majority 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 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 2013 were € 15,421 thousand (€13,887 thousand in 2012).

Detail of individual remuneration and benefits in 2013 paid to the Board of Directors (in thousands of Euros):

 

 

Additionally, in 2013 overall remuneration for key management of the company (Senior Management which are not executive directors), including both fixed and variable components, amounted to €14,656 thousand (€13,574 thousand in 2012).

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 Abengoa SA’s Board of Directors on 24 February 2003 pursuant to Article 28 of the Regulations of the Board of Directors, with the aim of incorporating the recommendations on the Appointments and Remunerations Committee in Law 44/2002 on the Reform of the Financial System. The Board of Directors also approved its internal regulations.

Composition

The current composition of the Committee is as follows:

 

 

The Appointments and Remunerations Committee is consequently comprised of one executive and four non-executive board members, in compliance with the requirements set forth in the Law on the Reform of the Financial System. Likewise, in accordance with the provisions of Article 2 of its Internal Regulations, the post of Committee Chairman is compulsorily held by a non-executive board member.

Duties and roles

The following are the duties and competencies of the Appointments and Remuneration Committee:

1. Inform the Board of Directors about appointments, re-elections, dismissals and remuneration of the Board and its posts, as well as about the general policy on remuneration and incentives for directors and senior management.
2. Inform the Board of Directors in advance on all proposals it may submit to the General Shareholders’ Meeting for the appointment or dismissal of board members, even in cases of co-optation by the Board of Directors itself; annually checking to ensure compliance with the conditions that led to the appointment of a board member and the nature or type thereof. This information shall be included in the Annual Report. When filling new vacancies, the Appointments and Remuneration Committee will ensure that the selection procedure contains no implicit bias that may hinder the selection of female Board members and also that women who meet the required profile are included as potential candidates.
3. Prepare an annual report on the activities of the Appointments and Remuneration Committee, to be included in the management report.

Sessions and convening

To execute the duties listed above, the Appointments and Remuneration Committee shall meet as many times as necessary and at least once every six months. It shall also meet on the behest of the Chairman. Lastly, a meeting shall be deemed valid if all its members are present and they decide to hold a session.

The Committee held four meetings during 2013; the most relevant among the issues dealt with on the agenda were the proposals of appointments and renewals of the Board of Directors, as well as the verification that the conditions that were the basis for the appointment of the board members and the nature or type thereof continued to be upheld.

Quorum

The Committee is considered validly constituted if the majority of its members are present. Only non-executive board members may act as representatives.

Decisions taken shall be deemed valid if favorably voted by the majority of the committee members, present or represented. In the event of a tie the Chairman shall have the casting vote.

The company’s head of remuneration shall act as secretary in the Committee meetings.

Committee analysis and proposals

• Follow-up and progress of remuneration of the members of the Board of Directors and the company’s senior management.
• Remuneration proposals for members of the Board of Directors and the company’s senior management.
• Preparation of the relevant information to be included in the financial statements.
• Propose to the Board of Directors the appointment of Mr Ricardo Hausmann as a director, to be submitted to the next General Shareholders' Meeting.
• Proposal to the Board of Directors for the re-election of Mr. Felipe Benjumea Llorente, Mr. Javier Benjumea Llorente, José Joaquín Abaurre Llorente, Mr. José Luis Aya Abaurre and Mr. José Borrel Fontelles as a board member because previous mandates had expired.
• Propose to the Board of Directors the appointment of Mr José Borrell Fontelles as a member of the Audit Committee, following the resignation submitted by Aplidig, S.L. (represented by Mr José B. Terceiro Lomba).
• Proposal to the Board of Directors for the approval of the annual report on the Remuneration of Board Members (Remuneration Annual Report).
• Report on the verification that the conditions that were the basis for the appointment of board members and their nature and type continue to be upheld.
• Reports on comparative salaries and market research by independent experts

10.-  Other relevant information

10.1. Stock exchange information

According to the figures supplied to the company by Bolsas y Mercados Españoles, 117,689,141shares A and 1,058,550,337 shares B were traded in 2013, equivalent to an average daily volume of 461,526 and 4,151,177  for A and B shares, respectively; and an average traded cash value of €1.1 million and €7.8 million per day, respectively.

 

 

The final listed prices of Abengoa’s shares in 2013  was €2.305 (A-shares), which is a 4% decrease on the closing price for the previous year, and €2.244 (B-shares), a 4% 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 590% which is more than 6.9 times the initial price. During this same period, the select IBEX-35 has increased by 110%.

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 2013, 2012 and 2011 represent a payout ratio of 70.0%, 10.1% and 8.7% respectively over the previous year's result, which represented a payment of 39, 38 and 18 million respectively.
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 euros 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 euros.

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 euros 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 euros.

In July 2011, Abengoa paid 18 million euros in dividends for the year 2010 (equivalent to 0.20 per Class A common share based on the number of shares issued then).  

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 April 02, 2013, Standard & Poor’s (‘‘S&P’’) Rating Services downgraded our corporate family rating and probability of default rating from ‘‘B+’’ to ‘‘B’’ with a negative outlook and on November, 04 they reaffirmed the rating of the corporate family and of our high-yield notes.  On March 27, 2013 Moody’s Investors Service, Inc. (‘Moody´s) downgraded our corporate family rating and probability of default rating from ‘‘B1’’ with a negative outlook to ‘B2’ with a stable outlook. In addition, Fitch Ratings, Inc. (‘Fitch’) has maintained stable the rating ‘B+’ with a stable outlook during 2013, reaffirming it on October 24, 2013.

 

10.4. 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 2013. 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 2013 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 2013.

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

After the end of the year 2013 and following the so-called “regulatory reform of the electric sector”,  the Ministry of Industry, Energy and Tourism submitted to the National Competition and Markets Commission a proposal of Ministerial Order establishing a set of compensation parameters regarding energy-generation facilities from renewable sources, cogeneration and waste. Among other parameters, there are those related to benchmarks of investment and operation of thermosolar facilities (both solar power tower and parabolic-cylinder technology), photovoltaic and cogeneration plants of the Group. This new regulatory development, since it represents an additional evidence regarding some conditions that existed prior to the closing date of the financial year and, in particular, allows us to estimate future cash flows from the abovementioned facilities , has been taken into account when preparing these Financial Statements.

Since December 31, 2013, 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