Red Electrica Corp. S.A. Annual Report 2017

Plain-text annual report

S U S T A I N A B I L I TY R E P O R T S U M M A R Y 2 0 1 7 The value of connected energy S U S T A I N A B I L I T Y R E P O R T S U M M A R Y 2 0 1 7 Ta b l e o f c o n t e n t s 2 S u s t a i n a b i l i t y R e p o r t 2 0 1 7 / S u m m a r y w w w . r e e . e s 3 This Report presents a summary of the Sustainability Report 2017. The full version, as well as the legal information (Consolidated Annual Accounts 2017 and Corporate Governance Report 2017) are published solely in electronic format (browsable pdf) and are available on the corporate website www.ree.es. Sustaina bility Report 2017 PDF Corporate Governance Rep ort 2017 PDF Consolidated Annual Accoun ts 2017 PDF 4 - LETTER FROM THE CHAIRMAN AND THE CE / The year in review, a comprehensive assessment of 2017 10 12 16 20 - KEY PERFORMANCE INDICATORS / Red Eléctrica at a glance: our performance during 2017 01 THE COMPANY / The Red Eléctrica Group / Activity in Spain and international activity 02 STRATEGY / Strategic Plan 2014-2019 / Essential strategies and cross-cutting strategies 03 COMMITMENT TO SUSTAINABILITY / Our commitment to sustainability / Sustainability principles / Sustainability priorities 26 34 44 60 04 ANTICIPATING CHANGE AND TAKING ACTION / Anticipating change and taking action / Sustainability opportunities / Risk management / Innovation 05 DECARBONISATION OF THE ECONOMY / Energy transition and climate change / Sustainable development of the transmission grid / Integration of renewable energy / Energy efficiency: demand-side management / Reduction of the carbon footprint 06 RESPONSIBLE VALUE CHAIN / Good governance / Ethics and compliance / Economic impact and financial soundness / Employees / Responsible environmental management / Supply chain / Customer orientation 07 CONTRIBUTION TO THE DEVELOPMENT OF SOCIETY / Commitment to society / Economic and social contribution of investment projects / Tax transparency T A B L E O F C O N T E N T S L e t t e r f r o m t h e C h a i r m a n a n d t h e C E O 4 5 Letter from the Chairman and the CEO Therefore, the Company maintains a clear position on this aspect as reflected in its climate change action plan, which, in addition to taking on challenging targets to reduce its carbon footprint by the 2020 and 2030 horizons, includes different courses of action to contribute to an energy model that is capable of providing electricity based on more emission-free energy sources. In this regard, the Company has continued in 2017 with the sustainable development of the transmission grid and has invested 411.8 million euros in new infrastructure mainly aimed at improving grid reliability, favouring the evacuation of renewable energy and the development of interconnections between electricity systems. Among the projects undertaken, those aimed at improving interconnections with Europe are noteworthy due to their major influence on improving the quality and security of the Spanish electricity system and the integration of renewable energy. Investment I N T H E T R A N S M I S S I O N G R I D 411.8 m€ in new line and new substation bays I N V E S T M E N T F O C U S Improvement in the reliability and security of the grid and the development of interconnections between electricity systems. These projects are aimed at ensuring that by 2030 the Spanish electricity system has a 15 % interconnection capacity in relation to the installed power capacity in our country, a milestone that is a priority in Europe, as it is an essential aspect for the integration of the European single electricity market. Similarly, Red Eléctrica has continued to guarantee the security and quality of the electricity supply, making it compatible with the maximum integration of renewable energy. In this regard, the work of the Control Centre of Renewable Energy has been key, as it made it possible for 33.8 % of the energy integrated into the system on the Spanish peninsula to have come from renewable sources. In addition, the Company is carrying out projects aimed at energy storage, such as the construction of the Soria-Chira pumped- storage hydroelectric power station in Gran Canaria, conceived as system operation tools to optimise the efficiency of the electricity system and to safely integrate renewable energy into isolated systems. JUAN LASALA Chief Executive Officer JOSÉ FOLGADO Chairman of Red Eléctrica Corporación consumer and which favours growth and job creation. Red Eléctrica, as the centrepiece of the electricity system, is a crucial player in the transition to this new energy model, whose key elements must be the electrification of the economy, the maximum integration of renewable energy in the energy mix and increasing energy efficiency, ensuring at all times the security of supply. The challenge of combating both the global warming of the planet and climate change is a priority issue on the world agenda and is a challenge that, as is made clear in the energy targets that the European Union has set itself in the medium and long term, requires making economic growth compatible with the reduction of greenhouse gases. To address this, it is essential to accelerate the transition to an energy model that offers reliable, affordable and increasingly cleaner energy for the Sustainability Report 2017 / Summarywww.ree.es 6 7 Complementary to these projects, initiatives are also carried out regarding demand-side management and energy efficiency, in addition to those undertaken for the promotion of electric mobility. OTHER AREAS OF BUSINESS In the international arena, the Red Eléctrica Group has continued to manage projects for the construction and operation of electricity grids in two border areas between Peru and Chile. During 2017, noteworthy was the awarding of a new concession contract for the construction of a new line in the southern region of Peru, which will enable the closing of the ring that makes up the rest of the infrastructure managed by the Group in that area. Value C R E A T I O N 669.8 m€ of net profit 5.2 % higher than in 2016 S H A R E H O L D E R R E T U R N Shareholder remuneration in the form of dividends has increased 7 % with respect to the previous year. On the other hand, in 2017 the Chilean subsidiary TEN commissioned the first interconnection between the north and central electricity systems of the country, through the Mejillones-Cardones transmission line. Similarly, the Group, through the subsidiary REDENOR, has been awarded the contract for the construction of a new project in northern Chile. In the telecommunications services business line, the subsidiary REINTEL has continued to consolidate itself as a telecommunications infrastructure operator of reference in Spain, through the commercial management and operation of the country's largest dark fibre optic network. FINANCIAL RESULTS Focusing on the creation of value, during 2017, the Red Eléctrica Group has shown stable growth, achieving solid results and an important strengthening of its main solvency ratios, while maintaining a clear orientation towards operational efficiency and the permanent generation of value. Red Eléctrica has been recognised as the top company in the world in sustainability in the Electric Utilities sector by the Dow Jones Sustainability Index. T H E R E D E L É C T R I C A G R O U P ’ S C O M M I T M E N T T O S U S TA I N A B I L I T Y 2 0 3 0 Based on four priorities: anticipation change and taking action, decarbonisation of the economy, responsible value chain and contribution to the development of society. This is reflected in the sound financial results obtained: net revenue reached 1,941.2 million euros, 0.5% higher than the previous year, and the EBITDA margin stood at 78.3%. Additionally, net profit for the year amounted to 669.8 million euros, 5.2 % higher than the previous year, and shareholder remuneration in the form of dividends increased by 7 % compared to 2016; all this, in line with the objectives set out in the 2014-2019 Strategic Plan. SUSTAINABILITY COMMITMENT The commitment to sustainability taken on by the Red Eléctrica Group ever since the Company began obtained clear backing in 2017 through recognition by the Dow Jones Sustainability Index (DJSI) as the top company in the world in sustainability in the Electric Utilities sector, also reaching the leading position in the Utilities super-sector, which encompasses the electricity, gas and water sectors. On its path of continuous improvement, the Company has taken huge strides in the management of this area through the design of the Sustainability Commitment 2030 of the Red Eléctrica Group; a cross-cutting commitment, with a long-term vision and in keeping with the Company's strategy, which allows us to establish a global scope and a common framework to give a better response to stakeholders, increase efficiency and showcase all of the Group’s actions in the field of sustainability. The new commitment to sustainability is based on four priorities: anticipating change and taking action; decarbonisation of the economy; a responsible value chain; and contribution to the development of society. These priorities will act as the key drivers to respond to the challenges and opportunities that the Company faces. The design of this commitment has taken into account, among others, the objectives set in the United Nations Sustainable Development Goals, so that the sustainability priorities contribute significantly to the achievement of the SDGs. Letter from the Chairman and the CEOSustainability Report 2017 / Summarywww.ree.es8 9 The Sustainability Commitment 2030 of the Red Eléctrica Group: a cross-cutting commitment, with a long-term vision and in keeping with the Company's strategy. In this new scenario of sustainability, innovation is conceived as an important lever for growth and anticipation, extending to all areas of business activity: digitalisation, people, sustainability and technology. Digital transformation occupies a priority position in order to improve operational efficiency, develop new business models and adapt the Group's human capital to the Company's transformation process in the coming years. The involvement of our professionals and their high level of expertise are the basis of the success of our business management. To foster this commitment, the Company is committed to their training and professional development, an aspect that is enhanced through the new Red Eléctrica Campus, as the corporate university. Similarly, gender equality and equal opportunity is one of the aspects where significant progress is being made, as reflected in the progressive increase of women in the workforce and in managerial positions, and the continued high level of representation of women on the Board of Directors. Another aspect to which the Company attaches special significance is health and safety at work. In 2017, there was an improvement in the main accident indicators for both Company employees and employees of contracted companies. Compared to 2016, the frequency rate and severity rate experienced a reduction of 29.6 % and 44.4 % respectively within the Group's companies in Spain. Similarly, in the contracted companies the frequency rate was reduced by 29 % and the severity rate by 13 %. G E N D E R E Q U A L I T Y Red Eléctrica continues to progressively increase the number of women in the workforce and in managerial positions. For the Red Eléctrica Group, good governance, ethics and compliance are fundamental pillars to ensure the proper functioning of the business activity. For this, the Company has a series of corporate conduct rules that establish the values and business conduct guidelines, and it has a compliance system in place aligned with the best practices in this area, aimed at ensuring that the organisation adequately respects the established obligations and the commitments undertaken; all this, based on a proactive culture of risk management. Red Eléctrica is aware that its long-term sustainability depends on providing a service that adds value to society and generates a positive impact on society. Therefore, one of its priorities is to contribute to the economic, environmental and social progress of society, for which it complements its projects in the territory with collaborative programmes that generate shared value in the communities in which the Company’s facilities are located. In addition, to assess the beneficial impact of its projects on society, the Company has adopted a methodology that allows the contribution of its investment, as a dynamic element of the country's economic activity, to be measured. This contribution is supplemented, in turn, through a commitment that ensures maximum respect and care for the environment in the Company’s execution of its activities throughout the useful life of the facilities. Furthermore, said commitment fosters biodiversity protection, through the development of various courses of action aimed at its conservation, or the promotion of projects in collaboration with public administrations, NGOs and other stakeholder groups. Lastly, it should be noted that Red Eléctrica voluntarily adheres to various initiatives that strengthen its commitment to sustainability, including the commitment acquired through the principles of the United Nations Global Compact. Equal O P P O R T U N I T I E S 83.3 % of new appointments to managerial positions have been women 24.8 % of women in the workforce of the Group’s companies in Spain hold managerial positions O C C U PAT I O N A L H E A LT H & S A F E T Y Significant reduction in the accident frequency and severity rates in 2017. Letter from the Chairman and the CEOSustainability Report 2017 / Summarywww.ree.esK e y p e r f o r m a n c e i n d i c a t o r s 2 0 1 7 10 S u s t a i n a b i l i t y R e p o r t 2 0 1 7 / S u m m a r y w w w . r e e . e s 11 Key performance indicators 2017 GOOD GOVERNANCE BUSINESS FINANCIAL DATA EMPLOYEES ENVIRONMENTAL SOCIAL INDEPENDENT BOARD MEMBERS WOMEN ON THE BOARD ATTENDANCE AT THE SHAREHOLDERS’ MEETING REDUCED BOARD 58.3 % N/C 33.3 % -3.1 pp 58.5 % 12 members -2 pp N/C KM OF LINE AVAILABILITY OF THE PENINSULAR GRID FIBRE-OPTIC NETWORK INTEGRATION OF RENEWABLE ENERGY 43,793 km +0.3 % 98.28 % -0.03 pp 33,000 km +2 % 33.8 % of the total electricity generated -7 pp NET REVENUE EBITDA NET PROFIT DISTRIBUTION OF DIVIDENDS 1,941.2 M€ +0.5 % 1,519.5 M€ +2.3 % 669.8 M€ +5.2 % 0.9188 €/share +7 % GROUP WORKFORCE WOMEN IN THE WORKFORCE ACCIDENT FREQUENCY RATE TRAINING 1,815 people +2.3 % 24.2 % +0.7 pp 1.71 -29.6 % 108 hrs/ employee +31.7 % DIRECT EMISSIONS (Scope 1) LINES MARKED WITH BIRD-SAVING DEVICES RESTORATION OF HABITATS (Red Eléctrica Forest) ENVIRONMENTAL MANAGEMENT EXPENDITURE 28,765 t CO₂ eq. -8.7 % 332 km in areas of critical priority +52.3 % 778 ha recovered (2009-2017) +2.2 % +0.4 % 22.7 M€ INVESTMENT IN THE COMMUNITY TOTAL TAX CONTRIBUTION OF THE GROUP CUSTOMER SATISFACTION LOCAL SUPPLIERS 6.5 M€ 662 M€ 8.3 out of 10 +1.6 % -2.8 % N/C 94 % of purchases +3 pp The figures shown in small circles reflect the variation compared to 2016. pp: percentage points N/C: no change The business, environmental and social indicators correspond to the companies of the Group in Spain. 01 T H E C O M P A N Y 13 projects in Peru and Chile), the definitive consolidation of its telecommunications activity (with the creation of REINTEL), and the development of energy storage infrastructure in the Canary Islands (with the creation of REINCAN). The Red Eléctrica Group The Red Eléctrica Group has had a holding structure since 2008 to strengthen the separation and transparency of regulated activities (the electricity business in Spain) from the rest of the Group’s activities. Red Eléctrica Corporación is the parent company. The main activity of the Group is carried out by Red Eléctrica de España, whose role is transmission agent and operator of the Spanish electricity system (TSO -Transmission System Operator). The Group’s international business is geared towards investment in electricity transmission infrastructure abroad. This activity, initiated in 1999, and with a current presence in Peru and Chile, is managed through the companies integrated into Red Eléctrica Internacional. In recent years there has been a significant boost concerning the diversification of activities of the Red Eléctrica Group, with significant advances in international business (new R E D E L É C T R I C A G R O U P ( 2 0 1 7 ) W o r k f o r c e 1,815 people R e v e n u e 1,941.2 M€ S t o c k m a r k e t c a p i t a l i s a t i o n 10,124 M€ (at year end) E l e c t r i c i t y a c t i v i t y i n S p a i n 93% of revenue O t h e r a c t i v i t i e s 7% of revenue Sustainability Report 2017 / Summarywww.ree.es Activity in Spain International activity 14 15 ELECTRICITY ACTIVITY Red Eléctrica de España is the sole transmission agent and operator (TSO) of the Spanish electricity system. Its mission is to guarantee the security and continuity of the Spanish electricity supply at all times, and to manage the development and maintenance of a safe and reliable transmission grid. TELECOMMUNICATIONS ACTIVITY The Group’s telecommunications business is conducted through the subsidiary Red Eléctrica Infraestructuras de Telecomunicación (REINTEL). Its main activity is the leasing of dark fibre and sites and technical spaces for housing telecommunications equipment. ENERGY STORAGE ACTIVITY IN THE CANARY ISLANDS Red Eléctrica Infraestructuras en Canarias (REINCAN) focuses on promoting energy storage projects in the Canary Islands, developed as system operator tools to help guarantee supply, improve system security and optimise the integration of renewable energy on the islands. R E D E L É C T R I C A D E E S PA Ñ A manages a transmission grid of about 44,000 km of electricity line and operates an electricity system with 100 GW of installed power capacity. R E I N T E L manages and operates a fibre-optic network of more than 33,000 km of cable deployed along the electricity transmission grid and the railway network. R E I N C A N will build the Soria-Chira pumped- storage hydroelectric power station that will enable the further development of renewable energy in the Canary Islands. ACTIVITY IN PERU Red Eléctrica Internacional owns 100 % of: ∫ Red Eléctrica Andina (REA), specialised in the maintenance of electricity infrastructure. ∫ Red Eléctrica del Sur (REDESUR), which together with its subsidiaries, develops electricity transmission projects in southern Peru. In 2017, the Company was awarded a new project in the area. ACTIVITY IN CHILE Red Eléctrica Internacional through its subsidiary Red Eléctrica Chile owns: ∫ 50 % of Transmisora Eléctrica del Norte (TEN), which in 2017 commissioned the interconnection line between the electricity systems of the central zone and northern Chile. ∫ 70 % of REDENOR which was awarded a new project in northern Chile in 2017. R E D E L É C T R I C A I N T E R N A C I O N A L manages, through its subsidiaries in Peru and Chile, the Group’s international business, which is geared towards the construction and operation of electricity transmission grids outside of Spain. With the incorporation of the new projects for 2017, the Company will manage more than 1,300 km of line in Peru and almost 1,500 km in Chile. PERU TES4 2017 TES 2010 Lima REDESUR 1999 TES3 2015 TES2 2015 REDENOR 2017 TEN 2016 Santiago CHILE 220 kV Tintaya-Azángaro line (TES4) REDESUR - TES - TEN TES2 - TES3 - REDENOR 500 kV 220 kV T.E.S.: Transmisora Eléctrica del Sur (subsidiaries of REDESUR) 01 The companySustainability Report 2017 / Summarywww.ree.es 02 17 Strategic Plan 2014-2019 The Strategic Plan 2014-2019 focuses not only on the execution of Red Eléctrica’s role as TSO in Spain but also on reinforcing efficiency criteria and driving the expansion of the business base as an alternative path for growth and the creation of value. E S S E N T I A L S T R A T E G I E S Development of the TSO role Efficiency Expanding the business base C R O S S - C U T T I N G S T R A T E G I E S S T R A T E G Y Innovation Excellence People Sustainability Report 2017 / Summarywww.ree.es18 19 Essential strategies and cross-cutting strategies Essential strategies DEVELOPMENT OF THE ROLE AS TSO The main activity of Red Eléctrica is linked to its role as sole transmission agent and operator of the Spanish electricity system. Therefore, the Company's core strategy focuses on: ∫ the development of an increasingly meshed transmission grid that is more robust and better interconnected, and ∫ the efficient operation of the electricity system, with the aim of contributing to a sustainable energy model through the safe integration of renewable energy and the promotion of projects oriented towards energy efficiency. innovation as a lever for growth that will allow us to respond to the great challenges of the future. EXCELLENCE Consolidate ourselves as a sustainable company, through a management that is both ethical and committed to the stakeholders, maintaining a position of reference in the field of excellence. EXPANSION OF THE BUSINESS BASE Development of regulated activities that are different from the current and unregulated activities in the scope of telecommunications and the management of infrastructure, as well as expansion into other geographical areas, with the aim of driving the growth path of the Company in the coming years. Cross-cutting strategies EFFICIENCY Improvement of efficiency levels, generating value through the optimisation of operating margins, in order to mitigate the impact of the decrease in the profitability of new investments as a result of the new remuneration model. INNOVATION Promote innovation as an integral part of the operational process, boosting technological PEOPLE Commitment to a healthy working environment that favours the organisation of work and the well-being of employees. This commitment enables the Company to optimise resources and foster talent in order to tackle the challenges it faces. S T R A T E G I C P L A N S N A P S H O T T A R G E T S 2 0 1 4 - 2 0 1 9 A C H I E V E M E N T S 2 0 1 4 - 2 0 1 7 I n v e s t m e n t 2 0 1 4 - 2 0 1 9 4,575 M€ E f f i c i e n c y 2 0 1 4 - 2 0 1 9 ≥200 basis EBITDA margin in 2019 points F i n a n c i a l s t r u c t u r e 3.5X Net debt / EBITDA (average) G r o w t h 2 0 1 4 - 2 0 1 9 5-6% 7% EPS (CAGR) DPS (CAGR) CONSOLIDATED ACTIVITIES 3,575 M€ NEW ACTIVITIES 1,000 M€ 60% Made to date ∫ EBITDA margin 2017 ∫ Control of operating costs Pending 77% Made to date and earmarked 78.3% 3.5X 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 ∫ EPS growth ∫ DPS growth 6.1% 7% CAGR 2014-17(1) CAGR 2014-17 (1) Calculated using 2013 as the base year. Legend > EPS: Earning Per Share / DPS: Dividend Per Share / CAGR: Compound Annual Growth Rate. 02 StrategySustainability Report 2017 / Summarywww.ree.es 03 C O M M I T M E N T T O S U S T A I N A B I L I T Y Our commitment to sustainability 2030 21 In 2017, the Board of Directors approved the Sustainability Commitment 2030 of the Red Eléctrica Group. This commitment offers a long-term focus, capable of both responding to new challenges and seizing opportunities that may arise in terms of sustainability, and that is far-reaching in scope and applicable to all activities of the Group. S U S T A I N A B I L I T Y P R I O R I T I E S Responsible value chain _ The Red Eléctrica Group has undertaken a commitment to sustainability which is strategic, cross-cutting and with a long-term vision. Decarbonisation of the economy _ Anticipating change and taking action _ Contribution to the development of society _ Sustainability Report 2017 / Summarywww.ree.esCornerstones of sustainability Sustainability priorities 22 23 The Red Eléctrica Group understands that ensuring its continuity and success depends on its commitment to sustainability through the creation of shared value for all its stakeholders in the responsible development of its activities. This commitment is based on ten principles defined in the Corporate Responsibility Policy of the Company and is set out as four sustainability priorities identified as the key drivers to respond to the challenges and opportunities that the Company faces. Sustainability B A S E D O N Financial sustainability Talent, diversity and equality Excellence and corporate responsibility Partnerships with our stakeholders Innovation Creation of shared value Corporate governance and ethics Care for the natural environment Transparency Respect for Human Rights Anticipating change and taking action Responsible value chain Promote a corporate culture of innovation and flexibility that allows us to identify growth opportunities and respond to the challenges of the future, anticipating and adapting both to global trends and to the regulatory environment arising from the new energy model. Extend our commitment to responsibility to all links in the value chain, ranging from our own people to suppliers and customers, accomplishing this through the creation of partnerships and by basing it on our governance and integrity model. The four sustainability priorities are deployed through specific multiannual plans for the companies of the Group and programmes of annual projects. In 2017, the overall degree of fulfilment of the sustainability programme was 91 %. Decarbonisation of the economy Contribution to the development of society Be a proactive agent in the energy transition towards a zero-emission model, advocating for the electrification of the economy and the efficient integration of renewable energy, through a robust and better interconnected grid, as well as the development and operation of energy storage systems. Contribute to the economic, environmental and social progress of society, through the provision of a key service in a safe and efficient manner. This is achieved by promoting environmental conservation, the quality of life and social well-being of people and involving the community in the execution of our activities, with the goal of generating mutual benefit. E X C E L L E N C E I N M A N A G E M E N T In 2017, the Company renewed the European Seal of Excellence 500+ with a score of over 700 points. 03 Commitment to sustainabilitySustainability Report 2017 / Summarywww.ree.es24 25 STAKEHOLDER MANAGEMENT Red Eléctrica has a stakeholder management model that ensures the adequate management of the relevant economic, social and environmental impacts of its activities on stakeholders. This stakeholder management model incorporates the requirement for rules and standards of reference (AA1000, IQNet SR10, ISO26000 and Global Reporting Initiative). In 2017, Red Eléctrica reached the highest score (100 points) in the Dow Jones Sustainability Index criteria, which assesses a company’s commitment and performance with regard to its stakeholders. Overall S A T I S F A C T I O N of all the stakeholders analysed in 2017 was 8.49 OUT OF 10 LEADERSHIP IN SUSTAINABILITY The Red Eléctrica Group has been recognised as the best company in the world in sustainability in the Electric Utilities sector by the Dow Jones Sustainability Index (DJSI), with an overall score of 93 points out of 100, reaching the highest rating in 12 of the 23 criteria assessed. Similarly, the Company leads the Utilities super-sector, encompassing the electricity, gas and water sectors. As a result of this excellent assessment, Red Eléctrica has received the ‘Gold Class’ award in ‘The Sustainability Yearbook 2018’ given by RobecoSAM. M A I N R E C O G N I T I O N S R E C E I V E D B Y R E D E L É C T R I C A R E G A R D I N G S U S T A I N A B I L I T Y to all the SDGs, although it contributes to Goal 7 (Affordable and clean energy), 9 (Industry, innovation and infrastructure) and 13 (Climate action) mainly due to the nature of its business activities. CONTRIBUTION TO THE SUSTAINABLE DEVELOPMENT GOALS (SDGS) The design of the Group’s Sustainability Commitment 2030 has taken into account the objectives set in the Sustainable Development Goals, so that the sustainability priorities contribute significantly to the achievement of the SDGs. In this regard, Red Eléctrica endeavours to contribute GOALS MOST CLOSELY LINKED TO THE COMPANY’S ACTIVITIES 03 Commitment to sustainabilitySustainability Report 2017 / Summarywww.ree.es04 A N T I C I P A T I N G C H A N G E A N D T A K I N G A C T I O N 27 Anticipating change and taking action The current global context is determined by a constant change in which companies must identify the trends that will affect them in the future, focusing their management in a proactive way that is capable of converting potential risks into opportunities. In this regard, the Red Eléctrica Group takes on the following commitment as one of its sustainability priorities. Promote a corporate culture of innovation and flexibility that allows us to identify growth opportunities and respond to the challenges of the future, anticipating and adapting both to global trends and to the regulatory environment arising from the new energy model. Sustainability opportunities _ Anticipating change and taking action _ Innovation _ Risk management _ Sustainability Report 2017 / Summarywww.ree.es Sustainability opportunities Risk management 28 29 Within the Sustainability Commitment 2030, the Red Eléctrica Group has identified a series of global challenges and opportunities that define the roadmap the Company will follow in the coming years. The fight against climate change is one of the main existing challenges that offers the opportunity to advance towards a more sustainable energy model, in addition to promoting the electrification of the economy and fostering electric mobility. In this regard, the need to increase the share of renewable energy in the electricity system through the connection of new facilities and the optimisation of their management, together with the enhancements necessary to improve system efficiency and changes in mobility policies, with the promotion of rail transport and the development of electric vehicles, represent a clear need for new investment in the transmission grid, in terms of new infrastructures and interconnections and, therefore, represent a clear business opportunity for the Company. C H A L L E N G E S A N D O P P O R T U N I T I E S Actively collaborate in the definition of the future energy model, identifying opportunities to generate value in the services offered. Encourage the participation of society in all development stages of a project by integrating social and environmental criteria. Consolidate innovation as a key lever for growth, thanks to the application of new knowledge and ways of expanding on existing knowledge. Showcase the contribution of the Red Eléctrica Group in the achievement of objectives defined in global commitments, such as the Paris Agreements (COP21) and the Sustainable Development Goals. Anticipate the future needs of professional profiles, guaranteeing a professional environment capable of attracting and retaining the talent needed to tackle the future scenario. The Comprehen- sive Risk Management System facilitates the fulfilment of the strategies and objectives of the Group. The Red Eléctrica Group has a comprehensive risk management system in place that facilitates the fulfilment of the Group’s strategies and objectives, ensuring that risks that could affect them are identified, analysed, assessed, managed and controlled systematically, with uniform criteria Structu re of m anag ed and controlled r isk in 2017 % Electricity system operational risks Other operational risks Comprehensive Corporate Security Financial and counterparty 34 19 9 9 8 9 6 3 2 TSO regulation Business abroad Other regulation Environmental and that related to people Telecommunications business 04 Anticipating change and taking actionSustainability Report 2017 / Summarywww.ree.es30 31 and within the level of acceptable risk approved by the Board of Directors. This system, which conforms to the ISO 31000 standard on the principles and guidelines in risk management, is complemented by a Policy and a General Procedure for comprehensive risk management and control based on the Integrated Framework for the Management of Corporate Risk COSO II (Committee of Sponsoring Organizations of the Treadway Commission). MONITORING AND CONTINGENCY PLANS In the process of identification, analysis, assessment and control O U R R I S K M A N A G E M E N T System contemplates the monitoring of more than 500 ACTION PLANS Aimed at reducing the risk level and which includes more than 300 KPIs to monitor their evolution Classificatio n of manage d and con trolled risks in 2017 % 3 30 67 High-level risks Medium-level risks Low-level risks of risks, the necessary actions are established to reduce the level of risk and bring it to the acceptable risk value. In 2017, work was undertaken on the development of the regulatory compliance and comprehensive security risks map. In addition, the Company has contingency plans that govern various crisis situations that could potentially arise in the event of an electrical incident (in order to guarantee the security of supply), or may affect the environment, people, the operation of the Company, the availability of its systems, the business results or any other event with an impact on the reputation of the Company. R E D E L É C T R I C A has an action guide for the management of cyber-incidents, which was updated in 2017. Innovation The Red Eléctrica Group remains committed to promoting innovation as a lever for growth and efficiency by incorporating technologies, solutions and new ways of working that promote and facilitate a cultural change in the Group in order to tackle future challenges and for its long-term sustainability. For this, the Company has an innovation strategy for 2016-2019 aimed at spreading innovation to all areas of business activity, focusing mainly on four vectors: people, technology, digitalisation and sustainability. INNOVATION VECTORS STRATEGIC PLAN 2014-2019 INNOVATION STRATEGY 2016-2019 Cross-cutting strategy and lever for the fulfilment of the Company’s strategic plan. Spreading innovation to areas of activity where the Company considers that innovation will be more relevant in the upcoming years: people, technology, digitalisation and sustainability: innovation vectors. People The voice of the employee Occupational health and safety Talent management. Digital transformation Technology Disruptive research Discontinuous innovation Automatisation and robotics The state of the equipment and facilities Taking advantage of new resources Digitalisation Digital transformation and mobility solutions Cybersecurity Optimisation of systems Sustainability Landscape integration of facilities Saving resources and preventing contamination Biodiversity Climate change Sustainable or circular economy Social acceptance of facilities 04 Anticipating change and taking actionSustainability Report 2017 / Summarywww.ree.es32 33 Based on the objectives and guidelines set out in the innovation strategy, multi-year plans are established per vector in which the key actions and specific activities to be undertaken in each of them are defined. In the last three years, the average investment in innovation projects stands at 9.17 million euros per year, and the average number of projects underway is 80. Evoluti on of innovatio n 76 9.6 76 8.6 85 9.3 10 5 100 80 60 40 20 2 0 1 5 2 0 1 6 2 0 1 7 Innovation expenditure (M€) Nº of projects Regarding technological innovation projects, during 2017, work has been carried out on 85 projects. A few of the most significant ones are detailed below. Most significant projects currently underway BEST PATHS European project to overcome the technical barriers that the current pan-European electricity grid may encounter when attempting to safely integrate massive amounts of energy from renewable sources. MIGRATE Project aimed at improving the understanding of the behaviour of the electricity system with a high penetration of devices based on power electronics. VEGETA Development of a new methodology to optimise the plan for managing the vegetation growing along the routes of the high-voltage electricity lines. TRAFO SOSTENIBLE Approval of the use of natural ester fluids as a refrigerant in standard power transformers. Innovation P R O J E C T S 85 PROJECTS underway during 2017 T H E D I G I TA L T R A N S F O R M AT I O N S T R AT E G Y Structured on three axes: • Cultural change • Data technology and governance • Efficiency and new business DIGITAL TRANSFORMATION In 2017, the Company established a digital transformation strategy for the Group that serves as a fundamental element for the deployment of the key actions of the strategic plan and that will facilitate the transformation process of the Company in the coming years. In keeping with this, the digital transformation of the Company seeks to improve operational efficiency, develop new business models and adapt the Group’s human capital so that staff are effective working in a digital company. GRID2030 Innovation programme Multi-year collaborative innovation programme, a pioneering initiative in Spain, which explores innovation of a technical or socio-economic nature related to the operation and transmission of electricity. Together with other actors of the sector (researchers, start-ups and companies), we analyse and debate the future of electricity systems, identify the challenges associated with this and accelerate the development of disruptive technological solutions. 04 Anticipating change and taking actionSustainability Report 2017 / Summarywww.ree.es05 D E C A R B O N I - S A T I O N O F T H E E C O N O M Y 35 Decarbonisation of the economy Climate change is a global challenge that occupies a high priority on the international agenda. The objective is to make economic growth compatible with the reduction of greenhouse gases (GHG), in the medium and long term, in order to limit the global warming of the planet. In this regard, the Red Eléctrica Group takes on the following commitment as one of its sustainability priorities. Be a proactive agent in the energy transition towards a zero-emission model, advocating for the electrification of the economy and the efficient integration of renewable energy, through a robust and better interconnected grid, as well as the development and operation of energy storage systems. Energy transition and climate change _ Reduction of the carbon footprint _ Energy efficiency: demand-side management _ Decarbonisation of the economy _ Transmission grid development _ Integration of renewables _ Sustainability Report 2017 / Summarywww.ree.esEnergy transition and climate change Sustainable development of the transmission grid 36 37 The Company gears all its actions towards making the European Union’s commitment to energy goals and the fight against climate change a reality, and thus contribute to accelerating the energy transition. Therefore, aware of its key role in the electricity system, Red Eléctrica has adopted a voluntary commitment in T R A N S I T I O N T O A N E W E N E R G Y M O D E L K E Y E L E M E N T S Electrification of the economy Maximum integration of renewables Energy efficiency Security of supply this field, as reflected in its Climate Change Action Plan that sets out the emission reduction targets to be achieved in the 2020 and 2030 horizons and includes the main measures for this to be achieved. Climate Change Action Plan Contribution to a sustainable energy model Reduction of the carbon footprint Develop new electricity infrastructure to facilitate the electrification of the economy, connect new renewable power capacity and provide electrical power for the railway network. Achieve the maximum integration of renewable energy. Contribute to greater energy efficiency through demand-side management measures. Improvement of the calculation of the carbon footprint. Reduction of SF6 gas emissions. Decrease in emissions derived from the consumption of electricity. Improvement of efficiency in mobility, seek greater involvement of the supply chain and increase the offsetting of emissions. Positioning and disclosure Involve stakeholders in the commitment to fight climate change through: Actions aimed at raising awareness on how the electricity system works The promotion of demand-side management measures and the fostering of energy efficiency. Adaptation to change Identify and evaluate both the risks and the opportunities arising from climate change and develop actions based on this analysis aimed at mitigating its effects. The development of transmission grid infrastructure is carried out in accordance with that set out in the current infrastructure planning (2015- 2020), which is binding in nature for Red Eléctrica. This planning includes the projects of new electricity infrastructure necessary to guarantee the supply nationwide, taking into consideration economic efficiency and the sustainability of the electricity system. TRANSMISSION GRID CONSTRUCTION In 2017, investment in the transmission grid has basically been allocated to security of supply, the Grid C O N S T R U C T I O N New lines 147 km of new line 110 new substation bays resolution of technical restrictions, the development of interconnections between electricity systems and providing electrical power for the high-speed train. Throughout 2017, 147 km of new line and 110 new substation bays were commissioned, and the transformer capacity was increased by 1,210 MVA, with an overall total investment in the transmission grid of 411.8 million euros. Invest ment in the transmission gr id m€ 2 0 1 7 2 0 1 6 2 0 1 5 411.8 398.5 410.7 200 400 600 05 Decarbonisation of the economySustainability Report 2017 / Summarywww.ree.es 38 39 The development of new electricity interconnections with Europe will be one of the main challenges to be addressed in the coming years. Among the projects developed, noteworthy are those aimed at improving interconnections with Europe due to their enormous influence on improving the quality and security of the Spanish electricity system and the integration of renewable energy. In this regard, in 2017 work was carried out on: ∫ the commissioning of a phase shifter on the Arkale- Argia 220 kV line, and I N T E R C O N N E C T I O N W I T H F R A N C E V I A T H E B A Y O F B I S C A Y / K E Y D A T A ∫ at the beginning of the public information consultation process of the submarine interconnection project with France through the Bay of Biscay. This new electricity link will increase the exchange capacity between Spain and France up to 5,000 MW. SERVICE QUALITY The service quality indicators once again show the high level of security and quality of supply provided by Red Eléctrica’s facilities, as reflected in the availability rates of not only the peninsular grid but also that of the grids of the Balearic Islands and the Canary Islands. This is achieved, in part, through the efficient application of sustainable and responsible maintenance policies regarding the transmission grid facilities. Electricity transmission gr id infrastructu re km of line Overhead lines (km) Submarine cable (km) Underground cable (km) Substation bays (nº) Transformer capacity (MVA) Peninsular and non-peninsular cumulative data as at 31 December 2017. Provisional data pending audit. Total 43,793 42,011 835 947 5,601 86,654 (%) Quality I N D I C A T O R S HIGH DEGREE OF SECURITY AND QUALITY of supply provided by electricity facilities Thanks to the efficient application of maintenance policies INCREASE IN EXCHANGE CAPACITY UP TO 5,000 MW 4 CABLES 2 PER LINK IN DIRECT CURRENT 370 km IN LENGTH (280 km is SUBMARINE) 2 x 1,000 MW TRANSMISSION CAPACITY Ser vice qu ality. Transm ission grid availability rate Peninsular transmission grid Balearic Islands transmission grid Canary Islands transmission grid Provisional data pending audit. 2015 2016 2017 97.92 96.86 96.74 98.31 96.93 98.06 98.28 97.84 98.12 R E D E L É C T R I C A manages around 44,000 km of electricity line nationwide. 05 Decarbonisation of the economySustainability Report 2017 / Summarywww.ree.es Integration of renewable energy 40 41 As operator of the electricity system, the core mission of Red Eléctrica is to guarantee the security and quality of the electricity supply, maximising the integration of renewable energy. To this end, the control and supervision work carried out by the Control Centre of Renewable Energy (CECRE) is essential. During 2017, the production of energy from renewable sources represented 33.8% of the total energy production generated in the peninsular electricity system. In line with previous years, noteworthy is the important contribution of wind power generation with 19% of the total production. This ranks wind in second place, behind nuclear energy, among the technologies included in the complete set of generating facilities in the peninsular system. Renewable E N E R G Y 33.8 % share of the electricity generation mix on the peninsular electricity system The Soria-Chira pumped-storage hydroelectric power station (Gran Canaria) The construction of this power station between the reservoirs of Soria and Chira will be an essential tool to advance towards the sustainability of the new energy model in the Canary Islands, since, in addition to improving the security of supply, it will enable a greater development of renewable energy on the island of Gran Canaria. Almacena Project This electrochemical storage system (with a power of 1 MW and a capacity of 3 MWh) came into operation in 2014 in Carmona, Seville, and over the years has served the purpose of testing functionalities geared towards favouring the integration of renewable energy and the improvement of the operational services of the system. ENERGY STORAGE PROJECTS In order to improve the guarantee and security of the system and the integration of renewable energy, Red Eléctrica is carrying out several projects aimed at energy storage, conceived as a tool for the system operator that helps optimise the efficiency of the electricity system. Electricity genera tion with renewa ble energ y on the Spa nish p en insu la (1) % 2 0 1 7 2 0 1 6 2 0 1 5 33.8 40.8 36.9 10 20 30 40 50 (1) Renewables: hydro, wind, solar photovoltaic, solar thermal, other renewable and 50% of urban solid waste. Does not include pumped-storage generation. Wind power G E N E R A T I O N 19 % share in the peninsular electricity generation mix S O R I A - C H I R A P O W E R S TAT I O N This pumped-storage hydroelectric power station will have a turbine power capacity of 200 MW and a pumping capacity of 220 MW. 05 Decarbonisation of the economySustainability Report 2017 / Summarywww.ree.es Energy efficiency: demand-side management Reduction of the carbon footprint 42 43 Red Eléctrica continues to actively work on the promotion, development and dissemination of initiatives in the field of demand-side management and smart grids, with the aim of contributing to maintain the guarantee of supply and promote the integration of renewable energy, the reduction of polluting gas emissions and fostering the sustainable use of energy. The main initiatives in the field of demand-side management are described below: Smart grids Active citizen Initiatives in this field are aimed at anticipating solutions in the field of new energy storage technologies, dynamic capabilities of the grid, monitoring of grid elements and infrastructure, self-consumption, the electric vehicle and new consumer options all of which are already currently shaping the electricity grid of the future. In the transition towards a new, more dynamic energy model, the role of citizens as key protagonists in system operation is becoming increasingly prominent. Therefore, it is essential to promote initiatives to make information about the situation of the system available to citizens or to disseminate recommendations on best practices for efficient consumption. Interruptibility Service Electric vehicle Profiling Service Through this tool, the industrial consumers that provide this service reduce their consumption, at the request of the system operator, up to certain predetermined values, thus providing a fast and efficient response to the needs of the electricity system. In 2017, the CECOVEL project (Electric Vehicle Control Centre) was commissioned, an initiative to support electric mobility that allows the demand originating from the recharging of electric vehicles to be monitored. With the aim of having a greater knowledge of the hourly consumption of households, small businesses and services, since 2013 the PERFILA project has been underway, which enables the analysis of hourly data coming from a panel of 25,000 consumers who have a smart meter. This information has been used to draft the proposals regarding the initial consumption profiles of recent years. Red Eléctrica strives to improve the calculation of its emissions and reduce them as much as possible. In 2017, the review of existing reduction targets was carried out to align them with the commitment adopted in Paris (COP21) to limit global warming. CONTROL OF SF6 EMISSIONS The main direct emissions derived from the activities of Red Eléctrica are those of sulfur hexafluoride (SF6) and for this the Company has various courses of action underway aimed at improving knowledge about and control of the gas and the reduction of leaks. These include: improvement in the control procedures, supply of the most efficient equipment with the lowest leakage rate, training on gas handling procedures and the development of innovation projects to improve its management. Direct greenhouse ga s em issions 2 0 1 7 28,765 t CO₂ eq. -8.7% Emission reduction targets 2020 Reduction of 10% of total emissions from scope 1 and 2 per MWh transported compared to 2015. 2030 Reduction of 60% of the total emissions from scope 1 and 2 per MWh transported compared to 2015. EFFICIENCY IN ELECTRICITY CONSUMPTION In 2017, a reduction of 82.6% of the emissions associated with electricity consumption was achieved with respect to 2015, thanks to the implementation of efficiency measures and the contracting of renewable energy for its supply to the Company. SUSTAINABLE MOBILITY Red Eléctrica has been working for some years on the optimisation of work-related travel and the reduction of emissions associated with them. To this end, it has a Sustainable Mobility Plan in place whose main courses of action are: an improvement of the energy rating of the vehicles used, the optimisation of business trips and the rationalisation in the use of private vehicles for the daily commute. OFFSETTING EMISSIONS In order to advance more quickly in reducing the carbon footprint, it is important to focus on ways of offsetting it. In this regard, the Company offsets its emissions through the planting of trees as part of the ‘Red Eléctrica Forest’ project. 05 Decarbonisation of the economySustainability Report 2017 / Summarywww.ree.es 06 R E S P O N S I B L E V A L U E C H A I N 45 Responsible value chain Society now enjoys a level of empowerment which allows it to demand that companies act more responsibly in the way they do business. This responsibility encompasses all the activities carried out by a company, including the management of its supply chain and the relationship with its customers and stakeholders. In this regard, the Red Eléctrica Group takes on the following commitment as one of its sustainability priorities. Extend our commitment to responsibility to all links in the value chain, ranging from our own people to suppliers and customers, accomplishing this through the creation of partnerships and by basing it on our governance and integrity model. Responsible value chain _ Customer focused _ Supply chain _ Responsible environmental management _ Good governance _ Ethics and compliance _ Economic impact and financial soundness _ Employees _ Sustainability Report 2017 / Summarywww.ree.es46 47 Good governance From the outset, Red Eléctrica has maintained a constant and firm commitment to adopting best corporate governance practices. This is made possible not only by complying with the applicable legal regulations and the most widespread national and international recommendations on the subject, but also by voluntarily implementing a series of measures and initiatives targeted at the core of the most important issues regarding good governance of the Company, and which are of most concern to and demanded by shareholders, investors and the markets. Noteworthy actions in 2017 BOARD ACTIVITY • Implementation of the Regulations of the Board of Directors approved in December 2016. • Complete digitalisation of the sessions of the Board of Directors and its Committees. • Ongoing reinforcement of gender diversity on the Board of Directors with the appointment of a female nominee director. • Appointment, ratification and re-election of three directors at the General Shareholders’ Meeting, with an average of 97.88% of the votes in favour. • Development and implementation of the new Compliance System. • Assessment of the Board of Directors with the collaboration of a new external consultant. Shareholder structure % 4 10 Spanish Institutions Minority Shareholders 20 SEPI 66 Foreign Institutions ADAPTATION AND REVISION OF PROCEDURES • Review and approval of the contingency plans for the succession of the Chairman of the Board and the CEO. • Adaptation of the Internal Code of Conduct on the Securities Market to the European Regulation on Market Abuse. • Approval of the new Induction Plan for new board members. COMMUNICATION • New design and revision of contents of the Annual Corporate Governance Report 2017. • Transparency in matters of tax policy. • Annual disclosure of improvements regarding corporate governance. RECOGNITIONS • Corporate governance recognition, for the second year in a row, by the prestigious English publication ‘Ethical Boardroom Magazine’. • Recognition as a global and European leader in the utilities and super-utilities sector in the Dow Jones Sustainability World Index and the Dow Jones Sustainability Europe Index. G O V E R N A N C E S T R U C T U R E O F R E D E L É C T R I C A G E N E R A L S H A R E H O L D E R S ’ M E E T I N G B O A R D O F D I R E C T O R S A S A T 3 1 D E C 2 0 1 7 33.3% WOMEN 1 1 CHAIRMAN CHIEF EXECUTIVE OFFICER 7 INDEPENDENT DIRECTORS 58.3% A P P O I N T M E N T S A N D R E M U N E R A T I O N C O M M I T T E E C HAIR MAN Independent director 3 NOMINEE DIRECTORS A U D I T C O M M I T T E E C HAIR MAN Independent director 60% Independent directors 80% Independent directors 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.es B O A R D O F D I R E C T O R S A S A T 3 1 D E C 2 0 1 7 Ethics and compliance 48 49 CHAIRMAN José Folgado Blanco NOMINEE DIRE CTORS (SEPI) CHIE F E XECUT IVE OF FI CER Juan Francisco Lasala Bernad IN DE PE ND EN T DI REC TOR S Fernando Fernández Méndez de Andés Member of the Audit Committee Carmen Gómez de Barreda Tous de Monsalve Member of the Appointments and Remuneration Committee and Lead Independent Director María José García Beato Member of the Audit Committee Antonio Gómez Ciria Chairman of the Audit Committee Santiago Lanzuela Marina Member of the Appointments and Remuneration Committee GENERAL COUNSEL AN D SECRETARY OF THE BOARD Socorro Fernández Larrea Member of the Audit Committee José Luis Feito Higueruela Chairman of the Appointments and Remuneration Committee Mercedes Real Rodrigálvarez Member of the Appointments and Remuneration Committee Rafael García de Diego Barber Non-Board Director Arsenio Fernández de Mesa y Díaz del Río Member of the Audit Committee Alberto Carbajo Josa Member of the Appointments and Remuneration Committee Ethics and compliance for the Red Eléctrica Group are fundamental pillars for the proper functioning of the business activity. To this end, it has a series of corporate conduct rules that establish the values and business conduct guidelines that must be undertaken by every single person in the Red Eléctrica Group in the performance of their professional activities. In addition, the Company develops a Compliance System aligned with the best practices in this area, aimed at ensuring that the organisation adequately respects the established obligations and the commitments undertaken. Noteworthy actions in 2017 • Definition of a specific methodology for the assessment of compliance risks. • Drafting of the preliminary map of compliance risks. • Development of the awareness and disclosure plan regarding the compliance system. • Launching of the Compliance Forum. (100 points) in the Code of Conduct / Compliance / Anti-corruption and Bribery section of the Dow Jones Sustainability Index. Similarly, it has a human rights management model aligned with the Guiding Principles on Business and Human Rights of the United Nations. For the third consecutive year, the Company has obtained the highest score I N T E G R I T Y M O D E L Compliance system Criminal risk prevention programme Code of Ethics Supplier code of conduct Guide for the prevention of corruption 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.esEconomic impact and financial soundness Employees 50 51 During 2017, Red Eléctrica showed stable growth, in line with that established in its strategic plan. The Company has obtained solid results and an important strengthening of its main solvency ratios, maintaining a clear orientation towards operational efficiency and the permanent generation of value. SHAREHOLDER RETURN In 2017, direct return to the shareholder in the form of dividends grew by 7% compared to the previous year. The gross dividend to be distributed is 0.9188 euros per share. Key finan cial indicators Revenue Gross operating profit (EBITDA) Net operating profit (EBIT) Profit before tax Net profit Non-current assets Equity Operating cash flow after taxes Total investment (1) Net Financial Debt Financial debt structure % FIXED VS. VARIAB LE RATE On 5 January 2018, a gross interim dividend pay-out of 0.2549 euros per share was made, with 0.6639 euros per share pending distribution 89 11 Credit rating Fixed rate Variable rate SHO RT-TERM VS. LO NG-TERM 86 14 Long-term debt Short-term debt Red Eléctrica has been given a long-term credit rating of ‘A-’ by Standard & Poor’s with a stable outlook and a short- term rating of ‘A-2’. Meanwhile, Fitch has given Red Eléctrica a long-term rating of ‘A’ with a stable outlook, and ‘F1’ in the short term. Both rating agencies indicated the predictability and recurring nature of earnings as well as the soundness of the income statement as some of Company’s strengths. Red Eléctrica is committed to stability in employment, equal opportunities, talent management and occupational health and safety. At the end of 2017, the Red Eléctrica Group had a total workforce of 1,815 people, 2.3 % more than in 2016. 96 % of the total (1,741 people) work in Spain and 4 % in Peru and Chile. However, it should be noted that the majority of the employees work for Red Eléctrica de España. (m€) % 0.5% 2.3% 2.8% 4.6% 5.2% -0.5% 5.9% 3.6% 2016 2017 1,932.3 1,486.0 1,003.3 850.8 636.9 9,256.8 2,920.5 1,146.9 643.1 1,941.2 1,519.5 1,031.4 890.2 669.8 9,214.2 3,093.4 1,187.9 510.2 -20.7% 4,949.5 4,791.8 -3.2% Key em ploym ent indicators (1) Total workforce Women (%) Men (%) Women in managerial positions (%) People with some type of disability (%) Creation of net employment (Nº of posts) Average age Average length of service (years) Undesired external turnover (%) (2) Total turnover (%) (2) Permanent contracts (%) 2015 2016 2017 1,697 1,682 1,741 23.1 76.9 20.2 0.8 15 44 15 1.6 2.1 23.7 76.3 21.8 0.8 -15 45 16 2.0 2.8 24.4 75.6 24.8 0.8 35 45 16 2.6 3.7 99.9 99.8 98.3 (1) Investment in 2016 included 199.8 million euros corresponding to the acquisition of 50 % of the Chilean company TEN. (1) As of 2017 data includes: Red Eléctrica de España + Red Eléctrica Corporación + REINCAN + Red Eléctrica Internacional + REINTEL. (2) Data includes: Red Eléctrica de España + Red Eléctrica Corporación. 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.es 52 53 Red Eléctrica has obtained the highest score (100 points) in the Dow Jones Sustainability Index evaluation in the criteria Development of Human Capital and Labour Practice. G R U P O R E D E L É C T R I C A Workforce The Company offers its employees quality and stable employment, and outstanding professional career development. In 2017, 100 % of the appointments to managerial positions were covered through internal promotion. 1,815 PEOPLE P R I N C I P L E S O F T H E H U M A N R E S O U R C E S D I R E C T O R P L A N Equal opportunities Work-life balance Efficiency Respect for diversity Fair and personalised treatment for all professionals Red Eléctrica offers the same Professional development opportunities to men and women. Proof of this is that 83.3 % of the new appointments to managerial positions were women. DIVERSITY AND EQUALITY For Red Eléctrica, it is essential to promote a quality work environment based on ethical conduct, respect, diversity and equality. In order to ensure that the commitment to these principles is fulfilled, the Company develops various initiatives aimed at guaranteeing a discrimination-free environment that promotes Percentag e of wom en I N T H E W O R K F O R C E diversity when faced with barriers of gender, age and disability. 24.4 % I N M A N A G E R I A L P O S I T I O N S 24.8 % Training hou rs per em ployee 2 0 1 7 2 0 1 6 2 0 1 5 108 82 100 Investment in training per employee € 2 0 1 7 2 0 1 6 2 0 1 5 4.398 3.431 3.984 Data of the Group in Spain. TALENT MANAGEMENT To promote the training and professional development of its employees, the Company has opted for a global model of talent management, which in 2017 focused on the design and optimisation of the training model, aligning the content with the three business levers of the new Red Eléctrica Campus: strategy and leadership, transformation and innovation, and culture. Red Eléctrica Campus In 2017, the Red Eléctrica Campus project was completed, becoming the Company’s corporate university. Its mission is to serve as a platform for the deployment of the strategy, values and culture of the Red Eléctrica Group that facilitates the achievement of business objectives. This project will serve as a model to manage the transformation of the Company in the coming years. 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.es HEALTHY WORKPLACE Red Eléctrica promotes the best practices in occupational health and safety and well-being through the commitment and leadership of the management team. To this end, it has the ‘healthy workplace’ model in place, a key element for the promotion of occupational health and safety, which H E A L T H Y W O R P L A C E M O D E L / P R I N C I P L E S Health resources Provide the workforce with tools to improve their state of physical and mental health, contributing to their well-being and quality of life. Community involvement Actions carried out by the Company that can impact on the improvement of the health and well-being of the families of their employees and the local communities in which the Company’s facilities are located. Physical work environment Provide the necessary means to perform the tasks associated with the role under the optimal health and safety conditions. Psychosocial work environment Implement tools and resources regarding the management and organisation of work that promote the physical and psychosocial well-being of employees. 54 55 86 % of the workers took part in the working climate survey conducted in 2017, which encompassed the entire Group, and resulted in a satisfaction level of 8.9 out of 10. Significant reduction I N A C C I D E N T I N D I C A T O R S (employees) revolves around four main lines of action. One aspect to which the Company attaches special significance is health and safety at work. In 2017, there was an improvement in the main accident indicators for both Company employees and employees of contracted companies. Compared to 2016, the frequency rate and severity rate experienced a reduction of 29.6 % and 44.4 % respectively within the Group’s companies in Spain. Health promotion In 2017, Red Eléctrica received recognition from the Spanish National Institute of Safety, Health and Well-being at Work for its ‘Best Practices for the Promotion of Health in the Workplace’ model and has won the Ágora Bienestar Award 2017. Similarly, in the contracted companies the frequency rate was reduced by 29 % and the severity rate by 13 %. Accident freq uency rate ( E M P L O Y E E S ) 4.52 2.49 2.82 1.71 2.43 2013 2014 2015 2016 2017 Accident sever ity rate ( E M P L O Y E E S ) 0.14 0.12 0.12 0.09 0.05 2013 2014 2015 2016 2017 Data of the Group in Spain. - 29.6 % in the frequency rate - 44.4 % in the severity rate Compared to 2016 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.es56 57 100 % of projects undergo an Environmental Impact Assessment. B I O D I V E R S I T Y Red Eléctrica’s facilities occupy just 0.08 % of the Red Natura Española (Natura 2000 Network). Of the total infrastructure existing in 2017, only 15 % of the lines and 5.9 % of the substations are located in protected areas (Red Natura). Responsible environmental management Red Eléctrica carries out all its environmental protection activities in accordance with the principles established in its environmental policy and has an environmental management system certified according to the ISO 14001 standard and registered in the Community Eco-Management and Audit System (EMAS). In 2017, the Company approved a new multi-year Biodiversity Action Plan that lays down the challenges and main objectives for the period 2017-2021. I N T E G R A T I O N O F F A C I L I T I E S I N T O T H E E N V I R O N M E N T Protection of archaeological and ethnological heritage • Archaeological survey prior to the works. • Presence of an archaeologist when the results of the survey so determine. • Digital mapping of catalogued heritage (ARQUEORED Project). Minimising the impact on the socio-economic environment • Use of a boom crane or helicopter for assembling electricity towers. • Restoration of areas affected by the works (slopes, roads, accesses, enclosures) and the recovery of crops. • Improvement in the noise reduction levels generated by the facilities (ACURED Project). Reduction of the visual impact of facilities • Design of electricity towers that blend better into the landscape. • Landscape integration of substation buildings. • Restoration of affected areas and the creation of vegetation screens. Protection of habitats and species Preventive and corrective measures to avoid the alteration of the habitat of certain species of fauna and flora, and the impact on vegetation (HABITAT Project). Prevention of forest fires Signing of agreements for the prevention of forest fires, collaborating with public administrations (12 agreements). Biodiversity conservation • Participation in projects for the conservation of wildlife (11 birdlife projects) and flora (‘Red Eléctrica Forest’ and ‘Posidonia oceanica Marine Forest’ in Majorca). • Development of innovation projects (VEGETA Project). Protection of birdlife Multi-year marking plan with bird-saving devices for electricity infrastructure in critical priority areas. 332 km of line marked (45 % of the total scheduled to be marked). 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.es 58 59 Supply chain The Supplier Code of Conduct guarantees the sustainable management of the supply chain. Red Eléctrica has a sustainable supply chain management model that is governed, among other things, by the Procurement Policy guidelines and falls within the framework of the relationship established in the Supplier Code of Conduct. In this regard, the Company incorporates criteria regarding occupational health and safety, environmental, ethics and the working conditions of its suppliers as part of its entire purchasing process. For key and recurring supplies, these requirements are verified initially in the supplier qualification process and, subsequently, as part of the relationship maintained between the parties going forward. In 2017, the Company managed its purchases of goods and services through 1,054 suppliers, for a total of 624.7 million euros. 74% of this amount corresponds to services and civil works, while the remaining 26% was for materials and equipment. 94% of the aforementioned amount was awarded to suppliers with head offices in Spain and 99% of purchases were made within the European Union SOCIAL AUDITS In order to verify compliance with the Supplier Code of Conduct, during 2017 the Company conducted social audits of 75 suppliers. These audits are focused on those supplies that may have a high impact (potential or actual) on working conditions and ethical conduct. Similarly, these audits are conducted on suppliers who have been identified as having committed an infringement of an ethical nature. Pillars of the sustainable management of the supply chain • Continuous search for the lowest expected cost for the Company. • Segregation of functions in the supply process and transparency in its management. • Ethical management of suppliers and subcontractors and their ongoing professional development. • Minimisation of risks associated with the supply chain. Code O F C O N D U C T 75 AUDITS conducted on suppliers during 2017 Regarding compliance with the Supplier Code of Conduct S O C I A L A U D I T S As a result of social audits, improvements or action plans have been agreed with 63 % of the suppliers. Customer orientation Red Eléctrica has a System Operator Code of Conduct, which guarantees maximum transparency, confidentiality, ethics and objectivity in its duties and responsibilities as electricity system operator. In addition, the Company is obliged to publish information regarding the price of energy in the markets, as well as information on processes associated with the system Information platforms ‘e-sios’ website Platform to ensure compliance with the legal requirements for communication and disclosure of information on system operation. IESOE website Regional information platform for operators of the French, Portuguese, Moroccan and Spanish electricity systems. operation, guaranteeing at all times the confidentiality of the data provided by the market agents. For this reason, confidentiality is based on the applicable legal requirements as well as on other guidelines and is reflected in its internal procedures. The communication and publication of information takes place through various channels, as shown below. ENTSO-E transparency website Platform designed to send data from the electricity markets, according to the provisions of the Transparency Regulation. SmartVIu App Application for mobile devices that shows the status of the peninsular electricity system in real time. Other information channels Voluntary Price for the Small Consumer (PVPC) Information related to the PVPC, in compliance with the provisions of Royal Decree 216/2014. CTSOSEI Bi-monthly committee in which information is provided on the operation of the electricity systems of Spain and Portugal. Reporting to ACER (Agency for the Cooperation of Energy Regulators) Information on explicit capacity auctions and electricity nomination procedures regarding capacities communicated by the participants in said auctions. Customer S A T I S F A C T I O N S T U D I E S The latest study obtained an overall average rating of 8.3 OUT OF 10 Conducted in 2016 06 Responsible value chainSustainability Report 2017 / Summarywww.ree.es 07 C O N T R I B U T I O N T O T H E D E V E L O P M E N T O F S O C I E T Y 61 Contribution to the development of society Companies are increasingly aware that their long-term sustainability depends on providing a service that contributes value to society. Therefore, it is necessary to generate a positive impact on the social environment, whereby the social footprint is one of the key drivers of its corporate management. In this regard, the Red Eléctrica Group takes on the following commitment as one of its sustainability priorities. Contribute to the economic, environmental and social progress of society, through the provision of a key service in a safe and efficient manner. This is achieved by promoting environmental conservation, the quality of life and social well-being of people and involving the community in the execution of our activities, with the goal of generating mutual benefit. Contribution to the development of society _ Tax transparency _ Commitment to society _ Socio-economic contribution of the projects _ Sustainability Report 2017 / Summarywww.ree.es Commitment to society 62 63 The Company complements its projects in the territory through collaboration programmes that reflect its social commitment and contribute to the progress of the communities in which its facilities are located. The Red Eléctrica Group focuses its socio- environmental commitment towards the creation of shared value with society, promoting actions and investments aligned with its business objectives. At the same time, this commitment generates value for the Company while having a positive impact on society and on the territory and its inhabitants. SOCIAL COMMITMENT The social programme of Red Eléctrica mainly includes actions aimed at the socio- economic development of the territory; the conservation, protection and enhancement of the natural heritage of the municipalities; the dissemination of knowledge regarding how the electricity system works; and transparency in reporting. Socio-economic development of the territory In 2017, Red Eléctrica collaborated on more than 260 initiatives, among which we can highlight construction projects or improvement of municipal infrastructure, collaboration on projects of social relevance with an impact on tourism, promotion of the cultural wealth of the territories and projects for the restoration of emblematic buildings. Protection of natural heritage One of the challenges undertaken by the Company in keeping with its biodiversity commitment is to promote the conservation of natural heritage through active participation or the promotion of projects in collaboration with the public administration, NGOs and other stakeholders. Social innovation Red Eléctrica has taken another step forward in its commitment to generate shared value, creating a model of social innovation to identify the challenges, needs and opportunities of each territory, in order to work hand-in-hand by providing innovative and effective solutions for the development of the social environment concerned. In 2017 the Company participated in several biodiversity conservation projects in eleven autonomous communities, most of which are linked to the conservation of birdlife and the restoration of habitats. Among the latter noteworthy are the following: ∫ ‘Red Eléctrica Forest’: the planting of trees in order to recover degraded natural spaces, support the development of local economies and offset a part of the Company’s emissions. ∫ ‘Red Eléctrica Marine Forest’: restoration of Posidonia oceanica seagrass meadows in the Bay of Pollensa (Balearic Islands). Dissemination of knowledge The Company plays an active role in disseminating information and raising awareness regarding the operation of the electricity system and acknowledges that a more informed society has a greater capacity to develop and maintain a P O S I D O N I A O C E A N I C A S E A G R A S S M E A D O W S The Posidonia oceanica seagrass meadows recovery project received the ‘Good Practice of the Year Award 2017’ from the Renewable Grid Initiative (RGI). ‘A highway behind the wall socket’ exhibition The objective of this exhibition is to explain the electricity supply process, from generation to consumption, showcasing the activities of the Company as TSO of the Spanish electricity system, in addition to making citizens aware of the need to consume electricity in an efficient and responsible manner. In April 2017, this travelling exhibition moved to the City of Arts and Sciences in Valencia, where it received more than 550,000 visitors. This exhibition, which began its journey in 2010, has travelled to nine Spanish cities accumulating a total of more than 900,000 visits. R E D E L É C T R I C A F O R E S T I N F I G U R E S 2 0 0 9 - 2 0 1 7 778 ha Surface area recovered 1,843,941 € Invested 647,053 ud Trees and shrubs planted 184,771 t de CO2 eq. Emissions offset 07 Contribution to the development of societySustainability Report 2017 / Summarywww.ree.es 64 65 In 2017, noteworthy was the launch of the new website of the telecommunications subsidiary REINTEL sustainable energy model that effectively meets the energy needs of citizens. Information transparency Throughout 2017, information transparency along with an educational approach has continued to be the basis of the Red Eléctrica’s relationship with the media. Efforts have focused on reporting on the development of the core activity - the transmission of electricity and system operation - as well as the Company’s international business and all its activity regarding sustainability (25 % of the 71 press releases issued in 2017 and 66 % of the information published in the ‘Entrelíneas’ blog were related to sustainability issues). A key tool in the field of transparency is the corporate website that contributes to improving general knowledge regarding the Company’s activities, in addition to acting as a direct channel of communication with stakeholders. REE in the classroom This project is aimed at helping children become efficient consumers of the future who are respectful towards the environment and through their actions contribute to the sustainability of the electricity system. In this regard, in 2015, the Company created the digital educational game ‘entreREDes’ through which students of secondary education learn about the functioning of the electricity system and review the contents of the school curriculum in a fun and entertaining way. Until 2017, in collaboration with educational institutions, 18 training activities were organised, in which more than 8,370 school students from 10 autonomous communities took part. In 2017, visits to the website remained above two million hits and more than one million downloads of various publications were registered. The corporate website is ranked 12th among the best websites of the IBEX 35 companies, according to the international Webranking survey 2017-2018 conducted by the consultancy firm Comprend. More than 2 million accesses to the corporate website 14 Meetings and press conferences held with the media 57 Interviews and statements TIES WITH THE COMMUNITY Red Eléctrica promotes and maintains a permanent relationship with the local communities in which its facilities are located, not only during the process of construction of new infrastructure but also throughout the entire lifecycle of the facilities. In 2017, noteworthy was the signing of 96 collaboration agreements with public and social entities for the execution of projects mainly regarding socio-economic, environmental, educational and cultural development aspects. In the case of local councils, the Company fosters close- knit ties with communities to inform on the need for facilities, as well as to promote dialogue that facilitates the carrying out of projects in a sustainable manner and with complete social acceptance. INVESTMENT IN THE COMMUNITY In 2017, the Company contributed 6.5 million euros to the development or promotion of social initiatives; an amount obtained by applying the methodology of the LBG (London Benchmarking Group). Amicable agreements were reached with 94% of land owners affected by projects whose permitting process was completed in 2017. Investment in T H E C O M M U N I T Y 6.5 m€ earmarked for the development and promotion of social initiatives el 59% is aligned with business activities Social initia tives - scop e of a cti on % 6 4 8 34 27 21 Socio-economic development Education Environment Social well-being Art and culture Other 07 Contribution to the development of societySustainability Report 2017 / Summarywww.ree.esEconomic and social contribution of investment projects Tax transparency 66 67 The investment effort made by Red Eléctrica generates a beneficial impact for society in that the investment made has a boosting effect on the country’s economic activity, as the stimulation of production generates increased wealth (measured through GDP). As a consequence, employment is increased, and therefore public administrations have access to more income that can be dedicated to improvements in the general well-being of society. During 2017, Red Eléctrica adopted a methodology based on the implicit activity multipliers obtained in the Input-Output Tables that allows the level of general activity that is generated from an initial investment to be estimated. The calculations are made taking into consideration three major impacts: direct, indirect and induced. In 2017, Red Eléctrica made a total investment in the transmission grid of 412 million euros, of which it is estimated that 102 million euros were allocated to the import of the goods necessary to carry out the activity. The remaining, Total impact of the investment in the transmiss ion grid Direct Indirect Induced Totals Production (m€) Income - GDP (m€) 310 121 Employment (nº of jobs) 2,100 Tax revenue (m€) 48 300 126 2,276 48 30 10 307 4 640 257 4,683 100 310 million euros, corresponds to direct investment in Spain whose impacts, after applying the methodology adopted, are outlined below. DIRECT IMPACT Estimation and valuation of the following: the production chain, the creation of employment and the incomes generated in the national economic system as a result of an initial investment. INDIRECT IMPACT In order to execute the initial investment, the direct awardees need to acquire other goods and services (intermediate consumption) from the rest of the production systems, which, in turn, demand other goods and services from their own suppliers, which ends up generating new income and new employment. INDUCED IMPACT This impact reflects the effect derived from all the income generated in the previous stages. In this regard, it incorporates both the impact of final consumption derived from all the income generated, as well as the tax collected by all public administrations when applying the various taxes to the total of the activity and the income generated. The Tax Strategy of the Red Eléctrica Group, approved by the Board of Directors, is based on three core values: transparency, good governance and accountability. Continuing the good practice initiated in 2014, and with the aim of voluntarily offering tax A N N U A L TA X T R A N S PA R E N C Y R E P O R T Within the framework of the Code of Good Tax Practices, the Red Eléctrica Group has voluntarily submitted the Annual Tax Transparency Report 2016 to the Spanish Tax Authority. information to different stakeholders, with greater transparency, the Company publishes its Total Tax Contribution, in order to highlight the relevant economic and social function derived from the Group’s tax payments Total Tax Contribution 2017 Tax borne Tax collected Total tax contribution Spain 238 414 652 Peru Chile Others (UE) 2 5 7 2 1 3 - - - (m€) Total 242 420 662 K E Y D A T A I N 2 0 1 7 662 m€ Total Tax Contribution More than 3,200 m€ Tax borne in the period 2013-2017 43% of the generated value earmarked for the payment of taxes 99% of the Total Tax Contribution paid in Spain 34% Tax Contribution compared to the revenue figure of the Company 07 Contribution to the development of societySustainability Report 2017 / Summarywww.ree.es Published by: RED ELÉCTRICA Paseo del Conde de los Gaitanes, 177 28109 Alcobendas (Madrid) Tel. +34 91 650 85 00 www.ree.es Edition and co-ordination Communication and Corporate Image Department of Red Eléctrica Graphic design and layout dis_ñ estudio@dis-n.es Photograph iStock (Getty Images) Red Eléctrica’s photographic archives Other data about the publication March 2018 English translation by Wayman English International www.waymanenglish.com This English version is a translation of the original and authentic Spanish text found in the ‘Informe de Sostenibilidad 2017 Resumen’, originally issued in Spanish. In the event of discrepancy, the Spanish-language version shall prevail. Red Eléctrica works on selecting the most legible typographical font for their publications. The typographical fonts Geogrotesque and Klavika have been used for the texts and graphics in this report. Paseo del Conde de los Gaitanes, 177 28109 Alcobendas (Madrid) www.ree.es

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