CEPSA Annual Report 2009 Consolidated Financial Statements

Transcription

1

2 CEPSA Annual Report 2009 Consolidated Financial Statements

3 Legal Documents CEPSA Group Report from Independent Auditors Consolidated Financial Statements Balance Sheets Statements of Income Cash Flow Statements Statement of Recognised Income and Expense Statement of Recognised Income and Expense Notes to the Financial Statements Management Discussion & Analysis

4 Annual Report 2009 Consolidated Financial Statements Report from Independent Auditors Compañía Española de Petróleos, S.A. and subsidiaries (CEPSA GROUP) 4

5 5

6 Annual Report 2009 Consolidated Financial Statements Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs, as adopted by the European Union (see Notes 2 and 30). In the event of a discrepancy, the Spanish-language version prevails.77 Consolidated Balance Sheets at December 31, 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) ASSETS Non-current assets Intangible assets (Note 4) Intangible assets and rights 481, ,067 Impairment losses and amortisation charge (234,158) (251,789) Total intangible assets 246, ,278 Goodwill in consolidation (Note 5) 61,025 52,616 Property, plant and equipment (Note 6) Tangible assets and rights 10,339,850 9,500,491 Impairment losses and depreciation charge (5,227,585) (4,635,705) Total property, plant and equipment 5,112,265 4,864,786 Investments accounted for using the equity method (Note 7) 88,926 95,034 Non-current financial assets (Note 8) 109, ,805 Deferred tax assets (Note 14) 88, ,840 Total non-current assets 5,707,341 5,545,359 Current assets Inventories (Note 9) 1,448,512 1,336,595 Trade and other receivables (Note 10) 2,317,936 2,059,877 Current income tax assets - 34,768 Other current financial assets (Note 8) 266, ,985 Other current assets 8,595 9,328 Cash and cash equivalents (Note 11) 598, ,954 Total current assets 4,639,891 4,105,507 Total assets 10,347,232 9,650,866 (The accompanying Notes 1 to 30 are an integral part of these Consolidated Balance Sheets) 6

7 SHAREHOLDERS' EQUITY AND LIABILITIES Equity (Note 12) Shareholders Equity Share capital 267, ,575 Share premium 338, ,728 Revaluation reserve 90,936 90,936 Retained earnings 4,201,847 4,194,677 Profit attributable to the Parent 374, ,745 Interim dividend paid (107,030) (107,030) Total equity 5,166,744 5,059,631 Adjustments for changes in value Translation differences 66,050 54,675 Other adjustments for changes in value 54,762 24,861 Total adjustments for changes in value 120,812 79,536 Total equity attributable to shareholders of the parent 5,287,556 5,139,167 Minority interests (Note 12.f) Equity attributed to minority interests 49,119 49,638 Profit attributed to minority interests 16,117 16,267 Total minority interests 65,236 65,905 Total equity 5,352,792 5,205,072 Non-current liabilities Bank borrowings (Note 13) 1,109, ,516 Other financial liabilities (Note 13) 150, ,701 Deferred tax liabilities (Note 14) 228, ,820 Grants related to assets (Note 15) 81,451 70,119 Provisions (Notes 16 and 17) 130, ,157 Other non-current liabilities (Note 18) 31, ,838 Total non-current liabilities 1,732,703 1,730,151 Current liabilities Bank borrowings (Note 13) 740, ,388 Other financial liabilities (Note 13) 69,647 18,199 Trade and other payables (Note 18) 2,407,498 1,944,260 Current income tax liabilities 35,599 5,399 Other current liabilities 8,365 9,397 Total current liabilities 3,261,737 2,715,643 Total equity and liabilities 10,347,232 9,650,866 (The accompanying Notes 1 to 30 are an integral part of these Consolidated Balance Sheets) 7

8 Annual Report 2009 Consolidated Financial Statements Consolidated Statements of Income for the years ended December 31, 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) Sales and services relating to ordinary activity 16,084,145 22,830,564 Excise tax on oil and gas charged on sales 2,280,753 2,284,935 Revenue (Notes 3.n and 25) 18,364,898 25,115,499 Changes in inventories of finished goods and work in progress (410,159) 170,684 In-house work on non-current assets 56,169 39,430 Procurements (Note 25) (12,852,169) (18,833,595) Other operating income (Note 25) 43,948 35,884 Staff costs (Note 25) (530,867) (554,744) Changes in operating allowances 524,842 (593,892) Other operating expenses: Excise tax on oil and gas (2,281,291) (2,285,169) Other expenses (Note 25) (1,777,181) (2,059,362) Amortisation charge (615,877) (587,810) Allocation to profit or loss of grants related to non-financial assets and other grants (Note 25) 85, ,954 Impairment and gains or losses on disposals of non-current assets (Note 25) (33,677) (50,840) Profit from operations (note 24) 574, ,039 Share in profit of companies accounted for using the equity method (Note7) 35,600 37,492 Finance income (Note 27) 93,698 42,620 Finance costs (Note 27) (42,140) (68,870) Impairment and gains or losses on disposals of financial instruments 1, Consolidated profit before tax 663, ,992 Income tax (Nota 3.m y 14) (272,456) (243,980) Consolidated profit for the period from continuing operations 390, ,012 Consolidated profit for the period 390, ,012 Attributable to: Shareholders of the Parent 374, ,745 Minority interests 16,117 16,267 Earnings per share: Basic Diluted (The accompanying Notes 1 to 30 are an integral part of these Consolidated Statements of Income) 8

9 Consolidated Cash Flow Statements for the years ended 31 December, 2009 and 2008 Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) CASH FLOWS FROM OPERATING ACTIVITIES Net profit for the year 390, ,012 Depreciation and amortisation charge and impairment losses 649, ,667 Changes in provisions for contingencies and expenses 2,724 37,404 Grants related to assets and other deferred income (85,821) (126,970) Changes in deferred taxes (11,710) (74,229) Impairment and gains or losses on disposals of financial instruments (1,646) (1,477) Current provisions changes (524,842) 592,267 Other changes 8,627 6,709 Cash flows from operating activities before change in operating working capital 427,691 1,364,383 Change in operating working capital 647,681 (497,603) Total cash flows from operating activities (a) 1,075, ,780 Cash flows from investing activities Payments Intangible assets (24,748) (17,509) Property, plant and equipment (895,095) (1,204,444) Financial assets Associates and other investments (859) (1,492) Other financial assets (65,394) (47,471) Consolidated share adquisitions - (86,065) Grants received 7, Total payments (978,749) (1,356,353) Collections Intangible assets 2,803 1,234 Property, plant and equipment 34,767 8,034 Financial assets 25,576 39,102 Total collections 63,146 48,370 Total cash flows from investing activities (915,603) (1,307,983) Cash flows from financing activities Dividends paid: To shareholders of the Parents (267,575) (294,333) To minority interests (24,557) (14,675) Total dividends paid (292,132) (309,008) Net change in non-current financial liabilities 378, ,305 Net change in current financial liabilities (135,961) 343,064 Net change in financial investments with returns (5,718) - Finance lease payments (23,184) (21,183) Total cash flows from bank borrowings 213,307 1,048,186 Total cash flows from financing activities (78,825) 739,178 Net increase in cash and cash equivalents 80, ,975 Adjustments due to changes in the scope of consolidation - 3,154 Effect of exchange rate changes 36,639 (28,228) Cash and cash equivalents at beginning of year 480, ,053 Cash and cash equivalents at end of year 598, ,954 (a) The net income tax payments in 2009 and 2008 amounted to EUR 288,735 and EUR 313,326 thousand, respectively. The net interest payments for 2009 and 2008 amounted to EUR 1,588 thousand and EUR 24,040 thousand, respectively. 9

10 Annual Report 2009 Consolidated Financial Statements Consolidated Statement of Recognised Income and Expense for the years ended 31 December 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries ( Consolidated Group) ) A) CONSOLIDATED PROFIT FOR THE PERIOD of the income statement 390, ,012 B) INCOME AND EXPENSES RECOGNISED DIRECTLY IN EQUITY: 47,769 (51,180) 1. Measurement of financial instruments: - (983) a) Available-for-sale financial assets - (983) 2. Cash flow hedges 37,119 (84,864) 3. Translation differences 19,146 14, Companies accounted for using the equity method 303 (832) 5. Tax effect (8,799) 21,365 C) TRANSFERS TO PROFIT OR LOSS: 1,278 (7,581) 1. Cash flow hedges 1,826 (10,830) 2. Tax effect (548) 3,249 Total recognised income/(expenses) (A+B+C) 439, ,251 a) Attributable to the Parent 415, ,896 b) Attributable to minority interests 23,888 9,355 (The accompanying Notes 1 to 30 are an integral part of these Consolidated Statement of Comprenhensive Income) 10

11 Consolidated Statement of Changes in Equity for the years ended 31 December 2009 and 2008 (Notes 1, 2 and 3) Compañía Española de Petróleos, S.A. and Subsidiaries ( Consolidated Group) Reserve for Fair Share Share Revaluation Retained Translation Interim Value Accounting of Minority Capital Premium Reserve Earnings Differences Dividend Assets and Liabilities Interests Total Balance at 01/01/08 267, ,728 90,936 4,529,146 33,629 (147,166) 97,756 71,225 5,281,829 Profit for the year 274,745 16, ,012 Gains (losses) recognised directly in equity 21,046 (72,895) (6,912) (58,761) Total gains (losses) recognised directly in equity ,745 21,046 - (72,895) 9, ,251 Changes due to transactions with shareholders - Gross dividend (334,469) 147,166 (13,519) (200,822) - Interim dividend (107,030) (1,156) (108,186) Total transactions with shareholders (334,469) - 40,136 - (14,675) (309,008) Balance at 31/12/ , ,728 90,936 4,469,422 54,675 (107,030) 24,861 65,905 5,205,072 Reserve for Fair Share Share Revaluation Retained Translation Interim Value Accounting of Minority Capital Premium Reserve Earnings Differences Dividend Assets and Liabilities Interests Total Balance at 01/01/09 267, ,728 90,936 4,469,422 54,675 (107,030) 24,861 65,905 5,205,072 Profit for the year 374,688 16, ,805 Total gains (losses) recognised directly in equity 11,375 29,901 7,771 49,047 Gains (losses) recognised directly in equity ,688 11,375-29,901 23, ,852 Changes due to transactions with shareholders - Gross dividend (267,575) 107,030 (15,471) (176,016) - Interim dividend (107,030) (9,086) (116,116) Total transactions with shareholders (267,575) (24,557) (292,132) Balance at 31/12/ , ,728 90,936 4,576,535 66,050 (107,030) 54,762 65,236 5,352,792 (The accompanying Notes 1 to 30 are an integral part of these Consolidated Statement of Changes in Equity) 11

12 Annual Report 2009 Consolidated Financial Statements Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with IFRSs as adopted by the European Union (see Notes 2 and 30). In the event of a discrepancy, the Spanish-language version prevails. Notes to the Financial Statements Notes to the consolidated financial statements for the years ended 31 December 2009 and 2008 Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) 1. CEPSA GROUP ACTIVITIES Compañía Española de Petróleos, S.A. ( CEPSA ), whose registered office is at Avenida del Partenón 12 (Campo de las Naciones), Madrid, was incorporated for an unlimited period of time on 26 September 1929, it is registered in the Madrid Mercantile Register in Volume 206 of the Companies book, Sheet 100, Page Its employer identification number is A CEPSA and its investees (together the CEPSA Group ) compose an integrated business group which operates in the oil and gas industry, in Spain and abroad, engages in business activities relating to the exploration for and extraction of crude oil, the production of petrochemical and energy products, asphalts, lubricants and polymers and the distribution and marketing thereof; as well as the distribution of gas and the generation of electricity. Table I, which forms part of these notes to the consolidated financial statements, shows the directly or indirectly owned subsidiaries, jointly controlled entities and associates which, together with CEPSA, compose the consolidated Group. The table lists these companies' registered offices and lines of business, together with the most significant economic and financial information thereon for BASIS OF PRESENTATION AND BASIS OF CONSOLIDATION a) Basis of presentation The accompanying consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and with all the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB applicable at 31 December 2009 as adopted at that date by the European Union, in conformity with Regulation (EC) no. 1606/2002 of the European Parliament and of the Council, applicable at the balance sheet date. These financial statements and the 2009 individual financial statements of the Group companies included in the scope of consolidation will be submitted for approval by their shareholders at the respective Annual General Meetings, and it is considered that they will be approved without any changes. These financial statements are presented in thousands of euros (unless stated otherwise) since this is the currency of the principal economic environment in which the Group operates. Foreign operations are included in accordance with the policies set forth in Note 2-d. The financial statements of CEPSA and the CEPSA Group for 2008 were approved by the shareholders at the Annual General Meeting in Madrid on 26 June 2009, without any changes. 12

13 Entry into force of new accounting standards In 2009 the following interpretations of standards came into force and, where applicable, were used by the Group in the preparation of the consolidated financial statements of the Group, and application thereof did not have a significant impact on the Group s financial statements: Standard or interpretation Content Effective Date IFRS 8 Operating Segment 01/01/2009 Review IAS 23 Borrowing Cost 01/01/2009 Review IAS 1 Presentation of Financial Statements 01/01/2009 Amendment IFRS 2 Share-based payment - Vesting conditions and cancellations 01/01/2009 Amendment IAS 32 and IAS 1 Instruments Puttable at Fair 01/01/2009 Value and Obligations Arising on Liquidation Amendment IFRS 7 Financial Instruments: Disclosures 01/01/2009 Amendment IAS 39 and IFRIC 9 Embedded Derivatives s 01/01/2009 IFRIC 13 Customer Loyalty Programmes 01/01/2009 IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, 01/01/2009 Minimum Funding Requirements and their interaction According to revised IAS 1 CEPSA Group has included in these annual accounts a new statement named consolidated statement of other comprehensive income. When retrospective changes or reclassifications are applied a balance sheet must be presented at the beginning of the earliest comparative period (in this case, 1 January 2008). However, since the presentation of this new statement has no effect on the aforementioned balance sheet, it was not considered necessary to include it. At 31 December 2009, the Cepsa Group had not applied the following issued standards or interpretations, since its effective implementation is required after that date or have not been adopted by the European Union.: Standard or interpretation Content Effective Date Review IFRS 3 Business Combinations 01/07/2009 Amendment IAS 27 Cost of an investment in separate financial statements of an entity 01/07/2009 Amendment IAS 39 Items designed as hedged 01/07/2009 Amendment IAS 32 Classification rights to share 01/02/2010 IFRIC 12 (1) Service Concession Arrangements 01/04/2009 IFRIC 15 (1) Agreements for the Construction of Real Estate 01/01/2010 IFRIC 16 (1) Hedges of a Net Investment in a Foreign Operation 01/07/2009 IFRIC 17 (1) Distributions fon Non-cash Assets to Owners 01/11/2009 IFRIC 18 (1) Transfers of Assets from Customers 01/11/2009 IFRS 9 (2) Financial Instruments: Classification and measurement 01/01/2013 Improvements project Non-urgent improvements to IFRS Several Amendment IFRS 2 (2) Share-based payments within the Group 01/01/2010 Review IAS 24 (2) Related Party Disclosures 01/01/2011 Amendment IFRIC 14 (2) Advances minimun payments required 01/01/2011 IFRIC 19 (2) Extinguishing financial liabilities with equity instruments 01/07/2010 (1) Date of obligatory application based on approval in the Official Journal of the European Union, which differs from the original date stated in the IASB. (2) Standards and interpretations not yet adopted by the European Union at the date of preparation of these consolidated financial statements 13

14 Annual Report 2009 Consolidated Financial Statements According to its analysis of these standards and interpretations, Company management foresees that it will be applied from the date required in each case and considers that the application thereof will not have a material effect on the financial statements. b) Use of estimates and assumptions The information in these financial statements is the responsibility of the Group's directors who expressly state that all the policies and methods included in the IFRSs have been applied. In the preparation of the consolidated financial statements in accordance with IFRSs the directors were required to make estimates and assumptions. The final figures might differ based on these estimates and assumptions. These estimates and assumptions relate basically to the following: - The determination of the recoverable amount for the calculation of the impairment losses on certain assets (see Notes 4, 5 and 6), - Estimation of crude oil reserves which mainly affects depreciation calculated using the unit of production method (see Note 3.c) and the determination of the recoverable amounts on the basis of impairment tests performed on exploration and production assets, - The actuarial calculation of the post-employment benefit liabilities and obligations (see Note 16), - The useful life of the property, plant and equipment and intangible assets (see Note 3-c), - The measurement of provisions for liabilities (see Note 3-j). Although these estimates were made on the basis of the best information available at 31 December 2009 on the events analysed, events that take place in the future might make it necessary to change these estimates (upwards or downwards) in coming years; Changes in accounting estimates would be applied prospectively in accordance with the requirements of IAS 8, recognising the effects of the change in estimates in the related consolidated income statements. c) Basis of consolidation All the companies over which the Parent exercises direct or indirect control were fully consolidated. Control is the power to govern the financial and operating policies of a company so as to obtain benefits from its activities. The share of the minority interests in the equity and profit of the CEPSA Group's consolidated subsidiaries is detailed under Equity - Minority Interests in the consolidated balance sheets and Profit Attributed to Minority Interests in the consolidated income statement, respectively. Jointly controlled entities were proportionately consolidated and, accordingly, the accompanying consolidated financial statements include the assets, liabilities, expenses and income of these companies only in proportion to the CEPSA Group's ownership interest in their capital. Joint control exists in those cases where strategic decisions of the company, both financial and operative, must be unanimously approved by the parties sharing control. (see note 7) The associates over which the Group exercises significant influence but not effective control, which are not jointly controlled entities, were accounted for using the equity method. Significant influence is generally deemed to be exercised over companies which are between 20% and 50% owned. In particular, although the ownership interest in Compañía Logística de Hidrocarburos CLH, S.A. is lower than 20%, significant influence is exercised because, among other factors, the CEPSA Group is present in its Board of Directors and there is a high volume of commercial operations between them. 14

15 Any excess of the acquisition cost of the consolidated Group over the fair value of their net assets (assets acquired less liabilities assumed) at the date of acquisition is included under Goodwill. Any deficiency of the acquisition cost of the consolidated subsidiaries below the fair value of their net assets is recognised in the consolidated income statements. All material balances, transactions and results between the fully consolidated companies were eliminated on consolidation. The balances, income, expenses and results from transactions with proportionately consolidated companies were also eliminated based on the percentage of ownership. In addition, the accounting policies and procedures used by the Group companies were unified with those applied by the Parent, and all accounting policies and measurement bases with a significant effect on the consolidated financial statements were applied. d) Foreign currency transactions and translation of financial statements in foreign currencies Foreign currency transactions are recognised in euros by applying the exchange rates prevailing at the date of the transaction. Any gains or losses arising at the date of settlement are recognised in the consolidated income statement. Monetary items in foreign currencies are recognised in the consolidated balance sheet in euros at the year-end exchange rates or at the hedged exchange rates, if any. Exchange differences with respect to the exchange rates prevailing at the date of transaction are recognised in the consolidated income statement. Exchange differences arising on foreign currency loans to finance investments in the same functional currency which give rise to a hedge of the foreign currency risk associated with the loans (cash flow hedge) are recognised in equity as unrealised gains or losses in the accompanying consolidated balance sheets. The financial statements denominated in foreign currencies of the Group companies resident abroad, which have a functional currency other than the euro, were translated to euros by applying the "year-end exchange rate" method, consisting of the translation to euros of assets and liabilities at year-end exchange rates, of income and expenses at the average weighted exchange rates for the year and of equity at the historical exchange rates. The resulting translation differences are recognised in equity under Translation Differences in the accompanying consolidated balance sheets. The effect of the changes in exchange rates on each item is shown in the Other Changes column of the respective tables. e) Comparative information The scope of consolidation at 31 December 2009 is considered equal to year ended

16 Annual Report 2009 Consolidated Financial Statements The changes in the scope of consolidation in 2008 were as follows: Full/Proportionate Company Consolidation Method Equity Method CEPSA Petrosur, S.A. - E Comar, Gestáo de Postos de Combustíveis, LDA I - Ertisa, S.A. E - Gestmanilva, S.L. - E Gestvilar 2003, S.A. - E Intercontinental Química, S.A. (INTERQUISA) B - Lubricantes Nervión, S.A. (LUBRINER) - E Petrolera del Puerto, S.L. - I Petropesca, S.L. I E Petroquímica Española, S.A. (PETRESA) E I= Inclusion; E= Exclusion It should be noted in this connection that mainly the exclusions from the scope of consolidation in 2009 and 2008 are related to mergers by absorption or liquidation. Among these are notably the exclusions at end-june 2008, due to the merger of Ertisa, S.A., Intercontinental Química, S.A. (INTERQUISA) and Petroquímica Española, S.A. (PETRESA) into Cepsa Química, S.A. The detail of the effect on equity of the change in consolidation method and of the inclusions in and exclusions from the scope of consolidation is shown in the Other Changes column in the respective tables disclosing the changes in each item during the year. 3. ACCOUNTING POLICIES The principal accounting policies applied on consolidation were as follows: a) Intangible assets Intangible assets are measured at acquisition cost, and are reviewed for impairment when there are indications of impairment, and at least annually for assets with indefinite useful lives and for assets that are not yet available for use. (see Note 3-d) Research and development expenditure is recognised in the income statement as incurred, except in the case of development expenses relating to projects the technical and commercial feasibility of which has been determined, which are capitalised and amortised on the basis of their useful lives. Manufacturing license rights are amortised at the same rates as those used to depreciate the industrial units to which they relate. Service station surface rights and flagging contracts are amortised over an average of twenty and five years, respectively, based on the contracts for transactions of this type, and computer software is amortized over a maximum of three years. 16

17 In compliance with the commitments to reduce greenhouse gas emissions - the Kyoto Protocol - assumed by the European Union in May 2002, various EU and national regulations were issued, which led to the approval, by Royal Decree 1402/2008 of 29 October, of the National Emission Allowance Assignment Plan, which is in force for and affects eleven industry sectors including the refining and electricity generation sectors. Allowances received for no consideration under the National Emission Allowance Assignment Plan are measured at the market price prevailing at the beginning of the year to which they relate, and are recognised with a credit to a Grant item. The emission allowances are recognised as non-amortisable intangible assets, measured at acquisition or production cost, and are derecognised when they are delivered, transferred to third parties or meet the conditions established for their expiry. (see Note 4) Pursuant to this legislation, the CEPSA Group must deliver in the first few months of the following year CO2 emission allowances equal to the volume of emissions made during the year. If the net realisable value of emission allowances is less than their carrying amount, the value of the allowances owned will be reduced to market value. Depending on whether these allowances were acquired or received for no consideration from public authorities. In the first case the appropriate impairment of intangible assets will be recognised or, in the second case, the value of the intangible assets will be adjusted or in the second case (allowances received from public authorities), the value of grants related to assets is adjusted with a charge to Allocation to Profit or Loss of Grants Related to Non-Financial Non-Current Assets and Other Grants in the consolidated income statement. b) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition of the investees over the fair value of their net assets -assets acquired less liabilities assumed- at the date of acquisition. (see Note 5) The acquisition cost comprises the sum of the fair value of the assets delivered, the liabilities assumed and the equity instruments issued, plus any other costs directly attributable to the transaction. The fair value of net assets comprises the fair value of the assets and liabilities acquired that meet the requirements established for their recognition plus the fair value of intangible assets which were not acquired but are identifiable and meet the other requirements for their recognition and, lastly, the contingent liabilities which can be reliably measured. In accordance with IFRS 3 and IAS 36, goodwill is not amortised, but rather, is tested for impairment at least once per year (or more frequently if there is any indication of impairment). (see Note 3-d) Goodwill is deemed to be an asset of the company acquired. Consequently, the foreign currency goodwill of the Group companies resident abroad with a functional currency other than the euro is translated to euros at the exchange rates prevailing at the consolidated balance sheet date, and any resulting variations are recognised as translation differences. c) Property, plant and equipment c.1) Exploration and production assets Investments in exploration and production are recognised by the successful efforts method, whereby the accounting treatment of the various costs incurred is as follows: 17

18 Annual Report 2009 Consolidated Financial Statements Exploration costs and investments in areas with unproven reserves: Exploration costs are charged to income as incurred. Acquisitions of exploration rights are capitalised and feasibility analyses and impairment tests, if any, are performed periodically on a field-by-field basis based on the results of exploration (see Note 3-d). Exploration rights are amortised over a period not exceeding the term of the contract. In the case of the discovery of proven reserves, the carrying amount is transferred to Investments in Areas with Proven Reserves. Drilling costs are capitalised temporarily until it is determined whether proven reserves have been discovered, in which case they are transferred to Investments in Areas with Proven Reserves. On the contrary, if the results are negative, they are charged to income. Investments in areas with proven reserves: Investments relating to the acquisition of proven reserves, the development of fields and the construction of production plants, as well as the estimated present value of abandonment costs, are capitalised and depreciated over the estimated life of the field based on the proven and recoverable reserves extracted (unit-of-production method) at the beginning of each year. With respect to joint production contracts, this calculation is based on the proportion of production and reserves assigned to the Company taking account of the estimates based on the contractual clauses. Impairment tests are performed periodically for each field and any impairment losses are recognised in the income statement. (see Note 3-d) c.2) Other items of property, plant and equipment Property, plant and equipment are measured at cost. Cost includes the acquisition cost and staff costs and other items related directly to these assets incurred only during the construction period. It also includes the estimated present value of the abandonment costs that the CEPSA Group must bear, where appropriate. Assets acquired before 31 December 2003, are measured at cost, revalued, where appropriate, pursuant to the related legislation. The costs of expansion, modernisation or improvements leading to increased productivity, capacity or efficiency or to a lengthening of the useful lives of the assets are capitalised. Periodic maintenance, upkeep and repair expenses are recognised in the income statement on an accrual basis as incurred. Retired assets and the related accumulated depreciation are derecognised. Assets held under finance leases are presented in the balance sheet by recognising an asset and a liability for the same amount, equal to the lower of the fair value of the leased asset and the present value of the minimum lease payments. These assets are recognised based on the nature of the leased asset and are depreciated on the basis of their useful lives. Assets held under finance leases are subject to the same rules with respect to impairment losses as any other item of property, plant and equipment. At the reporting date the Group assesses whether there is any indication of impairment of property, plant and equipment. If such indication exists, an impairment test is performed and, where appropriate, the related impairment loss is recognised. (see Note 3-d) 18

19 The Group depreciates its property, plant and equipment, net of their residual value, using the straight-line method, at rates based on the following years of estimated useful life: Depreciation of property, plant and equipment Years of Useful Life Buildings and other structures 33 to 50 Plant and machinery: Machinery, installations and fixtures 10 to 15 Furniture 10 Plants in service: Units 12 to 15 Lines and networks 15 Tanks and spheres 20 Other items of property, plant and equipment 4 to 10 d) Impairment of assets At the reporting date the CEPSA Group assesses whether there is any indication of impairment of property, plant and equipment and intangible assets and, where appropriate, estimates the recoverable amount thereof. Additionally, regardless of whether such an indication exists, the carrying amount of intangible assets with indefinite lives and of goodwill is compared with their recoverable amount at least once per year. (see Notes 3-a, 3-b and 3-c) If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted, using assumptions which are consistent with the Group s strategic plan. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, its value is reduced to its recoverable amount and an impairment loss is recognised as an expense, under Impairment and gains or losses on disposals of non-current assets in the accompanying consolidated income statement. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased up to the revised estimate of its recoverable amount, recognised as an expense, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years, and a reversal of an impairment loss is recognised as income. 19

20 Annual Report 2009 Consolidated Financial Statements e) Financial assets Except for investments in associates, which are recognised using the equity method (see Note 2-c), both current and non-current financial assets are initially recognised at acquisition cost, which is the fair value of the consideration given, including transaction costs. Following the initial recognition, financial assets are measured on the basis of their classification, as follows: - Originated loans and receivables and held-to-maturity investments are recognised at their amortised cost, net of any impairment losses. (see Note 8) - Held-for-trading financial assets are measured, if any, at fair value, and fair value changes are recognised in the consolidated income statement. - Available-for-sale financial assets, which consist mainly of non-current equity investments, are measured at fair value and fair value changes are recognised directly in equity until the investments are sold, when the accumulated amount relating to such investments is recognised in full in the consolidated income statement. Where fair value is lower than cost, the difference is recognised directly in the consolidated income statement. For companies whose shares are not listed on the stock market, the market price is taken to be the present value of the estimated cash flows or, if these cannot be estimated, the underlying carrying amount obtained from the latest balance sheet, including, where appropriate, the unrealised gains existing at the time of acquisition and still existing at the date of subsequent measurement. (see Note 8) f) Inventories Crude oil, oil derivatives and petrochemical products are measured at the lower of weighted average cost and net realisable value. Crude oil and oil derivatives in transit are recognised at the cost at source plus direct costs incurred through year-end. Replacement parts and supplies and other inventories are measured at the lower of average acquisition or production cost or net realisable value. (see Note 9) The Company assesses the net realisable value of the inventories at the end of each year and recognises the appropriate loss if this value is lower than the carrying amount. When the circumstances that previously caused inventories to be written down no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed. Individual costs are allocated to refined products in proportion to the selling price thereof (isomargin method) due to the complexity costs to each item. g) Cash and cash equivalents This heading includes cash and cash equivalents and other liquid assets. Cash equivalents includes bank deposits and other investments maturing within three months and other liquid assets includes the same type of assets with maturities at three to twelve months. (see Note 11) 20

21 h) Grants Grants related to assets are measured at fair value. Non-refundable grants are recognised as deferred income under Non-Current Liabilities in the consolidated balance sheet and are charged to income on the basis of the useful life of the assets concerned. Repayable grants are recognised as non-current debt transformable into grants under Non- Current Liabilities. Grants related to income are credited to income when earned. Grants related to Assets-Greenhouse Gas Emission Allowances includes allowances received for no consideration, as provided for in the National Emission Allowance Assignment Plan, which are measured at the market price prevailing at the beginning of the year to which they relate. This grant was allocated to profit or loss as grants related to nonfinancial non-current assets: - Generally, as the costs incurred on the actual emissions accrue. (see Notes 15 and 25) - If an impairment loss was recognised on the emission allowances received from the Government, as an adjustment to the initially recognised value. (see Note 4) i) Pension and similar obligations CEPSA and several of its subsidiaries have the following pension obligations to employees and their beneficiaries: - Pension obligations funded by the occupational pension plans assigned to the CEPSA Group, Pensions funds. These pension plans entitle participants to receive benefits for retirement or, where appropriate, for death or disability, as specified in the plans. The plans take the form of hybrid plans and combine defined contribution plans, which cover retirement - whereby the sponsor makes periodic contributions-, and defined benefit plans which cover benefits for death or disability through an annually renewable policy -whereby the sponsor undertakes to fulfill the contributions corresponding to Pensions Funds. Accordingly, these contingencies should be considered to be a defined contribution plan. The vested amount of the contingency assumed by the sponsor is covered each year with the annual contribution. - Life insurance. A defined contribution obligation instrumented through an insurance policy which establishes the right of the insured to receive retirement benefits or, where appropriate, benefits for death or disability. The contributions made by the policyholder are made as a supplement to the pension plan, or since the commitments to employees exceed the maximum contributions to pension plans. - Annuity income for retired employees. These are obligations prior to the arrangement of pension plans, which entitle personnel or their beneficiaries to receive supplementary social security pension benefits in the event of retirement, death or permanent disability. This commitment has been externalised in full through the related insurance policies. The adjustments arising from CPI increases or declines, which affect only the policies covering obligations tied to annual CPI performance, are recognised as expenses or income for the year, as appropriate, and their amount was not material. 21

22 Annual Report 2009 Consolidated Financial Statements Other non-current employee benefit costs The Group has a commitment to a certain group of employees for the payment of annuity monetary consideration arised from the withdrawal of company stores. Actuarial studies are performed annually and the actuarial gains and losses are recognised as income or expenses, as appropriate. The Company must recognise actuarial gains and losses as income or expenses when the unrecognised cumulative actuarial gains and losses for each individual plan exceed by more than 10% the present value of the benefit obligations or the fair value of the plan assets. At 31 December 2009, this situation had not arisen in the CEPSA Group. j) Other provisions Provisions includes liabilities arising from litigation in progress, environmental risks, abandonment costs and other contingencies, which are uncertain as to their amounts or timing. These provisions are recorded when a present obligation arises as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The provision amount recognised is the present value of the expenditure expected to be required to settle the obligation. Provisions are reviewed at each balance sheet date based on the information available. The obligation to deliver emission allowances for the CO2 emissions produced in the year is recognised as the greenhouse gas emissions are made. These costs are charged to Other Operating Expenses in the income statement and credited to a short-term provision included under Trade and other payables, until the date the related emission allowances are delivered (see Notes 3-a and 18). The unit value to be assigned to the emissions is determined taking into account the following amounts: - Firstly, the carrying amount of the emission allowances received for no consideration. - Secondly, the cost of the other emission allowances capitalised in the balance sheet - Lastly, where necessary, the most up-to-date estimate of the cost of acquisition of the remaining allowances k) Bank borrowings and other financial liabilities Bank borrowings and other financial liabilities are initially recognised at their fair value less directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest method. In accordance with its foreign currency risk management policy, the CEPSA Group arranged borrowings denominated in US dollars to finance certain investments in non-current assets which generate cash flows also in US dollars. These financial liabilities were accounted for as a cash flow hedge. (see Note 13 and 22) These hedges are designated and documented at inception, the high probability of cash flows is determined for the hedged item and effectiveness is assessed both prospectively and retrospectively, all in accordance with IAS 39 relating to hedge accounting. 22

23 Changes in the fair value of these financial liabilities are recognised directly in equity, net of the related tax effect, under Adjustments for changes in value in the accompanying consolidated balance sheets and are recognised in income for the year as the hedge materialises. (see Note 25) l) Derivative financial instruments and hedge accounting The CEPSA Group uses hedging instruments and derivatives, including most notably futures contracts with crude oil and product brokers, to hedge the price risks arising from the monthly purchases and sales of oil-based products. The transaction limits and the hedging instruments have been approved by Group management and the monitoring process respects the separation of the performance and control functions. For foreign currency and interest rate risks, the transaction limits and hedging instruments (basically forward currency transactions and interest rate swaps) have also been approved by Group management and the monitoring process respects the separation of the performance and control functions. All derivatives, whether or not they are designated as hedging instruments, are recognised in the accompanying consolidated balance sheets at their fair value. The fair value of derivative financial instruments is calculated using quoted prices. When no quoted prices exist, fair value is determined on the basis of discounted cash flows, using the embedded derivatives curve applicable for the term of the derivatives, and option pricing models for derivative-options. Exchange rate hedging contracts are measured using exchange rate hedge prices and embedded interest rate curves calculated on the basis of the interest rates prevailing when the contracts expire. The changes in the fair value of these derivative financial instruments were allocated to profit for the year, except in the case of instruments classified as cash-flow hedges, the changes in which were recognised directly in equity, net of their tax effect, under Reserve for Fair Value Accounting of Assets and Liabilities in the accompanying consolidated balance sheets. (see Note 23) The long-term firm commitments of purchases and sales of oil and gas were analysed and it was determined that they fall outside the scope of IAS 39 since they relate to contracts with the purpose of receiving or delivering non-financial assets and in all cases they concern anticipated purchase and sale transactions. m) Income tax Current and deferred income taxes are recognised under Income Tax in the accompanying consolidated income statement, except when they arise from economic events that have been directly recognised in equity, in which case they are recognised directly in equity. The current income tax expense is the result of applying the tax rate to the taxable profit (tax loss) for the year, after deducting the tax credits allowable for tax purposes. Deferred tax is accounted for using the balance sheet liability method, under which temporary differences are determined as the difference between the tax bases of assets and liabilities and their carrying amounts. 23

24 Annual Report 2009 Consolidated Financial Statements Deferred tax liabilities are recognised for all taxable temporary differences, unless, in general, the temporary difference arises from the temporary recognition of goodwill, whereas deferred tax assets arising from deductible temporary differences and tax loss and tax credit carryforwards are only recognised if it is probable that sufficient future taxable profit will be available against which they can be utilised. Deferred tax assets and liabilities are measured based on the tax legislation in force and the tax rates that have been, or are being, enacted at the balance sheet date. The Group reassesses unrecognised deferred tax assets and unrecognised tax loss and tax credit carryforwards at each balance sheet date, and recognises those for which it is probable that future taxable profit will be available against which they can be utilised. Recognised deferred tax assets and recognised tax loss and tax credit carryforwards are reassessed and their amount is reduced to the extent it is no longer probable that future taxable profit will be available against which they can be utilised. n) Recognition of revenue and expenses Revenue and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. Net Revenue does not include the value of exchanges of strategic stocks arranged with other operators. In accordance with the legislation applicable to companies operating in the oil and gas industry, the excise tax on oil and gas sales is recorded as part of the selling price and as an addition to cost under Net Revenue and Other Operating Expenses, respectively, in the consolidated income statements. Interest income is accrued on a time proportion basis, by reference to the principal outstanding and the effective interest rate applicable. Dividend income from investments is recognised when the shareholder's rights to receive payment have been established. o) Leases Finance leases Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. When the consolidated companies act as the lessee, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognise a liability for the same amount (which will be the lower of the fair value of the leased asset and the aggregate present values of the amounts payable to the lessor plus, where applicable, the price of exercising the purchase option). These assets are depreciated using similar criteria to those applied to the items of property, plant and equipment that are owned Operating leases In operating leases, the ownership of the leased asset and substantially all the risks and rewards relating to the leased assets remain with the lessor. 24

25 When the consolidated companies act as the lessor, they present the acquisition cost of the leased asset under Property, Plant and Equipment, either as Investment Property, or Other Assets Leased out under an Operating Lease. These assets are depreciated using a policy consistent with the lessor's normal depreciation policy for similar items and lease income is recognised in the income statement on a straight-line basis. When the consolidated companies act as the lessee, lease costs, including any incentives granted by the lessor, are recognised as an expense on a straight-line basis. p) Current/Non-current classification In the accompanying consolidated balance sheet debts due to be settled within twelve months are classified as current items and those due to be settled within more than twelve months as non-current items. Loans due within twelve months but whose long-term refinancing is assured at the Company's discretion through existing long-term credit facilities are classified as non-current liabilities. q) Earnings per share Basic earnings per share are calculated by dividing the net profit attributable to the Parent by the number of shares outstanding during the year. The number of outstanding shares (267,574,941) remained unchanged in 2009 and There are no other equity instruments giving rise to diluted earnings per share different from basic earnings per share. r) Information on the environment Per the Resolution dated 25 March 2002 of the Spanish Accounting and Audit Institute, environmental investments are defined as investments included in the Company's assets for use in its business on a lasting basis which are mainly for the purpose of minimising the impact on the environment and protecting and improving the environment, including the reduction or elimination of pollution in the future caused by the operations performed by Group companies. Also, environmental expenses are deemed to be those incurred to prevent, reduce or repair damage to the environment, i.e. the natural surroundings, as well as those relating to environmental commitments. With respect to provisions for environmental risks and obligations, the Group recorded provisions for environmental actions to remedy the risk of gradual soil pollution, with a charge to Other Operating Expenses in the consolidated income statements. These provisions were quantified on the basis of in-house estimates and technical studies. Also, the Group has taken out insurance policies to cover such other environmental damage as might arise, including any third-party liability that might arise therefrom. (see Note 28) 25

26 Annual Report 2009 Consolidated Financial Statements s) Segment reporting The CEPSA Group divides its organisational structure and activity management function into four business segments: Exploration and Production, Refining and Distribution, Derivative Petrochemicals and Gas and Power. These areas are segments whose operating results are regularly reviewed by the highest authority in making of operating decisions, to decide the resources allocations and assess its performance (see Note 24-a). The key financial data thereon are as follows: Operating profit, which comprises the revenue and expenses arising from the operations of each primary business segment and the asset depreciation and amortisation charges, but does not include finance income or finance costs, nor other non-operating income or expenses, such as the gains or losses on disposal of non-current assets. The operating profit included in Note 24 on segment reporting was calculated using the same bases as those used for internal management information purposes. Accordingly, due to the special nature of certain economic events, some income and expense items are classified as non-recurring items and are excluded from segment result (see Note 24-c). These non-recurring items generally relate to transactions that are significant but unusual and to the difference in the value of inventories between average cost -used in the consolidated financial statements- and replacement cost -used to measure business segments- thus facilitating the analysis of business segment performance and comparison between years. In the section on segment assets and liabilities, the capital employed figure is disclosed. Capital employed is composed of non-current assets plus working capital (adjusted replacement cost) minus non-current non-financial liabilities, which is equal to the Group's financial structure (equity plus net borrowings). Net borrowings basically consist of current and non-current borrowings minus cash and cash equivalents. The information disclosed in relation to the geographical areas in which the Group carries on its activity was prepared based on the location of the assets, while information on income was prepared based on the location of customers. 26

27 4. INTANGIBLE ASSETS The detail of the gross investments in intangible asset accounts, of the related accumulated amortisation and impairment losses and of the changes therein in 2008 and 2009 is as follows:: 2008 (Thousands of euros ) Balance at Additions or Other Disposals or Balance at Charges Transfers Changes Retirements Assets Concessions, patents and licences 80, (977) (1,262) (8,469) 70,222 Goodwill 5, ,732 17,125 (4,803) 20,961 Computer software 127,564 9, (517) (867) 135,742 Flagging contracts 65,296 6, (1,080) 70,256 Other intangible assets 118, ,611 (1,489) 14,284 (48,249) 215,881 Total 396, , ,630 (63,468) 513,067 Amortisation Concessions, patents and licences (41,427) (3,015) ,257 (34,745) Goodwill (4,860) ,745 - Computer software (101,640) (6,618) - 6 (185) (107,385) Flagging contracts (20,339) (9,305) - - (133) (29,195) Other intangible assets (30,276) (4,504) 82 (4,168) (133) (37,054) Total (198,542) (23,442) 933 (3,458) (85,402) (208,379) Impairment losses (46,027) (43,410) ,027 (43,410) Net intangible assets 152,426 82,749 1,242 26,172 (1,311) 261,278 27

28 Annual Report 2009 Consolidated Financial Statements 2009 Assets Balance at Additions or Other Disposals or Balance at Charges Transfers Changes Retirements Concessions, patents and licences 70,222 3, (241) 74,176 Goodwill 20, (1,049) 19,912 Computer software 135,747 9,113 1, (185) 146,724 Flagging contracts 70,256 6, (3) 76,984 Other intangible assets 215, , (156,054) 163,216 Total 513, ,011 1, (157,532) 513,067 Amortisation Concessions, patents and licences (34,745) (3,744) - (365) 241 (38,613) Goodwill Computer software (107,385) (7,874) (89) (296) 15 (115,629) Flagging contracts (29,195) (3,028) (32,221) Other intangible assets (37,054) (9,654) - (311) 1,182 (45,837) Total (208,379) (24,300) (89) (972) 1,440 (232,300) Impairment losses (43,410) (2,458) ,010 (1,858) Net intangible assets 261,278 96,253 1,438 (33) (112,082) 246,854 The additions to intangible assets amounting to EUR 149,601 thousand in 2008 and EUR 123,011 thousand in 2009, relate mainly to the investment in computer software updates recognised by the Group companies under Computer Software, to investments in the renewal and execution of new flagging contracts for the service station network and to the addition to Other Intangible Assets in respect of the value of CO2 emission allowances relating to the allowances assigned for no consideration under the National Emission Allowance Assignment Plans as detailed below. (see Note 15) Thousands of euros Thousands of metric tones Thousands of euros Thousands of metric tones Beginning balance 88,682 5, ,702 Assignments 88,118 5, ,092 5,810 Impairment losses (18,778) - (43,410) - Deliveries (85,005) (5,289) (140) (6,702) Other changes 1,219 (58) - - Ending balance 74,236 6,061 88,682 5,810 28

29 Emission allowances assigned for no consideration are measured at the market price prevailing at the beginning of the year to which they relate. As a result of a decrease in the difference between this value and their quoted price on the emission allowance market at 2009 and 2008 year-end, the CEPSA Group recognised an impairment loss for the emission allowances amounting to EUR 18,778 thousand and EUR 43,410 thousand respectively. (see note 25) In 2010 the allowances relating to emissions made in 2009 will be delivered and the related amount will be derecognised from intangible assets and from the short-term provision for contingencies and expenses. (see Note 18) The CEPSA Group, through its Parent CEPSA, has a 1.373% share in the Spanish Coal Fund for the purpose of financing various projects that target greenhouse gas reduction and the sustainable development of developing countries. If these projects are successful, they will generate emission allowances. In 2009 EUR 273 thousand were paid to the World Bank for this share, and recognised as an addition under Other Intangible Assets, whereas in 2008 no payment was made in this connection. The non-current asset disposals in 2008 and 2009 relate mainly to the delivery of emission allowances used in 2007 and 2008, respectively. The additions column includes EUR 6,372 thousand in 2008 and EUR 4,143 thousand in 2009 relating to staff costs, finance costs and other expenses relating to these projects which were credited to the related expense captions in the accompanying consolidated income statements. At 31 December 2009 the Group had intangible asset purchase commitments amounting to EUR 9,717 thousand. 5. GOODWILL The detail, by company, of Goodwill in 2008 and 2009, is as follows: 2008 Balance at Othe Impairment Balance at Additions Changes Disposals Losses Company Deten Química, S.A. 36,780 - (7,140) ,640 CEPSA Estaciones de Servicio, S.A. 3, ,515 CEPSA Portuguesa, S.A. - 16, ,899 Lubricantes del Sur, S.A Detisa, S.A Petropesca, S.L , ,041 Total 40,816 16,899 (5,099) ,616 29

30 Annual Report 2009 Consolidated Financial Statements 2009 Sociedad Balance at Othe Impairment Balance at Additions Changes Disposals Losses Deten Química, S.A. 29,640-8, ,049 CEPSA Estaciones de Servicio, S.A. 3, ,515 CEPSA Portuguesa, S.A. 16, ,899 Lubricantes del Sur, S.A Detisa, S.A Petropesca, S.L. 2, ,041 Total 52,616-8, ,025 The balance in the Acquisitions column for 2008 relates to the goodwill that arose on the purchase of all the shares of Total Portugal Petróleos, S.A. This company was merged with Cepsa Portuguesa Petroleos, S.A. According to the accounting records, the transaction gave rise to goodwill of EUR 16,899 thousand as a result of the difference between the recognised fair value of its net assets (assets acquired less liabilities assumed) at the date of acquisition, amounting to EUR 69,166 thousand, and the acquisition cost, amounting to EUR 86,065 thousand. The Other Changes column includes notably those relating to the effect of the change in exchange rates on the goodwill of Deten Química, S.A., since it was translated at the year-end exchange rate (see Note 3-b), and to the transfer in 2008 of the goodwill of Petropesca, S.L. from Investments Accounted for Using the Equity Method. (see Notes 2-e and 7) The goodwill allocated to the various cash-generating units at 31 December 2009 and 2008 is as follows: Exploration & Production - - Refining & Distribution 22,854 22,854 Petrochemical 38,049 29,640 Gas & Power Total 61,025 52,616 The cash-generating units to which goodwill was allocated were tested for impairment and the recovery of their carrying amounts was ascertained; it was not necessary to recognise any impairment loss. 30

31 The recoverable amount of the business units was determined on the basis of their value in use calculated using the assumptions and cash flows included in the Group s strategic plan, approved by its management. (see Note 3-d) 6. PROPERTY, PLANT AND EQUIPMENT The detail of the gross investments in property, plant and equipment, of the accumulated depreciation and impairment losses and of the changes therein in 2008 and 2009 is as follows: 2008 Balance at Additions or Other Disposals or Balance at charges for the year Transfers Changes Retirements Assets Land and structures 340, ,712 29,759 (888) 373,316 Plant and machinery 5,348,812 18, ,335 (36,260) (23,095) 5,539,442 Investments in areas with proven reserves 1,126, ,924 11,512 56,382 (11) 1,761,450 Investments in areas with unproven reserves 88,949 67,246 (10,276) 493 (15,857) 130,555 Other facilities, tools and furniture 110, ,435 5,630 (2,937) 121,254 Advances and property, plant and equipment in the course of construction 428, ,140 (248,457) 113 (1,205) 877,001 Other property, plant and equipment 646,201 46, ,716 (4,684) 697,473 Total 8,090,133 1,399,412 (5,210) 64,833 (48,677) 9,500,491 Depreciation Accumulated depreciation of structures (83,106) (9,292) - (9,035) 299 (101,134) Accumulated depreciation of plant and machinery (3,055,124) (264,421) 3,981 20,915 17,411 (3,277,238) Accumulated depreciation of investments in areas with proven reserves (621,064) (190,780) (11,293) (7,969) 4 (831,102) Accumulated depreciation of investments in areas with unproven reserves (69,441) (57,236) 11,293 (1,940) 15,857 (101,467) Accumulated depreciation of other facilities, tools and furniture (82,128) (6,912) (137) (4,341) 2,802 (90,716) Accumulated depreciation of other property, plant and equipment (173,046) (35,725) 124 (4,088) 4,135 (208,600) Total (4,083,909) (564,366) 3,968 (6,458) 40,508 (4,610,257) Impairment losses (18,089) (8,333) (25,448) Net property, plant and equipment 3,988, ,713 (1,242) 58,379 (7,199) 4,864,786 31

32 Annual Report 2009 Consolidated Financial Statements 2009 Assets Balance at Additions or Other Disposals or Balance at charges for the year Transfers Changes Retirements Land and structures 373,316 6,723 3,297 2,190 (1,349) 384,177 Plant and machinery 5,539,442 22, ,563 58,456 (39,936) 5,900,750 Investments in areas with proven reserves 1,761,450 61,991 (184,943) (18,914) (10,952) 1,608,632 Investments in areas with unproven reserves 130,555 69, ,596 (2,526) (18,937) 366,270 Other facilities, tools and furniture 121,254 2,273 5, (1,281) 127,976 Advances and property, plant and equipment in the course of construction 877, ,489 (351,650) (159) (2,117) 1,247,564 Other property, plant and equipment 697,473 2,004 18,458 (2,798) (10,656) 704,481 Total 9,500, ,287 (1,527) 36,827 (85,228) 10,339,850 Depreciation Accumulated depreciation of structures (101,134) (6,826) (1,169) 9, (99,557) Accumulated depreciation of plant and machinery (3,277,238) (281,517) (7,298) (43,476) 33,885 (3,575,644) Accumulated depreciation of investments in areas with proven reserves (831,102) (193,852) 27,628 8,301 3,874 (985,151) Accumulated depreciation of investments in areas with unproven reserves (101,467) (63,445) (20,392) 1,744 13,613 (169,947) Accumulated depreciation of other facilities, tools and furniture (90,716) (7,919) 1, ,172 (95,867) Accumulated depreciation of other property, plant and equipment (208,600) (38,018) (33) (520) 9,694 (237,477) Total (4,610,257) (591,577) 89 (24,630) 62,732 (5,163,643) Impairment losses (25,448) (37,492) - (2,158) 1,156 (63,942) Net property, plant and equipment 4,864, ,218 (1,438) 10,039 (21,340) 5,112,265 The additions to property, plant and equipment, which amounted to EUR 1,399,412 thousand in 2008 and EUR 889,287 thousand in 2009, relate most notably to the following items: - In the area Exploration and Production, increase the exploration efforts in various countries and investments made in the fields located in Algeria and Colombia to improve and expand facilities. Additionally in 2008 the acquisition of oil and gas exploration and production rights in the Caracara block in Colombia. - In the area Refining and Marketing, investments in refinery units aimed at enlarging, improving and flexibilising the production processes, including most notably the construction of new units at the La Rábida refinery under the capacity expansion plan for distillation, production of middle distillates and other petrochemical products and new vacuum and mild hydrocracking units at the Gibraltar-San Roque refinery; to the acquisition, in 2008, from TOTAL of its distribution activities in Portugal, to the enhanced organisation of direct sales and to the increased presence and greater efficiency of the service station network, and, in general, improvements in industrial facilities to minimise the impact on the environment and enhance safety in the Group s activities. 32

33 - In the area Gas and Electricity, investments made mainly for the construction of two new co-generation plants. Additions in 2008 and 2009 include EUR 45,646 thousand and EUR 63,337 thousand, respectively, of staff, finance and other costs relating to the construction period of various items of property plant and equipment which were credited to the accompanying consolidated income statements. Noteworthy among the changes in transfers were those recognised in 2009, totalling EUR 196,768 thousand, in Investments in Areas with Proven Reserves and Investments in Areas with Unproven Reserves as a result of the definitive recognition of the acquisition of oil and gas exploration and production rights in the Caracara block in Colombia. The amounts recorded in the Other Changes column relate basically to changes in the scope of consolidation in 2008 and to the effect of changes in foreign exchange rates against the euro at certain foreign subsidiaries. The Disposals or Retirements column for 2008 includes mainly the derecognition of fully depreciated exploration assets and that of petrochemical plants and other supply facilities, whereas for 2009 it includes mainly the derecognition of exploration assets (see Note 25) and other plants. Certain CEPSA Group companies recognised impairment losses at 2008 and 2009 year-end of EUR 8,333 thousand and EUR 37,492 thousand, respectively, arising from the adjustment of asset values based on the expected recovery of the net investment through the generation of future revenues, with the most significant in 2009 relating to those recognised in the petrochemical area by one of its business lines in Canada, due to the decrease in margins and business activities. (see Note 25). At 31 December 2009, the Group had property, plant and equipment purchase commitments amounting to EUR 214,323 thousand, relating mainly to the investments currently being made at the La Rábida refinery. At 31 December 2009, no material items of property, plant and equipment had been pledged to secure compliance with obligations relating to the ownership thereof. The detail of the items of property, plant and equipment acquired under finance lease arrangements at 31 December 2009 and 2008, is as follows: Accumulated Carrying Accumulated Carrying Cost Depreciation Amount Cost Depreciation Amount Plant 59,623 (24,400) 35,223 59,551 (21,420) 38,131 Transport equipment 81,975 (14,058) 67,917 82,043 (11,141) 70,902 Other property, plant and equipment 24,371 (2,207) 22,164 25,930 (1,616) 24,314 Total 165,969 (40,665) 125, ,524 (34,177) 133,347 In 1996 certain consolidable Group companies revalued their property, plant and equipment pursuant to Royal Decree- Law 7/1996 of 7 June, increasing the carrying amount of these assets by EUR 117,350 thousand. This increase in value is being depreciated (the depreciation charge is a tax-deductible expense) with a charge to profit in 1997 and subsequent years based on the years of residual useful life of the revalued assets. 33

34 Annual Report 2009 Consolidated Financial Statements Certain CEPSA Group companies have been granted administrative concessions by the Spanish State to use mooring facilities and access and adjacent areas at the ports of Santa Cruz de Tenerife which will revert to the State from 2009 to 2028, Algeciras-La Línea on 2022 and Palos de la Frontera from 2018 to Management of the CEPSA Group expects that these concessions will be renewed when they expire. The Group has taken out insurance policies to cover the possible risks to which its property, plant and equipment are subject and the claims that might be filed against it for carrying on its business activities. These policies are considered to sufficiently cover the related risks. 7. INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD AND JOINTLY CONTROLLED ENTITIES Investments in Companies Accounted for Using the Equity Method at 2009 and 2008 year-end relates basically to CLH is presented in the table below: Company CLH 28,566 34,745 Other companies 60,360 60,289 Total investments in companies accounted for using the equity method Compañía Logística de Hidrocarburos CLH, S.A. has 2.54% of all the shares comprising its share capital listed on the four Spanish stock markets, the last quoted closing price of December 2009 was euros per share. The detail of the changes in 2009 and 2008 in the above-mentioned heading is as follows: Beginning balance 95, ,370 Profit after taxes incurred in the year 35,600 37,492 Dividends paid in the year (42,397) (54,373) Additions of investments in companies accounted for using the equity method Retirements of companies as a result of: Mergers/ Change in consolidation method - (11,869) Other changes 681 (2,798) ENDING BALANCE 88,926 95,034 34

35 The principal financial aggregates relating to associated companies accounted for using the equity method are summarised below: Total Assets 705, ,767 Total Liabilities 616, ,497 Net Assets 88,127 91,270 Total Revenues 823,973 1,438,685 Profit for the year 190, ,998 Share of results of companies accounted for using the equity method 35,600 37,492 The detail of the goodwill of companies accounted for using the equity method, by the cash generating unit to which it was allocated, in 2008 and 2009 is as follows:: 2008 Balance at Other Impairment Balance at Additions Changes Disposals Losses Direct sales companies Distribution network companies 6, ,666 Bunkering companies 2,041 (2,041) Total 9,642 - (2,041) - - 7, Balance at Other Impairment Balance at Additions Changes Disposals Losses Direct sales companies Distribution network companies 6, ,666 Total 7, ,601 35

36 Annual Report 2009 Consolidated Financial Statements The Other Changes column for 2008 includes the transfer of the goodwill of Petropesca, S.A. to Goodwill. (see Notes 2-e and 5) The information at 31 December 2009 and 2008 of the financial statements of the main companies jointly controlled by the Group is as follows: 2008 Owner-ship Non-Current Current Non-Current Current Operating Operating % Assets Assets Liabilities Liabilities Income Costs Nueva Generadora del Sur, S.A. 50% 359,308 47, , , , ,207 CEPSA Chimie Montreal, LP 51% 336,306 74, ,683 21, , ,594 CEPSA Chimie Becancour, INC 51% 33,106 39,622 37,076 35, , , Owner-ship Non-Current Current Non-Current Current Operating Operating % Assets Assets Liabilities Liabilities Income Costs Nueva Generadora del Sur, S.A. 50% 337,614 44, ,948 65, , ,296 CEPSA Chimie Montreal, LP 51% 250,312 76,646 92, , , ,714 CEPSA Chimie Becancour, INC 51% 37,654 30,845 38,469 30, ,827 98,956 All the proportionately consolidated companies are jointly controlled entities in accordance with the definition established in IAS 31 (see note 2.c) and are included in Table I, which provides information on their line of business and main economic aggregates. Table II, which is an integral part of these Notes to the consolidated financial statements, details the main joint ventures operated as jointly-controlled ventures and jointly-controlled assets, in which the CEPSA Group has an interest. The accompanying consolidated financial statements include the assets, liabilities, expenses and income in proportion to the Group s ownership interest. 36

37 8. FINANCIAL ASSETS The balances of and changes in financial assets in 2008 and 2009 are as follows: 2008 Balance at Other Balance at Additions Transfers Changes Disposals Non-current loans to companies accounted for using the equity method 74,008 27,440 (25,239) (900) (2) 75,307 Other non-current loans 56,690 15,210 (8,605) (652) (15,234) 47,409 Other non-current financial assets 45,557 6,312 (5) (3,418) (8,748) 39,698 Allowances (23,206) (1,374) 2, (20,609) Total non-current loans and financial assets 153,049 47,588 (31,018) (4,143) (23,671) 141,805 Current loans to companies accounted for using the equity method 85, ,787 25,240 (13,936) (75,370) 153,568 Other current loans 23,172 21,294 8,604 (784) (25,865) 26,421 Other current financial assets 1, , ,798 (438,526) 6,858 Allowances - (428) (2,831) (2,862) Total current loans and financial assets 110, ,827 31,018 (11,922) (539,364) 183, Balance at Other Balance at Additions Transfers Changes Disposals Non-current loans to companies accounted for using the equity method 75,307 37,597 (74,918) - (2,110) 35,876 Other non-current loans 47,409 23,023 (8,756) 741 (17,911) 44,506 Other non-current financial assets 39,698 5,625-4,348 (2,922) 46,749 Allowances (20,609) (2,647) - (915) 6,474 (17,697) Total non-current loans and financial assets 141,805 63,598 (83,674) 4,174 (16,469) 109,434 Current loans to companies accounted for using the equity method 153,568 59,961 74,918 (60) (47,058) 241,329 Other current loans 26,421 34,195 8,756 (4,184) (34,314) 30,874 Other current financial assets 6,858 12,743 - (110) (15,488) 4,003 Allowances (2,862) (9,467) - - 2,434 (9,895) Total current loans and financial assets 183,985 97,432 83,674 (4,354) (94,426) 266,311 37

38 Annual Report 2009 Consolidated Financial Statements Following is a detail of the financial assets and liabilities at 31 December 2008 and 31 December 2009, by type and category for valuation purposes: Financial assets Held-for-trading Available-for-sale Loans and Hedging by type / category financial assets financial assets receivables derivatives TOTAL Equity instruments - 14, ,504 Debt instruments , ,334 Other financial assets ,967-16,967 Non current - 14, , ,805 Debt instruments , ,128 Derivatives 5, ,520 Other financial assets - - 1,337-1,337 Current 5, , ,985 Total 5,008 14, , , Financial assets Held-for-trading Available-for-sale Loans and Hedging by type / category financial assets financial assets receivables derivatives TOTAL Equity instruments - 16, ,243 Debt instruments ,452-73,452 Other financial assets ,739-19,739 Non current - 16,243 93, ,434 Debt instruments , ,310 Derivatives 3, ,279 Other financial assets Current 3, , ,311 Total 3,186 16, , ,745 38

39 The detail, by maturity, of the balances of Loans to Companies Accounted for Using the Equity Method and Other Loans at 31 December 2008 and 31 December 2009, is as follows: 2008 Maturing in Other Total Loans to companies accounted for using the equity method 153,568 69,176 4, , ,875 Otros Créditos 26,421 9,789 14,962 13,282 2,800 6,576 73,830 Total 179,989 78,965 19,512 13,282 2,800 8, , Maturing in Other Total Loans to companies accounted for using the equity method 241,329 28,814 4, , ,205 Other loans 30,874 9,250 6,886 5,929 13,098 9,343 75,380 Total 272,203 38,064 11,138 5,929 13,098 12, , INVENTORIES The detail of Inventories at 31 December 2009 and 2008 is as follows: Crudes 466, ,405 Other raw materials 51,238 38,610 Finished goods 822,777 1,243,848 Other supplies 111, ,742 Allowances (3,655) (548,010) Total 1,448,512 1,336,595 39

40 Annual Report 2009 Consolidated Financial Statements Pursuant to the Directorate-General of Energy Policy and Mining resolution dated 26 December 2007, CEPSA and other Group companies which act as operators are required to maintain minimum oil product safety stocks equivalent to 50 days of sales of the preceding 12 months in the domestic market for 2009, which was established in 2008 in 53 days, excluding sales to other wholesalers, and Corporación de Reservas Estratégicas de Productos Petrolíferos (CORES) inspects and controls the fulfilment of this obligation. CEPSA management considers that the consolidated Group has been meeting this obligation. As indicated in Note 3-f, CEPSA uses the average unit cost method to measure raw material and commercial goods inventories. In 2008 inventories were written down by a further EUR 544,133 thousand to adjust their carrying amount to their net realisable value, due to the sharp drop in oil prices during the last few months of the year. Conversely, in 2009 the EUR 544,355 thousand inventory write-down was reversed, since the circumstances for which it had been recognised at 31 December 2008 had disappeared, due to the increase in the net realisable value of the inventories. 10. TRADE AND OTHER RECEIVABLES El desglose de la cifra de deudores comerciales y otras cuentas a cobrar correspondientes a los ejercicios de 2009 y 2008 es el siguiente (véase nota 22): Trade receivables for sales and services 2,225,229 1,897,573 Receivable from companies accounted for using the equity method 171, ,890 Sundry accounts receivable 12,846 15,163 Tax receivables 59,676 55,480 Allowances (151,192) (133,229) Total 2,317,936 2,059,877 40

41 11. CASH AND CASH EQUIVALENTS The detail of Cash and Cash Equivalents relating to 2009 and 2008 is shown below: Cash 111, ,383 Cash equivalents 487, ,571 Total 598, ,954 This item includes cash balances, cash equivalents, bank deposits and other investments maturing within three months. (see Note 3.g) 12. EQUITY a) Share capital and share premium Share capital amounted to EUR 267,574,941 and consisted of 267,574,941 book-entry shares, totally subscribed and paid, of EUR 1 par value each. Per the information provided by the members of the Board of Directors who are shareholders, at 31 December 2009, Total, S.A. and International Petroleum Investment Company (IPIC), directly and indirectly owned 48.83% and 47,06% respectively, of the share capital of CEPSA. In 2009 the ownership interests held by Banco Santander and Unión Fenosa in CEPSA, of 32.5% and 5% respectively at 31 December 2008, were sold to IPIC. CEPSA's shares are traded on the continuous market on the four Spanish Stock Exchanges. The Corporate Law expressly permits the use of the share premium account balance to increase capital and establishes no specific restrictions as to its use. There were no changes in 2009 or 2008 in the balance of this account, which amounted to EUR 338,728 thousand. b) Revaluation reserve In 1996 CEPSA and several consolidated Group companies revalued their property, plant and equipment pursuant to Royal Decree-Law 7/1996 of 7 June, and increased their equity by EUR 58,438 thousand and EUR 58,438 thousand, respectively. This latter figure was recognised under Consolidated Reserves on consolidation, which is included in retained earnings. 41

42 Annual Report 2009 Consolidated Financial Statements The revaluation reserve also includes EUR 32,498 thousand relating to the revaluations made in 1979 and 1981 pursuant to State Budget Law 1/1979 and State Budget Law 74/1980, which can now be transferred to unrestricted voluntary reserves. The balance of the Revaluation Reserve, Royal Decree-Law 7/1996 account can be used, free of tax, to eliminate recorded losses and to increase capital. From 1 January 2007 (i.e. ten years after the date of the balance sheet reflecting the revaluation transactions) the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realised. The surplus will be deemed to have been realised in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognised. If this balance were used in a manner other than that provided for in Royal Decree-Law 7/1996, it would be subject to tax. c) Reserves at consolidated companies The breakdown, by company, of reserves at consolidated companies, which are included in Retained Earnings, at 2009 and 2008 year-end, is as follows: Fully and proportionately consolidated companies: CEPSA Estaciones de Servicio, S.A. 221, ,919 CEPSA Lubricantes, S. A. 25,796 25,894 CEPSA Portuguesa, S.A ,615 Proas, S.A. 11,239 11,170 CEPSA Química 656, ,314 Other Companies 176, ,382 Total fully and proportionately consolidated companies 1,093,186 1,095,294 Companies accounted for using the equity method: Compañía Logística de Hidrocarburos CLH, S.A. (12,544) (6,620) Other Companies 17,061 17,939 Total companies accounted for using the equity method 4,517 11,319 Total 1,097,703 1,106,613 42

43 d) Translation differences The detail, by company, of the balance of Translation Differences is as follows: Company CEPSA International, B.V. (4,738) (3,417) Deten Quimica, S.A. 32,943 5,094 CEPSA Chimie Montréal, LP 4,735 3,785 CEPSA Chimie Bécancour, INC 2,728 2,212 CEPSA Colombia 32,495 49,917 Other companies (2,113) (2,916) Total translation differences 66,050 54,675 The change in the balance of this heading in 2009 was basically due to the fluctuation in the year-end exchange rates of the Canadian dollar, Brazilian real and US dollar. e) Dividends Interim Dividend Paid includes the dividends paid out of CEPSA's profit at 31 December 2009 and 2008 amounting to EUR 107,030 and EUR, for both years. The shareholders at the Annual General Meeting on 26 June 2009 resolved to pay a dividend of EUR 1.00 per share out of 2008 profit which, after deducting the interim dividend already paid, gave rise to a final dividend of EUR 0.60 per share. This dividend was effective on 7 July Also the shareholders at the Annual General Meeting on 27 June 2008 resolved to pay a dividend of EUR 1.25 per share out of 2007 profit which, after deducting the interim dividend already paid, gave rise to a final dividend of EUR 0.70 per share. This dividend was effective on 7 July The final dividend out of 2009 profit that CEPSA's Board of Directors will propose to the shareholders at the Annual General Meeting will not be deducted from equity until it has been approved by the shareholders. 43

44 Annual Report 2009 Consolidated Financial Statements f) Minority interests The detail of Minority Interests at 31 December 2009 and 2008 is as follows: Minority interests Equity Profit (Loss) Equity Profit (Loss) Company C.M.D. Aeropuertos Canarios, S.L. 12,180 1,976 12,180 2,495 Deten Química, S.A. 21,415 11,120 21,854 7,111 Generadora Eléctrica Penínsular, S.A. 15,520 3,021 15,601 6,661 Other Total 49,119 16,117 49,638 16, BANK BORROWINGS AND OTHER FINANCIAL LIABILITIES The detail of the balances of current and non-current bank borrowings and other financial liabilities in 2009 and 2008 is as follows: 2009 Current Non-Current Total Bank borrowings relating to finance leases 26,523 10,035 36,558 Other bank borrowings 714,105 1,099,566 1,813,671 Derivatives 1,756-1,756 Other financial liabilities 67, , ,817 Total 810,275 1,260,527 2,070, Current Non-Current Total Bank borrowings relating to finance leases 28,547 30,835 59,382 Other bank borrowings 709, ,681 1,595,522 Derivatives 7,611-7,611 Other financial liabilities 10, , ,289 Total 756,587 1,116,217 1,872,804 44

45 The detail by maturity of the bank borrowings and other financial liabilities at 31 December 2009 and 2008, is as follows: 2009 Maturring in: Resto Total Bank borrowings relating to finance leases 26,523 7,391 2, ,558 Other bank borrowings 714, , ,859 29,226 74, ,972 1,813,671 Derivatives 1, ,756 Other financial liabilities 67,891 35,251 13,337 13,567 17,753 71, ,817 Total 810, , ,811 42,822 92, ,990 2,070, Maturring in: Resto Total Bank borrowings relating to finance leases 28,547 24,222 4,740 1, ,382 Other bank borrowings 709, , ,855 65,298 7, ,927 1,595,522 Derivatives 7, ,611 Other financial liabilities 10,588 85,224 13,306 12,758 14,042 74, ,289 Total 756, , ,901 79,900 21, ,298 1,872,804 The detail by maturity of the bank borrowings and other financial liabilities at 31 December 2009 and 2008, is as follows: Financial Liabilities Current Non-current Total Current Non-current Total Euro 501, ,635 1,250, , , ,321 Foreign currencies 308, , , , ,555 1,018,064 Unmatured interest payable ,419-2,419 Total bank borrowings and other financial liabilities 810,275 1,260,527 2,070, ,587 1,116,217 1,872,804 45

46 Annual Report 2009 Consolidated Financial Statements The average annual nominal interest rate on the loans in euros was 1.39% in 2009 and 3.79% in 2008, and that on the foreign currency loans was 0.76% in 2009 and 2.99% in The weighted average cost of the financing received was 1.09% in 2009 and 3.38% in The fair value of these financial liabilities coincides basically with their carrying amount as they relate mainly to loans at variable interest rates. The loans denominated in US dollars are contracted directly or through US dollar forward sales. The interest rates presented in the preceding paragraph include the effect of these forward sales. In accordance with its foreign currency risk management policy (see Note 22), the CEPSA Group has arranged loans in US dollars to finance certain investments in non-current assets that generate cash flows in US dollars and are accounted for as cash flow hedges. (see Notes 3.k and 22) The detail of the balances and changes in 2009 and 2008 in Reserves for Fair Value Accounting Financial Assets and Liabilities relating to these transactions is as follows: Beginning balance 26,946 97,756 Gains or losses recognised directly in equity 28,387 (63,229) Transferred to income statement 956 (7,581) Ending balance 56,289 26,946 At 31 December 2009 and 2008 the CEPSA Group companies had undrawn credit facilities totalling over EUR 700,000 thousand and EUR 500,000 thousand, respectively. In addition to these amounts available, at those dates there were Cash and Cash Equivalents balances included under Liquid Assets in the consolidated balance sheets. 46

47 A detail of the Group s financial liabilities at 31 December 2009 and 2008, by nature and category, is as follows: Financial liabilities Held-for trading Borrowings and Hedging by type / category financial liabilities payables derivatives Total Bank borrowings - 1,109,601-1,109,601 Other financial liabilities - 150, ,926 Non-current - 1,260,527-1,260,527 Bank borrowings - 740, ,628 Derivatives 1, ,756 Other financial liabilities - 67,891-67,891 Current 1, , ,275 Total 1,711 2,069, ,070, inancial liabilities Held-for trading Borrowings and Hedging by type / category financial liabilities payables derivatives Total Bank borrowings - 916, ,516 Other financial liabilities - 199, ,701 Non-current - 1,116,217-1,116,217 Bank borrowings - 738, ,388 Derivados 7, ,611 Derivatives - 10,588-10,588 Current 7, , ,587 Total 7,386 1,865, ,872,804 47

48 Annual Report 2009 Consolidated Financial Statements 14. TAX MATTERS CEPSA and certain Group companies have filed consolidated income tax returns. Table I contains a list of the main companies in the tax Group in The detail of the income tax expense is as follows: In the consolidated income statements: Current tax expense Period tax expense 322, ,128 Adjustments to the tax expense for the period or prior years (7,329) (9,407) Deferred tax expense Related to the creation or reversal of temporary differences (43,124) (67,741) otal tax expense recognised in the consolidated income statement 272, ,980 In the consolidated statement of changes in equity: Deferred tax expense Related to the creation or reversal of temporary differences 9,347 (24,614) Total tax expense recognised in equity 9,347 (24,614) The income tax expense is obtained from the accounting profit before taxes as indicated below: Accounting profit (before taxes) 663, ,992 Theoretical tax rate 198, ,498 Difference due to different tax rates 104, ,014 Permanent differences 15,358 16,515 Tax credits and relief applied (38,829) (39,640) Tax adjustment (7,329) (9,407) Total income tax expense 272, ,980 The tax on remuneration of production activities in force in Algeria is deemed to be of the same nature as Spanish Income Tax. The current tax rate is 38% on the gross annual remuneration in barrels of Saharan Blend crude oil, withheld and settled through the Algerian state-owned company Sonatrach, in the name and on behalf of CEPSA. The related tax payable in 2009 and 2008 amounted to EUR 191,074 thousand and EUR 230,852 thousand, respectively, and in 2009 and 2008, under Algerian law, included the tax payable for the new tax on exceptional profits which is higher as crude price increases and came into force in August

49 The Difference Due to Different Tax Rates includes mainly the effect of different tax rates to which CEPSA is subject on income obtained in the exploration for and production of crude oil from the Algerian fields and attributed to its permanent establishment. Other foreing institutions or subsidiaries have no significant influence on this rate differential. The Permanent Differences arise mainly from the exemptions of revenues which have already been taxed abroad, capital gains on the transfer of certain assets and non-deductible expenses. The Tax Adjustment amounts of EUR (7,329) thousand in 2009 and EUR (9,407) thousand in 2008 include the difference between the income tax expense recorded at 31 December 2008 and 2007, and the income tax expense per the final tax returns for those years and other items such as the effect of applying temporary adjustment reversibility criteria for income tax purposes and the effect of the assessments issued by the tax inspection authorities and other supplementary assessments issued to various Group companies. In calculating the income tax expense for each year, the Group took into account the applicable tax credits for dividend double taxation and certain activities and other tax incentives. At 31 December 2009 and 2008, the CEPSA Group did not have any material unused tax credits. In 2009 and 2008 the income qualifying for the reinvestment tax credit amounted to EUR 1,312 thousand and EUR 2,238 thousand, respectively. This income was reinvested in 2009 and As permitted by Article 35 of the Income Tax Law, the CEPSA Group took the following tax credits for investment in measures to reduce environmental impact in 2009 and 2008: General Tax Regime Canary Islands Tax Regime Enviromental investments 31,150 41, Tax credit 1,246 2,488-5 At 31 December 2009 and 2008, certain companies in the consolidated tax Group had EUR 10,265 thousand and EUR 24,995 thousand, respectively, of tax losses available for carryforward. The related tax assets were recognised only in those cases in which it was reasonably estimated that their future recovery is assured. 49

50 Annual Report 2009 Consolidated Financial Statements The detail of the balances of the deferred tax assets and liabilities is as follows, broken down according to origin: Deferred tax assets Non-current assets 35,900 40,497 Tax loss carryforwards 5,330 10,515 Provisions 27,728 34,815 Other 19,879 44,013 Total deferred tax assets 88, ,840 Deferred tax liabilities Finance leases 67,749 63,143 Non-current assets 32,254 37,605 Hedges 11,484 19,945 Current assets 73, ,843 Other 43,649 21,284 Total deferred tax liabilities 228, ,820 The deferred tax liabilities arising from current assets include mainly the deferred tax liability arising from the difference between the carrying amount of inventories measured at average unit cost and their tax base measured at LIFO cost. In 2008 Royal Decree 1514/2007, which approved the New Spanish National Chart of Accounts, came into force requiring, inter alia, that the Group companies apply the average unit cost method of measurement in their individual financial statements, since it does not permit the use of the LIFO method. For tax purposes, this change meant that the tax base is the same as the carrying amount of the inventories. However, in accordance with Law 4/2008, of 23 December, which abolishes the wealth tax, adopts monthly VAT refund arrangements for general use and introduces other amendments to tax legislation, one-third of the adjustments arising from first-time application of the new accounting legislation may be included in the taxable income for income tax purposes in each of the first three consecutive years. Consequently, at 31 December 2009, the balance of Deferred Tax Liabilities includes a third of the aforementioned difference, having been included two thirds in the taxable income for 2008 and Assessments have been contested for various taxes, including the excise tax on oil and gas. The CEPSA Group has filed appeals against such assessments with the appropriate courts and has recorded a provision for the full amount thereof, together with the related late-payment interest accrued through 2009 year-end. The years open for review by the tax authorities in connection with the taxes applicable to the Group vary for the different consolidated companies, although they are generally the years since 2002, except for the income tax of the CEPSA tax Group which are the years since

51 In 2008 the tax authorities completed their audit of the CEPSA Tax Group s income tax for the period 2000 to 2004 and their review of the tax returns did not bring to light any discrepancies which might have given rise to liabilities for which no provisions had been recognised. CEPSA management does not expect any additional material liabilities for which provisions have not been recognised to arise for the Parent or for the other consolidated Group companies as a result of the appeals filed or of inspection of the open years. In opinion of the Company s Directors and its tax advisors, related parties transactions are carried at market value, transfer prices are adequately supported and it is estimated that there are not significant risks of future consideration liabilities in this aspect of those resulting liabilities for future consideration for the company. 15. GRANTS RELATED TO ASSETS The changes in 2008 and 2009 in Grants Related to Assets and the balances thereof at year-end are as follows: 2008 Balance at Other Transferred to Balance at Additions Changes Retirements Income Grants related to assets 69, ,904 - (10,121) 64,324 Greenhouse gas emission allowances ,478 - (16) (116,833) 5,795 Total 70, ,106 3,904 (16) (126,954) 70, Balance at Other Transferred to Balance at Additions Changes Retirements Income Grants related to assets 64,324 10, (5) (9,600) 66,471 Greenhouse gas emission allowances 5,795 85,718 (64) - (76,469) 14,980 Total 70,119 96, (5) (86,069) 81,451 51

52 Annual Report 2009 Consolidated Financial Statements The detail, by grantor entity, of the additions to Grants Related to Assets in 2009 and 2008 is as follows: Grants received from - European Union Central government 6, Autonomous Community governments 4, Total 10, The additions to Greenhouse Gas Emission Allowances include the market value of the emission allowances assigned for no consideration at the date of assignment and the Transferred to Income column includes the valuation adjustment initially recognised for the amount recorded as an impairment loss on allowances received from the Government and the recognition in income of the value of the allowances assigned for CO2 emissions made in the year. (see Notes 4 and 25) 16. PENSIONS AND OTHER SIMILAR OBLIGATIONS a) Defined contribution plans For the period 2009 and 2008, CEPSA and several of its subsidiaries recognised the following expenses for defined contribution obligations: Defined obligations Retirement (pension plan) 10,333 8,278 Life insurance 4,257 4,457 Total 14,590 12,735 ) b) Defined benefit obligations The net amounts of expenses and revenues recognised in the consolidated income statement and the variation in defined benefit obligations on the liability side of the balance sheet are as follows: Defined obligations Balance at 1 January 11,016 10,789 Current service cost 2,305 2,355 Interest cost of benefit Effect of reductions or settlements (2,683) (2,492) Balance at 31 December 10,986 11,016 52

53 The main assumptions used to determine the pension obligations and post-employment benefits under the plans of CEPSA and several of its subsidiaries are as follows: Company Store Discount rate 4% 4% Expected salary increase rate 2% 2% Mortality tables PEMF2000 PEMF OTHER PROVISIONS The detail of the changes recorded in 2008 and 2009 in Other Provisions and of the balances at 31 December 2008 and 2009, is as follows: 2008 Balance at Other Amounts Balance at Additions Transfers Changes Used Provisions for third-party liability 54,759 7,322 11,466 (15,130) (35,845) 22,572 Environmental provisions 19,653 3, (6,223) 17,086 Other provisions 117,138 17,877 (10,789) 12,848 (22,591) 114,483 Total 191,550 28, (2,282) (64,659) 154, Balance at Other Amounts Balance at Additions Transfers Changes Used Provisions for third-party liability 22,572 3,059 (286) (586) (3,535) 21,224 Environmental provisions 17,086 5, (4,881) 17,691 Other provisions 114,483 19, ,464 (75,016) 80,448 Total 154,141 27,776-20,878 (83,432) 119,363 "Provisions for Third-Party Liability" covers the contingencies arising from the Group companies' ordinary operations that might give rise to actual liabilities in their dealings with third parties. The main items were obligations to third parties relating to contractual undertakings and contingencies relating to lawsuits in progress. It also includes the provisions recorded to cover possible tax contingencies arising from assessments signed on a contested basis and other tax contingencies in connection with the years open for review by the tax authorities. Environmental Provisions includes the estimated amounts relating to legal or contractual liabilities or commitments acquired by the CEPSA Group to prevent, reduce or repair damage to the environment with a charge to professional services or repair and upkeep expenses. It also includes the estimated amounts for environmental action to remedy the risk of gradual soil pollution. 53

54 Annual Report 2009 Consolidated Financial Statements "Other Provisions" includes other contingencies and provisions for the abandonment of crude oil production fields once the recoverable reserves have been extracted. The main changes in 2009 related to the amounts used in relation to the finalisation of certain disputes, the most significant of which were the agreements reached with the Brazilian tax authorities under the new regulatory framework, and in 2008 related to the conclusion of the inspection of the CEPSA Tax Group s income tax for 2000 to 2004 (see Note 14). The directors of CEPSA consider that the provisions recorded in the accompanying consolidated balance sheet cover adequately the risks relating to litigation, arbitration proceedings and other transactions described in this Note and, accordingly, they do not expect any liabilities additional to those disclosed to arise. In view of the nature of the risks covered by these provisions, it is not possible to determine a reasonable schedule for the related payments, if any. 18. OTHER NON-CURRENT LIABILITIES AND TRADE AND OTHER PAYABLES The detail of the balances of Other Non-Current Liabilities and Trade and Other Payables in 2009 and 2008 is as follows: Non-Current Current Non-Current Current Trade payables - 1,520,400-1,138,662 Payable to companies accounted for u sing the equity method - 283, ,041 Guarantees/deposits received 3,773 9,905 3,776 6,536 Other non-trade payables 27, ,331 21, ,783 Taxes payable ,120 77, ,368 Provisions - 61,107-86,870 Total 31,804 2,407, ,838 1,944,260 ) Provisions includes at 31 December 2009 and 2008 amounts of EUR 57,757 thousand and EUR 82,718 thousand, respectively, relating to the obligation to deliver allowances for the CO2 emissions made, which are lower than the allowances assigned under the National Emission Allowance Assignment Plan. (see Notes 3-j and 4) 54

55 19. RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are related parties, were eliminated on consolidation and are not disclosed in this Note. Transactions between the Group and its associates and joint ventures are disclosed below: Transactions with associates and joint ventures In the consolidated balance sheets: Trade and other receivables 171, ,890 Current and non-current loans 277, ,875 Trade and other payables 283, ,041 In the consolidated income statements: Revenue 1,036,854 1,694,165 Other operating income 628 3,068 Procurements 205, ,465 Other operating expenses 131, ,935 Finance income 5,961 7,191 Finance costs 296 1,067 Transactions and balances with associates and joint ventures relate basically to normal Group business operations and were carried out on an arm's-length basis. Lastly, Trade and Other Payables includes EUR 201,783 thousand and EUR 189,462 thousand relating to the excise tax on oil and gas accrued in December 2009 and 2008, respectively, which CEPSA paid to the tax authorities in January 2010 and 2009, through Compañía Logística de Hidrocarburos CLH, S.A. 55

56 Annual Report 2009 Consolidated Financial Statements Transactions with significant shareholders The relevant transactions performed by the CEPSA Group with significant shareholders in 2009 were as follows: Name of the Significant CEPSA Group Type of Type of Shareholder Company Relationship Transaction Amount Banco Santander (*) CEPSA Comercial Services received and EUR 7,364 thousand. finance costs Comercial Financial income EUR 4,947 thousand. Corporate Dividends and other distributed profit EUR 50,870 thousand. Grupo Total CEPSA Comercial Purchases, services and EUR 180,650 thousand of ; sundry expenses sales; EUR 1,071 thousand for services and sundry expenses. Comercial Sales, services and EUR 180,650 thousand of ; sundry income sales; EUR 1,071 thousand for services and sundry income. Corporate Dividends and other EUR 130,668 thousand.. distributed profit International Petroleum CEPSA Corporate Dividends and other EUR 65,679 thousand.. Investment Company beneficios distribuidos Unión Fenosa, S.A. (*) CEPSA Comercial Purchases, services and EUR 25,036 thousand of sundry expenses purchases; EUR 1,499 thousand for services and of services and sundry income.. (*) For the period that the companies were linked by a significant. Comercial Sales, services and EUR 5,693 thousand sundry income of sales; EUR 1,008 thousand e ingresos diversos. Corporate Dividends and other EUR 8,027 thousand.. distributed profit The CEPSA Group and its directors and executives did not perform any relevant transactions in 2009 and 2008, other than those described in Note

57 20. REMUNERATION AND OTHER BENEFITS OF DIRECTORS AND SENIOR EXECUTIVES The remuneration earned by the directors at the consolidated Group in 2009 and 2008 was as follows: Remuneration Fixed remuneration 800 1,054 Variable remuneration Attendance fees Bylaw-stipulated director emoluments 3,603 3,708 Other items 12 1,844 Pension funds and plans: contributions and obligations Total 5,864 8,099 On 27 June 2008 the Executive Chairman resigned and retired and was replaced by a non-executive Chairman. Pursuant to Article 127 ter. 4 of the Spanish Companies Law, introduced by Law 26/2003, of 17 July, which amends Securities Market Law 24/1988, of 28 July, and the Consolidated Spanish Companies Law, in order to reinforce the transparency of listed corporations, the Company's directors have made the disclosures to which the aforementioned article refers. Following is a detail of the companies engaging in an activity that is identical, similar or complementary to the activity that constitutes the company object of Compañía Española de Petróleos S.A. in which the members of the Board of Directors own equity interests, and of the functions, if any, that they discharge thereat: Director Investee Line of Business % of Ownership Function Mr. Michel Bénézit TOTAL, S.A. Energy Not significant Member of the Executive Committee - General Manager of Refining and Marketing Mr. Eric de Menten TOTAL, S.A. Energy Not significant General Manager of Marketing Europe Mrs. Bernadette Spinoy TOTAL, S.A. Energy Not significant General Manager of Styrene-Polymer purchase logistics Mr. Humbert de Wendel TOTAL, S.A. Energy Not significant General manager of corporate development - Financial Division Mr. Patrick Pouyanné TOTAL, S.A. Energy Not significant General manager of Exploration and Production -Research and Development Strategy Also, pursuant to the aforementioned law, we set forth below the activities carried on by the members of the Board of Directors that are identical, similar or complementary to the activity that constitutes the company object of Compañía Española de Petróleos S.A., and the duties they discharge at other subsidiaries and associates: 57

58 Annual Report 2009 Consolidated Financial Statements System under Company through which the Activity which the Activity Director Line of Business is Performed is Performed Position or Function at the Company Concerned Mr. Michael Bénézit Integrated oil As an employee TOTAL S.A. TOTAL S.A. Member of the Executive Committee and company General Manager of Refining and Marketing Mrs. Bernadette Spinoy Integrated oil As an employee TOTAL S.A. TOTAL S.A. General Manager of company Styrene-Polymer purchase logistics Mr. Murtadha Al Hashmi Integrated oil As an employee IPIC IPIC General manager of Financial Division company Mr. Eric de Menten Integrated oil As an employee TOTAL S.A. TOTAL S.A. General Manager company of Marketing Europe Mr. Saeed Al Mehairbi Oil transport As an employee IPIC SUMED (Sued-Mediterranean Pipeline) Proyect management division director. Mr. Khadem Al Qubaisi Integrated oil As an employee IPIC Chief Executive Officer company Mr. David Forbes Integrated oil As an employee IPIC Director of Strategy Department company Mr. Patrick Pouyanné Integrated oil As an employee TOTAL S.A. TOTAL S.A. General manager of Exploration company and Production Research and Development Strategy Mr. Humbert de Wendel Integrated oil As an employee TOTAL S.A. TOTAL S.A. General manager of company corporate development - Financial Division Director Corporate Name of the Subsidiary Position or Function at the Company Mr.Dominique de Riberolles CEPSA Química, S.A. Chairman CEPSA Estaciones de Servicios, S.A. Chairman CEPSA Chimie Bécancour Chairman CEPSA Química Montreal LP Chairman Detén Química S.A. Chairman Petresa América Inc. Director Interquisa Canada, Inc Director CEPSA Gas Comercializadora, S.A. Director Compañía Logística de Hidrocarburos CLH, S.A. Director At 31 December 2009, the Board of Directors was composed by 13 members, one female and 12 males, and at 31 December 2008, it was composed of 19 members, one female and 18 males. Total remuneration of senior executives who were not simultaneously executive directors of the consolidated Group amounted to EUR 6,535 thousand in At 2009 year-end are as follows: Remuneration 2009 Fixed remuneration 4,295 Variable remuneration 740 Other items 532 Pension funds and plans: contributions and obligations 1,733 Total 7,300 58

59 The number of member of Senior Executives has grown 14 in 2008 to 15 in Senior executives receive an annual fixed and variable remuneration payment. The latter is calculated as a percentage of the fixed remuneration, with said percentage being conditional upon the level of achievement of the objectives established for the year. These objectives, which are subject to measurement and control systems, are determined on the basis of the earnings of the Consolidated Group, occupational safety rates, operating aspects of the business, such as the performance of projects pursuant to established criteria relating to price, quality and deadline, and individual performance. 21. GUARANTEE COMMITMENTS TO THIRD PARTIES AND OTHER CONTINGENT LIABILITIES At 31 December 2009 and 2008, certain Group companies had provided guarantees, mainly for bank transactions and supply contracts, the breakdown being as follows: Public entities 155, ,732 Suppliers/creditors and other 627, ,656 Total 783, ,388 The guarantees to Suppliers/Creditors and Other relate mainly to guarantees provided by CEPSA to financial institutions for drawdowns against credit facilities granted to Group companies, which amounted to EUR 411,874 thousand and EUR 583,915 thousand in 2009 and 2008, respectively. These amounts were recognised, by maturity, under Bank Borrowings on the liability side of the consolidated balance sheets. At 31 December 2009, the Group had not pledged any financial assets as security for liabilities or contingent liabilities. Long-term firm commitments to purchase, Cepsa Group at 31 December are as follows: Procurements Subsecuent years Total Purchase commitments: Liqued Natural Gas 394, , , , ,598 1,956,782 3,516,076 These commitments have been quantified using the best estimates of Cepsa Gas Comercializadora (Brent 80$/bbl and an exchange rate $/ 1.40).. 59

60 Annual Report 2009 Consolidated Financial Statements 22. RISK MANAGEMENT POLICY Main risks associated with the CEPSA Group's operations The CEPSA Group carries on its activities in environments marked by a series of external factors, the changes in which could affect the manner in which operations are performed and the results obtained therefrom. These activities are managed through the application of policies whose main objective, in accordance with the strategy established by the Company s management, is the optimisation of the ratio of costs to risks covered. The strategic and budget planning processes involve estimating the effect of business risks and a sensitivity analysis is performed for the main variables in order to gain comprehensive insight on their impact. CEPSA publishes an annual Corporate Governance Report which contains, among other matters, an extensive breakdown of the economic, social and environmental actions performed and on their contribution to sustainable development, which Report was prepared in accordance with the directives of the Global Reporting Initiative (GRI). The Board of Directors through the audit committee, CEO and general managers of the respective divisions, supervise and monitor risks on a regular basis, and adjust risk profiles, where necessary, depending on the circumstances. In the area of environmental protection, safety and quality, the basic function of the P.A.S.C.A.L. Committee is to periodically review the risks of this type and to propose, where appropriate, measures aimed at compliance or change. In the field of information security, a Corporate Security Committee is entrusted with monitoring and fostering compliance with information security measures. The CEPSA Group has risk control systems in place that may affect the investments it makes and the activities it carries on. Such systems are appropriate for the Group s risk profile. The main risks to which the Group is exposed can be grouped in the following categories: Market risks The nature of the CEPSA Group s businesses entails a certain degree of sensitivity to the changes in and volatility of oil and gas prices, refining margins and energy product sales. In this respect, the Group's high degree of vertical integration, which has increased in recent years, is a strategy which by itself minimises the risk arising from the economic cycles and their specific impact on the Group's business units or areas. A rise in the level of crude oil prices has a positive impact on the earnings of the Exploration and Production division. However, this impact can be dampened by the application of certain clauses of the production share contract type agreements Products Share Contract (PSC) and their effect on the quantities of crude to be received. Fluctuations in crude oil prices also have an effect on the results of refining and marketing operations, the scale of which depends, among numerous other factors, on the speed with which price changes in energy products or base petrochemical products at source can be relayed to the international and local finished goods markets. In accordance with the sensitivity analysis performed, at 31 December 2009 and 2008, a 10 dollars increase in a similar dates in the price of a barrel of oil would lead to an approximate increase in net profit without the effect of Non- Recurring elements (see note 24.c), of EUR 34 and EUR 48 million respectively. Also, a 10 dollar cents increase in the refining margin per barrel would imply approximate growth in the aforementioned aggregate of EUR 9 million in both years. 60

61 With respect to the risk of crude oil and products price changes in international markets, CEPSA arranges and operates a price risk hedging system whereby it protects against the effects of the daily volatility of prices and variations of crude and products stock s that has been previously defined and reviewed annually to cover the needs for strategic stocks and minimum level of operations. The hedge of these fluctuations in the market is articulated by IPE Crude Brent Oil futures market, compensating with sale positions, the excess of operative stocks and with purchase positions the defect of operative stocks. Capital Management Maintaining a sound equity structure has been set as a priority objective of capital management by the CEPSA Group. This overall objective is implemented by controlling the level of borrowings in order to ensure, as it allows them to tackle any possible changes in economic and industry-based circumstances and, above all, ensures readiness to appropriate financing enabling the Group take on developments and new profitable business opportunities which may act as an additional driver of growth and contribute significant value for shareholders. The changes in the level of borrowings are measured by the ratio of the CEPSA Group s net borrowings to Equity, broken down by origin: Non-current financial liability 1,260,527 1,116,217 Current financial liability 810, ,587 Gross liability 2,070,802 1,872,804 Financial assets paid 83,800 66,900 Cash and cash equivalents 598, ,954 Net debt paid 1,388,465 1,324,950 Equity 5,352,792 5,205,072 Net debt paid / Equity 25.9% 25.5% Foreign currency, interest rate and other financial risks The Group's operations are exposed, in varying degrees, to risks of fluctuations in the financial markets. The Group s activities are generally sensitive to fluctuations in the euro exchange rate versus the US dollar, the currency in which crude oil, and oil and petrochemical products are priced, with respect to the euro. Exposure to this kind of risk is hedged in accordance with the Group's internal policy. From the operational standpoint, is centralised and managed the foreign currency risk exposure of the Group companies net global foreign currency cash flow position. Also in the Group is centralised the managing of the recourse to financial markets for loans, investment of surpluses and financial instruments. 61

62 Annual Report 2009 Consolidated Financial Statements In the case of foreign investments in long-term assets which will generate future cash flows in foreign currencies, the Group minimises its foreign currency exposure by arranging financing in the same currency, which hedges, to a certain extent, the foreign currency risk assumed in the cash flows generated by such assets. This means that the foreign currency financing covers, to a certain extent, the foreign currency risk arising from the future cash flows generated by these assets. At 31 December 2009 and 2008 net debt in dollars equivalent to EUR 817 million and EUR 1,010 million, representing 39% and 54% respectively of total consolidated debt. On the basis of the sensitivity analyses performed, at 31 December 2009 and 2008 average annual depreciation of the US dollar against the euro of 5 dollar cents could give rise to a reduction of approximately EUR 29 million and EUR 32 million, respectively, in net profit excluding non-recurring items (see Note 24.c) and an increase in equity, excluding the aforementioned effect on net profit, of EUR 18 million and EUR 19 million, respectively. Operations are also sensitive to interest rate changes. The Group has arranged most of its debt at floating rates, taking into account the low debt ratio and because it considers that this financing method will entail a lower cost at long term. In relation to liquidity risk management, in order to manage potential short-term fund requirements, the Company has credit facilities available, as detailed in Note 13 of the notes to the financial statements and available Treasury, to the undrawn balance of which does not bear interest. In accordance with the sensitivity analysis performed, at 31 December 2009 and 2008, a 25 basic points increase in interest rates relating to all periods and currencies would lead to a decrease in net profit of approximately EUR 3 million. The banks with which the Group operates are leading Spanish and international entities of renown; however, the counterparty risk in investments and financial instruments contracts is analysed. Risks relating to changes in the legislation applicable to activities and/or the industry The activities carried on by the Group, in Spain or abroad, are subject to various legislation. The changes that might arise could affect the structure under which activities are performed and the results generated by operations Industrial risks, prevention and safety The safety control system applied is included in the Risk Prevention Manual and its Basic Standards, in accordance with the OHSAS international specifications. Also in place are action procedures that reflect the standards developed in accordance with best practices, which ensure the maximum possible level of safety, paying special attention to the elimination of risk at source. The objective of this system is ongoing improvement in risk reduction, focused on various activities, such as work planning, the analysis and monitoring of corrective actions derived from incidents and accidents, internal audits, periodic inspections of the facilities and supervision of maintenance work and operations. 62

63 Environmental risks Certain of the Group s activities have an impact on the environment through emissions into the air, water, soil and ground water and also through the production and management of waste. Since 2007 this type of impacts are regulated by the Integrated Pollution Prevention and Control Directive (IPPC) and its transposition into Spanish Law 16/2002. In this connection, all the Group s industrial plants were awarded their Integrated Environmental Permits, which involve rigorous control over their processes with the aim of minimising impact on the environment. Nevertheless, for many years now, one of Cepsa's longstanding primary objectives has been to minimise the impact of its activities on the environment in which it operates its industrial plants, which is reflected in its internal environmental protection policies and is regulated by the Basic Environmental Standards. A summary of the measures adopted in order to minimise impacts, by area, is as follows, by vectors: Air Internal procedures are applied with the aim of controlling and managing impacts and control networks have been implemented, in relation to both emissions and inmissions, consisting of continuous measurements. The data obtained is sent in real time to the competent authority. Discharges into waterways the Group has industrial waste treatment plants at all of its facilities which allow waste discharged into waterways to be controlled and significantly reduces the impact on the environment. As in the case of air emissions, the data relating to the parameters of industrial waste are sent in real time to the competent authority and environmental controls are also performed on both the waterways and sediments. Soil/ground water All the facilities are equipped with piezometric control networks which show the state of the soil and ground water at any given time and allow prompt measures to be taken in the event of an incident, thus minimising the impact on this area. Waste In its activities Cepsa has established a preventative policy regarding the production of waste, encouraging its reduction, reuse, recycling and recovery with the aim of protecting the environment and human health. Protection against Accidental Marine Pollution The Group carries out all the actions geared towards compliance with the provisions of the Domestic Contingency Plan for Accidental Marine Pollution and those specified in internal procedures for the prevention and solution of this type of pollution. The Group carries out all the actions required to improve the operations of the maritime terminals or facilities, minimising the risk arising from activities. Exploration and crude oil production - In its operations in Algeria, Colombia, Egypt and Peru, the CEPSA Group applies strict environmental criteria in order to minimise the impact of its activities with the utmost respect for the natural environments in which it operates and the indigenous communities in these areas. Since 1995, Cepsa has been carrying out analyses and assessments of the environmental risks of its activities with the aim of managing and controlling them in order to reduce possible incidents which could lead to significant impacts on the environment or biodiversity. In this connection, the aforementioned analyses were carried out at various Group plants which were adapted to UNE :2008 standard on Analysis and Assessment of Environmental Risks, a benchmark standard in Spain. Also, all of Cepsa's large industrial plants are equipped with environmental management systems certified by external entities. The primary objective is to obtain certification for the few activities which are still uncertified. 63

64 Annual Report 2009 Consolidated Financial Statements In this connection, claims may be filed against the CEPSA Group by affected parties for environmental damage caused by its operations inside or outside of its facilities. As far as it is currently aware, management considers that the accounting provisions recognised in this connection and the insurance policies arranged will cover all possible outcomes. Management has yet to determine, on the basis of the related legislation to be enacted, the amount of the financial guarantees that could be required as a result of the application of the Regulation partially implementing the Environmental Liability Law at certain of the Group s plants. The amounts of the financial guarantees will be determined as soon as the regulations implementing the law and the environmental liability regulations are enacted. Also, certain of the Group s production facilities must comply with the requirements of the regulations affecting greenhouse gas emissions. In 2008 and 2009 the emissions from the plants affected by this regulation, verified by AENOR, were, overall, slightly less than the allowances granted under the National Allocation Plan. Equity risk The Company has taken out insurance to cover the risk of damage to property, including the breakdown of machinery and the control of crude-oil wells involved in exploration and production; the risk of loss of profits arising from damage to property; third-party liability of both CEPSA and its employees or directors during the performance of activities and deriving from damage to property or personal injury to third parties or employees caused by occupational accidents and the risk of loss or damage during the transport of crude oil, products and equipment. Customer credit risks Commercial loans and collections are managed in accordance with periodically updated Internal Regulations and Procedures. This regulation determines commercial credit limits for each customer, establishes the most appropriate collection instruments, includes the actions to be performed for managing default and the monitoring and control of the assigned credit limits. The Group also uses risk analysis computer systems to process internal and external data in an integrated and automated manner. Such data are assessed by applying the models established to classify each customer s commercial risk and assign the related credit limit. Insurance policies have also been taken out to cover the risk of customer default in certain commercial areas. Following is a detail of the past-due receivables that had not been provisioned and of total unmatured receivables, included under Trade and Other Receivables at 31 December Debts not past due 2,103,561 1,647,416 Debts 0-30 days past due 112, ,195 Debts days past due 44,649 89,594 Debts days past due 38,965 39,637 Debts more than 180 days past due 18,647 8,035 Total trade and other receivables 2,317,936 2,059,877 64

65 As discussed previously, credit insurance policies have been arranged that cover the risk of default on a portion of the past-due receivables that have not been provisioned. Also, guarantees have been provided that cover another portion thereof. Risks related to the security of information CEPSA has a security organisation in charge of ensuring the availability, integrity, confidentiality and auditability of the information required for the correct performance of the Group's activities with an adequate level of risk and cost. The Group has an Information Security Management System based on the reduction of risk, which was awarded the highest ISO international certification. Other risks The CEPSA Group has various litigation in process in relation to its business, including tax and competition disputes and is also subject to tax inspections for the years still open for review. Although the final outcome of these matters cannot be foreseen, the Group s management considers that, based on current information, the provisions recognised adequately cover risks of this nature. The audits of income tax for 2000 to 2004 of the CEPSA Tax Group were completed in the first quarter of 2008 and no discrepancies arose in the tax returns reviewed which might give rise to liabilities for which provisions had not been recognised. 23. DERIVATIVES Pursuant to the risk management policies, the CEPSA Group uses derivative financial instruments to hedge exposure to foreign currency, interest rate and commodity price (basically crude oil and oil products) risks on future cash flows. The types of derivatives used are normally forward contracts to hedge foreign currency risk, swap contracts for interest rate risk and futures and swaps to hedge commodity price risk. All of these derivatives mature is less than one month, which means that the change in their fair value resulting from changes in the assumptions used for their measurement is scantly significant. 65

66 Annual Report 2009 Consolidated Financial Statements The detail of derivatives at 31 December 2009 and 2008 is as follows: Notional or Notional or Fair Value contractual amount VFair Value contractual amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities s Derivatives Foreign currency forwards ,220 5,685 5,520 2, ,076 55,013 Crude oil futures ,793 6,383-3,620-22,964 Oil product futures ,308 14, ,233 Oil product swaps 1, ,762 64, ,058-83,362 Total derivatives 3,279 1, ,083 91,714 6,241 8, , ,572 ) The notional amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since these amounts only constitute the basis on which the derivative settlement calculations were made. 24. SEGMENT REPORTING a) Business segment reporting: The CEPSA Group organises and manages its businesses through four business segments: Exploration and Production, which includes oil and gas exploration and production operations Refining and Distribution, which includes supply, refining and distribution operations. Petrochemicals which includes production, distribution and marketing. Gas and Power which includes the cogeneration of electricity and the distribution and retailing of electricity and natural gas. The selling prices between the business segments are similar to market prices and the amounts of income, expenses, assets and liabilities were calculated before the eliminations on consolidation, except for the internal eliminations of each business segment. The financial data shown below were obtained using the same methodology and internal reporting structures as those established to provide management information and to measure the profitability of the business segments, applied on a uniform basis with

67 Segment reporting at 31 December 2009 and 2008 Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) Primary segment reporting Information excluding Non-Recurring Items Exploration & Refining & Gas & Intra-Group Non-Recurring Consolidatng 31/12/09 Production Distribution Petrochemical Power Eliminations Total Items Total Income Revenue Revenue from external customers 632,306 15,446,527 1,887, ,498-18,364,898 18,364,898 Intra-Group revenue 80, ,613 40, ,074 (1,103,620) - - Total revenue 712,709 16,313,140 1,928, ,572 (1,103,620) 18,364,898 18,364,898 Excise tax on oil and gas charged on sales - (2,280,753) (2,280,753) (2,280,753) Revenue without excise tax on oil and gas 712,709 14,032,387 1,928, ,572 (1,103,620) 16,084,145 16,084,145 Procurements and Changes in inventories of finished goods and work in progress (36,088) (11,967,636) (1,369,906) (398,185) 895,387 (12,876,428) (385,900) (13,262,328) Other operating income and expenses (204,392) (1,685,242) (415,262) (53,522) 208,233 (2,150,185) (14,990) (2,165,175) Result 472, , ,929 62,865-1,057,532 (400,890) 656,642 Changes in operating allowances - (11,283) (6,916) (1,770) (19,969) 544, ,842 Depreciation and amortisation charge (263,053) (249,266) (81,871) (21,687) (615,877) (615,877) Allocation to profit or loss of grants related to non-financial assets and others (20) 10,214 10,616 21,717 42,527 42,527 Impairment and gains or losses on disposals of non-current assets 26,391 (16,099) (2,968) (3,915) 3,409 (37,086) (33,677) Profit from operations 235, ,075 61,790 57, , , ,457 Share in profits of equity companies - 32,860 2,962 (222) 35,600 35,600 Net financial profit 14,160 37,398 51,558 Impairment and gains or losses on disposals of financial instruments 1,646 1,646 Consolidated profit before tax 519, , ,261 Income tax (237,808) (34,648) (272,456) Profit/loss for the year from discontinuing operations Consolidated net profit for the year 281, , ,805 Assets and liabilities Non-current assets by segment 1,002,420 3,527, , ,600 5,582,602 5,582,602 Share capital in equity companies 0 76,676 7,298 4,952 88,926 88,926 Total non-current capital invested 1,002,420 3,604, , ,552-5,671,528 5,671,528 Working capital 949,430 3,935, , ,469 6,373, ,677 6,741,212 Cash flow statement Payments due to investments 205, ,195 34,755 86, , ,096 Proceeds from disposal 29,737 27,668 5, ,146 63,146 Cash flows from operating activities 290, , ,988 55, ,582 (400,891) 427,691 67

68 Annual Report 2009 Consolidated Financial Statements Primary segment reporting Information excluding Non-Recurring Items Exploration & Refining & Gas & Intra-Group Non-Recurring Consolidatng 31/12/08 Production Distribution Petrochemical Power Eliminations Total Items Total Income Revenue Revenue from external customers 642,272 21,619,026 2,293, ,135-25,115,499 25,115,499 Intra-Group revenue 61,284 1,250,458 67, ,547 (1,516,313) - - Total revenue 703,556 22,869,484 2,360, ,682 (1,516,313) 25,115,499 25,115,499 Excise tax on oil and gas charged on sales - (2,284,935) (2,284,935) (2,284,935) Revenue without excise tax on oil and gas 703,556 20,584,549 2,360, ,682 (1,516,313) 22,830,564 22,830,564 Procurements and Changes in inventories of finished goods and work in progress 30,884 (17,974,881) (1,703,130) (565,897) 1,355,280 (18,857,744) 194,833 (18,662,911) Other operating income and expenses (153,118) (1,967,399) (474,316) (45,550) 161,033 (2,479,350) (2,479,350) Result 581, , ,644 87,235-1,493, ,833 1,688,303 Changes in operating allowances - (30,134) (19,273) (272) (49,679) (544,212) (593,892) Depreciation and amortisation charge (250,885) (232,135) (84,373) (20,417) (587,810) (587,810) IAllocation to profit or loss of grants related to non-financial assets and others 1,360 40,965 16,763 8,189 67,277 67,277 Impairment and gains or losses on disposals of non-current assets 47 (27,065) (7,747) (8,712) (43,477) (7,363) (50,840) Profit from operations 331, ,900 88,014 66, ,781 (356,742) 523,039 Share in profits of equity companies 34,487 3,219 (214) 37,482 37,482 Net financial profit (26,250) (26,250) Impairment and gains or losses on discontinuing operations Consolidated profit before tax 891,734 (356,742) 534,992 Income tax (351,002) 107,022 (243,980) Profit/loss for the year from de explotaciones discontinuadas Consolidated net profit for the year 540,732 (249,720) 291,012 Assets and liabilities Non-current assets by segment 1,080,803 3,231, , ,228 5,376,661 5,376,661 Share capital in equity companies - 81,784 8,076 5,174 95,034 95,034 Total non-current capital invested 1,080,803 3,312, , ,402-5,471,695 5,471,695 Working capital 1,051,932 3,846,979 1,029, ,958 6,273, ,440 6,529,827 Cash flow statement Payments due to investments 638, ,903 24,599 71,832 1,356,981 1,356,981 Proceeds from disposal 2,051 43,135 1,324 1,860 48,370 48,370 Cash flows from operating activities 351, , ,083 66,035 1,169, ,834 1,339,383 68

69 Set out below is a detail of the most significant aggregates of the exploration and evaluation activity: Result Profit from operations (42,722) (69,668) Balance Non current assets 197,834 32,262 Cash flow statements Payments due to investments 92,061 62,670 Proceeds from disposal 29,461 - Cash flows from operating activities before tax (2,829) (7,202) b) Geographical segment reporting: The breakdown, by geographical area, of net revenue, net property, plant, equipment, intangible assets and investments is as follows: Revenue from Net intangible assets and Additions Investment in sales to external customer property, plan and equipment non-current assets 31/12/09 31/12/08 31/12/09 31/12/08 31/12/09 31/12/08 Spain (*) 13,853,176 19,598,322 4,089,730 3,741, , ,705 Other EU countries 2,251,332 2,778, , ,064 5,575 2,959 Africa 482, , , ,878 74,724 98,953 America 1,216,668 1,619, , , , ,396 Rest of the world 561, , Total consolidated 18,364,898 25,115,499 5,359,119 5,126,064 1,012,298 1,549,013 (*) The data under "Revenue forcsales to external customers" in Spain in 2009 and 2008 includes excise taxes 69

70 Annual Report 2009 Consolidated Financial Statements c) Information on non-recurring items: The breakdown, by business segment, of the main items composing this heading is as follows: Non-Recurring Items Exploration & Refining & Gas & Production Distribution Petrochemical Power Total Profit from operations Difference in valuation and replacement cost - 197,917 (34,523) (4,483) 158,911 Impairment losses on non-current assets - (3,479) (33,607) - (37,086) Other non-recurring items - - (14,990) - (14,990) Total - 194,438 (83,120) (4,483) 106,835 Profit before tax Difference in valuation and replacement cost - 197,917 (34,523) (4,483) 158,911 Impairment losses on non-current assets - (3,479) (33,607) - (37,086) Other non-recurring items ,408-22,408 Total - 194,438 (45,722) (4,483) 144,233 Consolidated net profit Difference in valuation and replacement cost - 138,541 (24,166) (3,138) 111,237 Impairment losses on non-current assets - (2,435) (15,901) - (18,336) Other non-recurring items ,684-16,684 Total - 136,106 (23,383) (3,138) 109, Non-Recurring Items Exploration & Refining & Gas & Production Distribution Petrochemical Power Total Profit from operations Difference in valuation and replacement cost - (297,705) (54,980) 3,306 (349,379) Impairment losses on non-current assets - (3,133) (4,230) - (7,363) Total - (300,838) (59,210) 3,306 (356,742) Profit before tax Difference in valuation and replacement cost - (297,705) (54,980) 3,306 (349,379) Impairment losses on non-current assets - (3,133) (4,230) - (7,363) Total - (300,838) (59,210) 3,306 (356,742) Consolidated net profit Difference in valuation and replacement cost - (208,394) (38,486) 2,314 (244,566) Impairment losses on non-current assets - (2,193) (2,961) - (5,154) Total - (210,587) (41,447) 2,314 (249,720) 70

71 As discussed in Note 3-s, non-recurring items include the difference in the value of inventories between the average cost method used in the consolidated financial statements - and the replacement cost method used to measure business segments, thus facilitating the analysis of business segment performance and comparison between years. In this sense, the consolidated net result excluding Non-recurring Items used for sensitivity analysis also excludes the difference mentioned before. (see Note 22) The breakdown of Difference in valuation and replacement cost, as is follow: Difference in valuation and replacement cost Exploration & Refining & Gas & Production Distribution Petrochemical Power Total Profit from operations Inventories changes - (339,955) (38,030) (7,915) (385,900) Inventories provision changes - 537,872 3,507 3, ,811 Total - 197,917 (34,523) (4,483) 158, Difference in valuation and replacement cost Exploration & Refining & Gas & Production Distribution Petrochemical Power Total Profit from operations Inventories changes - (239,578) (51,466) 6, ,833 Inventories provision changes - (537,283) (3,514) (3,415) (544,212) Total - (297,705) (54,980) 3,306 (349,379) 25. OPERATING INCOME AND EXPENSES The detail of the various items of operating income and expenses relating to 2009 and 2008 is as follows: Revenue Sales 15,768,031 22,473,847 Services provided 356, ,262 Sales returns and volume discounts (40,344) (48,545) Excise tax on oil and gas 2,280,753 2,284,935 Total 18,364,898 25,115,499 71

72 Annual Report 2009 Consolidated Financial Statements The income generated by exchanges of strategic stocks with other operators, not included in Revenue in 2009 and 2008 amounted to EUR 616,978 thousand and EUR 1,569,335 thousand, respectively. Sales includes EUR (1,366) in 2009 and EUR 8,573 in 2008 relating to the recognition in income of the exchange differences recognised in equity and arising from cash flow hedges of certain of the Group s income. (see Notes 13 and 3-k) Other operations income Grants 3,262 1,903 Other operating income 40,686 33,981 Total 43,948 35,884 Procurements Purchases (12,774,485) (18,706,442) Change in inventories (77,684) (127,153) Total (12,852,169) (18,833,595) Staff costs Wages and salaries (406,635) (425,384) Pension contributions and life insurance premiums (14,590) (12,735) Other staff costs (109,642) (116,625) Total (530,867) (554,744) The average number at 31 December 2009 and 2008, the number of employees, by professional category and sex, was as follows: Labour force by professional category (Average Number of Employees ) Executives/Deparment Heads Other line personnel 3,352 3,285 Skilled employees/assistants/clerical staff 7,813 7,858 Total 11,807 11,809 72

73 At 31 December 2009 and 2008, the number of employees, by professional category and sex, was as follows: Labor force by professional category Number of Employees ) Women Men Women Men Executives/Department Heads Other line personnel 768 2, ,594 Skilled employees/assistants/clerical Staff 3,010 4,663 3,052 4,770 Total 3,855 7,848 3,870 7,945 The detail of the Other operating expenses relating to 2009 and 2008 is as follows: Other operating expenses Outside services received (1,300,469) (1,420,996) Transport and freight (318,643) (491,082) Taxes other than income tax (60,253) (43,609) Environmental expenses (19,492) (16,447) Other operating expenses (78,324) (87,228) Total (1,777,181) (2,059,362) The following should be pointed out in relation to Other Operating Expenses : The fees for financial audit services provided to the various companies composing the CEPSA Group and subsidiaries by the principal auditor and by other entities related to the auditor in 2009 and 2008 amounted to EUR 1,639 thousand and EUR 1,657 thousand, respectively. The audit fees charged by other auditors participating in the audit of the various Group companies totalled EUR 478 thousand and EUR 396 thousand, respectively. Additionally, the fees for other professional services provided to the various Group companies by the principal auditor and by other entities related to the auditor during 2009 and 2008 amounted to EUR 89 thousand and EUR 513 thousand, respectively, whereas the fees charged for such services by other auditors participating in the audit of the various Group companies totalled EUR 103 thousand and EUR 70 thousand, respectively. 73

74 Annual Report 2009 Consolidated Financial Statements The detail at 31 December 2009 and 2008 of "Allocation to Profit or Loss of Grants Related to Non-Financial Non- Current Assets and Other Grants is as follows: Allocation allowances Allocation of CO2 emission allowances (see Note 15) 76, ,833 Allocation of capital allowances 9,352 10,121 Total 85, ,954 In 2009 and 2008 the detail of impairment losses and gains or losses on the disposal of non-current assets recognised was as follows: Impairment and gains or losses on disposals of financial instruments CO2 emission alowances impairment (seenote 4) (18,778) (43,410) Other operating income impairment (see Note 6) (37,086) (7,363) Impairment result on nos-current assets 22,187 (67) Total (33,677) (50,840) Noteworthy under Gains or Losses on the Disposal of Non-Current Assets in 2009 was the sale of 50% of the exploration rights of the South Alamein block in Egypt, with the Group maintaining ownership of the remaining 50% as operator. 26. LEASES The Group acquired the use of certain assets through finance and operating leases. The most significant operating leases relate to the rental of buildings, plant, tankers for the transport of crude oil and oil products and service stations leased from third parties. In 2009 lease expenses under operating lease arrangements totalled EUR 142,963 thousand. Contingent payments recognised in the consolidated income statement amounted to EUR 4,733 thousand. 74

75 The future maturities of the amounts payable under operating leases at 31 December 2009 and 2008 are as follows: Maturing in: Operating Leases , , , , , and subsequent years 221,361 Total payments 798,492 Maturing in Operating Leases , , , , , and subsequent years 346,656 Total payments 916,160 The main items of property, plant and equipment held under finance leases are two double-hull crude oil tankers, butane gas distribution cylinders and other plant. (see Note 6) The future maturities of the amounts payable under finance leases at 31 December 2009 and 2008 are as follows Maturing in Finance Leases , , , and subsequent years - Total future payments 37,197 Less interest (639) Present value of minimum lease payments 36,558 75

76 Annual Report 2009 Consolidated Financial Statements Maturing in: Finance Leases , , , , and subsequent years - Total future payments 61,382 Less interest (2,000) Present value of minimum lease payments 59, FINANCE COST OF NET BORROWINGS AND OTHER FINANCE INCOME AND COSTS The detail of the finance cost of net borrowings and other finance income and costs in 2009 and 2008 is as follows: Finance cost of net borrowings Finance income 26,198 38,875 Finance costs (25,345) (61,535) Capitalised finance costs 11,310 9,400 Total 12,163 (13,260) Other finance income and costs Income from equity investments Gains (losses) on current financial assets (72) - Gains (losses) on derivatives transactions (2,124) (12) Deferred interest allocated to income Exchange differences 3,989 (15,017) Other finance income 62,518 35,911 Other finance costs (25,405) (34,513) Total 39,395 (12,990) 76

77 28. ENVIRONMENTAL MATTERS Information on the environment for 2008 and 2009 is as follows: Environmental Investments Balance at Additions/ Disposals/ Other Balance at Charges Amounts Used Changes Environmental assets 246,481 96,163 (684) 45, ,629 Accumulated depreciation of environmental assets (131,270) (13,778) 445 (6,029) (150,632) Total 115,211 82,385 (239) 39, ,997 Environmental Investments Balance at Additions/ Disposals/ Other Balance at Charges Amounts Used Changes 31,12.09 Environmental assets 387,629 48,098 (3,431) 1, ,481 Accumulated depreciation of environmental assets (150,632) (15,932) 3, (162,500) Total 236,997 32,166 (126) 1, ,981 The environmental investments were calculated in 2002 in accordance with the definition contained in the Spanish Accounting and Audit Institute (ICAC) Resolution of 25 March 2002, approving the rules for the recognition, measurement and disclosure of environmental matters in financial statements. With a view to contributing to Sustainable Development the CEPSA Group has programmes in place for the ongoing improvement of its production processes, its reduction of waste water effluents, the elimination of effluent spills and its management of solid waste. To such end it has implemented and keeps updated an Environmental Management System whereby it can ensure compliance with its legal obligations with the aforementioned commitments of ongoing improvement. The investments relating to the environment reflect the commitment acquired by the Company as a result of environmental targets. The most significant environmental assets are the sulphur recovery plants, plants for the treatment of amino acids and acidified water, waste water treatment plants (chemical and biological) and technical improvements to production plant equipment in order to achieve enhanced energy efficiency and the reduction of COV and NOX emissions. 77

78 Annual Report 2009 Consolidated Financial Statements Environmental provisions Balance at Additions/ Disposals/ Balance at Charges Amounts Used Provision for environmental activities 11,807 2,181 (4,748) 9,240 Provision for environmental contingencies and obligations 7,846 1,475 (1,475) 7,846 Total 19,653 3,656 (6,223) 17,086 Environmental provisions Balance at Additions/ Disposals/ Balance at Charges Amounts Used Provision for environmental activities 9,240 5,486 (4,881) 9,845 Provision for environmental contingencies and obligations 7, ,846 Total 17,086 5,486 (4,881) 17,691 Provision for Environmental Activities includes the CEPSA Group's best estimates of the contractual or legal obligations and commitments to prevent, reduce or repair damage to the environment with a charge to professional services or repairs and upkeep expenses. Provisions for Environmental Contingencies and Obligations includes provisions for environmental action to remedy the risk of gradual soil pollution, the only risk not covered by the insurance policies taken out by the CEPSA Group. The amounts used in the year related mainly to extraordinary expenses incurred in the treatment of soils. Environmental expenses Rent and fees Repairs and upkeep 1,742 1,722 Transport Other services 12,084 10,773 Additions for environmental provisions 5,486 3,656 Total outside services 19,492 16,447 Other Services includes mainly the expenses relating to the inerting of waste at CEPSA's facilities amounting to EUR 3,166 thousand in 2009 and EUR 3,128 thousand in EVENTS AFTER THE BALANCE SHEET DATE No significant event took place from 31 December 2009 to the date when these consolidated financial statements were authorised for issue. 30. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH These consolidated financial statements are presented on the basis of IFRSs, as adopted by the European Union. Certain accounting practices applied by the Group that conform with IFRSs may not conform with other generally accepted accounting principles. 78

79 Table I List of the main companies composing the consolidated CEPSA Group at 31 December 2009 is as follows: (%)of ownership Share Capital Thousands of Euros Equity Reserves + Net Cost Of Consolidation Tax Name Registered Office Line of business Direct IndirectSubscribed Paid Net Profit Investment Method (*) Group ASFALTOS ESPAÑOLES, C/ Orense, 34 4ª Planta. Oil refining to obtain asphalt 50% 8,529 8,529 14,236 17,869 P No S.A. (ASESA) MADRID. ESPAÑA products ATLAS, S.A. C/ Playa Benitez, s/n. Oil and gas trading 100% 3,930 3,930 11,195 4,077 G Sí COMBUSTIBLES CEUTA. ESPAÑA Y LUBRIFICANTES C.M.D. AEROPUERTOS Polígono Industrial Jet fuel distribution 60% 21,576 21,576 12, G No CANARIOS, S.L. Valle de Güimar Manzana XIV, parcelas 17 y Güimar - Santa Cruz de Tenerife. ESPAÑA CEDIPSA, CIA. Avda. del Partenón, 12. Service station operation and 100% 8,114 8,114 15,941 10,059 G Yes ESPAÑOLA MADRID. ESPAÑA installation DISTRIBUIDORA DE PETROLEOS, S.A. CEPSA AVIACIÓN, Es. Comb. Aviac. Camino de San Lázaro, Oil and gas transport 100% , G Yes S.A. s/n Zona ind. Aerop. Tenerife Norte Los Rodeos San Cristobal de la Laguna - Sta. Cruz de Tenerife. ESPAÑA CEPSA CARD, S.A. Avda. Partenón, 12 3ª C. Management of Group Cards 100% G Yes MADRID. ESPAÑA CEPSA COLOMBIA, S.A. Avda. Ribera del Loira, nº 50. Research and exploration 100% 21,856 21, , ,631 G Yes MADRID. ESPAÑA CEPSA COMERCIAL C/ Embajadores Final, s/n. Oil and gas trading 100% 1,169 1,169 1,551 0 G Yes MADRID, S.A. (CECOMASA) Apartadero Santa Catalina MADRID. ESPAÑA CEPSA E. P., SOCIEDAD Avda. Ribera del Loira, Research and oil exploration 100% 3,438 3,438 20,512 16,136 G No ANONIMA nº MADRID. ESPAÑA CEPSA EGYPT SA, B.V. Amsteldijk 166 6Th Floor Research and exploration 100% 10,000 10,000 6,432 7,267 G No LH Amsterdam. Netherlands CEPSA ESTACIONES DE Avda. Partenón, 12. Service station operation 100% 82,043 82, , ,017 G Yes SERVICIO, S.A. (CEPSA EE.SS.) MADRID. ESPAÑA CEPSA GAS Avda. Partenón nº 12. Gas distribution 35% 3,060 3,060 22,066 1,071 P No COMERCIALIZADORA, S.A Madrid. ESPAÑA CEPSA GAS Avda. Ribera del Loira, nº 50 Gas sales and distribution 100% 36,752 36,752 84,466 42,012 G Yes LICUADO, S.A. 1ª planta MADRID. ESPAÑA (*(*) F = Fully consolidated ; P = Proportionately consolidated ; E = Accounted for using equity method 79

80 Annual Report 2009 Consolidated Financial Statements (%)of ownership Share Capital Thousands of Euros Equity Reserves + Net Cost Of Consolidation Tax Name Registered Office Line of business Direct IndirectSubscribed Paid Net Profit Investment Method (*) Group CEPSA INTERNATIONAL Beurs - World Trade Centre - Oil and gas trading 100% 4,060 4,060 34,529 15,210 G No B.V. Office 668 Beursplein AA Rótterdam. The Netherlands CEPSA ITALIA, S.p.A. Viale Milanofiori Palazzo Petrochemicals trading 100% 6,000 6,000 9,044 9,737 G No A/ Assago- MILAN. ITALIA CEPSA LUBRICANTES, Avda. Ribera del Loira 50 3ª planta. Lubricant trading 100% 15,000 15,000 31,519 15,025 G Yes S.A. (C.L.S.A.) MADRID. ESPAÑA CEPSA MARINE Avda. del Partenòn nº 10 Oil and gas trading 100% 25,060 25,060 14,486 25,060 G Yes (Campo de las Naciones) 1ª planta. FUELS, S.A Madrid. ESPAÑA CEPSA OPERACIONES Avda. de Anaga, nº Corporate services for 100% , G Yes MARINA-AVIACIÓN, S.A. Santa Cruz de Tenerife bunkering - aviation and oil (Tenerife). ESPAÑA Transport CEPSA PERU, S.A. Avda. Partenón, 12. Research 100% ,585 0 G Yes Madrid. ESPAÑA and exploration CEPSA PORTUGUESA Rua General Firmino Miguel, nº 3 Oil and gas trading 100% 30,000 30,000 87, ,957 G No PETROLEOS, S.A. Torre 2 2º andar LISBOA. PORTUGAL CEPSA CHIMIE 5250 Boulevard Becancour. G9H Production 51% 63,775 63,775-34,079 28,772 P No BÉCANCOUR, INC. 3X3 Becancour. QUEBEC. CANADÁ and sale of petrochemicals CEPSA CHIMIE East Sherbrooke Street. Production 51% 191, , ,856 87,010 P No MONTREAL, L.P. H1B 1B4 Montreal - QUEBEC. CANADA and sale of petrochemicals CEPSA QUÍMICA, S.A. Avda. del Partenón nº Production 100% ,003 80,192 G Sí MADRID. ESPAÑA and sale of petrochemicals CEPSA UK, LTD. Audrey House Petrochemicals trading 100% ,804 7,336 G No Ely Place. EC1N 6SN London. REINO UNIDO CEPSA, S.A. Avda. del Partenón, 12. Corporate services 100% G Yes MADRID. ESPAÑA COGENERACIÓN DE Avda. Manuel Hermoso Rojas, Cogeneration 100% 6,000 6,000 12,811 4,988 G Yes TENERIFE, S.A.U. (COTESA) nº Santa Cruz de Tenerife (TENERIFE). ESPAÑA (*) F = Fully consolidated ; P = Proportionately consolidated ; E = Accounted for using equity method 80

81 (%)of ownership Share Capital Thousands of Euros Equity Reserves + Net Cost Of Consolidation Tax Name Registered Office Line of business Direct IndirectSubscribed Paid Net Profit Investment Method (*) Group COMPAÑÍA ESPAÑOLA DE Avda. Ribera del Loira 50 Lubricant trading 100% 1,932 1,932-1, G Yes PETRÓLEOS ATLÁNTICO, 3ª planta MADRID. ESPAÑA S.A. (ATLANTICO) COMPAÑÍA LOGÍSTICA DE C/ Titán, nº 13. Oil product distribution 14.15% 84,070 84, ,882 86,299 E No HIDROCARBUROS CLH, S.A MADRID. ESPAÑA DERIVADOS ENERGÉTICOS Avda. Partenón, 12 1ª Sector A. Oil product distribution 100% 12,330 12,330 31,745 12,328 G Yes PARA EL TRANSPORTE Y LA MADRID. ESPAÑA INDUSTRIA, S.A. (DETISA) DETEN QUIMICA, S.A. Rua Hidrogenio 1744 Complejo Production and 71.44% 84,961 84,961 28, ,959 G No Industrial sale of Camaçari Bahía. Brasil. BRASIL petrochemicals GENERACIÓN ELÉCTRICA Avda. del Partenón, nº 12. Cogeneration 70% 32,000 32,000 30,398 22,400 G No PENINSULAR, S.A ESPAÑA LUBRICANTES DEL SUR, Avda. Ribera del Loira,nº 50 Lubricant trading 100% 6,102 6,102 9,691 24,610 G Yes S.A. (LUBRISUR) 2ª planta MADRID. ESPAÑA NUEVA GENERADORA Avda. San Luis, nº 77 Edificio C Power cogeneration 50% 96,000 96,000 54,914 71,100 P No DEL SUR, S.A. 4ª planta Madrid. ESPAÑA PETRÓLEOS DE CANARIAS, Explanada de Tomás Quevedo, Bunkering services 100% , G Yes S.A. (PETROCAN) s/n Las Palmas de Gran Canarias (GRAN CANARIA). ESPAÑA PETROPESCA, S.L. Avda. del Partenón, nº 12 Sale of fuel and 100% 2,000 2,000 6,907 6,892 G Yes Campo de las Naciones. lubricant Madrid. ESPAÑA PRODUCTOS ASFÁLTICOS, Avda. Ribera del Loira, nº 50 Asphalt product sales 100% 3, ,313 G Yes S.A. (PROAS) 2ª planta MADRID. ESPAÑA PROMOTORA DE MINIMERCADOS, Avda. del Partenón, nº 12 Retailing 100% ,325 1,989 G Yes S.A. (PROMIMER) 2º C MADRID. ESPAÑA at Service Stations PROPEL-PRODUTOS DE Avda. Columbano Bordalo Pinheiro, Supply point 93% 7% ,514 1,380 G No PETROLEO, L.D.A º LISBOA. PORTUGAL management services SOCIETAT CATALANA DE Avda. Diagonal nº 605,4 Oil product 45% 15,093 15,093-5,657 4,258 E No PETROLIS, S.A. (PETROCAT) T 6A BARCELONA. ESPAÑA import and distribution (*) F = Fully consolidated ; P = Proportionately consolidated ; E = Accounted for using equity method 81

82 Annual Report 2009 Consolidated Financial Statements Table II The detail of the main companies comprising the CEPSA Group as at 31 December 2009: Name Country Operator Activity % of Ownership Ourhoud Argelia Sonatrach Exploration and Production 39.76% Timimoun Argelia Total Exploration & Production Algerie Exploration and Production 11.25% Tiple Colombia CEPSA Colombia Exploration 70.00% Garibay Colombia CEPSA Colombia Exploration 50.00% Puntero Colombia CEPSA Colombia Exploration 70.00% Cabrestero Colombia CEPSA Colombia Exploration 70.00% Merecure Colombia CEPSA Colombia Exploration 70.00% El Edén Colombia CEPSA Colombia Exploration 50.00% El Portón Colombia CEPSA Colombia Exploration 50.00% Los Ocarros Colombia CEPSA Colombia Exploration 50.00% El Sancy Colombia CEPSA Colombia Exploration 50.00% Cebucán Colombia PETROBRÁS Exploration 30.00% Balay Colombia PETROBRÁS Exploration 30.00% Cop 14 Colombia Metapetroleum Exploration 37.50% Cop 12 Colombia Metapetroleum Exploration 30.00% SJ & RP Colombia HOCOL Exploration 33.33% Caracara Colombia CEPSA Colombia Exploration and Production 70.00% CPR Espinal Colombia PETROBRÁS Exploration and Production 16.67% La Cañada Norte Colombia Ecopetrol Exploration and Production 16.67% Block 127 Perú CEPSA Perú SA Exploration 80.00% Block 114 Perú CEPSA Perú SA Exploration 60.00% Block 131 Perú CEPSA Perú SA Exploration 70.00% North Barhein Egipt ENI Exploration 25.00% South Alamein Egipt CEPSA Egypt SA, BV Exploration 50.00% Rodaballo Spain Repsol Exploration and Production 15.00% Casablanca Spain Repsol Exploration and Production 7.40% Montanazo Spain Repsol Exploration and Production 7.00% Boquerón Spain Repsol Exploration and Production 4.50% 82

83 Management Discussion & Analysis of 2009 for Compañía Española de Petróleos, S.A. and Subsidiary Companies (CEPSA Group) at December 31, 2009 and 2008 Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) OPERATING ENVIRONMENT The oil industry in 2009 was affected by a sharp drop in demand for oil, gas and petroleum products, as a result of adverse global economic conditions. Despite this circumstance, crude prices steadily treaded upwards throughout the year, firmly underpinned by OPEC production restraints, stronger demand in Asia and positions taken on energy futures markets ahead of a turnaround in the economy. European benchmark Brent Blend, which started out the year at $36.55/bbl, rose consistently during 2009 until reaching $77.67/bbl on December 31 st. In spite of this increase, the annual average stood at $61.5/bbl, sharply less than the median price of $97/bbl in Persistently feeble economic activity, especially in OECD member countries, prevented the spike in raw material prices from being passed along fully to petroleum product prices. Looking at developments in Diesel/Brent spreads in 2009, they continued to be very weak, with the yearly average at $69.2/t, considerably below the average of $207.2/t recorded in This substantial erosion in margins, prompted by the steep fall in demand for middle distillates on account of the economic downturn and its effects on the transportation industry, had a negative impact on earnings from refining activities, which are struggling with the industry s overcapacity. As a result of this trend in product/crude spreads and the rise in crude purchasing formulas, refining margins dropped to all-time lows. Margins, as published by the International Energy Agency IEA for the area where CEPSA s refineries are located (Ural Med Cracking and Ural Med Hydroskimming), fell in the period; as regards hydroskimming, from $2.5/bbl in 2008 to -$3.4/bbl in 2009 while the conversion (Cracking) margin plunged from $7/bbl to $1.5/bbl in As for the U.S. dollar against the euro, its value continued to decline throughout 2009, with the annual average at $1.39/ ; nonetheless, this exchange rate was up 5% when compared to the rate in the same period of 2008, which stood at $1.47/. Key Economic Variables Variation % Brent price in $/barrel % Exchange rate $/ % 83

84 Annual Report 2009 Management Discussion & Analysis ACTIVITY Exploration & Production In the upstream segment, CEPSA s crude oil production from its working interests in 2009 totaled thousand BOPD, 5% lower than in Similarly, the Company s entitlement in the period, understood to be the amount assigned to CEPSA after applying contractual conditions and before paying taxes, amounted to 20 million barrels, climbing 15% from the previous year. CEPSA added production from the Caracara block in Colombia as of March This new contribution came in addition to sales of barrels produced in the Company s Algerian acreages, which, as a result of applying production-sharing conditions, were significantly higher in 2009 than in 2008 due to lower crude oil prices in the current year. Furthermore, CEPSA continued its intensive exploration efforts in Algeria (Timimoun block which as of October has begun the development phase to produce gas starting in 2013), Colombia (16 blocks, 11 as operator), Peru (4 blocks, all as operator) and Egypt (2 blocks, 1 as operator). Total capital and exploration investments stood at 214 million in the year. Refining & Marketing The decline in petroleum product consumption led to oversupply in the marketplace, especially in OECD member countries, which, compounded by worse crude supply and marketing conditions, gave way to an unprecedented plunge in downstream earnings. CEPSA s refinery throughput in 2009 amounted to 20.3 million tons, lower (-6%) than 2008 s level. This drop was due to the decision to reduce processing at the Company s refining facilities, in order to tailor the volume to prevailing economic conditions. As for marketing activity, CEPSA s sales totaled 26.5 million tons in 2009, slipping 1% from the amount sold in As for motor fuel sales, they declined 4.9% vis-à-vis the same period a year earlier, which in turn had dropped 5% from the year before. Capital spending in the downstream segment, totaling 594 million in the period, was primarily assigned towards the construction of new Crude and Hydrocracking units in the La Rábida Refinery, slated to start up in 2010, and new Vacuum and Mild-Hydrocracking units in the Gibraltar-San Roque Refinery, which will significantly raise the competitiveness of these refineries. As regards greenhouse gas emissions, noteworthy was that for the fifth year in a row, there was a favorable balance under the National Allocation Plan, and there was no need to purchase emission allowances outside. Petrochemicals Petrochemical product sales in 2009 totaled 3 million tons, sliding 4% from the same period of 2008, reflecting the downturn in this industry across-the-board. Despite the dismal operating environment for this business, efforts to scale back fixed and variable costs as a result of synergies achieved by merging the various activities in this division into a single company, CEPSA Química S.A., made it possible to partially offset the erosion in margins and activity. Capital expenditures in the area totaled 34 million in the year. 84

85 Gas & Power Electricity sales in 2009 amounted to 3,273 GWh, slipping 6% from the year before, in line with weaker domestic demand for electricity. In 2009, electricity sales prices to the pool averaged 37/MWh, 43% less than the year before. The downswing in prices continued into the fourth quarter, posting their lowest levels since As for natural gas retailing activities carried out through the affiliate CEPSA Gas Comercializadora, S.A. (35% CEPSAowned), sales totaled 21,338 GWh in the year, with a 4% drop in activity vis-à-vis the same period of 2008, consistent with declining natural gas demand in Spain. Capital expenditures in the year, totaling 101 million, were allocated towards the construction of cogeneration units in Lubrisur Plant in San Roque, Asesa in Tarragona and the La Rábida Refinery, and the construction of the deepwater gas pipeline between Algeria and Spain (Almería) by the company MEDGAZ, which is slated to come on-stream in RESULTS The CEPSA Group s financial statements for the period ended December 31, 2009, have been prepared in compliance with International Financial Reporting Standards (IFRS), which are mandatory for the accounts of certain groups of companies pursuant to Spanish law. Highlights of the consolidated financial statements for full-year 2009, expressed in millions of euros, are as follows: Information by segments excluiding non-recurring items Exploration & Refining & Gas & (millons of euros) Production Marketing Petrochemicals Power 31/12/ /12/2008 Net sales to external customers Total ,447 1, ,365 25,115 Total excluding excise tax on oil & gas charged to sales ,361 1, ,279 22,831 Operating income by segments % change from previous year Average Cost Replacement Cost and other non-recurring items Other income and expenses Consolidated income before taxes Corporate income taxes Gains/(losses) from discontinued operations 0 0 Consolidated net income (before minority interests) Income attributable to: Shareholders of the parent company Minority interests Operating income from all business segments, excluding non-recurring items, stood at 468 million, 46.9% less than the figure posted in

86 Annual Report 2009 Management Discussion & Analysis As regards the caption of non-recurring items, the breakdown is as follows: Non-recurring items (Millions of ) 31/12/ /12/2008 Asset impairment Difference in inventory valuation (Average Cost Replacement Cost) Other non-recurring items Within this caption, the most significant item is the difference in valuing company-owned inventory at replacement cost, used as a business segment performance indicator and an internal measure in reporting to the Company s governing bodies, versus the Average Cost method applied under IFRS. This difference amounted to 159 million in 2009, driven by the surge in crude oil and distillate product prices in the year, versus a negative million in Consolidated pre-tax income amounted to 663 million, 23.9% higher than the year before. Net income attributable to shareholders of the parent company totaled 375 million, equivalent to an EPS (Earnings Per Share) of 1.40, up 35.9% from the figure posted in FINANCIAL AND EQUITY POSITION At December 31, 2009, the CEPSA Group s consolidated assets totaled 10,347 million, 7.2% higher than at year-end Out of this figure, non-current assets, which include tangible fixed assets, intangible assets and long-term financial investments, amounted to 5,707 million at the end of December 2009, 162 million more than the figure recorded a year earlier. The Group s capital employed came to 6,741 million at year-end 2009, the breakdown by business segments being as follows: Información by segments (Millons of ) Exploration Refining & Gas & Total & Production Distribution Petrochemicals Power Consolidated Capital Employed at , ,741 Capital Employed at ,052 4,117 1, ,530 Variation Equity attributable to shareholders of the parent company, before the final dividend distribution, at December 31, 2009, amounted to 5,287 million, funding 78.4% of the capital employed at this date. During the year, CEPSA s cash flow from operating activities amounted to 1,196 million and financial debt rose by 132 million. These funds enabled financing capital expenditures and other long-term assets at 986 million and distributing a dividend payment of 292 million. Total debt levels continued to be very restrained, as reflected in the debt-to-equity ratio, which came to 25.9% in the year as a whole. 86

87 MAJOR RISKS ASSOCIATED WITH THE CEPSA GROUP S ACTIVITY The CEPSA Group s activities, due to their nature, are exposed to a series of external risks and factors that can affect the way operations are conducted and the results obtained thereof. In order to mitigate this impact, the CEPSA Group implements a general risk policy that seeks to optimize the risk/reward tradeoff, consistent with the strategy established by the Group s Executive Management. As part of the planning and budget processes, the effects of business risks are assessed and a sensitivity analysis is made for key variables, in order to have a complete and comprehensive view of their impact on the Group. Each year, CEPSA publishes a Corporate Responsibility Report that contains, among other matters, a broad and detailed description of the actions carried out by the CEPSA Group in social, economic and environmental areas and its contribution to sustainable development throughout the year. This report is prepared following the guidelines of the Global Reporting Initiative (GRI). The Board of Directors, the Chief Executive Officer, as well as the Executive Managers of the different business divisions, supervise and regularly control risks, and adapt, wherever feasible, their profile to prevailing circumstances. In the area of Environmental Affairs, Safety and Quality, CEPSA s PA.S.CAL (Environmental Protection, Safety and Quality) Committee s basic function involves the periodic review of the CEPSA Group s environmental, occupational health and safety and quality management and its associated risks, proposing any needed changes or adjustments. In the area of Information Security, there is a Corporate Security Committee whose aim is to monitor and oversee implementation of information security measures. The CEPSA Group has established risk control systems that may affect the development of the Company s investments and activities and which are consistent with the Group s risk profile. The key risks encompassed in the Control System are as follows: Market Risks The very nature of the businesses engaged in by the CEPSA Group involves a certain degree of sensitivity to prevailing trends and volatility in oil and gas prices and refining and marketing margins. Accordingly, the Group s high level of vertical integration, strengthened in recent years, is one tool that can enable the Company to counteract and, if possible, override the cyclicality of the oil industry and ease the effects this can have on one or another of the Group s different segments or areas. For instance, an increase in crude oil prices has a positive impact on upstream earnings, even though the extent of this effect can be limited by the application of contractual terms and conditions under Production-Sharing Contracts (PSC) and their constraints on the amount of crude available for sale. Fluctuations in the price of crude oil can likewise have an effect on refining and marketing operations, the dimensions of which are mostly determined by how swiftly these price changes can be passed along to international and local finished product markets. As regards risks associated with price trends for crude oil and products on global markets, the CEPSA Group maintains and operates a comprehensive hedging system that insures it against the impact of price volatility and crude and product inventory variations as compared to a previously-defined level of inventory that is reviewed on a yearly basis covering the minimum strategic stock and operating requirements. These variations are hedged on the Brent IPE futures market, with forward sales offsetting surplus volumes of targeted inventories, and forward purchases offsetting volumes that stand below the targeted inventories. 87

88 Annual Report 2009 Management Discussion & Analysis Capital and Financial Risk (Exchange Rate, Interest Rate, etc.) Management The Group s activities, to varying degrees, are exposed to risks stemming from movements on financial markets. The Company strives to maintain a sound financial and equity position and the appropriate risk controls to be able to successfully overcome challenging or shifting scenarios in the oil industry and global marketplace, and particularly to have the funds available to capitalize on future developments and attractive new business opportunities that will provide a springboard and momentum for further growth and yield significant long-term, sustainable value for its shareholders. The Group s businesses are, to a large extent, sensitive to fluctuations in the exchange rate between the euro and the US dollar, which is the currency in which most crude oil and petroleum and chemical products are priced. The Group strives to minimize the impact of this exchange risk on commercial transactions carried out. From an operational point of view, the Company centralizes and manages exchange risk from the net overall cash flow position in foreign currencies of all the Group s companies. The arrangement of financing options and risk hedging instruments, as well as the investment of surplus funds, are also centralized in the Group. In the case of foreign investments in fixed assets which generate future cash flow in foreign currencies, the Group seeks to minimize its exchange risk exposure by financing these capital expenditures in the same functional currency. In other words, its debt in foreign currencies to some extent covers the exchange risk exposure it has from cash flow generated by these assets. The Company s activities are also sensitive to interest rate fluctuations. As a result, the Group has arranged most of its financial debt at a floating rate, bearing in mind its currently low debt ratio, the stable environment for interest rates in euros and the fact that it considers that this financing model will entail a lower cost over the long run. In order to manage liquidity risks, the CEPSA Group maintains credit facilities and surplus cash to ensure it will be able to handle its current financial liabilities and meet any funding needs that may arise. The CEPSA Group works with leading and highly-reputable Spanish and international financial entities, although it additionally analyzes the counterpart risk of negotiating investments and financial instruments. Risks Related to Changes and Developments in Regulations Applicable to Petroleum-related Activities and/or the Oil Industry The Group s businesses both in Spain and abroad are subject to a wide variety of laws and regulations. Any changes that may arise can affect these activities both in their structure and their earnings and results. Industrial Risks, Prevention and Safety The CEPSA Group has a safety management system as stated in its Risk Prevention Manual and Basic Regulations, pursuant to international OHSAS standards. Likewise, it has established procedures to follow, reflecting industry-wide, generally-accepted best practices, that guarantee the highest possible levels of safety, paying special attention to the elimination of risks at source. The system in place is aimed at ongoing improvement in risk reduction, relying on a number of activities, such as work planning, analysis and monitoring of remedial actions related to incidents and accidents, internal auditing, routine inspections of facilities and supervision of maintenance and operational work. 88

89 Environmental Risks Some of the CEPSA Group s operations generate impacts on the environment, such as those related to emissions of air pollutants and discharges into waterways, soil and groundwater as well as during the production and disposal of wastes. Since 2007, these impacts have been regulated by the IPPC (Integrated Pollution Prevention and Control) Directive, which has been transposed into Spanish legislation by Act 16/2002. Accordingly, all of the CEPSA Group s major industrial facilities have been awarded Integrated Environmental Authorizations which entail rigorous control over its processes with the aim of minimizing environmental impacts. Notwithstanding the above, one of CEPSA s key priorities throughout the years has been to conduct its industrial operations in a safe and environmentally-friendly manner, as reflected in its internal Environmental Protection policy and governed by its Basic Environmental Rules and Regulations. In short, measures adopted to minimize environmental impacts, by categories, are the following: Air emissions Internal procedures are applied to manage and control impacts and control networks have been put into place for both inmissions and emissions, using measuring stations whose data are reported to the authorities in real time. Water discharges Industrial effluent treatment plants have been deployed at all industrial sites to control water discharges, thereby considerably minimizing their impact. As in the case of air emissions, data on industrial effluent parameters are provided to the authorities in real time; and measures are implemented to control the receptor body, both as regards waters and sediments. Soils/Groundwater All of the Group s industrial plants have piezometer networks to allow ongoing monitoring of the condition of soils and groundwater, enabling a rapid response to any possible incidents and as a result, minimizing their impacts. Wastes CEPSA has established a preventive policy with regard to the production of wastes which encourages the reduction, reuse, recycling and recovery of wastes in order to enhance environmental protection and the safety and health of surrounding communities. Accidental Marine Pollution Measures are put into effect to comply with the provisions contained in Internal Contingency Plans for Marine Pollution Accidents (PICCMA) and in internal procedures to prevent and control this type of pollution. Steps are taken to improve the operational capabilities of Maritime Terminals and Facilities, minimizing risks inherent in their activities. Crude oil exploration & production In its upstream operations in Algeria, Colombia, Egypt and Peru, the CEPSA Group applies stringent environmental principles, guidelines and strategies to minimize the impact of its activities and ensure utmost respect to the environment and the surrounding indigenous communities where it conducts its businesses. Since 1995, CEPSA has been proactively working on the analysis and assessment of environmental risks stemming from its activities in order to ensure their effective management and control, reducing possible incidents that may lead to significant impacts on the environment and its biodiversity. In this respect, these tests and reviews were conducted at the Group s various plants and sites, all of which are compliant with UNE :2008 standards on Environmental Risk Analysis and Assessment, the benchmark standard in Spain. Additionally, all of the CEPSA Group s major industrial facilities have environmental management systems certified by independent accrediting agencies. One of its key priorities at this time is to complete the certification of the few remaining activities that are still not in possession of this accreditation. 89

90 Annual Report 2009 Management Discussion & Analysis The CEPSA Group may be a party to claims or litigation in connection with environmental damages caused by its activities both within and outside its sites and facilities. Although future costs are indeterminable, based on currently-available knowledge, Management feels that these contingencies are adequately covered with the accounting provisions created for such purposes and different kinds of liability insurance policies. Depending on future legislation in this regard, the specific amounts of the financial guarantee that may arise as a result of the enforcement of the regulations under the Environmental Responsibility Law in certain Group facilities have yet to be determined. The amounts covered by the financial guarantees will be specified as soon as the provisions of the law and the rules and regulations of environmental responsibility are developed. Additionally, a number of the Group s productive facilities are required to comply with regulations that affect greenhouse gas emissions. Both in 2008 and 2009, emissions from all the plants and units affected by this legislation, and which have been verified by AENOR, were slightly lower than the volume of emission allowances assigned in the National Allocation Plan. Property and Casualty Risks The CEPSA Group is insured against risks involving material damages, including machinery failures and the control of crude exploration and production wells; injuries to workers from occupational accidents; loss of profit stemming from material damages; civil liability, both for the companies of the CEPSA Group as well as their employees in performing their jobs and arising from material damages or personal injuries; and loss or damage in the transportation of crude oil, products and equipment. Customer Credit Risks The CEPSA Group has established a commercial credit and collection management policy, regulated through its Internal Standards and Procedures that are periodically updated, which include determining commercial credit limits for each customer; establishing the appropriate collection instruments; laying out procedures to follow in case of defaults; and monitoring and controlling assigned credit limits. Furthermore, computerized risk analysis systems are used to globally manage and automate internal and external data, evaluating them by applying models established for classifying each customer s commercial credit risk and the assignment of their credit limit. Notwithstanding the above, insurance policies have been arranged to cover the risk of customer payment defaults in certain commercial areas. Information Security Risks CEPSA has a security organization in place to guarantee the availability, integrity, confidentiality and auditability of the information required to ensure the smooth development and progress of the Group s activities and with the acceptable cost and risk. The Company has an Information Security Management System based on minimizing security risks, which has been awarded international ISO certification. Other Risks The CEPSA Group is involved in a variety of legal proceedings related to its businesses, including tax and antitrustrelated lawsuits and is likewise subject to tax inspections for years that are still liable for inspection. Although the results of these matters are unforeseeable, Management considers that, based on current information, provisions made for such contingencies reasonably and prudently cover these risks. 90

91 Inspections by tax authorities to review the years spanning 2000 to 2004 with regard to the corporate income taxes paid by the CEPSA Tax Group were completed in the first half of 2008, and no discrepancies were detected in the tax returns under review that could lead to non-provisioned liabilities. MATERIALIZED RISKS No material asset or equity losses occurred during the year. On the other hand, trends in doubtful trade debts improved from the previous year and the appropriate allowances were made in this connection. The implementation of ongoing improvements in risk control systems is enabling the Company to steadily reduce the frequency of accidents, particularly in the area of occupational safety, and noteworthy is that the frequency rate (number of lost-workday injuries for each million hours worked) fell from 4.65 in 2008 to 3.59 in 2009, meaning a year-on-year decline of more than 22%. IDENTIFICATION AND DESCRIPTION OF THE PROCESSES OF COMPLIANCE WITH REGULATIONS THAT AFFECT THE CEPSA GROUP. The energy sector in which CEPSA conducts its businesses is basically governed by Hydrocarbons Act 34/1998 of October 7th; RDL 15/1999 of October 1st, approving measures to deregulate the market, implement structural reforms and increase competition in the oil and gas sector; RD 16/2002, on Integrated Pollution Prevention and Control; RD 1716/2004 of July 23rd regulating the obligation to maintain minimum security stocks of petroleum products, the diversification of natural gas supplies and the Corporation for Strategic Reserves of petroleum products; RD 398/1996 of March 1st and subsequent regulations on automotive gasoline and diesel specifications; RDL 6/2000 of June 23rd on urgent measures to intensify competition in markets for goods and services; Act 9/2006, of April 28th on the evaluation of the effects of certain environmental plans and programs; RD 61/2006 of January 31st setting gasoline, diesel, fuel oil and LPG specifications and regulating the use of certain bio-fuels and the sulfur content in specific marine fuels; RD 679/2006, of June 2nd, regulating used oils management; RD 1370/2006 of November 24th, which approves Spain s GHG emission trading allowances for ; EU Council Decision of October 14, 2004, regarding the signature, on behalf of the European Community, of the Stockholm Convention on Persistent Organic Pollutants; European Directive 2008/1EC, passed by the European Parliament and Council on January 15, 2008, concerning integrated pollution prevention and control (IPPC); Act 26/2007 of October 23rd on environmental responsibility which transposes Directive 2004/35/EC of the European Parliament and Council of April 21, 2004; RD 2090/2008 of December 22nd approving Regulations that partially develop the aforementioned Act; RD Law 1/2008 on environmental risk assessment and Act 34/2007 on air quality and atmospheric protection. In environmental matters, CEPSA has included the requisites of applicable legislation in its Basic Environmental Regulations and Internal Procedures. Likewise CEPSA has strengthened its commitment to the environment through the development of its Biodiversity Regulations which regulate measures to be adopted to preserve habits and species in communities where the Company operates. Noteworthy is that CEPSA has implemented an environmental management system, certified according to UNE-EN ISO and Regulation 761/2001 of the European Parliament and Council regarding the voluntary participation of organizations in an Environmental Management and Audit System (EMAS), in most of its activity centers by independent agencies which in turn are accredited by the Spanish Ministry of Industry, Tourism and Commerce s ENAC (National Accreditation Bureau). As for petrochemicals in the CEPSA Group, the Company has voluntarily adhered to the Responsible Care scheme, a proactive program put into practice by the worldwide chemical industry to demonstrate the strides made by leading businesses in the areas of health, safety and the environment, through associated codes and regulations. With regard to occupational risk prevention, CEPSA has a set of Basic Rules for Industrial and Occupational Risk Prevention which apart from complying with legislation in this area, also include guiding principles and policies needed to achieve the highest standards of safety in its operations; the Corporate Management Manual for the Prevention of 91

92 Annual Report 2009 Management Discussion & Analysis Industrial and Occupational Risk Prevention ; and other action guidelines that guarantee solid safety performance in the entire productive process, from plant design to product marketing. RESEARCH & DEVELOPMENT ACTIVITIES The Technology area s key focus is developing and implementing technological innovations and improvements that enhance CEPSA s competitive position and improve the quality of its products. In order to achieve this goal, the Research Center continued to work towards advancing the Company s reservoir of scientific and technical know-how and expertise to further its productive processes. This Center is also actively involved in a number of key research projects, chief among which are those related to the production and use of bio-fuels, and in the study of new alternatives for capitalizing on these products. This activity is basically undertaken at CEPSA s new Research Center in the Scientific-Technological Park of the Alcalá de Henares University (Madrid), which was completed and became operational at the end of HUMAN RESOURCES At December 31, 2009, employees of CEPSA and its controlled companies numbered 11,703 people, 112 fewer than a year ago, due to adjustments made in the workforce in the petrochemicals division. CEPSA gives top priority to the professional growth and development of its workforce, the improvement of their skills and capabilities and their increased training and awareness of issues related to safety, quality and environmental protection. Instructional hours provided in the period remained in line with those for the same period a year ago, most of which belonged to in-house plans and programs. TREASURY STOCK Neither CEPSA nor any of the companies making up the CEPSA Group directly or indirectly acquired, sold or owned shares of Compañía Española de Petróleos, S.A. in SIGNIFICANT EVENTS FOR THE CEPSA GROUP IN THE YEAR First-Half 2009 On March 25, 2009, Banco Santander filed a Significant Event with the Spanish Securities Market Commission (CNMV) reporting the agreement reached with International Petroleum Investment Company (IPIC) based in Abu Dhabi, United Arab Emirates, one of CEPSA s core shareholders, for the sale of the Bank s 32.5% stake in CEPSA. Similarly, Unión Fenosa also filed a Significant Event with the Spanish stock market regulator, referring to the aforesaid notification by Santander, that as a result of the mandate that the utility company had given Santander to act on its behalf to make a joint sale, it was also selling IPIC its 5% interest in CEPSA under the same conditions as the ones reached between IPIC and Santander. Additionally, IPIC also notified the CNMV, in connection with the transaction, that among the conditions precedent for the purchase-sale agreement was the granting of a dispensation by the CNMV from having to make a public tender offer (PTO) on shares, as provided for Article 4.2 of Royal Decree 1.066/2007. Notwithstanding the above, IPIC likewise reported that it has the right to waive this condition. As a result of these transactions, which Banco Santander added were still subject to regulatory approval and financing, IPIC would own % of the Company s share capital, as far as CEPSA was aware. On May 27, 2009, CEPSA announced that Pedro López Jiménez tendered his resignation as a Director of the Company, representing UNIÓN FENOSA. 92

93 On June 26, 2009, the Company issued a release on the Annual General Meeting of Shareholders and the resolutions adopted therein, noteworthy being the approval of the 2008 Financial Statements and MD&A s, the fullyear dividend payout of 1 per share, with the final dividend of 0.60 payable July 7 th and the ratification or reelection, where applicable, of the Directors Santiago Bergareche Busquet, Joël Vigneras, Jean-Luc Guiziou, Juan Rodriguez Inciarte and Ernesto Mata López. Second-Half 2009 On July 30, 2009, IPIC, the Santander Group and UNIÓN FENOSA notified the Spanish Securities Market Commission (CNMV) on the completion of the transaction filed as a Significant Event on March 25, 2009, as well as IPIC s intention of requesting the aforementioned market regulator to grant it a dispensation from having to make a public tender offer (PTO) on all shares of CEPSA, as provided for in Articles 60.2 of the Securities Market Act and 4.2 of Royal Decree 1066/2007. The purchase-sale agreement with the Santander Group and UNIÓN FENOSA, S.A. for % of CEPSA s share capital would be subject to a cancellation provision if such dispensation was not granted. On August 20, 2009, International Petroleum Investment Company (IPIC) submitted at request to the CNMV for a dispensation from having to make a Public Tender Offer on shares of Compañía Española de Petróleos, S.A. This dispensation was granted by the CNMV on September 15, On October 1, 2009, the Company reported that significant changes were made to CEPSA s Board of Directors, with the resignations tendered by the Directors Alfredo Saénz Abad, Fernando de Asúa Álvarez, Juan Rodriguez Inciarte, Ernesto Mata López, Joël Vigneras, Jean-Luc Guiziou and José Luis Leal Maldonado. Incoming Directors provisionally co-opted onto the Board included Khadem Al Qubaisi and David Forbes, both representing IPIC. Khadem Al Qubaisi was also appointed Vice Chairman of the Board and member of the Nomination and Compensation Committee. On October 7, 2009, CEPSA announced that it had received authorization from the Algerian authorities for the Timimoun Gas Project Development Plan. Operated by a joint organization made up of CEPSA (11.25% interest), Sonatrach (51% interest) and TOTAL (37.75% interest), this project, located in south-western Algeria, includes the drilling of around 40 wells and is slated to come on-stream in 2013, with a gas output volume of 5 million cubic meters a day (1.6 BCM/year). On November 25, 2009, CEPSA s Board of Directors, at its meeting held on this date, approved an interim dividend distribution of 0.40 per share, payable December 14, OUTLOOK The strategy laid down by the CEPSA Group, and implemented in recent years, is primarily targeted towards balancing and diversifying earnings contributions from its different business segments through their organic growth. The Group also strives to maintain a sound financial and equity position and the proper risk controls to be able to successfully override challenging or shifting scenarios in the oil industry and global marketplace, and particularly to have the funds available to capitalize on future developments and attractive new business opportunities that will provide a springboard for further growth and yield significant long-term, sustainable value for its shareholders. Over the coming years, CEPSA plans on implementing a capital spending program in its different business segments that basically involves the following actions and objectives: 93

94 Annual Report 2009 Management Discussion & Analysis As regards the upstream area, the Company s goal is to consolidate the level of proprietary reserves over the long run, through investments in producing fields, exploration programs and/or the acquisition of reserves to build up its asset portfolio in a variety of designated geographical areas. In seeking to meet this objective, CEPSA has finalized the process to acquire the exploration and production rights on the Caracara Block in Colombia and has obtained an extension of the contract to operate the RKF field in Algeria. In petroleum product and basic chemical manufacturing, a sizeable capital expenditures plan is being put into place to better meet changing market demands, reducing the shortage of gas oils and other middle distillates and raising chemical production. Investments will be made across the board in the Company s refining facilities but the bulk will be earmarked towards the La Rábida Refinery (Huelva), where targeted investments exceed 1,100 million, with these new capital projects scheduled to come on-stream in 2010, in addition to new Vacuum and Mild Hydrocracking units at the Gibraltar-San Roque, which will significantly increase the competitiveness of these facilities. Other key strategic plans include efficiency and operational enhancements in the company s three refining platforms and the development of environmentally-friendly biofuel components for blending with gasoline and motor diesel. As far as downstream objectives are concerned, the Group is steadfastly focused on consolidating its presence in its traditional and niche markets, harnessing and driving synergies in activities with high added value and proactively and dynamically pursuing growth opportunities in other markets in our area of influence. In petrochemical intermediates, the merger of the Company s chemical affiliates into a single company called CEPSA Química has led to improved efficiency and cost-containment, which are key strategic objectives in this area, considering the current business environment. Lastly, CEPSA s strategy in its Gas & Power segment, as regards natural gas, is to establish proprietary supply sources, raising its total market share in natural gas and completing the construction, start-up and operation of the MEDGAZ pipeline that will connect Algeria to Europe via Spain, in which CEPSA s shareholding comes to 20%. In the power business, the primary goal is to add to our CHP or cogeneration capabilities for the Group s industrial plants. SUBSEQUENT EVENTS No significant events or noteworthy developments occurred up to the time of the approval of the summarized consolidated financial statements by the Board of Directors. OTHER INFORMATION Additional information, the inclusion of which is mandatory for listed companies in their management reports, as set out in the Securities Market Act 6/2007, is provided in the Management Discussion & Analysis of Compañía Española de Petróleos, S.A. 94

95 95

96