LEGAL DOCUMENTS CEPSA GROUP

Transcription

1 LEGAL DOCUMENTS CEPSA GROUP 044 Report from Independent Auditors /2003 Financial Statements 046 Consolidated Balance Sheets 048 Consolidated Statements of Income 050 Notes to Consolidated Financial Statements 098 Management Discussion & Analysis

2 Legal Documents CEPSA Group

3 Report from the Independent Auditors for Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) 44 Report from the Independent Auditors

4 CEPSA Group 45

5 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Note 25). In the event of a discrepancy, the Spanish-language version prevails. Consolidated Balance Sheets as of December 31, 2003 and 2002 (Notes 1, 2, and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) ACTIVO ASSETS Inmovilizado Fixed Gastos and de other establecimiento noncurrent assets (Nota 4) Inmovilizaciones Start-up expenses inmateriales (Note 4) (Nota 5) Intangible Bienes y assets derechos (Note inmateriales 5) , Provisiones Intangible assets y amortizaciones and rights 1,456,853 ( ) 1,366,919 ( ) Total Provisions inmovilizaciones and accumulated inmateriales amortization (554,776) (433,806) Inmovilizaciones Total intangible materiales assets (Nota 6) Tangible Terrenos fixed y construcciones assets (Note 6) 902, , Instalaciones Land and structures técnicas y maquinaria 285, , Otro Technical inmovilizado installations and machinery 3,974, ,407, Anticipos Other tangible e inmovilizaciones fixed assets en curso 316, , Provisiones Advances and y amortizaciones construction in progress 217,342 ( ) 583,782 ( ) Total Provisions inmovilizaciones and accumulated materiales amortization (2,388,534) (2,223,874) Inmovilizaciones Total tangible financieras fixed assets (Nota 7) Long-term Participaciones financial puestas investments en equivalencia (Note 7) 2,405, ,313, Créditos Holdings a in sociedades companies puestas carried en by the equivalencia equity method 142, , Cartera Loans to de companies valores a carried largo plazo by the equity method 16, , Otros Long-term créditos investment securities 33, , Provisiones Other loans 207,151 (58.655) 240,689 (64.843) Total Provisions inmovilizaciones financieras (48,414) (58,655) Total long-term financial investments 351, ,261 Total inmovilizado Total fixed and other noncurrent assets 3,659,078 3,678,632 Fondo de comercio de consolidación (Nota 8) Goodwill in consolidation (Note 8) De sociedades consolidadas por integración global o proporcional Co. consolidated by the global or proportional integration method 84,959 92,530 De sociedades puestas en equivalencia Companies carried by the equity method 14,363 2,037 Total Fondo de comercio de consolidación Total goodwill in consolidation 99,322 94,567 Gastos Deferred a distribuir charges (Note en varios 10) ejercicios (Nota 10) 56, , Activo Current circulante assets Existencias Inventories (Note (Nota 11) 736, , Deudores Accounts receivable (Nota 2.d) (Note 2-d) 1,418, ,363, Inversiones Short-term financial financieras investments temporales (Note (Nota 7) 7) 182, , Tesorería Cash 40, , Ajustes Prepaid por expenses periodificación 23, , Total activo circulante Total current assets 2,401,550 2,179,104 TOTAL ASSETS 6,216,453 6,010,755 TOTAL ACTIVO (The accompanying Notes 1 to 25 are an integral part of these Consolidated Balance Sheets) 46 Consolidated Balance Sheets

6 SHAREHOLDERS EQUITY AND LIABILITIES Shareholders' equity (Note 12) Subscribed capital stock 267, ,575 Paid-in surplus 338, ,728 Revaluation reserve 90,936 90,936 Other reserves of the controlling company: Unrestricted reserves 1,012, ,822 Restricted reserves 54,056 54,056 Prior years' earnings Reserves at companies consolidated by the global or proportional integration method 725, ,951 Reserves at companies carried by the equity method (51,639) (55,392) Translation differences: Companies consolidated by the global or proportional integration method (39,244) (45,101) Companies carried by the equity method (262) 279 Income allocable to the controlling company 612, ,857 Interim dividend paid in the year (112,381) (61,542) Total shareholders' equity 2,898,425 2,518,432 Minority interests (Note 13) Shareholders' equity attributed to minority interests 30,303 18,865 Income attributed to minority interests 7,803 17,377 Total minority interests 38,106 36,242 Negative difference in consolidation (Note 9) Co. consolidated by the global or proportional integration method 2,317 3,727 Total Negative difference in consolidation 2,317 3,727 Deferred revenues (Note 14) Capital subsidies 79,656 64,469 Other deferred revenues 283, ,229 Total deferred revenues 362, ,698 Provisions for contingencies and expenses (Note 15) 302, ,531 Long-term debt (Note 16) Payable to credit entities 835, ,527 Payable to companies carried by the equity method ,822 Other accounts payable 118, ,317 Total long-term debt 954,044 1,147,666 Current liabilities Payable to credit entities (Note 16) 262, ,348 Payable to companies carried by the equity method (Note 16) 235, ,202 Trade accounts payable 743, ,521 Other nontrade payables (Notes 2-d and 16) 407, ,957 Accrued expenses 9,237 6,431 Total current liabilities 1,658,004 1,764,459 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,216,453 6,010,755 Grupo CEPSA 47

7 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Note 25). In the event of a discrepancy, the Spanish-language version prevails. Consolidated Statements of Income for the years ended December 31, 2003 and 2002 (Notes 1, 2, and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) DEBIT Expenses: Procurements (Note 20) 7,990,941 7,174,552 Decrease in finished product and products-in-process inventories 21,451 - Personnel expenses (Note 2-d) 401, ,371 Period depreciation and amortization 377, ,112 Variation in operating provisions (5,476) 7,240 Other operating expenses: Excise tax on oil and gas (Note 3-o) 2,142,893 2,052,024 Other expenses (Note 2-d) 1,420,770 1,246,911 12,350,399 11,122,210 Operating income 936, ,314 Financial expenses (Note 20) 42,689 49,652 Variation in financial investment provisions (11,273) (2,062) Translation losses (Note 3-a) 5,812 7,643 37,228 55,233 Amortization of goodwill in consolidation (Note 8) 9,910 11,641 Income from ordinary activities 939, ,783 Losses on fixed assets (Note 20) 11,658 2,683 Variation in intangible assets, tangible fixed assets and control portfolio provisions (Note 20) (8,698) 10,611 Extraordinary expenses (Note 20) 64,100 71,670 Prior years' expenses (Note 20) ,897 85,389 Extraordinary income (Nota 20) 6, ,293 Consolidated income before taxes 945, ,076 Corporate income taxes (Note 17) 325,710 96,842 Consolidated income for the year 620, ,234 Income attributed to minority interests (Note 13) 7,803 17,377 Income attributed to the controlling company 612, ,857 (The accompanying Notes 1 to 25 are an integral part of these Consolidated Statements of Income) 48 Consolidated Statements of Income

8 CREDIT Revenues: Sales and services on ordinary activities 11,056,491 9,407,290 Excise tax on oil and gas charged on sales 2,142,794 2,051,503 Net Sales (Notes 3-o and 20) 13,199,285 11,458,793 Increase in finished products and work-in-process inventories - 39,396 Capitalised expenses of group in-house work on fixed assets 33,420 49,749 Other operating revenues 54,014 63,586 13,286,719 11,611,524 Revenues from shareholdings Other financial revenues 30,963 25,809 Gains on short-term financial investments 64 - Exchange gains-(losses) (1,599) 6,822 29,724 32,867 Financial loss 7,504 22,366 Share in income of companies carried by the equity method 19,049 18,067 Allocation of Negative difference in consolidation (Note 9) 1,410 1,409 Gains on fixed assets (Note 20) 43, ,751 Capital subsidies transferred to income for the year (Note 3-h, 14 y 20) 9,355 6,863 Extraordinary revenues (Note 20) 21,189 56,851 Prior years' revenues (Note 20) 277 2,217 74, ,682 Extraordinary loss (Note 20) - - Grupo CEPSA 49

9 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Note 25). In the event of a discrepancy, the Spanish-language version prevails. Notes to Consolidated Financial Statements for the years ended December 31, 2003 and 2002 Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) 1. Description of the CEPSA Group 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 September 26, 1929, and is registered in the Madrid Mercantile Register in Volume 206 of the Companies book, Folio 100, Sheet Its employer identification number is A Compañía Española de Petróleos, S.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 and engages in business activities relating to the 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 consolidated financial statements, shows the directly or indirectly owned dependent, multigroup and associated companies 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 Consolidation Principles a) True and fair view The accompanying consolidated financial statements were prepared from the accounting records of the CEPSA Group companies in accordance with the Spanish National Chart of Accounts and consolidation regulations and, accordingly, they give a true and fair view of the Group s net worth, financial position and results of operations. These consolidated financial statements and the individual financial statements of the consolidated companies for 2003 will be submitted for approval by the respective Shareholders' Meetings, and it is considered that they will be approved without any changes. The 2002 individual and consolidated financial statements of CEPSA and the CEPSA Group, respectively, were approved without any changes by the Shareholders' Meeting held in Madrid on June 26, b) Consolidation principles The companies at which a majority of the voting rights are owned or controlled and/or at which a majority of the members of the Board of Directors can be appointed or removed were consolidated by the global integration method; the multigroup companies which are managed jointly with third parties were consolidated by the proportional integration method; and the associated companies over which there is significant influence but not effective control are carried by the equity method. Because of their scant importance, certain companies were not consolidated but, exceptionally, were carried by the equity method; others, representing a total of less than 1% of the CEPSA Group s total assets and income in 2003, were not consolidated because they are inactive or not material. The positive differences between the acquisition cost of the consolidated subsidiaries and their underlying book value at the acquisition date, adjusted for the unrealized gains on their assets at that date and which still exist, are included under the Goodwill in Consolidation caption. Negative differences are recorded under the Negative Difference in Consolidation caption in the consolidated balance sheet. In the case of consolidable Group companies, these unrealized gains are allocated to the balance sheet captions relating to the assets on which they arose. Unrealized gains at companies carried by the equity method are treated as additions to the value of the holding therein, and are included under the "Holdings in Companies Carried by the Equity Method" caption. 50 Notes to Consolidated Financial Statements

10 The consolidated reserves at the companies consolidated by the global and proportional integration methods are reflected as such in a specific caption under "Shareholders' Equity" in the consolidated balance sheet and were determined on the basis of the variation in the reserves of these companies from when each of them was first included in the consolidable Group, net of the portion corresponding to minority interests, which is included under the "Minority Interests" caption. Similarly, the reserves at the companies carried by the equity method from when they were first consolidated are reflected, in the amount proportional to the consolidable Group's percentage of ownership in them, under the "Shareholders' Equity - Reserves at Companies Carried by the Equity Method" caption in the consolidated balance sheet. The equity of minority shareholders in the net worth and income of the CEPSA Group s consolidated dependent companies is recorded under the "Minority Interests" caption in the consolidated balance sheets and the "Income Attributed to Minority Interests" caption in the consolidated statements of income, respectively. All material balances, transactions and results between the companies consolidated by the global integration method were eliminated in consolidation. Based on the percentage of ownership, the balances, revenues, expenses and results from transactions with companies consolidated by the proportional integration method were also eliminated. In addition, the accounting principles and procedures used by the Group companies were unified with those applied by the parent company and all accounting principles and valuation methods with a material effect on the consolidated financial statements were applied. c) Comparative information In compliance with the Spanish National Chart of Accounts, approved by Royal Decree 1643/1990, the consolidated financial statements present, in addition to the figures for the year ended, those of the year before. The changes in the scope of consolidation in 2003 compared with 2002 were as follows: Company Global/Proportional Integration method Equity method Carburantes Ayala, S.A. E Cepsa Comercial Norte, S.L. I Deripetro, S.L. I Jazmín Cabello Latorre e Hijos, S.L. E I= Included; E= Excluded The changes in the scope of consolidation in the year include most notably the retirements due to mergers of various companies into Cepsa Estaciones de Servicio, S.A. The detail of the net worth effect of the change in consolidation method and of the changes in the consolidated companies can be seen in the respective tables disclosing the variations in each caption during the year, in the Other Variations column. CEPSA Group 51

11 d) Grouping of items The balances of the "Accounts Receivable" and "Other Nontrade Payables" captions in the accompanying consolidated balance sheets for 2003 and 2002 consist of the items detailed below: Current Assets (Accounts Receivable) Trade receivables for sales and services 1,252,385 1,246,254 Receivable from companies accounted for by the equity method 162, ,782 Sundry accounts receivable 3,029 2,846 Taxes receivable 92,205 63,257 Allowances (91,545) (101,494) Total 1,418,241 1,363, Current Liabilities (Other nontrade payables) Taxes payable 209, ,368 Other payables 190, ,008 Guarantees and deposits received 7,808 6,581 Total 407, , Notes to Consolidated Financial Statements

12 The amounts recorded under the "Personnel Expenses" and "Other Expenses" captions in the 2003 and 2002 consolidated statements of income consist of the following items: Personnel Expenses Wages, salaries and similar expenses 297, ,886 Contributions and provisions for pensions 2,275 12,395 Other employee welfare expenses 101,759 91,090 Total 401, , Other Expenses Taxes other than income tax 27,365 23,705 Transport and freights 387, ,959 Outside work and services and utilities 978, ,741 Other current operating expenses 8,248 5,835 Environmental expenses (Note 22) 19,632 18,671 Total 1,420,770 1,246,911 In compliance with the Spanish Accounting and Audit Institute (ICAC) Resolution of March 25, 2002, approving the regulations for the recognition, valuation and reporting of environmental matters in the financial statements, a breakdown is given of the environmental expenses for 2003 and 2002 included under the Other Operating Expenses caption (see Notes 3-r and 22). CEPSA Group 53

13 3. Valuation Standards The main valuation methods applied in consolidation were as follows: a) Translation of financial statements in foreign currencies The financial statements denominated in foreign currencies of the Group companies resident abroad were translated to euros as follows: for the Group companies which engage in trading for the Group, the "monetary-non-monetary" method was used and the translation differences are included under the "Translation Gains/Losses" captions in the consolidated statements of income; for the remaining foreign companies, the "year-end exchange rate" method was used, consisting of the translation to euros of assets and liabilities at year-end exchange rates, of capital and reserves at historical exchange rates and of revenues and expenses at the average exchange rates for the year. The resulting translation differences are recorded under the "Shareholders Equity - Translation Differences" caption in the accompanying consolidated balance sheets. The effect of the changes in exchange rates can be seen in the respective tables disclosing the variations in each caption during the year in the Other variations column. b) Start-up expenses This caption comprises incorporation, preopening and capital increase expenses, valued at their effective cost, net of amortization taken by the straight-line method over five years. c) Intangible assets Intangible assets are valued at acquisition cost or at the direct and indirect cost incurred in producing or developing them, including personnel, financial and other expenses relating to projects carried out (see Note 5). Research and development expenses are amortized in full when the related project is completed, regardless of its outcome, unless the technology developed is patented, in which case they are amortized over 13 years. Oil well drilling investments are recorded by the successful efforts method, and exploration costs are expensed as incurred. Drilling costs are capitalized until it is determined whether exploitable reserves have been discovered. If so, they are amortized, together with the field development expenses, on the basis of the reserves extracted as a percentage of the reserves proven to be recoverable; if the reserves detected are not exploitable, the drilling costs are charged to income as soon as this becomes known. Manufacturing license rights are amortized at the same rates as those used to depreciate the manufacturing units to which they relate. Service station surface rights are amortized over an average of 20 years, based on the contracts for transactions of this type, and computer software is amortized over a maximum of 3 years. The rights under financial lease contracts, when there is no reasonable doubt that the purchase option will be exercised, are recorded at the cost of the related assets, and the total debt for lease payments plus the amount of the purchase option are recorded as a liability. The difference between the two amounts, which represents the interest expenses on the transaction, is recorded as a deferred expense. These rights are amortized at the same rate as the leased asset. When the purchase option is exercised, the value of the rights recorded and the related accumulated amortization are relieved from intangible assets and are recorded as part of the value of the acquired asset. d) Differences in first-time consolidation Goodwill in consolidation and the negative difference in consolidation are recorded as the positive or negative difference, respectively, between the price paid to acquire the investees and their underlying book value at the acquisition date, net of the differences in first-time consolidation attributed to asset items. Goodwill is amortized on a straight-line basis over five years, except in the case of the goodwill relating to heating fuel marketing companies and to Deten Quimica,S.A, which is amortized over three and fifteen years, respectively, since these are the periods over which the decline in value will foreseeably occur. The first-time consolidation differences arising on the holding in CLH were allocated to long-term investments and amortized over the estimated average useful life of the underlying assets. Negative differences in consolidation are allocated to income over five years as provided for in Article 25.3 of Royal Decree-Law 1815/1991 enacting the regulations for the preparation of consolidated financial statements. 54 Notes to Consolidated Financial Statements

14 e) Tangible fixed assets Tangible fixed assets are carried at cost, revalued pursuant to the applicable enabling legislation, which includes personnel expenses and other expenses directly and indirectly related to these assets incurred during the construction period only. In 2003 and 2002 certain CEPSA Group companies recorded provisions adjusting the net values of certain of their refinery, combined heat and power and service-station network assets based on the amounts expected to be recovered through the generation of future revenues. If necessary, in accordance with Spanish accounting regulations, the values of tangible fixed assets are definitively adjusted by deducting from their cost the amounts that it is not possible to recover through the generation of future revenues (see Note 6). The costs of expansion, modernization or improvements leading to increased productivity, capacity or efficiency or to a lengthening of the useful lives of the tangible fixed assets are capitalized. Repair, upkeep and maintenance expenses are expensed currently. Retirements of assets and components are recorded by removing the asset and the related accumulated depreciation from the accounts. The Group depreciates its tangible fixed assets by the straight-line method at annual rates based on the following years of estimated useful life: 2003 Years of Useful Life Buildings and other structures 33 to 50 Technical installations and machinery Machinery, installations and tools 10 to 15 Furniture and fixtures 10 Plants in service: Units 12 to 15 Lines and network 15 Tanks and spheres 20 Other tangible assets 4 to 10 f) Marketable securities and other similar financial investments Except for the investments in associated companies that are carried by the equity method, marketable short- and long-term fixed-income and equity securities are recorded at the lower of cost or market. If cost is higher than market value, the required provisions for diminution in value are recorded with a charge to income. The market value of investments in unlisted companies is taken to be the underlying book value per the latest balance sheet, including, where appropriate, the unrealized gains disclosed at the time of the acquisition and still existing at the date of subsequent valuation. g) Inventories Crude oil, oil products and petrochemicals are valued at the lower of Dollar Value LIFO cost or market value. Crude oil in transit is valued at the cost at source plus direct costs incurred through year-end. Replacement parts and supplies and other inventories are valued at the lower of average acquisition or production cost or market (see Note 11). In the case of refined products, the individual costs are allocated to the various products in proportion to the selling price thereof (isomargin method). Production cost includes the acquisition cost of raw materials and other consumables required, determined in accordance with the valuation standards of the Spanish Chart of Accounts, and the costs directly allocable to the product and the reasonably corresponding portion of the indirect costs, insofar as these costs relate to the production, manufacturing or construction period. CEPSA Group 55

15 h) Subsidies Capital subsidies are recorded at the amount granted. Nonrefundable capital subsidies are recorded under the Deferred Revenues caption in the consolidated balance sheet and are allocated to income over the useful life of the subsidized investments. Refundable capital subsidies are recorded as long-term debt transformable into subsidies; operating subsidies are credited to income when earned. i) Provisions for pensions and similar obligations The value of the commitments to employees covered by in-house allowances has been calculated by means of actuarial studies conducted by the companies based on individual capitalization techniques and using interest rates in line with the commitments (see Note 15). The annual cost accrued for commitments to employees and for the financial effect related to pension funds revaluation is recorded under the Personnel expenses and Financial expenses captions. The difference as of December 31, 1989, between the value of the commitments to retired and serving employees and the allowances recorded at that date is being amortized, after taking into account the tax effect, by charges to Reserves over seven and fifteen years, respectively, pursuant to Transitional Provision Four of Royal Decree 1643/1990 and subsequent regulations (see Note 10). In December 1999 CEPSA and other Group companies agreed with their workers representatives to externalize the internal allowances relating to the capital amount of each participant at the date the Pension Plan was set up, referred to as Past Service Cost, in accordance with Royal Decree 1588/1999 enacting the regulations for instrumentation of companies pension commitments to workers and beneficiary rightholders. The CEPSA Group covered this commitment in full, making payments in 1999 and 2000 for a total amount of Eur 167,791 thousand. Also, on November 16, 2002, the CEPSA Group externalized its commitments to workers and beneficiary rightholders for death of spouse, death of parent, disability and retirement, totaling Eur 24,343 thousand, pursuant to Additional Provision 25 of Law 14/2000 on Tax, Administrative and Employee Welfare Measures for j) Other provisions The Provisions for Contingencies and Expenses caption includes provisions for major repairs to the production units, covering the estimated expenses of extraordinary overhauls based on the projected cost of the next overhaul and the period between two overhauls. It also includes provisions for third-party liability, covering the probable or certain expenses arising from litigation in progress and obligations of undetermined amount, and for risks relating to liabilities that may arise from contracts and transactions in progress. Additionally, the caption includes other provisions for expenses expected to be incurred on the abandonment of crude oil production fields once all recoverable reserves have been extracted. k) Classification of debt In the accompanying consolidated balance sheets, debts maturing at over 12 months from year-end were classified as longterm debt and the remainder as current liabilities. l) Corporate income tax The expense for corporate income tax for each year is calculated on the basis of book income before taxes, increased or decreased, as appropriate, by the permanent differences (individual and consolidated) from the income for tax purposes, net of the effect of tax relief and tax credits taken, except those applicable to several years which are deferred so that the tax credit is proportional to the diminution in value of the asset giving rise to it. In the case of the Group companies which file consolidated tax returns, the consolidated tax expense is allocated pursuant to an internal agreement which, as regards the recording and determination of individual tax charges, observes Rule Six of a Resolution dated October 9, 1997, of the Spanish Accounting and Audit Institute, partially amended by the Resolution dated March 15, 2002 (see Note 17). In accordance with Rule 9.3 of this Resolution, the Corporate Income Tax Expense account includes the difference between the estimated 2002 and 2001 corporate income tax expense per the financial statements for these years and the definitive expenses determined when the tax was settled. The Corporate Income Tax Expense caption also includes the expenses arising from accepted and contested tax assessments and from supplementary tax returns (see Note 17). 56 Notes to Consolidated Financial Statements

16 m) Foreign currency transactions and balances Transactions in foreign currencies are translated to euros at the exchange rates ruling at the transaction date and the exchange gains or losses arising at the date of settlement of the transactions are credited or charged, as appropriate, to income. Short-term receivables and payables denominated in foreign currencies are recorded in the consolidated balance sheet in euros after translation at the year-end exchange rates or at the hedged exchange rates, if any. Exchange losses arising at year-end with respect to the exchange rates prevailing at the transaction date are recorded under the "Exchange Differences" caption with a charge to income. However, in accordance with the accounting principle of prudence, exchange gains are deferred to future years under the Deferred Revenues caption in the accompanying consolidated balance sheets. Exchange differences arising on foreign currency loans to finance investments for which the functional currency is the same, and for which there are exchange rate hedges relating to the loans, are recorded with a balancing entry under the Deferred Revenues or Deferred Charges caption, and are allocated to income as the foreign currency financing from which they derive is repaid or when the risk ceases to be hedged (see Notes 10 and 14). n) Termination indemnities Under current legislation, companies are required to make indemnity payments to employees terminated without just cause. Although there are no labor force reduction plans in place, several Group companies, in accordance with the accounting principle of prudence, have recorded provisions to cover any risks that might arise in this connection. o) Recognition of revenues and expenses Revenues and expenses are recognized 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. However, in accordance with the accounting principle of prudence, the Group companies only record realized income at year-end, whereas foreseeable contingencies and losses, including possible losses, are recorded as soon as they become known. 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 the Net Sales and Other Operating Expenses captions, respectively, in the consolidated statements of income. The Net Sales caption includes the value of exchanges of strategic stocks arranged with other operators. p) Refurbishing of service stations In recent years certain service stations have been flagged. Investments made in installations and equipment owned by the Group companies are recorded as tangible fixed assets, whereas disbursements made to refurbish and improve flagged service stations are recorded as deferred charges and are amortized on a straight-line basis over the term of the related flagging contract. The period amortization of these deferred charges amounted to Eur 9,553 thousand in 2003 and Eur 12,549 thousand in 2002 (see Note 10). q) Hedging transactions The CEPSA Group uses certain 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. Any negative differences between the market price at year-end and the agreed price of open transactions at year-end are charged to income (see Note 19). For exchange and interest rate risks, the transaction limits and hedging instruments (basically forward currency transactions and interest rate swaps) have been approved by Group management and the monitoring process respects the separation of the performance and control functions. Any negative differences between the market price at year-end and the agreed price of open transactions at year-end are charged to income (see Note 19). The imcome or loss resulting from hedging transactions is taken to the statement of income symmetrically to the revenue from or cost of the hedged item. Its effect is not material with respect to the Group s income. CEPSA Group 57

17 r) Environmental matters Per the Resolution of March 25, 2002, of the Spanish Accounting and Audit Institute, investments of an environmental nature 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 minimizing 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 the companies in the Group. Likewise, expenses of an environmental nature 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 contingencies and obligations, the Group recorded provisions for environmental actions to remedy the gradual pollution of soil, with a charge to Extraordinary Loss in the statements of income. These provisions were quantified on the basis of the estimates and in-house technical studies performed. Also, the Group has taken out insurance policies which cover such other environmental damage as might arise, including any third-party liability that might arise therefrom (see Note 22). 4. Start-up Expenses The breakdown of the balances of this caption as of December 31, 2002 and 2003, and of the variations therein in 2002 and 2003 is as follows: Balance at Other Amortizations Balance at Additions Variations and Write-downs Incorporation expenses (32) 66 Preopening expenses 2,612 2,208 (181) (721) 3,918 Capital increase expenses (5) (20) 113 Total 2,780 2,208 (118) (773) 4,097 Balance at Other Amortizations Balance at Additions Variations and Write-downs Incorporation expenses (38) 44 Preopening expenses 3, (4,069) 101 Capital increase expenses (15) (10) 189 Total 4, (4,117) Notes to Consolidated Financial Statements

18 5. Intangible Assets The gross investments and accumulated amortization and allowances in intangible asset accounts, and the variations therein in 2002 and 2003 are as follows: Balance at Additions or Other Retirements Balance at Provisions Transfers variations or Reductions Assets Research and development expenses 6,579 5,003 (4,671) (1,540) - 5,371 Oil well drilling expenses 703, , (73) 939,201 Concessions, patents and licenses 46, ,762 (3,366) (403) 48,903 Goodwill 10, ,479 Computer software 67,286 11,828 (158) (497) (155) 78,304 Other intangible assets 259,707 22,621 (152) 2,733 (1,248) 283,661 Total 1,094, , (1,827) (1,879) 1,366,919 Accumulated amortization and allowances Research and development expenses (1,955) (1,059) (2,456) Oil well drilling expenses (263,786) (37,984) - - 2,218 (299,552) Concessions, patents and licenses (36,653) (4,488) (40,445) Goodwill (3,570) (744) (4,310) Computer software (51,362) (10,134) (61,141) Other intangible assets (17,153) (9,310) 69 (47) 539 (25,902) Total (374,479) (63,719) 69 1,008 3,315 (433,806) Net intangible assets 719, , (819) 1, ,113 CEPSA Group 59

19 Balance at Additions or Other Retirements Balance at Provisions Transfers variations or Reductions Assets Research and development expenses 5,371 5,137 (6,020) 104-4,592 Oil well drilling expenses 939,201 67, (1) (4,143) 1,002,311 Concessions, patents and licenses 48,903 2,281 4, ,412 Goodwill 11,479 1, (602) (3,116) 9,412 Computer software 78,304 10, (59) 88,644 Other intangible assets 283,661 17,220 (3,145) (17) (2,237) 295,482 Total 1,366, ,472 (3,791) (192) (9,555) 1,456,853 Accumulated amortization and allowances Research and development expenses (2,456) (216) 787 (33) - (1,918) Oil well drilling expenses (299,552) (133,167) (77) - 32,639 (400,157) Concessions, patents and licenses (40,445) (5,722) (15) (21) - (46,203) Goodwill (4,310) (930) (70) - 1,499 (3,811) Computer software (61,141) (6,827) (6) (13) 41 (67,946) Other intangible assets (25,902) (10,405) (17) 59 1,524 (34,741) Total (433,806) (157,267) 602 (8) 35,703 (554,776) Net intangible assets 933,113 (53,795) (3,189) (200) 26, ,077 The Research and Development and Oil Well Drilling Expenses caption includes mainly oil well drilling investments relating to exploitable concessions in Spain, Colombia and Algeria with net amounts of Eur 639,649 thousand and Eur 602,154 thousand as of December 31, 2002 and 2003, respectively. These investments in Algeria led to the discovery of two fossil fuel fields: RKF, which started production in July 1996 and Ourhoud (single field), which started operating in December 2002, and in which CEPSA holds a working interest of %. The most significant investments in 2002 and 2003 were basically for the construction of new oil extraction and water and gas injection wells. The amortized amounts relating to extracted crude oil reserves were Eur 16,024 thousand in 2002 and Eur 113,304 thousand in In addition, exploration costs amounting to Eur 19,367 thousand in 2002 and Eur 19,027 thousand in 2003 were amortized, of which Eur 14,596 thousand and Eur 8,122 thousand related to investments made and amortized in the same year. This caption also includes Eur 28,604 thousand in 2002 and Eur 11,853 thousand in 2003 of personnel, financial and other expenses relating to these projects. These amounts were charged to this caption with a credit to the Capitalized Expenses of Group In-House Work on Fixed Assets caption in the accompanying consolidated statements of income. The investment recorded by the Group companies under the Computer Software caption relates to acquisitions made in order to update computer software to the most recent market versions. The main investments in the Other Intangible Assets caption were basically that of Eur 17,835 thousand in 2002 for the construction, through lease settlements, of four tanks of 50,000 m3 for the storage of gas oil, and that of Eur 6,046 thousand in 2003 for the acquisition on a lease basis by Cepsa Elf Gas of butane distribution cylinders. 60 Notes to Consolidated Financial Statements

20 The main information relating to the lease agreements entered into in 2003 and 2002, as of December 31, 2003 and 2002 is as follows: Original cost (excluding purchase option) 231, ,073 Purchase option 5,682 5,132 Principal repaid 102,475 68,119 Exchanges differences (25,028) (16,964) Interperiod allocation of deferred interest expenses Outstanding financial expenses 9,547 13,604 Lease payments paid 117,008 83,399 Lease payments payable 119, , Tangible Fixed Assets The gross investments and accumulated depreciation in tangible fixed asset accounts, and the variations therein in 2002 and 2003 are as follows: Balance at Additions or Other Retirements Balance at Provisions Transfers variations or Disposals Assets Land and structures 263,353 6,575 14,024 (3,386) (3,330) 277,236 Plant and machinery 3,262,996 23, ,204 (35,704) (52,622) 3,407,227 Other fixtures, tools and furniture 91,925 2,869 5,151 (9,228) (2,048) 88,669 Advances and construction in progress 479, ,357 (270,359) (15,430) (700) 583,782 Other tangible fixed assets 142,464 4,387 41,009 (3,008) (4,731) 180,121 Total 4,240, ,541 (971) (66,756) (63,431) 4,537,035 Accumulated depreciation Structures (43,678) (5,929) 44 1, (47,069) Plant and machinery (1,888,436) (161,784) (4,798) 22,345 10,454 (2,022,219) Other fixtures, tools and furniture (48,214) (8,848) 4,796 4,840 1,895 (45,531) Other tangible fixed assets (56,681) (10,103) (111) 1,731 4,135 (61,029) Total (2,037,009) (186,664) (69) 30,707 17,187 (2,175,848) Allowances (75,692) (12,383) ,990 (48,026) Net tangible fixed assets 2,127, ,494 (1,040) (35,990) (6,254) 2,313,161 CEPSA Group 61

21 Balance at Additions or Other Retirements Balance at Provisions Transfers variations or Disposals Assets Land and structures 277,236 8,191 6,757 1,967 (9,069) 285,082 Plant and machinery 3,407,227 44, ,324 2,566 (77,652) 3,974,599 Other fixtures, tools and furniture 88,669 3,339 (4,390) 427 (3,867) 84,178 Advances and construction in progress 583, ,870 (645,941) 3,727 (1,096) 217,342 Other tangible fixed assets 180,121 7,116 47,632 2,924 (5,246) 232,547 Total 4,537, ,650 2,382 11,611 (96,930) 4,793,748 Accumulated depreciation Structures (47,069) (8,102) 2,604 (168) 645 (52,090) Plant and machinery (2,022,219) (178,422) (11,916) (2,039) 18,608 (2,195,988) Other fixtures, tools and furniture (45,531) (9,042) 7,357 (149) 3,289 (44,076) Other tangible fixed assets (61,029) (12,314) 42 (835) 4,108 (70,028) Total (2,175,848) (207,880) (1,913) (3,191) 26,650 (2,362,182) Allowances (48,026) (43,114) - (671) 65,459 (26,352) Net tangible fixed assets 2,313,161 88, ,749 (4,821) 2,405,214 Tangible fixed asset additions in 2002 and 2003, amounting to Eur 427,541 thousand and Eur 339,650 thousand, respectively, related particularly to investments in refining units aimed at improving and flexibilizing production processes; to the consolidation of the Direct Sales organization, by fostering loyalty among distributors and to improving the presence and efficiency of the service station network in Spain and Portugal; to the erection of new facilities at industrial and distribution plants to promote sales of butane gas for household use and piped propane; to expanding the storage capacity at the Gibraltar and La Rábida refineries; to the construction of a new plant by INTERQUISA in San Roque in order to double the production capacity of PTA, and of another new plant by INTERQUISA CANADA; to the completion of the expansion of the paraffin production unit at PETRESA s plant in Algeciras; and to improvements in industrial facilities to minimize the impact on the environment and enhance safety in the Group s activities and also to comply with the legal requirements scheduled to come into force in 2005 with respect to gas oil and petrol specifications. In 2002 and 2003, Eur 21,145 thousand and Eur 21,567 thousand, respectively, of personnel and other expenses relating to the construction period of various tangible fixed assets were credited as an investment to the Capitalized Expenses of Group In-House Work Fixed Assets caption in the accompanying consolidated statements of income. The amounts recorded in the Other Variations column relate basically to the effect of variations in the exchange rates with the euro at certain foreign subsidiaries. The Retirements or Disposals column for 2002 and 2003 includes in the case of Land and Structures the sale of various land lots; in the Plant caption the most significant event was the reduction of the net value of certain refining facilities, since it was considered that, based on the recoverability of the investment per the estimated future revenues, the factors for recoverability are definitive as well as the sale of stations service At 2002 and 2003 year-ends, certain CEPSA Group companies recorded Eur 8,505 thousand and Eur 13,364 thousand, respectively, under the Provisions caption arising from reasonable adjustment of refinery, cogeneration and service station network asset values based on the expected recovery of the net investment through the generation of future income. 62 Notes to Consolidated Financial Statements

22 1992 saw the foreclosure of a mortgage for Eur 8,915 thousand taken out on the land on which the La Rábida refinery is located in Palos de la Frontera (Huelva), which Ertoil, S.A. (now merged into CEPSA) had used as security for the mortgage bond issue made in 1976 by Unión Explosivos Rio Tinto, S.A., later Ercros, S.A. This sum, deposited by CEPSA at Court No. 1 of Moguer (Huelva), was initially retained and the principal amount thereof (Eur 7,690 thousand) was delivered to the foreclosing debentureholders syndicate in At 2003 year-end, the amount of the interest, costs and expenses had yet to be settled, and this will depend on the decision to be handed down by the First Chamber of the Spanish Supreme Court in respect of a request by CEPSA that the mortgage be declared null and void. In any case, CEPSA has recorded the provisions considered necessary to meet any financial liability that may arise from this litigation (see Note 15). Also, the Spanish Supreme Court will hand down a decision on other proceedings brought by CEPSA against Ercros, S.A. to obtain reimbursement from the latter of the Eur 8,915 thousand deposited at the Moguer Court and compensation for damages caused by the aforementioned mortgage foreclosure. In 1996 certain consolidable Group companies revalued their tangible fixed assets pursuant to Royal Decree-Law 7/1996, increasing the book value 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 income in 1997 and subsequent years based on the years of residual useful life of the revalued assets. In 2003 and 2002 the additional tangible fixed asset depreciation charges resulting from the aforementioned revaluation were Eur 7,014 thousand and Eur 7,885 thousand, respectively, at the consolidable Group companies. At 2003 and 2002 year-ends the undepreciated increases in book value amounted to Eur 27,432 thousand and Eur 34,578 thousand, respectively. 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, Algeciras-La Línea and Palos de la Frontera, which will revert to the State in 2061, 2065, 2005 and 2022, respectively. Management of the CEPSA Group expects that these concessions will be renewed when it falls due and considers that no provision to a reversion reserve is necessary since the facility maintenance programs ensure that they are in good working order and the related cost will have been depreciated in full for accounting purposes before the end of the concession period. CEPSA Group 63

23 7. Marketable Securities and Other Similar Financial Investments The breakdown of the financial investments and the related provisions and of the variations therein in 2002 and 2003 is as follows: Balance at Additions or Other Retirements Balance at Provisions Transfers variations or Disposals Assets Investments in companies accounted for by the equity method 170,161 2,021 - (1,320) (36,562) 134,300 Loans to companies accounted for by the equity method 23,073 64, ,004 Long-term investment securities 29,460 4,348 - (8,507) (1,378) 23,923 Other loans 212,851 74,188 9,033 (323) (75,654) 220,095 Long-term deposits and guarantees 21,854 2,441 (2) (3,276) (423) 20,594 Total 457, ,927 9,031 (13,424) (114,017) 486,916 Allowances Investments in companies accounted for by the equity method (49,878) ,341 (33,537) Other long-term financial investments (14,965) (1,059) (12,314) 512 2,708 (25,118) Total (64,843) (1,059) (12,314) ,049 (58,655) Net long-term financial investments 392, ,868 (3,283) (12,912) (94,968) 428,261 Balance at Additions or Other Retirements Balance at Provisions Transfers variations or Disposals Assets Investments in companies accounted for by the equity method 134,300 21,919 - (821) (12,558) 142,840 Loans to companies accounted for by the equity method 88,004 - (60,646) - (10,789) 16,569 Long-term investment securities 23,923 11,318 - (1,323) (611) 33,307 Other loans 220,095 43,394 (2,313) 2,214 (76,116) 187,274 Long-term deposits and guarantees 20,594 7,448 (1) (891) (7,273) 19,877 Total 486,916 84,079 (62,960) (821) (107,347) 399,867 Allowances Investments in companies accounted for by the equity method (33,537) ,426 (28,111) Other long-term financial investments (25,118) (10,138) ,183 (20,303) Total (58,655) (10,138) ,609 (48,414) Net long-term financial investments 428,261 73,941 (62,960) (51) (87,738) 351, Notes to Consolidated Financial Statements