02 L E G A L D O C U M E N T S

Transcription

1 02 LEGAL DOCUMENTS

2 REPORT FROM INDEPENDENT AUDITORS /2001 FINANCIAL STATEMENTS 44 Balance Sheets 44 Statements of Income 46 Notes to the Financial Statements 48 MANAGEMENT DISCUSSION & ANALYSIS 88 41

3 02 42 REPORT FROM INDEPENDENT AUDITORS

4 Report from Independent Auditors for Compañía Española de Petróleos, S.A. and Subsidiaries (CONSOLIDATED GROUP) 43

5 02 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, 2002 and 2001 (Notes 1, 2, and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) ASSETS Fixed and other noncurrent assets Start-up expenses (Note 4) 4,097 2,780 Intangible assets (Note 5) Intangible assets and rights 1,366,919 1,094,443 Provisions and accumulated amortization (433,806) (374,479) Total intangible assets 933, ,964 Tangible fixed assets (Note 6) Land and structures 277, ,353 Technical installations and machinery 3,407,227 3,262,996 Other tangible fixed assets 268, ,389 Advances and construction in progress 583, ,914 Provisions and accumulated amortization (2,223,874) (2,112,701) Total tangible fixed assets 2,313,161 2,127,951 Long-term financial investments (Note 7) Holdings in companies carried by the equity method 134, ,161 Loans to companies carried by the equity method 88,004 23,073 Long-term investment securities 23,923 29,460 Other loans 240, ,705 Provisions (58,655) (64,843) Total long-term financial investments 428, ,556 Total fixed and other noncurrent assets 3,678,632 3,243,251 Goodwill in consolidation (Note 8) Co. consolidated by the global or proportional integration method 92, ,296 Companies carried by the equity method 2,037 2,825 Total goodwill in consolidation 94, ,121 Deferred charges (Note 10) 58,452 83,938 Current assets Inventories (Note 11) 674, ,481 Accounts receivable (Note 2,d) 1,363,645 1,253,095 Short-term financial investments (Note 7) 75, ,916 Cash 36,251 43,492 Prepaid expenses 29,043 22,266 Total current assets 2,179,104 2,072,250 TOTAL ASSETS 6,010,755 5,504,560 (The accompanying Notes 1 to 25 are an integral part of these Consolidated Balance Sheets) 44 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 841, ,277 Restricted reserves 54,056 54,056 Prior years' earnings Reserves at companies consolidated by the global or proportional integration method 625, ,859 Reserves at companies carried by the equity method (55,392) (59,662) Translation differences: Companies consolidated by the global or proportional integration method (45,101) (3,077) Companies carried by the equity method Income allocable to the controlling company 460, ,883 Interim dividend paid in the year (61,542) (61,110) Total shareholders' equity 2,518,432 2,263,321 Minority interests (Note 13) Shareholders' equity attributed to minority interests 18,865 28,054 Income attributed to minority interests 17,377 17,657 Total minority interests 36,242 45,711 Negative difference in consolidation (Note 9) Co. consolidated by the global or proportional integration method 3,727 5,136 Total Negative difference in consolidation 3,727 5,136 Deferred revenues (Note 14) Capital subsidies 64,469 69,573 Other deferred revenues 174,229 84,847 Total deferred revenues 238, ,420 Provisions for contingencies and expenses (Note 15) 301, ,922 Long-term debt (Note 16) Payable to credit entities 996, ,238 Payable to companies carried by the equity method 13,822 12,982 Other accounts payable 137, ,780 Total long-term debt 1,147,666 1,045,000 Current liabilities Payable to credit entities (Note 16) 245, ,473 Payable to companies carried by the equity method (Note 16) 208, ,801 Trade accounts payable 735, ,537 Other nontrade payables (Notes 2,d and 16) 568, ,348 Accrued expenses 6,431 6,891 Total current liabilities 1,764,459 1,649,050 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,010,755 5,504,560 45

7 02 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, 2002 and 2001 (Notes 1, 2, and 3) Compañía Española de Petróleos, S.A. and Subsidiaries (Consolidated Group) DEBIT Expenses Procurements (Note 20) 7,174,552 7,324,315 Personnel expenses (Note 2.d) 380, ,130 Period depreciation and amortization 261, ,766 Variation in operating provisions 7,240 11,774 Other operating expenses: Excise tax on oil and gas (Note 3.o) 2,052,024 1,952,409 Other expenses (Note 2.d) 1,246,911 1,263,823 11,122,210 11,160,217 Operating income 489, ,688 Financial expenses (Note 20) 49,652 73,331 Losses on short-term financial investments - - Variation in financial investment provisions (2,062) 2,513 Translation losses (Note 3.a) 7,643-55,233 75,844 Amortization of goodwill in consolidation (Note 8) 11,641 10,323 Income from ordinary activities 474, ,286 Losses on fixed assets (Note 20) 2,683 4,088 Variation in intangible assets, tangible fixed assets and control portfolio provisions (Note 20) 10,611 13,035 Extraordinary expenses (Note 20) 71,670 40,897 Prior years' expenses (Note 20) 425 1,252 85,389 59,272 Extraordinary income (Nota 20) 100,293 - Consolidated income before taxes 575, ,291 Corporate income taxes (Note 17) 96, ,751 Consolidated income for the year 478, ,540 Income attributed to minority interests (Note 13) 17,377 17,657 Income attributed to the controlling company 460, ,883 (The accompanying Notes 1 to 25 are an integral part of these Consolidated Statements of Income) 46 STATEMENTS OF INCOME

8 CREDIT Revenues Sales and services on ordinary activities 9,407,290 9,712,931 Excise tax on oil and gas charged on sales 2,051,503 1,951,083 Net Sales (Notes 3.o and 20) 11,458,793 11,664,014 Increase in finished products and work-in-process inventories 39,396 6,792 Capitalised expenses of group in-house work on fixed assets 49,749 57,403 Other operating revenues 63,586 52,696 11,611,524 11,780,905 Revenues from shareholdings Other financial revenues 25,809 27,533 Translation gains (Note 3.a) - 2,368 Exchange gains-(losses) 6,822 (5,605) 32,867 24,427 Financial loss 22,366 51,417 Share in income of companies carried by the equity method 18,067 44,928 Allocation of Negative difference in consolidation (Note 9) 1,409 1,410 Gains on fixed assets (Note 20) 119,751 13,054 Capital subsidies transferred to income for the year (Note 3.h, 14 y 20) 6,863 5,156 Extraordinary revenues (Note 20) 56,851 19,583 Prior years' revenues (Note 20) 2, ,682 38,277 Extraordinary loss (Note 20) - 20,995 47

9 02 NOTES TO THE FINANCIAL STATEMENTS 48 NOTES TO THE FINANCIAL STATEMENTS

10 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, 2002 and 2001 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 2002 will be submitted for approval by the respective Shareholders' Meetings, and it is considered that they will be approved without any changes. The 2001 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 May 30, 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 2002, 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. 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. 49

11 02 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 accordance with the Spanish National Chart of Accounts approved by Royal Decree 1643/1990, the consolidated financial statements present, together with the figures for 2002, those for 2001 translated from pesetas to euros at the irrevocable conversion rate of Ptas = Eur 1. The changes in the scope of consolidation in 2002 compared with 2001 were as follows: Company Integration Global/Proportional Equity Method Compañía de Petróleos Avanti, S.A. E Estación de Servicios Aeropuerto, S.A. E Jazmín Cabello Latorre e Hijos, S.L. I Mercedes Lloret 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. d) Grouping of items The balances of the "Accounts Receivable" and "Other Nontrade Payables" captions in the accompanying consolidated balance sheets for 2002 and 2001 consist of the items detailed below: Current Assets (Accounts Receivable) Customer receivables for sales and services 1,246,254 1,141,805 Receivable from companies carried by the equity method 152, ,837 Other accounts receivable 2,846 3,209 Tax receivables 63,257 82,531 Provisions (101,494) (94,287) Total 1,363,645 1,253, NOTES TO THE FINANCIAL STATEMENTS

12 Current liabilities (Other nontrade payables) Accrued taxes payable 179, ,433 Other accounts payable 383, ,792 Guarantees and deposits received 6,581 9,123 Total 568, ,348 The amounts recorded under the "Personnel Expenses" and "Other Expenses" captions in the 2002 and 2001 consolidated statements of income consist of the following items: Personnel Expenses Wages, salaries, etc. 276, ,552 Contributions and provisions for pensions 12,395 9,008 Other employee welfare expenses 91,090 86,570 Total 380, ,130 Other Expenses Taxes other than income tax 23,705 21,685 Transport and freights 295, ,261 Outside work, supplies and services 902, ,451 Other current operating expenses 5,835 8,829 Environmental expenses (Note 22) 18,671 11,597 Total 1,246,911 1,263,823 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 2002 and 2001 included under the Other Operating Expenses caption. The environmental expenses for 2001 have been reorganized to permit comparison with those for 2002 (see Notes 3-r and 22). 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. 51

13 02 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 three 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 Química,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. 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 2002 and 2001 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 52 NOTES TO THE FINANCIAL STATEMENTS

14 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: Years of Useful Life 2002 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 longterm 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. 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 Per actuarial studies conducted by the companies based on individual capitalization techniques and using interest rates in line with the commitments, the value of the commitments to employees covered by in-house allowances amounts to Eur 35,955 thousand and Eur 67,082 thousand in 2002 and 2001, respectively (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. 53

15 02 In December 1999 CEPSA and other Group companies agreed with workers representatives on the externalization of the capital relating to each participant at the date on which the pension plan was set up (i.e. past services), in accordance with Royal Decree 1588/1999 approving the Regulations on the instrumentation of companies pension commitments to workers and beneficiaries.the Cepsa Group has fully covered this commitment, making payments in 1999 and 2000 amounting to Eur 167,791 thousand. On November 16, 2002, the Cepsa Group externalized commitments for death of spouse, death of parent, disability and retirement to its employees and their beneficiaries amounting to Eur 24,343 thousand, in accordance with Additional Provision 25 of Law 14/2000 on Tax,Administrative, Labor and Social Security Measures for As required by Transitional Provision Four of Royal Decree 1643/1990 and subsequent legislation, the difference as of December 31, 1989, between the value of the commitments to retired and serving employees and the provisions recorded for pension payments at that date, net of the related tax effect, is being amortized with a charge to reserves over 7 and 15 years, respectively.the unamortized amounts of Eur 6,425 thousand and Eur 9,641 thousand in 2002 and 2001, respectively, relate only to serving employees. 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. In previous years provisions were recorded at year-end to cover the estimated expenses relating to the adaptation of the computer systems and other fixed assets as a result of the changeover to the euro.the conversion process was completed without any noteworthy incidents and this provision was used and released in full. 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 2001 and 2000 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). 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 yearend with respect to the exchange rates prevailing at the transaction date are recorded under the "Exchange Differences" caption 54 NOTES TO THE FINANCIAL STATEMENTS

16 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 12,549 thousand in 2002 and Eur 13,970 thousand in 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 income 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. r) Environmental matters Under an ICAC Resolution of March 25, 2002, environmental investments are defined as those included in the Company s assets for long-term use in its business activities mainly to minimize the environmental impact and to protect and improve the environment, including the reduction or elimination of future pollution. 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 55

17 02 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, 2001 and 2002, and of the variations therein in 2001 and 2002 is as follows: 2001 Balance at Additions Other Amortization Balance at variations Incorporation expenses 30-6 (6) 30 Preopening expenses (6) (764) Capital increase expenses (78) 138 Total (848) Balance at Additions Other Amortization Balance at variations Incorporation expenses (32) 66 Preopening expenses (181) (721) Capital increase expenses (5) (20) 113 Total (118) (773) NOTES TO THE FINANCIAL STATEMENTS

18 5. Intangible Assets The gross investments and accumulated amortization and allowances in intangible asset accounts, and the variations therein in 2001 and 2002 are as follows: 2001 Balance at Additions Transfers Other Retirements Balance at or Provisions variations or Reduct Assets R&D 6,531 3,787 (3,324) (415) - 6,579 Oil well drilling expenses 438, , (258) 703,390 Concessions, patents and licenses 42, ,303 (787) (24) 46,807 Goodwill 7,032 1, ,208-10,674 Computer software 53,000 14,575 (192) (91) (6) 67,286 Other intangible assets 173,404 79,682 (6) 7,120 (493) 259,707 Total 721, ,289 1,737 7,035 (781) 1,094,443 Accumulated amortization R&D (1,714) (325) (1,955) Oil well drilling expenses (230,619) (35,643) - - 2,476 (263,786) Concessions, patents and licenses (31,965) (4,706) (36,653) Goodwill (2,951) (66) - (553) - (3,570) Computer software (42,034) (9,400) (51,362) Other intangible assets (12,580) (4,706) 6 (71) 198 (17,153) Total (321,863) (54,846) 42 (486) 2,674 ( ) Net intangible assets Balance at Additions Transfers Other Retirements Balance at or Provisions variations or Reduct Assets R&D 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 R&D (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 57

19 02 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 439,604 thousand and Eur 639,649 thousand as of December 31, 2001 and 2002, respectively. These investments gave rise to the discovery of two oil fields: RKF, which came on stream in July 1996, and Ourhoud (a unitized field) which came on stream in December 2002 and in which CEPSA has a % working interets holding. Of the 23 wells for the extraction of crude oil, built up to date in Ourhoud, 9 came on stream in December 2002, and the remaining wells will come on stream, successively, in the first half of 2003, together with water and gas injection wells and the production plant, which was designed to reach a plateau production of 230,000 barrels a day. The amortized amounts relating to extracted crude oil reserves were Eur 19,076 thousand in 2001 and Eur 16,024 thousand in In addition, exploration costs amounting to Eur 12,958 thousand in 2001 and Eur 19,367 thousand in 2002 were amortized, of which Eur 12,384 thousand and Eur 14,596 thousand related to investments made and amortized in the same year. This caption also includes Eur 35,028 thousand in 2001 and Eur 28,604 thousand in 2002 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. Eur 76,387 thousand and Eur 17,835 thousand were included as an investment in 2001 and 2002 under the Other Intangible Assets caption.the investments in 2001 relate to the recording, as the result of a lease settlement, of four tanks of 150,000 m3 to store crude oil and three double-hulled crude oil tankers, while those made in 2002 include four tanks of Eur 50,000 m3 for diesel storage. The main information relating to the lease agreements entered into in 2001 and 2002, as of December 31, 2001 and 2002 is as follows: Original cost (without purchase option) 226, ,812 Purchase option 5,132 4,558 Principal repaid 68,119 34,180 Exchanges losses and gains (16,964) 1,963 Interperiod allocaton of deferred interest expenses Outstanding financial expenses 13,604 18,128 Lease payments paid 83,399 43,859 Outstanding lease paid 159, , NOTES TO THE FINANCIAL STATEMENTS

20 6.Tangible Fixed Assets The gross investments and accumulated depreciation in tangible fixed asset accounts, and the variations therein in 2001 and 2002 are as follows: 2001 Balance at Additions Transfers Other Retirements Balance at or Provisions variations or Reduct Assets Land and structures 240,219 13,294 3,925 17,557 (11,642) 263,353 Technical installations and machinery 3,081,960 16, ,305 38,840 (8,426) 3,262,996 Other installations, tools and furniture 83,234 5,788 2,584 9,358 (9,039) 91,925 Advances and construction in progress 178, ,996 (178,032) 4,177 (2,229) 479,914 Other tangible fixed assets 116,778 3,949 35,614 1,443 (15,320) 142,464 Total 3,700, ,344 (1,604) 71,375 (46,656) 4,240,652 Accumulated depreciation Land and structures (37,836) (6,208) (12) (43,678) Technical installations and machinery (1,729,713) (153,514) (66) (12,175) 7,032 (1,888,436) Other installations, tools and furniture (43,838) (8,078) (132) (2,879) 6,713 (48,214) Other tangible fixed assets (60,672) (9,159) 102 (938) 13,986 (56,681) Total (1,872,059) (176,959) (108) (15,908) 28,025 (2,037,009) Provisions (67,422) (23,229) - (6) 14,965 (75,692) Net tangible fixed assets 1,760, ,156 (1,712) 55,461 (3,666) 2,127, Balance at Additions Transfers Other Retirements Balance at or Provisions variations or Reduct Assets Land and structures 263,353 6,575 14,024 (3,386) (3,330) 277,236 Technical installations and machinery 3,262,996 23, ,204 (35,704) (52,622) 3,407,227 Other installations, 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 Land and structures (43,678) (5,929) 44 1, (47,069) Technical installations and machinery (1,888,436) (161,784) (4,798) 22,345 10,454 (2,022,219) Other installations, 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) Provisions (75,692) (12,383) ,990 (48,026) Net tangible fixed assets 2,127, ,494 (1,040) (35,990) (6,254) 2,313,161 59

21 02 The tangible fixed asset additions in 2001 and 2002, which amount to Eur 517,344 thousand and Eur 427,541 thousand, respectively, relate mainly to investments in the refinery units to improve production and to increase the flexibility of production processes; to the consolidation of the Direct Sales organization through stimulation of distributor loyalty, thereby improving the appearance and efficiency of the service station network in Spain and Portugal; to the assembly of new installations in industrial and distribution plants in order to develop the marketing of household butane gas and piped propane; to the expansion of the tankage at the Algeciras and Huelva refineries; to the construction by INTERQUISA of a new plant in San Roque to double the PTA production capacity and the construction by INTERQUISA CANADA of another new plant; and to the termination of the expansion of the paraffin production unit at PETRESA s plant in Algeciras; and improvements to industrial installations to minimize the environmental impact of and increase safety in the Group s operations. In 2001 and 2002, Eur 22,375 thousand and Eur 21,145 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 in 2001 relate mainly to the changes in the scope of consolidation. Noteworthy among them were the inclusions of Compañía de Petróleos Avanti, S.A. and the proportional part of COTESA, GEMASA and GETESA, since CEPSA acquired Endesa Cogeneración y Renovables S.A. s 50% holdings in them. As regards 2002, this column includes mainly the effect of the depreciation of the exchange rates against the euro applicable to certain foreign dependent companies. The reductions recorded in 2001 relate mainly to the sale of various land lots recorded and the retirements of computer hardware recorded in the year. Reductions in 2002 relate mainly to the decrease in the net value of certain refinery facilities as a result of using the provision recorded in 2000 and 2001, since it was considered that, based on the recoverability of the investment through future projected income, the events leading to the recording of such provision were irreversible. At 2001 and 2002 year-ends, certain CEPSA Group companies recorded Eur 9,634 thousand and Eur 8,505 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 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 2002 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 2002 and 2001 the additional tangible fixed asset depreciation charges resulting from the aforementioned revaluation were Eur 7,885 thousand and Eur 8,260 thousand, respectively, at the consolidable Group companies.at 2002 and 2001 year-ends the undepreciated increases in book value amounted to Eur 34,578 thousand and Eur 42,600 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, 60 NOTES TO THE FINANCIAL STATEMENTS

22 which will revert to the State in 2061, 2065, 2005 and 2022, respectively. Management of the CEPSA Group 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. 7. Marketable Securities and Other Similar Financial Investments The breakdown of the financial investments and the related provisions and of the variations therein in 2001 and 2002 is as follows: 2001 Balance at Additions Transfers Other Retirements Balance at or Provisions variations or Reduct Assets Holdings in companies carried by the equity method 238,188 (65,419) - (1,869) (739) 170,161 Loans to companies carried by the equity method 20,927 10,357 - (8,211) - 23,073 Long-term investment securities 24,695 7, (2,645) 29,460 Other loans 204,313 40,471 (1,407) 2,938 (33,464) 212,851 Long-term deposits and guarantees 20,273 3,131 - (547) (1,004) 21,854 Total 508,396 (4,440) (1,407) (7,299) (37,853) 457,399 Provisions Holdings in companies carried by the equity method (49,878) (49,878) Other long-term financial investments (13,000) (3,060) 1,028 (690) 757 (14,965) Total (62,878) (3,060) 1,028 (690) 757 (64,843) Net long-term financial investments 445,518 (7,500) (379) (7,989) (37,094) 392, Balance at Additions Transfers Other Retirements Balance at or Provisions variations or Reduct Assets Holdings in companies carried by the equity method 170,161 2,021 - (1,320) (36,562) 134,300 Loans to companies carried 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 Provisions Holdings in companies carried 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 61

23 02 The Holdings in Companies Carried by the Equity Method caption as of December 31, 2002 and 2001, relates mainly to CLH and ASESA, the detail being as follows: Company ASESA 8,746 9,117 CLH (Including difference in first time consolidation) 75, ,465 Other companies 50,144 47,579 Total 134, ,161 The variations in the aforementioned caption in 2001 and 2002 are as follows: Beginning balance 170, ,188 Income after tax for the year 18,067 44,928 Dividend distributed in the year (16,536) (128,780) Inclusion of companies carried by the equity method ,433 Retirement of companies due to: Transfer to "Other Investment Securities" (36,562) - Change in consolidation method - (2,320) Mergers (1,563) - Other variations 243 (288) Ending Balance 134, ,161 In 2001, Compañía Logística de Hidrocarburos CLH, S.A. made a distribution of reserves, of which Eur 85,987 thousand were allocated to CEPSA.This amount is included under the Dividends Declared during the Year caption in the preceding table. Also, in 2001, the capital increase at Nueva Cogeneradora del Sur, S.A. subscribed to by CEPSA for Eur 15,602 thousand was included under the Inclusions of Companies Carried by the Equity Method caption in the aforementioned table. In 2002 the Disposals caption relates to the sale by CEPSA of 5,745,255 shares of Compañía Logistica de Hidrocarburos, which represent a 8.2% of its capital stock, in accordance with the stipulations of Royal Decree-Law 6/2000 on urgent measures to intensify competition in the goods and services markets.these transactions will continue till CEPSA s holding in Compañía Logística de Hidrocarburos, S.A. is reduced to a maximum of 15%. 62 NOTES TO THE FINANCIAL STATEMENTS