CEPSA Legal Documents and Corporate Governance Report 2009

Transcription

1 CEPSA Legal Documents and Corporate Governance Report 2009 Together along the way

2 CEPSA CEPSA Legal Documents and Corporate Governance Report

3 Legal Documents Documentación Legal del grupo CEPSA Report from Informe Independent Auditoría Auditors Externa Balance Cuentas Sheets Anuales 6 Statements Consolidadas of Income Statements Balances of Changes de Situación in Equity Cash Flow Cuentas Statements 10 de Pérdidas Y Ganancias Notes to the Financial Statements 12 Estados de Flujos Management de Efectivo Discussion & Analysis 82 Estados de Cambios en el Patrimonio Neto Annual Corporate Memoria Governance Report Informe de A- Ownership Gestión Structure Consolidado B- Corporate Governance Structure 91 C- Related-party transactions 108 D- Risk Control Systems 110 E- Shareholder Meetings 116 F- Level of Compliance with Corporate Governance Recommendation 120 G- Other information interest 134

4 CEPSA Legal Documents and Corporate Governance Report Report from Independent Auditors Compañía Española de Petróleos, S.A. (CEPSA) 4

5 Cuentas Anuales Informe Anual

6 CEPSA Legal Documents and Corporate Governance Report Balance Sheets at 31 December 2009 and 2008 (Notes 1, 2, 3 and 4) Compañía Española de Petróleos, S.A. (CEPSA) ASSETS Notes (thousands of euros) Non-current assets 4,494,523 4,252,911 Intangible assets (Note 5) 90,438 96,700 Property, plant and equipment (Note 6) 2,623,952 2,248,148 Land and buildings 38,807 35,928 Plant and machinery 1,454,405 1,437,313 Property, plant and equipment in the course of construction and advances 1,130, ,907 Investments in Group companies and associates 1,746,370 1,865,758 Equity instruments (Note 8) 1,270,126 1,272,124 Loans to third parties (Note 17) 476, ,623 Other financial assets (Note 17) 8 11 Non-current financial assets (Note 8) 9,655 10,614 Equity instruments 1,217 1,172 Loans to third parties 6,013 6,983 Other financial assets 2,425 2,459 Deferred tax assets (Note 14) 24,108 31,691 Current assets 3,691,569 3,110,611 Inventories (Note 10) 992, ,589 Trade and other receivables (Note 2.e) 1,768,503 1,501,813 Current investments in Group companies and associates (Note 17) 536, ,563 Current financial assets (Note 8) 8,838 6,230 Current prepayments and accrued income 2,433 4,763 Cash and cash equivalents (Note 2.e) 382, ,653 Total assets 8,186,092 7,363,522 (The accompanying Notes 1 to 24 are an integral part of these balance sheets) 6

7 CEPSA Legal Documents and Corporate Governance Report SHAREHOLDERS' EQUITY AND LIABILITIES Notes (thousands of euros) Shareholders' equity (Note 11) 4,145,684 3,997,851 Shareholders' equity 4,128,338 3,989,900 Registered share capital 267, ,575 Share premium 338, ,728 Reserves Legal reserves 53,605 53,605 Other reserves 3,169,447 3,153,364 Profit for the year 406, ,658 Interim dividend (107,030) (107,030) Grants, donations or gifts and legacies received 17,346 7,951 Non-current liabilities 1,248,217 1,053,261 Long-term provisions (Note 12) 45,376 46,763 Bank borrowings (Note 13) 1,044, ,780 Payable to Group companies and associates (Note 17) 31,884 31,730 Deferred tax liabilities (Note 14) 120, ,168 Non-current accruals and deferred income 6,548 6,820 Current liabilities 2,792,191 2,312,410 Short-term provisions (Note 12) 36,225 50,017 Bank borrowings (Note 13) 598, ,083 Payable to Group companies and associates (Note 17) 794, ,834 Trade and other payables (Note 2.e) 1,361, ,412 Current accruals and deferred income 1,186 2,064 Total shareholders' equity and liabilities 8,186,092 7,363,522 (The accompanying Notes 1 to 24 are an integral part of these balance sheets) 7

8 CEPSA Legal Documents and Corporate Governance Report Statements of Income for the years ended 31 December 2009 and 2008 (Notes 1, 2, 3 and 4) Compañía Española de Petróleos, S.A. (CEPSA) CONTINUING OPERATIONS Notes (thousands of euros) Revenue (Note 16) 14,127,848 20,251,089 Sales 13,681,024 19,684,587 Services 446, ,502 Changes in inventories of finished goods and work in progress (23,724) (187,228) In-house work on non-current assets 14,329 13,141 Procurements (Note 16) (10,107,355) (16,107,536) Other operating income 4,778 7,609 Non-core and other current operating income 2,953 7,399 Income-related grants transferred to profit or loss 1, Staff costs (Note 2.e) (210,003) (222,653) Other operating expenses (Note 2.e) (3,275,399) (3,412,302) Depreciation and amortisation charge (226,808) (216,675) Allocation to profit or loss of grants related to non-financial assets and other grants (Note 11) 49,265 77,694 Excessive provisions 1,146 - Impairment and gains or losses on disposals of non-current assets (12,860) (26,816) Impairment and other losses (1,380) - Gains or losses on disposals and other (11,480) (26,816) Other gains or losses (Note 16) (7,463) (5,479) Profit from operations 333, ,844 Finance Income 294, ,702 From investments in equity instruments 252, ,264 Group companies and associates (Note 8) 252, ,260 Third parties 4 4 From marketable securities and other financial instruments 31,086 74,297 Group companies and associates (Note 17) 18,786 60,863 Third parties 12,300 13,434 Capitalisation of finance costs 11,253 10,141 Finance Costs (28,704) (68,026) On debts to Group companies and associates (Note 17) (10,411) (45,791) On debts to third parties (16,971) (20,151) Interest cost relating to provisions (1,322) (2,084) Change in fair value of financial instruments (441) 2,504 Held-for-trading financial assets/liabilities and other (441) 2,504 Exchange losses (Note 15) 21,563 (57,160) Impairment and gains or losses on disposals of financial instruments (11,305) (674) Impairment and other losses (16,276) (12,095) Gains or losses on disposals and other 4,971 11,421 Financial profit 275, ,346 Profit before tax 609, ,190 Income tax (Note 14) (12,379) 95,320 Other taxes (Note 14) (191,074) (230,852) Profit/loss for the year from continuing operations 406, ,658 Profit for the year 406, ,658 (The accompanying Notes 1 to 24 are an integral part of these income statements) 8

9 CEPSA Legal Documents and Corporate Governance Report Statement of Changes in Equity for the years ended 31 December 2009 and 2008 Compañía Española de Petróleos, S.A. (CEPSA) A) STATEMENT OF RECOGNISED INCOME AND EXPENSE (thousands of euros) Profit/Loss per income statement 406, ,658 Income and expenses recognised directly in equity Arising from cash flow hedges Grants, donations or gifts and legacies received 62,687 85,571 Tax effect (18,806) (25,957) Total income and expenses recognised directly in equity 43,881 60,562 Transfers to profit or loss Arising from cash flow hedges - (7,426) Grants, donations or gifts and legacies received (49,265) (77,694) Tax effect 14,779 25,537 Total transfers to profit or loss (34,486) (59,583) Total statement of recognised income and expense 415, ,637 B) STATEMENT OF TOTAL CHANGES IN EQUITY (thousands of euros) Grants, Donations Share Capital Share Profit for (Interim Valuation or Gifts and Registered Premium Reserves the year Dividend) Adjustm. Legacies Received Total Begining balance , ,728 2,819, ,326 (147,166) 4,535 2,437 4,007,546 Total recognised income and expense ,658 - (4,535) 5, ,637 Transactions with shareholders or owners (334,468) 40, (294,332) ( - ) Dividends paid (334,468) 40, (294,332) Other changes in equity ,858 (387,858) Ending balance , ,728 3,206, ,658 (107,030) - 7,951 3,997,851 Begining balance , ,728 3,206, ,658 (107,030) - 7,951 3,997,851 Total recognised income and expense , , ,408 Transactions with shareholders or owners (267,575) (267,575) ( - ) Dividends paid (267,575) (267,575) Other changes in equity ,083 (16,083) Ending balance , ,728 3,223, ,013 (107,030) - 17,346 4,145,684 (The accompanying Notes 1 to 24 are an integral part of this statement of changes in equity) 9

10 CEPSA Legal Documents and Corporate Governance Report Statement of Cash Flows for the years ended 31 December 2009 and 2008 Compañía Española de Petróleos, S.A. (CEPSA) CASH FLOWS FROM OPERATING ACTIVITIES (thousands of euros) Profit/Loss for the year before tax 609, ,190 Adjustments for (560,716) 494,900 Depreciation and amortisation charge 226, ,675 Impairment losses 17,656 34,935 Changes in provisions (475,012) 478,493 Recognition of grants in prof it or loss (49,265) (1,504) Gains/Losses on derecognition and disposal of non-current assets 11, Gains/Losses on derecognition and disposal of f inancial instruments (4,971) (11,421) Finance income (294,599) (354,053) Finance costs 27,382 70,708 Exchange dif ferences (20,374) 54,863 Changes in fair value of financial instruments (+/-) Other income and expenses (272) 5,561 Changes in working capital 708, ,832 Inventories 402,521 (66,275) Trade and other receivables (246,229) 885,277 Other current assets 70, ,918 Trade and other payables 402,629 (728,785) Other current liabilities 79,333 (462,303) Other cash flows from operating activities 23,320 (21,439) Interest paid (16,623) (68,482) Dividends received 264, ,264 Interest received 28,779 66,418 Income tax recovered (paid) (254,781) (294,639) Other payments (proceeds) (-/+) 1,685 - Cash flows from operating activities 780,970 1,359,483 (The accompanying Notes 1 to 24 are an integral part of this statement of cash flows) 10

11 CEPSA Legal Documents and Corporate Governance Report CASH FLOWS FROM INVESTING ACTIVITIES (thousands of euros) Payments due to investment (710,029) (1,811,040) Group companies and associates (61,388) (1,274,711) Intangible assets (7,525) (4,945) Property, plant and equipment (640,119) (530,787) Other f inancial assets (997) (597) Proceeds from disposal 5,477 62,682 Group companies and associates 3,951 62,274 Intangible assets Property, plant and equipment Other f inancial assets Cash flows from investing activities (704,552) (1,748,358) CASH FLOWS FROM FINANCING ACTIVITIES (thousands of euros) Proceeds and payments relating to equity instruments 6, Grants, donations or gifts and legacies received 6, Proceeds and payments relating to financial liability instruments 331, ,277 Issue of: Bank borrowings 491, ,425 Borrowings from Group companies and associates - 1,408 Other borrowings - 11,705 Repayment of: Bank borrowings (159,916) (24,215) Other borrowings - (46) Dividends and returns on other equity instruments paid (269,973) (291,934) Dividends (269,973) (291,934) Returns on other f inancial instruments (-) - - Cash flows from financing activities 67, ,578 Effect of exchange rate changes 46 - Net increase/decrease in cash and cash equivalents 143, ,703 Cash and cash equivalents at beginning of year 238,653 19,950 Cash and cash equivalents at end of year 382, ,653 (The accompanying Notes 1 to 24 are an integral part of this statement of cash flows) 11

12 CEPSA Legal Documents and Corporate Governance Report Notes to the Financial Statements for the years ended for the years ended 31 December 2009 and Compañía Española de Petróleos, S,A, (CEPSA) 1. COMPANY ACTIVITIES Compañía Española de Petróleos, S.A. ( CEPSA ), whose registered office is at Avenida del Partenón 12 (Campo de las Naciones), Madrid, was incorporated for an unlimited period of time on 26 September 1929, and is registered in the Madrid Mercantile Register in Volume 206 of the Companies book, sheet 100, page Its employer identification number is A CEPSA s company object is basically to carry on in Spain and abroad all manner of activities relating to solid, liquid and gaseous hydrocarbons. The Company is the head of a group of subsidiaries and is obliged under current legislation to prepare consolidated financial statements separately. The consolidated financial statements of the CEPSA Group for 2009 were formally prepared by the directors at the Board of Directors Meeting held on 25 February The consolidated financial statements for 2008 were approved by the shareholders at CEPSA s Annual General Meeting held on 26 June 2009 and were filed at the Madrid Mercantile Registry. The accompanying financial statements do not reflect the changes in value of the Company s ownership interests in the aforementioned subsidiaries, that would arise from the application of consolidation principles in accordance with International Financial Reporting Standards (EU-IFRSs). The main aggregates of these consolidated financial statements are as follows (thousands of Euros): ASSETS Non-current assets 5,707,341 5,545,539 Current assets 4,639,891 4,105,507 Total assets 10,347,232 9,650,866 LIABILITIES Shareholder equity 5,352,792 5,205,072 Non-current liabilities 1,732,703 1,730,151 Current liabilities 3,261,737 2,715,643 Total liabilities 10,347,232 9,650,866 12

13 2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS a) Fair presentation The accompanying financial statements, which were prepared from the Company s accounting records, are presented in accordance with the Spanish National Chart of Accounts approved by Royal Decree 1514/2007 and, accordingly, present fairly the Company s equity, financial position, results of operations and cash flows for the related year. These financial statements are presented in thousand of euros (unless stated otherwise). These financial statements, which were formally prepared by the Company s directors, will be submitted for approval by the shareholders at the Annual General Meeting, and it is considered that they will be approved without any changes. The financial statements for 2008 were approved by the shareholders at the Annual General Meeting held on 26 June b) Non-obligatory accounting principles applied No non-obligatory accounting principles were applied. Also, the directors formally prepared these financial statements by taking into account all the obligatory accounting principles and standards with a significant effect thereon. All obligatory accounting principles were applied. c) Key issues in relation to the measurement and estimation of uncertainty In preparing the accompanying financial statements estimates were made by the Company s directors in order to measure certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates relate basically to the following: - The assessment of possible impairment losses on certain assets (see Note 4-c). - The assumptions used in the actuarial calculation of pension and other obligations to employees (see Note 4-n). - The useful life of property, plant and equipment and intangible assets (see Notes 4-a and 4-b). - The fair value of certain financial instruments (see Note 4-f). - The calculation of provisions (see Note 4-k). - The calculation of Income Tax (see Note 4-i). - The calculation of exploitable crude oil reserves in the Exploration and Production areas. Although these estimates were made on the basis of the best information available at 2009 year-end, events that take place in the future might make it necessary to change these estimates (upwards or downwards) in coming years. Changes in accounting estimates would be applied prospectively. d) Comparative information The information relating to 2008 included in these notes to the financial statements is presented for comparison purposes with that relating to

14 CEPSA Legal Documents and Corporate Governance Report e) Grouping of items Certain items in the balance sheet, income statement, statement of changes in equity and statement of cash flows are grouped together to facilitate their understanding; however, whenever the amounts involved are material, the information is broken down in the related notes to the financial statements. The balances of Trade and Other Accounts Receivable, Cash and Cash Equivalents and Trade and Other Payables in the accompanying balance sheets at 31 December 2009 and 2008 consist of the items detailed below (thousands of Euros): Current Assets (Trade and other receivables) Trade receivables for sales and services 601, ,812 Receivables from Group companies (Note 17) 1,095, ,030 Receivables from associates (Note 17) 51,625 64,027 Sundry accounts receivable 9,627 9,924 Employee receivables 1,458 1,438 Current tax assets (Note 14) 7,843 46,406 Other receivables from public authorities 1,199 2,176 Total 1,768,503 1,501,813 Current Assets (Cash and cash equivalents) Cash 23,175 4,506 Cash equivalents 359, ,147 Total 382, ,653 Current Liabilities (Trade and other payables) Payable to suppliers 335, ,170 Payable to Group companies (Note 17) 539, ,418 Payable to associates (Note 17) 203, ,645 Sundry accounts payable 148, ,160 Staff costs 8,159 11,025 Current tax liability (Note 14) 15,290 1,574 Other payables to public authorities 109,076 90,668 Advances received on orders 1, Total 1,361, ,412 14

15 CEPSA Legal Documents and Corporate Governance Report The detail of the balances of "Staff Costs" and "Other Operating Expenses" in the accompanying 2009 and 2008 income statements is as follows (thousands of euros): Staff costs Wages, salaries and similar expenses 166, ,311 Pension contributions and provisions to pension allowances (Note 16) 43,515 52,342 Total 210, ,653 Other Operating Expenses External Services 919,573 1,031,704 Taxes other than income tax 2,305,341 2,308,978 Losses, impairment and change in operating allowances 4,183 10,188 Other current operating expenses 46,302 61,432 Total 3,275,399 3,412,302 In compliance with the Spanish Accounting and Audit Institute (ICAC) Resolution of 25 March 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 2009 and 2008 included under "Other Current Operating Expenses" (see Notes 4-m and 18). f) Changes in accounting policies and correction of errors In 2009 there were no significant changes in the accounting policies used with respect to the policies used in g) Correction of errors In preparing the accompanying financial statements no significant errors were detected that would have made it necessary to restate the amounts included in the financial statements for

16 CEPSA Legal Documents and Corporate Governance Report 3. DISTRIBUTION OF PROFIT The proposed distribution of 2009 profit that the Board of Directors will submit for approval by the shareholders at the Annual General Meeting is as follows (thousands of Euros): Distributable profit Profit for the year 406,013 Total 406,013 Distribution Dividends 214,060 Equity interim dividends(1) 107,030 Complementary dividends(2) 107,030 To voluntary reserves 191,953 Total distributed 406,013 (1) 0.40 per share was paid from 14 December 2009 (2) 0.40 per share Of the amount of dividends, interim dividends totalling EUR 107,030 thousand were already paid in 2009, and this amount is recognised under Equity Interim Dividend in the accompanying balance sheet. This dividend was approved by the Board of Directors on 25 November 2009, on the basis of the accounting statement at 31 October 2009 (shown below), prepared in accordance with Article 216 of the Consolidated Companies Law, evidencing the existence of sufficient liquidity for the distribution of the aforementioned interim dividend (thousands of euros): ASSETS Accounting statement at Non-current assets 3,994,590 Intangible assets 104,019 Property, plant and equipment 2,572,890 Investments in Group companies and associates 1,282,415 Total non-current financial assets 10,797 Deferred tax assets 24,469 Current assets 3,995,745 Inventories 1,118,979 Trade and other receivables 1,674,776 Current investments in Group companies and associates 982,880 Current financial assets 3,248 Current prepayments and accrued income 3,887 Cash and cash equivalents 211,975 Total assets 7,990,335 16

17 CEPSA Legal Documents and Corporate Governance Report SHAREHOLDERS' EQUITY AND LIABILITIES Accounting statement at Shareholders' equity 4,236,623 Shareholders' equity Capital and reserves 3,829,355 Prof it/loss for the year 383,603 Grants, donations or gifts and legacies received 23,665 Non-current liabilities 1,105,396 Long-term provisions 46,233 Bank borrow ings 703,901 Payable to Group companies and associates 231,958 Deferred tax liabilities 116,710 Non-current accruals and deferred income 6,594 Current liabilities 2,648,316 Short-term provisions 39,248 Bank borrowings 435,407 Payable to Group companies and associates 854,362 Trade and other payables 1,314,912 Current accruals and deferred income 4,387 Total shareholders' equity and liabilities 7,990,335 The profit for the period after income tax shown in the foregoing accounting statement is the Company s distributable net profit at 31 October At that date the mandatory legal reserve was at the required level, working capital, i.e. the difference between current assets and current liabilities (eliminating short-term provisions and current accruals and deferred income), amounted to EUR 1,387,177 thousand, and the Company had unused credit facilities amounting to EUR 597,536 thousand. The undrawn balances did not bear interest. 4. ACCOUNTING POLICIES AND MEASUREMENT BASES The principal accounting policies and measurement bases used by CEPSA in the preparation of its financial statements for 2009 and 2008, prepared in accordance with the Spanish National Chart of Accounts, were as follows: a) Intangible assets As a general rule, intangible assets are recognised initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortisation and any accumulated impairment losses. These assets are amortised over their years of useful life (see Notes 4-c and 5). a.1) Research and development expenditure: CEPSA recognises research expenditure as an expense in the year in which it is incurred. Development expenditure is capitalised if the following conditions are met: 17

18 CEPSA Legal Documents and Corporate Governance Report - It is specifically itemised by project and the related costs can be clearly identified - There are sound reasons to foresee the technical success and economic and commercial profitability of the related projects Assets thus generated are amortised on a straight-line basis over their years of useful life (over a maximum period of five years). If there are doubts as to the technical success or economic profitability of the related project, the amounts capitalised are recognised directly in profit or loss. a.2) Intellectual property Under this account the amounts paid for the acquisition of title to or the right to use the related items, or for the expenses incurred in registration of the rights developed by the Company are recognised. These amounts are amortised at the same rates as those used to depreciate the industrial units to which they relate. CEPSA owns the registered trademarks and industrial designs with which it performs a portion of its trade transactions. Based on an analysis of all the relevant factors, Company management considers that there is no foreseeable limit to the period over which this trademark is expected to generate net cash inflows for the Company and, therefore, the trademark was classified as an intangible asset with an indefinite useful life. Accordingly, it is not amortised, but rather it is tested for impairment using the methodology described below. This indefinite useful life classification is reviewed at each reporting date and is consistent with the Company s related business plans. a.3) Computer software CEPSA recognises under Computer Software the costs incurred in the acquisition and development of computer programs. Computer software maintenance costs are recognised with a charge to the income statement for the year in which they are incurred. Computer software is amortised on a straight-line basis over a maximum of three years. a.4) Other assets Surface rights are amortised over average periods of twenty years, in accordance with the agreements executed for this type of operations. Other intangible assets are amortised on a straight-line basis over a maximum of three years. The accounting policies applied to greenhouse gas emission rights are detailed in Note 4-r. b) Property, plant and equipment b.1) Exploration and production assets Investments in exploration and production are recognised by the successful efforts method, whereby the accounting treatment of the various costs incurred is as follows: Exploration costs and investments in areas with unproven reserves Exploration costs are charged to income as incurred. Acquisitions of exploration rights are capitalised and feasibility analyses and impairment tests, if any, are performed periodically on a field-by-field basis based on the results of exploration (see Note 4-c). Exploration rights are amortised over a period not exceeding the term of the contract. In the case of the discovery of proven reserves, the carrying amount is transferred to Investments in Areas with Proven Reserves. 18

19 CEPSA Legal Documents and Corporate Governance Report Drilling costs are capitalised temporarily until it is determined whether proven reserves have been discovered, in which case they are transferred to Investments in Areas with Proven Reserves. Conversely, if the results are negative, the related costs are charged to income. Investments in areas with proven reserves Investments relating to the acquisition of proven reserves, the development of fields and the construction of production plants, as well as the estimated present value of abandonment costs, are capitalised and depreciated over the estimated life of the field based on the proven and recoverable reserves extracted (unit-of-production method) at the beginning of each year. With respect to joint production contracts, this calculation is based on the proportion of production and reserves assigned to the Company taking account of the estimates based on the contractual clauses. Impairment tests are performed periodically for each field and any impairment losses are recognised in the income statement (see Note 4-c). b.2) Other items of property, plant and equipment Property, plant and equipment are initially recognised at acquisition or production cost and are subsequently reduced by the related accumulated depreciation and by any impairment losses recognised, as indicated in Notes 4-c and 6. Property, plant and equipment upkeep and maintenance expenses are recognised in the income statement for the year in which they are incurred. However, the costs of improvements leading to increased capacity or efficiency or to a lengthening of the useful lives of the assets are capitalised. For non-current assets that necessarily take a period of more than twelve months to get ready for their intended use, the capitalised costs include such borrowing costs as might have been incurred before the assets are ready for their intended use and which have been charged by the supplier or relate to loans or other specific-purpose or generalpurpose borrowings directly attributable to the acquisition or production of the assets. In connection with the administrative concessions granted to CEPSA by the Spanish government for various uses, entailing obligations of dismantling or restoration, the Company does not expect to incur costs of any kind since it anticipates renewing all the concessions upon their expiry (see Note 6). In-house work on non-current assets is measured at accumulated external costs plus in-house costs, determined on the basis of in-house materials consumption, direct labour and general manufacturing costs calculated using absorption rates similar to those used for the measurement of inventories. Assets acquired before 31 December 1996, are measured at cost, revalued and adjusted, where appropriate, pursuant to the related legislation. 19

20 CEPSA Legal Documents and Corporate Governance Report CEPSA depreciates its property, plant and equipment using the straight-line method, at annual depreciation rates based on the years of estimated useful life of the related items, as follows: Depreciation of property, plant and equipment Years of useful life Buildings and other structures 33 a 50 Plant and machinery Machinery, installations and fixtures 10 a 15 Furniture 10 Specialised complex installations Units 12 a 15 Lines and networks 15 Tanks and spheres 20 Other items of property, plant and equipment 4 a 10 c) Impairment of assets At the reporting date (in the case of goodwill or intangible assets with an undefined useful life), or whenever there is any indication of impairment (in the case of other assets), CEPSA performs impairment tests to assess whether there is any indication of impairment that reduces the recoverable amount of such assets to below their carrying amount (see Notes 4-a and 4-b). Recoverable amount is the higher of fair value less costs to sell and value in use. The recoverable amounts are calculated for each cashgenerating unit, although in the case of property, plant and equipment, wherever possible, the impairment tests are performed individually for each asset. Each year a business plan by market and line of business, generally covering a period of several years, is prepared for each cash-generating unit. The main components of this plan are earnings projections and investment and working capital projections. Other variables affecting the calculation of the recoverable amount are the discount rate to be used and the cash flow growth rate used to extrapolate the cash flow projections. The projections are prepared on the basis of past experience and of the best estimates available, which are consistent with the information obtained from external sources. The business plans thus prepared are reviewed and ultimately approved by the Executive Committee/Board of Directors. If an impairment loss has to be recognised for a cash-generating unit to which all or part of an item of goodwill has been allocated, the carrying amount of the goodwill relating to that unit is written down first. If the loss exceeds the carrying amount of this goodwill, the carrying amount of the other assets of the cash-generating unit is then reduced, on the basis of their carrying amount, down to the limit of the highest of the following values: fair value less costs to sell; value in use; and zero. Impairment losses are recognised as an expense under Impairment and Gains or Losses on Disposals of Non-Current Assets in the income statement. 20

21 CEPSA Legal Documents and Corporate Governance Report When an impairment loss subsequently reverses (not permitted in the specific case of goodwill), the carrying amount of the asset or cashgenerating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised as income. d) Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are classified as operating leases (see Note 7). d.1) Finance leases In finance leases in which the Company acts as the lessee, the cost of the leased assets is presented in the balance sheet, based on the nature of the leased asset, and, simultaneously, a liability is recognised for the same amount. This amount will be the lower of the fair value of the leased asset and the present value, at the inception of the lease, of the agreed minimum lease payments, including the price of the purchase option, when it is reasonably certain that it will be exercised. The minimum lease payments do not include contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor. The total finance charges arising under the lease are allocated to the income statement for the year in which they are incurred using the effective interest method. Contingent rent is recognised as an expense for the period in which it is incurred. Leased assets are depreciated, based on their nature, using similar criteria to those applied to the items of property, plant and equipment that are owned. d.2) Operating leases Expenses resulting from operating leases are charged to income in the year in which they are incurred. Any collection or payment that might be made when arranging an operating lease will be treated as a prepaid lease collection or payment which will be allocated to profit or loss over the lease term in accordance with the time pattern in which the benefits of the leased asset are provided or received. e) Asset exchange transactions Asset Exchange means the acquisition of property, plant and equipment or intangible assets in exchange for the delivery of other nonmonetary assets or a combination of monetary and non-monetary assets. As a general rule, the asset received in an asset exchange transaction with commercial substance is recognised at the fair value of the asset given up, plus, where appropriate, any monetary consideration paid. The valuation differences that arise on derecognition of the asset given up in the exchange are recognised in the income statement. Assets received in an exchange that lacks commercial substance are recognised at the carrying amount of the asset given up plus, where appropriate, any monetary consideration paid, up to the limit of the fair value of the asset received if this is lower. 21

22 CEPSA Legal Documents and Corporate Governance Report f) Financial instruments f.1) Financial assets The financial assets held by CEPSA are classified in the following categories: - Loans and receivables: financial assets arising from the sale of goods or the rendering of services in the ordinary course of the Company s business, or financial assets which, not having commercial substance, are not equity instruments or derivatives, have fixed or determinable payments and are not traded in an active market. - Held-for-trading financial assets: assets acquired with the intention of selling them in the near term and assets that form part of a portfolio for which there is evidence of a recent actual pattern of short-term profit-taking. This category also includes financial derivatives that are not financial guarantees (e.g. suretyships) and that have not been designated as hedging instruments. (See Note 4.f.3) - Equity investments in Group companies, associates and jointly controlled entities: Group companies are deemed to be those related to the Company as a result of a relationship of control and associates are companies over which the Company exercises significant influence. Jointly controlled entities include companies over which, by virtue of an agreement, the Company exercises joint control with one or more other venturers. - Available-for-sale financial assets: these include debt securities and equity instruments of other companies that are not classified any of the aforementioned categories. Initial recognition Financial assets are initially recognised at the fair value of the consideration given, plus any directly attributable transaction costs. Subsequent measurement - Loans and receivables are measured at amortised cost net of any impairment losses. - Held-for-trading financial assets and those classified as at fair value through profit or loss are measured at fair value and the gains and losses arising from changes in fair value are recognised in the net profit or loss for the year. - Investments in Group companies and associates and interests in jointly controlled entities are measured at cost net, where appropriate, of any accumulated impairment losses. These losses are calculated as the difference between the carrying amount of the investments and their recoverable amount. Recoverable amount is the higher of fair value less costs to sell and the present value of the future cash flows from the investment. Unless there is better evidence of the recoverable amount, it is based on the value of the equity of the investee, adjusted by the amount of the unrealised gains existing at the date of measurement (including any goodwill). - Available-for-sale financial assets are measured at fair value and the gains and losses arising from changes in fair value are recognised in equity until the asset is disposed of or it is determined that it has become (permanently) impaired, at which time the cumulative gains or losses previously recognised in equity are recognised in the net profit 22

23 CEPSA Legal Documents and Corporate Governance Report or loss for the year. In this regard, impairment is deemed to exist (permanent) if the market value of the asset has fallen by more than 40% over a period of 18 months without the value having recovered. At least at each reporting date CEPSA tests financial assets not measured at fair value through profit or loss for impairment. Objective evidence of impairment is considered to exist when the recoverable amount of the financial asset is lower than its carrying amount. When this occurs, the appropriate write-down is recognised in the income statement. As regards the valuation adjustments of trade and other receivables, CEPSA recognises a write-down when the receivable is over six months past-due or when the Company s Legal Advisory Department takes legal action in order to obtain collection settlement. CEPSA derecognises a financial asset when it expires or when the rights to the cash flows from the financial asset have been transferred and substantially all the risks and rewards of ownership of the financial asset have been transferred, such as in the case of firm asset sales, factoring of trade receivables in which the Company does not retain any credit or interest rate risk. However, the CEPSA does not derecognise financial assets, and recognises a financial liability for an amount equal to the consideration received, in transfers of financial assets in which substantially all the risks and rewards of ownership are retained, such as in the case of bill discounting and with-recourse factoring. f.2) Financial liabilities Financial liabilities include accounts payable by the CEPSA that have arisen from the purchase of goods or services in the normal course of the business and those which, not having commercial substance cannot be classed as derivative financial instruments. Accounts payable are initially recognised at the fair value of the consideration received, adjusted by the directly attributable transaction costs. These liabilities are subsequently measured at amortised cost. CEPSA derecognises financial liabilities when the obligations giving rise to them cease to exist. f.3) Derivative financial instruments CEPSA uses hedging instruments and derivatives, including most notably futures contracts with crude oil and product brokers, to hedge the price risks arising from the monthly purchases and sales of oil-based products. The transaction limits and the defined hedging instruments have been approved by Company management and the monitoring process respects the separation of the performance and control functions. For foreign currency and interest rate risks, the transaction limits and products arranged (basically forward currency transactions and interest rate swaps) have also been approved by Company management and the monitoring process respects the separation of the performance and control functions (see Notes 9, 13 and 22). All derivatives, irrespective of whether or not they have been designated as hedging instruments, are recognised in the accompanying balance sheets at their fair value. 23

24 CEPSA Legal Documents and Corporate Governance Report The fair value of derivative instruments is calculated using price quotations. Where there are no price quotations the cash flows are discounted using the applicable yield curve of the underlyings for the term of the derivatives and option pricing models for derivative options. Foreign currency hedge contracts are measured using the price quotations for foreign currency hedges and the underlying yield rates calculated on the basis of the related interest rates at contract expiry. The changes in the fair value of these derivative instruments are recognised through profit or loss (See Note 22). g) Inventories Inventories are measured at the lower of acquisition or production cost and net realisable value. Trade discounts, rebates, other similar items and interest included in the face value of the related payables are deducted in determining the costs of purchase. Production cost includes the costs of direct materials and, where applicable, direct labour and production overheads. Net realisable value is the estimated selling price less the estimated costs of completion and costs to be incurred in marketing, selling and distribution. The cost of inventories is assigned by using the weighted average cost formula. The Company recognises the appropriate write-downs as an expense in the income statement when the net realisable value of the inventories is lower than acquisition or production cost. In the case of refined products, the costs incurred are allocated in proportion to the selling price of the related products (isomargin method), due to the complexity of allocating production costs to each item. h) Foreign currency transactions CEPSA s functional currency is the euro. Transactions in currencies other than the euro are deemed to be foreign currency transactions and are recognised by applying the exchange rates prevailing at the transaction date and the exchange differences arising at the date of settlement of the transactions are charged or credited, as appropriate, to income. Monetary assets and liabilities denominated in foreign currencies are recognised at each year-end in euros at the exchange rates then prevailing or at the hedged exchange rates, if any. Any resulting gains or losses are recognised directly in the income statement in the year in which they arise. i) Income tax Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income). 24

25 CEPSA Legal Documents and Corporate Governance Report The current income tax expense is the amount payable by the Company as a result of income tax settlements for a given year. Tax credits and other tax benefits, excluding tax withholdings and pre-payments, and tax loss carryforwards from prior years effectively offset in the current year reduce the current income tax expense. The deferred tax expense or income relates to the recognition and derecognition of deferred tax assets and liabilities. These include temporary differences measured at the amount expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled. Deferred tax liabilities are recognised for all taxable temporary differences, except for those arising from the initial recognition of goodwill or of other assets and liabilities in a transaction that is not a business combination and affects neither accounting profit (loss) nor taxable profit (tax loss), and except for those associated with investments in subsidiaries, associates and joint ventures in which the Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets, on the other hand, are only recognised to the extent that it is considered probable that the Company will have sufficient taxable profits in the future against which it will be possible to recover them. Deferred tax assets and liabilities arising from transactions charged or credited directly to equity are also recognised directly in equity. At each accounting close the deferred tax assets recognised are reviewed and appropriate adjustments are made where there are doubts as to their future recoverability. Likewise, at each accounting close the deferred tax assets that have not been recognised in the balance sheet are assessed and are recognised to the extent that their recovery against future taxable profits has become probable. Pursuant to Additional Provision 28th of the Consolidated Corporation Tax Law, the tax effect arising from charges and credits to reserve accounts treated as expenses or income, as a result of first application of the 2007 Spanish National Chart of Accounts, was included at a third of the amount thereof (EUR 443,510 thousand) in taxable profit for 2008 and 2009 income tax purposes. The remaining two thirds (EUR 221,755 thousand) will be included in taxable profit in the 2010 income tax returns (see Note 14). j) Revenue and expense recognition Revenue and expenses are recognised on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. Revenue is measured at the fair value of the consideration received, net of discounts and taxes. Revenue from sales is recognised when the significant risks and rewards of ownership of the goods sold have been transferred to the buyer, and the Company neither continues to manage the goods nor retains effective control over them. 25

26 CEPSA Legal Documents and Corporate Governance Report Net Revenue does not include the value of exchanges of strategic stocks arranged with other operators. In accordance with the legislation applicable to companies operating in the oil and gas industry, the excise tax on oil and gas sales is recognised as part of the selling price and as an addition to cost under Revenue and Other Operating Expenses, respectively, in the consolidated income statement. Revenue from the rendering of services is recognised by reference to the stage of completion of the transaction at the end of the reporting period, provided the outcome of the transaction can be estimated reliably. Interest income from financial assets is recognised using the effective interest method and dividend income is recognised when the shareholder's right to receive payment has been established. Interest and dividends from financial assets accrued after the date of acquisition are recognised as income. k) Provisions and contingencies When preparing the financial statements the Company s directors made a distinction between: - Provisions: credit balances covering present obligations arising from past events with respect to which it is probable that an outflow of resources embodying economic benefits that is uncertain as to its amount and/or timing will be required to settle the obligations. - Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the Company s control. The financial statements include all the provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. Contingent liabilities are not recognised in the financial statements, but rather are disclosed, unless the possibility of an outflow in settlement is considered to be remote. Provisions are measured at the present value of the best possible estimate of the amount required to settle or transfer the obligation, taking into account the information available on the event and its consequences. Where discounting is used, adjustments made to provisions are recognised as interest cost on an accrual basis. The compensation to be received from a third party on settlement of the obligation is recognised as an asset, provided that there are no doubts that the reimbursement will take place, unless there is a legal relationship whereby a portion of the risk has been externalised as a result of which the Company is not liable; in this situation, the compensation will be taken into account for the purpose of estimating the amount of the related provision that should be recognised. l) Termination benefits Under current legislation, CEPSA is required to pay termination benefits to employees terminated under certain conditions. Therefore, termination benefits that can be reasonably quantified are recognised as an expense in the year in which the decision to terminate the employment relationship is taken. The accompanying financial statements do not include any provision in this connection, since no situations of this nature are expected to arise. 26

27 CEPSA Legal Documents and Corporate Governance Report m) Information on the environment Per the Resolution dated 25 March 2002 of the Spanish Accounting and Audit Institute (ICAC), environmental investments are defined as investments included in the Company's assets for use in its business on a lasting basis which are mainly for the purpose of minimising the impact on the environment and protecting and improving the environment, including the reduction or elimination of pollution in the future caused by the operations performed by the Company. Also, environmental expenses are deemed to be those incurred to prevent, reduce or repair damage to the environment, i.e. the natural surroundings, as well as those relating to environmental commitments. With respect to provisions for environmental risks and obligations, CEPSA recorded provisions for environmental actions to remedy the risk of gradual soil pollution, with a charge to Other Operating Expenses in the income statements. These provisions are quantified on the basis of in-house estimates and technical studies. Also, CEPSA has taken out insurance policies to cover the third party liability that might arise from sudden accidental pollution and gradual subsequent pollution (see Note 18). n) Pension and similar obligations CEPSA has the following pension obligations to employees and their beneficiaries: Long-term defined contribution benefits - Pension obligations funded by the occupational pension plans assigned to the CEPSA Group, Pensions Fund. These pension plans entitle participants to receive benefits for retirement or, where appropriate, for death or disability, as specified in the plans. The plans take the form of hybrid plans and combine defined contribution plans, which cover retirement - whereby the sponsor makes periodic contributions-, and defined benefit plans which cover benefits for death or disability through an annually renewable policy arranged with an insurance company -whereby the sponsor undertakes to fulfil the contributions corresponding to the pension plans. Accordingly, these contingencies should be considered to be a defined contribution plan. The vested amount of the contingency assumed by the sponsor is covered each year with the annual contribution, which is recognised under Staff Costs in the income statement. - Life insurance. A defined contribution obligation instrumented through an insurance policy which establishes the right of the insured to receive retirement benefits or, where appropriate, benefits for death or disability. The contributions made by the policyholder are made as a supplement to the pension plan, or due to the fact that the commitments to employees exceed the maximum contributions to pension plans. - Annuity income for retired employees. These are obligations prior to the arrangement of pension plans, which entitle personnel or their beneficiaries to receive supplementary social security pension benefits in the event of retirement, death or permanent disability. This commitment has been externalised in full through the related insurance policies. The adjustments to arise from according to the commitments, are recognised as expenses or income for the year, as appropriate, and their amount was not material. 27

28 CEPSA Legal Documents and Corporate Governance Report Long-term defined benefit considerations - There is an obligation to a certain group of employees for the payment of an annuity monetary consideration arising from the withdrawal of company stores. Actuarial studies are performed annually, based on life expectancy tables (PEMF2000) with a discount rate of 4% and salary increases anticipated at 2%, and the actuarial gains and losses are recognised as income or expenses, as appropriate. The annual accrual of obligations to employees and the interest cost on the funds are recognised under Staff Costs and Finance Costs. o) Grants, donations or gifts and legacies received The Company accounts for grants, donations or gifts and legacies received as follows: - Non-refundable grants, donations or gifts and legacies related to assets: these are measured at the fair value of the amount or the asset received, based on whether or not they are monetary grants, and they are taken to income in proportion to the period depreciation taken on the assets for which the grants were received or, where appropriate, on disposal of the asset or on the recognition of an impairment loss except for grants received from shareholders or owners, which are recognised directly in equity and do not give rise to the recognition of any income. - Refundable grants: while they are refundable, they are recognised as a liability. - Grants related to income: grants related to income are credited to income when granted, unless their purpose is to finance losses from operations in future years, in which case they are allocated to income in those years. If grants are received to finance specific expenses, they are allocated to income as the related expenses are incurred. p) Joint ventures CEPSA accounts for its interests in joint ventures by recognising in its balance sheet the share corresponding to it, in proportion to its ownership interest, of the jointly controlled assets and of the jointly incurred liabilities. Also, it recognises in the income statement its share of the income earned and expenses incurred by the joint venture. In addition, the proportional part corresponding to the Company of the related items of the joint venture are included in the statement of changes in equity and the statement of cash flows. q) Related party transactions CEPSA performs all its transactions with related parties at market prices. Also transfer prices are appropriately supported and accordingly, the Company's directors do not consider that any significant risks that could give rise to material liabilities in the future exist in this connection. r) Greenhouse gas emission rights In compliance with the commitments to reduce greenhouse gas emissions - the Kyoto Protocol - assumed by the European Union in May 2002, various EU and national regulations were issued, which led to the approval, by Royal Decree 60/2005, of 21 January, of the National Emission Rights Allocation Plan, which affects eleven industries including the oil refining industry. Pursuant to this legislation, the Ministry of the Environment communicated the allocation for no consideration of emission rights equal of CO2 for the period. On 1 January 2008, the new National Plan for the 2008 to 2012 period came into force. (see Note 21) 28

29 CEPSA Legal Documents and Corporate Governance Report Pursuant to this legislation, in the first few months of the following year CEPSA must deliver CO2 emission rights equal to the volume of the emissions made during the year. The emission rights are recognised in compliance with Spanish Accounting and Audit Institute Resolution dated 8 February 2006 and adapted to the standards of the Spanish National Chart of Accounts of 16 November In the caption "Intangible assets" not depreciable, the rights are valued according to the purchase price or cost of production, giving up of the time of delivery, are transferred to third parties or the conditions marked for expiration. (See note 21) Rights received for no consideration under the National Emission Rights Allocation Plan are measured at the market price prevailing at the beginning at the year to which they relate, recognising a government grant related to assets as a balancing entry, which is taken to income as an exceptional item as the expenses arising from the actual emissions are incurred. (see Note 21) If the market value of the emission rights is lower than the carrying amount of the rights recognised under assets, the value of the rights held is adjusted to market. Depending on whether the rights are acquired or received from the government, an appropriate impairment loss on the non-current asset would be recognised (reversible losses) or the value of the intangible asset item would be written down (permanent losses). In the second case (rights received from the government), the value of government grants related to assets would be adjusted with a balancing entry in Allocation to Profit or Loss of Grants Related to Non-financial Non-current Assets and Other Grants (see Notes 5, 11 and 21). The obligation to deliver emission rights for the CO2 emissions made during the year is recognised as the greenhouse gas emissions are made. These costs are charged to Other Operating Expenses in the income statement and credited to a short-term provision until the related emission rights are delivered. The unit value to be assigned to the emissions is determined by taking into account the following amounts: Firstly, the carrying amount of the emission rights received for no consideration. Secondly, the cost of other emission rights capitalised in the balance sheet. Lastly, where necessary, the most up-to-date estimate of the cost of acquisition of the remaining rights. 29

30 CEPSA Legal Documents and Corporate Governance Report 5. INTANGIBLE ASSETS The changes in Intangible Assets in 2008 and 2009 were as follows (in thousands of Euros): 2008 Assets Balance at Additions or charges Retirements Balance at for the year Transfers or disposals Concessions Patents and licences 36, (125) - 37,255 Computer software 85,278 4,501 (33) - 89,746 Other intangible assets 1,000 - (428) Advances on intangible assets Greenhouse gas emission rights 70 80,011 - (26,236) 53,845 Certified reductions of GHG emissions Total 123,810 85,114 (586) (26,236) 182,102 Accumulated amortisation and impairment losses Concessions (58) (58) Patents and licences (10,040) (1,869) - - (11,909) Computer software (69,358) (3,944) - - (73,302) Other intangible assets (495) (19) (133) Total (79,951) (5,832) (85,402) Net intangible assets 43,859 79,282 (205) (26,236) 96,700 30

31 CEPSA Legal Documents and Corporate Governance Report 2009 Assets Balance at Additions or charges Retirements Balance at for the year Transfers or disposals Concessions Patents and licences 37,255 3, ,378 Computer software 89,746 4,222 (119) - 93,849 Other intangible assets Advances on intangible assets 91 (91) Greenhouse gas emission rights 53,845 56,808 - (68,994) 41,659 Certified reductions of GHG emissions 535 7, ,546 Total 182,102 71,064 (110) (68,994) 184,062 Accumulated amortisation and impairment losses Concessions (58) (58) Patents and licences (11,909) (2,379) - - (14,288) Computer software (73,302) (4,444) - - (77,746) Other intangible assets (133) (19) - - (152) Total (85,402) (6,842) - - (92,244) Accumulated depreciation Certified reductions of GHG emissions - (1,380) - - (1,380) Total - (1,380) - - (1,380) Net intangible assets 96,700 62,842 (110) (68,994) 90,438 In 2008 and 2009 EUR 3,183 thousand and EUR 4,143 thousand, respectively, of staff, finance and other costs relating basically to computer software developed in those years were capitalised to intangible assets with a credit to In-House Work on Non-Current Assets in the accompanying income statements. The rest of the investment recognised by CEPSA under Computer Software relates basically to acquisitions made in order to upgrade computer software to the most recent market versions. The CO 2 emission rights recognised in 2008 and 2009 for an amount of EUR 80,011 thousand and EUR 56,808 thousand, respectively, relate to the rights assigned for no consideration under the National Emission Rights Allocation Plans, and are equal to 3,519 thousand and 3,565 thousand tonnes, respectively. The 2007 assignment was reviewed with the delivery of rights equal to a further 211 K/Mt., which are included in the additions for (see Note 21) 31

32 CEPSA Legal Documents and Corporate Governance Report CEPSA has a 1.373% share in the Spanish Coal Fund for the purpose of financing various projects that target greenhouse gas reduction and the sustainable development of developing countries. If these projects are successful they will generate emission rights. In 2009, EUR 280 thousand were paid to the World Bank for CEPSA s share and recognised as an addition under Certified Reductions of Greenhouse Gas (GHG) Emissions. In 2009 Cepsa entered into various trading contracts whereby it delivered CO 2 emission allowances received for no consideration (EUAs), equivalent to 500 Mt. and worth EUR 7,552 thousand and received certified emission reductions (CERs) in exchange, equivalent to the same amount of tonnes for EUR 6,731 thousand, generating an inflow for CEPSA of EUR 821 thousand. The disposals in 2008 and 2009 related mainly to the delivery of CO 2 emission allowances to the Spanish Greenhouse Gas Emission Allowances Registry (RENADE) for the emissions produced in preceding years, respectively. At 2008 and 2009 year-end CEPSA had the following fully amortised intangible assets still in use (in thousands of euros): 2008 Gross carrying amount Concessions 58 Patents and licences 7,160 Computer software 66,585 Total 73, Gross carrying amount Concessions 58 Patents and licences 7,831 Computer software 71,533 Total 79,422 At year-end CEPSA s non-current assets were not subject to any guarantees or any other circumstance of a substantive nature affecting them. At the end of 2009 CEPSA had firm computer software purchase commitments amounting to EUR 422 thousand, (end of 2008: EUR 71 thousand). The Company s only assets of indefinite useful life are its registered trademarks and industrial designs. Note 4.a.2) on measurement bases details the circumstances on which the indefinite useful life assessment of the asset is based. At 2008 and 2009 year-end these assets recognised in Intangible Assets amounted to EUR 48 thousand and EUR 48 thousand, respectively. 32

33 CEPSA Legal Documents and Corporate Governance Report 6. PROPERTY, PLANT AND EQUIPMENT The changes in this heading in 2008 and 2009 were as follows (in thousands of euros): 2008 Assets Balance at Additions or changes Retirements Balance at for the year Transfers or disposals Land and buildings 38, ,276 Plant and machinery 2,520, ,452 (14,843) 2,677,533 Investments in areas with proven reserves 1,088,947-11,512 (10) 1,100,449 Investments in areas with unproven reserves 50,245 - (10,276) (15,857) 24,112 Furniture 15, ,289 Computer hardware 16, ,258 Transport equipment 1, (267) 864 Other property, plant and equipment 46,842-1,249-48,091 Property, plant and equipment in the course of construction and advances 354, ,482 (174,855) - 774,907 Total 4,133, , (30,977) 4,697,779 Accumulated amortisation and impairment losses Land and buildings (2,140) (29) - - (2,169) Plant and machinery (1,601,018) (116,928) (13) 11,661 (1,706,298) Investments in areas with proven reserves (593,540) (91,057) (11,293) 3 (695,887) Investments in areas with unproven reserves (38,577) (1,085) 11,293 15,857 (12,512) Furniture (11,255) (1,089) 13 - (12,331) Computer hardware (16,268) (512) - - (16,780) Transport equipment (637) (145) (597) Other property, plant and equipment (484) (484) Total (2,263,919) (210,845) - 27,706 (2,447,058) Accumulated depreciation Land and buildings (179) (179) Plant and machinery (2,394) (2,394) Total (2,573) (2,573) Net items of property, plant and equipment 1,866, , (3,271) 2,248,148 33

34 CEPSA Legal Documents and Corporate Governance Report 2009 (thousands of euros) Assets Balance at Additions or changes Retirements Balance at for the year Transfers or disposals Land and buildings 38, ,920 (52) 41,187 Plant and machinery 2,677, ,965 (16,083) 2,885,415 Investments in areas with proven reserves 1,100,449-12,014-1,112,463 Investments in areas with unproven reserves 24, ,344 Furniture 16, (180) 16,152 Computer hardware 17,258-1,463-18,721 Transport equipment (266) 1,031 Other property, plant and equipment 48, ,091 Property, plant and equipment in the course of construction and advances 774, ,793 (240,960) - 1,130,740 Total 4,697, , (16,581) 5,278,144 Accumulated amortisation and impairment losses Land and buildings (2,169) (32) - - (2,201) Plant and machinery (1,706,298) (132,612) 21 15,067 (1,823,822) Investments in areas with proven reserves (695,887) (85,573) - - (781,460) Investments in areas with unproven reserves (12,512) (68) - - (12,580) Furniture (12,331) (1,002) (12,666) Computer hardware (16,780) (493) (508) - (17,781) Transport equipment (597) (186) (625) Other property, plant and equipment (484) (484) Total (2,447,058) (219,966) - 15,405 (2,651,619) Accumulated depreciation Land and buildings (179) (179) Plant and machinery (2,394) (2,394) Total (2,573) (2,573) Net items of property, plant and equipment 2,248, , (1,176) 2,623,952 The Company s in-house work on non-current assets is recognised at production cost and includes, where appropriate, staff and other costs incurred during the related construction period. EUR 20,099 thousand and EUR 21,440 thousand of costs were capitalised to property, plant and equipment in this connection in 2008 and 2009, respectively, and these amounts were credited to Capitalisation of finance costs and Work on Non-Current Assets in the accompanying income statements. The additions to property, plant and equipment in 2008 and 2009, amounting to EUR 595,482 thousand and EUR 596,836 thousand, respectively, related mainly to investments in the fields in Algeria and to new refinery units aimed at increasing, enhancing and flexibilising the production processes, including most notably the construction of new units 34

35 at the La Rábida refinery, under the distillation capacity expansion plan, new units for the production of middle distillates and other petrochemical products, a new sulphur recovery plant and the construction of a new electricity combined heat and power unit; new vacuum and hydrogen units at the Gibraltar-San Roque refinery and, in general, improvements in the industrial facilities to minimise the impact on the environment and enhance safety in the course of activities. Disposals, retirements or reductions in 2009 included the delivery through a contribution in kind of supply facilities in the form of 28 dock fuel pumps in order to subscribe to the capital increase of Petropesca, S.A., a CEPSA Group company, and compulsory purchase of land relating to the Tenerife refinery disposals of land transport vehicles giving rise to a gain on such disposals and retirements of EUR 67 thousand and EUR 636 thousand, respectively. In 2009 and 2008 CEPSA did not capitalise dismantling costs, rehabilitation or retirement. At 31 December 2008 and 2009 CEPSA had investments in property, plant and equipment located in various prospecting fields in Algeria, as detailed below (in thousands of euros): 2008 Gross carrying amount Accumulated Depreciation Net carrying amount Investments in areas with proven reserves 1,100,449 (695,887) 404,562 Investments in areas with unproven reserves 24,112 (12,512) 11,600 Furniture 80 (20) 60 Computer hardware 1-1 Transport equipment 63 (20) 43 Property, plant and equipment in the course of construction and advances 69,490-69,490 Total 1,194,195 (708,439) 485, Gross carrying amount Accumulated Depreciation Net carrying amount Investments in areas with proven reserves 1,112,463 (781,460) 331,003 Investments in areas with unproven reserves 24,344 (12,580) 11,764 Furniture 122 (51) 71 Computer hardware 12 (1) 11 Transport equipment 64 (34) 30 Property, plant and equipment in the course of construction and advances 113, ,173 Total 1,250,178 (794,126) 456,052 All the material assets are assigned to operating facilities and are not depreciated for accounting purposes in the sets of equipment and materials in which they are included. 35

36 CEPSA Legal Documents and Corporate Governance Report At 31 December 2008 and 2009, fully-depreciated property, plant and equipment still in use were as follows (in thousands of euros): 2008 Gross carrying amount Land and buildings 1,727 Plant and machinery 1,024,166 Investments in areas with proven reserves 62,533 Investments in areas with unproven reserves 12,513 Furniture 7,570 Computer hardware 15,944 Transport equipment 163 Other property, plant and equipment 484 Total 1,125, Gross carrying amount Land and buildings 1,727 Plant and machinery 1,074,712 Investments in areas with proven reserves 63,586 Investments in areas with unproven reserves 12,581 Furniture 7,815 Computer hardware 16,616 Transport equipment 163 Other property, plant and equipment 484 Total 1,177,684 At year-end CEPSA had no non-current assets subject to guarantees or to any other circumstance of a substantive nature that may affect them. At 31 December 2008 and 2009 CEPSA has received grants to be used in refinery plants, totalling EUR 4,786 and EUR 5,225 thousand, respectively from the Ministry of Tourism and Trade, and totalling EUR 110 thousand and EUR 1,217 thousand, respectively from the Andalusia Autonomous Community Government and also EUR 539 thousand and EUR 128 thousand, respectively, from the Ministry of Science and Innovation for research and development projects. (see Note 11) At the 2008 and 2009 year-end CEPSA had firm property, plant and equipment purchase commitments for EUR 447,228 thousand and EUR 220,805 thousand, respectively. These commitments relate mainly to the following projects: increased distillation capacity and the production of middle distillates at la Rábida refinery, new vacuum units for the hydrogen plant, increase in petrochemical products and new vacuum and mild hydrocracking units at the Gibraltar-San Roque refinery as well as improvements to infrastructure and installations. As indicated in Note 7, at the end of 2008 and 2009 the Company held various items of property, plant and equipment under finance leases. 36

37 CEPSA Legal Documents and Corporate Governance Report CEPSA takes out insurance policies to cover the possible risks to which its property, plant and equipment are subject (see Note 22). At 31 December 1996, CEPSA revalued its property, plant and equipment, including those of the absorbed company Ertoil, S.A., by EUR 71,154 thousand, pursuant to the applicable asset revaluation law (Royal Decree 2607/1996, of 20 December regulating the rules for asset revaluations enacted by Royal Decree-Law 7/1996 of 7 June). This increase in value is being depreciated (the depreciation charge is a taxdeductible expense) with a charge to income in 1997 and subsequent years based on the years of residual useful life of the revalued assets. The revaluation made increased the property, plant and equipment depreciation charges for 2008 and 2009 by EUR 1,515 thousand and EUR 751 thousand, respectively. At the end of these years, the increases in value yet to be depreciated amounted to EUR 8,434 thousand and EUR 7,789 thousand, respectively. CEPSA has been granted administrative concessions by the Spanish State to use mooring facilities, access and adjacent areas at the ports of Algeciras-La Línea, Santa Cruz de Tenerife and Palos de la Frontera, which will revert to the State in 2022, between 2009 and 2028 and between 2018 and 2065, respectively. CEPSA management expects all the concessions to be renewed on expiration of the concession term and considers that it is not necessary to record a reversion reserve since the facilities are adequately maintained and the related cost will have been depreciated in full for accounting purposes during the concession term. 7. LEASES Leasing CEPSA has acquired the use of certain assets through finance and operating leases. The main items of property, plant and equipment acquired under finance lease are four tanks of 50,000 m3 each for petrol storage and four tanks of m3 for crude oil storage. At 2008 and 2009 year-end CEPSA, as the lessee under finance leases, had recognised the following assets acquired under finance lease (in thousands of euros): 2008 Cost Depreciation Net Value Plant 56,749 (20,679) 36,070 Computer hardware 255 (64) 191 Total 57,004 (20,743) 36, Cost Depreciation Net Value Plant 56,753 (23,497) 33,256 Computer hardware 409 (160) 249 Total 57,162 (23,657) 33,505 37

38 CEPSA Legal Documents and Corporate Governance Report The future expiries of the amounts payable under finance leases at 31 December 2008 and 2009 are as follows (in thousands of euros): 2008 Plant Computer Hardware Total Lease payments payable , , , , , , ,437-1,437 Future payments 17, ,627 Less interest (962) (10) (972) Present value of minimum lease payments 16, ,655 Contingent rent recognised in income , Plant Computer Hardware Total Lease payments payable , , , , , , Future payments 11, ,772 Less interest (467) (3) (470) Present value of minimum lease payments 11, ,302 Contingent rent recognised in income

39 CEPSA Legal Documents and Corporate Governance Report Operating leases The detail of the assets under operating leases and the future expiries of the related amounts payable at 31 December 2008 and 2009 are as follows (in thousands of euros): 2008 Transport Computer Buildings Plant equipment Hardware Other Total Lease payments payable , ,893 1,331-97, , ,843 1,099-96, , , , , , , , , ,135 Other expiries 6, , ,035 Future payments 56, ,389 3, ,635 Contingent rent recognised in income Transport Computer Buildings Plant equipment Hardware Other Total Lease payments payable , ,806 1, , , ,524 1, , , , , , , , , , ,741 Other expiries , ,287 67,394 Future payments 33,345 3, ,889 3,799 4, ,846 Contingent rent recognised in income (140) - 4, ,728 39

40 CEPSA Legal Documents and Corporate Governance Report 8. FINANCIAL ASSETS (NON-CURRENT AND CURRENT) Non-current financial assets The breakdown of Non-current Financial Assets, by nature and category, for 2009 and 2008 is as follows (in thousands of euros): Current Financial Instruments Types Equity Instruments Debt Securities and other financial assets Total Cathegories Loans and receivables - - 8,438 9,442 8,438 9,442 Assets at fair value through profit or loss 1,217 1, ,217 1,172 Total 1,217 1,172 8,438 9,442 9,655 10,614 At 2009 and 2008 year-end Loans and Receivables mainly included non-current non-trade loans to finance customer installations and longterm guarantees of EUR 1,924 thousand and EUR 1,966 thousand, respectively. The remainder is long term non-trade receivables for financing facilities for customer loyalty. In 2009, CEPSA also recognised under this heading an account receivable, which was renegotiated with the customer, for which a periodic monthly payment schedule until 2014 was established. Available-for-Sale Financial Assets mainly reflects the fair value of the permanent investments in equity instruments at companies not listed on official stock exchanges. At 31 December 2008 and 2009, as there were no firm long-term sales commitments to third parties. The changes arising from impairment losses recognised in Non-Current Financial Assets in 2009 and 2008 were as follows (in thousands of euros): 2008 Impairment losses at Impairment losses Impairment losses at 01/01/2008 in /12/2008 Loans and receivables 8,361 (2,831) 5,530 Assets at fair value through profit or loss Total 8,386 (2,785) 5, Impairment losses at Impairment losses Impairment losses at 01/01/2009 in /12/2009 Loans and receivables 5,530 (4,502) 1,028 Assets at fair value through profit or loss Total 5,601 (4,502) 1,099 40

41 CEPSA Legal Documents and Corporate Governance Report The detail by maturity of Non-Current Financial Assets at 31 December 2008 and 2009 is as follows (in thousands of euros): Maturing in Subsequent Year Total Loans and receivables 1,287 1,259 1,169 1,163 4,564 9,442 Assets at fair value through profit or loss ,172 1,172 Total 1,287 1,259 1,169 1,163 5,736 10,614 Maturing in Subsequent Year Total Loans and receivables 2,879 1,221 1,213 1,207 1,918 8,438 Assets at fair value through profit or loss ,217 1,217 Total 2,879 1,221 1,213 1,207 3,135 9,655 Current financial assets The breakdown of the balances of financial instruments, by nature and category, for 2009 and 2008 is as follows (in thousands of euros): Current Financial Instruments Types Derivatives Debt Securities and other financial assets Total Cathegories Assets at fair value through profit or loss 237 2, ,210 Loans and receivables - - 8,601 4,020 8,601 4,020 Total 237 2,210 8,601 4,020 8,838 6,230 At 2009 and 2008 year-end Assets at Fair Value through Profit or Loss reflects derivative financial instruments used to hedge foreign currency and interest rate financial risks (basically forward currency transactions and interest rate swaps). These derivatives are recognised as an asset when their fair value is positive and as a liability when it is negative. The changes arising from impairment losses recognised in Non-Current Financial Assets in 2009 and 2008 were as follows (in thousands of euros): 2008 Impairment losses at Impairment losses Impairment losses at 01/01/2008 in /12/2008 Loans and receivables - 2,862 2,862 Total - 2,862 2,862 41

42 CEPSA Legal Documents and Corporate Governance Report 2009 Impairment losses at Impairment losses Impairment losses at 01/01/2009 in /12/2009 Loans and receivables 2,862 7,033 9,895 Total 2,862 7,033 9,895 The fair value of these financial derivatives was estimated by discounting the cash flows associated therewith, taking into account the interest rates and exchange rates prevailing at the balance sheet dates and including the differences arising due to the credit risk terms and conditions of each instrument. In the case of some derivative instruments the market value furnished by the banks was also used as a supplementary component. Group companies and associates The main information relating to Group companies and associates at 2008 and 2009 year-end is as follows (in thousands of euros): 2008 Write down/ % of Registered Write-up Accrued Net ownership cost of the year Write down investment Dividends ASFALTOS ESPAÑOLES, S,A, 50,00% 17,869 17,869 ATLAS, SA COMBUSTIBLES Y LUBRIFICANTES 99,98% 4,077 4,077 4,690 CEPSA COLOMBIA, S,A, 99,96% 548,394 22, ,394 CEPSA EGYPT, SA, B,V, 100,00% 38,100 (22,569) (29,841) 8,259 CEPSA EP, S,A, 99,99% 16,136 16,136 3,558 CEPSA ESTACIONES DE SERVICIO S,A, 99,99% 120, , ,754 CEPSA GAS LICUADO, S,A, 99,99% 42,012 42,012 CEPSA INTERNACIONAL B,V, 100,00% 15,210 15,210 2,250 CEPSA LUBRICANTES, S,A, 99,99% 15,025 15,025 6,184 CEPSA MARINE FUELS, S,A, 99,99% 25,060 25,060 14,342 CEPSA PORTUGUESA PETRÓLEOS S,A, 99,99% 125, ,957 CEPSA QUIMICA, S,A, 99,90% 80,192 80,192 38,574 CMD AEROPUERTOS CANARIOS, S,L, 60,00% 12,946 12,946 4,474 COMPAÑÍA LOGÍSTICA DE HIDROCARBUROS CLH, S,A, (*) 14,15% 86,299 86,299 39,615 DERIVADOS ENERGÉTICOS PARA EL TRANSPORTE Y LA INDUSTRIA, S,A, 99,99% 12,328 12,328 1,608 LUBRICANTES DEL SUR, S,A, 99,99% 24,610 24,610 9,661 MEDGAZ S,A, 20,00% 5,932 5,932 NUEVA GENERADORA DEL SUR,S,A, 50,00% 71,100 71,100 13,600 PETROPESCA, S,L, 99,99% 6,892 6, PLASTIFICANTES DE LUTXANA, S,A, 99,99% 6,258 6,258 PRODUCTOS ASFÁLTICOS, S,A, 99,99% 5,312 5,312 Other investments 29,669 (1,000) (7,430) 22,239 21,485 Total 1,309,395 (1,381) (37,271) 1,272, ,260 42

43 CEPSA Legal Documents and Corporate Governance Report 2009 Write down/ % of Registered Write-up Accrued Net ownership cost of the year Write down investment Dividends ASFALTOS ESPAÑOLES, S,A, 50,00% 17,869 17,869 ATLAS, SA COMBUSTIBLES Y LUBRIFICANTES 99,98% 4,077 4,077 4,453 CEPSA COLOMBIA, S,A, 99,96% 548, ,394 CEPSA EGYPT, SA, B,V, 100,00% 38,100 (992) (30,833) 7,267 CEPSA EP, S,A, 99,99% 16,136 16,136 4,461 CEPSA ESTACIONES DE SERVICIO S,A, 99,99% 120, ,017 93,204 CEPSA GAS LICUADO, S,A, 99,99% 42,012 42,012 CEPSA INTERNACIONAL B,V, 100,00% 15,210 15,210 CEPSA LUBRICANTES, S,A, 99,99% 15,025 15,025 CEPSA MARINE FUELS, S,A, 99,99% 25,060 25,060 19,734 CEPSA PORTUGUESA PETRÓLEOS S,A, 99,99% 125, ,957 CEPSA QUIMICA, S,A, 99,90% 80,192 80,192 16,636 CMD AEROPUERTOS CANARIOS, S,L, 60,00% 12,946 12,946 COMPAÑÍA LOGÍSTICA DE HIDROCARBUROS CLH, S,A, (*) 14,15% 86,299 86,299 31,000 DERIVADOS ENERGÉTICOS PARA EL TRANSPORTE Y LA INDUSTRIA, S,A, 99,99% 12,328 12,328 30,319 LUBRICANTES DEL SUR, S,A, 99,99% 24,610 24,610 14,366 MEDGAZ S,A, 20,00% 5,932 5,932 NUEVA GENERADORA DEL SUR,S,A, 50,00% 71,100 71,100 PETROPESCA, S,L, 99,99% 6,892 6,892 4,555 PLASTIFICANTES DE LUTXANA, S,A, 99,99% 6,258 6, PRODUCTOS ASFÁLTICOS, S,A, 99,99% 5,312 5,312 15,942 Other investments 29,669 (1,006) (8,436) 21,233 17,333 Total 1,309,395 (1,998) (39,269) 1,270, ,256 (*) Compañía Logística de Hidrocarburos S.A. has 2.54% of all the shares comprising its share capital listed on the four Spanish stock markets. And, using the closing quotation price of December 2009 as reference, which was 40,50 per share. The other Group companies are not listed. The average annual interest rate applied by CEPSA on loans to subsidiaries in 2008 and 2009 was similar to the average cost of its borrowed funds for transactions of the same type (see Note 13). In relation to ownership interests in Group companies and associates, there has not been relevant changes in 2009, the most relevant changes in 2008 were due to: - The merger of Petroquímica Española S.A., Intercontinental Química S.A. and Ertisa S.A. into Cepsa Química, S.A. - The subscription of the capital increase at Cepsa Colombia, S.A. - The acquisition of shares of Total Portugal Petróleos S.A. 43

44 CEPSA Legal Documents and Corporate Governance Report - CEPSA s acquisition of 4.14% of Cepsa Portuguesa de Petróleos, S.A. from PROPEL- Productos de Petróleo LDA in order to subsequently perform the merger by absorption of Total Portugal S.A. into Cepsa Portuguesa, S.A., increasing its share capital until it was established at EUR 30,000 thousand (see Table I). In 2009 and 2008 impairment losses were recognised to adjust the cost of ownership interests in Group companies and associates recognised in the financial statements to the recoverable amount as the present value of the future cash flows arising from the investment. Table I (in the final pages of these explanatory notes) contains a detail of companies holding direct significant ownership interests in CEPSA at 31 December 2009, a breakdown of their equity and information on their activity. Joint ventures Set forth below is a detail of the main joint ventures operated as jointly-controlled ventures and assets, in which CEPSA has an ownership interest. The accompanying financial statements include the assets, liabilities, expenses and income in proportion to the Company s percentage of ownership Joint Sales in Venture thousands Joint Venture Holdings Country Operator Line of Bussiness % of Ownership Assets of euros Exploration and Ourhoud Field Algeria Sonatrach Production 39,76% 801, ,423 Total Exploration & Exploration and Timimoun Block Algeria Production Algerie Production 11,25% 24,113 - Total 825, , Joint Sales in Venture thousands Joint Venture Holdings Country Operator Line of Bussiness % of Ownership Assets of euros Exploration and Ourhoud Field Algeria Sonatrach Production 39,76% 822, ,294 Total Exploration & Exploration and Timimoun Block Algeria Production Algerie Production 11,25% 24,345 - Total 846, ,294 Revenue from the RKF and Ourhoud oilfields is obtained on a unit basis, thus optimising the rights generated by the exploitation of the two fields. The Timimoun block has not yet produced revenue since it is still at the development stage. 44

45 CEPSA Legal Documents and Corporate Governance Report 9. DERIVATIVE FINANCIAL INSTRUMENTS Pursuant to the risk management policies explained in Note 22, CEPSA uses derivative financial instruments to hedge the foreign currency and commodity price risks to which future cash flows are exposed. The types of derivatives normally used are forward contracts to hedge foreign currency risk, swap contracts to hedge interest rates and future and swap contracts to hedge commodity price risk. These derivatives mature in less than a month, which means that the change in their fair value resulting from changes in the assumptions used for their measurement is scantly material. These derivatives were not designated as hedging instruments since they do not meet all the requirements to qualify for hedge accounting, established in the Spanish National Chart of Accounts. At 2008 and 2009 year-end CEPSA had arranged derivative financial instruments with the following characteristics (in thousands of euros): 2008 Fair value Notional or Contractual Valuel Foreign currency forward contracts 1,732 6,660 Interest rate swaps ,491 Total 2, , Fair value Notional or Contractual Valuel Interest rate swaps ,954 Oil product futures 65 1,119 Oil product swaps 521 (4,672) Total ,401 The notional amounts of the contracts entered into do not reflect the actual risk assumed by CEPSA, since these amounts only constitute the basis on which the derivative s settlement calculations were made. 45

46 CEPSA Legal Documents and Corporate Governance Report 10. INVENTORIES The detail of "Inventories" at 31 December 2009 and 2008 is as follows (in thousands of euros): Crude in oil tanks 392, ,546 Crude in transit 66, ,115 Other raw materials 1,113 1,142 By - products and recovered materials 6,629 1,225 Refined finished products 432, ,099 Materials and other inventories 91,615 82,288 Advances to suppliers 2,136 5,300 Allowances (203) (513,126) Total 992, ,589 Pursuant to the resolution of the Directorate-General of Energy Policy and Mines, dated 26 October 2007, as an operator authorised to distribute oil products, CEPSA is required to maintain minimum safety stocks of certain products equivalent to 50 days of sales of the preceding 12 months in the domestic market for 2009, which was established in 2008 in 53 days, excluding sales to other wholesalers, compliance with which is inspected and monitored by Corporación de Reservas Estratégicas (CORES). Company management considers that it has been meeting this obligation. As indicated in Note 4-g, CEPSA uses the weighted average cost formula to measure its inventories of raw materials and goods held for resale. In 2009 and 2008, CEPSA recognised impairment losses of EUR 103 thousand and EUR 513,021 thousand on its inventories of raw materials and finished goods, respectively, based on their net realisable value and recognised EUR 100 thousand and EUR 105 thousand in cost of consumables used and the replacement of certain items due to technical obsolescence, respectively. At the end of 2009 CEPSA had inventory purchase commitments amounting to EUR 1,827 thousand (2008: EUR 3,161 thousand). At the end of 2009 and 2008 CEPSA had leased to third parties stocks of 109,082 Mt and 166,354 Mt, respectively. 11. EQUITY AND SHAREHOLDERS EQUITY Share capital and Share premium Fully subscribed and paid share capital amounted to EUR 267,574,941, and consisted of 267,574,941 book-entry shares of EUR 1 par value each. 46

47 CEPSA Legal Documents and Corporate Governance Report Per the information provided by the members of the Board of Directors who are shareholders, at 31 December 2009, Total, S.A., and International Petroleum Investment Company (IPIC), directly and indirectly owned 48.83% and 47.06%, respectively, of CEPSA s share capital. CEPSA s shares are traded on the continuous market on the four Spanish stock exchanges. The Consolidated Spanish Companies Law expressly permits the use of the share premium balance to increase capital and establishes no specific restrictions as to its use. There were no changes in 2009 or 2008 in the balance of this account, which amounted to EUR 338,728 thousand. Legal reserve Under the Consolidated Spanish Companies Law, 10% of net profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share capital. Such reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufficient other reserves are not available for that purpose. At 31 December 2009, CEPSA had recognised a legal reserve of EUR 53,605 thousand. Revaluation reserve This reserve, amounting to EUR 90,936 thousand, relates to the revaluations made pursuant to 1979 State Budget Law 1/1979, 1981 State Budget Law 74/1980 and Royal Decree-Law 7/1996, of 7 June, on asset revaluations, this amount has not changed in 2009 and The full balances of the aforementioned revaluations relating to State Budget Law 1/1979 and State Budget Law 74/1980, amounting to EUR 15,896 thousand and EUR 16,602 thousand, respectively, can be transferred to unrestricted voluntary reserves. The balance of the Revaluation Reserve, Royal Decree-Law 7/1996, of 7 June, account, which amounts to EUR 58,438 thousand, is still subject to the restrictions contained in the legislation under which it was recognised and can be used, free of tax, to eliminate recognised losses and to increase capital. From 1 January 2007 (i.e. ten years after the date of the balance sheet reflecting the revaluation transactions) the balance of this reserve can be taken to unrestricted reserves, provided that the monetary surplus has been realised. The surplus will be deemed to have been realised in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognised. At 31 December 2009, the unrestricted balance of this reserve amounted to EUR 52,043 thousand. If this balance were used in a manner other than that provided for in Royal Decree-Law 7/1996, it would be subject to tax. 47

48 CEPSA Legal Documents and Corporate Governance Report Grants The information on the grants received by the Company, which form part of equity, net of the tax effect, and on the amounts taken to income in this connection, for 2008 and 2009, is as follows (in thousands of euros): 2008 Balance at Transfer to Balance at Body Sphere 01/01/2008 Increases Income 31/12/2008 Grants received Ministry of Tourism and Trade State government 236 4,786 (415) 4,607 Ministry of Economy and Finance State government 1,418 - (657) 761 Ministry of Science and Innovation State government (4) 535 Ministry of the Environment and Rural and Marine Affairs (Note 21) State government 7 80,011 (76,190) 3,828 Andalusia Autonomous Community Autonomous Community Government Government 1, (303) 1,627 European Union Directorate-General XII Science International (125) - Total 3,481 85,571 (77,694) 11,358 Tax effect Ministry of Tourism and Trade State government (71) (1,436) 125 (1,382) Ministry of Economy and Finance State government (425) (228) Ministry of Science and Innovation State government - (162) 1 (161) Ministry of the Environment and Rural and Marine Affairs (Note 21) State government (2) (24,003) 22,857 (1,148) Andalusia Autonomous Community Autonomous Community Government Government (546) (33) 91 (488) European Union Directorate-General XII Science International - (37) 37 - Total (1,044) (25,671) 23,308 (3,407) Net grants 2,437 59,900 (54,386) 7,951 48

49 CEPSA Legal Documents and Corporate Governance Report 2009 Balance at Transfer to Balance at Body Sphere 01/01/2009 Increases Income 31/12/2009 Grants received Ministry of Tourism and Trade State government 4,607 5,225 (359) 9,473 Ministry of Economy and Finance State government Ministry of Science and Innovation State government (62) 601 Ministry of the Environment and Rural and Marine Affairs (Note 21) State government 3,828 56,117 (48,660) 11,285 Andalusia Autonomous Community Autonomous Community Government Government 1,627 1,217 (347) 2,497 European Union Directorate-General XII Science International Total 11,358 62,687 (49,265) 24,780 Tax effect Ministry of Tourism and Trade State government (1,382) (1,568) 108 (2,842) Ministry of Economy and Finance State government (228) - (49) (277) Ministry of Science and Innovation State government (161) (38) 19 (180) Ministry of the Environment and Rural and Marine Affairs (Note 21) State government (1,148) (16,835) 14,597 (3,386) Andalusia Autonomous Community Autonomous Community Government Government (488) (365) 104 (749) European Union Directorate-General XII Science International Total (3,407) (18,806) 14,779 (7,434) Net grants 7,951 43,881 (34,486) 17,346 CEPSA considers that in 2008 and 2009 all the requirements to ensure that the grants received are not repayable have been met. 12. PROVISIONS AND CONTINGENCIES Provisions The detail of the long-term provisions in the accompanying balance sheet and of the main changes therein in 2008 and 2009 is as follows (in thousands of euros): 2008 Balance at Long-term provisions Balance at 01/01/08 Additions Interest Cost Amounts Used 31/12/08 Long-term employee benefit obligations 11,011 2, (3,067) 10,643 Actuaciones medioambientales 7,610 1,475 - (1,475) 7,610 Other provisions 51,377 6,481 1,721 (31,069) 28,510 Total 69,998 10,291 2,085 (35,611) 46,763 49

50 CEPSA Legal Documents and Corporate Governance Report 2009 Balance at Long-term provisions Balance at 01/01/09 Additions Interest Cost Amounts Used 31/12/09 Long-term employee benefit obligations 10,643 2, (2,941) 10,331 Actuaciones medioambientales 7, ,610 Other provisions 28,510 (33) 975 (2,017) 27,435 Total 46,763 2,248 1,323 (4,958) 45,376 The detail of the short-term provisions in the accompanying balance sheet and of the main changes therein in 2008 and 2009 is as follows (in thousands of euros): 2008 Short-term provisions Balance at 01/01/08 Additions Amounts used Balance at 31/12/08 Provision for Greenhouse Gas Emissions 63 50,017 (63) 50,017 Total 63 50,017 (63) 50, Short-term provisions Balance at 01/01/09 Additions Amounts used Balance at 31/12/09 Provision for Greenhouse Gas Emissions 50,017 36,276 (50,068) 36,225 Total 50,017 36,276 (50,068) 36,225 Provisions for employee benefit obligations a) Long-term defined contribution obligations a.1) Defined contribution obligations expense The amounts recognised by CEPSA in 2009 and 2008 relating to the defined contribution obligations expense are as follows (in thousands of euros): Retirement (Pension Plan) 5,337 7,371 Life insurance 3,355 2,798 Total 8,732 10,169 50

51 CEPSA Legal Documents and Corporate Governance Report a.2) Long-term provisions and obligations to employees At 31 December 2009 and 2008, the accrued contributions payable in this regard amounted to EUR 1,740 thousand and EUR 2,057 thousand, respectively, and these amounts are recognised under Long-Term Provisions Provisions for Long-Term Employee Benefit Obligations and Other Provisions in the accompanying balance sheet. b) Long-term defined benefit obligations The net amounts of income and expenses recognised in the income statement and the changes in defined benefit obligations on the liability side of the balance sheet in 2009 and 2008 are as follows (in thousands of euros): Beginning balance 10,017 9,894 Provisions Finance costs Staff costs. Ordinary contributions to in-house funds and similar obligations Provisions for contingencies and other risks Amounts used Other amounts used and payments (332) (363) Ending balance 10,172 10,017 The main assumptions used to determine the pension obligations and post-employment benefits under CEPSA s plans are as follows: Discount rate 4% 4% Expected salary increase rate 2%-2.5% 2%-2.5% Mortality tables PEMF2000 PEMF2000 Provisions for environmental costs The information relating to 2008 and 2009 is as follows (in thousands of euros): 2008 Balance at 01/01/08 Additions Amounts Used Balance at 31/12/08 Provisions for environmental contingencies and liabilities 7,610 1,475 (1,475) 7,610 Total 7,610 1,475 (1,475) 7,610 51

52 CEPSA Legal Documents and Corporate Governance Report 2009 Balance at 01/01/09 Additions Amounts Used Balance at 31/12/09 Provisions for environmental contingencies and liabilities 7, ,610 Total 7, ,610 The provision for environmental initiatives covers the expenses arising from the potential risk of gradual land pollution, which is the only contingency not covered by the insurance policies taken out by CEPSA. The amounts used in 2008 basically offset the extraordinary expenses arising from land treatment. Other provisions The detail of the changes in 2008 and 2009 and of the balances at each year-end is as follows (in thousands of euros): 2008 Balance at Balance at 01/01/08 Additions Adjustments Amount Used 31/12/08 Provision for taxes other than income tax 36, (24,384) 12,628 Provision for third-party liability 7,280 2,440 - (6,684) 3,036 Provisions for other expenses 7,730 4,041 1,075-12,846 Total 51,377 6,481 1,720 (31,068) 28, Balance at Balance at 01/01/08 Additions Adjustments Amount Used 31/12/08 Provision for taxes other than income tax 12, (1,565) 11,500 Provision for third-party liability 3,036 (33) - (1) 3,002 Provisions for other expenses 12, (451) 12,933 Total 28,510 (33) 975 (2,017) 27,435 The provision For Taxes reflects the amounts recognised by the Company to cover possible tax contingencies arising from the assessments signed on a contested basis. The provisions For Other Liabilities and For Other Expenses cover the contingencies arising from CEPSA s ordinary operations from its relationships with third parties. CEPSA s directors consider that the provisions recorded in the accompanying balance sheet cover adequately the risks relating to litigation, arbitration proceedings and other transactions described in this Note and, accordingly, they do not expect any liabilities in addition to those disclosed to arise. In view of the nature of the contingencies covered by these provisions, it is not possible to determine a reasonable schedule for the related payments, if any. 52

53 CEPSA Legal Documents and Corporate Governance Report 13. FINANCIAL LIABILITIES Non-current financial liabilities The detail of Non-Current Payables at 2009 and 2008 year-end is as follows (in thousands of euros): Non-current financial instruments Bank Borrowings and Derivatives Types Finance Leases and Other Total Cathegories Payables 964, ,987 80,277 72,793 1,044, ,780 Total 964, ,987 80,277 72,793 1,044, ,780 At 31 December 2008 and 2009, as there were no firm long-term purchase commitments to third parties. The detail, by maturity, of Non-Current Payables at 31 December 2008 and 2009 is as follows (in thousands of euros): Maturing in Resto Total Bank borrowings 103, ,509 56, , ,814 Financial lease creditors 6,053 3,704 1, ,173 Other financial liabilities 3,317 4,827 6,729 8,012 49,908 72,793 Total 112, ,040 64,459 8, , ,780 Maturing in Resto Total Bank borrowings 206, ,001 20,000 68, , ,830 Financial lease creditors 3,750 1, ,198 Other financial liabilities 4,761 6,772 7,056 8,487 53,201 80,277 Total 215, ,221 27,056 76, ,173 1,044,305 53

54 CEPSA Legal Documents and Corporate Governance Report Current financial liabilities The detail of Current Payables at 2009 and 2008 year-end is as follows (in thousands of euros): Current financial instruments Bank Borrowings and Types Finance Leases Derivatives and Other Total Cathegories Payables 458, , , , , ,083 Total 458, , , , , ,083 The average annual nominal interest rate on the loans received in euros was 1.27% in 2009 and 4.12% in The interest rate on loans in foreign currencies was 0.80% in 2009 and 2.96% in 2008, not taking into account the exchange rate effect. The overall average annual interest rate on the loans received was 1.07% in 2009 and 3.61% in 2008, without the aforementioned effect. The fair value of these financial liabilities coincides basically with their carrying amount as they relate mainly to loans at variable interest rates. At 31 December 2009 and 2008, CEPSA had unused credit facilities amounting to EUR 594,696 thousand and EUR 376,617 thousand, respectively, arranged with various banks. The unused balance bears no interest. (see Note 22) 14. TAX MATTERS The detail of current balances receivable from and payable to public authorities is as follows (in thousands of euros): Debtors balance Tax Authority debtor for income tax ,109 Tax Authority debtor for VAT and IGIC 673 1,300 Others 7,656 7,173 Total 9,042 48,585 Creditors balance Tax Authority creditor for income tax 15,290 1,574 Tax Authority creditor for VAT and IGIC 83,095 65,282 Tax Authority creditor for fuel retail sales tax 5,342 5,460 Organisms of Social Security creditors 3,205 3,174 Others 17,434 16,752 Total 124,366 92,242 54

55 CEPSA Legal Documents and Corporate Governance Report CEPSA files consolidated income tax returns. The reconciliation of CEPSA s profit before tax to the taxable profit for Spanish corporation tax purposes for 2008 and 2009 is as follows (in thousands of euros): 2008 Increases Decreases Amount Accounting profit for the year before tax 419,190 Income tax Individual permanent differences 35, ,341 (318,732) Individual temporary differences Arising in the year 11,733 8,737 2,996 Arising in prior years 241,745 39, ,223 Individual taxable profit 305,677 Permanent differences in consolidation 1, ,888 (239,888) Taxable profit 65, Increases Decreases Amount Accounting profit for the year before tax 609,466 Income tax Individual permanent differences 34, ,304 (254,049) Individual temporary differences Arising in the year 6,992 68,032 (61,040) Arising in prior years 232,263 28, ,681 Individual taxable profit 498,058 Permanent differences in consolidation ,365 (208,534) Taxable profit 289,524 The permanent differences arose mainly as a result of non-deductible expenses and income not computable for tax purposes or of expenses and income that are computable for tax purposes in a future. The permanent differences recognised in 2008 and 2009 related basically to profit attributed to the permanent establishment in Algeria, covered by the exemption regime, provisions, fines, dividends distributed by Group companies, gains arising from asset transfers and consolidation adjustments. In 2008 and 2009 an impairment loss on a participating loan granted to Cepsa Perú was estimated at EUR 11,320 thousand and EUR 11,747 thousand, respectively, which was not deductible, (pursuant to Article 1.2. of the Consolidated Corporation Tax Law). 55

56 CEPSA Legal Documents and Corporate Governance Report The temporary differences were due mainly to accrued expenses and income earned that will be deductible for tax purposes in a future. The temporary differences recognised in 2008 and 2009 arose from expenses resulting from the provisioning and discounting to present value of supplementary pension obligations, which gave rise to increases of EUR 514 thousand in 2008 and EUR 499 thousand in 2009 relating to non-deductible period contributions and to decreases of EUR 18,207 thousand in 2008 and EUR 4,432 thousand in 2009 relating to the payments made in those years in connection with those commitments and to one-tenth of the reversal of the deferred tax asset for the externalisation of past-service costs in The increases and decreases in 2008 and 2009, as permitted under Additional Provision 28 of the Consolidated Corporation Tax Law, relate to the tax effect of charges or credits to the reserve accounts of items previously treated as income or expenses, as a result of the first application of the 2007 Spanish National Chart of Accounts. One third (EUR 221,754 thousand) of these amounts was included in taxable income. The detail of the taxes recognised directly in equity in 2008 and 2009 is as follows (in thousands of euros): 2008 Increases Decreases Amount Deferred taxes Arising in the year Grants 25,672-25,672 Other - cash flow hedge Arising in prior year Grants - 23,308 (23,308) Other - cash flow hedge - 1,944 (1,994) Total deferred taxes 25,957 25, Total taxes recognised directly in equity 25,957 25, Increases Decreases Amount Deferred taxes Arising in the year Grants 18,806-18,806 Other - cash flow hedge Arising in prior year Grants - 14,780 (14,780) Other - cash flow hedge Total deferred taxes 18,806 14,780 4,026 Total taxes recognised directly in equity 18,806 14,780 4,026 56

57 The detail of the calculation of the income tax expense for 2009 and 2008 is as follows (in thousands of euros): 2008 Increases Decreases Amount Recorded profit (before tax) Income Tax rate 30% Permanent differences ( ) Tax credits applied (29.160) Relief (4.504) Tax expenditure adjustment. Prior years (5.442) Change in temporary differences due to change in tax rate 975 Fiscal provisions (15.360) Total tax expense (95.320) 2009 Increases Decreases Amount Resultado contable (antes de impuestos) Income Tax rate 30% Permanent differences ( ) Tax credits applied (23.669) Relief (2.404) Tax expenditure adjustment. Prior years (5.612) Change in temporary differences due to change in tax rate - Fiscal provisions - Total tax expense In calculating the income tax expense for each year, CEPSA took into account the applicable tax credits for dividend double taxation and investments, as well as other tax incentives. The detail of the deferred tax assets recognised in 2009 and 2008 is as follows (in thousands of euros): Temporary differences (Deferred tax assets) Non-current assets 6,853 8,552 Current assets 1,173 3,237 Pension funds 8,953 11,698 Provision for contingencies and charges 7,146 8,221 Other (17) (17) Total deferred tax assets 24,108 31,691 57

58 CEPSA Legal Documents and Corporate Governance Report The deferred tax assets indicated above were recognised because the Company s directors considered that, based on their best estimate of the Company s future earnings, including certain tax planning measures, it is probable that these assets will be recovered. The detail of the deferred tax liabilities recognised in 2009 and 2008 is as follows (in thousands of euros): Temporary differences (Deferred tax liabilities) Non-current assets 29,583 25,232 Current assets 66, ,529 Current liabilities 24,350 3,407 Total deferred tax liabilities 120, ,168 At 2009 and 2008 year-end CEPSA did not have any unused tax assets for tax loss carryforwards. The amounts regularised based on the estimated effect of the reduction in rates with respect to the period in which the receivables and payables will be realised, the adjusted amounts implied a reduction of EUR 109 thousand in deferred tax liabilities and a reduction of EUR 1,084 thousand in deferred tax assets in In 2009 and 2008 CEPSA took the following tax credits for environmental investments pursuant to Article 35 of the Spanish Corporation Tax Law (in thousands of euros): General Tax Regime Environmental investments 21,087 41,031 Tax Credit 843 2,462 Also, pursuant to Article 94.1.a ("Tax Credit for Investment in the Canary Islands ) of Canary Islands Tax Law 20/1991, of 7 June, the following tax credit for environmental investments in the Canary Islands was taken (in thousands of euros): Canary Island Tax Regime Environmental investments - 21 Tax Credit - 5 At 31 December 2009 and 2008 CEPSA did not have any material unused tax credits. 58

59 CEPSA Legal Documents and Corporate Governance Report CEPSA is taxed in Algeria on the income obtained from the prospection for and production of crude oil from the Berkine Block 406 A oilfield, in the central eastern region of the Algerian Sahara, which is attributed to its permanent establishment. The tax on remuneration for production activities in force in Algeria is deemed to be of the same nature as the Spanish corporation tax. The current tax rate is 38% on the gross annual remuneration in barrels of Saharan Blend crude oil, withheld and settled through the Algerian state-owned company Sonatrach, in the name and on behalf of CEPSA. New legislation, applicable since August, was enacted in Algeria in 2006, introducing a new windfall profits tax. On this basis, CEPSA estimated the expense to be borne in this connection, which is also included, together with the tax on remuneration for production activities, under Other Taxes in the income statement. The tax chargeable in this connection amounted to EUR 191,074 thousand and EUR 230,852 thousand in 2009 and 2008, respectively. The tax inspection authorities reviewed the returns filed by CEPSA for various taxes, including the excise tax on oil and gas and income tax, and issued tax assessments, which were signed on a contested basis. CEPSA filed the related appeals against these assessments at the appropriate courts. The Company recognised a provision for the full amount of these assessments and for the related late-payment interest accrued until 2009 year-end (see Note 12) and paid the assessments for income tax, amounting to EUR 350 thousand. Under current legislation, taxes cannot be deemed to have been definitively settled until the tax returns filed have been reviewed by the tax authorities or until the four-year statute-of-limitations period has expired. At 2009 year-end the tax inspection of 2000 to 2004 for all taxes concluded, without giving rise to any discrepancies regarding the returns under review that could give rise to unprovisioned liabilities. CEPSA has 2005 onwards open for review for income tax and the other taxes applicable to it. The Company s directors consider that the aforementioned taxes have been settled correctly and that, therefore, even if discrepancies arose with respect to its interpretation of current legislation in its tax treatment of transactions, any potential liabilities, should they arise, would not have a material effect on the accompanying financial statements. In the opinion of the Company s Directors and its tax advisors, transactions with related parties are carried at market value, transfer prices are adequately supported and it is estimated that there are significant risks in this aspect of those resulting liabilities for future consideration for the company. 59

60 CEPSA Legal Documents and Corporate Governance Report 15. FOREIGN CURRENCY BALANCES AND TRANSACTIONS The detail of the of the most significant balances and transactions in foreign currency, valued at the year-end exchange rate and the average exchange rates for the year, is as follows (in thousands of euros): Receivable accounts 436, ,291 Loans signed 107, ,457 Other assets 18,413 28,589 Accounts payable 150,498 33,303 Bank borrowings 471, ,367 Other liabilities 411, ,413 Sales 3,931,355 5,630,190 Purchases 937,100 1,410,916 Services provided Services received 180, ,908 Finance Income 18,371 42,272 Finance Costs 7, ,511 The detail, by class of financial instrument, of the exchange differences recognised in profit for the year in 2008 and 2009 is as follows (in thousands of euros): 2008 For transactions For balance finished in the year pending of maturity Total Financial Assets Credits 11,376 64,317 75,693 Others 2,032 (4,918) (2,886) Total financial assets 13,408 59,399 72,807 Financial liabilities Bank debt (3,587) (47,543) (51,130) Debt securities and other liabilities (10,700) (70,142) (80,842) Others 380 1,625 2,005 Total financial liabilities (13,907) (116,060) (129,967) 60

61 CEPSA Legal Documents and Corporate Governance Report 2009 For transactions For balance finished in the year pending of maturity Total Financial Assets Credits 7,308 (22,405) (15,097) Others (1,229) 12,115 10,886 Total financial assets 6,079 (10,290) (4,211) Financial liabilities Bank debt (5,283) 21,094 15,811 Debt securities and other liabilities (1,310) 13,048 11,738 Others 1,572 (3,347) (1,775) Total financial liabilities (5,021) 30,795 25,774 The functional currency of CEPSA s Exploration and Production business is the US dollar (see Notes 6 and 8). 16. INCOME AND EXPENSES Importe neto de la cifra de negocios La distribución del importe neto de la cifra de negocios correspondiente a los ejercicios 2009 y 2008, distribuida por categorías de actividades y por mercados geográficos, es la siguiente (en thousands of euros): Product Services Product Services Sales Provided Total Sales Provided Total National market 11,646, ,994 11,832,506 16,957, ,559 17,160,243 Rest European Union market 403,969 2, , ,456 2, ,769 Rest of the world market 1,630, ,596 1,889,139 2,139, ,630 2,501,077 Total 13,681, ,824 14,127,848 19,684, ,502 20,251,089 The value of shares arising from strategic stock exchanges arranged by other operators not included in Revenue in 2009 and 2008 amounted to EUR 153,389 thousand and EUR 1,197,278 thousand, respectively. 61

62 CEPSA Legal Documents and Corporate Governance Report Procurements The detail of the balances of Cost of Goods Held for Resale Used and Cost of Raw Materials and Other Consumables Used in 2009 and 2008 is as follows (in thousands of euros): Goods consumed Purchases 754, ,899 Raw materials and other materials consumed Purchases 9,479,445 14,882,124 Changes in inventories (137,290) 261,148 Other external expenses 10,399 10,365 Total 10,107,355 16,107,536 The value of exchanges of strategic stocks arranged with other operators not included in "Net Revenue" in 2009 and 2008 amounted to EUR 154,465 thousand and EUR 1,275,393 thousand, respectively. Detail of purchases by origin The detail, by origin, of the purchases made by CEPSA in 2009 and 2008 is as follows (in thousands of euros): National 1,866,715 2,699,284 Intra-Community 626,567 1,037,965 Import 7,751,363 12,109,139 Total purchases according origin 10,244,645 15,846,388 Employee benefit costs The detail of Employee Benefit Costs in 2009 and 2008 is as follows (in thousands of euros): Employer social security costs 34,693 34,105 Pension contributions and provisions to pension allowances (1,463) 5,806 Other employee benefit costs 10,285 12,431 Total employee benefit costs 43,515 52,342 62

63 CEPSA Legal Documents and Corporate Governance Report Other results The detail of Other Results in the income statements is as follows (in thousands of euros): Expenses Income Expenses Income Expenses and compensation for accidents 6, , Environmental contingencies 837-1,475 - Penalties and fines For litigation and other disputes (33) - 2,440 - Indemnity for loss of profits Exceptional income due to bad debt recovery Other indemnities Excessive penalties relating to income tax ,025 Total 8, ,803 2, RELATED PARTY TRANSACTIONS AND BALANCES Related party transactions CEPSA performs its transactions with related parties on an arm s length basis. In 2008 and 2009, CEPSA performed related party transactions in relation to the following items (in thousands of euros): 2008 Other Group Companies Associates and Others Total Purchases (12,081,051) (77,136) (12,158,187) Services received (182,692) (152,739) (335,431) Interest paid (41,035) (4,756) (45,791) Sales 10,377, ,689 11,029,120 Services provided (162) - (162) Interest collected 52,034 8,829 60,863 Dividends received 232,851 54, ,260 Total (1,642,624) 480,296 (1,162,328) 63

64 CEPSA Legal Documents and Corporate Governance Report 2009 Other Group Companies Associates and Others Total Purchases (7,383,651) (88,603) (7,472,254) Services received (157,238) (143,837) (301,075) Interest paid (7,369) (3,042) (10,411) Sales 7,888, ,381 8,357,600 Services provided (50) 2 (48) Interest collected 12,208 6,578 18,786 Dividends received 220,430 31, ,256 Total 572, , ,854 Related party balances In addition, at the end of 2008 and 2009, CEPSA held the following balances with related parties (in thousands of euros): 2008 Other Group Companies Associates and Others Total Non-current financial assets and investments 1,647, ,283 1,865,758 Equity instruments 1,086, ,723 1,272,124 Loans to companies 561,068 32, ,623 Other financial assets Trade receivables 820,030 64, ,057 Current financial assets and investments 316, , ,563 Equity instruments Loans to companies 316, , ,563 Derivatives Other financial assets - 12,000 12,000 Non-current payables (31,507) (223) (31,730) Current payables (743,930) (115,904) (859,834) Trade payables (329,418) (192,645) (522,063) Total 1,679, ,410 1,812,751 64

65 CEPSA Legal Documents and Corporate Governance Report 2009 Other Group Companies Associates and Others Total Non-current financial assets and investments 1,499, ,812 1,746,370 Equity instruments 1,084, ,723 1,270,126 Loans to companies 415,149 61, ,236 Other financial assets Trade receivables 1,095,520 51,625 1,147,145 Current financial assets and investments 346, , ,226 Equity instruments Loans to companies 345, , ,565 Derivatives Other financial assets Non-current payables (31,884) - (31,884) Current payables (781,058) (13,440) (794,498) Trade payables (539,847) (203,042) (742,889) Total 1,588, ,687 1,860,470 Remuneration of directors and senior executives The detail of the remuneration received by the directors at CEPSA in 2009 and 2008, classified by concepts, is as follows (in thousands of euros): Fixed remuneration 800 1,054 Variable remuneration Attendance fees Remuneration per By-laws 3,603 3,603 Other items 12 1,844 Pension funds and plans: contributions Total 5,864 7,868 On 27 June 2008 the executive chairman retired and vacated his position, which was taken up by a non-executive chairman. Pursuant to Article 127 ter.4 of the Spanish Companies Law, introduced by Law 26/2003 of 17 July which amends Securities Market Law 24/1988 of 28 July and the Consolidated Spanish Companies Law, in order to reinforce the transparency of listed corporations, the directors have made the disclosures to which the aforementioned Article refers. 65

66 CEPSA Legal Documents and Corporate Governance Report Following is a detail of the companies engaging in an activity that is identical, similar or complementary to the activity that constitutes the company object of Compañía Española de Petróleos S.A. in which the members of the Board of Directors own equity interests, and of the functions that they discharge thereat. Director Investee Line of Business % of Ownership Function Member of the Executive Committee and General Not significant Manager of Refining D, Michel Bénézit TOTAL, S,A, Energy and Marketing General manager of corporate development - Financial D, Humbert de Wendel TOTAL, S,A, Energy Not significant Division General manager of Exploration and Production Research and D, Patrick Pouyanné TOTAL, S,A, Energy Not significant Development Strategy General Manager of D, Eric de Menten TOTAL, S,A, Energy Not significant Marketing Europe General Manager of Styrene- Dña, Bernadette Spinoy TOTAL, S,A, Energy Not significant Polymer purchase logistics Also, pursuant to the aforementioned law, we set forth below the activities carried on by members of the Board of Directors that are identical, similar or complementary to the activity that constitutes the company object of Compañía Española de Petróleos S.A., except for those carried on at other consolidated CEPSA Group companies. Director Line of Business System under wich Company through wich the Position or Function at the the Activity is Performed Activity is Performed Company Concerned Member of the Executive Committee and General Integrated oil Manager of Refining and D, Michel Bénézit company As an employee TOTAL, S,A, Marketing General Manager of Integrated oil Styrene-Polymer purchase Dña, Bernadette Spinoy company As an employee TOTAL,S,A, logistics General manager of D, Murtadha Al Hashmi Oil transport As an employee IPIC Financial Division Integrated oil General Manager D, Eric de Menten company As an employee TOTAL, S,A, of Marketing Europe General manager of Exploration and Production Integrated oil Research and Development D, Patrick Pouyanné company As an employee TOTAL, S,A, Strategy Proyect management D, Saeed Al Mehairbi Oil transport As an employee IPIC division director General manager of Integrated oil corporate development - D, Humbert de Wendel company As an employee TOTAL, S,A, Financial Division D, Khadem Al Qubaisi Oil transport As an employee IPIC Chief Executive Officer Director of Strategy D, David Forbes Oil transport As an employee IPIC Deparment 66

67 CEPSA Legal Documents and Corporate Governance Report The following Board members discharge director or executive offices at other Group companies and associates. Director Corporate Name of the Subsidiary Position or Function at the Company D,Dominique de Riberolles CEPSA Química, S,A, Chairman CEPSA Gas Comercializadora, S,A, Director CEPSA Estaciones de Servicio, S,A, Chairman CEPSA Chimie Bécancour Chairman Petresa America, Inc, Director Interquisa Canada Inc, Director CEPSA Chimie Montréal Chairman Deten Química, S,A, Chairman Compañía Logistica de Hidrocarburos, CLH, S,A, Director At 31 December 2009 and 2008, the Board of Directors was made up of 13 members, one of whom was a woman and 12 were men. In 2008 the remuneration received by senior executives who are not executive board members at CEPSA amounted to EUR 6,535 thousand. That relating to 2009, by item, was as follows (in thousands of euros): Board of Directors Remuneration Fixed remuneration 4,295 Variable remuneration 740 Other items 532 Pension funds and plans: contributions 1,733 Total 7,300 Senior executives receive an annual fixed and variable remuneration payment. The latter is calculated as a percentage of the fixed remuneration, with said percentage being conditional upon the level of achievement of the objectives established for the year. These objectives, which are subject to measurement and control systems, are determined on the basis of the earnings of the Consolidated Group, occupational safety rates, operating aspects of the business, such as the performance of projects pursuant to established criteria relating to price, quality and deadline, and individual performance The number of members of senior executive has changed from 14 to 15 in The Company has not granted any advances or loans to its Board members or to senior executives. 67

68 CEPSA Legal Documents and Corporate Governance Report Financial structure The Company is the Parent of the CEPSA Group, whose consolidated financial statements may be viewed on its website ( The CEPSA Group is organised and manages its businesses in four areas: - Exploration and Production, which includes the oil and gas prospecting and production activities. - Refining and Distribution, covering supply, refining and distribution. - Petrochemicals, which includes their production, distribution and marketing. - Gas and Electricity, comprising the production of electricity from combined heat and power sources, its distribution and retailing, together with natural gas. There are also various support and functional areas that provide across-the-board services to Group companies. In this respect the Group s financial structure hinges on its Corporate Finance and Risk Department, which centralises and manages, inter alia, the net global cash flow position of the various Group companies and also manages recourse to financial markets for loans and the investment of surpluses, selecting the best financing alternative in each case, all in compliance with the established policies and under the supervision of the Group s senior executives. 18. INFORMATION ON THE ENVIRONMENT At the end of 2008 and 2009 CEPSA had the following significant items of property, plant and equipment which it used for minimising environmental impact and for protecting and improving the environment, classified in accordance with their use (in thousands of euros): 2008 Gross carrying amount Accumulated Depreciation Net carrying amount Water 53,729 (31,074) 22,655 Air 210,892 (58,025) 152,867 Waste 522 (312) 210 Soil/ground water 477 (104) 373 Others/Noise 5,858 (478) 5,380 Total 271,478 (89,993) 181, Gross carrying amount Accumulated Depreciation Net carrying amount Water 63,775 (32,946) 30,829 Air 230,593 (61,040) 169,553 Waste 630 (338) 292 Soil/ground water 714 (115) 599 Others/Noise 7,081 (672) 6,409 Total 302,793 (95,111) 207,682 68

69 CEPSA Legal Documents and Corporate Governance Report Also, the expenses incurred in 2008 and 2009 (including in-house resources), and expenditure for the purpose of protecting and improving the environment, by the purpose thereof, were as follows (in thousands of euros): Expenses Investment Water 17,516 12,998 5,137 4,379 Air 24,301 21,967 25,447 81,843 Waste 2,190 1, Soil/ground water 1,296 1, Others/Noise 5,659 6,970 2,783 2,623 Total 50,962 44,848 33,854 88,895 The contingencies covered by provisions for environmental action in 2008 and 2009 were as follows (in thousands of euros): 2008 Balance at 01/01/08 Additions Amounts used Balance at 31/12/08 Provisión para riesgos y obligaciones medioambientales 7,610 1,475 (1,475) 7,610 Total 7,610 1,475 (1,475) 7, Balance at 01/01/08 Additions Amounts used Balance at 31/12/08 Provisión para riesgos y obligaciones medioambientales 7, ,610 Total 7, ,610 In accordance with the definition contained in the Spanish Accounting and Audit Institute (ICAC) Resolution, approving the rules for the recognition, measurement and disclosure of environmental matters in financial statements, environmental investments were identified for the purpose of this classification. In order to contribute to sustainable development CEPSA has programmes in place for the ongoing improvement of its production processes, the reduction of waste water, the elimination of spills and the management of waste. To achieve this it has implemented and keeps updated an environmental management system, an instrument that enables it to comply with its statutory obligations and to enhance the aforementioned areas on an ongoing basis. CEPSA s environmental investments reflect the commitments it has acquired through its environmental targets. The most significant environmental assets recognised by CEPSA under Plant are: plants for the recovery of sulphur, plants for the treatment of amino acids and acidified water, waste water treatment plants (chemical and biological) and technical improvements to equipment, production plants and to target enhanced energy efficiency and the reduction of COV and NOx emissions. 69

70 CEPSA Legal Documents and Corporate Governance Report Company management does not expect any contingencies to arise in connection with its actions in this respect. However, it has arranged insurance policies to cover potential risks that could arise from its activities, except for that of gradual soil pollution, the only contingency not covered in the insurance policies. CEPSA has therefore recognised a provision in this connection totalling EUR 7,610 thousand (see Note 12). 19. OTHER DISCLOSURES Emplyees The average number of employees in 2009 and 2008, by category, was as follows: Profesional Category (Average Number of Employees) Management Departament Heads Other line personal 1,259 1,250 Specialists / Assistants 1,511 1,478 Total 3,080 3,041 The headcount at 31 December 2009 and 2008, by category and gender, was as follows: Profesional Category and gender Categoría profesional Men Women Men Women Management Departament Heads Other line personal 1, , Specialists / Assistants 1, , Total 2, , Fees paid to auditors The balance of Independent Professional Services under External Services in the accompanying income statement for 2009, includes the fees for the audit of the Company s individual and the Groups consolidated financial statements, amounting to EUR 727 thousand. The heading also includes fees for other services billed by the auditors amounting to EUR 40 thousand. In 2008 the fees for the audit of the financial statements amounted to EUR 749 thousand and the fees for other services billed by the auditors or other entities related to the auditors amounted to EUR 181 thousand. 70

71 CEPSA Legal Documents and Corporate Governance Report 20. OFF-BALANCE SHEET AGREEMENTS Guarantee commitments to third parties and other contingent liabilities At 31 December 2009 and 2008, CEPSA had provided guarantees to various entities, mainly to secure financing to Group companies and in connection with supply contracts. The detail of these guarantees is as follows (in thousands of euros): Bank guarantees to public authorities as a result of CEPSA s business activities (1) 154, ,559 Guarantees provided by CEPSA to finantial institutions As a result of guarantees issued by such institutions to public authorities for the operations of subsidiaries (2) 110, ,993 As a result of financial transactions of Group subsidiaries (3) 445, ,046 Other guarantees 69,190 56,934 Total 779, ,532 As regards 2009:: (1) Includes guarantees provided to public authorities totalling EUR 75,166 thousand relating to subsidised loans and which had already been recognised on the liability side of CEPSA s balance sheet. (2) Includes guarantees of EUR 50,528 thousand in connection with subsidised loans granted to subsidiaries by public authorities and which had already been recognised on the liability side of the consolidated balance sheet. (3) These transactions had already been recognised on the liability side of the consolidated Group s balance sheet. CEPSA management does not consider that any unforeseen liabilities that could arise from the guarantees provided at 31 December 2009 would be material. 21. INFORMATION ON GREENHOUSE GAS EMISSION RIGHTS The delivery of all the rights assigned under the plan were registered in the Spanish National Greenhouse Gas Emission Rights Registry (RENADE). On 1 January 2008, the new national plan for the 2008 to 2012 period came into force. The rights assigned to CEPSA for no consideration during the period were as follows: (thousands metric tons) Assigned allowances 3,287 3,287 3,287 (1) 3,519 (1) 3,565 1) In 2008 rights equivalent to 211 thousands Mt of CO2 relating to 2007 due to re-assignment under the 2005/2007 plan were delivered. The assignment of rights for no consideration each year is measured at the market price prevailing at the time awarded, i.e. EUR 8.35/Mt in 2005, EUR 22.35/Mt in 2006 and EUR 5.86/Mt in 2007, EUR 22.73/Mt in 2008 and EUR 15.74/Mt in

72 CEPSA Legal Documents and Corporate Governance Report In 2008 no rights were purchased and no forward contracts referring to rights were traded, In 2009, 500 Mt were traded in contracts whereby allocated allowances (EUAs) were exchanged for certified emissions (CERs), generating an inflow of cash of EUR 820 thousand for CEPSA. At 2009 year-end the market price of the greenhouse gas emission rights was EUR 12.28/Mt. Consequently, and in application of the criteria contained in the ICAC resolution mentioned earlier (see Note 4-r), an impairment on the rights assigned for no consideration was recognised under both Intangible Assets and Grants, Donations or Gifts and Legacies Received. The changes in 2008 and 2009 were as follows: 2008 MT thousand of euros Greenhouse Gas Tangible assets Deferred Income Provisions for Current Emission Allowances (See note 5) ((See note 111) Contingencies and Expenses Balance at , Assignment for no consideration 3,730 80,011 80,011 - Additions/period provisions ,017 Reductions/amounts used (3,693) (74) (50,017) (63) Depreciation - (26,162) (26,173) - Balance at ,519 53,845 3,828 50, MT thousand of euros Greenhouse Gas Tangible assets Deferred Income Provisions for Current Emission Allowances (See note 5) (See note 11) Contingencies and Expenses Balance at ,519 53,845 3,828 50,017 Assignment for no consideration 3,565 56,117 56,117 - Additions/period provisions ,276 Reductions/amounts used (3,296) (50,336) (37,554) (50,068) Cer`s exchange (7,552) Depreciation (11,106) (11,106) Balance at ,834 41,659 11,285 36,225 The value of the emissions made is recognised under Other Operating Expenses in the accompanying income statement and a Short-Term Provision was recognised as a balancing item to cater for the obligation to deliver to the government the emission rights relating to each of the years. In 2008 and 2009, emissions were estimated at 3,693 Mt, with a value of EUR 50,017 thousand and at 3,240 Mt with a value of EUR 30,276 thousand, respectively. 72

73 CEPSA Legal Documents and Corporate Governance Report The use of the grant for rights assigned for no consideration, which is recognised under Grants, Donations or Gifts and Legacies Received (see Note 11), gives rise, as the emissions are produced, to recognition under Allocation to Profit or Loss of Grants Related to Non-financial Non-current Assets and other Grants in the income statement. In 2008 and 2009 the estimated emissions were lower than the volume of rights assigned for each year and, accordingly, the Company had surplus rights of 250 thousand tonnes in 2008 and 325 thousand tonnes in Company management does not expect the final certification of the rights taken into account to give rise to any significant liabilities. In 2010 the rights relating to emissions made in 2009 will be delivered to the Spanish government and the amount corresponding to such rights will be derecognised from Intangible Assets and Short-Term Provision. Company management does not expect any contingencies to arise in this connection. 22. RISK MANAGEMENT POLICY Main risks associated with the CEPSA's operations The CEPSA carries on its activities in environments marked by a series of external factors, the changes in which could affect the manner in which operations are performed and the results obtained therefrom. These activities are managed through the application of policies whose main objective, in accordance with the strategy established by the Company s management, is the optimisation of the ratio of costs to risks covered. The strategic and budget planning processes involve estimating the effect of business risks and a sensitivity analysis is performed for the main variables in order to gain comprehensive insight on their impact. CEPSA publishes an annual Corporate Governance Report which contains, among other matters, an extensive breakdown of the economic, social and environmental actions performed and on their contribution to sustainable development. The 2008 Report was prepared in accordance with the directives of the Global Reporting Initiative (GRI). The Executive Committee, the Managing Director, together with the Directors of the respective divisions, supervise and monitor risks on a regular basis, and adjust risk profiles, where necessary, depending on the circumstances. In the area of environmental protection, safety and quality, the basic function of the P.A.S.C.A.L. Committee is to periodically review the risks of this type and to propose, where appropriate, measures aimed at compliance or change. In the field of information security, a Corporate Security Committee is entrusted with monitoring and fostering compliance with information security measures. CEPSA has established risk control systems that may affect investments and developing activities, which are appropriate to the Group's risk profile. The main risks to which the Group is exposed can be grouped in the following categories: Market risks The nature of CEPSA s businesses entails a certain degree of sensitivity to the changes in and volatility of oil and gas prices, refining margins and energy product sales. In this connection the Group's high degree of vertical integration, which has increased in recent years, is a strategy that, of itself, mitigates the effects of economic cycles and their specific impact on the Group's business units or areas. 73

74 CEPSA Legal Documents and Corporate Governance Report In this respect it is to be noted that a rise in the level of crude oil prices has a positive impact on the earnings of the Exploration and Production division. However, this impact can be dampened due to the application of the clauses of the Production Share Contract (PSC)-type agreements and their effect on the quantities of crude oil to be received by CEPSA and that are available for sale. Fluctuations in crude oil prices also have an effect on product refining and marketing operations, the scale of which depends, among numerous other factors, on the speed with which price changes in energy products or base petrochemical products at source can be relayed to the international and local finished goods markets. In accordance with the sensitivity analysis performed, at 31 December 2009 and 2008, a 10 dollars increase in a similar dates in the price of a barrel of oil would lead to an approximate increase in net profit without the effect of Non- Recurring elements, of EUR 34 and EUR 48 million respectively. Also, a 10 dollar cents increase in the refining margin per barrel would imply approximate growth in the aforementioned aggregate of EUR 9 million in both years. With respect to fluctuations in prices of crude oil and oil products in international markets, CEPSA arranges and operates a price risk hedging system that protects from price fluctuations variations in stocks of crude and oil products above and below levels of operating stock previously defined as stock at risk and reviewed annually to ensure that strategic stock and minimum operating stock requirements are met. These fluctuations are hedged with Brent crude in the IPE futures market, where excess operating stocks are offset by future sales and insufficient volume of operating stocks is offset by future purchases. Capital Management, Foreign currency, interest rate and other financial risks The CEPSA's operations are exposed, in varying degrees, to risks of fluctuations in the financial markets. The maintenance of a sound capital structure and adequate risk control are prime objectives of the Group, as it allows them to tackle any possible changes in economic and industry-based circumstances and, above all, ensures readiness to take on developments and new profitable business opportunities which may act as an additional driver of growth and contribute significant value for shareholders. The most serious risk arises from fluctuations in the euro exchange rate versus the US dollar, the currency in which crude oil, and oil and petrochemical products are priced, with respect to the euro. Exposure to this kind of risk is hedged in accordance with the Group's internal policy. From the operational standpoint, is centralised and managed the foreign currency risk exposure of the Group companies net global foreign currency cash flow position. Also in the Group is centralised the managing of the recourse to financial markets for loans, investment of surpluses and financial instruments. In the case of foreign investments in long-term assets which will generate future cash flows in foreign currencies, the Group minimises its foreign currency exposure by arranging financing in the same currency. This means that the foreign currency financing covers, to a certain extent, the foreign currency risk arising from the future cash flows generated by these assets. At 31 December 2009 and 2008 net debt in dollars amounted to USD 465,084 million and USD 531,724 million, representing 28.31% and 43.30% respectively of total consolidated debt. 74

75 CEPSA Legal Documents and Corporate Governance Report In accordance with the sensitivity analysis performed, at 31 December 2009 and 2008, a 5 cents depreciation of the dollar against the euro would lead to an approximate decrease in net profit without the effect of Non-Recurring elements of EUR 29 million and EUR 32 million respectively and an increase in equity, excluding the aforementioned effect on profit, of EUR 18 million and EUR 19 million respectively. Operations are also sensitive to interest rate changes. CEPSA has arranged most of its debt at floating rates, taking into account the low debt ratio and because it considers that this financing method will entail a lower cost at long term. In relation to liquidity risk management, in order to manage potential short-term fund requirements, the Company has credit facilities available, as detailed in Note 13 of the notes to the financial statements and available Treasury, to the undrawn balance of which does not bear interest. The banks with which the Group operates are leading Spanish and international entities of renown; however, the counterparty risk in investments and financial instruments contracts is analysed. Industrial risks, prevention and safety The safety control system applied is included in the Risk Prevention Manual and its Basic Standards, in accordance with the OHSAS international specifications. Also in place are action procedures that reflect the standards developed in accordance with best practices, which ensure the maximum possible level of safety, paying special attention to the elimination of risk at source. The objective of this system is ongoing improvement in risk reduction, focused on various activities, such as work planning, the analysis and monitoring of corrective actions derived from incidents and accidents, internal audits, periodic inspections of the facilities and supervision of maintenance work and operations. Environmental risks Certain of the CEPSA s activities have an impact on the environment through emissions into the air, water, soil and ground water and also through the production and management of waste. Since 2007 this type of impacts are regulated by the Integrated Pollution Prevention and Control Directive and its transposition into Spanish Law 16/2002. In this connection, all the Group s industrial plants were awarded their Integrated Environmental Permits, which involve rigorous control over their processes with the aim of minimising impact on the environment. Nevertheless, for many years now, one of Cepsa's longstanding primary objectives has been to minimise the impact of its activities on the environment in which it operates its industrial plants, which is reflected in its internal environmental protection policies and is regulated by the Basic Environmental Standards. A summary of the measures adopted in order to minimise impacts, by area, is as follows: Air Internal procedures are applied with the aim of controlling and managing impacts and control networks have been implemented, in relation to both emissions and inmissions, consisting of continuous measurements. The data obtained is sent in real time to the competent authority. Discharges into waterways CEPSA has industrial waste treatment plants at all of its facilities which allow waste discharged into waterways to be controlled and significantly reduces the impact on the environment. As in the case of air emissions, the data relating to the parameters of industrial waste are sent in real time to the competent authority and environmental controls are also performed on both the waterways and sediments. 75

76 CEPSA Legal Documents and Corporate Governance Report Soil/ground water All the facilities are equipped with piezometric control networks which show the state of the soil and ground water at any given time and allow prompt measures to be taken in the event of an incident, thus minimising the impact on this area. Waste In its activities Cepsa has established a preventative policy regarding the production of waste, encouraging its reduction, reuse, recycling and recovery with the aim of protecting the environment and human health. Protection against Accidental Marine Pollution The Group carries out all the actions geared towards compliance with the provisions of the Domestic Contingency Plan for Accidental Marine Pollution and those specified in internal procedures for the prevention and solution of this type of pollution. The Group carries out all the actions required to improve the operations of the maritime terminals or facilities, minimising the risk arising from activities. Exploration and crude oil production - In its operations in Algeria, CEPSA applies strict environmental criteria in order to minimise the impact of its activities with the utmost respect for the natural environments in which it operates and the indigenous communities in these areas. Since 1995, Cepsa has been carrying out analyses and assessments of the environmental risks of its activities with the aim of managing and controlling them in order to reduce possible incidents which could lead to significant impacts on the environment or biodiversity. In this connection, the aforementioned analyses were carried out at various Group plants which were adapted to UNE :2008 standard on Analysis and Assessment of Environmental Risks, a benchmark standard in Spain. Also, all of Cepsa's large industrial plants are equipped with environmental management systems certified by external bodies. The primary objective is to obtain certification for the few activities which are still uncertified. In this connection, claims may be filed against the CEPSA by affected parties for environmental damage caused by its operations inside or outside of its facilities. As far as it is currently aware, management considers that the accounting provisions recognised in this connection and the insurance policies arranged will cover all possible outcomes. Management has yet to determine, on the basis of the related legislation to be enacted, the amount of the financial guarantees that could be required as a result of the application of the Regulation partially implementing the Environmental Liability Law at certain of the Group s plants. The amounts of the financial guarantees will be determined as soon as the regulations implementing the law and the environmental liability regulations are enacted. Also, certain of the Group s production facilities must comply with the requirements of the regulations affecting greenhouse gas emissions. In 2008 and 2009 the emissions from the plants affected by this regulation, verified by AENOR, were, overall, slightly less than the allowances granted under the National Allocation Plan. Equity risk The Company has taken out insurance to cover the risk of damage to property, including the breakdown of machinery and the control of crude-oil wells involved in exploration and production; the risk of loss of profits arising from damage to property; third-party liability of both CEPSA and its employees or directors during the performance of activities and deriving from damage to property or personal injury to third parties or employees caused by occupational accidents and the risk of loss or damage during the transport of crude oil, products and equipment. 76

77 CEPSA Legal Documents and Corporate Governance Report Customer credit risks Commercial loans and collections are managed in accordance with periodically updated Internal Regulations and Procedures. This regulation determines commercial credit limits for each customer, establishes the most appropriate collection instruments, includes the actions to be performed for managing default and the monitoring and control of the assigned credit limits. The Group also uses risk analysis computer systems to process internal and external data in an integrated and automated manner. Such data are assessed by applying the models established to classify each customer s commercial risk and assign the related credit limit. Insurance policies have also been taken out to cover the risk of customer default in certain commercial areas. Following is a detail of past-due receivables that had not been provisioned and of total unmatured receivables, included under "Trade and Other Receivables" (see Note 2.e) at the end of 2009 and 2008 (in thousands of euros): Maturity Not maturity debt 566, , days maturity debt 37,498 44, days maturity debt 12,547 20, days maturity debt 3,259 7,072 More than 180 days maturity debt 1,484 3,414 Total 621, ,756 As discussed previously, credit insurance policies have been arranged that cover the risk of default on a portion of the past-due receivables that have not been provisioned. Also, guarantees have been provided that cover another portion thereof. Risks related to the security of information. CEPSA has a security organisation in charge of ensuring the availability, integrity, confidentiality and auditability of the information required for the correct performance of the Group's activities with an adequate level of risk and cost. The Group has an Information Security Management System based on the reduction of risk, which was awarded the highest ISO international certification. Other risks CEPSA has various litigation in process in relation to its business, including tax and competition disputes and is also subject to tax inspections for the years still open for review. Although the final outcome of these matters cannot be foreseen, the Group s management considers that, based on current information, the provisions recognised adequately cover risks of this nature. 77

78 CEPSA Legal Documents and Corporate Governance Report The audits of income tax for 2000 to 2004 of the CEPSA Tax Group were completed in the first quarter of 2008 and no discrepancies arose in the tax returns reviewed which might give rise to liabilities for which provisions had not been recognised. Risks relating to changes in the legislation applicable to the activities and/or industry The activities carried on by the Group, in Spain or abroad, are subject to various legislation. Any amendments made thereto could affect the structure under which activities are performed and the results generated by operations. The industry in which CEPSA operates is basically governed by Oil and Gas Industry Law 34/1998 of 7 October, Royal Decree Law 15/1999, of 1 October, approving measures for the liberalisation, structural reform of and enhanced competitiveness in the oil and gas industry; Law 16/2002 on Integrated Prevention and Control of Pollution, Royal Decree R.D. 1716/2004, of 23 July regulating the obligation to maintain minimum security stocks, the diversification of natural gas supplies and Corporación de Reservas Estratégicas de Productos Petrolíferos (Corporation of Strategic Reserves of Oil-based Products); Royal Decree 398/1996, of 1 March, and implementing regulations on the specifications of petrol and diesel for vehicles; Royal Decree Law 6/2000, of 23 June, on urgent measures for enhancing competitiveness in the goods and services markets; Law 9/2006, of 28 April, on the assessment of the effects of certain environmental plans and programmes; Royal Decree 61/2006, of 31 January, setting the specifications for petrol, diesel, fuel oil and liquid petroleum gases, which regulates the use of certain biofuels and the sulphur content of fuels for seafaring vessels; Royal Decree 679/2006, of 2 June, regulating the management of used oils; Royal Decree 1370/2006, of 24 November, approving the Spanish National Allocation Plan for greenhouse gas emission allowances; EU Council Decision of 14 October 2004 concerning the conclusion, on behalf of the European Community, of the Stockholm Convention on Persistent Organic Pollutants; Directive 2008/1/EC of the European Parliament and of the Council of 15 January 2008 concerning integrated pollution prevention and control, known as the IPPC Directive; Environmental Liability Law 26/2007 of 23 October, transposing Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004; and Royal Decree 2090/2008, of 22 December, approving the regulations partially implementing the aforementioned Royal Decree 1/2008, on environmental impact assessment, Law 34/2007 on air quality and air protection. As regards environmental matters, CEPSA has implemented the Basic Environmental Regulations and the procedures implementing them, the objectives of which include compliance with the applicable legal requirements. CEPSA also strengthens its commitment to environmental protection with the implementation of its Biodiversity Regulations, regulating the measures to be taken to conserve the habitats and species in the environments in which it carries on its activities. It is to be noted that Cepsa has implemented an environmental management system, certified under the UNE-EN ISO standard and Regulation (EC) No 761/2001 of the European parliament and of the Council, of 19 March 2001, allowing voluntary participation by organisations in a Community eco-management and audit scheme (EMAS), at the majority of its business centres by outside entities accredited by ENAC (Spanish National Accreditation Entity). In the field of occupational risk prevention CEPSA s Basic Occupational and Industrial Risk Prevention Regulations not only comply with the statutory requirements, but also include other principles considered necessary to achieve high safety standards in its business areas. Its Corporate Management Manual for the prevention of occupational and industrial risks and other procedures ensure the correct operation of the production process, from the design of its facilities to the marketing of products. 78

79 CEPSA Legal Documents and Corporate Governance Report Risks materialising in 2009 In 2009 no significant asset losses due to accident took place. Furthermore, doubtful receivables from sales to customers improved compared to 2008 and were appropriately provisioned. The implementation of ongoing improvements to the risk control systems is producing a gradual reduction in accidents, particularly in the area of occupational safety, borne out by the accident frequency rate (number of accidents leading to absence from work per million hours worked), which was 1.90 in EVENTS SUBSEQUENT TO YEAR-END At the date of preparation of these financial statements, no significant events subsequent to 2009 year-end that could alter or have any effect of the financial statements presented had taken place. 24. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH These financial statements are presented on the basis of accounting principles generally accepted in Spain. Certain accounting practices applied by the Company that conform with generally accepted accounting principles in Spain may not conform with generally accepted accounting principles in other countries. 79

80 CEPSA Legal Documents and Corporate Governance Report TABLE 1 Detail of companies in which CEPSA has significant direct holdings at December 2009:, (Thousands of euros) Equity Capital Net Cost of Name Registered Office Line of Business % of Ownership Sub-scribed Paid Net Profit Investment Oil Refining ASFALTOS ESPAÑOLES, C/ Orense, 34 4ª Planta, for obtaining S,A, (ASESA) MADRID, ESPAÑA asphalt products 50% 8,529 8,529 14,236 17,869 ATLAS, S,A, C/ Playa Benitez, s/n, COMBUSTIBLES Y CEUTA, LUBRIFICANTES ESPAÑA Oil and gas trading 100% 3,930 3,930 11,195 4,077 Polígono Industrial Valle de Güimar Manzana XIV, parcelas 17 y 18, Güimar C,M,D, AEROPUERTOS Santa Cruz de Tenerife, CANARIOS, S,L, ESPAÑA Jet fuel distribution 60% 21,576 21,576 12,622 12,946 ES, Comb, Aviac, Camino de San Lázaro, s/n Zona ind, Aerop, Tenerife Norte Los Rodeos, San Cristobal de la Laguna - Sta, Cruz de Tenerife, Oil and gas CEPSA AVIACIÓN, S,A, ESPAÑA transport 100% , Avda, Ribera del Loira nº 50, Research and CEPSA COLOMBIA, S,A, MADRID, ESPAÑA exploration 100% 21,856 21, , ,394 CEPSA COMERCIAL C/ Embajadores Final, s/n, MADRID, S,A, Apartadero Santa Catalina, (CECOMASA) MADRID, ESPAÑA Oil and gas trading 100% 1,169 1,169 1,551 0 CEPSA E, P,, Avda, Ribera del Loira, nº 50, Research SOCIEDAD ANONIMA MADRID, ESPAÑA and exploration 100% 3,438 3,438 20,512 16,136 Amsteldijk 166 6Th Floor, 1079 LH Amsterdam, Research CEPSA EGYPT SA, B,V, Netherlands and exploration 100% 10,000 10,000 6,432 7,267 CEPSA ESTACIONES DE SERVICIO Avda, Partenón, 12, Service station S,A, (CEPSA EE,SS,) MADRID, ESPAÑA operation 100% 82,043 82, , ,017 CEPSA GAS Avda, Partenón nº 12, Gas sale COMERCIALIZADORA, S,A, Madrid, ESPAÑA and distribution 35% 3,060 3,060 22,066 1,071 Avda, Ribera del Loira, CEPSA nº 50 1ª planta, Gas sale GAS LICUADO, S,A, MADRID, ESPAÑA and distribution 100% 36,752 36,752 84,466 42,012 Beurs - World Trade Centre Office 668 Beursplein 37, CEPSA 3011 AA Rótterdam, INTERNATIONAL B,V, The Netherlands Oil and gas trading 100% 4,060 4,060 34,529 15,210 CEPSA LUBRICANTES, Avda, Ribera del Loira 50 3ª, S,A, (C,L,S,A,) MADRID, ESPAÑA Lubricant trading 100% 15,000 15,000 31,519 15,025 Avda, del Partenòn nº 10 CEPSA MARINE (Campo de las Naciones) 1ª, FUELS, S,A, Madrid, ESPAÑA Oil and gas trading 100% 25,060 25,060 14,486 25,060 Avda, de Anaga, nº 21, Corporate services for CEPSA OPERACIONES Santa Cruz de Tenerife bunkering- aviation MARINA-AVIACIÓN, S,A, (Tenerife), ESPAÑA and oil transport ,

81 CEPSA Legal Documents and Corporate Governance Report TABLE 1 Detail of companies in which CEPSA has significant direct holdings at December 2009: (contuinue) (Thousands of euros) Equity Capital Net Cost of Name Registered Office Line of Business % of Ownership Sub-scribed Paid Net Profit Investment Avda, Partenón, 12, Research and CEPSA PERU, S,A, Madrid, ESPAÑA exploration 100% ,585 0 Rua General Firmino Miguel, CEPSA PORTUGUESA nº 3 Torre 2 2º andar, PETROLEOS, S,A, LISBOA, PORTUGAL Oil and gas trading 100% 30,000 30,000 87, ,957 Production Avda, del Partenón nº 12-14, and sales of CEPSA QUÍMICA, S,A, MADRID, ESPAÑA petrochemicals 100% ,003 80,192 Avda, del Partenón, 12, Corporate CEPSA, S,A, MADRID, ESPAÑA Services 100% COMPAÑÍA LOGÍSTICA DE HIDROCARBUROS C/ Titán, nº 13, Oil product CLH, S,A, MADRID, ESPAÑA distribution 14% 84,070 84, ,882 86,299 DERIVADOS ENERGÉTICOS PARA EL TRANSPORTE Y LA INDUSTRIA, Avda, Partenón, 12 1ª Sector A, Oil product S,A, (DETISA) MADRID, ESPAÑA distribution 100% 12,330 12,330 31,745 12,328 Avda, Ribera del Loira, LUBRICANTES DEL SUR, nº 50, 2ª planta, S,A, (LUBRISUR) MADRID, ESPAÑA Lubricant trading 100% 6,102 6,102 9,691 24,610 Avda, San Luis, NUEVA GENERADORA nº 77 Edificio C 4ª planta, DEL SUR, S,A, Madrid, ESPAÑA Power generation 50% 96,000 96,000 54,914 71,100 Explanada de Tomás Quevedo, PETRÓLEOS s/n, Las Palmas DE CANARIAS de Gran Canarias S,A, (PETROCAN) (GRAN CANARIA), ESPAÑA Bunkering services 100% , Avda, del Partenón, nº 12 Campo de las Naciones, Sale of fuel and PETROPESCA, S,L, Madrid, ESPAÑA lubricant 100% 2,000 2,000 6,907 6,892 Avda, Ribera del Loira, PRODUCTOS ASFÁLTICOS, nº 50 2ª planta, Asphalt S,A, (PROAS) MADRID, ESPAÑA product sales 100% 3,150 3,150 19,167 5,312 Avda, Columbano Bordalo Supply point PROPEL-PRODUTOS Pinheiro, 108-3º, management DE PETROLEO, L,D,A, LISBOA, PORTUGAL services 93% ,514 1,356 81

82 CEPSA Legal Documents and Corporate Governance Report Management Discussion & Analysis Management Discussion & Analysisof 2009 for Compañía Española de Petróleos, S.A. A review of the environment in which CEPSA conducted its operations, as well as an explanation of the progress of the company s activities in its different segments, the risks associated with its businesses, its financial position and its research & development work and initiatives, can all be found in the Management Discussion & Analysis of the CEPSA Group. Likewise, the description therein of key events that took place subsequent to the end of the year and the Consolidated Group s future prospects and outlook are fully applicable to the parent company CEPSA. RESULTS At December 31, 2009, CEPSA s revenues from product sales mainly on the domestic market amounted to 14,128 million ( 11,847 million excluding the excise tax on oil and gas charged to sales), down 6,123 million from the same period a year ago. The cost of crude oil and product supplies and procurements decreased by a similar amount, 6,000 million, totaling 10,107 million in the year. Pre-tax income came to million, climbing 45% from 2008 s figure. After deducting corporate tax and other taxrelated expenses, net income stood at 406 million, rising 43% from the year before. Pre-tax income in the so-called adjusted statement, valuing inventory at replacement cost, stood at million, falling 40.7% from FINANCIAL AND EQUITY POSITION At December 31, 2009, CEPSA s total net assets amounted to 8,186 million, 4,495 million of which belonged to the net book value of long-term assets. At this same date, shareholders equity stood at 4,146 million, financing 51% of net assets. TREASURY STOCK Neither CEPSA nor any of the companies making up the CEPSA Group directly or indirectly acquired, sold or owned shares of Compañía Española de Petróleos, S.A. in OTHER INFORMATION Pursuant to the provisions of the amended Securities Market Act 6/2007, the following additional information which is required to be reported by listed companies in their management reports is included herein, as follows: 82

83 CEPSA Legal Documents and Corporate Governance Report a) Share Capital Structure The fully issued and paid-up share capital of Compañía Española de Petróleos, S.A. at December 31, 2009 amounted to 267,574,941, divided into 267,574,941 ordinary bearer shares, with a par value of one (1) euro each. All CEPSA shares carry equal voting and dividend rights and trade on all four Spanish Stock Exchanges in the Continuous Market. At December 31, 2009, there were no outstanding capital increases or convertible bonds. b) Restrictions on the Transferability of Shares There are no legal or by-law restrictions for acquiring or transferring shareholdings in the company, except as otherwise provided for by law. c) Significant Holdings in the Share Capital At December 31, 2009, the direct and indirect holders of significant interests in the share capital of Compañía Española de Petróleos, S.A. were as follows: Number of voting rights Corporate name of shareholder Direct Indirect Accumulated % shareholding Total S.A.* - 130,688, ,668, % International Petroleum Investment Company (IPIC) 125,926, ,926, % *Through Odival, S.A. Changes in the shareholding structure that took place in the year were as follows: Corporate name of shareholder Date of transaction Description of transaction Banco Santander, S.A. 30/07/2009 Shareholding fell below 3% Unión Fenosa, S.A. 30/07/2009 Shareholding fell below 3% International Petroleum Investment Company (IPIC) 30/07/2009 Shareholding over 45% d) Restrictions on Voting Rights There are no legal or by-law restrictions on voting rights, except as otherwise provided for by law. Nevertheless, Article 23 of the Company Bylaws states that right of admission to the Annual General Meeting, with the number of votes each shareholder is entitled to, is reserved to those shareholders of record who can demonstrate ownership of a minimum of sixty (60) shares, at least five (5) days prior to the scheduled date of the Annual General Meeting on first call. 83

84 CEPSA Legal Documents and Corporate Governance Report e) Shareholder Agreements Compañía Española de Petróleos, S.A. is unaware of the existence of any agreements or concerted actions among its shareholders. f.1) Applicable Standards Regarding the Appointment and Replacement of Members of the Board of Directors Directors are appointed, ratified, re-elected or removed from office by the Annual Meeting. Without prejudice to what is set forth in laws in force regarding the appointment of Directors according to the system of proportionality, significant shareholders propose nominees to serve on the Board, with the Board of Directors having express powers to co-opt members onto the Board whenever vacancies arise and to accept, where applicable, resignations tendered by Directors, as provided for in current regulations and the Company Bylaws. Directors shall be elected for five-year terms and need not be shareholders of the Company. Directors shall resign from their duties on the Board whenever, upon completion of the period for which they were appointed, they are not re-elected by the first General, whether Ordinary or Extraordinary, Meeting following completion of such period or the legal period for holding the Annual Meeting that is supposed to approve the financial statements of the previous year has elapsed, or whenever the Annual Meeting so decides, using the powers granted to it by law or in the Company Bylaws. Likewise, pursuant to the provisions of the Rules and Regulations of the Board of Directors, Directors must relinquish their seats to the Board and tender, if this body deems it advisable, the corresponding resignation in the following cases: - In the event that they resign from the executive position with which their appointment is connected. - In the event that they are involved in any of the cases of incompatibility or prohibition legally provided for. - In the event that they are convicted for a criminal offense Directors affected personally by proposed appointments, re-elections, resignation or removals shall abstain from taking part in discussions dealing with such matters. f.2) Applicable Standards Regarding the Amendment of the Company Bylaws As provided for in Articles 20 and 21 of the Company Bylaws, the Ordinary or Extraordinary General Meeting of Shareholders shall have broad powers to deliberate on and pass resolutions regarding the amendment of said Bylaws. However, to be able to lawfully make any amendment to such Bylaws, shareholders who hold at least fifty (50) percent of the outstanding voting shares of the Company must be present in person or represented by proxy at the Meeting, while twenty five (25) percent of this voting capital shall suffice for the second call, in order for the Meeting to have a valid quorum to transact the aforesaid business. When attended by shareholders representing less than fifty (50) percent of the outstanding shares of capital stock of the Company entitled to vote, the resolutions to which the preceding paragraph refer may only be validly adopted with the affirmative vote of two-thirds of the capital present in person or by proxy at the Meeting (Article 28 of the Bylaws). For such purposes, the Company shall abide by the system set out in the Corporations Act, in Article 144 and subsequent articles. 84

85 CEPSA Legal Documents and Corporate Governance Report g) Powers Assigned to the Board of Directors Powers delegated to the Chief Executive Officer of Compañía Española de Petróleos, S.A. include those set forth in the Company Bylaws, as well as other powers delegated by the Board that may be required to govern and represent the Company and to undertake transactions involving ownership, management, negotiation and engagement. The resolutions of the Board of Directors shall be adopted by an absolute majority of Board members in attendance at a meeting and in cases of a tie, the Chairperson shall have the casting vote. The Board of Directors is expressly authorized, as resolved by the Annual General Meeting of Shareholders held on June 23, 2006, to adopt a resolution to increase the company s share capital, without prior consent from the Annual Meeting, by means of new cash contributions to shareholders equity, in an amount not exceeding 133,787,471. The Board of Directors may use this authorization once or several times and in the manner and amount it deems advisable, within a period of five (5) years starting from the aforementioned date of June 23, 2006, and is required to report on the resolution or resolutions adopted in the first Annual Meeting held thereafter. The Board is likewise authorized to nullify, where applicable, the unsubscribed portion of the capital increase(s) resolved under this authorization. The Annual General Meeting of Shareholders held on June 26, 2009, renewed the authorization granted to the Board of Directors to be able to issue, under the terms and conditions established for these purposes in current legislation, fixed-yield securities that are not convertible into shares of the company within a maximum five-year period and up to the limit of 300 million. No authorization has been granted by the Annual Meeting to the Board of Directors to acquire treasury stock. h) Significant Agreements Entered Into by the Company There are no significant agreements that have been entered into by the company and that may become effective, be amended or finalize in the case of a change of control in the company as a result of a public takeover bid on shares. i) Agreements Between the Company and its Directors, Executive Officers or Employees Regarding Severance Payments There are no clauses of this kind in effect for directors, executive officers or employees, including the Chief Executive Officer, in the event of resignation, dismissal or changes in control as a result of a public takeover bid. In the event of dismissal, they shall be entitled to the same severance payment system that they would have had in the case of coming under the collective labor agreement. 85

86 CEPSA Legal Documents and Corporate Governance Report Annual corporate governance report PUBLICLY-TRADED COMPANIES ISSUER IDENTIFICATION END OF BUSINESS YEAR: 31/12/2009 BUSINESS I.D.: A Corporate name: COMPAÑÍA ESPAÑOLA DE PETRÓLEOS, S.A. MODEL OF THE ANNUAL CORPORATE GOVERNANCE REPORT FOR PUBLICLY-TRADED COMPANIES A. OWNERSHIP STRUCTURE A.1. Company Share Capital Date of Most Recent Change Share Capital in Euros Number of Shares Number of Voting Rights June 2, 1999 (*) 267,574, ,574, ,574,941 (*) Reduction of the share capital by 451, euros, for purposes of its re-denomination in this currency, by virtue of the resolution adopted at the Annual Meeting held on April 22, 1999, and notarized on June 2, 1999 through a deed issued by the Notary Public of Madrid, Ignacio Solís Villa. State whether there are different classes of shares with different associated rights. The Company does not have different classes of shares with different associated rights. A.2. Breakdown of direct and/or indirect owners of significant shareholdings in the Company s share capital at the end of the year, excluding board members At December 31, 2009, the owners of significant direct and/or indirect shareholdings in CEPSA s capital were as follows: Corporate Name Number of Direct Voting Number of Indirect % of Total of Shareholder Rights Voting Rights (*) Voting Rights Total, S.A ,668, International Petroleum Investment Company 125,926, (*) Through: Held Through: Corporate Name of Indirect Corporate Name of Number of % of Total Owner of Shareholding Direct Owner of Shareholding Direct Voting Rights Voting Rights Total, S.A. ODIVAL, S.A. 130,668,

87 CEPSA Legal Documents and Corporate Governance Report Changes in the Company s shareholding structure during the year: Corporate Name of Shareholder Date of Transaction Description of Transaction Banco Santander, S.A. 30/07/2009 Shareholding fell below 3% Unión Fenosa, S.A. 30/07/2009 Shareholding fell below 3% International Petroleum Investment Company 30/07/2009 Shareholding exceeded 45% A.3 Members of the Board of Directors who hold voting rights on Company shares Number of Direct Voting Number of Indirect % of Total Voting l Name of Director Rights Voting Rights (*) Rights Mr. Santiago Bergareche Busquet Mr. Dominique de Riberolles Mr. José Manuel Otero Novas Mr. Murtadha Al Hashemi Mr. Saeed Al Mehairbi % of total voting rights held by members of the Board of Directors Members of the Board of Directors holding option rights on shares of CEPSA:: No Director has option rights on shares of the Company. A.4 Family, commercial, contractual or corporate relationships among owners of significant shareholdings, insofar as the Company is aware of them, except in cases in which they are immaterial or are the result of routine business. CEPSA is unaware of the existence of relationships of this nature. 87

88 CEPSA Legal Documents and Corporate Governance Report A.5 Commercial, contractual or corporate relationships between owners of significant shareholdings and the Company and/or its Group, except in cases in which they are immaterial or are the result of routine business. Nombre o denominación social relacionados Tipo de relación Breve descripción TOTAL, S.A. Contractual TOTAL E&P ALGERIE (a subsidiary of TOTAL) and CEPSA have interests in natural gas exploration & production activities in Algeria, specifically in the Timimoun Basin (37.75%/11.25%, respectively). TOTAL, S.A. Corporate CEPSA and TOTAL have stakes in CEPSA GAS COMERCIALIZADORA (35%/35%, respectively), engaged in the commercialization of natural gas. TOTAL, S.A. Contractual Technical assistance agreement between CEPSA E.P. (a subsidiary of CEPSA) and TOTAL in oil and natural gas exploration & production activities. TOTAL, S.A. Contractual Technical cooperation agreement between PROAS (a subsidiary of CEPSA) and TOTAL regarding R&D activities for bitumen technologies. They also have a licensing agreement for the manufacture and sale of Styrelf products in Spain and Portugal. TOTAL, S.A. Contractual CEPSA LUBRICANTES, S.A. and TOTAL LUBRIFIANTS, S.A. (a subsidiary of TOTAL) have set up the company GAEL for jointly negotiating the purchase of additives and components needed to produce lubricants and for cooperating on projects in connection with technical research and development of automotive and industrial lubricants. TOTAL, S.A. Commercial As a result of CEPSA s acquisition of TOTAL s distribution activities in Portugal, TOTAL LUBRIFIANTS S.A. (a subsidiary of TOTAL) and CEPSA PORTUGUESA have an agreement to distribute TOTAL s lubricant brands in Portugal.. IPIC Corporate CEPSA and IPIC have stakes of 50% each in CEPSA MAGHREB, a company which, through its 70% shareholding in PETROSUD, is involved in marketing energy products in Morocco. A.6 Shareholder Agreements reported to the Company that may affect it pursuant to what is set forth in Article 112 of the Securities Market Act CEPSA is unaware of the existence of any agreements among shareholders of the Company. State whether the Company is aware of any concerted actions among its shareholders. CEPSA is unaware of the existence of any concerted actions among its shareholders. In the event that any changes or termination of such agreements or concerted actions may have taken place, indicate this expressly. Not applicable. 88

89 CEPSA Legal Documents and Corporate Governance Report A.7 State whether there is any individual or corporation that exercises or may exercise control over the Company pursuant to Article 4 of the Securities Market Act. According to information received by the Company, in enforcement of the provisions of RD 1362/2007 of October 19th, no shareholder directly or indirectly meets the requirements exacted by Article 4 of Securities Market Act 24/1988 of July 28th, nor do any of them meet the conditions set forth under section 1 of Article 42 of the Code of Commerce. A.8 Treasury Stock Neither CEPSA nor any of the companies of the Group directly or indirectly purchased shares of Compañía Española de Petróleos, S.A. in 2009, nor did they own any such securities at year-end. At year-end.. Number of Direct Shares Number of Indirect Shares (*) Total % of Share Capital Breakdown of significant changes, pursuant to the provisions of RD 1362/2007, that took place in the year: Increase/(decrease) in treasury stock during the period 0 A.9 Terms and conditions of any authorizations granted by the Annual Meeting to the Board of Directors to undertake acquisitions and/or transfers of treasury stock CEPSA s Annual Meeting has not granted any powers to the Board of Directors to buy, sell or transfer treasury stock. A.10 Legal or bylaw restrictions on the use voting rights, as well as legal restrictions on the acquisition or transfer of holdings in the share capital. State whether there are legal restrictions on the use of voting rights. There are no legal or by-law restrictions on voting rights, nor are there any for acquiring or transferring shares in the Company, except as otherwise provided for by law. Nevertheless, Article 23 of the Company Bylaws states that right of admission to the Annual General Meeting, with the number of votes each shareholder is entitled to (one share, one vote), is reserved to those shareholders who can demonstrate ownership of a minimum of sixty (60) shares, at least five (5) days prior to the scheduled date of the Annual General Meeting on first call. 89

90 CEPSA Legal Documents and Corporate Governance Report A.11 State whether the Annual Meeting has adopted measures to neutralize public takeover bids, pursuant to Act 6/2007. The Annual Meeting of Shareholders of Compañía Española de Petróleos, S.A. has not passed any resolutions regarding the adoption of preventive measures to neutralize or thwart takeover bids, pursuant to Act 6/

91 CEPSA Legal Documents and Corporate Governance Report B. CORPORATE GOVERNANCE STRUCTURE B.1 Board of Directors B.1.1 Maximum and minimum number of Directors pursuant to the Company Bylaws Maximum number of directors 30 Minimum number of directors 10 B.1.2 Board of Directors The configuration of the Board of Directors at December 31, 2009 was as follows: Name of Company Position on the Date of First Date of Most Recent Election Name of Director He or She Represents Board Appointment Appointment Procedure D. Santiago Bergareche Busquet Independent Chairman Annual Meeting D. Michel Bénézit TOTAL, S.A. Vice Chairman Annual Meeting D. Khadem Al Qubaisi IPIC Vice Chairman Co-option D. Dominique de Riberolles Executive Chief Executive Officer Annual Meeting D. HRH Carlos de Borbón Independent Director Annual Meeting D. Bernadette Spinoy TOTAL, S.A. Director Annual Meeting D. José Manuel Otero Novas Independent Director Annual Meeting D. Murtadha Al Hashemi IPIC Director Annual Meeting D. Eric de Menten TOTAL, S.A. Director Annual Meeting D. Patrick Pouyanné TOTAL, S.A. Director Annual Meeting D. Saeed Al Mehairbi IPIC Director Annual Meeting D. Humbert de Wendel TOTAL, S.A. Director Annual Meeting D. David Forbes IPIC Director Co-option Total number of directors at December 31, Indicate the resignations/departures from the Board of Directors that took place during the year: Name of Director Type of Director at the Time of Resignation/Departure Date ofresignation/departure D. Pedro Lopez Jiménez Shareholder representative D. Fernando de Asúa Álvarez Shareholder representative D. Juan Rodriguez Inciarte Shareholder representative D. Alfredo Sáenz Abad Shareholder representative D. Ernesto Mata López Shareholder representative D. José Luis Leal Maldonado Independent D. Joël Vigneras Shareholder representative D. Jean-Luc Guiziou Shareholder representative

92 CEPSA Legal Documents and Corporate Governance Report B.1.3 Breakdown of the Board of Directors. Executive Directors: Name of Director Nominating Body Position in Organizational Structure of the Company D. Dominique de Riberolles Nomination and Compensation Committee Chief Executive Officer Total number of Executive Directors 1 % of total Board 7,692 Non-Executive Shareholder Representative Directors: Name of Significant Shareholder that He or Name of Director Nominating Body She Represents or that Nominated Him or Her D. Michel Bénézit Nomination and Compensation Committee TOTAL, S.A. D. Khadem Al Qubaisi Nomination and Compensation Committee IPIC Dña. Bernadette Spinoy Nomination and Compensation Committee TOTAL, S.A. D. Murtadha Al Hashemi Nomination and Compensation Committee IPIC D. Eric de Menten Nomination and Compensation Committee TOTAL, S.A. D. Patrick Pouyanné Nomination and Compensation Committee TOTAL, S.A. D. Saeed Al Mehairbi Nomination and Compensation Committee IPIC D. Humbert de Wendel Nomination and Compensation Committee TOTAL, S.A. D. David Forbes Nomination and Compensation Committee IPIC Total number of non-executive shareholder representative directors 9 % of total Board Independent Directors:: Name of Director Nominating Body Professional Background D. Santiago Bergareche Busquet Nomination and Compensation Committee Financial and economics expert HRH Carlos de Borbón-Dos Sicilias Nomination and Compensation Committee Financial expert D. José Manuel Otero Novas Nomination and Compensation Committee Legal expert Total number of independent directors 3 % of total Board State any changes, where applicable, that took place during the year in the classification of directors. No changes in the classification of directors took place in B.1.4 State the reasons, where applicable, for the appointment of shareholder representative directors at the request of shareholders whose ownership in the share capital is less than 5%. 92

93 CEPSA Legal Documents and Corporate Governance Report No shareholder representative directors were appointed at the request of shareholders whose ownership in the share capital of the Company is less than 5%. State whether the Board of Directors disregarded formal requests for Board presence made by shareholders whose ownership in the share capital is equal to or greater than others whose call for such presence was met with the appointment of shareholder representative directors. No requests of this kind were made. B.1.5 Indicate whether any director left his/her seat on the Board prior to the completion of his/her term, if the director explained the reasons thereof to the Board and through which channels, and, in the event that the director sent a letter of explanation to the entire Board, please state below at least the reasons that were given: Name of Director Reason for Departure D. Alfredo Sáenz Abad Sale of stake held by Banco Santander, on behalf of which this director served on the Board D. Fernando de Asúa Álvarez Sale of stake held by Banco Santander, on behalf of which this director served on the Board D. Juan Rodríguez Inciarte Sale of stake held by Banco Santander, on behalf of which this director served on the Board D. Ernesto Mata López Sale of stake held by Banco Santander, on behalf of which this director served on the Board D. Pedro López Jiménez Resignation from his position on the basis of which he was elected to serve on CEPSA s Board, and in fulfillment of the Resolution of February 11, 2009 handed down by the National Competition Commission regarding the Gas Natural/Unión Fenosa S.A. transaction and Article 26 of CEPSA s Board Rules and Regulations D. José Luis Leal Maldonado Change in the Company s shareholding structure. D. Joël Vigneras Reduction of the number of Board members representing TOTAL as a result of the reduction of the size of CEPSA s Board D. Jean-Luc Guiziou Reduction of the number of Board members representing TOTAL as a result of the reduction of the size of CEPSA s Board B.1.6 Indicate the powers, if any, delegated to the Chief Executive Officer(s). Name of Chief Executive Officer Brief Description D. Dominique de Riberolles Delegated powers include those set forth in the Company Bylaws, as well as other powers delegated by the Board that may be required to govern and represent the Company and to undertake transactions involving ownership, management, negotiation and engagement. B.1.7 Members of the Board of Directors that are likewise board members or executives of other companies that belong to the group of the listed company. Name of Director Name of Group Subsidiary Position D. Dominique de Riberolles CEPSA Química, S.A. Chairman CEPSA Gas Comercializadora, S.A. CEPSA Estaciones de Servicio, S.A. CEPSA Chimie Bécancour Petresa America, Inc. Interquisa Canada Inc. CEPSA Chimie Montréal Deten Química, S.A. Board member Chairman Chairman Board member Board member Chairman Chairman 93

94 CEPSA Legal Documents and Corporate Governance Report B.1.8 State the members of the Board of Directors of the Company who are also members of the Boards of Directors of other companies listed on official securities markets in Spain, apart from the Group, that have been notified to the Company. Name of Director Name of Listed Company Position D. Santiago Bergareche Grupo Ferrovial Vice Chairman GAMESA Corporación Tecnológica, S.A. VOCENTO, S.A. DINAMIA Capital Privado, Sociedad de Capital Riesgo, S.A. Director Director Chairman D. Dominique de Riberolles Compañía Logística de Hidrocarburos, CLH, S.A. Director HRH Carlos de Borbón - Dos Sicilias Reyal-Urbis, S.A. Director B.1.9 Rules established by the Company regarding the number of boards on which its Directors are allowed to serve. Article 30 of the Rules and Regulations of the Board of Directors states that: Directors who perform actions that may involve competition with the Company in its geographical area of business, or provide their professional services as a Director of companies whose total or partial purpose is similar to the Company s or that compete with it in a significant or steady manner, within the aforementioned geographical area, must disclose such actions or services to the Company. CEPSA does not have any explicit rules limiting the number of boards on which its Directors may serve. B.1.10 With reference to recommendation 8 of the Unified Code, state the general policies and strategies of the Company that the Board reserves to itself for plenary approval. Investment and funding policies Definition of the structure and organization of the Group of Companies Corporate Governance policies Corporate Social Responsibility policies The strategic business plan and annual management and budgetary targets Executive management compensation and performance appraisal policies Risk control and management policies, as well as the periodic monitoring of internal information and control systems Dividend payout and treasury stock policies, and in particular, their limits Yes Yes Yes Yes Yes Yes Yes Yes Yes No 94

95 CEPSA Legal Documents and Corporate Governance Report B.1.11 Fill in the following tables on the aggregate Directors compensation accrued during the year. A) IN CEPSA. Compensation Components Thousands of Euross Fixed pay 800 Variable pay 218 Attendance fees 288 Bylaw stipulated fees 3,603 Stock options and/or other financial instruments 0 Miscellaneous components 12 TOTAL 4,921 Other Benefits Thousands of Euross Advances 0 Loans granted 0 Pension schemes: contributions 13 Pension schemes: liabilities incurred 930 Life insurance premiums 0 Guarantees 0 TOTAL 943 B) FOR BELONGING TO THE BOARDS OF DIRECTORS AND/OR EXECUTIVE MANAGEMENT OF OTHER COMPANIES OF THE GROUP Compensation Components Thousands of Euross Fixed pay 0 Variable pay 0 Attendance fees 0 Bylaw stipulated fees 0 Stock options and/or other financial instruments 0 TOTAL 0 Other Benefits Thousands of Euros Advances 0 Loans granted 0 Pension schemes: contributions 0 Pension schemes: liabilities incurred 0 Life insurance premiums 0 Guarantees 0 TOTAL 0 95

96 CEPSA Legal Documents and Corporate Governance Report C) TOTAL COMPENSATION BY TYPES OF DIRECTORS: (Thousands of euros) Types of Directors CEPSA Other CEPSA Group companies Executive 1,309 0 Non-executive shareholder representative 2,882 0 Non-executive independent Other non-executive TOTAL 4,921 0 D) OUT OF NET INCOME ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT COMPANY: (Thousands of euros) Total Directors compensation 4,921 Total Directors compensation/consolidated net income attributable to shareholders of the parent company (in %) 1.31 B.1.12 IIdentify Senior Managers or Executive Officers who are not likewise Executive Directors of the Board and indicate the total compensation accrued to them during the year. Name Position D. Fernando Maravall Herrero Senior Vice President Exploration & Production, Natural Gas & Corporate Management *D.Pedro Miró Roig Senior Vice President Corporate Technical Division D. Fernando Iturrieta Gil Senior Vice President Petrochemicals D. Juan Rodríguez Fidalgo Senior Vice President Human Resources, Legal Affairs & Property Asset Management D. José E. Aranguren Escobar Senior Vice President Strategy & Control D. Miguel de Mármol Senior Vice President Commercial Operations D. Federico Bonet Pla Vice President Specialties D. Luis Calderón Castro Vice President Communications & Institutional Relations D. Francisco Calderón Pareja Vice President Marketing Motor and Other Fuels D. Iñigo Diaz de Espada Soriano Vice President Supply & Trading D. José Maria García Aguado Vice President Refining D. Jaime Berbés Paronella Vice President Technology D. Federico Molina Félix Vice President Operations CEPSA Química D. Carlos Navarro Navarro Vice President Commercial Planning & Distribution D. Luis Travesedo Loring Vice President Exploration & Production * Ignacio Gómez Martínez held the position of SVP of the Corporate Technical Division until his retirement on April 18, 2009 Total compensation of Executive Managers (in thousands of euros) 7,300 96

97 CEPSA Legal Documents and Corporate Governance Report B.1.13 Provide an itemized list of the Guarantee or golden parachute clauses for senior managers, including executive directors, of the Company or its Group, that cover possible dismissals or changes in control. State whether these contracts have to be reported and/or approved by the Company or Group s governing bodies. There are no clauses of this kind in effect in the Company. However, all the senior managers, including the executive directors on the Board, are guaranteed that, in the event of dismissal, they will be entitled to the same severance payment system that they would have had in the case of coming under the collective labor agreement. Number of beneficiaries of the aforementioned clauses 10 Board of Directors Annual Meeting Body authorizing these clauses Yes No Is the Annual Meeting informed of such clauses? No B.1.14 Explain the process to determine compensation for members of the Board of Directors, and where applicable, the relevant clauses contained in the Company Bylaws. Compensation for Board members is determined based on the proposal made by the Nomination and Compensation Committee. Article 29 of the Board Rules and Regulations states that: Directors compensation shall be governed by provisions set forth in the Company s By-laws and laws in force. Article 51 of the Bylaws sets forth that The Company s earnings shall be determined according to the after-tax results recorded in the yearly Financial Statements duly approved by the Annual General Meeting of Shareholders. Such cash earnings shall be assigned annually as follows: 1ª) To cover the obligatory assignments to legal reserves and, where appropriate, voluntary reserves that may have been established. 2ª) To distribute an initial dividend to the shareholders. 3ª) To award compensation for the performance of their associated duties to the members of the Board of Directors by virtue of their appointment as Board members either by the Annual Meeting or by the Board itself through the system of co-option. Compensation referred to in the foregoing section shall be paid based on a profit-sharing system and as a bylaw stipulated fee. This payment shall be made up of two components: a) a yearly fee or retainer and b) attendance fees. Attendance fees shall be paid in advance and charged to the year s profits. The specific amount assigned for the aforementioned components to each Board member shall be determined by the Board of Directors. For such purposes, the duties performed by each Director on the Board per se and his or her membership on the various sub-committees and attendance of their respective meetings shall be taken into account. 97

98 CEPSA Legal Documents and Corporate Governance Report The aggregate annual amount of the compensation referred to in this section shall be equivalent to 2 percent of the Company s yearly profits, although the Board itself may renounce such compensation partially or in full whenever it deems it appropriate. Notwithstanding the above, Directors shall also be entitled to receive other compensation (salaries, incentives, bonuses, pension plans, insurance and severance payments), following the corresponding proposal by the Nomination and Compensation Committee and by resolution of the Board of Directors, which may be considered reasonable for the performance of other duties in the Company, apart from the oversight and decision-making responsibilities performed as rank-and-file members of the Board. 4ª) The remainder, if any, may be assigned by the Annual Meeting of Shareholders, as proposed by the Board, to increase the dividend to be paid to the shareholders, establish free reserves and/or for other purposes in the best interest of the Company. State whether the Board, in a plenary session, has reserved itself the right to approve the following decisions: Upon proposal of the CEO, the appointment and possible dismissal of senior managers, as well as their severance conditions. Directors compensation, as well as, in the case of Executive Directors, any additional payments for their executive duties and other terms and conditions to be included in their contracts. Yes Yes Yes No B.1.15 State whether the Board of Directors approves a detailed compensation policy and explain what decisions it makes in this regard. Breakdown, where applicable, of the fixed components of attendance fees for members of the Board and their sub-committees and an estimate of the overall yearly fixed pay arising out of these items Variable pay components Main features of pension and annuity systems, with an estimate of their yearly amount or cost Conditions that must by honored in the contracts of those persons who exercise executive management duties such as executive directors Yes Yes Yes Yesi B.1.16 State whether the Board submits a report on the compensation policy for directors to the Annual Meeting for a consultative vote. If so, explain the aspects of the report on the compensation policy approved by the Board for future years, the most significant changes in this policy compared to the policy applied during the year and an overall summary of how the compensation policy was applied during the year. Describe the role of the Compensation Committee and, if external advisors were engaged, the identity of such consultants. No. Were external advisors used? No 98

99 CEPSA Legal Documents and Corporate Governance Report B.1.17 Members of the Board of Directors of the Company that are likewise members of the Boards of Directors or Senior Managers of companies that have significant shareholdings in the listed Company and/or entities of your Group. Name of Significant Name of Director Shareholder Position D. Michel Bénézit TOTAL, S.A. Executive Committee member; President - Refining & Marketing Dña. Bernadette Spinoy TOTAL,S.A. Senior Vice President Styrenics Logistics procurement of polymers D. Murtadha Al Hashmi IPIC Finance Division Manager D. Eric de Menten TOTAL, S.A. Senior Vice President - Marketing Europe D. Patrick Pouyanné TOTAL, S.A. Senior Vice President Strategy, Business Development and R&D E&P D. Saeed Al Mehairbi IPIC Manager - Project Management Division D. Humbert de Wendel TOTAL, S.A. Senior Vice President - Corporate Development, Finance Division D. Khadem Al Qubaisi IPIC Managing Director D. David Forbes IPIC Strategy Director Provide a detailed explanation, where applicable, of significant affiliations or relationships apart from those addressed in the foregoing section, that link Board members to significant shareholders and/or entities of your group. No affiliations other than those listed above exist between significant shareholders and/or entities of the CEPSA Group. B.1.18 Modifications introduced during the year in the Rules and Regulations of the Board of Directors. No changes were made in the year to the Board Rules and Regulations. B.1.19 Procedures for appointing, re-electing, evaluating and removing Directors. List the competent bodies, procedures and formalities to be followed and criteria used in each of these procedures. Pursuant to Article 33 of the Company Bylaws and Article 23 of the Board Rules and Regulations, Directors are appointed, ratified, re-elected or removed from office by the Annual Meeting. Without prejudice to the application of the provisions included under Article 137 of the amended Companies Act regarding the appointment of Directors according to the system of proportional representation, proposals to appoint, re-elect and remove Directors submitted by the Board of Directors to the Annual Meeting and the resolutions to coopt directors to be adopted by the Board, shall first be formulated, studied and approved by the Nomination and Compensation Committee (Article 18 of the Board Rules and Regulations). Directors shall be elected for a period of five (5) years. At the end of their term, the Directors may be re-elected once or more times by the Annual Meeting; each of these re-elections shall grant the Director a new term, which shall not exceed five (5) years. (Article 34 of the Company Bylaws and Article 25 of the Board Rules and Regulations). 99

100 CEPSA Legal Documents and Corporate Governance Report Being a shareholder of the Company is not a pre-requisite for being elected to the Board of Directors (Article 33 of the Company Bylaws and Article 24 of the Board Rules and Regulations). There are no procedures in place for the evaluation of Directors performance. B.1.20 State the circumstances under which Directors are required to resign. Directors shall resign from their seats on the Board whenever, at the end of their term, they have not been reelected by the first Annual Meeting, whether Ordinary or Extraordinary, held immediately thereafter or whenever determined by the Annual Meeting using the powers legally conferred to it by applicable legislation or by the Company Bylaws. Likewise, pursuant to the provisions of Article 26 of the Rules and Regulations of the Board of Directors, Directors must relinquish their seats to the Board and tender, if this body deems it advisable, the corresponding resignation in the following cases: In the event that they resign from the executive position with which their appointment is connected. In the event that they are involved in any of the cases of incompatibility or prohibition legally provided for. In the event that they are convicted for a criminal offense. B.1.21 Explain whether the duties of chief executive of the Company are held by the Board s Chairperson. Where applicable, state the measures taken to limit the risks involved in having the offices of Chairperson and Chief Executive Officer held by the same person. The Chairman of the Board is an Independent Director. The duties of chief executive of the Company are held by the Chief Executive Officer (Executive Director) and not by the Chairman of the Board. State and, where appropriate, explain whether there are rules allowing one of the independent directors to be able to summon a Board meeting or include new items on the agenda so as to coordinate and voice the concerns of nonexecutive directors and to direct their development by the Board of Directors. Although no specific rules have been established in this regard, since the Chairman is one of the Independent Directors, he is entitled, according to the Bylaws, to summon Board meetings, determine the items on the agenda of such meetings and lead discussions within the Board. B.1.22 Are qualified or enhanced majorities, other than the legally-required majorities, needed for certain types of decisions? No. B.1.23 Explain whether there are specific requirements, apart from those required for Directors, for being appointed Chairperson. No. B.1.24 State whether the Chairperson has a casting vote. Article 44 of the Company Bylaws stipulates that the resolutions of the Board of Directors must be adopted by an absolute majority and in cases of a tie, the Chairperson shall have the casting vote. 100

101 CEPSA Legal Documents and Corporate Governance Report B.1.25 State whether the Bylaws of Board Rules and Regulations establish any age limits for Directors No. B.1.26 State whether the Bylaws or Board Rules and Regulations establish limits to the terms of office for Independent Directors. No. B.1.27 In the case of few or no female Directors, explain the reasons thereof and the initiatives adopted to remedy the situation. Currently, the percentage of female members out of total members of the Board of Directors is 7.7%. CEPSA does not have any special mechanisms to encourage the selection of its Board members based on gender. Directors are appointed by the Board as proposed by the shareholders of the Company, based on their professional profile, regardless of gender. In particular, state whether the Nomination and Compensation Committee has established any procedures to ensure that the selection of candidates does not contain any hidden biases against female directors and deliberately seek candidates meeting the required profile. No. B.1.28 State whether there are formal procedures for proxy authorizations and voting at Board meetings. Provide a brief explanation, where applicable. According to Article 43 of the Company Bylaws, all Directors may grant proxy authorizations to other attending Board members to represent them at Board meetings, specifying this in writing for each meeting called. No attending Director may hold more than three (3) proxy authorizations. B.1.29 State the number of Board Meetings held in the year. Likewise, indicate, where applicable, how many times the Board met during the year in absence of the Chairperson. Number of meetings of the Board of Directors 10 Number of meetings of the Board of Directors in absence of the Chairperson 0 Number of meetings of the Board sub-committees held in the year. Number of Audit Committee meetings 5 Number of Nomination and Compensation Committee meetings 3 101

102 CEPSA Legal Documents and Corporate Governance Report B.1.30 State the number of Board meetings held in the year without the attendance of all of its members. This calculation should take into account proxies authorized without specific instructions. Number of non-attendances by Directors during the year 1 % of non-attendances out of total votes during the year 0.6% B.1.31 State whether the individual and consolidated financial statements that are presented for the approval of the Board are certified beforehand. Yes. : Where applicable, identify the person(s) who has (have) certified the individual and consolidated financial statements of the Company to be filed by the Board. Name Position D. Dominique de Riberolles Chief Executive Officer D. José E. Aranguren Escobar Senior Vice President of Strategy & Control B.1.32 Established mechanisms, if any, to prevent individual or consolidated financial statements approved by the Board from being presented to the Annual Meeting with a qualified auditors report. CEPSA publishes, together with its individual and consolidated financial statements for the year, the letters of opinion from the independent auditors. Taking the last twelve years as a reference, the reports issued by the independent auditors contained no limitations of scope, qualifications or reservations whatsoever. B.1.33 Is the Corporate Secretary also a Director on the Board? No. B.1.34 Explain the appointment and removal procedures for the Secretary of the Board, indicating whether his/her appointment or removal is notified by the Nominations Committee and approved by the Board in a plenary meeting. Appointment and Removal Procedure No specific procedure has been established. Article 39 of the Company Bylaws nonetheless sets forth that the Board shall also appoint a Secretary and, if appropriate, one or more Vice Secretaries, who shall substitute the former in his or her absence or inability to act. The Secretary as well as the Vice Secretary or Secretaries may or may not be Directors, and therefore, are not required to be Company shareholders. Does the Nominations Committee report on the appointment? Does the Nominations Committee report on the removal? Is the Board required to approve the appointment in a plenary meeting? Is the Board required to approve the removal? Yes Yes Yes Yes 102

103 CEPSA Legal Documents and Corporate Governance Report Is it the Corporate Secretary s duty to take special care in overseeing that corporate governance recommendations are fulfilled? Yes. According to Article 13 of the Board Rules and Regulations, the Secretary shall devote particular attention to the formal and material legality of the Board s actions and ensure that its governing rules and procedures are observed and regularly reviewed. B.1.35 Indicate, where applicable, whether there are any mechanisms established by the Company to safeguard the independence of auditors, financial analysts, investment banks and rating agencies. Article 47 of the Bylaws grants the following powers and duties to the Audit Committee: To handle dealings with independent auditors to receive information on such matters that may jeopardize their independence. B.1.36 State whether the Company has changed its independent auditing firm during the year. Where applicable, identify the incoming and outgoing auditors. The Company did not change its independent auditors in If there were any discrepancies with the outgoing auditors, please explain what they involved. Not applicable. B.1.37 State whether the firm of auditors provides any non-audit services to the Company and/or Consolidated Group, and if so, state the amount of fees for such work and the percentage it represents of total fees invoiced to the Company and/or Group. Yes. Company roup Total Fees for non-audit services (thousands of euros) Fees for non-audit services/total amount invoiced by the auditing firm (in %) 5% 5% 5% B.1.38 State whether the report from the auditors on the financial statements has any reservations or qualifications. If so, indicate the reasons provided by the Chairperson of the Audit Committee to explain the content and scope of such reservations and qualifications. The report from the independent auditors on the 2009 financial statements was issued with no reservations or qualifications whatsoever. B.1.39 Indicate the number of consecutive years that the current auditing firm has conducted audits of the financial statements of the Company and/or its Group. Also state the percentage represented by the number of years audited by the current auditing firm out of the total number of years in which the financial statements were audited. The information provided below refers to the fiscal years from 1989 (Act 19/1988 of July 12th on Accounts Auditing, states in its First Additional Provision that it is mandatory for independent audits to be conducted on the financial 103

104 CEPSA Legal Documents and Corporate Governance Report statements of companies that, meeting certain requisites - one of which is to be a listed company begin their fiscal years subsequent to the aforementioned date) up to 2009, inclusive. Company Group Number of consecutive years Company Number of years audited by the current auditing firm/number of years that the Company has been audited (in %) 90,9 90,9 Groupo B.1.40 Indicate significant shareholdings of members of the Board of Directors of the Company in the capital of entities that have the same, similar or complementary type of activity as that of the Company or its Group, and that have been reported to the Company. Likewise, state the positions held or functions performed in such entities. Name of Director Company % of Holding Position D. Michel Bénézit TOTAL, S.A. Less than 0.01 Executive Committee member and President Refining & Marketing D. Humbert de Wendel TOTAL, S.A. Less than 0.01 Senior Vice President Corporate Development, Finance Division D. Patrick Pouyanné TOTAL, S.A. Less than 0.01 Senior Vice President Strategy, Business Development and R&D E&P D. Eric de Menten TOTAL, S.A. Less than 0.01 Senior Vice President - Marketing Europe Dña. Bernadette Spinoy TOTAL, S.A. Less than 0.01 Senior Vice President Styrenics Logistics procurement of polymers B.1.41State whether a procedure exists for Directors to be provided with outside counsel or expert assistance. No. B.1.42 State, and where applicable, provide details, on the existence of procedures for Directors to be provided with the necessary information beforehand to prepare the meetings of governing bodies with sufficient time. Prior to each Board meeting, the members receive a detailed report related to the economic-financial data and activities of the Company and its Consolidated Group as well as other reports on investments and significant matters in connection with the progress of the Company and its Group. The Chairmen of the Board sub-committees present the most significant matters dealt with at the meetings of the these bodies to the Board of Directors for their discussion and eventual adoption of resolutions, where applicable. B.1.43 State and, where applicable, provide details on whether the Company has established rules or procedures that require Directors to notify and, where appropriate, resign in cases in which they may damage or undermine the standing, credibility and reputation of the Company. Yes. 104

105 CEPSA Legal Documents and Corporate Governance Report Specifically, Article 37 of the Company Bylaws states that the duties of the office of Director must be performed with the diligence of a respectable businessman and loyal representative or fiduciary. Furthermore, Article 26 of the Board Rules and Regulations states as follows: Notwithstanding what is provided for by law, the Directors must relinquish their seats to the Board and formalize, if this body deems it advisable, the corresponding resignation in the following cases: In the event that they resign from the executive position with which their appointment is connected. In the event that they are involved in any of the cases of incompatibility or prohibition legally provided for. In the event that they are convicted for a criminal offense. B.1.44 State whether any of the Board members has notified the Company of being involved in a lawsuit or if any court proceedings have been filed against him or her for any of the offences listed in Article 124 of the Companies Act. No Indicate whether the Board of Directors has analyzed the case. If so, explain the grounds for the decision reached on whether or not the Director should remain on the Board. No. B.2 Board Committees. B.2.1 List all the Board committees and their members. Audit Committee: Name Position Type of Director D. Saeed Al Mehairbi Member Non-Executive Shareholder Representative D. Humbert de Wendel Member Non-Executive Shareholder Representative Nomination and Compensation Committee: Name Position Type of Director D. Santiago Bergareche Busquet Chairman Independent D. Michel Bénézit Member Non-Executive Shareholder Representative D. Khadem Al Qubaisi Member Non-Executive Shareholder Representative 105

106 CEPSA Legal Documents and Corporate Governance Report B.2.2 State whether the following duties and responsibilities are assigned to the Audit Committee: To supervise the preparation and integrity of the financial information for the Company, and, where applicable, its group of companies, reviewing compliance with regulatory requirements and legal provisions, the scope of the consolidation perimeter and the correct application of accounting principles. To periodically review the internal control and risk management systems so that key risks can be properly pinpointed, managed and reported on. To ensure the independence and efficacy of internal audit; propose the selection, appointment, re-appointment and, where applicable, removal of the internal audit manager; propose a budget for the internal audit service; receive periodic information on its activities; and ensure that senior management is aware of the conclusions and recommendations contained in such reports. To establish and supervise a mechanism that allows employees to confidentially, and if considered appropriate, anonymously report any irregularities they notice within the Company that may be of potential importance, especially financial and accounting irregularities. To submit to the Board proposals for selection, appointment, re-appointment and replacement of the independent auditors and the terms and conditions of their engagement. To regularly receive information from the independent auditors on the audit plan and the progress and outcome of its execution, verifying that senior management is duly aware of its recommendations. To ensure the independence of the externally-hired auditing firm. In the case of groups of companies, to help the group auditors take charge of the audits of the companies belonging to the group.. Yes Sí Sí Sí Sí Sí Sí Sí No No B.2.3 Describe the rules of organization and procedure, as well as duties and responsibilities, assigned to each of the Board committees. The Audit Committee meets at least on a quarterly basis to deal with matters coming under its authority: to report, at the Annual Meeting of Shareholders, on any matters that may properly be brought before such Meeting in connection with its duties and responsibilities; to propose to the Board of Directors, for approval of the Annual Meeting, the appointment of Independent Auditors, their contractual conditions, the scope and extent of their professional duties, where appropriate, the cancellation or renewal of their term; to supervise the internal auditing services of the Company; to oversee the financial information processes and internal control systems of the company; to handle dealings with independent auditors to receive information on such matters that may jeopardize their independence and any other matters related to the process of auditing the financial statements, as well as any other notifications provided for in account auditing legislation and technical auditing standards; to oversee compliance with laws and regulations regarding financial information and ensure that the quarterly financial statements of the parent company CEPSA and the CEPSA Group reported to the Board of Directors are consistent with the communication released to markets; to report to the Board of Directors on the performance and results of their work; and, generally speaking, to examine and study any activity or matter that the Board of Directors may determine to be related to the above. The Nomination and Compensation Committee, on the other hand, does not meet on a regular basis, given that its functions do not require it to do so. In all cases, advance notices are sent to convene the meetings of these Committees, accompanied by their respective agendas, and where applicable, the documents required to discuss certain matters. Its duties are to provide information and formulate proposals and recommendations regarding nominations, reelections, removals and compensation of members of the Board of Directors, as well as on the general compensation and incentive policies for Board members and Senior Managers of the Company, and to formulate reports and proposals to the Board on the decisions to be adopted in the event of a conflict of interest. 106

107 CEPSA Legal Documents and Corporate Governance Report B.2.4 Indicate the powers assigned to each committee to make recommendations, issue opinions and, where applicable, delegate powers. Name of Committee Audit Committee Nomination and Compensation Committee Brief Description The powers assigned to this Committee are set out in section B.2.3 The powers assigned to this Committee are set out in section B.2.3 B.2.5 Indique, en su caso, la existencia de regulación de las Comisiones del Consejo, el lugar en que están disponibles para su consulta, y las modificaciones que se hayan realizado durante el ejercicio. A su vez, se indicará si de forma voluntaria se ha elaborado algún informe anual sobre las actividades de cada Comisión Indicate, where applicable, if there are any rules and regulations for the Board Committees, where they are available for consultation and any changes or amendments made during the year. Likewise indicate whether an annual report on the activities of each Committee has been prepared on a voluntary basis. All of these documents are available through CEPSA s Shareholder Service Office, Avenida del Partenón, 12, Madrid, at the toll-free telephone number , at the address [email protected] or through the Company s website at: CEPSA prepares an annual report on the activities of the Audit Committee. B.2.6 State whether the composition of the Executive Committee reflects the proportions of the different types of Directors on the Board. Not applicable. 107

108 CEPSA Legal Documents and Corporate Governance Report C. RELATED-PARTY TRANSACTIONS C.1 State whether the Board, in a plenary session, has reserved itself powers to approve, based on a favorable report from the Audit Committee or any other entrusted with such a task, the transactions in which the Company engages with its directors, significant shareholders or shareholders with Board representation, or parties related to them: Yes. C.2. Provide a breakdown of the relevant transactions made during the year that involve a transfer of resources or obligations between companies or entities of the Group and the Company s significant shareholders. Name of Significant Group Nature of Type of Shareholder Company Relationship Transaction Amount Receipt of services Banco Santander, S.A. (1) Grupo CEPSA. Commercial and financial expenses 7,364 Banco Santander, S.A. (1) Grupo CEPSA Commercial Financial income 4,947 Dividends and other Banco Santander, S.A. (1) Grupo CEPSA Corporate distributed profits 50,870 Purchase of goods TOTAL, S.A. Grupo CEPSA Commercial (completed or in progress) 659,200 Dividends and other TOTAL, S.A. Grupo CEPSA. Corporate distributed profits 130,668 Sale of goods (completed TOTAL, S.A. Grupo CEPSA. Commercial or in progress) 181,721 International Petroleum Dividends and other Investment Company Grupo CEPSA Corporate distributed profits 65,679 Purchase of goods (completed Unión Fenosa, S.A. (1) Grupo CEPSA. Commercial or in progress) 26,535 Sale of goods (completed Unión Fenosa, S.A. (1) Grupo CEPSA. Commercial or in progress) 6,701 Dividends and other Unión Fenosa, S.A. (1) Grupo CEPSA. Corporate distributed profits 8,027 (1) During the period these entities were considered related parties, due to their significant shareholdings in the Company. 108

109 CEPSA Legal Documents and Corporate Governance Report C.3 Provide a breakdown of the relevant transactions involving a transfer of resources or obligations between the Company or entities of its Group, and the Directors or Senior Managers of the Company. None. C.4 Provide a breakdown of the relevant transactions made by the Company with other companies belonging to its same Group provided they are not eliminated in the process of consolidation and are not part of the Company s routine business. None. C.5 C.5. Indicate whether any Directors were involved in any conflicts of interests during the year, as defined in Article of the Companies Act. None. C.6 List the mechanisms established to identify, determine and settle possible conflicts of interests between the Company and/or its Group and its Directors, Executive Managers or significant shareholders. Article 31 of the Board Rules and Regulations states accordingly that: Directors who accept any executive position in another company or entity that may pose a conflict of interest shall inform the Board of Directors through its Chairperson. The Directors shall refrain from participating in debates that involve matters in which they have a personal interest, either directly or indirectly. Personal interest shall also be understood to mean when the matter affects a member of the Director s family or a company controlled by the Director; personal interest shall not be understood to mean instances in which the matter affects the company that is a shareholder of the Company for whom the Director was named or group of companies to which such shareholder may pertain. No Director shall be able to personally undertake commercial operations with the Company, nor may he or she guarantee any operations that are arranged between the Company and third parties. He or she may, however, jointly engage in such operations with the Company vis-à-vis third parties and also take part in company operations. Directors who directly or indirectly engage in professional transactions that may involve a conflict of interest must notify the Board of Directors." C7 Is more than one company of the Group listed on Spain s Stock Exchanges? No. 109

110 CEPSA Legal Documents and Corporate Governance Report D. RISK-CONTROL SYSTEMS D.1 Describe the general risk policies of the Company and/or Group, listing and evaluating the risks covered by the system, along with an explanation of the extent to which such systems are tailored to the profile of each type of risk. The CEPSA Group s activities are exposed to a series of external risks and factors that can affect the way operations are conducted and the results obtained thereof. These activities are managed through the implementation of policies that primarily seek to optimize the ratio between costs and covered risks, consistent with the strategy established by the Group s Executive Management. As part of the planning and budgetary processes, the effects of business risks are assessed and a sensitivity analysis is made for key variables, in order to have a complete and comprehensive view of their impact on the Group. Each year, CEPSA publishes a Corporate Responsibility Report that contains, among other matters, a broad and detailed description of the actions carried out by the CEPSA Group in social, economic and environmental areas and its contribution to sustainable development throughout the year. The 2008 Report was prepared following the G3 Guidelines of the Global Reporting Initiative (GRI). D.2. Indicate whether any of the different types of risks facing the company and/or its Group (operational, technological, financial, legal, reputational, tax, etc) have materialized during the year. No material asset or equity losses occurred during the year. On the other hand, trends in doubtful trade debts improved from the previous year and the appropriate allowances were made in this connection. The implementation of ongoing improvements in risk control systems is enabling the Company to steadily reduce the frequency of accidents, particularly in the area of occupational safety, and noteworthy is that the frequency rate (number of lost-workday injuries for each million hours worked) fell from 4.65 in 2008 to 3.59 in 2009, meaning a year-on-year decline of more than 22%. D.3. Indicate whether there is any committee or other governing body in charge of establishing and supervising control mechanisms. Yes. If so, provide an explanation of its duties and functions. Name of committee or body: The Board of Directors through the Audit Committee, the Chief Executive Officer as well as the Executive Managers of the different business divisions, regularly supervise and control risks, and adapt, wherever feasible, their profile to prevailing circumstances. In the area of Environmental Affairs, Safety and Quality, CEPSA s PA.S.CAL (Environmental Protection, Safety and Quality) Committee s basic function involves the periodic review of the CEPSA Group s 110

111 CEPSA Legal Documents and Corporate Governance Report environmental, occupational health and safety and quality management and its associated risks, proposing any needed changes or adjustments. In the area of Information Security, there is a Corporate Security Committee whose aim is to monitor and oversee implementation of information security measures. Description of duties and functions: The CEPSA Group has established risk control systems that may affect the development of the Company s investments and activities and which are consistent with the Group s risk profile. The key risks encompassed in the Control System are as follows: Property & casualty risks: The CEPSA Group is insured against risks involving material damages, including machinery failures and the control of crude exploration and production wells; injuries to workers from occupational accidents; loss of profit stemming from material damages; civil liability, both for the companies of the CEPSA Group as well as their employees and advisors in performing their jobs and arising from material damages or personal injuries either to third parties or to company personnel as a result of occupational accidents; and loss or damage in the transportation of crude oil, products and equipment. Customer credit risks: The CEPSA Group has established a commercial credit and collection management policy, regulated through its Internal Standards and Procedures that are periodically updated, which include determining commercial credit limits for each customer; establishing the appropriate collection instruments; laying out procedures to follow in case of defaults; and monitoring and controlling assigned credit limits. Furthermore, computerized risk analysis systems are used to globally manage and automate internal and external data, evaluating them by applying models established for classifying each customer s commercial credit risk and the assignment of their credit limit. Notwithstanding the above, insurance policies have been arranged to cover the risk of customer payment defaults in certain commercial areas. Financial, exchange and interest rate risk: The Group s activities, to varying degrees, are exposed to risks stemming from movements on financial markets. The Company strives to maintain a sound financial and equity position and the appropriate risk controls to be able to successfully overcome challenging or shifting scenarios in the oil industry and global marketplace, and particularly to have the funds available to capitalize on future developments and attractive new business opportunities that will provide a springboard and momentum for further growth and yield significant long-term, sustainable value for its shareholders. The Group s businesses are, to a large extent, sensitive to fluctuations in the exchange rate between the euro and the US dollar, which is the currency in which most crude oil and petroleum and chemical products are priced. The Group strives to minimize the impact of this exchange risk on commercial transactions carried out. From an operational point of view, the Company centralizes and manages exchange risk from the net overall cash flow position in foreign currencies of all the Group s companies. 111

112 CEPSA Legal Documents and Corporate Governance Report The arrangement of financing options and risk hedging instruments, as well as the investment of surplus funds, are also centralized in the Group. In the case of foreign investments in fixed assets which generate future cash flow in foreign currencies, the Group seeks to minimize its exchange risk exposure by financing these capital expenditures in the same functional currency. In other words, its debt in foreign currencies to some extent covers the exchange risk exposure it has from cash flow generated by these assets. The Company s activities are also sensitive to interest rate fluctuations. As a result, the Group has arranged most of its financial debt at a floating rate, bearing in mind its currently low debt ratio, the stable environment for interest rates in euros and the fact that it considers that this financing model will entail a lower cost over the long run. In order to manage liquidity risks, the CEPSA Group maintains credit facilities and surplus cash to ensure it will be able to handle its current financial liabilities and meet any funding needs that may arise. The CEPSA Group works with leading and highly-reputable Spanish and international financial entities, although it additionally analyzes the counterpart risk of negotiating investments and financial instruments. Industrial risks, prevention and safety: The CEPSA Group has a safety management system as stated in its Risk Prevention Manual and Basic Regulations, pursuant to international OHSAS standards. Likewise, it has established procedures to follow, reflecting industry-wide, generally-accepted best practices, that guarantee the highest possible levels of safety, paying special attention to the elimination of risks at source. The system in place is aimed at ongoing improvement in risk reduction, relying on a number of activities, such as work planning, analysis and monitoring of remedial actions related to incidents and accidents, internal auditing, routine inspections of facilities and supervision of maintenance and operational work. Environmental risks: Some of the CEPSA Group s operations generate impacts on the environment, such as those related to emissions of air pollutants and discharges into waterways, soil and groundwater as well as during the production and disposal of wastes. Since 2007, these impacts have been regulated by the IPPC (Integrated Pollution Prevention and Control) Directive, which has been transposed into Spanish legislation by Act 16/2002. Accordingly, all of the CEPSA Group s major industrial facilities have been awarded Integrated Environmental Authorizations which entail rigorous control over its processes with the aim of minimizing environmental impacts. Notwithstanding the above, one of CEPSA s key priorities throughout the years has been to conduct its industrial operations in a safe and environmentally-friendly manner, as reflected in its internal Environmental Protection policy and governed by its Basic Environmental Rules and Regulations. In short, measures adopted to minimize environmental impacts, by categories, are the following: Air emissions Internal procedures are applied to manage and control impacts and control networks have been put into place for both inmissions and emissions, using measuring stations whose data are reported to the authorities in real time. 112

113 CEPSA Legal Documents and Corporate Governance Report Water discharges Industrial effluent treatment plants have been deployed at all industrial sites to control water discharges, thereby considerably minimizing their impact. As in the case of air emissions, data on industrial effluent parameters are provided to the authorities in real time; and measures are implemented to control the receptor body, both as regards waters and sediments. Soils/Groundwater All of the Group s industrial plants have piezometer networks to allow ongoing monitoring of the condition of soils and groundwater, enabling a rapid response to any possible incidents and as a result, minimizing their impacts. Wastes CEPSA has established a preventive policy with regard to the production of wastes which encourages the reduction, reuse, recycling and recovery of wastes in order to enhance environmental protection and the safety and health of surrounding communities. Accidental Marine Pollution Measures are put into effect to comply with the provisions contained in Internal Contingency Plans for Marine Pollution Accidents (PICCMA) and in internal procedures to prevent and control this type of pollution. Steps are taken to improve the operational capabilities of Maritime Terminals and Facilities, minimizing risks inherent in their activities. Crude oil exploration & production In its upstream operations in Algeria, Colombia, Egypt and Peru, the CEPSA Group applies stringent environmental principles, guidelines and strategies to minimize the impact of its activities and ensure utmost respect to the environment and the surrounding indigenous communities where it conducts its businesses. Since 1995, CEPSA has been proactively working on the analysis and assessment of environmental risks stemming from its activities in order to ensure their effective management and control, reducing possible incidents that may lead to significant impacts on the environment and its biodiversity. In this respect, these tests and reviews were conducted at the Group s various plants and sites, all of which are compliant with UNE :2008 standards on Environmental Risk Analysis and Assessment, the benchmark standard in Spain. Additionally, all of the CEPSA Group s major industrial facilities have environmental management systems certified by independent accrediting agencies. One of its key priorities at this time is to complete the certification of the few remaining activities that are still not in possession of this accreditation. The CEPSA Group may be a party to claims or litigation in connection with environmental damages caused by its activities both within and outside its sites and facilities. Although future costs are indeterminable, based on currentlyavailable knowledge, Management feels that these contingencies are adequately covered with the accounting provisions created for such purposes and different kinds of liability insurance policies. Depending on future legislation in this regard, the specific amounts of the financial guarantee that may arise as a result of the enforcement of the regulations under the Environmental Responsibility Law in certain Group facilities have yet to be determined. The amounts covered by the financial guarantees will be specified as soon as the provisions of the law and the rules and regulations of environmental responsibility are developed. Additionally, a number of the Group s productive facilities are required to comply with regulations that affect greenhouse gas emissions. Both in 2008 and 2009, emissions from all the plants and units affected by this legislation, and which have been verified by AENOR, were slightly lower than the volume of emission allowances assigned in the National Allocation Plan. 113

114 CEPSA Legal Documents and Corporate Governance Report Market risks: The very nature of the businesses engaged in by the CEPSA Group involves a certain degree of sensitivity to prevailing trends and volatility in oil and gas prices and refining and marketing margins. Accordingly, the Group s high level of vertical integration, strengthened in recent years, is one tool that can enable the Company to counteract and, if possible, override the cyclicality of the oil industry and ease the effects this can have on one or another of the Group s different segments or areas. For instance, an increase in crude oil prices has a positive impact on upstream earnings, even though the extent of this effect can be limited by the application of contractual terms and conditions under Production-Sharing Contracts (PSC) and their constraints on the amount of crude available for sale. Fluctuations in the price of crude oil can likewise have an effect on refining and marketing operations, the dimensions of which are mostly determined by how swiftly these price changes can be passed along to international and local finished product markets. As regards risks associated with price trends for crude oil and products on global markets, the CEPSA Group maintains and operates a comprehensive hedging system that insures it against the impact of price volatility and crude and product inventory variations as compared to a previously-defined level of inventory that is reviewed on a yearly basis covering the minimum strategic stock and operating requirements. These variations are hedged on the Brent IPE futures market, with forward sales offsetting surplus volumes of targeted inventory, and forward purchases offsetting volumes that stand below the targeted inventory. Risks Related to Changes and Developments in Regulations Applicable to Petroleum-related Activities and/or the Oil Industry The Group s businesses both in Spain and abroad are subject to a wide variety of laws and regulations. Any changes that may arise can affect these activities both in their structure and their earnings and results. Information Security Risks CEPSA has a security organization in place to guarantee the availability, integrity, confidentiality and auditability of the information required to ensure the smooth development and progress of the Group s activities and with the acceptable cost and risk. The Company has an Information Security Management System based on minimizing security risks, which has been awarded international ISO certification. D.4 Identification and description of the processes of compliance with regulations that affect the Company and/or its Group. The energy sector in which CEPSA conducts its businesses is basically governed by Hydrocarbons Act 34/1998 of October 7th; RDL 15/1999 of October 1st, approving measures to deregulate the market, implement structural reforms and increase competition in the oil and gas sector; RD 16/2002, on Integrated Pollution Prevention and Control; RD 1716/2004 of July 23rd regulating the obligation to maintain minimum security stocks of petroleum products, the diversification of natural gas supplies and the Corporation for Strategic Reserves of petroleum products; RD 398/1996 of March 1st and subsequent regulations on automotive gasoline and diesel specifications; RDL 6/2000 of June 23rd on urgent measures to intensify competition in markets for goods and services; Act 9/2006, of April 28th on the evaluation of the effects of certain environmental plans and programs; RD 61/2006 of January 31st setting gasoline, diesel, fuel oil and LPG 114

115 CEPSA Legal Documents and Corporate Governance Report specifications and regulating the use of certain bio-fuels and the sulfur content in specific marine fuels; RD 679/2006, of June 2nd, regulating used oils management; RD 1370/2006 of November 24th, which approves Spain s GHG emission trading allowances for ; EU Council Decision of October 14, 2004, regarding the signature, on behalf of the European Community, of the Stockholm Convention on Persistent Organic Pollutants; European Directive 2008/1EC, passed by the European Parliament and Council on January 15, 2008, concerning integrated pollution prevention and control (IPPC); Act 26/2007 of October 23rd on environmental responsibility which transposes Directive 2004/35/EC of the European Parliament and Council of April 21, 2004; RD 2090/2008 of December 22nd approving Regulations that partially develop the aforementioned Act; RD Law 1/2008 on environmental risk assessment and Act 34/2007 on air quality and atmospheric protection. In environmental matters, CEPSA has included the requisites of applicable legislation in its Basic Environmental Regulations and Internal Procedures. Likewise CEPSA has strengthened its commitment to the environment through the development of its Biodiversity Regulations which regulate measures to be adopted to preserve habits and species in communities where the Company operates. Noteworthy is that CEPSA has implemented an environmental management system, certified according to UNE-EN ISO and Regulation 761/2001 of the European Parliament and Council regarding the voluntary participation of organizations in an Environmental Management and Audit System (EMAS), in most of its activity centers by independent agencies which in turn are accredited by the Spanish Ministry of Industry, Tourism and Commerce s ENAC (National Accreditation Bureau). As for petrochemicals in the CEPSA Group, the Company has voluntarily adhered to the Responsible Care scheme, a proactive program put into practice by the worldwide chemical industry to demonstrate the strides made by leading businesses in the areas of health, safety and the environment, through associated codes and regulations. With regard to occupational risk prevention, CEPSA has a set of Basic Rules for Industrial and Occupational Risk Prevention which apart from complying with legislation in this area, also include guiding principles and policies needed to achieve the highest standards of safety in its operations; the Corporate Management Manual for the Prevention of Industrial and Occupational Risk Prevention ; and other action guidelines that guarantee solid safety performance in the entire productive process, from plant design to product marketing. 115

116 CEPSA Legal Documents and Corporate Governance Report E. SHAREHOLDER MEETINGS E.1 Indicate and, where applicable, give details on whether there are any differences vis-à-vis the minimum requirements provided for in the Companies Act with the regard to quorums for holding Annual Meetings. There are no differences vis-à-vis the minimum requirements set forth in the Companies Act. E.2 Indicate, and where applicable, provide details on whether there are any differences compared to the system established under the Companies Act with regard to the adoption of corporate resolutions. There are no differences compared to the system provided for in the Companies Act. E.3 List the rights of shareholders with regard to Annual Meetings apart from those established in the Companies Act. The Company Bylaws do not provide for any special shareholder rights apart from those already set out in the Companies Act. E.4. Indicate, where applicable, the measures adopted to encourage shareholder participation at Annual Meetings. The following measures, among others, have been adopted: To provide information on an ongoing basis through the Shareholder Service Office. To reply to requests that, in using their legally-recognized rights to information, shareholders make in writing in due time prior to the date of the AGM. To distribute, as of the time that the AGM notice is published, the annual report and any other legally-required information at the Company s head offices, its branch offices and in venues specifically arranged for this purpose. To provide proxy cards and electronic voting for all shareholders via the internet. To provide free parking at the venue of the AGM for shareholders who use their own vehicles. To offer a complimentary gift item to shareholders present in person or by proxy at the AGM. 116

117 CEPSA Legal Documents and Corporate Governance Report E.5 State whether the Chairperson of the Annual Meeting is likewise the Chairperson of the Board of Directors. Explain, where applicable, any measures adopted to guarantee the independence and proper conduct of Annual Meetings. The Annual Meeting is presided by the Chairman of the Board, whose actions shall comply with applicable legislation, the provisions of the Company Bylaws and the Rules and Regulations for Shareholder Meetings which describes the working procedures of the Annual Meeting. Therefore, the independence and proper conduct of the AGM are deemed to be guaranteed. E.6 State whether any amendments were introduced in the Rules and Regulations of Shareholder Meetings during the year. The Company s Annual General Meeting of Shareholders held on June 26, 2009, approved, by a majority vote, the amendment of Article 9 of the AGM Rules regarding advance notification to call Shareholders Meetings. The wording of this Article was changed to the following: The notice convening Shareholders Meetings shall be issued at least one month prior to the date on which it is scheduled to be held on first call. The notices shall be published in the "Official Gazette of the Mercantile Registry" and in at least one of the major newspapers in the province where the Company has its registered offices. The notice shall likewise be available through the internet, on the company s website at The notice of such meeting shall state whether it is an Ordinary or Extraordinary Meeting or both; its purpose; the Agenda or list of items to be discussed; the date and time of the meeting on first and second call, and the venue. A period of at least twenty-four hours must elapse between the first and second call. If a Shareholders Meeting, duly convened, is not able to be held on first call, and the notice itself does not state the date of the second call, the latter should be announced following the same rules and requisites of public disclosure as for the first call, within fifteen (15) days following the date of the Shareholders Meeting not held, and at least eight (8) days prior to the date on which the Meeting on second call is to be held. Shareholders who represent at least five per cent of the company s share capital may request the publication of an addendum to the Annual Meeting notice, including one or more items of the Agenda. The addendum to the notice shall be published at least 15 days prior to the scheduled date of the Annual Meeting. This right shall be exercised by ensuring that the proper and reliable notification is received at the corporate head offices within five days following the publication of the notice. Failure to publish the addendum to the notice within the legallyestablished period shall nullify the AGM. 117

118 CEPSA Legal Documents and Corporate Governance Report E.7. Provide attendance figures and data for Annual Meetings held in the year. AGM Date % of Shareholders Present in % of Shareholders Represented Person by Proxy % of Electronic Votes % of Distance Votes Total June 26, E.8 Briefly indicate the resolutions adopted in Annual Meetings held during the year and percentage of votes cast to adopt each resolution Annual General Meeting of Shareholders (the only AGM held in the year): June 26, 2009, on first call, in Madrid, Auditorium B of the Municipal Convention Center, Avda. de la Capital de España Madrid, s/nº (Campo de las Naciones), Madrid. RESOLUTIONS ADOPTED: Summary of Proposals Submitted to a Vote of Shareholders Votes in Favor Votes Against Abstentions To study and approve the 2008 Financial Statements and Management Discussion & Analysis for CEPSA and its Consolidated Group, as well as the Proposal for CEPSA s Profit Distribution and the Company s executive management. 258,694, To ratify the appointment of Santiago Bergareche Busquet as a Director of the Company. 258,689,704 5,853 0 To ratify the appointment of Joël Vigneras as a Director of the Company. 258,101, ,495 0 To ratify Jean-Luc Guiziou as a Director of the Company. 258,104, ,982 0 To re-elect Juan Rodriguez Inciarte as a Director of the Company. 258,100, ,676 0 To re-elect Ernesto Mata López as a Director of the Company. 258,100, ,676 0 To renew, where applicable, the authorization granted to the Board of Directors of the Company to issue non-convertible fixed-yield securities, under the terms and conditions established for these purposes in legislation in force. 258,694,325 1,232 0 To amend Articles 26 and 51 of the Company Bylaws and Article 9 of the AGM Rules and Regulations. 258,693, ,350 To reappoint Deloitte, S.L., for a one-year period, as the independent auditors to examine and review the 2009 financial statements for CEPSA and its Consolidated Group 258,682,325 13,232 0 To delegate powers to the Board of Directors, or the person or persons on the Board that it may so designate, to notarize the resolutions passed at the Annual Meeting by a public deed. 258,694, ,

119 CEPSA Legal Documents and Corporate Governance Report E.9 State the minimum number of shares, if any, needed to attend Annual Meetings and whether there are any restrictions on such attendance in the Bylaws. Article 23 of the Company Bylaws states that the right of admission to the Annual Meeting shall be granted to all shareholders who can demonstrate ownership of a minimum of sixty (60) shares, at least five (5) days prior to the scheduled date of the Annual Meeting on first call. All shares have the same voting rights (each share is entitled to one vote). E.10 Indicate and explain the policies pursued by the Company with regard to proxy voting at Annual Meetings. The admission tickets for the AGM include the items on the Agenda and the voting instructions for each one of them. The Company applies what is provided for in Article 25 of its Bylaws and Article 13 of the Rules and Regulations of Shareholder Meetings, which state that shareholders may appoint other shareholders to represent their shares, and such proxy holders should be able to cast not only the votes they are entitled to, but also those of the shareholders they are representing. Proxies shall be appointed specifically for each Annual Meeting and must be authorized in writing or by the means of remote communication that comply with the requisites contained in the aforementioned articles.. E.11 State whether the Company is aware of the policies of institutional investors with regard to their involvement or non-involvement in corporate decisions. No, the Company is unaware of any such involvement. E.12 State the address and means of access to corporate governance contents on the Company s website. The Corporate Governance Report can be obtained either directly at the AGM, by requesting it via postal mail from the Shareholder Service Office, CEPSA, Avenida del Partenón 12, Madrid, by calling the toll-free telephone number , by at [email protected], or by logging on to the Company s website at information for shareholders, corporate governance, Corporate Governance Report, 119

120 CEPSA Legal Documents and Corporate Governance Report F. LEVEL OF COMPLIANCE WITH CORPORATE GOVERNANCE RECOMMENDATIONS Recommendation 1.- The Bylaws of listed companies should not impose an upper limit on the votes that can be cast by a single shareholder, or impose other restrictions that could hinder the takeover of the Company by means of share purchases on the securities market. The Company complies with this recommendation Recommendation 2.- Whenever a parent and its subsidiary company are listed on the Stock Exchange, both should clearly define a) The type of business or activity they each engage in and any business dealings between them, as well as between the subsidiary and other group companies. b) The mechanisms in place to ultimately settle possible conflicts of interest. Not applicable. Recommendation 3.- Even when mercantile legislation does not expressly require it, any decisions involving a structural or corporate change in the Company should be submitted to the Annual General Meeting for approval, particularly the following: a) The transformation of listed companies into holding companies through the process of subsidiarization, i.e., reassigning to subsidiaries core activities that were previously carried out by the originating firm, even though the latter retains full control of the former; b) The acquisition or sale of key operating assets, whenever this would effectively alter the corporate purpose; c) Transactions that effectively add up to the Company s liquidation. The Company complies with this recommendation. Recommendation 4.- Detailed proposals of the resolutions to be adopted at the Annual Meeting, including information referred to in Recommendation 28, should be disclosed and made available at the same time as the publication of the AGM notice. The Company complies with this recommendation. Recommendation 5.- Separate votes should be cast at the AGM on materially separate issues, so that shareholders may express their preferences in each case. This rule should particularly apply in the following cases: a) The appointment or ratification of directors, with separate voting on each candidate; b) In the case of amendments to the Bylaws, each article or groups of articles that are materially separate should be voted on individually. The Company complies with this recommendation. 120

121 CEPSA Legal Documents and Corporate Governance Report Recommendation 6. Companies should allow split votes so that brokers or custodians who are shareholders of record and but act on behalf of different clients can issue their votes according to the instructions of such clients. The Company complies with this recommendation. Recommendation 7. - The Board of Directors should perform its duties with unity of purpose and independent judgment, affording all shareholders the same treatment and consideration. It should be guided at all times by the Company s best interests and accordingly, strive to maximize its value over time. It should likewise ensure that the Company abides by applicable laws and regulations in its dealings with stakeholders; fulfils its obligations and covenants in good faith; respects the customs and good practices of the sectors and territories where it does business; and upholds any additional social responsibility principles it has voluntarily adhered to. The Company complies with this recommendation. Recommendation 8.- Que el Consejo asuma, como núcleo de su misión, aprobar la estrategia de la Compañía y la organización precisa para su puesta en práctica, así como supervisar y controlar que la Dirección cumple los objetivos marcados y respeta el objeto e interés social de la Compañía. Y que, a tal fin, el Consejo en pleno se reserve la competencia de aprobar: a) The policies and strategies of the Company and in particular: I) The strategic or business plan, as well as annual management and budgetary targets; II) Investment and funding policies; III) The definition of how the companies of the Group should be structured; IV) Corporate governance policies; V) Corporate social responsibility policies; VI) Executive management compensation and performance appraisal policies; VII) Risk control and management policies, as well as the periodical monitoring of internal information and control systems. VIII) Dividend pay-out and treasury stock policies, in particular with regard to their limits. b) The following decisions: I) At the proposal of the Company s chief executive officer, the appointment and possible removal of executive managers, as well as their severance conditions; II) Directors compensation, and any additional compensation awarded to executive directors for their executive duties and responsibilities and other terms and conditions included in their contracts; III) Financial information that the Company, as a listed company, is required to disclose; IV) Any and all kinds of investments and/or transactions that, due to their amount or special features, may be regarded as strategic, except where the AGM is specifically entrusted with the task of approving them; V) Creation or acquisition of shares in special-purpose entities or with registered offices in countries or territories considered to be tax havens, as well as any other transactions or operations of a similar kind whose complexity may jeopardize or undermine the Group s transparency. 121

122 CEPSA Legal Documents and Corporate Governance Report c) Transactions between the Company and its directors, its significant shareholders and/or shareholders with Board representation, or parties related to them ( related-party transactions ). Nevertheless, this Board authorization may not be required in related-party transactions that simultaneously meet the following three conditions: 1. They are governed by standard contracts applied on an across-the-board basis to a large number of clients and customers; 2. They are made at market rates that are generally set by suppliers of goods and services; 3. They are worth less than 1% of the Company s yearly revenues. The aforementioned powers assigned to the Board may not be delegated with the exception of those mentioned in b) and c), which may be delegated to the chosen Committee in urgent cases and subsequently ratified by the Board in a plenary meeting. The Company complies with this recommendation. Recommendation 9. - The Board of Directors should be the right size to make it work effectively and encourage the greatest participation of its members, and therefore it would be advisable to have no less than five and no more than fifteen members. The Company complies with this recommendation. Recommendation 10.- In the Board s composition, non-executive shareholder-representative and independent directors should represent a broad majority of the Board members and the number of executive directors should be the minimum required, consistent with the complexity of the corporate Group and the percentage of the share capital held by executive directors. The Company complies with this recommendation. Recommendation 11. If there are any non-executive directors who cannot be classified as shareholder representative or independent, the Company should explain the reasons thereof and their ties with either the Company, its executive managers and/or its shareholders. Not applicable. Recommendation 12.- Among non-executive directors, the ratio between shareholder representative and independent directors should reflect the existing proportion between the share capital represented by shareholder-representative directors and the remaining share capital. The strict interpretation of this principle of proportionality may be relaxed so that the percentage of shareholder representative directors is in fact greater than what would strictly correspond to the total percentage of capital they represent, in the following cases: 1. In large-cap companies where few or no equity holdings attain the legal threshold for being considered significant shareholdings, despite the considerable sums actually invested. 2. Whenever this involves companies in which a plurality of shareholders are represented on the Board but such shareholders otherwise have no ties among them. The Company complies with this recommendation. 122

123 CEPSA Legal Documents and Corporate Governance Report Recommendation 13. Independent directors should account for at least one third of the total number of Board members. The Company does not comply with this recommendation. At December 31, 2009, the Company had 3 independent directors, out of a total of 13 members, accounting for 23.1% of total Board members, bearing in mind that more than 95% of the share capital is directly or indirectly held by two shareholders with Board representation. Recommendation The Board should explain the type of each directorship to the Annual Meeting of Shareholders requested to appoint these directors or ratify their appointment. This should be confirmed or reviewed on a yearly basis in the Corporate Governance Report, after being verified by the Nominations Committee. This report should likewise disclose the reasons for the appointment of shareholder representative directors at the request of shareholders whose stake in the Company s share capital is less than 5%; and it should furthermore explain the reasons for rejecting, where applicable, formal requests for Board presence made by shareholders whose equity stakes are equal to or greater than those of others whose requests for shareholder-representative directorships were met. The Company complies with this recommendation. Recommendation 15.- If there are few or no female directors, the Board should explain the reasons thereof and the initiatives taken to remedy this situation, and in particular, the Nominations Committee should take the proper steps to ensure that, whenever vacancies arise: a) The selection process for filling such vacancies has no hidden gender bias; b) The Company makes a conscientious and deliberate effort to include women candidates who meet the desired professional background and requisites. The Company partially complies with this recommendation. There is one female director serving on CEPSA s Board, accounting for 7.7% of the total of 13 members. Recommendation The Chairperson, who is responsible for ensuring that the Board runs smoothly and efficiently, should strive to guarantee that all the Board members receive sufficient information prior to the meetings; encourage the directors to engage in discussion and actively participate in the meetings, safeguarding their freedom to take a stand on the issues brought before them and to express their opinions; and organize and coordinate regular and timely evaluations of the Board, or where appropriate, of the Company s Chairman or Chief Executive Officer, with the chairpersons of the respective Board sub-committees. The Company partially complies with this recommendation. As regards the periodic evaluation of the Board, taking into account the high caliber, expert background and extensive knowledge of all the Board members, the Company believes that there is no need to carry out a yearly performance appraisal of either the Board, the Chairperson or the CEO. Recommendation Whenever the Chairperson of the Board is also the Company s chief executive officer, one of the independent directors should be authorized to request that a Board meeting be summoned or to include new items on the agenda; coordinate and voice the concerns of non-executive directors and oversee the Board s evaluation of its Chairperson. Not applicable. 123

124 CEPSA Legal Documents and Corporate Governance Report Recommendation 18.- The Board Secretary should do his or her best to ensure that the Board s actions: a) Abide by the spirit and letter of the law and their enforcing regulations, including those issued by regulatory agencies; b) Meet the provisions of the Corporate Bylaws and the Rules and Regulations for Shareholder Meetings, the Board of Directors and any others that the Company may have; c) Keep in mind any recommendations on good corporate governance contained in this Unified Code that the Company has adhered to. And, in order to safeguard the independence, impartiality and professionalism of the Secretary, his or her appointment and removal should be proposed by the Nominations Committee and approved by the Board in a plenary meeting; and furthermore, the appointment and removal procedure should clearly be specified in the Rules and Regulations of the Board of Directors. The Company partially complies with this recommendation. The Board is currently reviewing the possible inclusion of a procedure to appoint and remove the Secretary in the Board Rules and Regulations.. Recommendation The Board should meet as frequently as needed to properly carry out its functions, following a pre-established schedule of meetings and issues drawn up at the beginning of the year, allowing each director to propose the inclusion of additional unforeseen items on the agenda. The Company complies with this recommendation. Recommendation Non-attendance at Board meetings should be limited to strictly unavoidable circumstances and should be specified in the Annual Corporate Governance Report. Whenever proxies are required, they should be granted with the proper voting instructions. The Company complies with this recommendation. Recommendation 21. Whenever the Secretary or directors express concerns about a specific proposal or, in the case of directors, on the progress of the Company and such concerns are not resolved within the Board, the person expressing them may request that they be recorded in the minutes. The Company complies with this recommendation. Recommendation 22.. The Board, in a plenary meeting, should evaluate the following points on a yearly basis: a) The quality and efficiency of the Board s stewardship; b) Based on a report submitted by the Nominations Committee, how well the Chairman and Chief Executive Officer have carried out their duties; c) The performance of the sub-committees on the basis of the reports provided by such committees. The Company complies with this recommendation. Recommendation 23. All directors should be able to exercise their rights to receive any additional information they require on matters that come under the Board s authority. Unless the Bylaws or Board regulations determine otherwise, such requests should be addressed to the Chairperson or the Secretary. The Company complies with this recommendation. 124

125 CEPSA Legal Documents and Corporate Governance Report Recommendation All the directors should be entitled to rely on the Company for the counsel and guidance needed to perform their duties. Furthermore, the Company should provide the suitable channels for the directors to exercise this right, which under special circumstances may include external counsel or assistance at the Company s expense. The Company partially complies with this recommendation. According to the Board Rules and Regulations, only the Audit Committee and the Nomination and Compensation Committee are entitled to request this external counsel and assistance. Recommendation The Company should establish an induction program to familiarize new Directors with the firm, and its corporate governance rules, as promptly and broadly as possible. The Company should also offer its directors refresher or professional development programs whenever circumstances so advise. The Company complies with this recommendation. Recommendation 26.- Companies should require Directors to dedicate sufficient time and effort to their Board duties in order to ensure they are performed effectively and therefore: a) Directors should inform the Nominations Committee of their other professional obligations, in case these interfere with the dedication and commitment required for their duties on the Company s Board; b) Companies should lay down rules on the number of Boards their directors are allowed to serve on.. The Company partially complies with this recommendation. Given the commitment and dedication of all the Board members, the Company believes that establishing rules to limit the number of Boards they can serve on is unwarranted. Recommendation 27.- The proposal to appoint or re-elect Directors submitted to the Annual Meeting by the Board, as well as provisional appointments by co-option, should be approved by the Board: a) Upon proposal by the Nominations Committee with regard to independent directors. b) On the basis of a report from the Nominations Committee in the case of the remaining Board members. The Company complies with this recommendation. Recommendation 28.- Que la Sociedad haga pública a través de su página web, y mantenga actualizada, la siguiente información sobre sus Consejeros: a) Professional and biographical background; b) Other Boards on which they serve, whether or not they belong to listed companies; c) An indication as to whether the directorship is executive, shareholder representative or independent, stating, in the second case, the shareholder which they represent and to whom they are affiliated; d) The date of their first and subsequent appointments, and; e) Shares and/or share options held in the Company. The Company complies with this recommendation. 125

126 CEPSA Legal Documents and Corporate Governance Report Recommendation 29.- Independent Directors should not serve as such for more than 12 consecutive years.. The Company complies with this recommendation. Recommendation 30.- Shareholder representative directors should resign whenever the shareholders they represent sell their entire stake in the Company. In the event that such shareholders reduce their stakes, the number of shareholder representatives they are entitled to should likewise be reduced in the same proportion. The Company complies with this recommendation. Recommendation 31.- The Board of Directors should not propose the removal of any independent director prior to the completion of his or her term of office as specified in the Bylaws, except where just cause is determined by the Board, based on a report from the Nominations Committee. In particular, just cause will be presumed whenever the Director is in breach of his or her fiduciary duties or has engaged in any of the circumstances listed in section III.5 (Definitions) of this Code. The removal of independent directors may also be proposed whenever takeover bids, mergers or similar corporate transactions lead to changes in the shareholding structure of the Company, in order to meet the proportionality criteria set out in Recommendation 12. The Company complies with this recommendation. Recommendation 32.- Companies should establish rules requiring directors to inform the Board, and where applicable, resign under any circumstances that may jeopardize the credibility and good standing of the Company and in particular, require that they report any criminal charges brought against them, and the status of any subsequent court or legal proceedings. If a director is indicted or brought to trial for any of the crimes stated in Article 24 of the Corporations Act, the Board should examine the matter as promptly as possible, and depending on the particular circumstances, decide whether or not he or she should be called on to resign. The Board should also reasonably disclose all such decisions in the Annual Corporate Governance Report. The Company complies with this recommendation. Recommendation All directors should clearly express their disagreement or disapproval whenever they believe that a proposed resolution submitted to the Board may go against the Company s best interests. In particular, independent and other directors unaffected by the conflict of interest should challenge any decision that may go against the interests of shareholders not represented on the Board. Whenever the Board adopts significant or reiterated resolutions on issues on which a director has expressed serious concerns or reservations, said director should draw the pertinent conclusions and if he chooses to resign over such matter, he should explain the reasons for leaving in a letter, as referred to in the following recommendation. This recommendation should also be applicable to the Secretary of the Board, even if he or she does not hold a directorship. The Company complies with this recommendation. 126

127 CEPSA Legal Documents and Corporate Governance Report Recommendation 34.- If directors leave their office before the end of their term, they should explain the reasons thereof in a letter sent to all the Board members. Notwithstanding the publication of such resignation as a significant event, the reasons for the resignation must be disclosed in the Annual Corporate Governance Report. The Company complies with this recommendation. Recommendation 35.- The Company s compensation policy, as approved by the Board, should specify at least the following points: a) Amount of fixed components, with a breakdown, where applicable, of Board and sub-committee meeting attendance fees, and an estimate of the associated fixed yearly pay for board members; b) Performance-related components, including, in particular: i) The types of directors to which they apply, as well as an explanation of the ratio of variable-to-fixed pay components; ii) Performance appraisal criteria to calculate an entitlement to the award of shares, share options or any other performance-related components; iii) Key parameters and grounds for any yearly bonus schemes or other non-cash benefits or perquisites; and iv) An estimate of the sum total of variable payments arising from the proposed compensation policy, based on the level of compliance with pre-set targets or benchmarks. c) Key features of pension and insurance schemes (for example, supplementary pensions, life insurance plans and other arrangements), with an estimate of their total amount or equivalent yearly cost; d) Conditions that the employment contracts of executive directors and senior managers must honor, including: i) Duration; ii) Notification periods; and iii) Any other clauses regarding hiring bonuses, as well as compensation or golden parachute clauses due to early termination or rescission of the contractual relationship between the Company and the executive director. The Company complies with this recommendation. Recommendation 36. Compensation involving awards of stock in the Company or companies of the Group, option awards or share-based incentives, non-equity incentive plans or pension/retirement schemes should be strictly limited to executive directors. Share awards are excluded from this limitation whenever directors are required to maintain them until the end of their term of office. Not applicable. 127

128 CEPSA Legal Documents and Corporate Governance Report Recommendation 37.- Non-executive directors remuneration should sufficiently compensate them for their commitment and dedication, qualifications and the responsibilities involved in the performance of their duties, but not be so high as to compromise their independence. The Company complies with this recommendation Recommendation 38.- In the case of performance-based pay or incentive plans, deductions should be calculated for any possible qualifications contained in the independent auditors report that may reduce earnings. The Company complies with this recommendation. Recommendation 39.- In the case of variable or earnings-based pay, compensation policies should include technical safeguards to ensure that they reflect the professional performance of the beneficiaries and not just the general progress of the markets or the Company s sector, or other similar circumstances. The Company complies with this recommendation. Recommendation The Board should submit a report on the directors compensation policy to the consultative vote of the Annual Meeting, as a separate item on the agenda. This report should be made available to shareholders either separately or in any other manner the Company deems advisable. The aforementioned report should focus on the compensation policy the Board has approved for the current year, with reference, as the case may be, to the policy planned for future years. It will address all the issues referred to in Recommendation 35, except those cases that may involve the disclosure of commercially-sensitive information. It should also highlight the most significant changes in the Company s compensation policy compared to the previous year and include a broad summary of how the policy was applied over the year concerned. The Board should also report to the Annual Meeting on the role of the Nominations Committee in designing the policy and, if outside counsel was sought, the identity of the external advisors or consultants hired for such purposes. The Company does not comply with this recommendation. The directors compensation policy is established by the Nomination and Compensation Committee within the limits set forth in the Company Bylaws. The itemized compensation components, attendance fees and bylaw stipulated fees are provided in this Corporate Governance Report and made available to all shareholders. The Executive Director s compensation is likewise determined by the Nomination and Compensation Committee and its components are included in this Corporate Governance Report for shareholders information. Taking into account that over 95% of the Company s share capital is represented on the Board of Directors, in addition to 3 independent directors, the submission of a report on the directors compensation policy to a vote of the Annual Meeting is deemed to be unwarranted. 128

129 CEPSA Legal Documents and Corporate Governance Report Recommendation 41.- The Notes to the Financial Statements should list the individual compensation packages for Directors during the year, including: a) Individualized breakdown of each Director s compensation, in particular: i) Attendance fees and other fixed payments associated with directorships; ii) Additional compensation for acting as Chairperson or member of a Board Committee; iii) Any payments made under profit-sharing schemes or bonuses and the reason for granting them; iv) Contributions on behalf of Directors to defined-contribution pension plans, or any increase in directors vested rights in the case of contributions to defined benefit schemes; v) Any severance packages agreed or paid out; vi) Any compensation they receive as directors of other group companies; vii) Compensation received by executive directors in conjunction with their senior management positions; viii) Any kind of compensation other than those listed above, regardless of its nature or the company making such payment, especially when it is considered a related-party transaction or when its omission would detract from a true and fair view of the total compensation received by the Director. b) A breakdown of shares, stock options or share-based incentives awarded in the year to the directors, itemized by: i) Number of shares or options awarded in the year, and the terms set for exercising the options; ii) Number of options exercised in the year, specifying the number of shares involved and the executed price; iii) Number of options outstanding at year-end, specifying their price, date and other exercise conditions; iv) Any change in the year in the exercise terms of previously-awarded options. c) Information on the relationship in the previous year between the compensation awarded to executive directors and the Company s earnings or any other performance measure. The Company does not comply with this recommendation. The Company considers that the grouped information given in both the Annual Report and the Annual Corporate Governance Report on Directors compensation is sufficient enough for shareholders to be apprised of what compensation Board members receive, and that there is no need for an individualized disclosure. Recommendation 42. In cases in which the Company has an Executive Committee, the breakdown of its members by director category should reflect that of the Board, and the Board s Secretary should act as this Committee s Secretary. Not applicable. 129

130 CEPSA Legal Documents and Corporate Governance Report Recommendation 43.- The Board should be kept fully apprised of the business transacted and resolutions adopted by the Executive Committee and all of the Board members should receive copies of the minutes of Executive Committee meetings. Not applicable. Recommendation In addition to the mandatory existence of an Audit Committee, pursuant to the Securities Market Act, the Board of Directors should form a committee, or two separate committees, for Nominations and Compensation. The rules governing the composition and working procedures of the Audit Committee and the Nomination and Compensation Committee should be set forth in the Rules and Regulations of the Board of Directors, and include the following: a) The Board should appoint members of such committees taking into account the background, expertise and experience of its directors and the duties and responsibilities of each Committee; discuss their proposals and reports; and oversee and evaluate their work, reporting back to the first full Board meeting held thereafter; b) Such committees should be exclusively made up of non-executive directors, having a minimum of three members. Executive directors or senior managers may also attend meetings at the express invitation of the committees; c) Committees should be chaired by an independent director; d) They may engage outside experts or consultants whenever they feel this is necessary for the performance of their duties; e) Meeting proceedings should be recorded in the minutes and sent to all the Board members. The Company partially complies with this recommendation. The Board of Directors has set up an Audit Committee and Nomination and Compensation Committee from among its members, with the working procedures and powers provided for in Articles 17 and 18 of the Board Rules and Regulations. The aforementioned Committees are composed exclusively of non-executive directors. The Chairman of the Nomination and Compensation Committee is an independent director. Recommendation 45.- The task of overseeing compliance with internal codes of conduct and corporate governance rules should be entrusted to the Audit Committee, the Nomination and Compensation Committee, or if they exist separately, the Compliance or Corporate Governance Committees. The Company partially complies with this recommendation. The Board of Directors is the body that oversees compliance with corporate governance rules. Recommendation 46. The members of the Audit Committee, particularly its Chairperson, should be appointed taking into consideration their knowledge and background in accounting, auditing and risk management. The Company complies with this recommendation. Recommendation 47. Listed companies should have an internal audit function, under the supervision of the Audit Committee, to ensure the proper operation of internal reporting and control systems. The Company complies with this recommendation. 130

131 CEPSA Legal Documents and Corporate Governance Report Recommendation 48. The internal audit manager should present an annual work program to the Audit Committee, directly report on any incidents arising during its implementation and submit an activities report at the end of each year.. The Company complies with this recommendation. Recommendation 49.- The control and risk management policy should at least specify: a) The different types of risks (operational, technological, financial, legal, reputational ) faced by the Company, including, with regard to financial or economic risks, contingent liabilities and other off-balance-sheet risks; b) The levels of risk that the Company considers acceptable; c) The measures established to mitigate the impact of identified risks, should they actually materialize; d) The internal control and reporting systems that will be applied to oversee and manage these risks, including contingent liabilities and off-balance-sheet risks. The Company complies with this recommendation. Recommendation 50. The Audit Committee s role and sphere of influence should be: 1º. With regard to internal control and reporting systems: a) To supervise the preparation and integrity of the financial information for the Company, and, where applicable, its group of companies, reviewing compliance with regulatory requirements and legal provisions, the scope of the consolidation perimeter and the correct application of accounting principles. b) To periodically review the internal control and risk management systems so that key risks can be properly pinpointed, managed and reported on. c) To ensure the independence and efficacy of internal audit; propose the selection, appointment, re-election and, where applicable, removal of the internal audit manager; propose a budget for the internal audit service; receive periodic information on its activities; and ensure that senior management is aware of the conclusions and recommendations contained in such reports; d) To establish and supervise a whistle-blowing mechanism that allows employees to confidentially, and if considered appropriate, anonymously report any irregularities they notice within the Company that may be of potential importance, especially financial and accounting irregularities. 2º. With regard to the independent auditors: a) To submit to the Board proposals for selection, appointment, re-appointment and replacement of the independent auditors and the terms and conditions of their engagement; b) To regularly receive information from the independent auditors on the audit plan and the progress and outcome of its execution, verifying that senior management is duly aware of its recommendations. c) To ensure the independence of the external auditors and accordingly: i) To ensure that the Company reports any change in the auditing firm to the Spanish Securities Market Commission (CNMV), accompanied by a statement on the possible existence of discrepancies that may have arisen with the outgoing auditing firm, and if so, the reasons thereof. 131

132 CEPSA Legal Documents and Corporate Governance Report ii) To ensure that the Company and the independent auditors respect and honor prevailing standards on the provision of non-auditing services, the limits on the focus of the auditors business, and generally speaking, any other existing standards aimed at guaranteeing the auditors independence iii) To examine the circumstances leading to the resignation, where applicable, of the independent auditors, if this should happen. d) In the case of groups of companies, to help the group auditors take charge of the audits of companies belonging to the group. The Company partially complies with this recommendation. With regard to item 1.d on establishing a whistle-blowing mechanism that allows employees to report any irregularities they notice within the Company that may be of potential importance, the possibility of implementing this in the CEPSA Group is being studied. Recommendation 51.- The Audit Committee should be entitled to meet with any of the Company s employees or senior managers, and to summon them without the presence of another senior manager. The Company complies with this recommendation. Recommendation 52.- The Audit Committee should provide information on the following items referred to in Recommendation 8 prior to any related resolutions passed by the Board: a) The financial information that the Company, as a publicly-traded company, must disclose periodically. The committee should ensure that interim financial statements are prepared using the same accounting principles as the yearly statements and, accordingly, may ask the independent auditors to conduct a limited review. b) The creation or acquisition of shares in special-purpose entities or entities with registered offices in countries or territories regarded as tax havens, and any other similar transactions or operations whose complexity could jeopardize the group s transparency. c) Related-party transactions, except in cases in which their review has been entrusted to another supervision and oversight committee. The Company complies with this recommendation. Recommendation 53.- The Board of Directors should strive to avoid having the financial statements that it formulates be presented to the Annual Meeting with reservations or qualifications in the auditors report; otherwise, both the chairperson of the Audit Committee and the auditors should provide a clear explanation to shareholders on the nature and extent of such reservations or qualifications. The Company complies with this recommendation. Recommendation 54. The majority of the members of the Nominations Committee or Nomination and Compensation Committee, as the case may be should be independent directors. The Company does not comply with this recommendation. CEPSA s Nomination and Compensation Committee is composed of one independent director who acts as Chairperson and two members who are the Vice-Chairmen of the Company and are non-executive shareholder representative directors appointed by shareholders who represent over 95% of the share capital.. 132

133 CEPSA Legal Documents and Corporate Governance Report Recommendation 55.- The Nominations Committee should have the following duties in addition to those set out in foregoing recommendations: a) Evaluate the skills, knowledge and experience required on the Board, define the roles and capabilities required of the candidates to fill each vacancy accordingly and decide on the time commitment and dedication needed for them to properly carry out their duties; b) Examine or plan, in the manner deemed advisable, the succession of the Chairperson and Chief Executive Officer, and where applicable, make proposals to the Board so that such succession takes place in an orderly and wellplanned way; c) Report on appointments and removals of senior managers as proposed to the Board by the Chief Executive Officer; d) Inform the Board on gender-diversity issues as explained in Recommendation 14 of this Code. The Company complies with this recommendation. Recommendation 56.- The Nominations Committee should consult with the Chairperson and Chief Executive Officer, especially with regard to matters involving executive directors. Any Board member may ask the Nominations Committee to consider potential directorship candidates to fill vacancies arising on the Board. The Company partially complies with this recommendation. For obvious reasons, the Nomination and Compensation Committee determines the compensation awarded to the Executive Director without consulting him. Recommendation 57.- The Compensation Committee should have the following duties in addition to those listed in foregoing recommendations, namely: a) To make proposals to the Board of Directors regarding: i) Compensation policies for directors and senior managers; ii) Additional compensation and other contractual conditions for executive directors; iii) Basic contractual conditions for senior managers. b) To oversee compliance with the compensation policies set by the Company. The Company complies with this recommendation. Recommendation 58.- The Compensation Committee should consult with the Company s Chairperson and Chief Executive Officer, especially in connection with matters involving executive directors and senior managers. The Company complies with this recommendation. 133

134 CEPSA Legal Documents and Corporate Governance Report G. OTHER INFORMATION OF INTEREST List and explain the contents of any relevant principles or aspects of corporate governance applied by the Company that has not been covered in this report. This section may include any other relevant information, clarification or particularity related to previous sections of the report, insofar as they are significant and not reiterative. Specifically indicate whether the Company is subject to corporate governance legislation applicable in countries other than Spain and, if so, include the mandatory information to be disclosed whenever this is different from what is required in this report. In corporate governance matters, CEPSA is strictly subject to the laws of Spain. BINDING DEFINITION OF INDEPENDENT DIRECTOR: Indicate whether any of the Independent Directors has or has had any material relationship with the Company, its significant shareholders and/or its executive or senior managers, as defined in section 5 of the Unified Code of Good Governance, that may compromise or influence his or her independence in the discharge of his or her duties: No This Corporate Governance Report has been approved by the Company s Board of Directors at its meeting held on February 25, This Report has been unanimously approved by all the Board members present in person or by proxy. None of the members abstained or voted against its approval. Madrid, February 25,

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