1.-  INTRODUCTION

1.1.- Quarterly Results

Third quarter 2000 net income, before all the company’s goodwill amortisation, was 84.2 up on year earlier figures at 770 million euros.  

Repsol YPF net reported income for the period was 628 million euros, 110.7% higher than 1999 figures.

Quarterly operating income rose 87.0% against 1999 figures, to 1,565 million euros.  Net cash flow for the third quarter 2000 was 1,545 million euros, in comparison to 974 million euros obtained in 1999.  On equal accounting terms, that is if 100% of Gas Natural SDG results were consolidated for the period in both 1999 and 2000, operating income would have registered a 72.9% growth, and cash flow would have risen 44.7%.

1.2.-January-September accumulated results

Net income for the first nine months 2000, before all goodwill amortisation, was 2,188 million euros, showing a 184.5% rise over the same period in 1999.  Accumulated net income up to September 2000 was up 204.5%, at 1,772 million euros.

In recurring terms, not including the extraordinary items and capital gains for both years, accumulated January to September adjusted net income and reported net income were 155.2% and 164.5% higher respectively over the 1999 equivalent.

Operating income for the nine months rose 180.7% to 4,604 million euros. In recurring terms, accumulated result for this period was 4,303 million euros, 162.4% over the 1999 equivalent.

1.3.- Financial debt

Accumulated net cash flow at September 2000 was 123.2% up on 1999, at 4,632 million euros.

Accumulated investments for the first three quarters of 2000 were 3,828 million euros including acquisitions amounting to 1,015 million euros. The remaining free cash flow went to dividend payments amounting to 471 million euros and to partially finance working capital requirements of 1,206 million euros due to oil price increases and the euro/US dollar devaluation.

The debt to capitalisation ratio as of September 30^th, 2000 decreased to 51.0%, in comparison to 53.5% registered at December 31^st, 1999.

Net figure for financial debt in absolute terms at September 30^th last, was 21,369 million euros compared to 18,551 million euros at the beginning of 2000. This was mainly due to the effects of the exchange rate of the US dollar against the euro, which had an impact of 2,513 million euros for the nine months.

1.4.-Third quarter highlights

We would like to draw attention to the following events that have arisen since our last quarterly report:

New appointments at Repsol YPF

On September 27th last, the Repsol YPF S.A. Board of Directors approved several appointments to the company’s executive bodies.  As a result, a new position of Corporate Vice President, and Member of the company’s Executive Committee, was created, which will be taken up by Ram�n Blanco, former Member of the Repsol YPF Board of Directors.

There were also changes in the  existing Executive Vice Presidencies.  Roberto Monti stepped down as Vice President of Exploration and Production, remaining as Member of the YPF Board of Directors.  Miguel Angel Remon has taken up his position.  Guzm�n Solana left his post as Vice President of Gas and Electricity to be appointed as President of Enagas, and has been replaced in this position by Antonio Gonz�lez-Adalid.  Finally, Juan Badosa was appointed Executive Vice President of Chemicals, whilst Juan Sancho continues as Executive Vice President of Refining and Marketing. Carmelo de las Morenas was appointed Chief Financial Officer, remaining part of the Executive Committee.

Several appointments were also made to the Directors’ Committee, and the RYS XXI plan was announced in order to give a new dimension to the company’s management system and rejuvenate the Repsol YPF work force.

YPF and Astra share swap for Repsol YPF shares

The final outcome to the Repsol YPF Share Offering to minority shareholders in Astra and YPF, S.A., which was mentioned in our last quarterly report, was highly successful, in that Repsol YPF now controls 99.0% of YPF and 99.4% of Astra.  Repsol YPF capital equity increased from the former 1,188,000,000 shares to a current 1,220,508,578 shares.

YPF merger with Astra and Repsol Argentina

On November 7^th, the YPF SA Board of Directors approved the merger by absorption of Astra Compa��a Argentina de Petr�leo SA and Repsol Argentina SA, with YPF SA as absorbing company.

Divestments in the U.K.

As part of the company’s divestment programme announced following the YPF acquisition, an agreement was reached in October last with Petrochem UK Ltd. for the sale of Carless Refining & Marketing, a U.K. based company producing and distributing solvents and special products.  The latter’s main assets are the Harwich refinery and the Longport and Accrington terminals.

Gas Natural SDG

Following the announcement of a merger between Endesa and Iberdrola, Gas Natural proposed to Iberdrola that the two companies (Gas Natural and Iberdrola) should merge in a venture to create a leading gas and electricity company.  This proposal was not approved by the Iberdrola Board of Directors, and on studying the situation, Gas Natural SDG decided to withhold from any further project to merge with it.

On October 30^th last, Gas Natural held an Extraordinary General Shareholders Meeting to approve the partial segregation of the Enagas Supply and Real Estate Leasing Business line in preparation for the divestment of Enagas, as stipulated in the Decree Law dated June 23^rd, 2000.

At this Extraordinary General Meeting, the President of Gas Natural referred to the company’s strategy for the gas & power chain and expressed its ambition to become a multi-utility company with a clear customer orientation in its main markets.  With this goal in mind, he stated the opportunity to optimise the gas and power businesses by monetising gas reserves and taking full advantage of vertical integration.

Agreement with BP in Trinidad & Tobago

On November 7^th last, a deal was made public with BP on gas reserves in Trinidad and Tobago.  Under this agreement, Repsol YPF will have 10% of BP reserves in the region, estimated at 600 BCM of gas and more than 300 million barrels of oil of proven, possible and probable reserves.  Furthermore, the equivalent production (some 21,000 boepd) will be computed with effect from January 1^st 2000 from the fourth quarter 2000 onwards.  There is another option on increasing Repsol YPF’s stake by a further 30% by 2003.

Spanish government measures

Enagas and CLH

In August last, Gas Natural SDG and CLH submitted to the Ministry of Economy proposals for the steps to be taken by Enagas and CLH respectively in fulfilment of the Royal Decree of Urgent Competition Development Measures, passed on June 23^rd last.

Bottled LPG

The Delegate Commission for Economic Affairs approved a new system of fixing maximum selling prices for bottled LPG, and set a new price ceiling of 1,309 pesetas for 12.5 kg. bottles of butane.  This was a 17.4% rise on the previous selling price, in force under the price freeze since October 3^rd 1999.  The company decided to make a conservative initial price rise of 20 pesetas per bottle.  

2.- ANALYSIS OF RESULTS FOR EACH BUSINESS AREA

Exploration and production

Quarterly results

Operating income for this activity in the third quarter 2000 was 1,030 million euros.  This compares with 1,142 million euros obtained in the second quarter 2000, and 471 million euros obtained in the third quarter 1999.

Second quarter income this year included 301 million euros of capital gain on the sale of UK assets.  If we eliminate this non-recurring item, there was a 22.5% growth in net income between the second and third quarters 2000.

The notable year-on-year increase in income was mainly the result of higher crude oil prices. The average price this quarter was US$30.4 per barrel of Brent, as opposed to US$20.6 per barrel a year earlier, and US$26.7 per barrel in the second quarter 2000. The strength of the US dollar, (the exchange rate against the euro rose 16% between third quarter 1999 and third quarter 2000) also boosted performance in this business area.

The drop in income from the second to third quarter 2000 may be explained by several factors affecting this quarter’s production, down 3% from the second quarter figure, which will hold down production figures for the whole year below original estimates.   These factors were:

Below forecast production of liquid hydrocarbons and gas in Argentina owing to a fall in demand from power stations which had a plentiful supply of hydraulic power over the period, and an exceptionally cold winter, which forced the company to paralyse activities in the southern fields.

Lower production at fields exploited under production sharing contracts, mainly in Indonesia, Egypt and Algeria.  Under this type of contract, production varies according to crude oil prices, as these contracts guarantee revenue as opposed to production, i.e., higher prices equals lower production, and vice versa.

In some countries such as Libya, where our production capacity could increase, output has to comply with the recent OPEC restrictions and we are producing at levels below our theoretical capacity.

As a result of the above, production in this third quarter was 1,021,000 barrels of oil equivalent per day in comparison to the 1,054,000 barrels produced in the second quarter.  Oil production was 621,000 barrels per day.

The above mentioned reasons, added to the delay of high gas consumption projects in Argentina (MEGA, Profertil and Dock Sud), will determine that the overall production profile of the year will result below initial estimates.

It is important to note that the recent sign of the Trinidad/Tobago deal (effective as from 1^st January 2000) will help increase the company’s production profile by approximately 21,000 boepd, which will raise third quarter production to 1,040,000 boepd, even with the previously mentioned exceptional circumstances and delays.

Accumulated results

Accumulated operating income at September 2000 was 2,917 million euros, in comparison to 548 million euros obtained for the equivalent period a year earlier.

The reasons for this good performance are as those already mentioned with reference to the third quarter.  The average price of Brent oil for the nine months rose to US$28.0 per barrel, in contrast to US$15.9 per barrel in 1999.

Net proven reserves as of September were of 4,370 million boe, 165 million boe under early year figures.

This decrease is originated by both an accumulative production as of September of 276 mboepd and asset sales of 107 mboe (mostly North Sea and USA), which were partially compensated by discoveries of 171 mboe (mainly in Bolivia, Argentina and North of Africa) and the revision of prior estimations by 47 mboe.

Investments

652 million euros were invested during the third quarter 2000, mainly in developing fields in Argentina, Indonesia and Egypt.

52 million euros were invested in exploration works, 277 million in development of fields and 267 million assigned to the exploration and production assets from the purchase of Astra and YPF minority shares in the recent public offering.

Accumulated investments for the first nine months 2000 were 118 million euros in exploration, 690 million euros in development of fields and 267 million euros in the above mentioned share purchase.

Of the total investments in exploration and development, 61% went to Argentina, 15% to other Latin American countries and 24% to other areas.

Refining and Marketing

Quarterly results

Third quarter 2000 income from refining and marketing activities showed a year-on-year rise of 15.9%, at 314 million euros, and were 4.3% lower than those for the second quarter of this year.

Higher international refining margins, mainly on conversion, were decisive in this improved performance.  Refining margins in Spain were US$3.9 per barrel, in comparison to US$3.3 per barrel obtained in the second quarter.  However, the distillation level in Spain fell by 790,000 tons, mainly because of a scheduled shutdown at the Puertollano.

In Argentina, refining margins, at US$4.9 per barrel, showed a 32% improvement with respect to the second quarter 2000, and distillation was 27,000 tons lower than in the second quarter, because of a scheduled shut-down at the La Plata refinery.

As in the first half, marketing operations in both Spain and Argentina suffered because of the difficulty in raising fuel retail prices to fully cover the higher prices of oil products. In Spain, an additional difficulty to raise prices was the devaluation of the euro against the US dollar.

However, the company has maintained a moderate pricing policy and has been affected by considerable public pressure both in Spain and Argentina, manifested in strikes, demonstrations and depo blockages during the third quarter.

The company raised prices considerably at the end of October, and this will permit us to recover part of this loss in margins in the fourth quarter.

LPG operating income was 3.7 million euros during this third quarter of 2000:  a 12.8 million euros negative result was obtained in Spain, and  a positive 16.5 million euros in Latin America.  This performance was 91.7% down on the third quarter 1999 as a result of the price freeze on bottled LPG in Spain, which cut back income by 31.6 million euros. 

After the approval of the new maximum price system by the Spanish government, the company will be able to recover its margin in the short term as a consequence of both this new improved maximum price and the fact that it will be revised on a half yearly basis instead of monthly, allowing lower volatility. With this new system the company will be able to recover traditional margins in a few months.

Sales in Spain were flat, and there was growth in all countries and products in Latin America, amounting to an overall 9%.

Accumulated results

Accumulated income from this business area for the first three quarters of 2000 showed a year-on-year rise of 15.0%, at 892 million euros.  This improvement not only came from the incorporation of YPF activities from June 1999, but also from strong refining margins over recent months.  These more than offset the sharp fall in marketing margins because of the previously mentioned difficulty in passing on higher feedstock costs in final selling prices, and reduced LPG income owing to the price freeze in Spain.

LPG operating income was 71.7 million euros for the first  nine months of 2000, 38.1 million of which were obtained in Spain, and 33.6 million in Latin America.  This figure is 56.2% lower than equivalent year earlier figures, as a result of the price freeze on bottled LPG in Spain, which reduced income by 94.1 million euros.

Sales in Spain showed a slight year-on-year fall of –1.5%, whereas in Latin America, they rose 36% thanks to the incorporation of YPF and a good performance by already existing business lines.

Investments

Third quarter investment in refining and marketing was 386 million euros, mainly to upgrade new refining units to produce medium distillates (catalytic hydro cracking), revamping of existing units and to develop service station network and LPG retail products  in Spain and Latin America.

Accumulated investments for the first three quarters were 811 million euros, mainly to new refining units to produce medium distillates (catalytic  hydro cracking), revamping of existing units, completion of the Cartagena-Puertollano pipeline, as well as development of the service station network and LPG retail products both in Spain and Latin America.

Chemicals

Quarterly results

Operating income from chemicals for the third quarter of 2000 was 35.4% down on year earlier figures, at 31 million euros, and 53.7% lower than in the second quarter, 2000.

Lower income from second to third quarters may be explained by a general fall in base chemical margins on international markets, resulting from the maintenance of contract prices for ethylene, together with a rise in the cost of naphtha, which produced an 11% reduction in the ethylene-naphtha differential.  Derivative chemicals also suffered from lower margins, due to a fall in selling prices on international markets, especially in the case of polyethylene and styrene.

A drop in margins may explain year-on-year quarterly reduction on derivative chemicals because of high feedstock prices (ethylene and propylene).  On the other hand, 1999 income included an extraordinary income of 25.7 million euros for the sale of rubber technology to the Mexican company Girsa.  The effect of these two items was not fully offset by better performance in base chemicals because of improved international conditions (a higher ethylene-naphtha differential of US$80 per ton).

Another reason for this drop in results is the delay in the start of the PO/SM plant in Tarragona.

Accumulated results

Operating income from chemicals for the first three quarters 2000 was 55.3% up on year earlier figures, at 132 million euros.  Improvement here was due to better international margins on base chemicals during the second quarter (a higher ethylene-naphtha differential of US$87 per ton), although this positive effect was curtailed by a lower income from derivative chemicals to date this year, in comparison to the same period of 1999 (when there was an extraordinary income from the sale of rubber technology to Girsa), and by 16% lower margins.

Accumulated sales of petrochemical products were 15% up in relation to the year earlier equivalent, at 2.1 million tons.

Investments

65 million euros were invested in chemicals in the third quarter 2000.  Most of this amount was spent on the Profertil urea/ammonium project in Bah�a Blanca (Argentina), and in capacity increases and  upgrading of existing units.  To date this year, investments total 173 million euros.

Gas and power

Quarterly results

Third quarter 2000 operating income from the Repsol YPF gas and power area posted a 155.8% rise over the same period of 1999, reaching 197 million euros.  This large improvement was mainly the result of consolidating 100% of the Gas Natural Group results from January 1^st 2000 onwards.  On equal accounting terms, a rise of 34.5% was registered, mainly from higher sales in Spain and Latin America.

Gas and power operations in Latin America generated 96 million euros over the third quarter 2000, and this was 140% more than that obtained in 1999.  Growth on the same terms would have been 60.0%. This performance was the result of economic recovery in the region, and the positive effect of US dollar appreciation against the euro.

Repsol YPF sales of natural gas come from both Gas Natural SDG (in Spain and Latin America) and its participation in Metrogas in Argentina.

Regarding the activities of Gas Natural SDG in the third quarter of 2000, we can highlight the following: 

10,128 million thermies of natural gas were sold to the residential and commercial sector in Spain and Latin America, showing a 16% rise over equivalent 1999 figures.  These higher sales may be attributed to growth in the customer list in both Spain and Latin America.

In consolidated terms, Gas Natural distributes gas to over 5,758,000 residential and commercial customers, showing an increase of 530,000 over the past twelve months. Of these, 330,000 were in Spain, 100,000 in Mexico, 40,000 in Argentina, and the remainder in Colombia and Brazil.

29,848 million thermies of natural gas were sold to the industrial sector in Spain and Latin America, showing a 9.5% rise over equivalent 1999 figures.  These higher sales were the result of good performance by the Spanish economy and commercial expansion in the areas where the company operates.

Regarding the activities of Metrogas in the third quarter of 2000, we can highlight the following: 

3,560 million thermies of natural gas were sold to the residential and commercial sector, showing a rise of 21.6% over year earlier equivalent figures owing to colder weather in July and August 2000.

A further 4,626 million thermies of natural gas were sold to the industrial and power station sector, showing a rise of 11.7% over year earlier equivalent figures. 862,000 customers are supplied through the stake in Metrogas. 

At September 30^th, 2000, Repsol YPF distributed natural gas directly or indirectly to a total of 8,728,000 customers, of which 3,521,000 were in Spain, and the remainder in Latin America.

Accumulated results

January to September operating income from the Repsol YPF gas and power area was 707 million euros, in contrast to 271 million euros obtained over the same period in 1999.  This 160.9% rise, on equal accounting terms (with 100% consolidation of Gas Natural), would be 27.4%.

This good performance was the result of higher sales to the residential commercial sector from growth in the customer list, and to the industrial sector thanks to a positive economic situation in Spain and the Latin American countries where Repsol YPF operates.

Investments

Investment in gas and power was 430 million euros during the third quarter, and 1,599 million euros for the first three quarters of the year 2000.  This was mainly spent on acquisitions in Mexico FD and Sao Paolo, the extension of the natural gas transmission and distribution infrastructure, and projects to integrate the gas-power chain.

2.5.-Corporate and others

This caption reflects corporate overheads not attributable to operating areas, and in this third quarter registered a loss of 7 million euros in contrast to 30 million euros in the third quarter 1999.  Accumulated expense for the first nine months of this year was 44 million euros in comparison to 40 million euros a year earlier.

3.- FINANCIAL RESULT

Net financial expenses for the third quarter of 2000 were 339 million euros, slightly higher than the figure of 310 million registered in the second quarter, which is the result of a rise in interest rates for the quarter, which increased the cost of short-term financial debt, or debt contracted at a variable interest rate.  This type of debt comprises 60% of the Group’s consolidated financial debt.

On the other hand, the evolution of the exchange rate of the US dollar against the euro has increased the figure of interests payable translated in euros, as 90% of the company’s financial debt is denominated in US dollars.

Accumulated interest coverage for the first nine months, expressed as EBITDA on the financial result, was 7.2 times, thus confirming the improvement shown during the first half 2000.

4.- EQUITY ON EARNINGS OF UNCONSOLIDATED AFFILIATES