| Preview of Income Statement, 4th quarter of 1997 |
| 1.- INTRODUCTION 1.1.- Income Statement Repsol’s net income for the last quarter of 1997 was 36,935 million pesetas, 14.5% higher than the results obtained for the fourth quarter of 1996. Quarterly operating income, at 70,280 million pesetas, and cash-flow, at 95,855 million pesetas, rose by 26.5% and 27.2% respectively, in comparison to the same period a year earlier. The 1997 financial year closed with a net profit of 126,098 million pesetas, which was 5.8% higher than that for 1996. Operating income also registered a considerable rise of 17.7%, and cash-flow was 26.4% up on the previous year. Last year’s performance was achieved in a year marked by certain voluntary decisions, taken by the company, and other measures decreed by the Spanish government. Measures of the first type included the effect of asset revaluation, which increased the value of corporate assets by 135,430 million pesetas. Higher amortizations resulting from this decision improved net cash-flow for the year by 6,851 million pesetas, although it led to a cut-back of 12,724 million pesetas in 1997 net income. Additionally, Repsol speeded up the rate of amortizations on natural gas transmission and distribution facilities in Spain, producing a 455 million pesetas tax saving, but an 845 million peseta reduction in net profit. If the above voluntary factors were disregarded, Repsol’s net income for 1997 would have shown a 17.1% rise over 1996, at 139,667 million pesetas. Under the category of factors set by the government, we must include the decision to freeze LPG prices over the first seven months of 1997. This decision cut Repsol’s operating income back by 15,110 million pesetas, and lowered net income by 9,822 million pesetas. Taking into account, both voluntary company decisions, and those dictated by law, Repsol would have closed the 1997 financial year with over a 25.4% higher income than in 1996. Throughout 1997, a series of steps were taken and provisions made, for an overall amount of 32,542 million pesetas, which allow us to confront 1998 with confidence. Of these, completion of a tax inspection up to 1992 and the conclusion of a dispute with the Chambers of Commerce in Spain are worth mentioning. Furthermore, 6,590 million pesetas were set aside for manpower restructuring programmes. It is also important to note that Repsol group inventories are valued at $14 per barrel. The difference between this and the $24 per barrel at which they were valued at December 31st, 1996, which amounted to 17,800 million pesetas, was absorbed in the 1997 income statement. Last year, capital expenditure was 507,766 million pesetas, and it was a record year for the company as far as investments are concerned. This outlay went to strengthen Repsol’s position in Latin America, to increase oil and gas reserves, and to bolster its ranking as a top company in its traditional activities in Spain. Financial costs for the year were affected by these large investments. 9 billion pesetas of the figure entered under this caption relate to projects which will not be in full operation until 1999 and the year 2000. 1.2.-Highlights of the last quarter, 1997
2.- ANALYSIS OF RESULTS BY ACTIVITIES 2.1. Exploration and production Quarterly results: Operating income for this activity in the fourth quarter was 8.9% higher than that of 1996, but 6.3% lower than in the third quarter of 1997. Crude oil prices were at similar levels to the preceding quarter, at $18.7 per barrel, and this is far below the $23.6 per barrel registered in the fourth quarter of 1996. The exchange rate of the dollar versus the peseta also continued to be high this quarter, at an average of Ptas. 148.3 per dollar, in contrast to Ptas. 128.9 per dollar for the fourth quarter of 1996. Repsol Exploraci�n operating income for the fourth quarter was 7,291 million pesetas, in comparison to 7,006 million pesetas in the previous quarter. Astra’s contribution to operating income in the last quarter of 1997 was 4,319 million pesetas, compared with 5,379 million pesetas in the prior quarter. This lower figure is the result of regularising Mexpetrol income when the latter was dissolved and 33.3% of operation at the El Port�n field was segregated from Astra. However, this reduction did not affect net profit, for it was counteracted by lower minority interests. Repsol’s production for the fourth quarter of 1997 was similar to third quarter levels. Higher production in Spain (gas from Poseid�n and oil from Boquer�n) practically compensated for slightly lower production from abroad. Results for the year: Operating income for 1997 was 45,484 million pesetas, in comparison to 31,579 million pesetas in 1996. This increase was mainly due to Astra’s contribution of 17,252 million pesetas in 1997, as opposed to 5,523 million pesetas in 1996. Repsol’s net production for the whole year was 82.13 million barrels of oil equivalent (14.59 million tonnes of oil equivalent), showing a 24% rise on the 66.46 million barrels net produced the year before. This rise may basically be explained by the inclusion of production from Astra over the whole year (as opposed to only six months in 1996), increased by the acquisition of Pluspetrol and Mexpetrol. Investments: 39,890 million pesetas were invested during the fourth quarter of 1997. 10,087 million pesetas of this was to raise Repsol’s stake in Astra by 9.27%. Investment in the development of fields was 23,287 million pesetas for the three month period. Overall investments for last year were 161% higher than the previous year, and amounted to 228,793 million pesetas. The greater part of expenditure for last year was to increase the level of the company’s oil and gas reserves. In fact, discoveries, extensions and revisions, alone permitted a 108% replacement of production for the whole year. At the close of the year, proved reserves reached a level of 1,037 million barrels of oil equivalent, which was 28% more than at the end of 1996, and practically double the figure for the end of 1995. 2.2. Refining and Marketing Quarterly results: Operating income for the fourth quarter was similar to that obtained in the third, and 16.3% higher than for the last quarter of 1996. Repsol’s refining margin indicator in Spain rose slightly in comparison to the third quarter, reaching $2.49 per barrel, and was 10% above that registered in the fourth quarter of 1996. The level of crude oil processed at Repsol’s refineries in Spain was 7% and 5% higher than in the final quarter of 1996, and the third quarter of 1997, respectively. Refining margins in Peru remained high, close to the $5 per barrel mark, and similar to those for the third quarter, whilst the distillation level remained at around 95% of nominal capacity. In comparison with the last quarter of 1996, there was a growth of 165% in La Pampilla refinery margins, and the level of distillation rose by 47%. These circumstances helped to nearly treble La Pampilla operating income for the fourth quarter of last year (at 3,764 million pesetas), with respect to the same period in 1996. Finally, the Argentinian company, EG3 made its first full quarterly contribution to operating income of 1,350 million pesetas. Turning to the logistics activity conducted by CLH, this dealt with 2.8% more products than in the same quarter a year earlier, in spite of falls of 7.2% in fuel-oil and 0.6% in gasoline. Over the whole year, CLH increased its activity by 1.4% in comparison to 1996, although there was again a fall of 7.7% in fuel-oil and 1.6% in gasoline, the latter due mainly to the growing popularity of diesel-engined vehicles. As for marketing, sales of light products in Spain (excluding those to other operators) over the last three months of 1997 rose by 3.1% with respect to the same period a year earlier, and 1.7% if we compute results for the two full years. Results for the year: 1997 operating income from this area was 36.3% up over 1996, at 110,824 million pesetas. This good performance may basically be attributed to continually high refining margins, 15,307 million pesetas contributed by companies acquired in Latin America, and high marketing margins on production in Spain. In 1997, for the first time, a pluri-annual agreement was reached with our service-station network dealers, contemplating the up-dating of commissions at a lower rate than forecast inflation. These commissions may be adjusted on the basis of service quality. Investments: Fourth quarterly investment in refining and marketing was 26,861 million pesetas. Investments for the whole year amounted to 117,463 million pesetas, and were 6.6% more than in 1996. Expenditure was made in building up refining and marketing activities in Argentina, improving refining units and storage facilities, and the extension and up-grading of service station networks. 2.3 Chemicals Quarterly results: Operating income from chemicals for the fourth quarter of last year was 8,784 million pesetas, showing a 69.3% rise over that for the same period in the previous year, and of 16.5% with respect to the third quarter of 1997. The great improvement in this quarter over the previous year may be attributed to a considerable growth in international margins on base chemicals. It should be mentioned that base chemical margins fell substantially during the last quarter of 1996 because of a sharp rise in the cost of naphthas, which it was impossible to pass on through price rises for ethylene and propylene. Income from derivative chemicals also improved by 7%, thanks to 12% higher sales, and 11% higher unitary margins. Better performance over the period, when compared with the previous quarter, was the result of a rise in sales of both base and derivative chemicals. However, the positive effect of higher sales was partly curtailed by a fall in margins on base chemicals during the final quarter. Results for the year: Accumulated income for the year was 17.9% up, at 28,379 million pesetas, against the 24,069 million pesetas obtained a year earlier. Here, the reason for improvement lay in higher base chemical prices on international markets. This had a contrary effect on derivative chemicals (cutting back the margin by 8%), because the higher feedstock costs could not be fully passed on to the customer by raising selling prices. 1,746 Kt of petrochemical products were sold in 1997. This was a fall of 8.9% over the previous year, mainly because of a prolonged shut-down at the olefin cracker in Tarragona, which affected sales of base and derivative chemicals alike. Investments: Investments in this area during 1997 amounted to 28,040 million pesetas, in comparison to 27,099 million pesetas in 1996. The main projects have been developed at Tarragona, where a new polypropylene plant, an increase in capacity at the low density polyethylene plant, and a 68 MW cogeneration unit have been built and are already on-stream. The re-vamping of the olefin cracker at Tarragona also went into operation, raising capacity for ethylene to 550,000 tonnes per year. 2.4 Gas and electricity Quarterly results: The 21,277 million pesetas in operating income from gas achieved by Repsol in the fourth quarter of 1997 was 42% more than that registered in the same period of 1996. LPG operating income for the three months was 84.1% up on year earlier figures, at 7,949 million pesetas, mostly because the price-setting formula was back in use again. As you will recall, prices were frozen in the last quarter of 1996. 752,000 tonnes of LPG were sold in the last quarter of 1997, and this is 10.4% more than the same period a year earlier. Here, Peru and Argentina account for improved performance, for sales in Spain registered a 3.8% fall against the fourth quarter, 1996. LPG activities in Latin America have not yet made a contribution of any weight, for growing income from Solgas, Peru, were countered by negative results from Algas, where business is still being rationalised. In the natural gas area, quarterly operating income was 13,328 million pesetas, 25% higher than the previous year, for unitary margins recovered, and sales rose in all categories. Indeed, it should be noted that the fourth quarter of 1997 included 1,300 million pesetas of additional amortizations following a revision of the useful life-span for transmission and distribution facilities in Spain. Fourth quarterly sales by the Gas Natural Group to the residential and commercial sector rose by 15.8% over 1996, to 8,089 million thermies. Here, the list of customers has grown through expansion in the areas already covered by the company, and new acquisitions made throughout the year. In consolidated terms, the Gas Natural Group distributes gas to more than 4,120,000 residential-commercial customers, showing an increase of 520,000 during 1997: 190,000 of these in Spain, 40,000 in Argentina, and the remainder from consolidation of shareholdings in Mexico, Colombia and Brazil. Demand from the industrial sector during the final quarter of 1997 jumped by 24.5% in comparison to year earlier figures, to reach 24,355 million thermies. Gas Natural Group sales of over 17 billion thermies to power stations in Spain, (4,197 of these in the fourth quarter), should also be mentioned. In Latin America, natural gas contributed 916 million pesetas during the fourth quarter, which was 96.1% more than in 1996. 6.3% higher sales, and 10.1% better operating figures in Argentina over the quarter were partly responsible, together with growing income from distributors in Brazil, Colombia and Mexico. For the whole of 1997, the contribution from Latin America was 16.1% higher than in 1996, at 5,379 million pesetas. Results for the year: Repsol’s gas activity registered an operating income of 50,321 million pesetas for the whole of 1997, in comparison to 62,629 million pesetas in 1996. As already mentioned in this report, the LPG price freeze decreed by the government cut back income from that sector by 15,110 million pesetas. Had it not been for this factor, income from gas would have increased by 4.5%. Investments: Quarterly investments in LPG amounted to 6,156 million pesetas, and in natural gas, 24,978 million pesetas. 127,963 million pesetas were invested over the whole of 1997, mainly for expansion in Latin America, and development of the gas transmission and distribution network in Spain. 2.5 Corporate and others This caption shows an operating expense for the quarter of 533 million pesetas, as opposed to 299 million pesetas a year earlier, and basically reflects the expenses incurred by Repsol’s corporate headquarters, which are not accountable to group companies. 3.- FINANCIAL RESULT Net financial expenses for the last quarter of the year were 7,770 million pesetas in contrast to 767 million pesetas over the same period a year earlier. When comparing results for the two periods, it should be recalled that the figure for the fourth quarter of 1996 showed the effect of a change in accounting criteria for capitalising financial costs, which meant that 2,600 million pesetas less were entered as financial expenses. Thus, bearing in mind this extraordinary effect, the difference between the fourth quarters of 1996 and 1997, under the same accounting terms, would be 4,400 million pesetas, as a result of higher net debt for the last quarter of 1997. Total financial expenses for 1997 were 24,988 million pesetas, in comparison with 8,141 million pesetas in 1996. This was basically the result of an increase in financial debt, which rose from 381,545 million pesetas at the end of 1996, to 548,483 million pesetas at December 31st, 1997. The large investments undertaken by Repsol over the past financial year are plainly visible here. 4.- EQUITY ON EARNINGS OF UNCONSOLIDATED AFFILIATES The figure obtained for the final quarter of 1997 through the companies in which Repsol has a minority stake, was 892 million pesetas. The greater part of this came from gas and electricity companies, and from the refining and marketing activity. 5.- GOODWILL AMORTIZATION During the fourth quarter of 1997, a goodwill amortization of 1,409 million pesetas was made, whereas the figure for the whole year was 3,796 million pesetas. Goodwill pending amortization at December 31st, 1997 was 71,090 million pesetas, and basically originated from investments made by Repsol in 1996 and 1997, in Latin America. 6.- EXTRAORDINARY ITEMS Looking at the year as a whole, an overall amount of 18,170 million pesetas was obtained from capital gains on divestments and asset write-offs, the application of liabilities and subsidies, plus other extraordinary revenues. 14,742 million pesetas were set aside as provisions and write-offs (6,590 million to finance future manpower restructuring programmes), and 8,152 million pesetas to cover future contingencies and losses. As a consequence of the foregoing, this caption registered an extraordinary net income for 1997 of 3,428 million pesetas. 7.- MINORITY INTERESTS It should be mentioned here that an issue of preference shares was made last October, to the value of $725 million. This was the first operation of its type ever carried out by a Spanish industrial company on the U.S.A. market. Dividends paid on these preference shares are entered under this caption of minority interests. Income attributable to minority shareholders for the financial year of 1997 was 23,600 million pesetas, against 13,812 million pesetas in 1996. The higher amount entered under this caption is mainly due to improved income from companies acquired in Latin America (7,303 million pesetas), and dividends on preference shares (1,560 million pesetas). 8.- TAXES The tax rate for 1997 was set at 28.9%, which is slightly lower than that foreseen for the whole financial year. This lower tax rate was the result of deductions on export activities to the amount of 3 billion pesetas: 1 billion pesetas of this originating from our stake in Gas Natural, and 2 billion from other Repsol investments in Latin America. REPSOL SUMMARISED INCOME STATEMENT (Million pesetas) (Non-audited figures)
______________________ BREAK-DOWN OF REPSOL OPERATING INCOME BY ACTIVITY (Million pesetas) (Non-audited figures)
__________________________________________________________________________ BREAK-DOWN OF REPSOL OPERATING CASH-FLOW BY ACTIVITY (Million pesetas) (Non-audited figures)
__________________________________________________________________________ BREAK-DOWN OF REPSOL OPERATING REVENUES BY ACTIVITY (Million pesetas) (Non-audited figures)
__________________________________________________________________________ BREAK-DOWN OF INVESTMENTS BY ACTIVITY (Million pesetas) (Non-audited figures)
__________________________________________________________________________ REPSOL COMPARATIVE BALANCE SHEET (Million pesetas) (Non-audited figures)
REPSOL CONSOLIDATED STATEMENTS OF CASH-FLOWS JANUARY-DECEMBER - 1996 AND 1997 (Million pesetas) (Non-audited figures)
OPERATING HIGHLIGHTS
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