Annual Report 2005 - Galp Energia

annual report 2005

“The capability demonstrated by the managers and all the employees of

Galp Energia during 2005 is the best foundation for the creation of an

essential and invigorating climate of confidence so that the company can

achieve the success that Portugal and its shareholders expect.”

Francisco Murteira NaboChairman of the Board of Directors

3table of contents :: annual report 2005

table ofcontents

Message from the Chairman of the Board of Directors 4Message from the Chief Executive Officer 5Governing Bodies 10From the Past to the Present Day 11Relevant Energy Sector Facts in 2005 13Organisational and Business Structure 14Management Report 171. Main Indicators 182. Business Segments 22

2.1. Exploration & Production 222.2. Refining & Marketing 242.3. Natural Gas Supply & Transport 302.4. Natural Gas Distribution 322.5. Power 332.6. International 34

3. Innovation and Brand 384. Personnel 445. Environment, Quality and Safety 486. Social Responsibility 527. Economic and Financial Performance 568. Implementation of International Accounting Standards (IAS/IFRS) 629. Relevant Facts Subsequent to the Close of the Financial Year 6610. Mandatory Statements 6711. Closing Notes 6812. Proposed Appropriation of Profits 69Appendices 71

Corporate Governance Report 72Consolidated Accounts 85Individual Accounts 165

annual report 2005 :: message from the chairman of the board of directors4

The year 2005 is one that will go down in the history of Galp Energia for three

fundamental reasons:

• The fact that a new strategic framework was defined for Portugal in the

energy sector, which permits Galp Energia to develop business interests in

the electricity market, besides continuing to implement business in a

more competitive regulatory climate, develop business activities in the

natural gas segment and, obviously, in the oil segment;

• The shareholder structure, which had been undefined for a relatively long

period of time and was the reason why the company was unable to fully

develop its business plan in a sustainable manner, was finally delineated;

• The company achieved its best ever financial and economic performance

and net income.

This was good news for all those who believe in the company, in particular

the company’s customers and its employees.

The company is thus duly equipped to tackle the challenges it faces, in particular:

• The successful implementation of the strategic vision, channelled towards

the ambitious creation of value, which the shareholders defined at the

end of the year;

• Listing in the Stock Exchange of its share capital, during 2006;

• Adjusting the company structure, governance and business ethos to a

more competitive and exacting environment.

The capability demonstrated by the managers and all the employees of Galp

Energia during 2005 is the best foundation for the creation of an essential

and invigorating climate of confidence so that the company can achieve the

success that Portugal and its shareholders expect.

On this occasion we must express our deep sorrow on the passing of João

Morais Leitão, former chairman of the General Meeting of Shareholders of

Galp Energia. He was a man of undeniable qualities, of great intelligence

and value, and always maintained a posture of great professionalism,

competence and impartiality in his duties, acting at all times in the defence

of the company’s best interests during a particularly difficult phase in the

Group’s life.

Francisco L. Murteira Nabo

Chairman of the Board of Directors

Message from the Chairman of the Board of Directors

5message from the chief executive officer :: annual report 2005

Message from the Chief Executive Officer

:: Successes in Challenging Times ::

The year 2005 was an important one for Galp Energia.

First, because of the excellent results achieved by our whole team, which

give us plenty of reasons for feeling satisfied. And I would like to mention

some of the facts and figures that I feel contribute most to this satisfaction:

• A record net income of EUR 442 million;

• A total return on average capital employed (ROACE) of 15 percent, with

15 percent for the oil business and 18 percent for the natural gas business,

placing us in a competitive position in relation to our international

competitors;

• A reduction in our debt to 1.3 times EBITDA, which guarantees a solid

capacity for investing in future growth;

• Some highly significant milestones, some of which are historic, achieved

in different business areas, such as:

• Record production at both Refineries (Porto and Sines) to a total of 14.3

million tonnes refined;

• Record sales by the wholesale business, to a total of 5.5 million tonnes;

• Stabilisation of the LPG business, in spite of substantial growth in

natural gas sales;

• Record natural gas sales in the domestic and industrial sectors for the

fifth year running;

• A new record of 1.375 GWh of electricity generated, limited for the time

being to co-generation plants;

• Crude sales of more than 1.8 million barrels.

This is certainly an impressive list of outstanding results that the Galp Energia

team was able to build in a business scenario with some favourable factors.

With dedication and professionalism, thanks to excellent performance levels,

the team took advantage of these external factors and managed to turn them

into capital gains for the company.

The year 2005 was also marked by significant changes in the national and

international business environment in which we operate.

At the international level, there were moderate increases in crude prices, but

even more important was a growth in refining margins resulting from a

substantial demand for refined products and a worldwide inability to produce

them. This deficient capacity was exacerbated by the disastrous storms in the

Gulf of Mexico that left a number of refineries paralysed for a long time.

Efforts are currently being made to make up for this deficiency by increasing

installed refining capacity at crude production centres and in markets in Asia,

for example.

In Portugal, we were faced with very important changes in legislation.

Of particular significance to Galp Energia was the debate that preceded

the approval in 2006 of legislation liberalising the natural gas market.

The short-term result of this liberalisation will be the sale to REN of our

re-gasification at the Sines terminal, our high-pressure transport assets

and some of our storage caves in Carriço, in a process aimed at creating

the right conditions for other operators to enter the market in the near

future. On the other hand, the National Energy Plan also provides for the

liberalisation of the electricity sector, in which Galp Energia is

determined to occupy a prominent position.

annual report 2005 :: message from the chief executive officer6

It is now up to us to ensure that it is implemented.

The reason of Galp Energia’s success has been its ability to react to market

changes and its special talent for innovation. One of the best examples of

this is the launch of the new “Pluma” gas cylinder by the LPG and marketing

teams. This product, which was planned and developed in Portugal,

achieved extraordinary success, not only in terms of sales but also in

strenthening Galp Energia’s market image. The “Pluma” was certainly a

perfect example of successful marketing that helped to confirm the

company’s capacity for innovation and customer satisfaction.

Another event of extreme importance to Galp Energia and all those who are

committed to its development took place in 2005. At the end of the year, a

new shareholders’ agreement was signed to create the stability and

confidence necessary for implementing the ambitious strategic plan that we

are developing. The agreement is of crucial importance to Galp Energia and

creates and institutionalises a stable shareholder base firmly committed to

rational, sustained long-term growth and the possibility of forming very

important technical and business partnerships. It was the perfect end to the

year.

We are beginning a new, intense cycle that promises to show great growth

potential for Galp Energia. The upcoming initial public offering of shares and

their subsequent admission to trading on the stock market will be an

excellent opportunity for us to show and develop the excellence that

characterises Galp Energia and its team.

I am absolutely sure that we have what it takes to do an excellent job.

José Marques Gonçalves

Chief Executive Officer

In short, we are facing a number of challenges and opportunities that the

Galp Energia team is sure to convert into yet another success.

At the same time, the company took a number of strategic decisions that

will naturally influence its future.

As a result of the good performance by Galp Energia and the changes in

circumstances that I have already mentioned, the Executive Committee of

the Board of Directors conducted an in-depth analysis and changed its

strategy to prepare the company for the coming years and plan its solid,

sustained growth in the setting of profound change that I have described.

This intense work involved many people at Galp Energia and resulted in the

Strategic Vision approved by the Board of Directors on 20 December 2005.

This vision provides for a large number of actions, some of the most

important of which are:

• A sustained commitment to the exploration and production of crude, in

order to reduce exposure to the volatility of refining margins;

• Substantial investment in refining, increasing the conversion capacity of

Galp Energia’s refining facilities, maximising return by optimising the mix

of crude purchased and producing products of higher commercial value;

• Initiation of the generation and sale of electricity, thereby making Galp

Energia one of the sector’s only companies worldwide with a tri-fuel offer.

This orientation has already manifested itself in a bid by a consortium led

by Galp Energia in the tender for licences to generate wind energy and by

the company’s application for licences to install combined-cycle power

plants.

The 2006-2010 Strategic Plan setting forth these ideas was approved

unanimously by the Board of Directors in 2006.

7executive committee :: annual report 2005

Executive Committee

From left to right:

André Freire de Almeida Palmeiro Ribeiro

Camillo Glória

João Pedro Leitão Pinheiro de Figueiredo Brito

José António Marques Gonçalves

Giancarlo Rossi

Fernando Manuel dos Santos Gomes

Rui Manuel Janes Cartaxo

galp energia

:: the management model adopted by Galp Energia seeks to ensure transparency and effectiveness,based on a clear separation of powers between the Board of Directors, which has supervision,monitoring and control powers over issues that are strategic in nature or concerning therelationship between the company´s shareholders and its governing bodies, and the ExecutiveCommittee, which is responsible for delegated operational tasks related to the day-to-daymanagement of the business units and focusing on the objective of value creation. ::

annual report 2005 :: galp energia10

Governing Bodies

As at 31 December 2005 the composition of the governing bodies of Galp

Energia S.G.P.S., S.A., for the 2005-2007 mandate was as follows:

General Meeting

Chairman:

Pedro Rebelo de Sousa

Vice-Chairman:

Victor Manuel Pereira Dias

Secretary:

Luís Miguel Pires Costa

Board of Directors

Chairman:

Francisco Luís Murteira Nabo

Vice-Chairmen:


Giancarlo Rossi

Directors:



Camillo Gloria

Angelo Taraborrelli

Federico Ermoli

Giorgio Puce

José Rodrigues Pereira dos Penedos



Eduardo de Oliveira Fernandes

Rui Miguel de Oliveira Horta e Costa

Joaquim Augusto Nunes de Pina Moura

Executive Committee

CEO:


Directors:

Giancarlo Rossi



Camillo Gloria



Single Auditor

In Office:

Pedro Leandro and António Belém, Chartered Accuntants registered in the

Portuguese Chamber of Chartered Accountants under n.º 96, represented

by Pedro Manuel da Silva Leandro, holding Chartered Accountant´s licence

n.º 392;

Substitute:

Oliveira Lima, Neves da Silva e Fernanda Colaço, Chartered Accounts

Company Secretary

Effective:

Rui Maria Diniz Mayer

Deputy:

Maria Helena Claro Goldschmidt

2002

• Acquisition of a 5% holding in CLH (Compañia Logística de Hidrocarburos),

which facilitated the development of a logistics strategy in the Spanish

market. This acquisition provided Galp Energia with the use of 15 storage

depots spread throughout Spain.

• Launch of HI ENERGY fuel in the additive-enhanced fuel market, a fuel

possessing innovative technical characteristics.

2003

• The 3rd phase of privatisation of Galp Energia, S.G.P.S., S.A., approved by

Decree-Law no. 124/2003 of 20 June, governed by Cabinet Order no. 193-

A/2003 of 26 December, which permitted REN to acquire 18.3% of the

share capital of Galp Energia through a private share offering - 4.8% from

the Portuguese state and the remaining 13.5% from Caixa Geral de

Depósitos.

• Cabinet Resolution no. 68/2003 of 10 May, outlining the general strategic

and organisational framework of the energy sector, promoting a

management model that is liaised and integrated with the electricity and

gas sub-sectors.

• Cabinet Resolution no. 63/2003 of 28 April, approving Portuguese energy

policy guidelines and revoking Cabinet Resolution no. 154/2001 of 19

October.

• Cabinet Resolution no. 14/2003 of 9 January, establishing the strategic

guidelines for the reorganisation of the energy sector and appointment of

a mission director to propose the reorganisation approach to take, business

alliance policy as well as the configuration of the operations that permit

these alliances to be implemented.

• The purchase of 1,240,774 shares, corresponding to 0.748% of the share

capital of Galp Energia, by Parpública - Participações Públicas, S.G.P.S., S.A.,

from the Portuguese state on 31 December 2003.

• The liberalisation of the public retail price of unleaded 95 petrol, road diesel

and coloured and marked diesel, via Ordinance no. 1423-F/2003 of 31

December.

:: From the Past to the Present Day ::

1999

• Galp Energia was founded by Decree-Law no. 137/99 of 22 April to

operate in the oil and natural gas segments as a result of the restructuring

of the energy sector in Portugal. The Portuguese state’s direct

shareholdings in Petrogal, GDP and Transgás were placed under the

control of Galp Energia and there followed an increase in the share capital,

which was only open to the other shareholders of Petrogal and Transgás.

2000

• A process of selection of international strategic partners was undertaken,

culminating in the selection of ENI and Iberdrola, which acquired 11% and

4%, respectively, of the share capital of Galp Energia from the Portuguese

state. This selection process comprised the second phase of privatisation of

Galp Energia, which was approved by Decree-Law no. 21/2000 of 1 March

and governed by Cabinet Resolution no. 10-A/2000 of 16 March.

• The signing of the purchase and sale contracts as a result of negotiations

with Petrocontrol, the ENI Group and EDP relative to the purchase of

Petrocontrol’s shareholding in Galp (33.34%) by the ENI Group (22.34%)

and EDP (11%).

• The implementation of the organisational model for the Galp Energia Group

and the public presentation of the company’s new corporate identity.

• The first significant results relative to oil production in Angola are achieved.

Awarded, together with Petrobras, the concession of two 10% equity

percentages in blocks located in the deep offshore of the Santos Basin, in

the 2nd License Round in Brazil.

• Commencement of ground preparatory work at the future site of the LNG

Terminal, in Sines.

2001

• Concluded the process of substituting town gas for natural gas in the

Lisbon gas distribution network. The construction of an underground

propane storage facility in Sines.

• Awarded, together with Petrobras, an equity percentage of 10% and 20%

in two blocks, in the 3rd License Round in Brazil.

11galp energia :: annual report 2005


• The company’s position in the Spanish market was reinforced through the

purchase of BP Enértica, which led to an attractive customer portfolio and

a logistics platform that permitted the expansion of the value chain in

Spain, moving it closer to the end customer.

• The conclusion of investment in the liquefied natural gas terminal in Sines

and connection of this infrastructure to the national network via the

Sines-Setúbal gas pipeline.

• The implementation of the SWAPS operation, a process that involved the

swap with Cepsa and Total Fina Elf of 78 service stations in Portugal for 79

service stations in Spain, allowing Galp to cement its position in six target

regions in Spain.

2004

• Decree-Law no. 233/2004 of 14 December approved the scheme for

trading greenhouse gas emission licences in the European Community,

transposing Directive no. 2003/87/EC of 13 October of the European

Parliament and Council of Ministers, into Portuguese law. It was amended

by Decree-Law no. 243-A/2004 of 31 December.

• Cabinet Resolution no. 171/2004 of 29 November approved the Action

Programme to Reduce Portugal’s Dependence on Oil.

• The accident at Petrogal’s Oil Terminal in Leixões on 31 July 2004,

during replacement works on the pipeline connecting the terminal

to Matosinhos Refinery.

• Decree-Law no. 71/2004 of 25 March, which amended Decree-Law

no. 10/2001 of 23 January, was approved, permitting that the storage

capacity of oil products be increased through the creation of reserves in

EU countries.

• Ordinance no. 517/2004 of 20 May established the scheme for the

creation and maintenance of oil product safety reserves and specifies the

minimum value of these reserves.

• The liberalisation of liquid fuels, approved by Ordinance no. 1423-F/2003

of 31 December, came into force on 1 January 2004.

• Parpública - Participações Públicas, S.G.P.S., S.A., purchased 5,774,401

shares of Galp Energia from the Portuguese state during the 2004 financial

year, thereby increasing the number of shares held in the company to

7,015,175, corresponding to a stake of 4.2298% of the share capital.


Relevant Energy Sector Facts in 2005

1. Purchase of Ptroval

On 31 January 2005, Galp Energia, via Petróleos de Portugal - Petrogal, S.A.,

purchased from Total 100% of Empresa Petróleos de Valência, S.A. - Ptroval,

the owner of Valencia Terminal Storage Depot.

2. Sale of Portgás

As a consequence of EDP - Energias de Portugal, S.A., exercising its call

option on shares and shareholder loans established in the "Shares and

Shareholder Loans Call Option Contract" entered into on 14 November 2003

between, on the one hand, EDP, and on the other, Galp Energia, GDP S.G.P.S.

and GDP Distribuição, the equity holding and shareholder loans that Galp

Energia held indirectly in Portgás - Sociedade de Produção e Distribuição de

Gás, S.A. - the only regional natural gas concessionaire not controlled by

Galp Energia - were sold to EDP on 10 January 2005 for EUR 84,974,201.24.

3. Restructuring of the Energy Sector

As a result of the European Commission’s decision of 9 December 2004,

which stated that the proposed acquisition of joint control of GDP - Gás de

Portugal, S.G.P.S., S.A., by ENI and EDP was infringing market rules, the

Portuguese government approved the National Energy Strategy in Cabinet

Resolution no. 169/2005 of 24 October. This legislative act defines the main

axes for the development of policies for the sector in addition to specifying

the framework for the reorganisation of those areas of sectoral companies

associated to the concession of regulated assets, market liberalisation and

competitiveness.

4. Changes to Galp’s Shareholder Structure

In December 2005, Parpública - Participações Públicas, S.G.P.S., S.A.,

purchased 13,373,134 shares of Galp Energia from the Portuguese state,

thereby increasing the number of shares held in the company to


On 7 December 2005, EDP - Energias de Portugal, S.A., announced that it

was going to sell its shareholding in Galp Energia to the Américo Amorim

Group.

EDP - Energias de Portugal, S.A., further announced that it had

simultaneously entered into an agreement with REN - Rede Eléctrica

Nacional, S.A., to regulate shareholder relations in Galp Energia, for the

purpose, amongst others, of establishing an understanding between the

parties regarding the implementation of the process of unbundling natural

gas regulated assets to REN, providing the Amorim Group with a buy option

on REN’s shareholding in Galp Energia.

5. Agreement Between the Portuguese Government and ENI

On 29 December 2005, a long-term agreement was signed by Galp

Energia´s principal shareholders - Amorim Energia, ENI and REN - regarding

the company’s management strategy through to 2010.

The contract establishes the possibility of Caixa Geral de Depósitos

becoming party to this agreement with a shareholding of at least 1% in Galp

Energia.

The agreement provides Galp Energia with the necessary shareholder

stability to permit the implementation of an ambitious strategic plan, in

accordance with the main guidelines unanimously approved at the meeting

of the Board of Directors of 20 December 2005.

The main provisions of the agreement are:

• An initial public offering of shares in 2006, in which part of the equity held

by the Portuguese state will be admitted to trading;

• The sale to REN of regulated natural gas storage and transport assets,

according to the government-defined guidelines for the energy sector;

• An option mechanism that, once the sale process of the regulated natural

gas assets has been completed, provides Amorim Energia with the right

to purchase REN’s shareholding in Galp Energia;

• Following the purchase of REN’s shareholding by Amorim Energia and the

acquisition of a shareholding in Galp Energia by Caixa Geral de Depósitos,

the shareholders ENI, Amorim Energia and Caixa Geral de Depósitos will

together hold more than two-thirds of the share capital of Galp Energia.

Under this agreement, all the shareholders decided to maintain the current

governance and management structure of the company.


Organisational and Business Structure

:: Galp Energia Group ::

Galp Energia, S.G.P.S.

GDP, S.G.P.S. 100% Petrogal 100%

Transgás, S.G.P.S.100%

GDPd, S.G.P.S.100%

Transgás100%

EMPL27.4%

Metragaz26.99%

Gasoduto Al And.33.04%

Gasoduto Extrem.49%

Gasoduto CMLB88%

Gasoduto BT51%

Transgás Atlântico100%

Transgás Armaz.100%

Transgás Indústria100%

Duriensegás75%

Paxgás100%

Dianagás100%

Medigás100%

Gásfomento100%

Lisboagás100%

Lusitaniagás85.038%

Setgás45.008%

Beiragás59.04%

Tagusgás41.27%

Driftal100%

Edel2.22%

PTL100%

Sacor Marítima100%

SM Internac.100%

Gasmar100%

Tripul100%

CLT100%

Tanquisado100%

Sigás60%

CLC65%

Blue FlagNavegation

100%

Eival100%

ASA50%

Probigalp50%

Galpgeste100%

Caiageste50%

Sopor51%

Sempre a Postos75%

Número Um49%

Brisa Access7.5%

Com. Líquidos75%

GalpServiexpress, S.A.

100%

Fast Access66,66%

P

Business Segments:

Exploration & Production

Refining & Marketing

Natural Gas Supply & Transport

Natural Gas Distribution

Power

International

Others


Petrogal 100%

Galp Energia, S.G.P.S.

Galp Madeira100%

CLCM75%

Gasinsular100%

Galp Açores100%

Saaga67.65%

Terparque23.5%

Galp Energia España100%

Galpgest100%

Gasolinera Gon100%

Estacion Alcalá100%

CLGás100%

CLH5%

Ptroval100%

GalpServiexpress, SLU

100%

Petrogal Guiné-Bissau100%

CLC GB45%

Petrogás GB65%

Petromar65%

ASB50%

Petrogal Moçamb.100%

Moçacor100%

Imopetro

PIM6.25%

Petrogal Angola100%

Agran98.67%

Sonangalp49%

Fina0.44%

Petrogal Cabo Verde100%

Enacol32.5%

Soturis100%

Galpmed100%

Tagus RE100%

Enerfin25.12%

Edel2.22%

PME Capital1.82%

PME Invest.1.82%

Galp E&P100%

Galp E&PSer. Brasil

95%

GITE24%

Petrogal Brasil100%

Energin35%

Carriço Cog.65%

Powercer70%

Sinecogeneração100%

Ecogen35%

Oni, S.G.P.S.4.095%

Galp Power, S.G.P.S.100%

Galp Serviços100%

Porten100%

Central-e20.3%

:: Galp Energia Group ::

management report

:: Galp Energia reported its best-ever earnings in 2005, with a net profit of EUR 442 million. Thisincome is 33% up on the 2004 figure (+ EUR 108.9 million) and it is proof of the sustainabilityof the company´s performance. ::

:: 1.2. Main Operational Indicators ::

annual report 2005 :: main indicators18

1. Main Indicators

:: 1.1. Economic and Financial Indicators ::

Indicator 2003 2004(*) 2005

(thousand euros)

Turnover 7,413,548 9,258,519 11,126,563

EBITDA 649,191 831,718 906,604EBITDA Margin 12.2% 12.0% 10.3%EBIT 334,510 447,109 529,350

Net Income 247,446 333,064 441,959Cash Flow 562,127 717,673 819,213ROA after taxes 3.7% 5.3% 6.2%ROE 15.9% 18.8% 21.7%ROACE 7.9% 10.9% 14.9%

Average Capital Employed 3,516,032 3,425,336 3,342,584Average Net Debt 1,960,162 1,656,079 1,306,902Average Equity 1,555,870 1,769,257 2,035,682Funding Needs 204,092 432,943 308,900Net Debt / EBITDA 2.9 x 1.7 x 1.3 xEBITDA / Net Interest 14.2 x 18.5 x 23.1 xGearing 52.8% 42.9% 34.7%Debt to Equity 111.9% 75.1% 53.2%Financial Autonomy 27.6% 31.3% 35.1%

Investment 466,319 334,992 333,107

(1) - Operating Income + Amortisations of tangible and intangible fixed assets + Provisions net of Adjustments and Reversals

(2) - EBITDA / Turnover excluding Tax on Oil Products

(3) - Operating Income

(4) - Net Income + Amortisations of tangible and intangible fixed assets + Provisions net of Adjustments and Reversals

N.B.: Cash Flow calculated from a Financial Statement perspective

(5) - EBIT * (1 - Corporate Tax rate) / Average Net Assets

(6) - Net Income / Average Equity

(7) - [Net Income - Net Financial Items w/o equity equivalence * (1- Corporate Tax rate)]/ Average Capital Employed

(8) - [Shareholders' Equity + Bank Debt + Net Shareholder Loans(*) - Cash and cash equivalents] average values

(9) - (Net debt year n -1 + Net debt year n ) / 2

(10) - (Shareholders' Equity year n -1 + Shareholders' Equity year n ) / 2

(11) - Net income + Amortisation for the year + Change in fixed assets + Investment in working capital (includes shareholder loans)

(12) - Net interest = Interest paid (group and associated companies + other) - Interest received (group and associated companies + other)

(13) - (Bank Debt + Net shareholder loans (*) - Cash and cash equivalents) / Capital employed and Minority interests

(14) - (Bank Debt + Net shareholder loans (*) - Cash and cash equivalents) / Shareholders' Assets and Minority interests

(15) - Shareholders' Equity with Minority interests / Net Assets

(*) - Shareholder Liabilities (Shareholder Loans) - Financial Assets (Loans) - Shareholder Assets (Shareholder Loans)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

(15)

2003 2004 2005

CommercialSales of Crude Oil (thousand bbl) 1,856 1,707 1,826Raw Material Processed in Refineries (million tons) 13.7 13.6 14.3Oil Product Sales (1) (million tons) 14.2 14.9 15.2Total Natural Gas Sales (million m3) 3,443 4,015 4,234Energy Production (Gwh) 726 1,219 1,375

InfrastructuresNumber of Service Stations in Iberia 1,090 1,094 1,060Length of Natural Gas Network (Km) 8,742 9,468 10,196

- Transport 1,405 1,431 1,435- Distribution 7.337 8,037 8,761

PersonnelTotal number of Galp Energia Employees (2) 5,390 5,806 5,909Number of Off-Site Galp Energia Employees (3) 3,482 3,635 3,702

(1) Including Spain, Competitors, Exports

(2) Including all companies of Galp Energia Group

(3) Excluding Galpgeste, Galpgest and Gesoil

N.B.: The values for natural gas Distribution Network are corrected for sale of Portgás, for comparison purposes

(*) - Some indicators published in the 2004 Management Report underwent change due to Decree-Law no. 35/2005 (reclassification of extraordinary income to operating income)

19main indicators :: annual report 2005

:: 1.3. Business Segments ::

Galp Energia 2004 2005 %

(thousand euros)

Turnover 9,258,519 11,126,563 20%EBITDA 831,718 906,604 9%EBIT 447,109 529,350 18%CAPEX 334,992 333,107 -1%ROA (1) 7.6% 8.6% 1.0 p.p.

(1) - Obtained by EBIT / Total Consolidated Assets w/o Financial Investment

Exploration & Production 2004 2005 %

(thousand euros)

Turnover 42,575 66,638 57%EBITDA 25,469 46,028 81%EBIT -19,343 23,537 -CAPEX 74,874 82,435 10%ROA (1) -5.7% 7.7% 13.4 p.p.Sales (thousand bbl) 1,707 1,826 7%


Refining & Marketing 2004 2005 %

(thousand euros)

Turnover 8,380,620 10,019,083 20%EBITDA 593,943 573,816 -3%EBIT 345,885 306,028 -12%CAPEX 162,115 155,255 -4%ROA (1) 10.5% 9.1% -1.4 p.p.Processed Raw Material (million tons) 13.6 14.3 5%

Natural Gas Supply & Transport 2004 2005 %

(thousand euros)

Turnover 705,144 956,517 36%EBITDA 146,914 197,636 35%EBIT 94,251 151,909 61%CAPEX 31,041 18,191 -41%ROA (1) 5.9% 9.7% 3.8 p.p.Sales (million m3 NG) 4,015 4,234 5%


Natural Gas Distribution 2004 2005 %

(thousand euros)

Turnover 196,523 226,066 15%EBITDA 73,562 83,225 13%EBIT 39,646 47,233 19%CAPEX 61,972 70,782 14%ROA (1) 4.3% 4.9% 0.6 p.p.Sales (million m3) 453 478 6%


Power 2004 2005 %

(thousand euros)

Turnover 14,241 24,780 74%EBITDA 2,791 3,668 31%EBIT -93 710 -CAPEX 3,854 1,233 -68%ROA (1) -0.2% 2.0% 2.2 p.p.Energy Production (Gwh) 1,219 1,375 13%



businesssegments

:: gross margin increased by EUR 169.5 million (up 11%) to EUR 1.695 billion. The performances ofall of Galp Energia´s business segments, were decisive to this evolution. ::

annual report 2005 :: business segments22

2. Business Segments

:: 2.1. Exploration & Production ::

The Exploration & Production represents the Group in the upstream sector of

the oil industry. This business segment is responsible for coordinating,

supervising, studying and performing all activities related to the

Prospecting, Investigation, Assessment, Development, Production and Sale

of hydrocarbonates. This field of intervention is complemented by the

identification, analysis and promotion of new development opportunities in

new oil exploration and production projects.

The Exploration & Production business segment achieved a EUR 46 million

EBITDA in 2005. This result is an increase of EUR 20.6 million (+81%) on the

2004 figure, and it is principally due to two favourable factors:

• The increase in the quantities sold (+119,000 barrels; +7%);

• The increase in the international reference prices - Brent. The average

annual price of Brent was USD 54.5/bbl, up 42% (+ USD 16/bbl) on the

2004 figure. The average sales price achieved by Exploration & Production

in 2005 was USD 45/bbl, as opposed to the average price of USD 31/bbl in

2004.

The Exploration & Production business segment has been subject to

consolidation in recent years by means of a selective investment policy,

aimed at acquiring an equity percentage of blocks of high potential,

preferentially in Portuguese-speaking countries (Angola and Brazil).

The investment made in this business segment rose to EUR 82.4 million, an

increase of 10% on last year’s figure. The block currently in production

(Block 14) was the investment priority, namely to conclude phase 1 of the

Benguela/Belize/Lobito/Tomboco project. The investment focused on

preparing for the start-up of the Benguela-Belize field and the performance

of seismic surveys and other investigative work.

The Benguela-Belize survey and production platform, located in Block 14 in

Angola, was awarded “Project of the Year” by the Offshore Energy

Association. This is one of the most important awards in the world oil industry.

The upstream portfolio of Galp Energia is composed of 60 shares in blocks

divided between Angola and Brazil. In Angola, Galp Energia holds an equity

percentage in six blocks. In Brazil, the company has an equity percentage in

54 blocks, all in partnership with the Brazilian company Petrobras. Thirty of

these blocks were awarded in the 7th round, which was concluded during

2005.

Angola:

2004 2005 %

(thousand euros)

Turnover 42,575 66,638 57%EBITDA 25,469 46,028 81%EBIT -19,343 23,537 -CAPEX 74,874 82,435 10%ROA (1) -5.7% 7.7% 13.4 p.p.Sales (thousand bbl) 1,707 1,826 7%


Block Type Operator Galp Energia %

Block 1/82 (Safueiro Field) Offshore AGIP/ENI 10%Cabinda Central Block Onshore Devon 20%

Block 14 Deep offshore Chevron 9%Block 14K Deep offshore Chevron 4.5%Block 32 Ultradeep Offshore Total 5%Block 33 Ultradeep Offshore Esso 5%

Brazil:

Production

The total production of Block 14 rose to 1,551,000 barrels, which is 103,600

barrels short (-6%) of the 2004 value. This production drop is largely due to

the change to the daily production equity percentage, which influenced all

of the operators’ available production.

Block 14 was also influenced by other relevant facts:

• The preparation for the production start-up of phase 1 of Benguela-Belize;

• The approval of the engineering project for the Lândana Tombua field. The

manufacturing contracts are forecast for 2006;

• Assessment studies of oil discoveries in the Gabela and Negage fields;

• The performance of two large-scale seismic surveys in Block 14 to study

the zone’s potential.

Exploratory work was performed in Block 14K, which confirmed the

existence of oil. This process was followed by an economic feasibility study.

The abandonment of Block 1 is forecast for the first half of 2006, after the

field produced six million barrels.

23business segments :: annual report 2005

The proven reserves corresponding to the equity percentages held by Galp

Energia´s rose to 38.1 million barrels, a downward review of the 2004 figure,

which stood at 44.3 million barrels. The basis for this change is due, on one

hand, to 2005 production figures and, on the other hand, to the review of

the reserves based on the Kuito Updated Reservoir Development Plan

drafted by the field operator (Chevron).

Exploration

Exploration work was carried out in the two geographical areas of interest.

In Angola, the most relevant facts included a new oil discovery in Block 32,

made by the “Gengibre-2” well. This block is located to the north-west of

Luanda about 180 kilometres from the coast, in water with depth of 1,700

metres. In Block 33, the initial exploration phase has been completed and

the economic-financial feasibility of the discovered oil is currently being

assessed.

In Brazil, exploratory work continued in the blocks awarded in the second

and third rounds. In Block BM-S-8, drilling preparatory work commenced,

while the drilling of the first well started in block BM-S-11. In all the other

blocks progress was made in the preliminary exploration studies.

Seismic work commenced in the field in the blocks awarded in the sixth

round.

Round Basin Block Type Operator Galp Energia %

2 Santos BM-S-8 Deep offshore Petrobras 10%2 Santos BM-S-11 Deep offshore Petrobras 10%3 Santos BM-S-21 Deep offshore Petrobras 20%3 Santos BM-S-24 Deep offshore Petrobras 20%6 Potiguar BT-POT-28 On shore Galp Energia 50%6 Potiguar BT-POT-29 On shore Galp Energia 50%6 Potiguar BT-POT-32 On shore Petrobras 50%6 Potiguar BT-POP-36 On shore Galp Energia 50%6 E. Santo BT-ES-23 On shore Galp Energia 50%7 E. Santo BT-ES-24 On shore Petrobras 50%7 Sergipe-Alagoas BT-SEAL-13 On shore Galp Energia 50%7 E. Santo BT-ES-28 On shore Petrobras 50%7 Potiguar BT-POT-59 On shore Galp Energia 50%7 Potiguar BT-POT-56 On shore Petrobras 50%7 Potiguar BM-POT-16 Deep offshore Petrobras 20%7 E. Santo BM-ES-31 Deep offshore Petrobras 20%7 Potiguar BM-POT-17 Deep offshore Petrobras 20%7 Potiguar BT-POT-51 On shore Galp Energia 50%7 Potiguar BT-POT-47 On shore Galp Energia 50%7 E. Santo BT-ES-29 On shore Galp Energia 50%7 Potiguar BT-POT-45 On shore Petrobras 50%

Angola (Block 14) 2003 2004 2005

Quantity Produced (bbl) 1,801,780 1,654,957 1,551,300Proven Reserves (bbl) 50,600,000 44,300,000 38,100,000


Projects

In relation to new projects, the most significant occurrences in 2005 include

the commencement of work to submit a bid for blocks located in East

Timor’s exclusively controlled territorial waters and a bid for participation in

the seventh round in Brazil.

:: 2.2. Refining & Marketing ::

This business segment is responsible for guaranteeing the timely and

sustained coverage of the needs of the oil products’ market, by selecting

and acquiring raw materials and semi-processed products and effectively

and efficiently using the industrial infrastructures of refining, oil and

logistics. Once refined, the finished products are placed on the market by

the company's business units for sale to private individuals and company

end users.

The EBITDA generated by the Refining & Marketing business segment was

EUR 573.8 million, which represents 63% of Galp Energia’s total EBITDA. This

drop of 3% on the 2004 figure was fundamentally due to non-recurrent

costs borne by the company as a result of energy sector restructuring and

the increase in pension fund contributions. Without these costs the EBITDA

would have been EUR 613.2 millions, equivalent to a 3% rise on the 2004

figure. The EBITDA figure for 2005 is also penalised by the lag time impact

on prices, which reflects the out-of-step alterations in sale and purchase

prices. In operational terms, the following played a favourable part in the

financial figures achieved in 2005:

• The increase in refinery processing volume, as absolute monthly records

were achieved;

• The improvement to international refining margins (with best ever

maximum values achieved in the last quarter);

• The reliability levels recorded for Sines -97% - and Porto -96%;

• The increase in business activity in the business units, leveraged by

growth in Spain.

Investment made in the Refining & Marketing segment was EUR 155.2

million in 2005, 4% below the 2004 figure. The bulk of the investment was

channelled to the reconfiguration of the logistics area, with the start-up of

CLCM on the island of Madeira, to the business units in order to promote

business growth in that area (service stations and stores), and to the field

of innovation, embodied in the acquisition of new LPG cylinder - “Pluma”.

Refining and Trading

The refining business in 2005 was marked by the record quantities

processed, in a year in which international margins were very favourable.

Growing demand in the market led the company to adapt to the new

requirements, and to essentially focus on adjusting refining operations to

the dieselisation of the market and logistical optimisation. Refining is

currently a market-orientated business that is aware of customers’ needs

and their satisfaction and, at the same time, intent on beating market

efficiency standards.

The refining business achieved historic results in 2005 due essentially to a

favourable double-barrelled effect:

• The improvement of international benchmark margins through the

increase of individual product quality differentials over crude;

• The increase of the quantities processed in the two Refineries, as record

monthly production highs were achieved.

The crude oil acquisition policy continued to be based on the diversification

of supply sources in terms of geographical location.

2004 2005 %

(thousand euros)

Turnover 8,380,620 10,019,083 20%EBITDA 593,943 573,816 -3%EBIT 345,885 306,028 -12%CAPEX 162,115 155,255 -4%ROA (1) 10.5% 9.1% -1.4 p.pProcessed Raw Material (million tons) 13.6 14.3 5%

Origin of Crude Imports

West Africa25%

Americas18%

CIS6%

Gulf19%

North Sea4%

Mediterranean28%


The acquisition portfolio was governed by an optimisation of demand for the

supply of specific grades combined with price negotiation flexibility, this

being the reason why the proportion of purchases made in the spot market

was around 52%. The rest was purchased under contract. Of note in this

vein is the quantity purchased under frame agreements (around 18%), with

the price negotiated with the supplier on a freight-by-freight basis. Fixed

contracts corresponded to 30% of the total.

The processing of crude oil and other raw materials achieved a maximum

of 14.3 million tons, exceeding the 2004 figure by 5% (equivalent to around

0.7 million tons). Production in 2005, in compliance with the company’s

positioning and strategy for the market and for the partnership with the

business units, with a view to meet customer requirements, was

significantly geared to the middle distillates (essentially diesel and jet fuel)

and fuel (essentially bunker fuel). The reduction of the national market for

gasoline was absorbed by exports to the USA, a market that was especially

strong during 2005.

This positioning was supported by the favourable development in the

differentials of the international price of some products due imbalances in

worldwide supply and demand, such as that noted in the development of

the prices of distillates and gasoline (gasoline was also influenced by the

abnormal hurricane season).

A total of 15.2 million tons of finished product were sold in 2005, a 3%

increase on 2004. The largest variations were recorded in the sale of Air and

Marine Bunker Fuel (+31%) and Exports (+16%).


The support provided by Galp Energia to the National Biofuel Production Plan

must also be mentioned. This support was provided through entering into

protocols with potential national producers, collaborating in the definition of

the project bases, the technology to be used, laboratory tests and trials and

the optimisation of logistical options. Galp Energia has carried out the

necessary adaptations and investment in its plants to acquire, control and

incorporate biofuels into its logistics chain, in accordance with the European

Directive, guaranteeing, at the same time, its own fundamental interests.

The ethos and practice of continual improvement that has been constantly

implemented in recent years has permitted improved refining performance

and the achievement of suitable levels of return on assets. With this

objective, Galp Energia has applied for the creation of a Technological

Research and Development Nucleus (NITEC) in the Porto Refinery which shall

consist of the creation of a permanent team devoted to the development of

technological know-how that may give rise to new products, processes or

solutions or even the introduction of significant improvements to those

already existing. The Porto Refinery NITEC was approved by the Innovation

Agency in 2005.

One of the main priorities in 2005 was the logistics expansion. With the

purchase and integration of Ptroval into Galp Energia’s supply chain at the

start of the year the first imports from Spain became possible. In addition,

with the operational start-up of the CLCM (Companhia Logística de

Combustíveis da Madeira) plant in Madeira, supply capacity to the island of

Madeira was strengthened in terms of regularity and stability.

In relation to the “Monoboia” infrastructure, and after the legal proceedings

of previous years, the installation of a new unit is underway. It is forecast

that this will commence operations in the second quarter of 2006. This asset

will permit a reduction to logistical costs and increase the flexibility and

profitability of the Porto Refinery in relation to crude discharges.

Of significance in the environmental field is the environmental licensing

project of the Refineries, which is a big challenge for coming years,

particularly in relation to compliance with the objective to reduce

greenhouse gas emissions and to increase energy efficiency. The main

purpose for licensing, in accordance with legislation (Decree-Law no.

194/2000), is to guarantee environmental protection and reduce the impact

of refining activity on water and soil resources and atmospheric emissions.

Crude and Refined Products Balance (Iberian Market) 2003 2004 2005(millions tons)

RefiningCrude 12.7 12.7 13.1Nafta 0.5 0.4 0.3Other Raw Materials 0.5 0.5 0.8Production 13.7 13.6 14.3

Refined Product 12.8 12.7 13.1Product Purchases (*) 1.9 2.1 2.1Stock Variation -0.5 0.1 0.1Available Product 14.2 14.9 15.2

Galp SalesCompetitors 4.4 4.3 4.2Customers (**) 7.2 7.5 7.3Exports (***) 1.6 2.0 2.3Bunkers 0.9 1.1 1.4Total 14.2 14.9 15.2

(*) - Including Spain. (**) - Including Spain and Autonomous Regions. (***) - Excluding Spain.


Greenhouse gas emission permits and the respective licence amounts were

issued to the Sines and Porto Refineries for the purpose of CO2 gas emission

allowance trading. A CO2 gas emission control and monitoring system has

already been implemented in the Refineries. In 2005, measures were taken

to reduce CO2 emissions, which consisted of improved energy use, altering

the characteristics of the fuel consumed and reducing losses by discharge

into the safety system.

In the safety field, Sines Refinery recorded one million man hours worked

without a single accident that required sick leave, which demonstrates the

increasingly important position that these subjects are taking up in the

company.

Investment made in 2005 rose to EUR 76.3 million, the majority of which

was channelled to the Refining area, to conclude the Parque do Caniçal

(CLCM) logistics project in Madeira, to construct the strategic warehouse

(CLC), which should be completed in 2006 and the investment made in

purchasing the Spanish company Ptroval - Petróleos de Valência, SAU.

Of particular note in the Refineries was the remodelling of the bitumen

storage and freight facilities (Sines), the revamping of the HV unit (Sines)

and the replacement of piping and improvement of safety conditions at

Leixões terminal (Porto).

Chemicals

The year 2005 was characterised by less attractive margins for the

production of aromatics, compared to the previous year.

The strong rise in the average cost of the raw material, reformate, the value

of which is directly related to the price of gasoline, was not accompanied by

higher aromatic prices; greater price increases of derivatives would affect

demand and promote their replacement for alternative products.

Despite the context of unfavourable margins, 540,000 tons were sold, a 7%

increase on the 2004 sales figure. The majority of sales were in the export

market (73%).

Retail

In Portugal, the fuel retail segment was marked by a stronger competitive

context, achieved through growth, due to the purchase of a second operator

with a significant market position and the increase of hypermarkets’ market

share in this business.

In this context, pressure was placed on prices and margins deteriorated, in

a year in which demand fell as a result of the economic recession that has

hit Europe, and which has not overlooked Portugal. The national retail

market for liquid fuel fell 3% compared to the previous year. Gasoline,

which recorded a drop of 7%, was the main product responsible for this fall.

In Spain, supply is dominated by three main operators, which, together,

have a 70% market share. Contrary to that recorded in Portugal, the Spanish

market grew 1.3% from 2004 (which was mainly driven by diesel, +5%).

Galp Energia implemented its business in Spain centred around six target

regions, which account for close to 65% of the entire Spanish market.

In Iberian terms, the Retail business accounted for 3.2 million cubic metres

of sales, which was practically identical to the 2004 figure. The performance

of Galp Energia sales was sustained by the increase of average sales per

service station (3,100 m3, up 4% on 2004) achieved with a smaller service

station network (down 34 stations on 2004), therefore, a more efficient and

optimised network.

The partnership with SONAE (“Vice-Versa” campaign) had a positive impact

on sales and is a clear demonstration of a winning partnership strategy that

brought value to both companies involved.

As an embodiment of the philosophy of creating a relationship of proximity

with the customer and providing solutions to meet their needs, Galp

Energia:

• Broadened its range of premium fuels through the launch of unleaded G-

force gasoline, as a continuation of the backing provided to the

diversification of fuel initiated in 2004;

Number of Service Stations 2004 2005 Change

TOTAL 1,094 1,060 -34Portugal 860 837 -23Spain 234 223 -11

• Continued the development of the “non-fuel” business strategy, through

the expansion of the chain of stores - opening 12 new stores.

Moreover, the importance of Centros Midas units grew, as the chain

achieved 10,300 more customers that it had in the previous year (up 44%).

The vehicle wash business also grew. In Portugal, 814,000 vehicle washes

were made in Galp service stations, a 4% increase on the 2004 figure. In

Spain, taking advantage of the experience and skills honed in Portugal, Galp

TV was launched.

Retail investment rose to EUR 46.2 million. This investment was primarily

channelled to the optimisation of the Iberian distribution network, through

the construction of new service stations, in selected areas, and through the

deactivation of positions deemed to be less profitable, and into the

expansion of the convenience store business (12 new stores).

In addition, the I.T. system infrastructures were restructured, through the

launch of the TIGER programme (Transformation of the Infrastructure of Galp

Retail) embodied in the following initiatives: local systems in service stations,

transaction management, business back-office systems and a convenience

business support system. This project will provide a fundamental contribution

towards adapting the information systems to the needs of the business.

In 2005, Galp Energia invested in redefining distribution network

management in Portugal and the consolidation and “cleansing” of the

network in Spain, redimensioning the cost structure to the real dimension of

the business, so as to carry out the groundwork for profitable growth.

Wholesale

The year 2005 was notable in the Wholesale business segment for strategic

consistency based on the profitable growth of the business, tight spending

control and the improvement in the management of receivable trade

accounts.

This business unit, sold 5.5 million tons of oil products in Iberia, a growth of

1 million tons on the 2004 figure, more than half of which was due to the

purchase of a company in Spain. But even excluding the impact of that


acquisition, sales were 13.5% up on the 2004 figure, driven by 11.6%

growth in Portugal and 19.5% in the Spanish market.

In Portugal, the priority of the wholesale business consisted of the

consolidation of the national market and the strengthening of commercial

ties with customers through entering into medium and long term contracts.

The development of the activity in Spain involved exploring the growth

potential in the segments in which Wholesale already operates. After the

acquisition of the ex-BP Enertica (currently called Serviexpress España),

2005 was the year in which it was restructured and integrated into the Galp

Energia value chain. The restructuring plan, initiated at the year start, will

make this logistics asset more profitable and provide for the leverage of

sales in Spain, demonstrated by the fact that the wholesale market share

grew to 5% overall, reaching 9% for diesel.

In this business segment, the management of relations with the customer

is guaranteed by CORe (Relations Operational Centre) which puts into action

the company’s approximation to the customer. In 2005, gains in efficiency

and effectiveness were recorded in certain key processes of customer

relations, such as the management of orders (eOrdering), the automation of

bonus calculation and allocation and the automatic production of proposals

and contracts. The external customer satisfaction index was 87.1%, an

improvement on the previous year’s value.

Number of Stores 2004 2005 Change

M24 86 92 6Tangerinas 62 68 6TOTAL 148 160 12


Investment in 2005 totalled EUR 14.8 million. Of particular note in this field

is the Iberian-wide expansion of the Serviexpress concept, investment in the

distributors project (involving the strengthening of sales relations with this

market segment, through entering into medium term contracts), and the

investment inherent to the acquisition and supply of fuel-oil to two large

customers of the electricity sector in the Madeira autonomous region (EEM

- Empresa de Electricidade da Madeira and AIE - Atlantic Islands Electricity).

The highlights of the year, per business area, were:

Aviation

In the Aviation business segment field the main point of interest was the

capacity to take advantage of market growth to increase sales. The

stabilisation of the Aviation portfolio, through the strengthening of relations

with the main customers and the renegotiation of contracts, and the

acquisition of new customers permitted a 3% increase in the number of

Galp Energy supply interventions in airports and an increase in sales of

around 13% (+57,700 tons). In logistics terms, the strategy of operational

optimisation was maintained.

In Spain, after 2004 was notable for Galp Energia by achieving a foothold in

the four main Spanish airports, 2005 was the year in which the impact of

this strategy would be felt, as sales reached 72,000 tons, distributed among

12 airports.

Marine

In the Marine business segment, 2005 was the year in which a new sales

record was achieved, with a total of 851,800 tons. The key factors for this

growth performance of +33% were the increase in sales of bunker fuel to

foreign ship owners - taking advantage of the good performance of our

Refineries in order to achieve better positioning in the international market

with a more competitive range - and to national ship owners.

Diesel supplies to the fishing segment in Galicia increased, providing for an

18.6% increase in sales over 2004.

A 3,000 tdw double-hulled tanker, Galp Marine, entered into operation, to

support the bunker fuel business segment. This asset is proof of the

company’s commitment to meeting environmental and safety parameters,

given that it meets legislative requirements on double hulls around three

years before the requirement comes into force.

Extra Network

In the Extra Network business segment the policy of consolidation of

commercial relations with the main customers of the transport segment

continued (through multi-year contracts, services rendered, and others) and

the implementation of the distributors project in the retail segment went

ahead. Sales in these segments in Portugal grew by more than 3% to close

to 1 million tons.

The distributors project sets out a new commercial relations model, based on two

main concepts: co-branded and Serviexpress. In independent co-branded retail

the value proposal is founded on the image of the Galp products retailer and on

the use of Galp payment and loyalty means. The Iberian Serviexpress brand

model seeks to cover, through direct selling or resellers, the last mile of the value

chain, by means of distributing diesel to the homes of domestic customers and

premises of small companies. A number of very important steps towards the

operational implementation of this project were achieved in 2005.

In Spain the year’s business activity was almost fully focused on the

restructuring (cost reductions and commercial and logistic optimisation) of

the former BP-Enértica, currently called Serviexpress, and the integration of

this company in the Galp Energia value chain. In a very competitive context,

the Extra Network business, including Serviexpress, achieved sales

exceeding 1.3 million tons.

Industry

In the Industry - Oil business, Wholesale maintained its leadership as the

supplier to Portuguese industry, entering into medium term contracts with

the largest economic groups in the country and contracting major new

clients. In 2005, sales in mainland Portugal and in the islands grew by

around 11% over the homologous period.

In Spain, the improved logistics chain allowed the continued backing of

growth in this market. Sales increased by 7% on 2004 figures.

Lubricants

In 2005, total lubricants and base oil sales increased 13% in this business

segment in Portugal, compared to the 2004 figure. New products were

launched, much in line with the company-wide innovation effort.

The continued optimisation of the vertical integration of the business

allowed this unit to achieve operational efficiency gains in the production

and logistics fields. At a time when the international price of raw materials

used for the manufacture of lubricants has reached an all-time high, these

gains in efficiency have proven to be essential to the business in order to

maintain a competitive range of products in the different market segments,

and be able to achieve good commercial results.

In Spain, during a year of business restructuring, sales grew by nearly 25%.

This increase was primarily based on demand for base oils.


Building Contractors

The Building Contractors business segment was characterised in 2005 by

stable sales figures in the Iberian market. The growth of sales in the

domestic market attenuated the fall in sales recorded in Spain. In general

terms, sales in this segment totalled 530,000 tons.

In the logistics sphere, the business verticalisation process in the bitumen

segment was implemented, providing an increase in operational efficiency,

the optimisation of stock management and the improvement of commercial

relations with our customers.

The Bitumen business segment of Galp Energia also achieved quality

certification in 2005 from APCER-Associação Portuguesa de Certificação

[Portuguese Certification Association]. The certification was awarded to the

quality system in place for the management of the production, distribution

and marketing of bitumen, which complies with the requirements of the

Portuguese Standard for Quality Management, NP EN ISO 9001:2000. The

certification obtained by the Bitumen business segment, demonstrates the

commitment to the continuous improvement of processes and contributes

to the strengthening of the business’ competitiveness as well as to raising

quality standards, in line with the best international practices of the sector.

LPG

The overall market share of the LPG business segment in Portugal remained

identical to that of 2004 - 44%. However, as a result of the replacement of

LPG by natural gas and adverse external factors, namely the rise in average

temperatures and the economic recession, sales fell by 4% in the Iberian

market.

In Spain sales grew by 16% on the 2004 figure. The business focused

particularly on the bulk segment, where prices are liberalised. The focus on

this segment aided in offsetting the erosion of profit margins in the cylinder

segment, where the market is strongly regulated and dependent on the

development of international prices. Growth in the bulk segment exceeded

40% (around 400 new customers).

In logistics terms, supply to Spain (Andalucia region) was consolidated

based around a logistics framework created in Sines, allowing the business

in this region of Spain to become more competitive.


Galp Energia, as a continuation of its policy of promoting innovation in

customer relations, launched the new “Pluma” cylinder in October. This

cylinder is wholly manufactured in Portugal, and it is synonymous with

innovation, design and safety. In just three months the factory was at

maximum production capacity for this cylinder, with supply being made

“just in time”.

The “Pluma” cylinder has already won a number of awards, one of the most

important of which is the IF Product Design Award 2006, which is currently

a benchmark in design that is vehicled by companies and offices receiving

the award as a certificate of quality, leaning towards innovation and the

spirit of competition.

The award of the IF Seal of Design Excellence to “Pluma” represents

recognition by the most exacting international jury, in terms of “design

quality, implementation capacity, selection of materials, level of innovation

that it represents, environmental friendliness, functionality, ergonomics, use

insight, safety, brand value and brand”, of this new Galp Energia product.

At the start of 2006, “Pluma” will receive a third international award - the

special “Best of the Best” award at the Red Dot Design Awards. Created in

1955 by Design Zentrum Nordrhein Westfalen to honour the best

international design work, the Red Dot Product Design Awards are being

awarded for the 51st time this year.

In 2005, the aggregate level of satisfaction of LPG customers remained at

around 80%, a value that is significantly above the energy sector average,

the only consequence of which is the level of comparison possible of values

obtained using different systems. In the cylinder gas segment the value

even surpassed 81% in both mainland Portugal and in the autonomous

regions.

Investment in the LPG business segment rose to EUR 18 million. It was

primarily focused on the development of the piped gas area, the launch of

the new “Pluma” cylinder, the modernisation of the Perafita depot, the

installation of the telemetry system in customer’s tanks and the expansion

of the propane and bulk business areas in Spain.

:: 2.3. Natural Gas Supply & Transport ::

Natural Gas Supply & Transport is the business segment responsible for

commercially exploiting and maximising profit relative to the supply,

transport, storage and distribution of high-pressure natural gas. Thus, this

business segment sells to power producers, to large industrial customers

and to local distribution companies.

In 2005, the EBITDA was EUR 197.6 million, 35% up on the previous year or,

in other words, up EUR 50.7 million. This result was fundamentally achieved

due to:

• Increased quantities sold: 4.2 bcm were sold in 2005, an increase of 0.2

bcm on 2004 (+5%). This increase was primarily generated in the

electricity segment, which was aided by low rainfall figures and the

commencement of supply to the third group generators at the Ribatejo

thermoelectric power plant. In the industrial segment, sales increased by

6% despite the impact of the economic recession.

In a year in which industrial activity remained weak, the natural gas

industry contracted 10 new customers and around 60 contracts were

2004 2005 %

(thousand euros)

Turnover 705,144 956,517 36%EBITDA 146,914 197,636 35%EBIT 94,251 151,909 61%CAPEX 31,041 18,191 -41%ROA (1) 5.9% 9.7% 3.8 p.p.Sales (million m3 GN) 4.015 4.234 5%


renegotiated. The good performance recorded for sales volumes was

accompanied by efforts to reduce payable debt and improve receivable

deadlines. The average time for receivables improved by around two days

on that recorded in 2004.

In 2005, sales of natural gas to large industrial customers accounted for

35% of the total volume supplied domestically. Cogeneration and the

ceramic and glass industries continue to be the most important sectors for

this business.

• The improvement of unit profit margins. The natural gas sector was not

immune to the rise in international crude and by-product prices. The

purchase cost of natural gas (Sonatrach basket) increased by 42% on the

previous year’s figure, which was reflected in the sale price.

Natural Gas Supply & Transport business segment currently has three distinct

supply sources:

• Algeria: the second largest supplier of Europe, with whom Transgás has a

long term contract;

• Nigeria: long term contracts for the purchase of liquefied natural gas;

• The spot market, where the company has purchased LNG that has

sporadically become available on the international market, from various

sources.

This business segment was structured so as to favour the supply of natural

gas from multiple sources, in order to prevent situations like that at the end

of 2005 and start of 2006 when the gas supply was cut to the Ukraine.

During 2005, 61% of purchases were from Algeria and 37% from Nigeria.

The remaining percentage refers to other contracts and purchases on the

spot market, with the objective of taking advantage of market

opportunities.

The year 2005 was also an important year in this segment, as it was when

a number of business support infrastructures were concluded and came

on-line. In relation to the natural gas underground storage project, two

caves were filled (corresponding to 170 million cubic metres of natural gas)

and the lixiviation work commenced on the third cave, which is expected to

be completed and filled in the fourth quarter of 2006.


At the Sines terminal, and after its operational start-up in 2004, 23 ships

were unloaded, doubling the number of road tanker loads - 1,059 - to fill

Autonomous Gas Units (810) or for trading (249). This entire operation was

achieved with elevated levels of efficiency and availability of premises

(99.9%).

In 2005 a number of customer distribution infrastructures were completed,

including the construction of some branch lines to industrial customers

(namely the Viana do Castelo industrial branch line to Portucel), of several

Autonomous Gasification Units (the Portimão and Estrela D’Alva AGUs) as

well as the expansion of the Gas Filling Units for the Carris and STCP bus

fleets, in Lisbon and Porto, respectively. Also noteworthy is the important

expropriation registration project which started in the previous year and

allowed the registration of more than 7,000 plots of land, which had not

been registered during the construction of the main pipelines, to be

regularised during 2005.

Internal studies carried out by the company demonstrated the suitability of

existing infrastructures to meet current needs and expected domestic

market growth through to 2009.

In operational terms, the activity of supply and transport of natural gas was

particularly focused on safety and operational efficiency. In relation to

safety, 2005 was one more year without incidents and without any

interruption in supply to customers. Moreover, safety certification was obtained

as the process that mobilised the entire business structure terminated. This

Environment, Quality and Safety Integrated Management System (SIGAQS)

was accredited by the Portuguese Institute of Quality as meeting the

requirements of the OHSAS 18001/ NP4397 standard.

The studies carried out and the measures that have been implemented in

the meantime in the different systems have allowed the operational losses

of natural gas to become aligned with the expected values and in line with

the best international practices. This procedure was essential to the

preparation of the transport infrastructure for third-party access.

EC Directive no. 2003/55/EC obliges the separation of the accounts relative

to sales and transport activities as well as the autonomising of the

management of those business activities so that effective conditions are

created for the free access of third parties to energy networks and permit

the liberalisation of the natural gas market.


Galp Energia, aware of the importance of these provisions for the future

opening up of the natural gas market, has implemented, far in advance, a

number measures that span the entire business, in order to create the

conditions that would permit the effective separation of the activities.

These measures include accounting separation, using the ABC (activity

based cost) method, as well as laying the groundwork for an instrument

that is fundamental to the management of third-party access to the

infrastructure operated by Transgás, the “Network Code” - the “K” version of

which was provided to ERSE and to DGGE last August - and, at the end of

2005, the functional and organisational autonomisation of the Natural Gas

Transport Unit, the embryo of the future transport company.

EUR 18.2 million was invested in 2005, which was primarily directed to the

conclusion and operation start-up of business support infrastructures, related

to the storage, transport and supply of natural gas.

:: 2.4. Natural Gas Distribution ::

Natural Gas Distribution is the business segment concerning the activity

developed by regional distributors and which consists of the channelling of

natural gas through the distribution network to the end customers, both

domestic, non-domestic and large customers.

In 2005, the concessionary company, Portgás, was sold providing a capital

gain of EUR 48 million.

This business segment achieved a record EBITDA of EUR 83.2 million, a

figure that is EUR 9.7 million (+13%) greater than the 2004 value. This

growth is more notable in the light of two adverse factors that endangered

the operational cash flow of the business:

• The temperature factor which, after two cold months at the start of the

year, recorded a series of dry and hot months that did not favour the use

the natural gas at all;

• The economic recession, which mainly impacted on the quantities

consumed by the non-domestic segment.

Even so, aggregated sales for the natural gas distribution segment totalled

478 million cubic metres, equivalent to a 6% increase on 2004 (removing

the activity of Portgás for comparison purposes). The main increases were

recorded in the domestic (+8%) and large customer (+5%) segments.

The number of natural gas distribution customers reached 739,000, which is

an 8% increase in the customer base (56,000 customers) over 2004.

Besides the contribution from sales, the increase in EBITDA was also

achieved through the improvement to cost efficiency that was recorded.

Cash costs accounted for 46% of the gross margin in 2005, a 2 p.p.

improvement on 2004.

The expansion of sales activity is also to be highlighted, as new areas in the

south of Portugal, Portimão and Sines, were exploited.

Investment made in the natural gas distribution business segment rose to

EUR 70.8 million, primarily channelled to the expansion of the distribution

network to selected zones, based on value creation criteria.

At the end of 2005, the natural gas distribution infrastructure covered a total

of 8,761 km of network, a 724 km increase on 2004 (+9%), which mainly

consisted of the construction of secondary networks and branch lines to

customers. The rate of construction of the network has slowed down in

recent years due to greater investment selectivity.

The increased optimisation that has been achieved in relation to the cost

efficiency of the two key business processes deserves particular focus: the

construction of the network and the conversion of customers. The unit

network construction cost (cost per km) is 33% less than it was in 2001,

while the saving in unit customer conversion cost (cost/converted

customer) is 43%. These segment costs in 2005 also recorded reductions in

comparison to 2004 values, reflecting the business’ emphasis on cost

reduction/streamlining and operational efficiency.

2004 2005 %

(thousand euros)

Turnover 196,523 226,066 15%EBITDA 73,562 83,225 13%EBIT 39,646 47,233 19%CAPEX 61,972 70,782 14%ROA (1) 4.3% 4.9% 0.6 p.p.Sales (million m3) 453 478 6%


The focus on improving service quality and customer orientation have been

core objectives, to which the monitoring of customer satisfaction has been

fundamental. To that end, the natural gas distribution segment has

implemented two complementary systems to assess customer satisfaction:

• Annual surveys performed by independent and reputable entities (ISEGI -

Universidade Nova de Lisboa), to assess customer satisfaction using a

method that is an international benchmark, permitting inter-sectoral and

international comparability.

Compared to the international customer satisfaction benchmark, domestic

customer satisfaction has progressed over the three years under analysis,

maintaining a maximum distance of two points in relation to the values

achieved by ACSI - Energy Utilities and HKCSI Towngas, over the last two

years.

• Daily surveys made through the Contact Center of Galp Energia of all

customers that establish direct contact with gas distributors, permitting

that customer satisfaction with the quality of the services provided can be

gauged and monitored. The results of these surveys are incorporated into

the performance assessment system of business unit collaborators.

Approximately 62,000 customers from all the regional distributor areas

were interviewed in 2005 under the scope of these surveys. The results

obtained are very positive since the customers indicated, for the second

year running, elevated levels of satisfaction with all the assessed services.


In relation to safety issues, 2005 brought important certification for the two

concessionary companies. Lisboagás confirmed its Quality, Environment and

Safety certification as it was the first company of the group to implement

the transition of its environmental system to the new version of the 2004

ISO 14001 standard. The certification that is obtained is a structural issue

orientated to institutional interests and customer safety, increasingly more

exacting and informed. Setgás had its quality certification for the Piped

Combustible Gas Distribution System renewed in conformity with the NP EN

ISO 9001:2000, which it has held since 2001.

:: 2.5. Power ::

The Power business segment contains Galp Energia’s interests in the

production and sale of electrical and thermal energy as a means of adding

value to the value proposition provided to its industrial customers.

69.7

73.0

63.9

72.270.0

72.0

65.6

71.6 71.1

73.1

n.d.

72.9

Satisfaction Index2003

Annual Natural Gas Customer Satisfaction Index (scale of 0 to 100)



Source: Annual Natural Gas Customer Satisfaction and Loyalty SurveyISEGI/Universidade Nova de Lisboa - March 2006

ACSI Energy Utilities (American Consumer Satisfation Index)

HKCSI Towngas (Hong Kong Consumer Satisfation Index)

Galp Gás

ECSI National Energy

4.04 4.03

December 2004

Continuous Natural Gas Customer Satisfaction Assessment Index (scale of 0 a 5)Global Valuation

December 2005

Source: Annual Report of the System for Ongoing Assessment of Natural Gas Customer Satisfaction - Marketing GDP Distribuição - January 2006

“Emergency Call-Out Technician” Service

“Technical Assistance-FAST” Service

“Natural Gas Connection” Service

“Conversion/Reconversion to Natural Gas” Service

“Installation of Central Heating” Service

4.07

3.94

4.284.14 4.12

3.99

4.46

Power 2004 2005 %

(thousand euros)

Turnover 14,241 24,780 74%EBITDA 2,791 3,668 31%EBIT -93 710 -CAPEX 3,854 1,233 -68%ROA (1) -0.2% 2.0% 2.2 p.p.Energy Production (Gwh) 1,219 1,375 13%



The assets held by this business segment are three cogeneration plants that

are currently operational - Energin, Carriço Cogeração and Powercer - with

an installed capacity of more than 80 MW and the Sines Refinery cogeneration

project, the investment has already started with the construction phase

planned to commence in 2006.

The EBITDA of this business segment was EUR 3.7 million, an increase of

+31% on last year’s figure. The improvement in operational cash flow was

primarily driven by the electricity and thermal production figures for the

year.

Annual electricity production was 500 GWh, representing a growth of 25% on

2004, mainly due to the increases of Energin and the operational start-up of

Powercer. Thermal energy production, produced in the form of steam and

hot water, totalled 875 GWh. This figure represents a 7% increase on 2004.

The unit mainly responsible for this increase was Powercer. Around 159

million cubic metres of natural gas were consumed to provide these

outputs, a 23% increase on 2004 consumption.

Investment made in this business segment rose to EUR 1.2 million, and it

was essentially centred on the Sines Refinery cogeneration project, which,

at the end of the year, was in the final phases of the tendering process. The

commencement of the construction phase is scheduled for April 2006.

During 2005, Galp Energia formed important partnerships with two

Portuguese groups, leaders in their respective fields of activity, for the

purpose of founding a solid and competitive national consortium to bid for

Portuguese government contracts in the wind energy production segment.

:: 2.6. International ::

The international expansion of the Galp Energia Group continued to be one

of the company’s main strategic objectives in 2005, through the efficient,

safe and competitive operational performance of the companies operating

in selected international markets in which Galp Energia has shareholdings,

contributing to the creation of value, the expansion and reinforcement of

the Galp brand, customer satisfaction and growth in turnover and return on

investment.

The presence of Galp Energia beyond the borders of the Iberian Peninsula

and the Exploration & Production interests in Brazil and Angola, has been

focused on the distribution and marketing of liquid fuels, gas and lubricants

in the African market, through stable and long-lasting interests in Angola,

Cape Verde, Mozambique and Guinea-Bissau.

The international expansion strategy defined by Galp Energia, which

combines business philosophy, values and processes with the specificities of

each local market, has consisted of the founding of Group companies, taking

shareholdings in existing companies or even establishing product supply

contracts.

International sales grew in all business segments in 2005 (liquid fuels: +8%;

gas: +8%; lubricants: +26%), which was reflected in the net income

achieved, which grew by more than 100% from 2004 and which is annually

becoming increasingly more positive, representative and of greater

significance amongst the Group of companies held by Galp Energia with

interests in Africa.

Angola:

In overall terms, sales in Angola totalled 65,900 cubic metres of liquid fuel,

6% down on the previous year's figure. The source of this reduction was

essentially due to the increased availability of products in the provinces,

which reduced demand among Sonangalp’s distributor customers in Luanda.

The retail network consists of nine service stations, all located in Luanda.

Two new service stations commenced operations in 2005. These new

stations recorded significant sales, placing them at the top of Angola’s

service station sales list. In logistics terms, Morro Bento fuel logistics base

started operations. This logistics base will make fuel and lubricant

distribution more efficient.

International Total 2004 2005 %

Quantites SoldLiquid Fuel (m3) 218,161 236,272 8%Gas (ton) 12,104 13,108 8%Lubricants (ton) 1,730 2,182 26%

Cape Verde:

Sales in Cape Verde increased in all segments, with the highlight being the

liquid fuel business, which grew 14% on the 2004 figure.

Two of the highlights of 2005 in Cape Verde were the launch of the CHIP

project - an electronic payment system at service stations, and entering into

a supply contract with the main public works contractors. A number of

cooperation partnerships and protocols were signed with a range of state

entities, which included Carris, the National Civil Protection Service and the

Fire Brigade.

Mozambique:

Sales in Mozambique rose in all business areas compared to 2004. The most

notable rises were 13% in liquid fuels and 35% in lubricants, which are

basically due to significant contracts entered into in the wholesale market.

The LPG segment also grew, by 11%, which led to additional investment in

the acquisition of cylinders to cover the growth in the business.


The main highlights of 2005 include the opening of the first direct sale

service station (Machava service station). In the LPG field, the first national

meeting of LPG resellers was held, which was basically composed of

training sections.

Guinea-Bissau:

All business areas recorded strong growth on the previous year, basically

due to the operational start-up of a new service station in Bissau, the

LPG cylinder and burning equipment exchange campaign and the

implementation of a customer loyalty policy.

Of note was the fact that Petromar was able to guarantee the supply of fuel

in the country, surpassing all the other operators that ran out of stock at the

start of the year.

Investment in 2005 was essentially channelled to the construction of Brá

service station and reinforcing the 6-kg LPG cylinder stock.

innovationand brand

:: the year 2005 was the year in which the Galp Energia brand matured. After previous years in whichthe brand objectives focused on re-branding and communicating and consolidating the new image,the year 2005 marked Galp Energia´s backing of product differentiation through innovation. ::

annual report 2005 :: innovation and brand38

3. Innovation and Brand

Innovation

The differentiation of products and services through innovation is essential

in a market that is as mature and competitive as the energy market.

Projects such as the Academy of Innovation in 2005 - on which a number

of Galp Energia directors collaborated and provided a creative spirit, and

which planted the seed for the company’s innovation management system

- COHITEC - which aims to take advantage of the networks of knowledge

and innovation existing in universities and COTEC –, and the new “Pluma”

gas cylinder - a project implemented as a consortium with Portuguese

Companies and Universities, allowed Galp Energia to achieve objectives that

go beyond traditional frontiers:

• Academy of Innovation - Members of each business segments were

selected by members of the Executive Committee to form part of Galp

Energia’s first Academy of Innovation. The format and methodology used

allowed innovation-orientated techniques, tools and philosophies to be

developed amongst a broad group of Galp Energia management staff.

Close on 100 business ideas were listed, which were sorted for assessment

purposes. The Executive Committee then discussed and approved three

projects with high potential in fields as diverse as the sale of natural gas and

fuel, LPG retailers, natural gas contractors and even industrial customers of

Galp Energia. Given the success of the initiative, its repetition is planned for

2006, thereby permitting that another of the project’s objectives - the

introduction of an innovation management system and systematic

methodology in its implementation - is fulfilled.

• COHITEC - This programme, promoted by COTEC Portugal with the

collaboration of the HITEC Group of the University of North Carolina

associates researchers and scientists to MBA students at the Universidade

Nova de Lisboa [New University of Lisbon] and members of industry. In this

way, the working groups have to validate the scientific viability of their

inventions as well as the economic and real viability of the potential

products that are derived. Galp Energia took part in two working groups,

providing an important contribution to the validation of the projects’

feasibility. The project allowed the Galp Energia staff members involved to

gain knowledge regarding the techniques and products of elevated

scientific value involved, as well as from the main participants of

Portuguese Universities, thereby strengthening the Company’s network of

knowledge.

• P3 Project - This programme in collaboration with the IN+ Department of

Instituto Superior Técnico [Lisbon Technical University], Inteli, and

Innovagency, developed a group of projects related to future trends in

urban mobility, impacting on motor vehicles as much as urban

infrastructures, particularly service stations. In this ambit, the team of one

of the IST / IN+ Master’s degree courses designed a service station of the

future. Vehicles and urban systems using alternative energy sources were

also projected.

Galp Energia continued to favour innovation in customer relations,

developing a range of initiatives that demonstrate its pro-active position

relative to the search for new solutions:

• “Pluma” - a new LPG cylinder, was launched at the end of 2005, as the final

product of almost two years of research and development that involved

effective partnerships with Porto and Minho Universities, in the fields of

manufacturing process modelling, prototype development, material testing

and selection.

The new LPG cylinder “Pluma” is also the result of Galp Energia’s

collaboration with companies possessing their registered office or

production units in Portugal. The new cylinder is produced in Guimarães, in

a high-tech factory specifically constructed from scratch for this project.

Twenty-nine new jobs were directly created. The total investment in the

“Pluma” project in Portugal, by the different participating entities, was

greater than EUR 10 million.

LPG “Pluma” cylinder constitutes a new generation of LPG cylinder designed

to meet the needs of consumers - a very light cylinder (weighing just 7.5

kg empty, compared to the 15 kg of the traditional steel cylinder),

ergonomic, safe and, at the same time, aesthetically appealing.

The design of Galp Energia’s new LPG cylinder comprises two essential

elements: an inner tank of steel coated with a polypropylene and fibre glass

matrix that increases its resistance threefold, and an outer sheath of highly

resistant plastic. This allows the mix of safety and resistance of traditional

steel cylinders and the lightness of a new generation of cylinders to be

combined in one single product. Allied to this is an exclusive design and

ergonomic construction that is greater than any other product in the

international arena.

• Galp GForce Fuel Range - Galp Energia’s top-range fuels maintained their

upward trend as the preference of drivers, either due to the performance

gains achieved using GForce Gasoline, or due to the proportional

consumption reductions achieved with GForce Diesel. This result is even

more notable in view of the strong pressure caused by the rise in fuel prices

in 2005, due to the rise in oil prices.

• Galp TV - The Galp TV channel completed its second year of broadcasting

in around 100 Galp service stations in Portugal and it continued to be an

example cited and followed by other companies that acknowledge the

advantages and effectiveness of this new channel, which is directly

present at the point of sale.

39innovation and brand :: annual report 2005

Preliminary steps were made to install this channel in Spain. A pilot

project has been set up, which makes Galp Energia the first oil company

in Spain to provide this channel, on an experimental basis. The pilot

project was successful and Galp TV will be installed in around 60 Galp

Energia service stations in Spain.

• Wi-Fi Network - Galp Energia was one of the first oil companies in Europe

to provide Wi-Fi broadband internet access in its service stations. The

service, which was launched in June 2005, was available in 50 service

stations. The Wi-Fi hot spot network, owned by the company Fastaccess,

in which Galp Energia has a shareholding, is part of the Portuguese

government’s broadband promotion campaign and it was co-financed by

POSI (the Operational Programme for an Information Society).

• B2C (Business to Consumer) E-Business - In 2005, Galp Energia’s

internet channels open to all consumers continued their growth

(www.galpenergia.com, www.fastaccess.pt), surpassing 55 million page

views and 650,000 unique users.

The “Futebol Positivo” [Positive Football] channel, launched at the time of

Euro2004 on the galpenergia.com site, continued to be one of the most

visited, providing support to the sponsorship of the Superliga Galp Energia,

the national team and the football player Luís Figo. A monthly, free-of-charge

Galp Energia newsletter was launched, which, in a few months, had several

thousands of subscribers.

2002 2003 2004 2005

www.galpenergia.com - Page Views 2002-2005

0

5.000.000

Page Views

10.000.000

15.000.000

20.000.000

25.000.000

30.000.000

35.000.000

40.000.000

2002 2003 2004 2005

www.galpenergia.com - Unique IP’s 2002-2005

0

100.000

200.000

300.000

400.000

500.000

600.000

Page Views

annual report 2005 :: innovation and brand40

The leadership position of the fastaccess.pt site amongst drivers, certified by

Marktest and its Netpanel, was strengthened in 2005 with the creation of

three channels of extensive usefulness and interest to drivers: the “Safety”

channel which contains online tests of the new highway code and tips on

defensive driving and vehicle maintenance, the “stand.fastaccess.pt”

channel for motor vehicle classified advertisements and the Galp Energia

motor sport drivers’ channel.

Process innovation in 2005 was based on the development of new

procedures aimed at reinforcing the operational efficiency of the company,

in order to consolidate strong competitiveness in the marketplace:

• E-ordering - In 2005, at the end of the first full year of operation of the

system, the forecast objectives for the number of business customers

adhering to e-ordering were exceeded. This system accounted for around

30% of all orders made to Galp Energia;

• E-Learning - An online customer service excellence training programme for

2,000 staff members was finalised during 2005. Through the installation of

this system, Galp Energia was able to inaugurate and consolidate new

across-the-board internal information and training processes;

• Galp Net - A number of new channels were made available on Galp

Energia’s Extranet, a private access network for Galp Energia’s business and

institutional partners and customers.

Brand

The year 2005 was the year in which the Galp Energia brand matured. After

previous years in which the brand objectives focused on re-branding and

communicating and consolidating the new image, the year 2005 marked

Galp Energia’s backing of product differentiation through innovation.

The GForce range was expanded to include 98-octane GForce petrol, which

broadened Galp Energia’s range of premium fuel, and the new “Pluma” LPG

Cylinder was launched.

In relation to the values associated to the brand, ‘Solidity and

Trustworthiness’ is the most cited, and it is also the value in which Galp

Energia is most ahead of its rivals. Another of the values most associated to

the brand is ‘Dynamic and Innovative’, a value that reflects all the effort and

endeavour of Galp Energia in providing innovative solutions with greater

perceived value to customers.

Over the year Galp Energia received a number of public recognition from

official bodies and entities regarding the importance and renown that the

brand holds, as well as confirmation from consumers in relation to the

confidence they have in Galp Energia. The following recognition deserve

mention: Brand Excellence 2005, Brand of Confidence 2005, ICEP

Certification of the Galp Energia brand and an Advertising Effectiveness

award.

Advertising Effectiveness Awards

The effectiveness awards are the only accolades in Portugal focused on

results achieved through advertising. These results can be equated in terms

of renown, sales or any other type of return that meets a previously defined

objective, and they place effectiveness as the authentic purpose of

advertising, the return on the investment made and its accelerating impact

on the business of the advertising company.

Galp Energia - with its Euro 2004 campaign "Would it be too much to

demand the cup" was the grand winner of the event, winning the gold

award in its category (Advertising Effectiveness, in non-food products of

widespread consumption) and the grand prize from amongst the 24 entries

in the different categories.

The evaluation was based on difficulty, innovation, presentation, use of

resources, return and demonstration criteria.

With this award-winning campaign, Galp Energia fulfilled and exceeded all

the objectives it had set, reaching top spot in the publicity table and having

the campaign’s anthem sung, written and spoken by nearly all Portuguese

nationals.

Sponsorship

A relatively solid sponsorship policy cutting across all of the company's

business segments was maintained in 2005. The aim of the policy was to

increase the renown and recognition of the Galp Energia brand, contribute

towards the preference of consumers and foster brand loyalty.

The main lines of implementation in the field of sponsorship were:

1. Sport:

• Football - Superliga Galp Energia (Premier professional league), 3D

hoardings, Portuguese national team, “Affinity Clubs” (FC Porto,

Benfica and Sporting boxes);

• Motorsport - Tiago Monteiro, Team Galp Energia - Carlos Sousa, Rally

of Portugal and Porto Grand Prix - Historic Festival.

2. Social, Environmental and Cultural responsibility:

• A number of different projects, the most significant of which are:

Portuguese Disabled Sports Federation, Fundação Luís Figo (Luís Figo

Foundation); CADIN; Fundação Gil (Gil Foundation); Ajuda de Berço;

Acreditar; COTEC and support to a number of different fire brigades,

Fundação Serralves (Serralves Foundation), the Presidency Museum’s

“Belém Palace” Temporary Exhibition.

41innovation and brand :: annual report 2005

3. Music:

• “Galp Energia Live 2005 Festival” and “World Music Festival” (Sines).

The benefits of the company’s association to sport and music were the great

projection and visibility of the brand, while the benefits of its social branding

were the revitalisation of the image of social and environmental

commitment.

personnel

:: a performance and career management model was designed in 2005, in the ambit of which theStrategic Action Programme was created. This programme aims to better mould the skills of theGroup´s management personnel to the requirements of the duties that they perform or mayperform in the future. ::

annual report 2005 :: personnel44

4. Personnel

The year 2005 was marked by the continued implementation of Galp

Energia's Strategic Training Plan. Its main pillars are:

• The “Value” Programme, designed to strengthen leadership and

performance management skills and in two years it has encompassed

around 1,600 employees;

• The “ESEC” Programme which aims to build a culture of excellence in the

provision of services to the customer. It too covered around 4,000

employees over two years.

A further 24 management personnel were trained in the “Executives”

programme forming part of the joint venture with INSEAD. This programme's

aim is to develop management skills.

A performance and career management model was designed in 2005, in

the ambit of which the Strategic Action Programme was created. This

programme aims to better mould the skills of the Group’s management

personnel to the requirements of the duties that they perform or may

perform in the future. This programme permitted that priority or

complementary improvement fields were defined for the employees

involved, providing the basis for the drafting of Individual Improvement

Plans, which encapsulate the professional training and/or mobility best

suited to the professional development of each person, thereby leading to

the strengthening of Galp Energia’s competitiveness. This programme

encompasses close on 200 Group managers and all 130 of the Sales

personnel.

The responses of around 300 management personnel, surveyed as part of

the continued process to assess the Group’s organisational climate, which

has been in operation since 2001, to questions on the current and desired

level of a set of factors directly related to professional satisfaction were

analysed in 2005. The results, showing a slight improvement on 2004,

indicate a stabilisation of the level of satisfaction relative to these factors.

In order to foster internal mobility, which aims, in a context of resource

streamlining and valorisation:

• to guarantee the timely response to recruitment needs, according to the

Group’s requirements;

• to provide opportunities for change and professional development to

employees, contributing to their motivation.

a number of vacant positions in 2005 were made available internally. A

large number of applications were received from employees that would, if

successful, lead to a complete change in duties.

The number of employees of the Galp Energia Group was 5,909 in 2005,

103 more than in the previous year. This increase was principally due to the

increase in the number of employees of Galpgest, related to the increase in

the service station network in Spain (41 employees) and the purchase of

Gás Insular (51 employees). The average age of off-site Group employees is

43, while the length of service (seniority) for the same employee group is

15 years. In 2005, 34% of the on-site employees were female (2,009

employees).

2004 2005 Change

Total number of Galp Energia Employees (1) 5,806 5,909 103Number of Off-Site Galp Energia Employees (2) 3,635 3,702 67

(1) - Including all companies of Galp Energia universe that consolidate by the full or proportional method(2) - Excluding Galpgeste, Galpgest, Caiageste and Gesoil

45personnel :: annual report 2005

environment,quality and safety

:: the Galp Energia Safety Programme was implemented throughout 2005. The aim of theprogramme is to consolidate a culture of prevention and to achieve excellence in safetymanagement. ::

annual report 2005 :: environment, quality and safety48

5. Environment, Quality and Safety

The environment, quality and safety programmes (EQS) continued to

achieve the objective in 2005 of reducing the company’s accident frequency

index.

The number of sick leave-causing accidents in Galp Energia diminished by

about 10% in terms of total accidents and accidents with sick leave. Spanish

operations recorded an accident frequency index reduction of 20%, while in

Portugal the index value stabilised.

The Galp Energia Safety Programme was implemented throughout 2005. The

aim of the programme is to consolidate a culture of prevention and to achieve

excellence in safety management. The programme covers all of Galp Energia’s

activities on the Iberian Peninsula and its key objectives are:

• To prevent accidents;

• To develop a culture of social responsibility;

• To achieve performance excellence;

• To make Galp Energia a benchmark company for safety performance in

Europe.

Phase I of the programme was concluded in this its first year of the

programme:

• An assessment of the different installations and services of the Company.

Sixty-five installations of Galp Energia in Portugal and Spain, in all business

areas, were visited and more than 500 employees interviewed and

contacted;

• Safety management performance, equipment compliance management

and the management of changes in Galp Energia's two Refineries were

assessed;

• Phase II of the programme, which focuses on safety management and

performance in situations identified in the assessment as being critical

and priority, was initiated.

Also in 2005, following World Health Organisation and European Union

recommendations and the company’s duty to promote and guarantee

appropriate health, safety and hygiene conditions, smoking on the premises

of the company’s registered office was prohibited, except in specifically

designated areas. This rule shall be extended to all Galp Energia installations

during the first four months of 2006.

In accordance with the ISPS Code (International Ship and Port Facility

Security Code) protection plans were drafted and port facility declarations of

compliance were obtained for the following terminals:

• Petrogal Liquid Bulk Terminal - Leixões port;

• Liquid Bulk Terminal, Petrogal Dock no. 22 - Aveiro port;

• Petrogal Fuel Terminal - Lisbon port;

• Tanquisado Fuel Terminal - Setúbal port.

A large part of Galp Energia’s investment in the environment, quality and

safety has been channelled into the implementation of the best available

production and operational management techniques in its industrial plants,

preventing and reducing the impact of its business activities on water

resources, soils and atmospheric emissions.

The main challenges for Refining in the 2006-2008 period are compliance

with objectives for the reduction of greenhouse gas emissions, as defined

by the Kyoto Protocol, the reduction of the sulphur content of the fuel used,

increasing energy efficiency and the environmental licensing of its

premises, Porto and Sines Refineries.

The most significant developments in 2005 in terms of EQS projects was the

preparatory work for the environmental licensing of the Integrated Pollution

Prevention and Control (IPPC) installations (Refineries), far in advance of the

licensing limit of October 2007.

The main objective of licensing the Refineries under the scope of Integrated

Pollution Prevention and Control legislation is to guarantee the protection of

the environment as a whole, through:

• Preventive measures, reducing the overall impact of emissions and

environmental risks to a minimum, namely through the use of the best

available techniques (BATs), which lead to a streamlining of consumption

and use of material and energy;

• Reduction measures, which minimise waste and effluent production and

atmospheric emissions, or which promote their appropriate recycling and

elimination;

• Pollution and accident prevention control measures to be implemented

during operation and deactivation phases, in order to prevent and/or

avoid the pollution of different physical systems, with the intention of

protecting the environment as a whole.

The implementation of the BATs in the Refineries takes into consideration

the following aspects:

• Technological potential to reduce emissions;

• Allow environmental objectives to be achieved for a specified installation

(Refinery), in conformity with economic efficiency criteria;

• Accede to local environmental restrictions and needs.

In reality, a large part of the BATs that are applicable to the refining sector

have already been implemented in Galp Energia’s Refineries and this is one

of the reasons for the licensing application ahead of time.

Environmental licensing in 2006 will lead, as forecasted, to the conclusion

of all the projects specified in the Protocol on Continuous Environmental

Performance Improvement entered into in 1998 by Petrogal, S.A., and the

Ministries of the Economy and the Environment. The conclusion of this

protocol is currently dependent on the Refineries’ licensing conditions.

Compliance with the EC Directive on the European trading of emission

permits is similarly of particular importance to the Refineries and

cogeneration plants. This mechanism is key to guaranteeing that Portugal

comply with the objectives to reduce greenhouse gas emissions in the

2008-2012 period, as defined in the Kyoto Protocol.

In 2005, we would highlight that all Galp Energia industrial units

encompassed by the emission permit trading mechanism complied with

emission targets and the acquisition of additional emission permits to those

issued by the Portuguese state was not necessary.

In relation to product quality, the company made market preparations in

2005 for the introduction of biofuel. Biodiesel will enter the logistics chain

and commence nationwide sales in the first quarter of 2006. This measure

will have repercussions on atmospheric emissions by the transport sector

and this is one of the means by which the company shall contribute to

achieving national air quality objectives, in particular those defined in the

Kyoto Protocol.

49environment, quality and safety :: annual report 2005

In relation to certification and recognition, Galp Energia advanced and

consolidated the Group’s strategy in this area in 2005, contributing to the

continuous improvement in performance. Thus:

• New management systems were certified: the Bitumen and Probigalp

business (quality); Setgás (environment); Transgás and SAAGA (safety);

• Existing official recognition was maintained:

Certification - Lubricants business, Aviation Fuel, Base Oils, Galp Quimícos,

Galp Gás, Sines Refinery Inspection, Setgás, Gasfomento and SAAGA

(quality); Transgás (environment and quality); CLC, Beiragás, Lisboagás,

Lusitaniagás and Tagusgás (environment, quality and safety);

Accreditation - Quality systems of the Laboratories of Porto Refinery, Sines

Refinery and Galp Lubricants;

• New environment, quality and safety management systems were

developed with a view to obtaining certification in 2006: Galp Gás

(environment and safety), Setgás (safety), Aveiro and Porto Brandão

depots (environment, quality and safety).

With the continuous improvement of performance as an ultimate goal, Galp

Energia defines short medium term targets and objectives for compliance

with legislation, the maintenance of already certified management systems,

the preparation of other systems for certification, and the progressive

adoption of the best technology.

social responsibility

:: social responsability and its underlying values have been the basis for Galp Energia´s activities inthe most diverse of sectors. The materialisation and scope of many of the proposed objectives arebased on this new form of corporate thinking, moving step by step to more global socialresponsability, aware that this is a route that must be continuously followed. ::

annual report 2005 :: social responsability52

6. Social Responsibility

Social responsibility and its underlying values have been the basis for Galp

Energia’s activities in the most diverse of sectors. The materialisation and

scope of many of the proposed objectives are based on this new form of

corporate thinking, moving step by step to more global social responsibility,

aware that this is a route that must be continuously followed.

In this context, the Corporate Commitment to the Millennium Goals charter

of the United Nations was signed, whereby Galp Energia undertook to

disclose its main objectives: eradicate extreme poverty and hunger; achieve

universal primary education; promote gender equality and women’s

autonomy; reduce infant mortality rates; improve mother and child

healthcare; fight HIV-AIDS, malaria and other diseases; guarantee

environmental sustainability and promote a worldwide partnership for

development.

Particular emphasis was given in 2005 to the assimilation and dissemination

of certain basic values and concepts associated to social responsibility and

corporate ethics through the involvement and participation in the work of

technical commissions of the Portuguese Quality Institute (IPQ) to draft

national standards for this area.

Our employees:

In relation to the employees, which are deemed to be one of the most

significant interested parties of the Company, the Vidas Galp [Galp Lives]

programme continued. This programme is based on the valorisation and

public recognition of the contribution of each employee in making the

company into what it is today. This history that we are compiling through the

words of the most direct intervening parties, via audio and video testimonies,

has taken the approach of an investigative documentary.

General solidarity efforts:

A significant sum was set aside for the victims of the South-east Asia

tsunami tragedy and for the study of seismic phenomena in Portugal; the

protocol established with Fundação Luís Figo (Luís Figo Foundation)

continues, which includes support provided to the Portuguese Disabled

Sports Federation; we supported the 12th fundraising campaign of AMI; as

well as fundraising for Casa de Santo António - an institution supporting

teenage mothers. We launched, through Clube Galp Energia and the Porto

Refinery, the Solidarity 2005 project to assist the homeless, drug addicts, the

elderly and underprivileged children. We also provided support to: the

Corpo Nacional de Escutas (Portuguese Scouting Association), Associação

Humanitária Família Feliz (Humanistic Family Happy Association),

Associação Nacional de Combate à Pobreza (National Association for the

Fight Against Poverty), and Santa Casa da Misericórdia (a nationwide

welfare and social support organisation).

Assistance to children and young people:

A protocol with the Ministry of Home Affairs was signed to support the road

safety action programme, which included the dissemination of basic rules to

children and young people. The protocol providing assistance to Cadin -

Centro de Apoio ao Desenvolvimento Infantil (Child Development Support

Centre) was maintained. This protocol embodies the integration of disabled

young people in some of the company’s service stations.

Assistance in the health field:

A protocol with the Paediatric Service of Instituto Português de Oncologia

(Portuguese Oncology Institute) in Lisbon was signed, providing assistance

to the institution’s equipment acquisition plan and for the improvement of

facilities. Assistance was provided to hospitalised children via a partnership

with “Operation Red Nose” to provide entertainment to around 20,000

children in hospital units throughout the country, through visits from the

“Doctor Clowns”; assistance was provided to Grupo Pessoas com Cancro

(Group of People with Cancer); a partnership entered into with the Fundação

Gil (Gil Foundation), to facilitate the social reinsertion of hospitalised

children; Clube Galp Energia - Centro Region - backed a campaign of

solidarity for little Emanuel, the “blue boy”.

Environmental assistance:

Support was provided to the drafting of the Energy Efficiency Good Practices

Manual by BCSD Portugal and Universidade de Coimbra [Coimbra University]

- the aim of which is the implementation of sustainable development in

companies. The main objective is to publicise the state of the art on energy

efficiency techniques available in the marketplace. Assistance was also

provided to the Fundação Serralves (Serralves Foundation) for the “Galp

Energia Environment Week”, which aimed to provide contact with nature,

introduce concepts such as ecology, zoology and botany, foster a sense of

responsibility, the exercise of civic behaviour and provide knowledge on

plant and animal diversity.

A protocol was also signed with the European Blue Flag Association to

develop the “Eco-Reporter Energy” project, which will include a competition

of journalistic work focusing on the theme of energy efficiency and

sustainable mobility. Galp Energia took part in the study carried out by

Euronatura on “Climate Change and Corporate Management: Response

Index 2004” and it provided assistance to Quercus and to the Instituto de

Conservação da Natureza (Nature Conservation Institute).

An initiative on forest fires, promoted by Cotec, the corporate innovation

organisation, was also sponsored. In this field and in the broader field of

Safety, donations were given to the following entities: Leixões, Leça do

Balio, Santiago Cacém, Santo André and Bucelas volunteer fire brigades; the

Humanitarian Associations of Faro, Aveiro, Trafaria, Sacavém, Ílhavo,

Matosinhos and Leça da Palmeira volunteer fire brigades; Faro municipal fire

brigade; Aveiro volunteer safety corporation and Legião da Boa Vontade

(Porto). Galp Energia was also united with the retailer Fargás in the support

given by this latter company to the solidarity campaign for the Albufeira

volunteer fire brigade.

53social responsability :: annual report 2005

economic andfinancial performance

annual report 2005 :: economic and financial performance56

7. Economic and Financial Performance

:: 7.1. Individual Accounts ::

Galp Energia, S.G.P.S., S.A. is the Holding Company that manages the Group’s

equity holdings and centralises its main corporate functions. In 2005 Galp

Energia posted a net profit of EUR 442.0 million, which was basically derived

from the net profits of Group companies.

Galp Energia achieved an operating income of EUR 17.1 million, a

turnaround on the 2004 figure of negative EUR 18.1 million. The principal

reason for this change was the reallocation of energy sector restructuring

costs to Group companies.

:: 7.2. Consolidated Accounts ::

Galp Energia reported its best-ever earnings in 2005, with a net profit of EUR

442 million. This income is 33% up on the 2004 figure (+ EUR 108.9 million)

and it is proof of the sustainability of the company’s performance.

The earnings achieved in 2005 continue the steady trend of improved financial

figures as well as the reduction of bank debt and the increase of shareholders’

equity. Galp Energia has been reducing the Debt to Equity ratio since 2002. The

2005 value (53%) demonstrates the solidity of shareholder equity and the

reduced level of debt that the company possesses. The net debt was just 1.3

times the EBITDA generated in 2005.

The improvement to Galp Energia’s earnings achieved in 2005 was

influenced by external factors connected to the behaviour of international oil

and gas markets and by the sale of the natural gas concessionary company,

Portgás. This earnings growth trend was in line with that achieved by all

other international oil and gas operators.

The 2005 earnings allowed a number of one-off management options to be

implemented, which included the creation of provisions for asset

impairment and for environmental risk and the increased amortisation of

Block 14. In addition, the Group’s reinsurance company - Tagus RE - was

consolidated.

Even so, Galp Energia increased the level of remuneration of shareholders’

equity by three percentage points to an ROE of 22%, which provides

appreciable successive annual growth (it has almost tripled since 2002).

Endeavours to streamline the capital employed as well as earnings’

performance decisively contributed to a 4 p.p. increase in ROACE, to 15%.

Change

2004 2005 Value %

Operating Income -18,149 17,138 35,287 -194%Financial Income 346,585 430,238 83,653 24%Current Income 328,436 447,376 118,940 36%Extraordinary Income 297 -5,534 -5,831 -1.963%Profit Before Tax 328,733 441,842 113,109 34%Income Tax 4,331 117 -4,214 -97%Net Income 333,064 441,959 108,895 33%

442.0

2000

Net Income

247.5

333.1

114.5

96.9

45.2

2001 2002 2003 2004 2005

(million euros)

0

GE 2005

0.2 0.4 0.6 0.8 1 1.2 1.4 1.60

0.5

1.5

2.5

3.5

4.5

1

2

3

4

GE 2004

GE 2003

GE 2002

Net Debt/Equity

Net

Deb

t/EB

ITD

A

(thousand euros)

The earnings performance of 2005 and the income received from the sale

of Portgás allowed debt to be reduced by EUR 309 million (-21%). Galp

Energia has performed successive annual reductions to its bank debt, down

to the 2005 value, EUR 1.188 billion. In three consecutive years the

company has managed to reduce bank debt by almost half. As a result, the

Debt to Equity figure was 53%, an improvement of 22 percentage points on

the previous year’s value. This reduced percentage allows financial leverage

to become a driver of company growth and of the fulfilment of its strategic

plan.

57economic and financial performance :: annual report 2005

In 2005, the main financial figures evolved as follows:

Gross margin increased by EUR 169.5 million (up 11%) to EUR 1.695 billion.

The performances of all of Galp Energia´s business segments, which were

partly attenuated by the unfavourable lag time on sale prices, were decisive

in driving this trend:

• Exploration & Production: favourable impact of greater quantities sold (1.8

million barrels versus 1.7 million barrels) and improved prices (up 16

USD/bbl);

• Refining & Marketing: record quantities processed in the Refineries (14.3

million tons), in a scenario of favourable international prices for the

refining business and a broad increase in fuel sales and export quantities;

• Natural Gas Supply & Transport: a 5% increase in quantities sold (up 219

million cubic metres of natural gas) essentially in the electricity segment

due to low water levels;

• Natural Gas Distribution: a 6% growth in sales;

• Power: a general increase in electricity and thermal energy production.

Operating cash costs increased EUR 102.5 million to EUR 864.2 million (a

13% increase). This increase in costs from 2004 to 2005 is influenced by the

inclusion of the reinsurance company Tagus RE in the consolidation

perimeter and by the sums paid to EGREP for strategic stocks services.

2000 2001 2002 2003 2004

3%

7% 8%

19%22%

3%4% 5%

8%

16%

ROEROACE

Profitability Indicators

11%

15%

2005

1,188

2002

1,497

1,930

2,134

2003 2004 2005

Net Debt

(million euros)

2002 2003 2004

137%

Debt to Equity

2005

112%

75%53%

Change 2005/2004

2004 2005 Value %

Turnover 9,258,519 11,126,563 1,868,044 20%Gross Margin* 1,525,172 1,694,715 169,543 11%External Supplies and Services 437,258 524,312 87,054 20%Personnel Expenditure 255,073 275,997 20,924 8%Other Operating Income -1,123 12,198 13,321 -EBITDA 831.718 906.604 74.886 9%Amortisations, Provisions,Adjustments and Reversals 384,609 377,254 -7,355 -2%EBIT 447,109 529,350 82,241 18%Financial Income -29,781 -30,922 -1,141 4%Extraordinary Income 32,277 69,879 37,602 116%Minority Interests 4,625 3,113 -1,512 -33%Income before Tax andMinority Interests 449,605 568,307 118,702 26%Income Tax 111,916 123,235 11,319 10%Net Income** 333,064 441,959 108,895 33%

* Including Services Provided and Production Variation** After Minority Interests

(thousand euros)


Without these two factors, total cash costs would have been EUR 826.9

million, equivalent to a 9% rise on the 2004 figure.

The increase in costs that Galp Energia recorded in 2005 does not jeopardise

the path that the Company has been pursuing to improve the operational

efficiency of costs. Despite the increase in business activity recorded in

2005, total cash costs (from a year-on-year comparative basis) remained

stabilised in comparison to the gross margin.

External Supplies and Services reported an EUR 87 million increase (+20%)

on the previous year to a total of EUR 524.3 million. The main reason for this

increase was compliance with Decree-Law no. 35/2005, the aim of which is

to harmonise Portuguese accounting criteria with IAS/IFRS standards, which

led to the consolidation of the Group’s reinsurance company (Tagus RE) for

the first time in the history of the Galp Energia Group and a direct increase

of EUR 15 million under External Supplies and Services. Also, since 2005 was

the first operational year of EGREP, a company in which responsibility for the

creation of strategic reserves equivalent to around one month’s consumption

is concentrated, led to a direct increase in costs of EUR 9.6 million, but an

equivalent reduction in the capital employed by the company.

Excluding these facts, External Supplies and Services would have increased

14% to EUR 499.6 million, due fundamentally to the impact of two factors:

• An increase in the quantities sold that led to the increase of variable costs

(mainly transport, storage, filling and using depots, terminals and oil

pipelines);

• The pressure created on some costs due to the development of reference

prices, particularly the case with diesel prices.

Personnel costs rose EUR 20.9 million (+8%) to EUR 276 million. This

increase is mainly due to the increase in payments to the pension fund and

the increase in the total number of employees, 103 employees altogether,

principally in Spain and as a result of the purchase of the company

Gasinsular in Madeira.

Other operating income improved by EUR 13.3 million, basically due to the

reduction of hedging costs.

Non-cash costs (amortisations, provisions, adjustments and reversals)

totalled EUR 377.2 million, a 2% fall on the previous year. The amortisation

increase related to Block 14 (Kuito Field) and the operational start-up of the

company CLCM were more than sufficiently offset by a reduction to

provisions, which included in 2004 a EUR 31.8 million provision for Block 33

in Angola.

The value of net financial items in 2005 was the same as in the previous

year - negative EUR 30.9 million. The unfavourable behaviour of net

exchange rate differences due to the rising dollar in 2005 was diminished

by the gains resulting under Income from Shareholdings (basically

international gas pipelines and CLH) and by the reduction of interest rates

and overheads (due to the reduction of bank debt). Extraordinary income

increased EUR 37.6 million to EUR 69.9 million, strongly influenced by the

capital gain from the sale of the natural gas distribution concessionary

Portgás (EUR 48 million).

:: 7.3. Financial Analysis ::

Balance Sheet

The consolidated net assets of the Galp Energia Group, as at 31 December

2005, rose to EUR 6,299 millions, at a shareholders’ equity of EUR 2,184

millions.

2002 2003 2004

57%

Operating Cash Costs (*) vs Gross Margin

2005

50%

46% 46%

(*) excluding Hedging, Pension Fund, EGREP Fees and Tagus RE

Consolidated assets recorded growth of EUR 175 million on the 2004 figure.

This increase basically resulted from the increase of EUR 189 million in short

term receivables and, as in the previous year, the focus was on customers,

in view of the increased turnover.

Liabilities totalled EUR 4,115 millions, a fall of EUR 122 million from 2004.

This decrease was decisively influenced by the decrease of EUR 163 million

in Short term Accounts Payable, particularly bank debt.

Shareholders’ equity rose EUR 297 million.

Financing Policy

Under the financing policy pursued in 2002 and 2003 Galp Energia played

the role of financing vehicle for the entire Group. In 2004, faced with the

expected restructuring of the energy sector, in which the natural gas

business would most probably be separated from the oil business, GDP took

on the role of financing vehicle for the natural gas sector, which it

maintained in 2005. Company policy for 2006 and subsequent years will be

for Galp Energia to reassume the position of preferential vehicle for finance

for the Group, except with regard to project finance or any other structured

financing that must be managed at the company level.


Overall, Galp Energia’s debt was reduced by EUR 309 million while

maintaining a high level of operating cash flow.

The average cost of Galp Energia’s debt in 2005 was by 4.2%, increasing

versus 2004. This was caused by the appreciation of the dollar against the

euro and the reversal of monetary policy, from expansionist to

contractionist. This reversal in policy had been initiated by the American

Federal Reserve in 2004 and it was followed by the European Central Bank

at the end of 2005, through an increase of base rates.

Capital Structure

Shareholders’ equity rose by 16% in 2005, while short and medium long

term loans were reduced by 59% and 0.5%, respectively. The breakdown of

debt between short term and medium and long term substantially altered,

as financing policy had intended.

Breakdown of Galp Energia Financial Debt

Galp Energia4%

Petrogal Group32%

Others1%GDP Group

63%

Galp Energia15% Petrogal Group

39%

Others1%GDP Group

45%Galp Energia

4%

GDP Group65%

Petrogal Group29%

Others2%

2003 2004 2005

Debt Structure 2003 2004 2005 2005-2004(million euros)

Total Short Term Debt 748 633 257 -375Bond Loans 150 0 0 0Bank Loans 557 631 256 -375Other Loans 41 1 1 0

Total Medium and Long Term Debt 1,372 1,098 1,093 -5Bond Loans 310 310 310 0Bank Loans 1,057 784 780 -4Other Loans 5 4 3 -1

Total Interest-Bearing Liabilities 2,120 1,731 1,350 -381Cash 190 234 162 -72

Net Debt 1,930 1,497 1,188 -309

Balance Sheet 2003 2004 2005(million euros)

Intangible Fixed Assets 507 493 505Tangible Fixed Assets 3,282 3,252 3,192Financial Investments 224 204 179

Total Fixed Assets 4,012 3,949 3,876Medium Long term Receivable 40 33 25

Total Non - Current Assets 4,052 3,982 3,901Stock 719 677 766Short term Receivables 780 873 1,062Negotiable Securities 11 19 16Bank Accounts and Cash 179 215 147Accruals and Deferrals 328 358 407

Total Current Assets 2,017 2,142 2,398

TOTAL ASSETS 6,069 6,124 6,299

Shareholders' Equity 1,651 1,887 2,184Minority Interests 24 27 28Provisions 274 267 293Medium Long term Payables 1,392 1,125 1,129Short term Payables 1,922 1,980 1,817Accruals and Deferrals 805 838 848

Total Liabilities 4,418 4,237 4,115

TOTAL Shareholders' Equity + Liabilities 6 ,069 6,124 6,299


The securitisation operation carried out by Petrogal will mature in 2008.

Therefore, if the operation is not renewed in that year, a reimbursement of

EUR 210 million will be payable.

EC funds received for investment in the natural gas sector under the scope of

the Economy Operational Programme totalled EUR 44 million, leaving just

EUR 4 million still to be received.

Galp Energia has the right to receive EUR 75 million from the Portuguese

government as compensation payable to Petrogal under the terms of the

Shareholders’ Agreement between the State and Petrocontrol. This sum is to

subsidise investment made by Petrogal in the Porto and Sines Refineries to

remove sulphur from diesel. The first instalment of EUR 25 million was paid

in 2005.

Cash Flow and Investment Funding

Galp Energia’s cash flow permitted a reduction to the Group’s debt by EUR

309 million.

Financial Ratios

In 2005, Galp Energia once again showed substantial improvement in

financial ratios, achieving a 9% increase in EBITDA and 12% decrease of Net

Interest. The net debt/shareholders' equity ratio was 53%, mirroring the

constant strengthening of the capital structure, which will allow the

company to face the challenges of development and growth that it may

come across in the future.

:: 7.4. Integrated Risk Management ::

Galp Energia has in place an integrated risk management policy that seeks to

minimise volatility in the Company’s financial results, resulting from the

behaviour of external variables. The associated risk results from physical

business activities and, as such, it depends on the behaviour of the external

variables and the relationships between them.

All hedging operations are associated to the physical reality of the business.

Trading in paper markets is not permitted.

Received Due(million euros)

GDP Group 44 4Petrogal Group 28 50Total Galp Energia 72 54

1,497 853

323 72

216

157 801,188

309

NetDebt2004

OperatingCashFlow

InvestmentCashFlow

SubsidiesReceivable

DividendsPaid

NetInterest

and Taxes

Others NetDebt2005

Cash FlowAvailable to

ReduceDebt

2003 2004 2005

EBITDA/Net Interest 14.2 x 18.5 x 23.1 xNet Debt*/EBITDA 2.9 x 1.7 x 1.3 xGearing 53% 43% 35%Net Debt*/Shareholders' Equity with Minority Interests 112% 75% 53%Financial Autonomy 28% 31% 35%

* Includes inter-Group company loans

Capital Structure

MinorityInterests

1%

Short TermLoans20%

Shareholders’Equity43%

2003 2004 2005

MinorityInterests

1%

MinorityInterests

1%



Short TermLoans17%

Short TermLoans17%

Medium and LongTerm Loans

36%


30%


31%

Repayment Profile of Medium and Long Term Debt

Galp Power

488

2007

78

286

161

2008 2010 >20112009

79

Petrogal GroupGDP Group Galp Energia

(million euros)

These risks are managed through organised futures markets (NYMEX and

IPE) and direct operations with international financial institutions and other

oil companies.

The hedging instruments that are used protect the company from adverse

market shifts, but, nevertheless, allow a profit to be made from the

associated positive risk, a market upturn in other words.

Hedging operations are only performed on the underlying physical

exposure. These operations are performed with counterparties holding

investment-grade ratings.

This policy is implemented with the task of executing hedging operations

separated from that of controlling such operations. The Risk Management

Committee is responsible for co-ordinating these activities and for analysing

the value at risk. It defines the actions to be taken to reach the proposed

objectives.

Given that the exogenous variables are not independent of each other, the

objective of the hedging operations carried out is to maintain the natural

coverage existing in the business and between businesses, as well as to

reduce the remaining residual risk.


Galp Energia’s main risk lies in the refining margin.

In 2005, the Galp Energia Group continued to implement its policy for

managing the exposure of cash flow to the behaviour of the underlying

exogenous variables.

The price-smoothing policy for the purchase of crude was maintained in

2005, through recourse to the futures market as a means of guaranteeing

that the purchase price approaches the average international price for each

month.

The Galp Energia Group continued to denominate part of its debt in USD in

order to manage business exposure to the USD/EUR exchange rate. Given

the behaviour of interest rates in 2005, the company continued to

implement an interest rate risk management policy by performing interest

rate pegging transactions to reduce cash flow exposure to interest rate

fluctuations. Interest rate market trends also led the company to prefer

instruments that specify the maximum cost but allow the lowest short term

rates to be profited from.

annual report 2005 :: implementation of international accounting standards (ias/ifrs)62

8. Implementation of International Accounting Standards (IAS/IFRS)

The Galp Energia Group has bonds listed on stock markets and is, therefore,

bound to comply with the guidelines specified in EC Regulation no.

1606/2002 of 19 July.

Accordingly, a plan to implement the International Accounting Standards in

all of the Group’s companies was established and the Balance Sheet for the

conversion of the Portuguese GAAP to IAS, as of 1 January 2004, was drafted.

In compliance with EC Regulation 1606/2002e of the European Parliament

and Council of Ministers, the consolidated accounts of GDP, S.G.P.S., S.A. are

submitted in accordance with IAS/IFRS, given that the company possesses

listed bonds and submits consolidated accounts.

Since no other company of the Group possesses these characteristics, the

company and consolidated accounts of Galp Energia and all the other Group

companies are submitted in accordance with Portuguese accounting

standards (Portuguese GAAP).

However, from the 2006 financial year onwards, Galp Energia’s company

and consolidated accounts and those of all the Group’s companies shall be

drafted in compliance with international standards (IAS/IFRS).

63implementation of international accounting standards (ias/ifrs) :: annual report 2005

relevant factssubsequent to the close

of the financial year

annual report 2005 :: relevant facts subsequent to the close of the financial year66

9. Relevant Facts Subsequent to the Close of the Financial Year

1. Changes to Shareholder Structure

As a result of the purchase and sale contract entered into by EDP - Energias

de Portugal, S.A., and the Américo Amorim Group, on 7 December 2005,

Amorim Energia, B.V., purchased 23,663,875 shares of Galp Energia from

EDP Participações, S.G.P.S., S.A., in January 2006, representing 14.268% of

the share capital of Galp Energia. Amorim Energia, B.V., also purchased the

shareholding of Portgás, totalling 72,905 shares, thereby providing it with a

total of 23,736,780 shares, equivalent to 14.312% of the share capital of

Galp Energia.

Subsequent to this, Amorim Energia, B.V., sold a quantity of shares

equivalent to one percent of the share capital of Galp Energia to Caixa Geral

de Depósitos.

2. Restructuring of the Energy Sector

The general principles relative to the organisation and operation of the

National Electricity System (SEN), the National Natural Gas System (SNGN)

and the National Oil System (SPN), which originated from the strategic

guidelines defined by the government in the national strategy for the

energy sector, approved by Cabinet Resolution no. 169/2005 of 24 October,

were introduced into legislation through Decree-Law nos. 29/2006,

30/2006 and 31/2006, all of 15 February. These decree-laws transpose to

national legislation the principles of European Parliament and Council of

Ministers’ Directive no. 2003/54/EC of 26 June, which establishes common

rules for domestic electricity markets, and the principles of European

Parliament and Council of Ministers’ Directive no. 2003/55/EC of 26 June,

which establishes common rules for domestic natural gas markets.

3. Biofuel

Decree-Law no. 62/2006 of 21 March transposed to national legislation

European Parliament and Council of Ministers’ Directive no. 2003/30/EC of

8 May, which promotes the use of biofuel and other renewable fuels in

motor vehicles.

Decree-Law no. 66/2006 of 22 March amended the Special Consumption

Taxation Code, which was approved by Decree-Law no. 566/99 of 22

December and which provides partial and full exemption of the payment of

taxes on oil and energy products (ISP) to biofuel used by motor vehicles for

transport, when incorporated into petrol and diesel.

4. Open Invitation to Tender for the Award of Wind Energy Production

Licences

On 1 March 2006, the Ventinveste consortium, led by Galp Energia,

submitted its bid for the International Open Invitation to Tender for the

Award of Power Injection Capacity and Associated Points of Receipt for

Electricity Produced by Wind Farms.

The consortium intends to invest EUR 1 billion euros and create 1,250 new

jobs through a diversified industrial cluster and the construction of nine wind

farms in seven districts in Portugal.

Galp Energia, through Galp Power, is the main shareholder of the

Ventinveste consortium with 34%; Martifer holds 31% of the consortium,

Enersis holds 30%, Efacec Energia holds 2% and Repower Portugal, Repower

Systems AG and the blade factory Power Blades each hold 1%.

5. General Meeting of Shareholders of Galp Energia held on 29 March

2006

At the General Meeting of Shareholders of Galp Energia held on 29 March

2006, shareholders were provided with information on recent changes to

the shareholder structure of Galp Energia and the cross-company agreement

between ENI, REN, Amorim Energia and Caixa Geral de Depósitos, which

was recently unconditionally approved by the European Commission.

Another item of said meeting was the approval of some amendments made

to the company’s bylaws, focusing on formal procedures related to the

powers of approval of certain material held by the governing bodies. These

amendments aimed to establish stable rules of governance that are

compatible with best market practices, taking into account the current phase

of preparing Galp Energia for becoming listed on the stock exchange.

At the meeting, in which the representatives of the shareholder Amorim

Energia took part for the first time, the shareholders also ratified the

decision of the Board of Directors to co-opt the new members of the Board

of Directors proposed by said shareholder, Mr. Manuel Carlos and Mr. Diogo

Tavares.

1. Shareholders with Direct and Indirect Qualifying Shareholdings (Article

448, paragraph no. 4, of the Portuguese Companies’ Code and Article 20 of

the Portuguese Securities’ Code)

During the 2005 financial year, Parpública - Participações Públicas S.G.P.S.,

S.A., purchased 13,373,134 shares of Galp Energia from the Portuguese

State, thereby increasing its number of shares held in the company to


2. Own Shares (Article 66, sub-paragraph d), and Article 325-A, paragraph

1, of the Portuguese Companies’ Code)

During the 2005 financial year Galp Energia did not acquire or sell own

shares. As at 31 December 2005, Galp Energia did not hold any own shares.

3. Shareholdings of Members of the Board of Directors and Supervisory

Body (Article 447, paragraph 5, of the Portuguese Companies’ Code)

The members of the management and supervisory bodies of Galp Energia

do not hold shares or bonds of the company or of the companies of the

same Group or with which it is bound by a relationship of control. No

transaction of any kind was recorded in 2005.

67mandatory statements :: annual report 2005

4. Business Between Members of the Board of Directors and the Company

(Article 66, sub-paragraph e) and Article 397 of the Portuguese Companies’

Code)

No authorisations were granted in 2005 to members of the Board of

Directors of Galp Energia to carry out any business with the company.

5. Other Positions Held by Directors (Article 398 of the Portuguese

Companies’ Code)

In 2005, except for Mr. João Pedro Leitão Pinheiro de Figueiredo Brito, up to

his election as a member of the Board of Directors on 24 May 2005, no

other director held any other permanent or temporary post, directly

employed as staff or indirectly as a service provider, and embodied in an

employment contract, in the Company or in any of the Companies of the

same Group or with which it is bound by a relationship of control.

During the 2005 financial year, the directors did not perform any activity, on

their account or on behalf of others, competing with that of the company.

N.B.:

In the meeting of Galp Energia’s Board of Directors of 24 February 2005, the

issue of the possible conflict of interests was raised regarding the fact that

Mr. Rui Horta e Costa is a member of said Board and also of the Board of

Directors of EDP, in which he holds the same duties and which became a

competitor of Galp Energia following EDP’s acquisition of Portgás through the

purchase from Galp Energia of 46.6% of this company’s share capital, on 10

January 2005.

10. Mandatory Statements

Shareholders possessing more than one-third and less than one-half of the sharecapital *ENI Portugal Investment, Spa 55,294,432 shares 33.34%Shareholders possessing more than one-tenth and less than one-third of the sharecapital *REN 30,350,573 shares 18.3%Portuguese State 29,373,123 shares 17.71%EDP Participações - S.G.P.S., S.A. 23,663,875 shares 14.27%Parpública, S.G.P.S., S.A. 20,388,309 shares 12.29%

* the percentage of capital is rounded up based on the total number of shares (165,850,127)

annual report 2005 :: closing notes68

The Chairman of the Board of Directors informed the shareholders of this

fact so that, taking into consideration the provisions of Article 398,

paragraph nos. 3 and 4, and Article 254, paragraph nos. 2 to 6, of the

Portuguese Companies’ Code, they may take any action deemed necessary

through the General Meeting of Shareholders, within the legal time limit

established in said provisions.

At the meeting of the Board of Directors of Galp Energia on 28 April 2005,

the Chairman of the Board of Directors stated that a response had only been

received from the shareholder EDP. He further informed those present that

a legal opinion on the matter had been ordered.

In the Board of Director’s meeting of Galp Energia of 19 July 2005, the

Chairman of the Board of Directors stated that a letter from the Ministry of

Finance and Public Administration had been received in reply to the request

for a legal opinion regarding the possible conflict of interests of the

aforementioned member of the Board of Directors, which had been sent on

29 April 2005. The opinion of the Ministry was disclosed, confirming the

non-existence of incompatibility in holding the post of director in the two

companies.

6. Provision of Services to Group Companies and Creditor Positions

Relative to Companies in which Shareholdings are Held (Article 5,

paragraph 4, of Decree-Law no. 495/88 of 30 December, as last amended

by Decree-Law no. 318/94 of 24 December).

See Note 16 (Provision of services to Group companies) and Note 49

(Creditor positions in companies in which shareholdings held) of the Notes

to the Balance Sheet and Company Financial Statements.

The Board of Directors of Galp Energia S.G.P.S., S.A., would like to thank its

shareholders for their cooperation, endeavour and confidence in

accompanying the development of the Galp Energia Group during 2005.

The Board of Directors extends its gratitude to all those entities that

cooperated with Galp throughout 2005, in particular:

• The Portuguese state’s Court of Auditors, the Directorate-General for

Public Revenue and the Inspectorate-General for Taxation;

• The Directorate-General for Geology and Energy;

• The Institute for the Environment;

• The statutory auditor and external auditors;

• The financial institutions that continued to support Galp Energia’s projects.

Finally, we would like to address a special word of appreciation to our

customers, retailers and suppliers for their preference and the trust they

have in us, and to the staff of the Group for all their hard work and their

unfaltering commitment.

11. Closing Notes

69proposed appropriation of profits :: annual report 2005

12. Proposed Appropriation of Profits

The net income of Galp Energia S.G.P.S., S.A., in the 2005 financial year was

EUR 441,958,609.17.

Lisbon, 12 April 2006

THE BOARD OF DIRECTORS

Chairman:

Francisco Luís Murteira Nabo

Vice-Chairmen:


Giancarlo Rossi

Directors:



Camillo Gloria

Angelo Taraborrelli

Federico Ermoli

Giorgio Puce

José Rodrigues Pereira dos Penedos



Manuel Carlos Costa da Silva

Diogo Mendonça Rodrigues Tavares

Joaquim Augusto Nunes de Pina Moura

Galp Energia S.G.P.S., S.A.(euros)

a) Allocation to Legal Reserve (5%) 22.097.930,46b) Dividends (€1,34/share) 222.239.170,18b) Retained Earnings 197.621.508,53

Total 441.958.609,17

appendices

annual report 2005 :: corporate governance report72

Corporate Governance Report

In keeping with the Recommendations issued by CMVM (Portuguese

Securities and Exchange Commission) and the duties to disclose information

imposed by Regulation no. 7/2001 of 20 December, as amended by

Regulation nos. 11/2003 of 2 December and 10/2005 of 18 November,

Galp Energia has implemented a set of improvements at the corporate

governance level.

Although Galp Energia has no shares listed on a regulated market, the issue

of corporate governance has been one of the company’s management’s

concerns. Accordingly, the Board of Directors discloses information on

governance practices and structure in the Company for the fifth consecutive

year.

:: Chapter I - Disclosure of Information ::

:: 1. The Group’s Organisational and Functional Structure ::

The management model adopted by Galp Energia seeks to ensure

transparency and effectiveness, based on a clear separation of powers

between the Board of Directors, which has supervision, monitoring and

control powers over issues that are strategic in nature or concerning the

relationship between the company’s shareholders and its governing bodies,

and the Executive Committee, which is responsible for delegated operational

tasks related to the day-to-day management of the business units and

focusing on the objective of value creation.

This management model comprises five Business Units, under the leadership

and guidance of each one of the executive directors. The model is based on

the principles of across-the-board, flexibility, simplicity, efficiency, and the

delegation of duties with a view to creating value and obtaining synergies

within and between Business Units.

Galp Energia’s Business Units are as follows:

• Galp ARL guarantees the acquisition, industrial transformation, storage and

supply of crude oil and finished products to Group customers (commercial

units) and some external customers;

• Galp Transgás guarantees the acquisition, transport and storage of natural

gas (NG) and its supply to internal customers and large external customers,

and is responsible for the development of liquefied natural gas (LNG)

regasification infrastructures (Sines LNG Terminal);

• Galp Gás guarantees the distribution of gas (NG and LPG);

• Galp Empresas guarantees the provision of integrated multi-product and

multi-service solutions to wholesale customers;

• Galp Retalho develops the fuel and non-fuel businesses through the retail

network of service stations.

In addition to the referred-to business units there are also smaller

management units responsible for developing and launching new business

projects.

These smaller units related to the cogeneration and alternative energies

areas are managed by Galp Power, those related to oil exploration and

production are managed by Galp Exploração, those related to international

markets, mainly Africa, are managed by Galp Internacional, and the

commercial management of the Sines LNG terminal is managed by Galp

Atlântico.

In addition to the business units, there are management units:

• Corporate Functions;

• Services’ Unit.

The role of the Corporate Functions unit is to assist the Board of Directors

and the Executive Committee in the formulation and implementation of

corporate strategy, the management of essential corporate resources, the

definition of global policies for the Group, and driving the Business Units’

performance.

The duties and powers of the Corporate Functions unit are as follows:

Corporate Finance - Responsible for optimising the funding and capital

structure of the Galp Energia Group, guaranteeing the integrated

management of risks and the focusing of synergies into the achievement of

funding needs.

Corporate Planning and Control - Responsible for driving business

performance and ensuring that the same is in line with the company’s

strategic objectives, guaranteeing that their information systems function in

a context of strategic management and outlook.

Corporate Human Resources - Develop and implement the Group’s human

resources policy, guaranteeing that the strategic and operational

requirements of the different businesses are met, that staff are motivated

and that personal and professional development is feasible.

Corporate Marketing - Lead, establish and implement Galp Energia’s

marketing strategy with the aim of maximising the Company’s value,

customer loyalty and satisfaction, and the construction of a solid and

consistent brand with the Group’s values and vision.

Legal Services and Organisation - Support the activities of Galp Energia’s

governing bodies and Group companies of a legal and organisational nature,

guaranteeing the correction, dissemination and upkeep of all official

information of the Group in the contractual or corporate field. It must also

provide technical consultancy and assistance to the business units on all

matters of a legal nature, so as to safeguard the interests and rights of Galp

Energia, guaranteeing the development of work and communication

organisation, processes, systems and platforms, in line with the values,

vision, mission, strategy and governance model of Galp Energia, so as to

support the growth and valorisation of the businesses.

Corporate Environment, Quality and Safety - Vitalise the assimilation of

environment, quality and safety policies into the management of all

activities, products and services, as an intrinsic value in the sustainable

development of the businesses.

Internal Audit - Independently and systematically assesses the Group’s

activities, delivering added value through the minimisation of risks, the

optimisation of management processes and internal control and corporate

governance systems.

73corporate governance report :: annual report 2005

Institutional Corporate Communication - Formulate and implement Galp

Energia’s corporate institutional communication strategy and policy,

furthering the consolidation of the Company’s objectives, values and

reputation, taking the lead in media relations and making sure that the

general public is kept clearly and correctly informed.

Institutional Relations - Formulate and implement the Group’s institutional

relations strategy and policy, in particularly with all public and private

institutions directly or indirectly implicated in its activities, such as municipal

authorities and business or community entities (associations, foundations or

other), furthering the company’s objectives, values and reputation.

Human Resources Strategy Development Office - Formulate strategies and

respective programmes and processes regarding recruitment, retaining

management staff and performance assessment, the definition of

leadership profiles and skills development, training and development plans,

mobility policy within the Group and diverse aspects of internal

communication.

Galp Serviços unit supports the Group’s activities, particularly the business

units, by providing services in many areas, including the following fields:

administrative, financial, legal, insurance, staff management, information

and training systems, among others. This unit is responsible for ensuring

high standards of quality, efficiency and economy, in compliance with

agreed service levels.

In 2005, Galp Energia’s Executive Committee created seven Immediate

Focus Strategic Projects:

• Spain Project - improved results;

• Natural gas strategy in view of liberalisation;

• “Simplification of the Group’s Legal Structure” project;

• “Galp Customer” project;

• Refining Strategy;

• Strategy for entering the Electricity business sector;

• Galp Energia’s Strategy for the Exploration & Production business.


(The table indicating the division of powers between the members of the

Executive Committee is further on in this document.)

In view of the postponement of Galp Energia’s IPO, the Investors’ Office was

not created.

The relations of Group companies with securities listed on Euronext Lisbon

with the capital markets have been guaranteed, since 20 October 2005, by

an appointed common representative, the head of Corporate Finance:

Pedro Dias

Rua Tomás da Fonseca, Torre C, 1600-209 Lisboa

Tel: 210 039 024

Fax: 210 039 011

Email: [email protected]

:: 2. Internal Control System ::

The Internal Control System is assured by a set of specific committees, the

most significant of which are described below.

• Investment Committee

The Investment Committee analyses and monitors the implementation of

investment policy in the various businesses with respect to the nature, cost

and structural risks of the projects, reporting to the Executive Committee of

Galp Energia.

• Information Systems Committee

The objective of the Information Systems Committee is to foster an

integrated vision of and communication between all parties involved in Galp

Energia´s communication systems.

:: Galp Energia Governance Model ::

* reports to the Chairman of the Board of Directors

Corporate Planning and Control Corporate Finance

Legal and Organisation Services Corporate Marketing

Environment, Quality and Safety Internal Audit*

Human Resources Development of HR Strategies

Institutional Communications Institutional Relations

Executive Committee

Corporate Functions

Board of Directors

Business Units

GalpTransgás

GalpARL

GalpGás

GalpEmpresas

GalpRetalho

Service Unit - Galp Serviços

Galp Internacional

Galp Exploração

Galp Power

The following organisational chart indicates Galp Energia’s governance model, showing the division of duties between the company’s different bodies and departments in

the context of the business decision process:

• Committee for the Analysis and Qualification of Functions

The function of the Committee for the Analysis and Qualification of Functions

is to guarantee, in a coherent manner and in accordance with uniform

criteria, the process of analysing and assessing duties within the Galp

Energia Group, defining an organisational framework that provides for the

development and implementation of a set of human resource management

instruments.

• Pricing Committee

The Pricing Committee defines pricing policy and strategy for liquid fuels in

Portugal.

Risk Management and Control System

The corporate organisation of Galp Energia includes an internal audit unit

responsible for assessing the activity of the Business Units in an

independent and systematic manner, so as to minimise risks, guaranteeing

the effectiveness of management processes and internal control systems.

The Corporate Finance Division, on the other hand, ensures the

implementation of the approved Integrated Risk Management Policy as well

as the integrated management of Galp Energia’s risk. Its main functions are

to provide support to the Business Units and subsidiaries regarding the

expected behaviour of external variables and providing the respective

historical analysis.

The Risk Management Committee of Galp Energia defines how the Risk

Management Policy approved by the Board of Directors should be

implemented and suggests changes to the same policy, as well as analysing

hedging operations.

The integrated risk management policy formulated in 2005 by Galp Energia

is aimed at ensuring a minimum return on capital employed, thereby

reducing the volatility of Galp Energia’s cash flows.

Dividend Distribution Policy

Galp Energia’s dividend policy takes into account a number of factors that

influence its activity, specifically its investment plan, capital structure,

liquidity and the cash flow generation capacity of its operations.


Galp Energia, thus, seeks to ensure a balanced and stable dividend policy,

reflecting the company’s current state and in line with the market practices

of its peer companies.

The dividend per share paid out in the last three years was:

:: 3. The Use of New Technology to Disclose Financial Information ::

Galp Energia has been gradually introducing the use of new technology to

disclose relevant information regarding the company’s status, including

financial information on the company and on the Group’s main companies,

in particular its website (www.galpenergia.com).

The information made available through these means includes the annual

reports and accounts for the last three financial years of the Group

companies with securities listed on Euronext Lisbon (GDP - Gás de Portugal,

S.G.P.S., S.A., and Lisboagás GDL - Sociedade Distribuidora de Gás Natural de

Lisboa, S.A.), as well as the respective articles of the bylaws, shareholder

structure and governing bodies.

The myGalpenergia portal on the company’s intranet continues to be

developed as a work platform for all staff. The content of this portal, which

is used to disclose relevant information, is entirely produced by the Business

Units.

:: 4. Remunerations ::

Remunerations Committee

Galp Energia’s memorandum of association establishes that remuneration of

members of the governing bodies are set by a remunerations committee

formed by representatives of three shareholders. It also establishes that

members of the Board of Directors or of the Supervisory Board may not

simultaneously be a member of the remunerations committee.

Financial year dividend referring to 2002 2003 2004

Dividend per share (EUR) 0.26 0.56 1.00


Galp Energia’s Remunerations Committee was appointed by the General

Meeting of Shareholders on 24 May 2005 for the 2005-2007 three-year

period, and sitting on it is the Portuguese state, as the chair, represented by

José Isidoro d’Oliveira Carvalho Netto, Eni Portugal Investment, SpA,

represented by Giancarlo Cepollaro, and Rede Eléctrica Nacional (REN),

represented by Victor Manuel da Costa Antunes Machado Baptista.

None of the members of the Remunerations Committee is simultaneously a

member of the Board of Directors of Galp Energia.

As established in the company’s memorandum of association, the

remuneration of the members of the Board of Directors may include a

percentage of the year’s net profit, up to the global limit of 0.5% of said

profits.

Auditors

Galp Energia’s independent auditors are responsible for expressing an

opinion on the individual and consolidated financial statements drafted in

accordance with accounting principles generally accepted in Portugal.

Since 2001, Galp Energia’s auditor has been Deloitte & Associados.

The overall annual remuneration paid to the auditor of the companies in the

Galp Energia Group in 2005 for services that including statutory auditing was

EUR 825,000. EUR 24,464 of this total corresponds to the cost incurred for

the audit of Galp Energia’s individual accounts.

Since 31 March 2003, KPMG has provided tax consultancy services to the

Galp Energia Group.

:: Chapter II - Exercise of Shareholders’ Voting and Representation

Rights ::

Under the terms of Article 10 of Galp Energia’s bylaws, only shareholders

with voting rights are allowed to take part in General Meetings of

Shareholders. Each group of 100 shares corresponds to one vote.

Shareholders owning less than this may group together to exercise voting

rights, in which case they may be represented by one of their number or by

another shareholder.

For the purposes of attending shareholders’ meetings, all shareholders are

deemed to be those holding shares that have been registered in their name

at least five days prior to the date of a meeting.

Shareholders that are corporate bodies may appoint any person to represent

them at shareholders’ meetings, by any written means. Shareholders that

are private individuals may only be represented at shareholders’ meetings

by a member of the Board of Directors, their spouse or an immediate family

member, or by another shareholder. Said representation must be formulated

in writing.

All shareholders, except for the Portuguese State, that wish to appoint a

representative, must provide the company with the document of

representation at least five days prior to the scheduled date of the meeting,

and, when corporate entities, must indicate who will be the representative;

the chairman of the meeting may, however, allow representatives not

indicated within said time period to take part in the meeting if it is

ascertained that this will not jeopardise the meeting’s tasks.

Galp Energia’s bylaws do not expressly provide for so-called “postal votes”.

:: Chapter III - Company Rules ::

Galp Energia’s memorandum of association, which is available on the

company’s website, establishes the main operational and organisational

rules of the company.

The drafting of the company’s rules/codes of conduct, applicable to the

governing bodies, is currently underway. Other internal regulations

specifically aimed at situations of conflict of interest, confidentiality and

incompatibility, are also being drafted.

Galp Energia’s memorandum of association does not establish any

restrictions to the free transfer of ownership of shares.

Galp Energia’s share capital is divided into special shares, which are held by

the Portuguese State (“Category A shares”) and ordinary shares (“Category

B shares”), held by the remaining shareholders.

Under Article 4 of the bylaws, Category A shares have the following special

rights:

a) The right to appoint, in accordance with Article 391, paragraph 2, of the

Portuguese Companies’ Code, three, four or five members of the Board of

Directors, determined by whether the Board is formed of a total of 11, 13

or more members, respectively;

b) The right to veto, on the first or any subsequent scheduled date of a

meeting, irrespective of the majority of votes in favour, any resolutions to

amend the company’s bylaws, to authorise the entering into group

agreements of equal division or agreements subordinating the company to

another, or any resolutions that could negatively affect, in any way, the

supply of oil, gas or derivative products to Portugal.

The public has been informed of the fact that the shareholders, the

Portuguese State and ENI Portugal Investments, SpA, have entered into a

shareholders’ agreement.

:: Chapter IV - Board of Directors ::

According to the company’s bylaws, Galp Energia’s Board of Directors can be

composed of 11 to 21 directors. The current Board of Directors, which was

appointed at the General Meeting of Shareholders of 23 May 2002 for a

three-year mandate, is composed of 15 directors.

As established in the bylaws, Galp Energia’s Board of Directors represents

the company, legally or otherwise, actively and passively. It has broad

management powers, including powers to decide on any matter of the

company’s administration. It may also admit guilt, broker deals or withdraw

from any litigation, as well as commit the company in arbitration.


According to Article 16 of the bylaws, the Board of Directors meets at least

once each quarter.

The Board met nine times during 2005.

The Board of Directors created an Executive Committee by its decision of 30

May 2005, in accordance with Article 17 of the company’s bylaws.

The operating rules of the Executive Committee and the delegation of

powers were approved by the Board of Directors at the abovementioned

meeting. The rules of information provision and the Board of Directors’

monitoring of the Committee's activities were also established at said

meeting.

The Executive Committee is composed of seven directors and it must meet

at least twice a month. The Executive Committee met 43 times during 2005.

The Executive Committee, at its meeting of 30 May 2005, established the

areas of administration for which its members will be specifically

responsible. These areas are indicated in the organisational chart below.

Besides the matters established in Article 407 of the Portuguese Companies’

Code, the Board of Directors is responsible for a range of affairs and issues

deemed to be of greatest importance to and having the most impact on the

company and the Group. These are:

• To formulate the business model and strategy;

• To define the organisational and corporate framework;

• To define the composition of the business portfolio;

• To foster inter-business synergies;

• To approve large scale or high-risk investment;

• To establish value-creation objectives for each business;

• To control compliance with defined objectives.


The members of the Executive Committee work full-time for the Group and

each one is in charge of specified management units, without prejudice to

the Executive Committee’s role of global supervision of all the units. The

members may also hold unpaid director positions in other Group companies.

In accordance with the policy in force in the Galp Energia Group, the

remuneration of Galp Energia employees includes all remuneration relative

to the performance of any duties in subsidiary companies.

The information relative to the affairs and/or decisions of the Executive

Committee, in particular those concerning matters for which Galp Energia

holds exclusive responsibility, are regularly reported to the Chairman of the

Board of Directors, taking into account said chairman’s powers and

responsibilities provided by law and the bylaws, namely with regard to the

coordination of the activities of the body chaired and relations with

shareholders and other governing bodies.

The Chairman of the Board of Directors notifies the Board of the most

relevant decisions of the Executive Committee and also submits to the Board

those decisions deemed to require, due to their relevance, confirmation by

the Board.

The corporate posts held by the members of the Board of Directors in Group

companies and other companies are listed in the Annex to this report.


:: Corporate Positiond Occupied by Executive Members of the Board

of Directors in Companies of the Galp Energia Group and other

Companies, as at 31 December 2005:

:: Vice-Chairman of the Board of Directors and Chief Executive Officer:

José António Marques Gonçalves ::

Group Companies:

• Chairman of the Board of Directors of Petróleos de Portugal

- Petrogal, S.A.

• Chairman of the Board of Directors of GDP - Gás de Portugal, S.G.P.S., S.A.

• Chairman of the Board of Directors of Transgás S.G.P.S., S.A.

• Chairman of the Board of Directors of Galp Energia España, S.A.

• Chairman of the Board of Directors of Transgás Atlântico

- Sociedade Portuguesa de Gás Natural Liquefeito, S.A.

• Member of the Consultative Board of Petrogal Brasil, Ltda.

• The Management of Internal Auditing reports to the Chairman of the Board of Directors

• The Strategy Development Office of Human Resources reports to the Chief Executive Officer

Corporate Function Business Unit

:: Executive Committee - Division of Powers ::

Executive Committee

Board of Directors

Marques GonçalvesCEO

Giancarlo RossiCFO/COO

Rui CartaxoCOO

André RibeiroCOO

Camillo GloriaCOO

Fernando GomesCOO

João Pedro BritoCOO

• Corporate Human Resources

• Corporate Institutional Communication

• Institutional Relations

• Legal and Organisational Services

• Corporate Finance

• Planning and Corporate Control

Service UnitGalp Serviços

Galp ARL

• Corporate Environment, Quality and Safety

• Sustainable Development

Galp Power

Galp Exploração

Galp Internacional

Galp Imobiliária

• Corporate Marketing

Galp Retalho

Galp Gás Galp Empresas Galp Transgás

Galp Atlântico

The following organisational chart indicates the allocation of the main areas of responsibility amongst the members of the Executive Committee:


:: Vice-Chairman of the Board of Directors and Member of the

Executive Committee: Giancarlo Rossi ::

Group Companies:

• Member of the Board of Directors of Petróleos de Portugal - Petrogal, S.A.

• Member of the Board of Directors of GDP - Gás de Portugal, S.G.P.S., S.A.

• Member of the Board of Directors of Transgás S.G.P.S., S.A.

• Chairman of the Board of Directors of Galp Energia España, S.A.

• Chairman of the Board of Directors of Galp Serviços - Serviços e

Consultoria de Apoio à Gestão Empresarial, S.A.

Other Companies:

• Chairman of the Board of Directors of Eni Portugal Investment, SpA

:: Member of the Board of Directors and Member of the Executive

Committee: Rui Manuel Janes Cartaxo ::

Group Companies:



• Member of the Board of Directors of Transgás, S.G.P.S., S.A.

• Member of the Board of Directors of Galp Energia España, S.A.

• Chairman of the Board of Directors of GDP Distribuição, S.G.P.S., S.A.


Committee: André Freire de Almeida Palmeiro Ribeiro ::

Group Companies:





• Chairman of the Board of Directors of Transgás Indústria - Sociedade

Portuguesa de Fornecimento de Gás Natural à Indústria, S.A.


Committee: Camillo Gloria ::

Group Companies:


• Member of the Board of Directors of GDP - Gás de Portugal, S.G.P.S., S.A

• Member of the Board of Directors of Transgás, S.G.P.S., S.A.


• Chairman of the Board of Directors of Transgás - Sociedade Portuguesa

de Gás Natural, S.A.

• Vice-Chairman of the Board of Directors of Transgás Atlântico

- Sociedade Portuguesa de Gás Natural Liquefeito, S.A. and Chairman of

the Executive Committee of Transgás Atlântico

• Chairman of the Board of Directors of Transgás Armazenagem

- Sociedade Portuguesa de Armazenagem de Gás Natural, S.A.

Other Companies:

• Member of the Board of Directors of Eni Portugal Investment, SpA

• Member of the Board of Directors and Member of the Executive

Committee of Union Fenosa Gas


Committee: Fernando Manuel dos Santos Gomes ::

Group Companies:





• Chairman of the Management Board of Galp Exploração e Produção

Petrolífera, Lda

• Chairman of the Management Board of Petrogal Angola, Lda.

• Chairman of the Management Board of Petrogal Moçambique, Lda.

• Chairman of the Management Board of Petrogal Guiné-Bissau, Lda

• Member of the Consultative Board of Petrogal Brasil, Lda

• Member of the Board of Directors of Sopor - Sociedade Distribuidora de

Combustíveis, S.A.

Other Companies:

• Member of the Founders’ Council of Fundação Serralves (Serralves

Foundation)

• Member of the Board of Directors of Fundação Portugal África (Portugal

África Foundation)

• Member of the Founders’ Council of CADIN


Committee: João Pedro Leitão Pinheiro de Figueiredo Brito ::

Group Companies:





• Chairman of the Management Board of Sempre a Postos

- Produtos Alimentares e Utilidades, Lda.

• Chairman of the Board of Directors of Sopor - Sociedade Distribuidora de

Combustíveis, S.A.

:: Corporate Positions Occupied by Non-Executive Members of the

Board of Directors in Companies of the Galp Energia Group and

other Companies, as at 31 December 2005:

:: Chairman of the Board of Directors: Francisco Luís Murteira Nabo ::

Other Companies:

• Member of the Board of Directors of BPG - BANCO PORTUGUÊS DE

GESTÃO, S.A.

• Member of the Board of Directors of HOLDOMNIS - Gestão e

Investimentos, S.A.

• Member of the Board of Directors of STDP - Sociedade Transnacional de

Desenvolvimento de Participações, S.G.P.S., S.A.

• Member of the Board of Directors of of ORIENTE, S.G.P.S., S.A.

• Member of the Board of Directors of of SAGRES - COMPANHIA DE

SEGUROS, S.A.

:: Member of the Board of Directors: Angelo Taraborrelli ::

Other Companies:

• Chief Operating Officer ENI - Refining & Marketing Division


:: Member of the Board of Directors: Federico Ermoli ::

Other Companies:

• International Asset Management Senior Vice President - Eni Gas&Power

Division:

• Member of the Board of Directors - TIGAZ, Ungheria

• Member of the Supervisory Board - GVS - Gasversorgung

Sueddeutchland GmbH, Stuttgart

• Member of the Board of Directors - Gas Brasiliano GBD, São Paulo, Brasil

:: Member of the Board of Directors: Giorgio Puce ::

(Does not hold other corporate positions)

:: Member of the Board of Directors: José Rodrigues Pereira dos

Penedos ::

Other Companies:

• Chairman of the Board of Directors of REN - Rede Eléctrica Nacional, S.A.

• Chairman of the Board of Directors of RENTELECOM - Comunicações, S.A.

• Chairman of APE - Associação Portuguesa de Energia (Portuguese Energy

Association)

• Chairman of UCTE - Union for the Co-ordination of Transmission of

Electricity

• Chairman of the Portuguese Committee of CIGRÉ - Conseil International

des Grands Réseaux Electriques

:: Member of the Board of Directors: Eduardo de Oliveira Fernandes ::

Other Companies:

• Member of the Environmental Board of EDP

• Chairman of the General Board of APREN, Energias Renováveis

• Chairman of the General Meeting of SPES, Sociedade Portuguesa de

Energias Renováveis

• Chairman of the Consultative Board of the Municipal Energy and

Environment Agency, Lisboa e-nova

• Director of the National Culture Centre

rannual report 2005 :: corporate governance report82

:: Member of the Board of Directors: Rui Miguel de Oliveira Horta e

Costa ::

Other Companies:

• Director of EDP - Energias de Portugal

• Director of CPPE - Companhia Portuguesa de Produção de Electricidade

• Director of EDP Participações - S.G.P.S.

• Director of EDP Energias do Brasil

• Chairman of the Board of Directors of EDP Imobiliária

• Director of ONI, S.G.P.S.

• Director of EDP Estudos e Consultoria

• Director of Electricidade de Portugal Internacional, S.G.P.S.

• Director of Internel - Serviços de Consultoria Internacional

• Director of EDP - Investimentos, Gestão de Participações e Assistência

Técnica, Limitada

• Director of IBERENERGIA

• Director of Energia RE

• Manager of EDALPRO Imobiliária, Lda.

• Chairman of the Board of Directors of CENTRAL-e - Informação

e Comércio Electrónico

:: Member of the Board of Directors: Joaquim Augusto Nunes de Pina

Moura ::

Other Companies:

• Chairman of the Board of Directors of Iberdrola Participações, S.G.P.S., S.A.

• Chairman of the Board of Directors of Iberdrola Portugal - Electricidade e

Gás, S.A.

• Chairman of the Management Board of Iberdrola II - Comercialização de

Energia, Unipessoal Lda.


consolidated accounts

annual report 2005 :: consolidated financial statements86

consolidated balance sheets as of 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

2005 2004

Assets Notes Gross Amort., Dep. and Adjust. Net Net

FIXED ASSETS:Intangible assets:

Installation expenses 25 and 27 35,962 (26,082) 9,880 14,926 Research and development expenses 25 and 27 9,848 (7,346) 2,502 1,785 Industrial property and other rights 25 and 27 234,449 (104,811) 129,638 128,975 Re-conversion of consumption to natural gas 25 and 27 322,828 (64,289) 258,539 242,904 Property rights 25 and 27 31,361 (16,108) 15,253 16,119 Goodwill 10, 25 and 27 78,450 (16,162) 62,288 58,063 Intangible assets in progress 27 27,047 - 27,047 29,934 Advances on account of intangible assets 27 100 - 100 284

740,045 (234,798) 505,247 492,990

Tangible assets:Land and natural resources 27 264,449 (11,225) 253,224 251,501 Buildings and other constructions 27 732,150 (402,143) 330,007 312,118 Machinery and equipment 27 5,064,334 (2,935,054) 2,129,280 2,161,277 Transport equipment 27 27,542 (24,828) 2,714 4,496 Tools and utensils 27 5,368 (4,678) 690 435 Administrative equipment 27 135,902 (117,149) 18,753 18,250 Reusable containers 27 164,699 (137,944) 26,755 28,968 Other tangible fixed assets 27 100,303 (55,808) 44,495 30,993 Tangible assets in progress 27 417,145 (33,321) 383,824 439,982 Advances on account of tangible assets 27 2,310 - 2,310 4,271

6,914,202 (3,722,150) 3,192,052 3,252,291

Investments:Equity investments in group companies 2 3,663 - 3,663 4,083 Loans to group companies 2 3,602 (1,871) 1,731 1,353 Equity investments in associated companies 3 89,205 - 89,205 87,599 Loans to associated companies 3 60,050 - 60,050 88,250 Securities and other financial applications 27 54,101 (30,434) 23,667 22,342 Other loans granted 27 143 - 143 143

210,764 (32,305) 178,459 203,770

MEDIUM AND LONG TERM ASSETS:Medium and long term receivables:

Clients - current accounts 149 - 149 161 Clients - notes receivable - - - 311 Other debtors 52 25,304 - 25,304 32,303

25,453 - 25,453 32,775

CURRENT ASSETS:Inventories:

Raw, subsidiary and consumable materials 50 186,364 (5,569) 180,795 196,753 Work in progress 50 327 - 327 45 Finished goods and intermediate products 50 392,914 (3) 392,911 346,134 Merchandise 50 187,588 (184) 187,404 133,780 Advances on account of purchases 50 4,828 - 4,828 3

772,021 (5,756) 766,265 676,715

Current receivables:Clients, current accounts 876,660 (893) 875,767 643,289 Clients - notes receivable 5,665 - 5,665 3,700 Clients - doubful accounts 74,298 (57,294) 17,004 17,293 Group companies 2 1,424 - 1,424 2,631 Associated companies 3 105 - 105 2,124 Advances to suppliers 3,298 - 3,298 2,394 Advances to suppliers of fixed assets 6,855 - 6,855 5,030 State and other public entities 51 14,803 - 14,803 12,699 Other debtors 52 140,691 (3,703) 136,988 183,368

1,123,799 (61,890) 1,061,909 872,528

Marketable securities:Other treasury applications 60 16,052 - 16,052 19,347

16,052 - 16,052 19,347

Bank deposits and cash:Bank deposits 60 139,402 - 139,402 198,501 Cash 60 6,923 - 6,923 16,245

146,325 - 146,325 214,746

ACCRUALS AND DEFERRALS:Accrued income 53 97,987 - 97,987 75,921 Deferred costs 53 309,203 - 309,203 282,354

407,190 - 407,190 358,275

Total amortisation and depreciation (3,913,981)

Total adjustments (142,918)

Total assets 10,355,851 (4,056,899) 6,298,952 6,123,437

The accompanying notes form an integral part of the consolidated balance sheet as of 31 December 2005.

87consolidated financial statements :: annual report 2005

Shareholders’ equity, minority interest and liabilities Notes 2005 2004

SHAREHOLDERS’ EQUITY:Capital 55 and 56 829,251 829,251

Share premium account 55 82,006 82,006 Consolidation differences 10 and 55 81,254 81,254 Adjustments in equity investments in subsidiary and associated companies 10 and 55 (13,019) (33,573)

Reserves: - -Legal reserve 55 56,949 40,296 Other reserves 55 27,977 27,977

Retained earnings 55 677,637 527,076 Consolidated net profit for the year 55 441,959 333,064

Total Shareholders’ Equity 2,184,014 1,887,351

Minority interest 54 27,773 26,880

PROVISIONS:Provision for pensions 46 74,574 77,964 Provision for life insurance and healthcare 46 124,447 106,452 Provision for taxes 46 2,948 2,954 Other provisions 46 91,053 79,179

293,022 266,549

MEDIUM AND LONG TERM LIABILITIES:Bonds 34 309,760 309,760 Bank loans 34 780,166 784,304 Suppliers, current accounts 16,083 -Associated companies 3 441 -Participated and participant companies 27 14,338 19,999 Other loans obtained 34 2,816 4,078 Suppliers, notes payable 1,486 1,862 Suppliers of fixed assets, current accounts 47 383 701 Other creditors 52 3,127 4,154

1,128,600 1,124,858

CURRENT LIABILITIES:Bank loans 34 256,086 631,302 Advances on account of sales 50 330,595 276,512 Suppliers, current accounts 459,165 377,152 Suppliers, invoices pending 227,464 114,525 Suppliers, notes payable 2,382 416 Group companies 2 - 10,000 Associated companies 3 34,853 -Participated and participant companies 27 1,502 49,760 Advances from clients 5,954 3,851 Suppliers of fixed assets, current accounts 79,080 83,477 Suppliers of fixed assets - Invoices pending 7,377 9,576 State and other public entities 51 374,118 361,255 Other loans obtained 34 1,304 1,304 Other creditors 52 37,619 60,642

1,817,499 1,979,772

ACCRUALS AND DEFERRALS:Accrued costs 53 104,736 93,633 Deferred income 53 743,308 744,394

848,044 838,027

Total shareholders’ equity, minority interest and liabilities 6,298,952 6,123,437


consolidated statements of profit and loss by naturefor the years ended 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

Expenses Notes 2005 2004

Cost of merchandise sold and material consumed:Merchandise 2,895,825 2,245,876 Raw and subsidiary material 6,596,857 9,492,682 5,469,952 7,715,828

External supplies and services 524,312 437,258

Personnel costs:Remuneration 178,866 174,326 Social charges:

Pensions 46,368 34,767 Others 50,763 275,997 45,980 255,073

Amortisation and depreciation 27 337,330 318,414 Adjustments 27, 32 and 43 35,114 55,985 Provisions 46 19,839 392,283 18,512 392,911

Taxes 9,085 7,520 Other operating costs 54,765 63,850 61,822 69,342

(A) 10,749,124 8,870,412

Loss on group and associated companies 44 2,205 8,279 Amortisation and adjustments in financial applications and investments 44 112 153 Interest and similar costs:

Relating to group and associated companies 44 325 672 Others 44 148,970 151,612 138,858 147,962

(C) 10,900,736 9,018,374

Extraordinary costs 45 42,237 30,388

(E) 10,942,973 9,048,762

Income tax for the year 51 123,235 111,916 Minority interest 3,113 4,625

(G) 11,069,321 9,165,303

Consolidated net profit for the year 441,959 333,064

11,511,280 9,498,367

The accompanying notes form an integral part of the consolidated statement of profit and loss by nature for the year ended 31 December 2005.


Income Notes 2005 2004

Sale of products and merchandise:Merchandise 36 4,018,912 3,221,625 Products 36 6,957,963 5,905,622

Services rendered 36 149,688 11,126,563 131,272 9,258,519

Variation in production 60,834 (17,519)Own work for the company 9,307 9,524

Supplementary income 41,701 39,841 Operating subsidies 5,471 1,560 Other operating income 19,569 17,294 Reversal of amortisation, depreciation and adjustments 27, 32 and 43 15,029 81,770 8,302 66,997

(B) 11,278,474 9,317,521

Gain on group and associated companies 44 50,710 33,738

Income from trading securities and other financial applications:Others 44 178 156

Other interest and similar income:Relating to group and associated companies 44 2,539 3,791 Other 44 67,263 120,690 80,496 118,181

(D) 11,399,164 9,435,702

Extraordinary income 45 112,116 62,665

(F) 11,511,280 9,498,367

Operating profit: (B) - (A) 529,350 447,109 Net financial expenses: (D-B) - (C-A) (30,922) (29,781)Current income: (D) - (C) 498,428 417,328 Profit before taxes and minority interest: (F) - (E) 568,307 449,605 Consolidated net profit for the year: (F) - (G) 441,959 333,064


consolidated statements of cash flowsfor the years ended 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

Notes 2005 2004

Operating activities:Received from clients 12,761,202 8,726,852Paid to suppliers (9,587,224) (5,163,525)Paid to personnel (207,929) (198,167)Payments/receipts of tax on petroleum products (2,382,723) (2,254,607)

Flows generated by operations 583,326 1,110,553

(Payment)/receipt of income tax (117,942) (112,074)Contributions to the pension fund 21 and 46 (26,235) (20,595)Payments to early retired and pre-retired personnel (12,916) (15,084)Payment of insurance costs of retired personnel (9,158) (576)Other (payments)/receipts relating to operating activities 229,177 (68,595)

Flows generated before extraordinary items 646,252 893,629

Receipts relating extraordinary items 11,910 770Payments relating to extraordinary items (7,167) (14,648)

4,743 (13,878)

Flows from operating activities (1) 650,995 879,751

Investing activities:Receipts relating to:

Investments 3 85,806 8,359Tangible fixed assets 3,788 2,227Intangible fixed assets 3,304 1,914Investment subsidies 49 71,691 78,486Interest and similar income 15,850 2,680Dividends 27 39,339 37,196Loans granted 7,845 1,874

227,623 132,736

Payments relating to:Investments (3,835) (6,848)Tangible fixed assets (276,060) (348,284)Intangible fixed assets (56,354) (58,101)Loans granted (2,714) (313)

(338,963) (413,546)

Flows from investing activities (2) (111,340) (280,810)

Financing activities:Receipts relating to:

Loans obtained 290,413 1,045,366Capital increases, supplementary capital contributions and share premium 263 -Interest and similar income 2,351 1,208Discounted notes 18,771 13,541

311,798 1,060,115

Payments relating to:Loans obtained (520,490) (1,364,659)Interest on loans obtained (42,802) (31,312)Interest and similar costs (26,700) (21,855)Dividends/profits distributed 27 (215,938) (46,941)Acquisition of treasury shares (quotas) - (6)Repayment of discounted notes (18,192) (13,325)Payment of interest on finance lease contracts (306) (423)Interest on finance lease contracts (4) (6)Bond interest (9,246) (13,979)Coverage of losses (290) -

(833,968) (1,492,506)

Flows from financing activities (3) (522,170) (432,391)

Variation in cash and cash equivalents (4) = (1) + (2) + (3) 17,485 166,550Effect of exchange differences 4,983 (5,179)Cash and cash equivalents at the beginning of the year 60 67,894 (103,336)Cash and cash equivalents at the end of the year 60 90,362 58,035

The accompanying notes form an integral part of the consolidated statement of cash flows for the year ended 31 December 2005.


consolidated statements of profit and loss by functionsfor the years ended 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

Notes 2005 2004

Sales and services rendered 36 11,126,563 9,258,519Cost of sales and services rendered (10,132,584) (8,334,704)

Gross profit 993,979 923,815

Other operating income 161,613 122,009Distribution costs (387,594) (358,930)Administrative costs (50,595) (42,379)Other operating costs (194,568) (166,143)

Operating profit 522,835 478,372

Net financial costs (50,994) (54,075)Gain (loss) on subsidiary and associated companies 44 48,505 25,459Gain (loss) on other investments 45 47,961 (151)

Current profit 568,307 449,605

Income tax on current profit 51 (123,235) (111,916)

Current profit after income tax 445,072 337,689

Extraordinary items - - Income tax on extraordinary items - - Minority interest (3,113) (4,625)

Consolidated net profit 441,959 333,064

Earnings per share 2.66 Eur 2.01 Eur

The accompanying notes form an integral part of the consolidated statement of profit and loss by functions for the year ended 31 December 2005.

Natural Gas Supply & Transport Natural Gas Distribution Refining & Marketing

2005 2004 2005 2004 2005 2004

Gross Margin 223,035 175,741 128,432 115,316 1,120,169 1,058,043Sales 942,808 692,680 216,852 187,135 9,910,806 8,271,374

Inter-segment 115,787 77,803 - - 2,803 3,945External 827,021 614,877 216,852 187,135 9,908,003 8,267,429

Cost of goods sold and material consumed (719,773) (516,939) (88,712) (71,714) (8,852,528) (7,196,140)Inter-segment - - (84,163) (66,022) (84,819) (3,321)External (719,773) (516,939) (4,549) (5,692) (8,767,709) (7,192,819)

Production - - 292 (105) 61,891 (17,191)

Income 17,899 16,603 17,678 18,019 188,016 186,929Inter-segment 3,037 2,806 3,128 2,895 19,662 20,928External 14,862 13,797 14,550 15,124 168,354 166,001

Variable Costs 0 0 (30,805) (28,217) (310,499) (270,459)Inter-segment - - (11,397) (11,412) - -External - - (19,408) (16,805) (310,499) (270,459)

Fixed Costs (43,298) (45,430) (32,080) (31,556) (423,870) (380,570)Overheads (29,961) (30,364) (8,231) (7,811) (198,313) (176,690)

Inter-segment (11,984) (12,388) (495) (268) (97,929) (64,416)External (17,977) (17,976) (7,736) (7,543) (100,384) (112,274)

Personnel costs (13,337) (15,066) (23,849) (23,745) (225,557) (203,880)

Non Cash Costs (45,726) (52,663) (35,992) (33,916) (267,789) (248,058)Amortisation and Depreciation (45,128) (46,397) (35,396) (33,689) (232,627) (220,379)Provisions, Adjustments and Reversals (598) (6,266) (596) (227) (35,162) (27,679)Other Costs - - - - - -

Segment Results 151,910 94,251 47,233 39,646 306,027 345,885

Company Income Not Allocated - - - - - -

Company Costs Not Allocated - - - - - -

Operating Results 151,910 94,251 47,233 39,646 306,027 345,885

Financial Costs (38,480) (32,117) (15,569) (15,914) (94,349) (85,583)Financial Income 52,226 31,334 2,357 5,820 63,634 66,841

Results before extraordinary items,taxes and minority interest 165,655 93,468 34,021 29,552 275,312 327,143

Extraordinary Items 17,165 19,061 42,118 11,348 2,947 1,430

Income Tax (40,739) (24,665) (12,083) (11,859) (70,851) (78,802)Minority Interest (1,792) (1,782) (3,076) (2,600) 1,783 (732)

NET RESULT FOR THE YEAR 140,289 86,082 60,980 26,441 209,191 249,039

OTHER INFORMATION

Segment Assets (1)

Current assets 354,369 336,951 94,219 91,486 2,057,370 1,857,519Fixed assets (2) 1,189,440 1,221,100 872,353 838,703 1,318,209 1,426,418

Investments (3) 103,279 98,278 18,808 41,477 43,717 43,477Medium and long term assets 19,818 26,424 1,602 2,174 4,027 3,749

Company assets not allocated - - - - - -

Consolidated Total Assets 1,666,906 1,682,753 986,982 973,840 3,423,323 3,331,163

Segment liabilitiesCurrent liabilities 635,519 585,300 440,370 606,889 1,709,080 1,704,336Medium and long term liabilities 521,108 557,928 313,809 183,687 319,387 267,573

Provisions 9,248 9,007 31,230 29,908 202,030 189,324Company liabilities not allocated - - - - - -

Consolidated Total Labilities 1,165,875 1,152,235 785,409 820,484 2,230,497 2,161,233

Fixed Capital Expenditure (4)


consolidated segment reportingfor the years ended 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

(1) Net amount.(2) In Tangible and Intangible Fixed Assets.(3) In accordance with the Equity Method(4) During the financial year


Exploration & Production Others Eliminations Consolidated

2005 2004 2005 2004 2005 2004 2005 2004

65,289 42,352 8,514 4,620 (412) (2,172) 1,545,027 1,393,90066,639 42,575 24,942 15,270 (185,172) (81,787) 10,976,875 9,127,24766,582 - - 39 (185,172) (81,787) - -

57 42,575 24,942 15,231 - - 10,976,875 9,127,247- - (16,428) (10,650) 184,760 79,615 (9,492,681) (7,715,828)- - (15,778) (10,272) 184,760 79,615 - -- - (650) (378) - - (9,492,681) (7,715,828)

(1,350) (223) - - - - 60,833 (17,519)

5,424 26 154,974 95,634 (158,253) (117,720) 225,738 199,491- - 132,426 91,091 (158,253) (117,720) - -

5,424 26 22,548 4,543 - - 225,738 199,491

(16,442) (14,963) (14,277) (1,893) 11,397 11,412 (360,626) (304,120)- - - - 11,397 11,412 - -

(16,442) (14,963) (14,277) (1,893) - - (360,626) (304,120)

(8,243) (1,946) (143,310) (106,530) 147,268 108,480 (503,533) (457,552)(7,683) (1,723) (130,617) (91,846) 147,268 105,954 (227,537) (202,480)

(904) (440) (35,956) (28,442) 147,268 105,954 - -(6,779) (1,283) (94,661) (63,404) - - (227,537) (202,480)

(560) (223) (12,693) (14,684) 0 2,526 (275,996) (255,073)

(22,491) (44,812) (5,258) (5,161) 0 0 (377,256) (384,610)(19,179) (12,526) (5,001) (5,341) - - (337,330) (318,332)(3,312) (32,286) (257) 180 - - (39,925) (66,278)

- - - - - - - -

23,537 (19,343) 643 (13,330) 0 0 529,350 447,109

- - - - - - - -

- - - - - - - -

23,537 (19,343) 643 (13,330) 0 0 529,350 447,109

(5,508) (4,860) (3,951) (9,489) 6,250 - (151,607) (147,963)4,857 5,731 3,860 8,456 (6,250) - 120,685 118,181

22,886 (18,472) 552 (14,363) 0 0 498,427 417,327

7 26 7,642 413 - - 69,879 32,278

(53) (3) 491 3,413 - - (123,235) (111,916)0 0 (28) 489 - - (3,113) (4,625)

22,840 (18,449) 8,657 (10,048) 0 0 441,959 333,064

23,261 108,361 331,482 268,438 (462,961) (521,144) 2,397,740 2,141,611284,087 228,066 33,210 30,994 - - 3,697,299 3,745,281

2,647 670 151,010 19,868 (141,001) - 178,460 203,7700 0 6 428 - - 25,453 32,775- - - - - - - -

309,995 337,097 515,708 319,728 (603,962) (521,144) 6,298,952 6,123,437

22,395 87,489 321,140 354,929 (462,961) (521,144) 2,665,543 2,817,799- 18 115,352 115,652 (141,001) - 1,128,655 1,124,858

39,564 35,167 10,981 3,143 - - 293,053 266,549- - - - - - - -

61,959 122,674 447,473 473,724 (603,962) (521,144) 4,087,251 4,209,206

:: Introductory Note ::

Galp Energia, S.G.P.S., S.A. (hereinafter referred to as Galp or the Company), was founded as a State - owned company on 22 April 1999, under Decree-Law 137-A/99,

with the name “Galp - Petróleos e Gás de Portugal, S.G.P.S., S.A.”, having on 13 September 2000 adopted its present name of Galp Energia, S.G.P.S., S. A..

The Company’s head Office is in Lisbon and its corporate object is to manage equity participations in other companies, having, as of the date of its foundation, grouped

the State’s directly owned participations in the following companies: Petróleos de Portugal - Petrogal, S.A.; GDP - Gás de Portugal, S.G.P.S., S.A. and Transgás-Sociedade

Portuguesa de Gás Natural, S.A..

Galp’s initial share capital of Euros 411,383,565 was fully paid up in kind through transfer of the State’s shares in the above mentioned companies. In September 1999

the State increased Galp’s share capital to Euros 502,164,785.

On 7 July 1999, under Decree-Law 261-A/99, Galp’s privatisation process was started, with its share capital being opened up to the other shareholders of Petróleos de

Portugal - Petrogal, S.A. and Transgás - Sociedade Portuguesa de Gás Natural, S.A..For this purpose a further capital increase was made, limited to those shareholders,

paid up essentially in kind through transfer of their participations in these companies.

Therefore, on 31 December 1999 a capital increase of Euros 327,085,850 was made, which was subscribed for by Petrocontrol, S.G.P.S., S.A. (“Petrocontrol”), EDP -

Electricidade de Portugal, S.A. (currently called EDP - Energias de Portugal, S.A. (“EDP”)), Caixa Geral de Depósitos, S.A., Portgás - Sociedade de Produção e Distribuição

de Gás, S.A. and Setgás - Sociedade de Produção e Distribuição de Gás, S.A., Galp’s share capital becoming Euros 829,250,635.

On 13 July 2000, following agreements made on 17 January 2000, the companies defined as strategic partners - ENI Portugal Investment, Spa. (“ENI”) and Iberdrola, S.A.

(“Iberdrola”) - signed, with the Portuguese State, Share Purchase and Sale Contracts and Strategic Partnership Agreements, acquiring 11% and 4%, respectively of Galp’s

share capital. At the same time Petrocontrol sold all its participation in Galp, the ENI group having acquired 22.34% and EDP 11%.

The third phase of Galp’s privatisation process was approved under Decree-Law 124/2003 of 20 June. Pursuant to that decree REN - Rede Eléctrica Nacional, S.A. (“REN”)

acquired 18.3% of Galp’s share capital, of which 13.5% from Caixa Geral de Depósitos and the remaining 4.8% from the Portuguese State. In addition Parpública -

Participações Públicas S.G.P.S., S.A. acquired 0.75%, 3.48% in 2004 and an additional 8.06% in 2005 of Galp’s share capital from the Portuguese State.

Galp’s shareholder structure after these operations is shown in Note 57. In the beginning of 2006 there was a further change in Galp’s shareholder structure (Notes 57

and 63).

At 31 December 2005 the Galp Group (“the Group”) was made up of Galp and its subsidiaries, which includes Petróleos de Portugal - Petrogal, S.A. (“Petrogal”) and its

subsidiaries, GDP - Gás de Portugal, S.G.P.S., S.A. and its subsidiaries, Galp Power, S.G.P.S., S.A. and its subsidiaries, Porten - Portugal Energia, S.A. and Galp Serviços -

Serviços e Consultoria de Apoio à Gestão Empresarial, S.A..

annual report 2005 :: notes to the consolidated financial statements94

notes to the consolidated financial statementsas of 31 december 2005(Translation of notes originally issued in Portuguese - Note 65)

(Amounts stated in thousands of Euros - tEuros)

Petrogal is the only company to operate in the petroleum refining sector in Portugal and it has majority control over the distribution of refined petroleum products through

the Galp brand.

The natural gas transport and distribution subsidiaries, Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A., Transgás - Sociedade Portuguesa de Gás

Natural, S.A., Lusitaniagás - Companhia de Gás do Centro, S.A. and Beiragás - Companhia de Gás das Beiras, S.A., operate based on concession contracts with the

Portuguese State, which end in 2028 (2034 in the case of Beiragás). At the end of this period the assets relating to the concessions will be transferred to the Portuguese

State, the companies receiving an indemnity corresponding to the book value of the assets.

Resolution of the Council of Ministers 169/2005 of 24 October approved the national energy strategy, having the objective, among others, of segregating the regulated

assets of the natural gas sector (reception, transport and storage) and regulating the functioning of their operations in relation to the company operating the electricity

transmission network.

The principal measures of this strategy contemplate revision of the concession contract with Transgás - Sociedade Portuguesa de Gás Natural, S.A., integration in a

company, of the electricity transmission and natural gas transport networks, and separation of the commercialisation from the distribution activity, in both the case of

electricity and natural gas (Note 64).

The following notes are numbered in accordance with the Portuguese Official Chart of Accounts (Plano Oficial de Contabilidade - POC) for consolidated financial statements.

The numbers omitted refer to notes that are not applicable to the Group or not significant to the accompanying consolidated financial statements.

The amounts for the year ended 31 December 2004, included in the accompanying financial statements for comparative purposes, are presented in conformity with the

model resulting from the changes introduced by Decree-Law 35/2005 of 17 February (Note 43).

95notes to the consolidated financial statements :: annual report 2005

:: 1. Companies Included in the Consolidation ::

The companies included in the consolidation, their head offices and the percentage of capital held in them at 31 December 2005 are as follows:


Percentage of Capital Held byGalp Energia in the Group Companies

Company Name Head Office Direct Indirect Total

Parent Company:Galp Energia, S.G.P.S., S.A. Lisbon - - -

Subsidiary:Galp Serviços - Serviços e Consultoria de Apoio à Gestão Empresarial, S.A. Lisbon 100.00% - 100.00%Porten - Portugal Energia, S.A. Bucelas 100.00% - 100.00%

Petrogal Sub-Group:Petróleos de Portugal - Petrogal, S.A. Lisbon 100.00% - 100.00%

Subsidiaries:Galp Energia España, S.A. and subsidiaries: Madrid - 100.00% 100.00%

Galpgest - Petrogal Estaciones de Servicio, S.A. Madrid - 100.00% 100.00%Estación de Servicio Alcalá, S.L. Madrid - 100.00% 100.00%Gasolinera Gon S.L. Huelva - 100.00% 100.00%CLG - Compañia Logística del Gas, S.A. Madrid - 100.00% 100.00%Petróleos de Valência, S.A. Sociedad Unipersonal Valencia - 100.00% 100.00%Galp Serviexpress, S.L.U. Madrid - 100.00% 100.00%

Sacor Marítima, S.A. and subsidiaries: Lisbon - 100.00% 100.00%Gasmar - Transportes Marítimos, Lda. Funchal - 100.00% 100.00%Tripul - Soc. de Gestão de Navios, Lda. Lisbon - 100.00% 100.00%S.M. Internacional-Transp. Marítimos, Lda. Funchal - 100.00% 100.00%

Probigalp - Ligantes Betuminosos, S.A. Amarante - 50.00% 50.00%Soturis - Sociedade Imobiliária e Turística, S.A. Lisbon - 100.00% 100.00%Sopor - Sociedade Distribuidora de Combustíveis, S.A. Lisbon - 51.00% 51.00%Eival - Sociedade de Empreendimentos, Investimentos e Armazenagem de Gases, S.A. Lisbon - 100.00% 100.00%Galp Exploração e Produção Petrolifera, Lda. and subsidiary: Funchal - 100.00% 100.00%

Gite - Galp International Trading Establishment Liechtenstein - 24.00% 24.00%Galp Serviexpress - Serviços de Distribuição e Comercialização de Produtos Petrolíferos, S.A. Lisbon - 100.00% 100.00%Galpgeste - Gestão de Áreas de Serviço, Lda. and subsidiary: Lisbon - 100.00% 100.00%

Caiageste - Gestão de Áreas de Serviço, Lda. Elvas - 50.00% 50.00%C.L.C. - Companhia Logística de Combustíveis, S.A. Aveiras de Cima - 65.00% 65.00%C.L.T. - Companhia Logística de Term. Marítimos, Lda. Matosinhos - 100.00% 100.00%Petrogal Brasil, Lda. Recife - 100.00% 100.00%Petrogal Trading Limited Dublin - 100.00% 100.00%Petrogal Moçambique, Lda. and subsidiary: Maputo - 100.00% 100.00%

Moçacor - Distribuição de Combustíveis, S.A. Maputo - 100.00% 100.00%Galp Açores - Distribuição e Comercialização de Combustíveis e Lubrificantes, Lda. and subsidiary: Ponta Delgada - 100.00% 100.00%

Saaga - Sociedade Açoreana de Armazenagem. de Gás, S.A. Ponta Delgada - 67.65% 67.65%Galp Madeira - Distribuição e Comercialização de Combustíveis e Lubrificantes, Lda. and subsidiaries: Funchal - 100.00% 100.00%

CLCM - Companhia Logistica de Combustíveis da Madeira, S.A. Funchal - 75.00% 75.00%Gasinsular - Combustíveis do Atlântico, S.A. Funchal - 100.00% 100.00%

Galpmed - Mediação Seguros, Sociedade Unipessoal Lda. Lisbon - 100.00% 100.00%Tanquisado - Terminais Marítimos, S.A. Setúbal - 100.00% 100.00%Sigás - Armazenagem de Gás, A.C.E. Sines - 60.00% 60.00%Sempre a Postos - Produtos Alimentares e Utilidades, Lda. Lisbon - 75.00% 75.00%Combustíveis Líquidos, Lda. Lisbon - 75.00% 75.00%Blue Flag Navigation - Transportes Marítimos, Lda. Funchal - 100.00% 100.00%Galp Investment - Fundo Lisbon (a) (a) (a)Galp Investment Fund, PLC Dublin (a) (a) (a)Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A. Oeiras - 66.66% 66.66%Tagus Re, S.A. Luxembourg - 100.00% 100.00%

GDP Sub-Group:GDP - Gás de Portugal, S.G.P.S., S.A. Lisbon 100.00% - 100.00%

Subsidiaries:Driftal - Plastificantes de Portugal, S.A. Lisbon - 100.00% 100.00%GDP Distribuição, S.G.P.S., S.A. and subsidiaries: Lisbon - 100.00% 100.00%

Beiragás - Companhia de Gás das Beiras, S.A. Viseu - 59.04% 59.04%Gásfomento - Sistemas e Instalações de Gás, S.A. Lisboa - 100.00% 100.00%Dianagás - Sociedade Distribuidora de Gás Natural de Évora, S.A. Bucelas - 100.00% 100.00%Paxgás - Sociedade Distribuidora de Gás Natural de Beja, S.A. Bucelas - 100.00% 100.00%Medigás - Sociedade Distribuidora de Gás Natural do Algarve, S.A. Bucelas - 100.00% 100.00%Duriensegás - Sociedade Distribuidora de Gás Natural do Douro, S.A. Bucelas - 75.00% 75.00%Lusitaniagás - Companhia de Gás do Centro, S.A. Aveiro - 85.04% 85.04%Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. Lisbon - 100.00% 100.00%

Transgás, S.G.P.S., S.A. and subsidiaries: Bucelas - 100.00% 100.00%Transgás - Sociedade Portuguesa de Gás Natural, S.A. and subsidiaries: Bucelas - 100.00% 100.00%

Gasoduto de Campo Maior - Leiria - Braga, S.A. Bucelas - 88.00% 88.00%Gasoduto Braga - Tuy, S.A. Bucelas - 51.00% 51.00%

Transgás Atlântico - Sociedade Portuguesa de Gás Liquefeito, S.A. Sines - 100.00% 100.00%Transgás Armazenagem - Sociedade Portuguesa de Armazenagem de Gás Natural, S.A. Bucelas - 100.00% 100.00%Transgás Indústria - Sociedade Portuguesa de Fornec.de Gás Natural à Indústria, S.A. Bucelas - 100.00% 100.00%

Galp Power Sub-Group:Galp Power, S.G.P.S., S.A. and subsidiaries: Bucelas 100.00% - 100.00%

Carriço Cogeração Sociedade de Geração de Electricidade e Calor, S.A. Bucelas - 65.00% 65.00%Powercer - Sociedade de Cogeração da Vialonga, S.A. Bucelas - 69.97% 69.97%Sinecogeração - Cogeração da Refinaria de Sines, S.A. Lisbon - 100.00% 100.00%

(a) In 2003 Petrogal entered into an accounts receivable securitisation operation with Galp Investment Fund, PLC (“the Fund”) in the amount of tEuros 210,000 (Note 34), which has an expected maturity of 5 years and a legal maturity of 7 years.In order to cover this amount the Fund issued “Note A” bonds totalling tEuros 199,500 and “Note B” bonds totalling tEuros 10,500, which are remunerated at the Euribor rate plus 0.5% and 0.95%, respectively. The transactions are made usinganother vehicle with head office in Portugal - Galp Investment - Fundo - which purchases the receivables and places them with Galp Investment Fund PLC. As these Funds are vehicles constituted solely for this operation and considering theIAS/IFRS accounting requirements for this type of operation, the assets and liabilities of the Funds, which consist essentially of accounts receivable from Petrogal clients and bonds issued by the Fund, respectively, have been consolidated intothe Group’s financial statements.

During the year ended 31 December 2005 the consolidation perimeter was changed as follows in relation to the preceding year:

i) In December 2005 the subsidiary Petróleos de Portugal - Petrogal, S.A. acquired 33.33% of the share capital of Fast Access - Operações e Serviços de Informação e

Comércio Electrónico, S.A., becoming holder of 66.66% of the capital of that subsidiary, which has been included in the consolidation perimeter;

ii) In January 2005 the subsidiary Galp Energia Espanã, S.A. acquired all the share capital of Petróleos de Valência, S.A. Sociedad Unipersonal, the operations of which

consist of the deposit, storage and distribution of petroleum and chemical products and their derivatives and sub-products, for the amount of tEuros 13,937 resulting

in goodwill of tEuros 7,838, recognised in the caption “Goodwill” (Note 10);

iii) In May 2005 the company Galp Madeira - Distribuição e Comercialização de Combustíveis e Lubrificantes, Lda. acquired all the share capital of Gasinsular - Combustíveis

do Atlântico, S.A., the main operations of which consist of the distribution, storage and transport of liquid and gas fuel, for the amount of tEuros 50, resulting in goodwill

of tEuros 403, recognised in the caption “Goodwill” (Note 10);

iv) In the year ended 31 December 2005 the Group sold 10% of its participation in CLCM - Companhia Logistica de Combustíveis da Madeira, S.A., for tEuros 75, resulting

in no gain or loss, and reducing its participation from 85% to 75%. Also in 2005 the 100% participation in Ao Sol - Energias renováveis, Lda was sold for tEuros 520,

resulting in a loss of tEuros 135;

v) The company Tagus Re, S.A. started being included in the consolidation. Up to 2004 it was excluded from the consolidation as its operations were so different that it

was incompatible for the presentation of a true and fair view of the companies included in the consolidation (item 4, article 4 of D.L. 238/91). In the year ended 31

December 2005, with the introduction of Decree-Law 35/2005, which revoked item 4, article 4 of D.L. 238/91, the company started being included in the

consolidation. Consequently, retained earnings relating to the equalisation reserve of prior years, in the amount of tEuros 16,227, were included in the caption

“Adjustments in equity investments in subsidiary and associated companies” (Note 55);

vi) In the year ended 31 December 2005 the following companies were dissolved: (i) Água Solar - Serviços de Energia Solar, S.A. of the Galp Power, S.G.P.S. sub-group

and (ii) Natgás- Companhia Portuguesa de Gás Natural S.A. of the Trangás S.G.P.S., S.A. sub-group;

vii) In the year ended 31 December 2005, effective as of 1 January 2005, the fully owned subsidiaries of the Group (i) Serviexpress Distribuicion S.A., was merged into

Galp Serviexpress, S.L.U. and (ii) TLG - Transportes Líquidos e Gasosos, Lda., was merged into Petróleos de Portugal - Petrogal, S.A.;

ix) In 2005 the subsidiary Galp Energia Espanã, S.A. sold its participation in Galpfer - Distribuição de Lubrificantes, S.L., resulting in no gain or loss.

Except for C.L.C. - Companhia Logística de Combustíveis, S.A., Sigás - Armazenagem de Gás, A.C.E. and Caiageste - Gestão de Áreas de Serviço, Lda., which were

consolidated using the proportional method as explained in Note 5, all the companies mentioned above were consolidated using the full integration method based on

line d), item 1, article 1 of Decree-Law 238/91 of 2 July (in the case of GITE nomination of the majority of the members of the corporate boards) and in the other cases

based on line a), item 1, article 1 of Decree-Law 238/91 of 2 July (majority of voting rights).


The changes in the caption “Investments - Equity investments in group companies” during the year ended 31 December 2005 are as follows:


At 31 December 2005 and 2004 the group companies had the following receivables (in the form of loans, shareholders’ loans and other accounts receivable) from group

companies excluded from the consolidation:

:: 2. Companies Excluded from the Consolidation ::

The companies excluded from the consolidation, their head offices and the percentage of capital held in them at 31 December 2005 and 2004 are as follows:

Head % Total Total Shreholders’ Net Book ValueGroup Companies Office Participation Assets Liabilities Equity Result 2005 2004

Petrogal Angola, Lda. and subsidiaries Luanda 100% (a), (d) and (e) 5,128 7,653 (1,815) 24 - 314Petrogal Guiné-Bissau, Lda. and subsidiaries Guiné-Bissau 100% (a) and (d) 4,717 2,904 1,813 380 1,813 1,439Petrogal Cabo Verde, Lda. São Vicente 100% (c) (g) (g) (g) (g) 50 50Tagus Re, S.A. Luxemburg 100% (b) (b) (b) (b) (b) - 2,276Asa - Abastecimento e Serviços de Aviação, Lda. Lisbon 50% (c) 111 102 9 1 4 4Galp Exploração Serviços do Brasil, Lda. Brazil 100% (c), (d) and (f) 2,128 332 1,796 470 1,796 -

3,663 4,083

less: provision for equity investments in group companies (Note 46) (1,815) -

1,848 4,083

Beginning Balance 4,083

Effect of applying the equity method to results for the year (Note 44):- Positive 1,263- Negative (7)

Effect of applying the equity method to other changes in shareholders’ equity of subsidiaries (Note 55):- Exchange translation adjustments:

- Negative (329)- Other changes in shareholders’ equity:

- Positive 355- Negative (2,212)

Participation in Tagus Re,S.A., included in the consolidation at 31 December 2005 in accordance with the full integration method: (2,276)

Reversal of the provision for investments (Note 46) 1,815

Initial capital of the company Galp Exploração Serviços do Brasil, Lda. 971

Ending Balance 3,663

(a) Companies excluded from the consolidation due to restrictions of the Parent company’s rights over their equity (line a), item 3, article 4 of D.L. 238/91). At 31 December 2005 these participations were recorded in accordance with the equitymethod.

(b) Up to 2004 this company was excluded from the consolidation as its operations were so different that it was incompatible for the presentation of a true and fair view of the companies included in the consolidation (item 4, article 4 of D.L.238/91). In the year ended 31 December 2005, with the introduction of Decree-Law 35/2005, which revoked item 4, article 4 of D.L. 238/91, the company started being included in the consolidation (Note 1).

(c) Companies excluded from the consolidation due to their immateriality for purposes of the presentation of a true and fair view of the financial position and results of operations of the Group (item 1, article 4 of D.L. 238/91). At 31 December2005 these participations were recorded in accordance with the equity method.

(d) Provisional financial statements.(e) At 31 December 2005 a provision of tEuros 1,815 was recorded in the caption “Other provisions”, for the company Petrogal Angola, Lda., which had negative equity (Note 46).(f) On 5 January 2005 the company Galp Exploração Serviços do Brasil, Lda, was founded with head Office in Recife, Brazil, in which the Company is the sole shareholder, its capital of tEuros 128 not yet having been paid up, the amount being

reflected in the caption “Other creditors”.(g) Financial information not available.

Medium and Long Term Receivables: 2005 2004

Loans to group companies:Petrogal Guiné-Bissau, Lda. 1,871 1,683Petrogal Angola, Lda. 1,731 1,500

3,602 3,183Adjustments to receivables (Note 32) (1,871) (1,830)

1,731 1,353

Central E, S.A 2,575 Energin - Sociedade de Produção de Electricidade e Calor, S.A. 673 Gásfomento Energia, S.A. 10Ecogen - Serviços de Energia Descentralizada, S.A. 276

3,534


The loans of tEuros 3,602 to group companies at 31 December 2005 do not have defined repayment schedules and are not remunerated. Management believes that

these loans will not be repaid in 2006 and so they have been classified as medium and long term receivables.

Short Term Receivables: 2005 2004

Receivables from group companies:Petrogal Guiné-Bissau, Lda. 387 1,121 Agran, S.A.R.L. (a) 753 803 Petrogal Angola, Lda. 222 645 Petrogás Guiné-Bissau, Lda. (b) 34 34Petromar - Sociedade de Abastecimentos Petrolíferos, Lda. (b) 23 23Petrogal Cabo Verde, Lda. 4 4Asa - Abastecimento e Serviços de Aviação, Lda. 1 1

1,424 2,631

(a) Subsidiary of Petrogal Angola, Lda.(b) Subsidiary of Petrogal Guiné - Bissau, Lda.

:: 3. Associated Companies Included in the Consolidation in Accordance with the Equity Method ::

The Group’s associated and participated companies, their head offices and the percentage participation held in them at 31 December 2005, included in the consolidation

in accordance with the equity method are as follows:

(a) Participations held by Petróleos de Portugal - Petrogal, S.A.(b) Participations held by Gasfomento - Sistemas e Instalações de Gás, S.A.(c) Participations held by GDP Distribuição, S.G.P.S., S.A. e pela Petróleos de Portugal - Petrogal, S.A.(d) Participations held by Transgás - Sociedade Portuguesa de Gás Natural, S.A.(e) Participations held by Petrogal Angola, Lda.(f) Participations held by Galp Power, S.G.P.S., S.A.(g) Participations held by GDP Distribuição, S.A. and GDP, S.G.P.S., S.A. sold in the year ended 31 December 2005(h) The provision for equity investments in associated companies with negative equity at 31 December 2005 is made up as follows (Note 46):

(i) Participation held by GDP Distribuição, S.G.P.S., S.A. (j) Participation held by Saaga - Sociedade Açoreana de Armazenagem de Gás, S.A.(k) Participation held by Petrogal Moçambique, Lda.(l) Participation held by Galp Energia España, S.A.. This participation is reflected in the caption “Securities and other financial applications”.(m) This company started being included in the consolidation (Note 1).

Percentage of Capital Held by BookGalp Energia in the Group Companies Value

Company Name Head Office Direct Indirect Total 2005 2004

EMPL - Europe Maghreb Pipeline, Ltd. (d) Madrid - 27.40% 27.40% 37,348 28,031Gasoduto Al-Andaluz, S.A. (d) Madrid - 33.04% 33.04% 16,387 16,429Gasoduto Extremadura, S.A. (d) Madrid - 49.00% 49.00% 13,547 12,447Setgás - Sociedade de Produção e Distribuição de Gás, S.A. (c) Setúbal - 45.00% 45.00% 9,219 7,364 Empresa Nacional de Combustíveis - Enacol, S.A.R.L. (a) Mindelo (Cabo-Verde) - 32.50% 32.50% 6,644 5,592 Tagusgás - Empresa Gás do Vale do Tejo, S.A. (i) Santarém - 41.27% 41.27% 2,677 2,673 Metragaz, S.A. (d) Morocco - 26.99% 26.99% 1,567 1,399 Terparque - Armazenagem de Combustíveis, Lda. (j) Angra do Heroísmo - 23.50% 23.50% 880 881 Brisa Access, S.A. (a) Cascais - 7.50% 7.50% 401 181 Número Um - Reparação de Automóvel, Lda. (a) Lisbon - 49.00% 49.00% 348 300 Gásfomento Sur Andalucia, S.A. (b) Seville - 30.00% 30.00% 95 20 Enerfin - Sociedade de Eficiência Energética, S.A. (a) Oporto - 25.12% 25.12% 51 142 TIGS - Engenharia e Manutenção, S.A. (b) Sintra - 48.70% 48.70% 32 29 Imopetro (k) Mozambique - 22.22% 22.22% 9 10 Portgás - Sociedade de Produção e Distribuição de Gás, S.A. (g) Matosinhos - - - - 12,091 Gásfomento Energia, S.A. (b) (h) Seville - 22.00% 22.00% - 10 Ecogen - Serviços de Energia Descentralizada, S.A. (f) (h) Bucelas - 35.00% 35.00% - -Central E, S.A. (h) Lisbon - 20.30% 20.30% - -Energin - Sociedade de Produção de Electricidade e Calor, S.A. (f) (h) Lisbon - 35.00% 35.00% - -Sonangalp - Sociedade Distribuição e Comercialização de Combustíveis, Lda. (e) Luanda - 49.00% 49.00% - -CLH - Compañia Logistica de Hidrocarboros, S.A. (l) Madrid - 5.00% 5.00% - -Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A. (a) (m) Oeiras - 66.66% 66.66% - -

89,205 87,599

less: provision for equity investments in group companies (Note 46) (3,534) (4,192)

85,671 83,407

Dividends distributed of tEuros 33,903 were received in full in 2005 (Note 27).


The participations in these companies are included in the consolidation in accordance with the equity method, based on the requirements of item 13.6 of the consolidation

standards established in Decree-Law 238/91 of 2 July.

In 2005 the Group sold its participation in Portgás - Sociedade de Produção e Distribuição de Gás, S.A. for tEuros 86,400 (including repayment of shareholders’ loans and

capitalised interest totalling tEuros 26,347) generating a gain of tEuros 47,961 (Note 45). Therefore in the year ended 31 December 2005 the Group received tEuros

85,806, net of commission and other charges, relating to the sale of investments.

The changes in the caption “Equity investments in associated companies” in the year ended 31 December 2005 were as follows:

Beginning Balance 87,599

Effect of applying the equity method to results for the year (Note 44):- Positive 41,864 - Negative (74)

41,790

Effect of applying the equity method to other changes in shareholders’ equity of associated companies (Note 55):- Exchange translation adjustments:

- Positive 5,845 - Negative (6)

5,839

Dividends distributed:Gasoduto Al-Andaluz, S.A. (2,707)Gasoduto Extremadura, S.A. (2,215)Metragaz, S.A. (234)EMPL - Europe Maghreb Pipeline, Ltd. (28,038)Empresa Nacional de Combustíveis - Enacol, S.A.R.L. (709)

(33,903)

Repayment of supplementary capital contributions made by Petróleos de Portugal - Petrogal, S.A. to Enerfin - Sociedade de Eficiência Energética, S.A. (126)Capital increase of Gasfomento Sur Andalucia, S.A. 87 Sale of participation in Portgás - Sociedade de Produção e Distribuição de Gás, S.A. (12,091)Other changes 10

89,205

The Group had the following accounts receivable from associated companies at 31 December 2005 and 2004:


2005 2004

Medium and Long Term Receivables:Loans to associated companies:

Gasoduto Al-Andaluz, S.A. 20,006 22,439 Gasoduto Extremadura, S.A. 14,424 17,534 Energin - Sociedade de Produção de Electricidade e Calor, S.A. 12,830 12,663 Setgás - Sociedade de Produção e Distribuição de Gás, S.A. 9,085 8,652 Tagusgás - Empresa Gás do Vale do Tejo, S.A. 2,475 848 Sonangalp - Sociedade Distribuição e Comercialização de Combustíveis, Lda. 744 644 Empresa Nacional de Combustíveis - Enacol, S.A.R.L. 337 505 Ecogen - Serviços de Energia Descentralizada, S.A. 149 144 Portgás - Sociedade de Produção e Distribuição de Gás, S.A. (a) - 23,638 Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A. (b) - 1,183

60,050 88,250

Short Term Receivables:Accounts receivable from associated companies:

Empresa Nacional de Combustíveis - Enacol, S.A.R.L. 69 72 Gásfomento Energia, S.A. 25 25 Número Um - Reparação de Automóvel, Lda. 11 10 Tagusgás - Empresa Gás do Vale do Tejo, S.A. - 1,688 EMPL - Europe Maghreb Pipeline, Ltd. - 314 Gásfomento Sur, S.A. - 11 Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A. (b) - 4

105 2,124

(a) The participation was sold in the year ended 31 December 2005.(b) The company started being included in the consolidation (Note 1)

The loans of tEuros 60,050 to associated companies at 31 December 2005 do not have defined repayment terms and are remunerated at market rates. The Company’s

management believes that they will not be repaid in 2006 and so they have been classified as medium and long term.

The Group had the following amounts payable to associated companies at 31 December 2005:

Payables to Associated Companies: Short Term Medium and Long Term

EMPL - Europe Maghreb Pipeline, Ltd. 34,839 -Empresa Nacional de Combustíveis - Enacol, S.A.R.L. 14 -Terparque - Armazenagem de Combustíveis, Lda. - 441

34,853 441

The short term payable of tEuros 34,839 to EMPL - Europe Maghreb Pipeline, Ltd. corresponds to a loan received by the subsidiary Petrogal Trading Limited, which is

remunerated at market rates.

:: 7. Average Number of Personnel ::

The average number of personnel of the Group companies included in the consolidation by the full consolidation and proportional consolidation methods in the years

ended 31 December 2005 and 2004 was 5,921 and 5,644 respectively, the number at 31 December 2005 being 5,909.

:: 10. Consolidation Differences and Adjustments in Equity Investments ::

i) Consolidation differences included in shareholders’ equity

The balance of this caption results essentially from the recognition in 1999 of deferred taxes relating to Group companies. The balance of this caption at 31 December

2005 and 2004 was made up as follows:

ii) Adjustments in equity investments included in shareholders’ equity

The balance of tEuros 13,109 of this caption at 31 December 2005 includes the accumulated translation adjustments to Euros of the foreign currency financial statements

of subsidiary and associated companies and other changes in the shareholders’ equity of the subsidiary and associated companies.

The changes in the balance of this caption in the year ended 31 December 2005 are shown in Note 55.


:: 5. Companies Consolidated by the Proportional Method ::

The companies consolidated by the proportional method, their head offices and the reasons Management used the proportional consolidation method are as follows:

Percentage of Capital Held byGalp in the Group Companies

Company Name Head Office Direct Indirect Total

CLC - Companhia Logística de Combustíveis, S.A. (a) Aveiras - 65.00% 65.00%Caiageste - Gestão de Áreas de Serviço, Lda (b) Elvas - 50.00% 50.00%Sigás - Armazenagem de Gás, ACE (c) Sines - 60.00% 60.00%

(a) Considering that in 1996 a joint management agreement of this subsidiary was signed between the current shareholders, that limits the actions of the major shareholder, this subsidiary it was included in the consolidation by the proportionalconsolidation method as it was considered to be a jointly controlled entity (item 4.3. of Portuguese Accounting Directive 24 - Joint ventures).

(b) Indirect participation held by Galpgeste - Gestão de Áreas de Serviço, Lda.. Considering that this is a joint venture, no shareholder being predominant, this company was included in the consolidation by the proportional consolidation methodas it was considered to be a jointly controlled entity (item 4.3. of Portuguese Accounting Directive 24 - Joint ventures).

(c) Considering that this is a jointly controlled entity it was included in the consolidation by the proportional consolidation method (item 4.3. of Portuguese Accounting Directive 24 - Joint ventures).

Consolidation Differences

2005 2004

Participations:Petróleos de Portugal - Petrogal, S.A. and subsidiaries 62,056 62,056GDP, S.G.P.S., S.A. and subsidiaries 19,198 19,198

81,254 81,254


iii) Goodwill reflected in intangible assets

The balance of this caption corresponds to goodwill arising on the acquisition of investments after 1 January 1991, or the date of the first consolidation of Galp, and is

made up as follows:

Percentage of Capital Acquiredas of the Acquisition Date Goodwill

Subsidiaries Year Acquired Cost % Amount 2005 2004

Moçacor - Distribuição de Combustíveis, S.A. 2001 804 100.00% 50 754 829Número Um - Reparação de Automóvel, Lda. 2002 374 49.00% 64 310 310Brisa Access, S.A. 2002 4,988 7.50% 73 4,915 4,915CLH - Compañía Logistica de Hidrocarburos, S.A. 2002 65,292 5.00% 14,897 50,395 49,411Combustiveis Líquidos, Lda. 2003 337 75.00% (70) 407 407Galpgest - Petrogal Estaciones de Servicio, S.A. 2003 16,290 100.00% 9,494 6,796 6,795Beiragás - Companhia de Gás das Beiras, S.A. 2003 55 0.48% 51 4 4Lusitaniagás - Companhia Gás do Centro, S.A. 2002 and 2003 365 0.871% 207 158 158Transgás - Sociedade Portuguesa de Gás Natural, S.A. (a) (a) (a) (a) 6,076 6,076Setgás - Sociedade de Produção e Distribuição de Gás, S.A. (a) (a) (a) (a) 172 172Saaga - Sociedade Açoreana de Armazenagem de Gás, S.A. 2005 858 67.65% 636 222 -Gasinsular - Combustíveis do Atlântico, S.A. 2005 50 100.00% (353) 403 -Petroleos de Valencia, S.A. 2005 13,937 100.00% 6,099 7,838 -Ao Sol - Energias Renováveis, Lda (b) 2000 115 100.00% 11 - 104Agua Solar - Serviços de Energia Solar, S.A. (b) 2001 45 90.00% 24 - 21

78,450 69,202

Less. Accumulated amortisation (16,162) (11,139)

62,288 58,063

Percentage of Shareholders’Equity Acquired as of the Date of

Subsidiary Year of Acquisition Cost % Amount Consolidation Differences

Galp Serviexpress, S.L.U. 2004 2,163 100.00% 9,797 7,634

7,634

Income recognised in the statement of profit and loss (382)

Total (Note 53) 7,252

(a) This amount results from adjustments made (for purposes of preparing and presenting the consolidated financial statements of the Galp Group) in the original consolidated financial statements of Petrogal - Petróleos de Portugal, S.A. and GDPS.G.P.S., S.A., due to recognition of goodwill corresponding to the difference between the cost of these investments and the corresponding shareholders’ equity as of the date of acquisition. This goodwill is being amortised over a period of 30years (up to 2028), which corresponds to the period of concession of the subsidiaries that operate in the natural gas sector.

(b) This goodwill was recognised in full in 2005 as a result of the sale of Ao Sol, S.A. and dissolution of Água Solar - Serviços de Energia Solar, S.A. (Note 1).

This goodwill is amortised over a period of five years, except in the case of the Group and associated companies that are dependent upon concession contracts, in which

case it is amortised on a straight-line basis up to the end of the concession period, which terminates in 2028 and CLH - Compañía Logistica de Hidrocarburos, S.A. Galpgest

- Petrogal Estaciones de Servicio, S.A., and Petroleos de Valência, S.A. in which case goodwill is being amortised during the estimated period of useful life of the assets

relating to their operations, which corresponds to 20 and 11 years, respectively.

iv) Consolidation differences included in deferred income

These consolidation differences are being recognised in income over a period of five years, beginning in 2005.


:: 15. Consistency of the Valuation Criteria Applied ::

The main valuation criteria used by the Group were consistent between the companies included in the consolidation and are described in Note 23.

:: 18. Accounting Policies Used for Investments ::

Galp uses the following accounting policies to record, in its non consolidated financial statements, the investments in Group and associated companies:

• Investments in Group and associated companies are recorded in accordance with the equity method. Under this method, investments are initially recorded at cost and

then increased or decreased by the difference in relation to the corresponding proportion of equity held in these companies as of the date the equity method was

applied for the first time or the acquisition date, if later;

• Of these differences, those arising from application of the equity method for the first time were recorded in the shareholders’ equity caption “Consolidation differences”

(Notes 10 and 55) and those arising from acquisitions are recorded in the intangible asset caption “Goodwill”, when positive, and in the caption “Deferred income”,

when negative. The differences are being amortised over a period of 5 years, with the exception of CLH - Compañía Logistica de Hidrocarburos, S.A. Petroleos de

Valência, S.A., Galpgest - Petrogal Estaciones de Servicio, S.A. and companies dependent upon concession contracts (Note 10);

• In accordance with the equity method, investments are adjusted annually by the amount corresponding to the participation in the net results of Group and associated

companies by corresponding entry to profit and loss for the year (Note 44). In addition, dividends received from these companies are recorded as decreases in the

amount of the investments;

• As explained in Note 23 q), the accumulated effect of the differences arising from the translation of the foreign currency financial statements of subsidiaries, is recorded

in the shareholders’ equity caption “Consolidation differences” (Notes 10 and 55);

• Investments in other companies (participations of less than 20%) are recorded at the lower of cost or estimated realisable value, except for the investments in CLH -

Compañía Logistica de Hidrocarburos, S.A. and Brisa Access, S.A., in which the Group has significant influence, which are recorded in accordance with the equity method;

• Loans to Group and associated companies are stated at the lower of their nominal value or estimated realisable value;

• Estimated losses on the realisation and/or recovery of investments and loans are recorded in the caption “Provisions for investments” (Note 46).

As from 1992 and 1993, Galp’s subsidiaries have adopted the equity method to record their investments in subsidiary and affiliated companies in their individual financial

statements, in accordance with Portuguese Accounting Directive 9.

:: 21. Financial Commitments Assumed and Not Included in the Consolidated Balance Sheet ::

Pension Fund

As expained in Note 23.i), Petrogal, Sacor Marítima and some companies of the GDP sub group (GDP Distribuição, S.G.P.S., S.A., Lisboagás - Sociedade Distribuidora de

Gás Natural de Lisboa, S.A., Driftal - Plastificantes de Portugal, S.A., and Gásfomento - Sistemas de Instalação de Gás, S.A.), transferred their liabilities for the payment

of pension supplements to personnel retired due to age, incapacity and pensions to survivors, to autonomous pension funds ("Fundo de Pensões Petrogal", "Fundo de

Pensões Sacor Marítima" and “Fundo de Pensões GDP”). In addition, by decision of Petrogal as from 1997, inclusive, the Petrogal Pension Fund covers the liability for

pension supplements to personnel retiring early.

The Petrogal Pension Fund does not cover Petrogal’s liability for early retirement and pre-retirement pensions, Social Security of pre-retired personnel, flexible retirement

age, voluntary social insurance of persons retired early, retirement premiums and other retirement benefits, such as healthcare and life insurance. These liabilities are

covered by provisions specifically recorded for that purpose (Note 46). In addition, the GDP Pension Fund does not cover the liability assumed by Lisboagás GDL -

Sociedade Distribuidora de Gás Natural de Lisboa, S.A. to reimburse the retirement supplements payable by EDP to its retired personnel and pensioners working for the

Company, as well as retirement and survivor supplements of retired personnel as of the date of constitution of the fund. These liabilities are covered by specific provisions

included in the balance sheet caption “Provisions for pensions” (Note 46).

In 2005, as the Company recognises its liability for post retirement benefits in accordance with International Accounting Standard 19, which establishes that the rate used

for discounting the liability for post retirement benefits is determined with reference to the market interest rate of high quality bonds as of the balance sheet date, the

discounting rate was adjusted from 4.75% to 4.25%. The change in this actuarial assumption resulted in an increase of approximately 4.96% in the past service liability

of the Petrogal Pension Fund and 7.63% for the GDP Group Pension Fund. In addition, the mortality tables used were changed, the TV 88/90 table being adopted for

current and pre-retired personnel.

During the year ended 31 December 2005, Petrogal and the GDP sub group companies contributed tEuros 23,770 and tEuros 2,465, respectively, to their respective

Pension Funds to partially cover their liabilities.

The minimum liability of Petrogal and the GDP Group at 31 December 2005, calculated in accordance with the method and assumptions required by the Institute of

Insurance of Portugal, amounts to tEuros 317,773 and tEuros 24,041, respectively.

At 31 December 2005 the net assets of the pension funds, “Fundo de Pensões Petrogal”, “Fundo de Pensões Sacor Marítima” and “Fundo de Pensões GDP” were as

follows in accordance with a report of the fund management company:


Petrogal Sacor Marítima GDP

Bonds:Fixed rate Euro Bonds 157,325 3,332 8,571Variable rate Euro Bonds 38,528 754 1,035Other non Euro Bonds 9,416 - 550

Shares:European 37,140 1,341 3,103Other shares 13,863 885 3,242

Hedge Funds 5,500 273 -Derivatives - 4 -Indirect real estate 5,653 241 1,352Galp Building (part) 22,300 - -Cash 37,832 121 3,500

Total 327,557 6,951 21,353

At 31 December 2005 and 2004 the liability for pension supplements of retired and current personnel of Sacor Marítima amounted to tEuros 6,331 and tEuros 6,011,

respectively. The difference between this liability and the amount of the pension fund is not reflected in the financial statements.

The assumptions used to calculate the retirement benefits are those considered by the Petrogal and GDP Groups and the entity specialised in actuarial studies as those

that best meet the commitments established in the pension plan, and are as follows:


Evolution of the pension fund assets in 2005 was as follows:

Petrogal Sacor Marítima GDP

Beginning Balance 300,479 6,366 18,467

Contributions to the fund 23,770 - 2,465Estimated return on the assets 13,699 715 850Actuarial gain/(loss) 10,298 - 665Pensions paid in the year (20,689) (130) (1,094)

Ending Balance 327,557 6,951 21,353

Petrogal 2005 2004

Asset remuneration rate 4.25% 4.75%Technical interest rate 4.25% 4.75%Salary increase rate 3.00% 3.00%Pension increase rate 1.50% 1.50%Current and pre-retired employee mortality table TV 88/90 TV 73/77Retired personnel mortality table TV 73/77 TV 73/77Incapacity table EVK 80-50% EVK 80-50%Normal retirement age 65 65Method Projected unit credit Projected unit credit

Liability and corresponding coverage:i) Liability relating to the pension fund:

Current personnel 49,758 37,320Pre-retired personnel 10,456 9,602Early retired personnel 19,172 22,120Retired personnel and pensioners 264,469 249,288

Total 343,855 318,330

Coverage relating to the pension fund:By the pension fund assets 327,557 300,479By accruals and deferrals (Note 53) (65,549) (59,024)Change in assumptions and methodology - 5,649Unrecognised (gain) and loss 81,847 71,226

Total 343,855 318,330

ii) Liability not relating to the pension fund:Pre-retired personnel 21,162 23,770Early retired personnel 18,235 19,501Retirement bonus 6,491 5,573Voluntary social insurance 269 572Flexible retirement age (DL 9/99) 10,778 9,840

Total 56,935 59,256

Covered by provisions (Note 46):Pre-retired personnel 22,383 25,667Early retired personnel 24,307 25,134Retirement bonus 6,309 5,883Voluntary social insurance 49 412Flexible retirement age (DL 9/99) 9,634 8,481

Sub-total 62,682 65,577

Change in assumptions and methodology:Pre-retired personnel - 924Early retired personnel - 219Retirement bonus - 250Voluntary social insurance - (19)Flexible retirement age (DL 9/99) - 168

Sub-total - 1,542

(Gain) and loss not recognised:Pre-retired personnel (1,221) (2,822)Early retired personnel (6,072) (5,851)Retirement bonus 182 (560)Voluntary social insurance 220 180Flexible retirement age (DL 9/99) 1,144 1,190

Sub-total (5,747) (7,863)

Total 56,935 59,256


Group GDP 2005 2004

Asset remuneration rate 4.25% 4.75%Technical interest rate 4.25% 4.75%Salary increase rate 3.00% 3.00%Pre-retired employee mortality table TV 88/90 TV 73/77Retired personnel mortality table TV 73/77 TV 73/77Incapacity table EVK 80-50% EVK 80-50%Normal retirement age 65 65Method Projected unit credit Projected unit credit

Liability and corresponding coverage:i) Liability relating to the pension fund:

Current personnel 22,192 17,594Pre-retired personnel 804 1,078Pensioners 9,751 9,419

Total 32,747 28,091

Coverage relating to the pension fund:By the pension fund assets 21,353 18,467By provisions (Note 46) 5,325 5,325By accruals and deferrals (Note 53) (213) (73)Change in assumptions - 872Unrecognised (gain) and loss (Note 23 i)) 6,282 3,500

Total 32,747 28,091

ii) Liability not relating to the pension fund:Current personnel 311 217Retired personnel 6,776 6,921Flexible retirement age (DL 9/99) 323 288

Total 7,410 7,427

Covered by provisions (Note 46):Current personnel 140 87Retired personnel 5,875 6,495Flexible retirement age (DL 9/99) 299 267

Sub-total 6,314 6,849

Change in assumptions and methodology:Current personnel - (1)Retired personnel - 2Flexible retirement age (DL 9/99) - (3)

Sub-total - (2)

(Gain) and loss not recognised:Current personnel 171 131Retired personnel 901 425Flexible retirement age (DL 9/99) 24 24

Sub-total 1,096 580

Total 7,410 7,427

Others 2005 2004

Asset remuneration rate 4.25% 4.75%Technical interest rate 4.25% 4.75%Salary increase rate 3.00% 3.00%Current and pre-retired employee mortality table TV 88/90 TV 73/77Retired personnel mortality table TV 73/77 TV 73/77Incapacity table EVK 80-50% EVK 80-50%Normal retirement age 65 65Method Projected unit credit Projected unit credit

Liability and corresponding coverage:i) Liability not relating to the pension fund:

Total liability: 302 249

Covered by:Provisions 253 213Change in assumptions - (3)Unrecognised gains and losses 49 39

302 249

Evolution of the pension liability of Petrogal and GDP in 2005 was as follows:


Relating to the Not Relating toPetrogal Pension Fund the Pension Fund Total

Total liability at 31 December 2004 318,330 59,260 377,590

Current service cost 1,955 680 2,635Interest cost 14,547 2,539 17,086Benefits paid in the year (20,689) (13,338) (34,027)Pre-retired and early retired personnel starting during the year - 6,578 6,578Actuarial (gain)/loss for the year 29,712 1,216 30,928


COSTS FOR THE YEAR 2005Interest and current service cost 16,502 3,219 19,721Early retirements in the year - 3,356 3,356Amortisation of the corridor excess 8,793 (896) 7,897Amortisation of the change in assumptions 5,649 1,542 7,191Estimated return on assets (13,699) - (13,699)

17,245 7,221 24,466

Relating to the Not Relating toGDP Group Pension Fund the Pension Fund Total


Current service cost 965 56 1,021Interest cost 1,308 331 1,639Benefits paid in the year (1,094) (929) (2,023)Actuarial (gain)/loss for the year 3,477 525 4,002


COSTS FOR THE YEAR 2005Interest and current service cost 2,273 387 2,660Amortisation of the change in assumptions 872 (2) 870Amortisation of the corridor excess 30 9 39Estimated return on assets (850) - (850)

2,325 394 2,719

Others Not relating to the pension fund

Total liability at 31 December 2004 249

Current service cost 31Interest cost 12Actuarial (gain)/loss for the year 10

Total liability at 31 December 2005 302

COSTS FOR THE YEAR 2005Interest and current service cost 43Amortisation of the change in assumptions (3)Amortisation of the corridor excess 1

41

The current service cost and interest cost, net of the expected return on fund assets, for the year 2005, totalling tEuros 7,875, was recorded in the caption “Personnel

costs”.

The increase of tEuros 6, 578 in Petrogal’s liability for pre-retirements and early retirements in the year ended 31 December 2005 was recorded by corresponding entry

to: (i) transfer of tEuros 3,222 from the provision for restructuring, recognised as a cost in prior years (Note 46); and (ii) personnel costs for the year in the amount of

tEuros 3,356.


The actuarial gains and losses due to the increase/decrease in the pension liability resulting from updating the financial and demographic assumptions, in the amounts

of tEuros 42,230 and tEuros 162, respectively, as of 1 January 2001, were recorded in the respective liability captions of provisions - past service cost not recognised, by

corresponding entry to provisions or pensions - liabilities having been recognised as an extraordinary cost over a period of five years (2001 to 2005). In 2005 the Group

recognised extraordinary losses and gains of tEuros 8,063 and tEuros 5, respectively, relating to amortisation of these amounts (Note 45)

The amount of tEuros 7,937, relating to amortisation for 2005 of the excess of the corridor as of 31 December 2004, was recognised in personnel costs.

On 31 December 2002 ISP authorised the incorporation of the Galp Energia defined contribution Pension Fund. In 2003 Galp Energia, S.G.P.S., S.A. incorporated a defined

contribution Pension Fund for its employees and allowed the employees of the other Group companies to adhere to the Fund. Petróleos de Portugal - Petrogal, S.A., GDP

- Gás de Portugal, S.G.P.S., S.A., Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. and Galp eNova S.A. (this company was merged into Galp Serviços

- Serviços de Consultoria de Apoio à Gestão Empresarial, S.A. on 17 December 2003), as associates of the Fund, allowed their employees to choose between this new

defined contribution pension plan and the previous defined benefits plan. Therefore, in 2005 the Group recognised, in the caption “Personnel costs”, the amount of tEuros

650 relating to the contribution for the year of the associated companies to the Galp Energia defined contribution Pension Fund, in favour of their employees, by transfer

of that amount to the fund managing entity.

As explained in Note 23.i), actuarial gains and losses are recognised in the financial statements, only to the extent that they exceed the 10% limits defined for the

corridor, and are amortised as from the year following that in which they were determined, as explained below.

The following table summarises, by benefit plan, the liability included in the “corridor” mechanism and the maximum interval (10%) thereof.

Unrecognised “Corridor” Excess of the Amount to beBenefits (Gain) and Loss Interval (10%) “Corridor” Interval Recognised in 2006

Petrogal GroupRetirement supplement (Fund) 81,847 34,385 47,462 11,087Pre-retirements (1,221) 2,116 - -Early retirements (6,072) 1,823 (4,249) (993)Retirement bonus 182 649 - -Voluntary social insurence 220 27 193 45Flexible retirement age (DL 9/99) 1,144 1,078 66 15

Sub-Total 76,099 40,078 43,471 10,154

GDP GroupRetirement supplement (Fund) 6,282 3,275 3,076 580Retirement supplement (not cocered by theFund) 1,072 709 364 56Flexible retirement age (DL 9/99) 24 32 - -

Sub-Total 7,378 4,016 3,440 636

OthersRetirement supplement (not cocered by theFund) 49 30 23 1

Sub-Total 49 30 23 1

Total 83,526 44,124 46,935 10,791

Petrogal’s liability for pension supplements exceeds the limits of the 10% corridor by the net amount of tEuros 43,471. This amounts will be recognised as cost and/or

income in future years based on the expected average future period of service of the employees covered by the plans which, at 31 December 2005, was 4.28 years.

Consequently, costs, net of income, in the amount of tEuros 10,154, resulting from amortisation of the excess of the “corridor”, will be recognised in 2006.

The GDP Group’s liability for pension supplements (covered and not covered by the Fund) exceeds the limits of the 10% “corridor” by the net amount of tEuros 3,440.

This amount will be recognised as cost and/or income in future years based on the expected average future period of service of the employees covered by the plans,

which, at 31 December 2005, was 5.12 years for Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A., 24.08 years for Gásfomento - Sistemas e

Instalações de Gás, S.A. and 11.74 years for GDP Distribuição, S.G.P.S., S.A.. Consequently, costs, net of income, in the amount of tEuros 636, resulting from amortisation

of the excess of the “corridor”, will be recognised in 2006.

The liability of the remaining companies for retirement pension supplements (covered and not covered by the Fund) exceeds the limits of the 10% “corridor” by the net

amount of tEuros 23. This amount will be recognised as cost and/or income in future years based on the expected average future period of service of the employees

covered by the plans, which, at 31 December 2005, was 16.94 years for Galp Energia, S.G.P.S., S.A. and 13.77 years for Galp Serviços - Serviços e Consultoria de Apoio à

Gestão Empresarial, S.A.. Consequently, costs, net of income, in the amount of tEuros 1, resulting from amortisation of the excess of the “corridor”, will be recognised in

2006.

Derivative financial instruments

The Group has financial derivative contracts to hedge business risk, namely commodity and exchange risk in the case of the Petrogal Group and interest rate risk in the

case of the GDP Group.

The portfolio of financial derivates at 31 December 2005 is made up as follows:


Fair Value of the Hedging Instrument Interest Rate Nominal Value Maturity Derivatives in Euros

Interest rate swap Pay between 5.1375% and 5.14% receive USD Libor 6m tUSD 100,000 2011 (1,312)

Interest rate swap Pay Euribor 12m+103 pb receive 4.77% tEUR 5,611 2006 31

Interest rate swap Pay between 3.37% and 6.2425%,receive between Euribor 3m and 6m and spread between 0 bp and 175 tEUR 78,927 2006 to 2010 (1,855)

"Knock out" swap with cap Pay Euribor 12m with Cap of 3.49% and knock-out of 5.25% receive Euribor 3m tEUR 7,482 2010 1

Interest rate swap with cap Pay Cap between 3.25% and 4% and Floor between 0% and 2.5% + tEUR 175,000 2008 to 2009 (2,146)+ between 23.5 bp and 60.5 bp receive between Euribor 3m and 6m

Collar Pay Cap of 3.25% and Floor of 1.75% + 23.5 bp Receive Euribor 6m tEUR 20,000 2010 52

Collar Pay Cap of 4% and Floor of 2.5% + premium of 45bp Receive Euribor 6m tEUR 15,000 2008 (193)

Total (5,421)

Fair Value ofType of Derivative Characteristics Maturity the Derivatives

Options over commodities Refining margin 2006 404

Swaps over commodities Purchase of Brent 2006 and 2007 (123)Sale of Brent

Total 281


The fair value of the financial derivatives was determined by banking entities based on generally accepted models and valuation techniques. The fair value at 31

December 2005 does not indicate the future gain or loss, as this can be reversible.

However, the Company follows the historical cost principle and so it has not recognised these derivatives at fair value.

Others

At 31 December 2005 the Petrogal Sub-Group had the following commitments not reflected on the balance sheet:

• tEuros 5,415 relating to tangible fixed assets ordered but not yet received;

• tEuros 4,661 relating to notes not yet due, discounted in the banking system;

• tEuros 327,557 and tEuros 6,331 relating to liabilities covered by the Petrogal and Sacor Marítima Pension Funds, respectively;

• tEuros 76,099 and tEuros 86,026 relating to liabilities to the pension plans, healthcare, life insurance and minimum benefit defined contribution (Note 46), respectively,

not recorded in the financial statements, as they are within the limits of the 10% “corridor” (Notes 23.i) and 23.j)) or because they correspond to the excess corridor

not yet recognised in the statement of profit and loss;

• Petrogal has been carrying out an Environmental and Process Reconfiguration of Domestic Refining - Auto-Oil - project under the European Union legislation, in order to

comply, on the one hand, with fuel specifications, namely petrol and diesel fuel and, on the other hand, to make the environmental performance of its Refineries comply

with the expected legislation. The cost of the changes made and to be made is currently estimated at tEuros 250,000. This estimate still depends on some specifications

currently under discussion on a European level. Up to the end of 2005 the total amount spent in this project was approximately tEuros 146,000. Depending on the

considerations referred to earlier, the amount of tEuros 104,000 is expected to be spent up to the end of the project (2009).

Conscious of its responsabilities to the environment, Petrogal decided in September 1998 to publicly commit itself to environmental protection, by signing a Continuous

Improvement of Environmental Performance Protocol with the Ministries of the Economy and the Environment.

The object of this protocol was to establish an extensive set of environmental protection actions - Environmental Action Program - to enable the company to pursue its

Strategic Environmental Policies and Objectives.

The company considered that all the actions contemplated in the protocol were completed in 2005, except for those corresponding to implementation of the process

changes to be carried out for the refineries to comply with the conditions established under the Legal Diplomas (PCIP, GIC’s) in the 2007/2008 period.

Anticipating the legally defined limit of October 2007 for its refineries to be licensed, Petrogal expects the Competent Entities to establish, in 2006, the licensing conditions

and, consequently, to define the process changes to be made. However, the possible capital expenditure needed, estimated at around tEuros 60,000, has been identified

and safeguarded, this amount being subject to change, depending on the processing options adopted by the refineries.

In addition, in 2005 the company continued to carry out its filling station network re-qualification program to ensure that it complies with the legal requirements and

those established in Petrogal’s Continuous Environmental Performance Improvement Protocol. In 2005 tEuros 515 was invested in fixed assets in under program. The

amount of tEuros 873 is expected to be invested in this program in 2006.

At 31 December 2005 the GDP Sub-Group had the following financial commitments not reflected on the balance sheet.

• tEuros 21,353 relating to liabilities covered by the GDP Pension Fund;

• tEuros 7,378 and tEuros 4,231 relating to liabilities of the pension plan, healthcare, life insurance and minimum benefit defined contribution (Note 46),

respectively, not recognised in the financial statements, as they are within the limits of the 10% “corridor” (Notes 23.i) and 23.j)) or because they correspond

to the excess corridor not yet recognised in the statement of profit and loss;

• tEuros 7,780 relating to contractual liabilities to suppliers of fixed assets, regarding the construction of underground storage facilities, gas pipelines and other facilities

and equipment to implement the natural gas transportation network of Transgás - Sociedade Portuguesa de Gás Natural, S.A., as follows:


Description Contracted amount Realised To be Realised

Construction and installation - underground storage 89,540 83,651 5,888Rights-of-way/Expropriations 2,945 1,962 983Construction and equipment of industrial branches 2,194 1,293 902Autonomous gas units 7 - 7

94,686 86,906 7,780

:: 22. Guarantees Given ::

At 31 December 2005 the guarantees given by the GDP Sub-Group amounted to tEuros 67,493 and 192,500 thousand US Dollars, of which the more significant are:

• Guarantees of tEuros 10,734 and tEuros 329 given to the Portuguese State by a syndicate of banks led by Caixa Geral de Depósitos to enter into a public service contract

to import, transport and supply natural gas;

• Guarantee of tEuros 7,751 in favour of the Lisbon Tax Court of the 1st Instance - 5th court - 1st section, in guarantee of a payment demanded by the Municipal Council

of Lisbon, with respect to legal processes relating to occupation rates of the subsoil (Note 59);

• Guarantees of tEuros 20,422 in favour of the Portuguese State with respect to the obligations and duties resulting from the Concession Contract to operate the natural

gas regional distribution network of Lisboagás, GDL - Sociedade Distribuidora de Gás Natural de Lisboa S.A., Lusitaniagás - Companhia de Gás do Centro, S.A., Beiragás

- Companhia de Gás das Beiras, S.A., Dianagás - Sociedade Distribuidora de Gás Natural de Évora,S.A. and Tagusgás - Empresa de Gás do Vale do Tejo, S.A.;

• Guarantees of tEuros 6,522 given to Municipal Councils for “licences to occupy the public thoroughfare” with underground gas tubes and the rates for occupying the

subsoil (Note 59);

• Bank guarantee of tEuros 19,952 (Note 59) in favour of the Lisbon Council court, 2nd jurisdiction - 1st section;

• Guarantees and pledges relating to 27.4% (participation of Transgás, - Sociedade Portuguesa de Gás Natural, S.A.) and the following amounts of credit granted to

EMPL - Europe Maghreb Pipeline, Ltd:

Type Total Credit tUSD Transgás’ Part tUSD

BEI Bank 450,000 124,000ICO Security 200,000 54,800Banco Santander Security 50,000 13,700

700,000 192,500


In guarantee a loan contracted by Carriço Cogeração - Sociedade de Geração de Electricidade e Calor, S.A., there is a 15 year mortgage in favour of BES Investimento and

BES, over the surface rights of a plot of land in Pombal, acquired by that subsidiary company, up to the maximum amount of tEuros 28,237.

At 31 December 2005 the bank guarantees given by Petrogal amounted to tEuros 39,423. In addition the company issued comfort letters totalling tEuros 401,152 in

favour group and associated companies.

As C.L.C.’s capital expenditure was financed essentially through “project finance”, the financing banking consortium has assumed responsibilities under a bank guarantee

of tEuros 32,075 in favour of the European Investment Bank, of which tEuros 32,043 corresponds to principal and the remaining tEuros 32 to accrued interest.

C.L.C has assumed responsibilities through signing a commercial promissory note with no maturity date in guarantee of a bridging loan of tEuros 1,000 and corresponding

charges, to finance a new strategic storage tanks project. The promissory note will be cancelled as soon as the medium and long term loan contract to finance the project

is signed, which is expected to be in the first quarter of 2006.

Galp Energia, S.G.P.S., S.A. has a bank guarantee with Banco Comercial Português in the amount of tEuros 2,394.

:: 23. Bases of Presentation and Principal Accounting Procedures Used ::

Bases of presentation

The accompanying consolidated financial statements have been prepared on a going concern basis from the accounting records of the companies included in the

consolidation (Note 1) maintained in accordance with generally accepted accounting principles in Portugal.

Consolidation principles

The financial statements of the subsidiaries referred to in Note 1 were consolidated using the full consolidation method, except for the subsidiaries referred to in Note

5, which were consolidated using the proportional method. Significant transactions and balances between the companies were eliminated in the consolidation process.

The amount corresponding to third party interest in subsidiary companies is included in the caption “Minority Interest”. Consolidation differences are recorded as explained

in Note 10.

Principal valuation criteria

The valuation criteria used in the preparation of the consolidated financial statements are as follows:

a) Intangible fixed assets

Intangible fixed assets include essentially the following costs, under the captions “Installation expenses”, “Research and development expenses”, “Industrial property and

other rights”, “Re-conversion of consumption to natural gas”,

and “Goodwill”:

• Expenses incurred with studies and projects for the development of the computer systems, organisation expenses, natural gas institutional advertising campaigns, start-

up expenses (for the refineries) and restructuring and reorganisation expenses (Note 25), which are being amortised on a straight-line basis over periods ranging from

3 to 6 years;


• Exclusivity bonuses paid to retailers of GALP products and costs of surface rights and concessions, which are amortised on a straight-line basis over during the period

of the related contracts (which varies from 10 to 20 years);

• Goodwill relating to the difference between the carrying value of investments in subsidiaries and the corresponding equity held in them as of the date of their

acquisition, which is amortised on a straight-line basis over a period of 5 years, except for group and associated companies that are dependent on concession contracts,

in which case goodwill is amortised over the period of the concession, which terminates in 2028, and in the case of CLH - Compañía Logistica de Hidrocarburos, S.A.

and Galpgest - Petrogal Estaciones de Servicio, S.A., in which case goodwill is amortised over the estimated useful life of the assets related to their activity, which

corresponds 20, 11 and 20 years, respectively;

• Expenses relating to the right of passage of gas and the re-conversion of consumption to natural gas relating to the penetration of natural gas in the market, namely

commercialisation and marketing actions, which consist of the renewal, change and adaptation of the incinerating facilities and equipment. These costs are amortised

over a period from the start of operations to the end of the concession, which corresponds to their expected useful life;

• Expenses relating to property rights of service stations are amortised over a period of 20 years, except they it relate to rented service stations or surface rights. In such

cases the property rights are amortised over the period of the contracts (Note 25). The remaining property rights are amortised over periods ranging from 3 to 6 years.

b) Tangible fixed assets

Tangible fixed assets acquired up to 31 December 1996 are stated at cost, revalued in accordance with the applicable legislation (Note 41). Tangible fixed assets acquired

after that date are stated at cost. Cost includes the invoice price, transport and assembly costs, as well as financial expenses and exchange differences on bank loans

obtained, during the period of construction and overhead costs allocated during the construction period (paragraph n) below).

Depreciation of cost or revalued amount is provided on a straight-line annual basis from the year in which the assets are brought into use, at rates allowed by prevailing

tax legislation to depreciate the assets during their estimated useful lives, taking into consideration, where applicable, the limits imposed by the concession period.

The average annual depreciation rates used are as follows:

Rates

Land and natural resources - public rights of free passage 2.20% - 3.13%Buildings and other constructions 2.00% - 10.00%Machinery and equipment 2.20% - 12.50%Transport equipment 16.67% - 25.00%Tools and utensils 12.50% - 25.00%Administrative equipment 5.00% - 33.33%Reusable containers 7.14% - 33.33%Other tangible fixed assets 10.00% - 33.33%


The natural gas infrastructure of Transgás - Sociedade Portuguesa de Gás Natural, S.A. and of the other natural gas distributors is depreciated over a period of 45 years.

In the years from 1998 to 2002, Transgás - Sociedade Portuguesa de Gás Natural, S.A. and Lusitaniagás - Companhia de Gás do Centro, S.A. (the latter only up to 2000)

applied rates corresponding to 50% of the maximum rates based on the number of years of expected useful life of the machinery and equipment relating to the gas

pipeline, as it was being used below its normal capacity.

Recurring repair and maintenance costs are expensed in the year that they are incurred. Repairs involving the substitution of parts of equipment or of other fixed assets

are recorded as tangible fixed assets and depreciated over the remaining period of useful life of the corresponding fixed assets.

Long term recurring maintenance and repair costs, essentially related with the refineries, are accrued over the period between two such maintenance and repairs, the

part corresponding to each year being recorded in the statement of profit and loss by corresponding entry to accrued costs (Note 53).

Oil exploration and production

Tangible fixed assets relating to oil exploration and production are recorded at cost, which includes essentially:

i) costs incurred with the exploration and development of the oil fields, plus overheads and financial costs incurred up to the time production starts are recorded in fixed

assets in progress. When the oil field starts producing, these costs are transferred from fixed assets in progress to the definitive fixed assets captions and depreciated

in accordance with a coefficient calculated based on the proportion of the volume produced in each depreciation period in relation to the proved developed reserves

at the end of the period, plus production for the period. Therefore, such costs relating to oil fields which are still in the exploration and development phase are classified

as fixed assets in progress;

ii) costs of acquiring oil exploration and production licenses of areas already in production (signature bonus) are depreciated on a straight-line basis over the period of

the licence;

iii) all costs incurred in the exploration phase of unsuccessful oil fields are recognised as costs in the statement of profit and loss of the year in which discontinuance of

the exploration and/or development work becomes known.

c) Finance leasing

Fixed assets acquired under finance lease contracts and the corresponding liabilities are recorded using the financial method. Under this method the cost of the assets is

recorded under tangible fixed assets, the corresponding liabilities are recorded and the interest included in the lease instalments and depreciation of the fixed assets,

calculated as explained in Note 23.b), are recorded as expenses in the statement of profit and loss for the year to which they relate.

d) Investments

The Group companies record their investments in affiliated companies as explained in Note 18.


e) Inventories

Inventories are stated as follows:

i) Raw and subsidiary materials

Crude Oil - At cost determined on a LIFO (last in, first out) basis applied to a single family, which includes all the branches. Cost includes the invoice price and

transport and insurance costs.

Other raw materials (excluding general materials) - at cost determined on a LIFO (last in, first out) basis applied to families of products based on the characteristics

of the materials. Cost includes the invoice price and transport and insurance costs.

General materials - are stated at average cost, which includes the invoice price, transport and insurance costs

ii) Work in progress

Work in progress is stated at production cost, which includes the cost of raw materials, external supplies and services and overheads.

iii) Finished goods and intermediate products

Oil products - finished goods and intermediate products are stated at production cost, which includes the cost of raw and other materials consumed, direct labour

costs and production overheads. Products acquired from third parties are stated at cost which includes the invoice price and transport and insurance costs, on a

LIFO (last in, first out) cost basis applied to families of products based on the characteristics of the products.

The Petrogal Group includes, in the caption “Finished goods and intermediate products”, the Tax on Oil Products (ISP), relating to the introduction to consumption

of the finished goods already dispatched, subject to that tax, on a FIFO (first in, first out) basis.

Other finished and intermediate products - are stated at average production cost, which includes the cost of raw materials and variable and fixed production costs.

iv) Merchandise

Merchandise is stated at cost, which includes the invoice price, transport and insurance costs, determined on a LIFO (last in, first out) basis for natural gas and on

an average basis for oil products and other merchandise.

In the case of Transgás - Sociedade Portuguesa de Gás Natural, S.A., cost also includes costs incurred up to the Portuguese border, namely transport and right of

passage in Moroccan territory.

As explained earlier the Petrogal group companies also include the Tax on Oil Products (ISP) in inventories of merchandise already dispatched, subject to that tax.


As raw and subsidiary materials and merchandise in transit are not available for consumption or sale they are segregated from the remaining inventories and are valued

at their specific cost.

Where the estimated market or realisable value of the inventories at 31 December 2005 is lower than cost determined as explained above, the difference is provided

for in the balance sheet caption “Provision for inventory losses” (Note 32), by charge to the statement of profit and loss.

f) Marketable securities

Marketable securities are stated at the lower of cost or market value.

g) Accruals basis

The Group companies record income and expenses on an accruals basis. Under this basis income and expenses are recognised in the period to which they relate,

independently of when they are received or paid. Differences between the amounts received and paid and the corresponding income and expenses are recorded in

accrual and deferral accounts (Note 53).

h) Subsidies to finance tangible and intangible fixed assets

Non repayable subsidies granted to the Group to finance tangible and intangible (reconversions to natural gas) fixed assets are recorded as deferred income and

recognised as income over the period during which the corresponding fixed assets are depreciated.

i) Pension plan

Petrogal, Sacor Marítima and some companies of GDP Group (GDP Distribuição, S.G.P.S., S.A., Lisboagás - Sociedade Distribuidora de Gás Natural de Lisboa, S.A., Driftal -

Plastificantes de Portugal, S.A. and Gasfomento - Sistemas de Instalação de Gás, S.A.) have made a commitment to pay their employees pension supplements on

retirement due to age, incapacity and pensions to survivors as well as early retirement and pre-retirement pensions (early retirement and pre-retirement pensions only

apply to Petrogal). With the exception of early retirement and pre-retirement pensions, these payments are calculated on an increasing basis in accordance with the

number of years of employment. Early retirement and pre-retirement pensions correspond basically to the employee’s remuneration. When applicable, these

commitments also include Social Security of pre-retired personnel, voluntary social insurance of early retirees and retirement premiums payable upon reaching normal

retirement.

Petrogal, Sacor Marítima and the GDP Group companies have created autonomous pension funds (“Fundo de Pensões Petrogal”, “Fundo de Pensões Sacor Marítima” and

“Fundo de Pensões GDP”) to cover their liabilities relating to pension supplements for retirement due to age, incapacity and survivor pensions to current employees and

retired personnel and, in the case of Petrogal, also to pre-retired and early retired personnel (Note 21). However, the “Fundo de Pensões Petrogal” does not cover the

liability for early retirement and pre-retirement pensions, Social Security of pre-retired personnel, flexible retirement age (Decree Law 9/99) and the payment of

voluntary social insurance and retirement premiums. These liabilities are covered by specific provisions included in the balance sheet caption “Provisions for pensions”

(Notes 21 and 46).

In addition, the GDP pension plan does not cover the liability assumed by Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa to reimburse the retirement

pension supplements payable by EDP to its retired personnel and pensioners relating to that company, as well as retirement and survivor supplements payable to retired

personnel at the time of creating the Fund. These liabilities are covered by specific provisions included in the balance sheet caption “Provision for pensions” (Notes 21

and 46).


At the end of each accounting period the above mentioned companies obtain actuarial valuations and compare the amount of their liabilities with the market value of

the funds and with the balance of the provisions, in order to determine the additional provisions to be recorded.

Up to 31 December 2000 the difference between the liability and the market value of the pension fund and specific provisions for pensions resulting from current service

costs, interest costs and actuarial gains and losses were recognised as gains or losses in the statement of profit and loss for the corresponding year.

As from 1 January 2001, the actuarial gains and losses determined in a year for each of the benefits granted, resulting from actuarial assumption adjustments, experience

adjustments or scheme benefit adjustments are only recorded if the net accumulated amount of these actuarial gains and losses not recognised (Total deviation) at the

end of the period exceeds in absolute amount the greater of: 10% of the total liability or 10% of the market value of the fund, being recognised in the statement of

profit and loss as from the year subsequent to that which it is determined, on a straight-line basis in accordance with the expected average number of working years of

the employees participating in the benefit plan. This accounting policy is in accordance with International Accounting Standard 19.

The benefit plans identified by the Petrogal Group for determination of these liabilities are:

• Pension supplements for retirement, incapacity and surviving orphan;

• Pre-retirement;

• Early retirement;

• Pension premium;

• Voluntary Social Insurance;

• Special flexible retirement age regime under Decree-Law 9/99;

• Minimum benefit defined contribution plan.

The benefit plans identified by the GDP group for determination of these liabilities are:

• Pension supplements for retirement, incapacity and surviving orphan;

• Special flexible retirement age regime under Decree-Law 9/99.

Actuarial gains and losses due to the increase/decrease in the pension liability, resulting from updating the financial and demographic assumptions (Note 21) as of 1

January 2001, in the amounts of tEuros 42,230 and tEuros 162, respectively, were recorded in liability captions provisions for pensions - liabilities, by corresponding entry

to the caption provision for pensions - past service costs not recognised. This balance has been recognised in extraordinary expense and extraordinary income captions

in the statement of profit and loss, on a straight-line basis over a period of five years as from 2001.

On 31 December 2002 ISP authorised the creation of the Galp Energia defined contribution Pension Fund. The Group allowed some subsidiaries, as associates of the Fund,

to give their employees the possibility of choosing between this new defined contribution pension plan and the previous defined benefits plan, paying to the Group, in

these situations, an amount defined annually, corresponding to a percentage of the salary of each employee, which is recognised as a cost for that year.

j) Other retirement benefits - Health care, life insurance and minimum benefit of the defined contribution plan (incapacity and survivor)

The costs borne by the Group with respect to healthcare, life insurance and minimum benefit of the defined contribution plan (incapacity and survivor) are recognised

over the period in which the employees entitled to these benefits are in service in the respective companies, the liability being reflected in the balance sheet caption

provision for life insurance, healthcare and minimum benefit of the defined contribution plan (Note 46). Payments each year to the beneficiaries are recorded as

reductions in the provisions.


At the end of each accounting period the Group obtains actuarial valuations of the amount of its liability and compares this with the provisions recorded in order to

determine the additional amount to be recorded (Note 46).

Up to 31 December 2000 the difference between the liability and the amount of the specific provisions, resulting from the current service cost, interest cost and actuarial

gains and losses was recognised in the statement of profit and loss for the year. As from 1 January 2001 the Company adopted the accounting procedure explained in

Note 23.i).

The actuarial gains and losses due to the increase/decrease in the liability resulting from updating the financial and demographic assumptions as of 1 January 2001 were

recorded in the liability caption provisions for life insurance and healthcare - liabilities, by corresponding entry to provision for life insurance and health care - past service

cost not recognised. This balance has been recognised in the statement of profit and loss extraordinary expenses caption over a period of five years as from 2001.

k) Balances and transactions in foreign currencies

All assets and liabilities expressed in foreign currencies were translated to Euros at the exchange rates prevailing as of the balance sheet dates, except for foreign currency

balances covered by forward exchange agreements (“forwards”), which are translated at the contracted rates.

Gains and losses arising from differences between the exchange rates in force on the dates of transactions and those prevailing at the date of collection, payment or the

balance sheet date are recorded as income and expenses, respectively, in the consolidated statement of profit and loss for the year.

In the case of forward contracts Petrogal follows the procedure of deferring the difference between the spot exchange rate at the beginning of the contract and the

contracted rate and amortising it over the period of the contract.

l) Tax on Oil Products (“ISP”) included in sales and cost of inventories sold and consumed

In compliance with an interpretation of Portuguese Accounting Standard 22 by the Portuguese Accounting Standards Board (“Comissão de Normalização Contabilística”),

the companies in the Group include, in cost of sales, the tax on oil products (“ISP”), as this is considered as a cost of purchasing the products subject to it.

m) Sale of natural gas

The selling price of natural gas is determined by the Government through the General Directorate of Geology and Energy (“Direcção Geral de Geologia e Energia”). The

selling price of natural gas is fixed quarterly in accordance with a formula included in the concession contract. With the exception of Lusitaniagás, the meter readings,

invoicing and collection relating to the gas distribution operation is done by companies of the EDP - Energias de Portugal group and companies of the Galp group,

depending on whether they relate to small or large clients, respectively.

Sales of gas are recorded monthly in the caption accrued income based on the estimated amount to be invoiced and corrected in the period in which the meter reading

takes place.


n) Financial expenses

Financial expenses on loans to finance investment in fixed assets are capitalised in fixed assets in progress in proportion to the total costs incurred on the investments

up to the time they start operating (Note 28), net of subsidies received, the remaining costs being recorded in the statement of profit and loss for the year (Note 44).

The financial expenses capitalised in tangible fixed assets are depreciated in accordance with the period of useful life of the corresponding assets.

o) Capitalisation of overheads

As the GDP group companies are in the phase of constructing their natural gas infrastructures and launching the product in the market, they follow the procedure of

capitalising overhead costs up to the time the infrastructures start operating. Depending on the company involved, tthese costs are recorded in the fixed assets or deferred

costs captions.

p) Deferred taxes

Deferred taxes refer to temporary differences between the amount of assets and liabilities for accounting and for tax purposes.

Deferred tax assets and liabilities are calculated and evaluated annually using the tax rates expected to be in force when the timing differences reverse.

Deferred tax assets are recorded only when there is reasonable expectation of future taxable income to use them. Temporary differences underlying deferred tax assets

are reviewed at each balance sheet date in order to recognise deferred tax assets not recorded previously due to not fulfilling the conditions needed for them to be

recorded and/or to reduce the amounts of deferred tax assets recorded based on the current expectation of their future recovery (Note 51).

q) Translation of foreign currency financial statements

Exchange differences arising from the translation to Euros of the foreign currency financial statements of subsidiary and associated companies are included in the

shareholders’ equity caption "Adjustments in investments in subsidiary and associated companies". These financial statements are translated at the following exchange

rates:

i) exchange rate in force at the balance sheet date for all assets and liabilities;

ii) average exchange rate for the year for the statement of profit and loss captions; and

iii) historical exchange rate for the remaining shareholders’ equity captions.

r) Adjustment of receivables

Accounts receivable are stated at their net realisable value, which is determined considering the adjustments required for doubtful accounts, based on an assessment

estimated losses as of the balance sheet date (Note 32).


s) Derivative financial instruments

In managing interest rate, exchange rate, raw material price and refining margin risks inherent to its operations, the Group uses derivative financial instruments (Note

21). These financial instruments are not stated at fair value, the amount recognised depending on their nature and purpose, fair value only being disclosed in the notes

to the financial statements (Note 21).

t) CO2 emission licences

CO2 emitted by the Group’s plants and the “CO2 emission licences” attributed to it under the National CO2 Licence Allotment Plan do not give rise to any financial statement

recognition provided that: (i) it is not estimated that there will probably be a need for costs to be incurred by the Group to acquire emission licences in the market, which

would be recognised by the recording of a provision or (ii) such licences are not sold in the event that they are excessive, in which case income would be recognised

(Note 62).

:: 24. Rates Used for Translation to Euros ::

The financial statements of Galp International Trading Establishment, Petrogal Trading Limited, EMPL - Europe Maghreb Pipeline, Ltd and Petrogal Angola (expressed in

US Dollars) and subsidiary (expressed in Kwanzas), Petrogal Brazil (expressed in Reais), Enacol, S.A.R.L. (expressed in Cape Verde Escudos), Metragaz, S.A. (expressed in

Moroccan Dirhams), Petrogal Guiné-Bissau and subsidiaries (expressed in CFA Francs) and Petrogal Moçambique and subsidiaries (expressed in Meticais) were translated

to Euros at the following exchange rates:

Exchange rate

In Force at the End of the Year: 2005 2004

CurrencyUS Dollars 1.18 1.36Brazilian Reais 2.74 3.61Cape Verde Escudos 110.27 110.27Morrocan Dirhams 10.95 11.20Francos CFA Francs 655.96 655.96Mozambican Meticais 27,972.20 25,356.46

Exchange rate

Average for the Year: 2005 2004

CurrencyUS Dollars 1.24 1.24Brazilian Reais 3.04 3.66Cape Verde Escudos 110.27 110.27Morrocan Dirhams 11.03 11.03Francos CFA Francs 655.96 655.96Mozambican Meticais 28,298.31 27,247.60


:: 25. Installation Expenses, Research and Development Expenses, Industrial Property and Other Rights, Re-conversion of Consumption to Natural Gas,

Property Rights and Goodwill ::

The Group recognised the following costs in these captions at 31 December 2005:

Accumulated AccumulatedGross Amortisation Adjustments Net

Installation expenses:Incorporation expenses 1,302 (617) - 685Restructuring and reorganisation costs 885 (885) - -Prototypes and development of image for new stations 18 (12) - 6Financial studies to launch and develop natural gas 21,961 (18,939) - 3,022Studies and projects 7,433 (2,812) - 4,621Management information systems 778 (709) - 69Security systems 1,344 (1,245) - 99Quality Cerification System 125 (125) - -Cartography 727 (131) - 596Others 1,389 (607) - 782

35,962 (26,082) - 9,880

Research and development expenses:Development Programs 1,347 (247) - 1,100Integrated management services 2 (2) - -Expenses to promote and market the launch of natural gas 3,495 (3,495) - -Energy studies 881 (881) - -Studies 1,176 (790) - 386Certifications 247 (230) - 17Co-participations 2,188 (1,258) - 930Others 512 (443) - 69

9,848 (7,346) - 2,502

Industrial property and other rights:Surface rights and concessions 107,656 (39,214) - 68,442Exclusivity premiums paid to vendors GALP products 54,520 (30,851) (1,992) 21,677Technology utilisation licences 14,435 (11,225) - 3,210Rights and licensings 13,341 (10,499) - 2,842Cession of rights - o Gas supply contracts 256 (38) - 218Patents 2 (2) - -Utilisation licences 371 (313) - 58Contractual selling rights 4,102 (1,328) - 2,774Rights of way 32,465 (7,864) - 24,601Co-participations 1,695 (354) - 1,341Other products and licences 5,606 (1,131) - 4,475

234,449 (102,819) (1,992) 129,638

Reconversion of consumption to natural gas:Marketing and communication 303 (36) - 267Reconversion of consumption to natural gas - domestic 60,964 (11,549) - 49,415Reconversion of consumption to natural gas - industrial 4,537 (827) - 3,710Reconversion of consumption to natural gas - tertiary 1,201 (212) - 989Reconversion of consumption to natural gas 246,367 (46,075) - 200,292Reconversion of electricity plant of Carregado 9,045 (5,541) - 3,504Information Systems 3 (3) - -Other 408 (46) - 362

322,828 (64,289) - 258,539

Property rights and goodwill:Goodwill on the acquisition of equity investments (Note 10) 78,450 (16,162) - 62,288Intangible assets relating to service stations 26,199 (12,738) - 13,461Others 5,162 (3,370) - 1,792

109,811 (32,270) - 77,541

712,898 (232,806) (1,992) 478,100

Intangible assets relating to service stations in the amount of tEuros 13,461, net of accumulated amortisation, corresponds essentially intangible assets of service stations

bought by Galp Energia España, S.A. in 2003, which is being amortised over a period of 20 years, unless they refer to rented service station or surface rights, in which

case they are amortised over the period of the respective contracts.


:: 27. Changes in Fixed Assets ::

i) Intangible and tangible fixed assets

The changes in intangible and tangible fixed assets and related accumulated amortisation and depreciation in 2005 were as follows:

Opening Sales and Transfers and EndingGross Assets Balance Increase Write Offs Adjustments Balance

Intangible fixed assets:Installation expenses 37,447 817 (2,502) 200 35,962Research and development expenses 7,771 446 (6) 1,637 9,848Industrial property and other rights 230,002 8,271 (18,279) 14,455 234,449Reconversion of consumption to natural gas 294,847 896 - 27,085 322,828Property rights 30,323 1,019 (127) 146 31,361Goodwill (Note 10) 69,202 9,755 (430) (77) 78,450Intangible assets in progress 29,934 43,595 - (46,482) 27,047Advancing for account - Intangible assets 284 - (184) - 100

699,810 64,799 (21,528) (3,036) 740,045

Tangible fixed assets:Land and natural resources 262,325 985 (871) 2,010 264,449Buildings and other constructions 680,929 21,096 (19,269) 49,394 732,150Machinery and equipment 4,915,688 26,511 (68,738) 190,873 5,064,334Transport equipment 32,297 901 (5,850) 194 27,542Tools and utensils 4,960 448 (189) 149 5,368Administrative equipment 121,639 4,031 (2,419) 12,651 135,902Reusable containers 159,996 457 (1,831) 6,077 164,699Other tangible fixed assets 81,132 3,552 (2,247) 17,866 100,303Tangible assets in progress 471,835 230,254 (264) (284,680) 417,145Advances for tangible assets 4,271 161 (1) (2,121) 2,310

6,735,072 288,396 (101,679) (7,587) 6,914,202

7,434,882 353,195 (123,207) (10,623) 7,654,247

Opening Sales and Transfers and EndingAccumulated Amortisation and Depreciation and Adjustments Balance Increase Write Offs Adjustments Balance

Intangible fixed assets:Installation expenses 22,521 5,895 (2,335) 1 26,082Research and development expenses 5,986 1,366 (6) - 7,346Industrial property and other rights 101,027 20,558 (15,892) (882) 104,811Reconversion of consumption to natural gas 51,943 12,313 - 33 64,289Property rights 14,204 1,916 (12) - 16,108Goodwill (Note 10) 11,139 5,512 (430) (59) 16,162

- - - - -

206,820 47,560 (18,675) (907) 234,798

Tangible fixed assets:Land and natural resources 10,824 1,863 - (1,462) 11,225Buildings and other constructions 368,811 44,186 (9,348) (1,506) 402,143Machinery and equipment 2,754,411 244,875 (63,257) (975) 2,935,054Transport equipment 27,801 2,559 (5,532) - 24,828Tools and utensils 4,525 336 (181) (2) 4,678Administrative equipment 103,389 15,935 (2,175) - 117,149Reusable containers 131,028 9,368 (1,878) (574) 137,944Other tangible fixed assets 50,139 7,111 (1,442) - 55,808Tangible assets in progress 31,853 1,468 - - 33,321

3,482,782 327,701 (83,813) (4,519) 3,722,150

3,689,602 375,261 (102,488) (5,426) 3,956,948


The increases in the captions “intangible assets” and “tangible assets” in the amount of tEuros 353,195 refer essentially to:

• tEuros 29,312 relating to the opening balances of the companies included in the consolidation perimeter in 2005 (Note 1):

i) tEuros 23,762 - Petróleos de Valência, S.A. Sociedad Unipersonal;

ii) tEuros 1,982 - Gasinsular - Combustíveis do Atlântico, S.A.;

iii) tEuros 3,568 - Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A..

• tEuros 35,921 relating to the Retail Business Unit, essencially in the the remodelling of stations and convenience stores, business expansion and development of the

information system;

• The Sines and Porto Refineries incurred capital expenditure totalling tEuros 31,816, of which and tEuros 9,891 relates to Conformity projects, tEuros 7,239 relates to the

storage project and betumen shipping, tEuros 2,443 relates to pipeline substitution and tEuros 2,308 relates revamping of units;

• The LPG (Gas) Unit incurred capital expenditure of tEuros 13,560 in modernisation of the bottle filling lines, namely adaptation of the network, requalification and

acquisition of new bottles with the Sines project;

• tEuros 9,755 relating to goodwill, corresponding to the difference cost of the investments and the corresponding equity of the companies: (i) tEuros 7,838 relating to

Petróleos de Valência, S.A. Sociedad Unipersonal; (ii) tEuros 987 relating to CLH - Compañia Logistica de Hidrocarboros, S.A.; (iii) tEuros 222 relating to Saaga - Sociedade

Açoreana de Armazenagem. de Gás, S.A.; (iv) tEuros 403 relating to Gasinsular - Combustíveis do Atlântico, S.A.; (v) tEuros 305 relating to Natgás - Companhia

Portuguesa de Gás Natural S.A.;

• Construction of the Fuel Logistics Centre and the storage and harbour infrastructure on Madeira Island, in the amount of tEuros 15,876;

• Cost of exploration and development of oil fields in Angola, Block 14 in the amount of tEuros 66,122 and in Blocks 32 and 33 in the amounts of tEuros 8,902 and tEuros

299, respectively;

• tEuros 63,122 relating to the construction of natural gas infrastuctures (networks, branches, lots, underground storage and other facilities);

• tEuros 27,478 relating to investments in co-participation of shared networks and reconversion to natural gas.

In 2005 the Fuel Logistics centre of Madeira started operating and so the amount of tEuros 67,962 was transferred from fixed assets in progress to the definitive fixed

assets accounts, this being reflected in the column “Transfers and adjustments”.

The column “Transfers and adjustments” in the changes in fixed assets in the amount of tEuros 10,623 includes tEuros 7,422 which correponds to: (i) adjustment of

specialisations and advances for investments in the amount of tEuros 3,661; (ii) assets reclassified to expenses for the year in the amount of tEuros 2,951 and (iii) credit

notes relating to co-participation received for shared networks and the construction of industrial networks in the amount of tEuros 810.

In 2005 intangible and tangible fixed assets, comprising mostly fully amortised and depreciated items, were written off as a result of updating the fixed assets register

of Petrogal in 2005.

In compliance with the changes introduced by Decree-Law 32/2005, in 2005 provisions for impairment losses started being recognised and presented as adjustments

to the amount of fixed assets, except for Galp Energia España where they are reflected as liabilities (Note 46). Consequently the beginning balance of accumulated

amortisation and depreciation include the amount of tEuros 39,977 relating adjustments to the amount of fixed assets (Note 43).


The balance of amortisation, depreciation and adjustments at 31 December 2005 includes tEuros 53,322, made up as follows, relating to adjustments to the amount of

fixed assets:

i) tEuros 33,321 to cover the write off of assets relating to Block 33 in Angola;

ii) tEuros 9,634 to cover impairment losses of service stations;

iii) tEuros 4,553 to cover impairment losses of the Aveiro installations;

iv) tEuros 3,585 corresponding to the expected loss on the sale of the Sacavém installations;

v) tEuros 1,614 to cover decontamination of the Paycard software;

vi) tEuros 625 to cover remodelling of the service stations.

The difference between the increase in total accumulated amortisation and depreciation and amortisation and depreciation cost in the consolidated statement of profit

and loss, in the amount tEuros 37,961, corresponds to amortisation of goodwill in the amount of tEuros 5,512, reflected as a financial cost (Note 44), the opening balances

of the companies consolidated in accordance with the full consolidation method for the first time in 2005 (Note 1) in the amount of tEuros 13,969 and increase in

adjustments in fixed assets during the year in the amount of tEuros 18,480.

The increases and decreases in the adjustments to the amount of fixed assets are included in accumulated amortisation and depreciation in the columns “Increase” and

“Transfers and adjustments”, respectively, and correspond to the following:

Transfers and Adjustments

Increases Decreases Direct Utilisation

Block 33 in Angola 1,468 - -Impairment of service stations 9,634 - -Aveiro installations 4,553 - -Sacavém installations 587 - -Paycard software 1,614 - -Remodelling of service stations 624 - -Desactivatoin of PA’s - DL 246/92 - (667) -Assets not written off - (1,462) -Write off of service station construction assets (M24 Stores) - (161) (1,304)Write off of service station assets - (998) (534)

18,480 (3,288) (1,838)

In addition, the column “Transfers and adjustments” includes tEuros 250 relating to the reversal of depreciation, which was recorded in the caption “Reversal of

amortisation and depreciation and adjustments” in the consolidated statement of profit and loss.

The fixed assets relating to the exploration of crude oil and corresponding accumulated depreciation at 31 December 2005 were as follows:

AccumulatedTangible Fixed Assets: Gross Depreciation Adjustments Net

Exploration and development expenses relating to areas already in production 147,256 (75,600) - 71,656 Contract premiums for areas already in production 993 (229) - 764 Tangible fixed assets in progress 211,662 - (33,321) 178,341

359,911 (75,829) (33,321) 250,761


Exploration and development and contract premiums for areas already in production are reflected in the fixed assets caption “Machinery and Equipment”.

At 31 December 2005 Petrogal had impairment adjustments of the gross amount of fixed assets in progress totalling tEuros 33,321, corresponding to the total cost incurred

(including contract premiums) on Block 33 in Angola, due to the reduced prospects of future commercial discovery, based on studies carried out in 2005 (Note 43).

At 31 December 2005 Galp Group had tangible and intangible fixed assets implanted in third party property, in the hands of third parties and revertible fixed assets, the

more significant items being as follows:

Tangible Assets Intangible Assets(Gross Amounts) (Gross Amounts)

Installed on third party property 2,161,642 77,330On the hands of third parties 612,275 107,368Fixed assets abroad 147,105 14Natural gas/propane installations and networks 377,729 -Revertible to third parties (equipment in service stations) 181,439 46,061Natural gas distribution network - -Primary network 33,880 -Natural gas/propane meters 42,735 -Public rights of way 5,182 -

3,561,987 230,773

Bloco A-IMI & Bloco 14 - Congo and Angola 142,208Natural gas underground storage (Note 21) 83,651Contract premiums for petroleum research in blocks 32 and 33 in Angola (including contract premium) 69,454Industrial branches construction, UAG´s 24,548Renewal and expansion of the service station network 18,612Industrial investment relating to the refineries 15,463Construction of network infrastructures and re-conversion to natural gas 14,661Construction of networks and reconversion to natural gas in the municipality of Sintra 5,985Construction of networks and reconversion to natural gas in the municipality of Cascais 5,944Leixões - Pipelines in the Porto Refinery 4,566Construction of networks and reconversion to natural gas in the municipality of Oeiras 3,795Monobouy - Installation and spare parts 3,389Studies and licences - Porto Refinery 2,615Construction of networks and reconversion to natural gas in the municipality of Lisbon 1,981Construction of networks and reconversion to natural gas in the municipality of Amadora 1,948Construction of networks and reconversion to natural gas in the municipality of Loures 1,548Coparticipation in shared networks and costs of reconversion to natural gas 1,470Utilities - 10 kv electricity network - Sines Refinery 1,402Construction of networks and reconversion to natural gas in the municipality of Odivelas 1,323Construction of networks and reconversion to natural gas in the municipality of Vila Franca de Xira 1,241Wind farm in Sines 1,233Other projects 39,565

446,602

Intangible and tangible assets in progress (including advances) at 31 December 2005, by project, are as follows:


ii) Investments

Securities and other financial applications

Securities and other financial applications at 31 December 2005 and 2004 are made up as follows:

2005 2004Securities and Other Financial Applications % Participation Amount % Participation Amount

Marketable securities and property investments (a) - 18,179 - 18,297ONI S.G.P.S., S.A. (c) 4.10% 19,865 4.10% 19,865CLH - Compañia Logística de Hidrocarburos, S.A. (b) 5.00% 14,838 5.00% 13,252PME Capital - Sociedade Portuguesa de Capital de Risco, S.A. 1.82% 499 1.82% 499PME Investimentos - Sociedade de Investimento, S.A. 1.82% 499 1.82% 499Agene - Agência para a Energia, S.A. 10,98% 114 10.98% 114Omegás 5.00% 35 5.00% 35Ambelis - Agência para a Modernização Económica de Lisboa, S.A. 2.00% 20 2.00% 20Clube Financeiro Vigo - 19 - 19Cooperativa de Consumo do Pessoal da Petrogal, CRL 0.07% 7 0.07% 6OEINERGE - Agência Municipal Energia e Ambiente de Oeiras 1.45% 1 1.45% 1Others 25 27

54,101 52,634

Accumulated depreciation (10,335) (10,223)Ajustment of other financial applications (Note 32) (20,099) (20,069)

23.667 22,342

(a) Property not related to the Group’s core operations, acquired essentially in prior years. Accumulated depreciation at 31 December 2005 and 2004 totalled tEuros 10,335 and tEuros 10,223, respectively. In addition, the amount is net of adjustmentsof tEuros 30.

(b) Investment recorded in accordance with the equity method.(c) At 31 December 2005 the Group had an adjustment of tEuros 19,865 for securities and other financial applications (Note 32) relating to this participation.

The changes in the caption “Securities and other financial applications” during year ended 31 December 2005 were as follows:

Beginning balance 52,634 Effect of applying the equity method to results for the year (Note 44):

Positive 7,022 Dividends distributed:

CLH - Compañia Logistica de Hidrocarburos, S.A. (5,436)Others (119)

54,101

Loans granted:Cooperativa de Habitação Petrogal 53Agene - Agência para a Energia, S.A. 90

143

At 31 December 2005 the Group had the following acounts receivable from participated and participant companies:


At 31 December 2005 the Group had the following accounts receivable from participated and participant companies:

(a) Shareholder of CLCM - Companhia Logística de Combustíveis da Madeira, S.A.(b) Shareholder of Powercer - Sociedade de Cogeração da Vialonga, S.A.

In 2005 dividends of tEuros 1,693, tEuros 318 and tEuros 213,927 were paid by the subsidiaries of GDP, S.G.P.S., S.A., Petróleos de Portugal - Petrogal, S.A. and Galp

Energia, respectively, to shareholders outside the Group. The amount of tEuros 213,927 paid by Galp Energia includes tEuros 48,077 corresponding to dividends declared

in 2004 relating to the year 2003, and tEuros 165,850 corresponding to dividends for the year 2004 (Note 55).

Of the total dividends received in 2005, tEuros 39,339, tEuros 33,903 (Note 3) and tEuros 5,436 relate to associated companies and securities and other financial

applications, respectively.

The amount of tEuros 8,195 payable to Enagás, S.A. corresponds to shareholders’ loans obtained by the subsidiaries Gasoduto Braga - Tuy, S.A. and Gasoduto de Campo

Maior - Leiria - Braga, S.A. in the amounts of tEuros 2,160 and tEuros 6,035, respectively, which bear interest at market rates, the amount of tEuros 1,435 being classified

as short term as it is repayable in 2006.

The amount of tEuros 3,457 recorded as a medium and long term payable to ENI Portugal Investment, S.p.A. refers to shareholders’ loans obtained by the subsidiary

Lusitaniagás - Companhia de Gás do Centro, S.A., which bear interest at market rates and have no defined repayment term.

The medium and long term payable of tEuros 1,721 to Companhia Portuguesa de Produção de Electricidade, S.A. refers to shareholders’ loans obtained by the subsidiary

Carriço Cogeração Sociedade de Geração de Electricidade e Calor, S.A., which bears interest at market rates.

:: 28. Capitalised Financial Costs ::

In the year ended 31 December 2005 the Group capitalised financial costs of tEuros 1,897 (Note 44) incurred on loans to finance the acquisition of fixed assets during

the construction period.

Short Term Medium and Long Term

Enagás, S.A. 1,435 6,760 E.E.M. - Empresa de Electricidade da Madeira, S.A. (a) - 792 ENI Portugal Investment, SpA - 3,457 Companhia Portuguesa de Produção de Electricidade, S.A. - 1,721 Finerge - Gestão de Projectos Energéticos, S.A. (b) - 420 AIE - Atlantic Island Electricity (Madeira) Produção, Transporte e Distribuição de Energia, S.A. (a) - 396 Procomlog - Combustíveis e Logística, Lda (a) - 792 Others 67 -

1,502 14,338


:: 32. Adjustments to Current Assets ::

The changes in the adjustments to current assets captions in the year ended 31 December 2005 were as follows:

Beginning Transfers and EndingBalance Increases Decreases Adjustments Balance

Investments:Loans to group companies (Note 2) 1,830 41 - - 1,871Other financial applications (Note 27) 20,069 - - - 20,069

21,899 41 - - 21,940

Inventories:Raw, subsidiary and consumable materials 6,733 2,123 (3,287) - 5,569Finished goods and intermediate products 1,311 - (1,308) - 3Merchandise 416 73 (305) - 184

8,460 2,196 (4,900) - 5,756

Receivables:Clients, current accounts 59,365 15,668 (16,688) (159) 58,186Other debtors (Note 52) 3,514 847 (658) - 3,703

62,879 16,515 (17,346) (159) 61,889

93,238 18,752 (22,246) (159) 89,585

Increase in provisions:

The column “Increases” in the amount of tEuros 18,752 includes tEuros 2,077 relating to beginning balances of the following companies incorporated into the consolidation

perimeter (Note 1):

• tEuros 2,009 relating to Gasinsular - Combustíveis do Atlântico, S.A.;

• tEuros 68 relating to Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A..

Consequently, the increase of tEuros 16,675 was recorded as follows:

i) tEuros 16,634, relating to adjustments for doubtful collections and inventory losses was recorded in the caption “Adjustments” in the consolidated statement of profit

and loss;

ii) tEuros 41 (Note 2) relating to updating the exchange rate on the loan to the subsidiary Petrogal Guiné-Bissau, Lda. to 31 December 2005 recorded in the caption

“Interest and similar costs”.

Decreases and adjustments:

The decrease in the amount of tEuros 22,246 is made up as follows:

By DirectCaption Utilisation Decrease

Adjustments for doubtful collections (10,613) (6,733)Adjustments for inventory losses (3) (4,897)

(10,616) (11,630)


The amount of tEuros 11,630 relating to decreases and adjustments was recorded by corresponding entry to: (i) the caption “Reversal of amortisation, depreciation and

adjustments” in the amount of tEuros 11,491 and (ii) the caption “Provisions” in the amount of tEuros 139.

The direct utilisation relating to adjustments to receivables includes (i) tEuros 1,625 relating to reversal of amounts under legal action and (ii) tEuros 6,860 due to the

write off of the receivable from the company Corama - Combustíveis da Madeira Lda.

Adjustments for other financial applications:

The amount of tEuros 20,069 recorded in the caption “Adjustments to other financial applications” includes tEuros 19,865 corresponding to an adjustment relating to the

Group’s participation in ONI, S.G.P.S., S.A. (Note 27).

:: 33. Liabilities Maturing in More than Five Years ::

At 31 December 2005 liabilities maturing in more than five years, in the amounts of tEuros 29,928 and tEuros 458,381, are reflected in the captions “Bonds” and “Medium

and long term bank loans”, respectively (Note 34).

:: 34. Loans ::

Loans at 31 December 2005 and 2004 are made up as follows:

2005 2004Short Term Medium and Long Term Short Term Medium and Long Term

Bank loans:Domestic loans 99,045 119,178 192,489 65,854Foreign loans 84,776 644,988 254,155 718,450Bank overdrafts (Note 60) 72,015 - 176,058 -Renewable credit lines 250 16,000 8,600 -

256,086 780,166 631,302 784,304

Other loans obtained:IAPMEI 1,304 2,816 1,304 4,078

1,304 2,816 1,304 4,078

Bonds:GDP, S.G.P.S., S.A. 1997 issue - 49,880 - 49,880Lisboagás, S.A. 1998 issue - 49,880 - 49,880Galp Investment Fund, 2003 issue - 210,000 - 210,000

- 309,760 - 309,760

257,390 1,092,742 632,606 1,098,142

Medium and long term bank loans and bonds as of 31 December 2005 mature as follows:

2007 162,1202008 285,3242009 78,2422010 79,5992011 and following years (Note 33) 487,457

1,092,742


Bank loans

Accrued financial costs on bank loans at 31 December 2005 are recorded in the balance sheet caption “Accrued costs” (Note 53).

Foreign loans in the amount of tEuros 729,764 correspond essentially to a loan from the European Investment bank (EIB), which is fully covered by guarantees given by

a syndicate of banks, with right of recourse in the event of non compliance.

A mortgage up to the amount of tEuros 28,237 over the company’s 15 year surface rights to a plot of land in the Municipality of Pombal, in favour of BES Investimento

and BES, has been contracted in guarantee of a loan of tEuros 15,403 obtained by Carriço Cogeração - Sociedade de Geração de Electricidade e Calor, S.A..

The foreign currency bank loans at 31 December 2005 correspond to tEuros 79,085 and are in the following currencies (in thousands):

2005 2004Short Term Medium and Long Term Short Term Medium and Long Term

US Dollars 50,105 41,105 104,847 82,210Mozambican Meticais - 49,485,263 - 40,550,212

Bonds

i) GDP - Gás de Portugal, S.G.P.S., S.A. 1997 issue

On 25 June 1997 GDP - Gás de Portugal, S.G.P.S., S.A. issued bonds totalling tEuros 49,880, at par, for private subscription, which were fully subscribed for and paid up.

The bonds are redeemable at their nominal value in a single payment at the end of their term, which is ten years.

However, the bonds can be redeemed early, in part or in full, at the issuer’s option (call option), in the case of partial early redemption, by decrease in the nominal value

of the bonds, on any interest payment date as from the sixth coupon. In such a case, there is a redemption premium over the nominal value redeemed early.

If the Portuguese State ceases to be direct or indirect majority shareholder of GDP and/or if GDP ceases to have a direct or indirect majority participation in its group

companies that, as of the date the bonds are issued, have the corporate object of distributing piped gas, the bondholders can demand early redemption of their bonds.

These bonds bear interest payable half yearly in arrears at a rate indexed to the Euribor 6 month rate plus 7.5 basis points, rounded up to the closest 1/16 of a basis

point.


This issue was led by Banco Millennium BCP Investimentos (formerly CISF) Banco Português de Investimento, the placement having been guaranteed by a Syndicate of

Banks consisting by the following banks:

Banks Amount %

Millennium BCP Investimentos (ex-CISF) 13,592 27.25 Banco Português de Investimento 13,592 27.25 Banco Chemical Finance 4,988 10.00 Caixa Geral de Depósitos 4,988 10.00 Banco Finantia 3,492 7.00 Deutsche Bank de Investimento 3,492 7.00 Millennium BCP (ex-Mello) 1,995 4.00 Caixa Geral de Depósitos (ex-BNU) 1,247 2.50 Banco Santander de Negócios 1,247 2.50 Banco Bilbao Vizcaya 1,247 2.50

49,880 100.00

ii) Lisboagás, GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. 1998 issue

On 12 August 1998 Lisboagás, GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. issued bonds totaling tEuros 49,880 at par, for private subscription, which

were fully subscribed for and paid up.

The bonds are redeemable at par in five equal annual instalments on the due dates of the 22nd, 24th, 26th, 28th, and 30th coupons.

However, the bonds can be redeemed early, in part or in full, at par, at the issuer’s option (call option), as from the due date of the 10th coupon, inclusive and on the

respective interest payment dates.

The bondholders can also demand early redemption of the bonds or of the remaining outstanding principal of the bonds, at par, on the due dates of the 20th, 22nd,

24th, 26th and 28th coupons.

If the Portuguese State ceases to be direct or indirect majority shareholder of GDP - Gás de Portugal, S.G.P.S., S.A. or if GDP - Gás de Portugal, S.G.P.S., S.A. GDP ceases

to have a direct majority participation in Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A., the bondholders can demand early redemption of their

bonds.

Interest is payable half yearly in arrears at a rate corresponding to the Euribor 6 month rate in force on the second to last working day preceding the beginning of each

interest period plus 8 basis points.

The Bond issue was underwritten by a Syndicate of Banks composed by the following banks:

Banks Amount %

Banco Espirito Santo Investimento 13,517 27.10 Banco Português de Investimento 13,567 27.20 Millennium BCP (ex-CISF) 13,567 27.20 Caixa Geral de Depósitos (ex-BNU) 7,482 15.00 BMI 1,247 2.50 Banco Bilbao Vizcaya 500 1.00

49,880 100.00


iii) Bonds issued in 2003 - Galp Investment Fund

In 2003 Petrogal, S.A. entered into an accounts receivable securitisation operation with Galp investment Fund, PLC (“the Fund”), in the amount of tEuros 210,000, with

an expected maturity term of 5 years and a legal maturity term of 7 years. In order to cover this amount, the Fund issued tEuros 199,500 of “A Notes A” and tEuros

10,500 of “B Notes B”, which bear interest at the Euribor rate plus 50 basis points and 95 basis points, respectively. In 2005 Petrogal incurred financial expenses of tEuros

6,097 with this operation (Note 44).

:: 36. Sales and Services Rendered by Activity and Geographic Market ::

Sales and services rendered in the years 2005 and 2004, by geographic market, were as follows:

2005 2004

Sales:Domestic market 7,485,440 6,315,320Foreign market 3,491,435 2,811,927

10,976,875 9,127,247

Services rendered:Domestic market 113,772 117,139Foreign market 35,916 14,133

149,688 131,272

Sales of fuel include Tax on Petroleum Products (ISP).

The segment results for 2005 are presented in an attachment.

:: 38. Income Tax ::

Information regarding income tax of the year, can be found in Note 51.

:: 39. Remuneration of the Members of the Corporate ::

Remuneration of the members of the Group company’s corporate boards for 2005 and 2004 amounted to tEuros 3,756 and tEuros 3,698, respectively.

:: 41. Revaluation of Tangible Fixed Assets (Legislation) ::

The companies included in consolidation revalued their tangible fixed assets in previous years in accordance with the following legislation:

• Decree-law 126/77 of 2 April;

• Decree-Law 430/78 of 27 September;

• Decree-law 219/82 of 2 June;

• Decree-law 399-G/84 of 28 December;

• Decree-law 118-B/86 of 27 May;

• Decree-law 111/88 of 2 April;


• Decree-law 49/91 of 25 January;

• Decree-law 264/92 of 24 November;

• Decree-law 264/92 of 14 February under Decree-Law 132/95 of 6 June;

• Decree-law 31/98 of 11 February.

In 1995 GDP Group carried out two independent revaluations of its fixed assets, considering the revaluation terms of Decree-Law 22/92 of 14 February, which had the tax

effect applicable to the underlying Decree-Law.

:: 43. Accounts Not Comparable with the Preceding Year ::

The amounts for the year ended 31 December 2004 (immediately preceding year) included in the accompanying financial statements for comparative purposes, are

presented in conformity with the model resulting from the changes introduced by Decree-Law 35/2005 of 17 February.

Consequently, some captions in the consolidated balance sheets as of 31 December 2005 and 2004 and the consolidated statements of profit and loss for the years then

ended are not directly comparable between themselves. The principal differences resulting from the above restatement are as follows:

Consolidated balance sheet

Reclassification of the liability caption “Other provisions”, in the amount of tEuros 39,977, to the following asset captions:

AmountCaption Nature (tEuros)

Intangible fixed assets:Industrial property and other rights De-activation of service stations - DL 246/92 607

Sub-total 607

Tangible fixed assets:Land and natural resources Sacavém installations 1,425

Others 1,462

2,887

Buildings and other constructions Sacavém installations 555Write off of service station assets and write off of service station constructions 1,474De-activation of service stations - DL 246/92 32

2,061

Machinery and equipment Sacavém installations 964Write off of service station assets 949De-activation of service stations - DL 246/92 28

1,941

Tools and utensils Write off of service station assets 2

Administrative equipment Sacavém installations 54Write off of service station assets 572

626

Tangible assets in progress Block 33 in Angola 31,853

Sub-total 39,370

Total 39,977


Consolidated statement of profit and loss by nature

Reclassification to adjustments for the year of the expense caption “Provisions” in the amount of tEuros 55,985, of which tEuros 38,515 relates to increase for the year

for the matters referred to above and tEuros 17,470 relates to adjustments to accounts receivable and for inventory losses.

Reclassification of extraordinary income of tEuros 8,302, relating to adjustments to accounts receivable, for inventory losses and loans, to the caption “Reversal of

amortisation, depreciation and adjustments”

:: 44. Consolidated Net Financial Expenses ::

The caption “Consolidated net financial expenses” for the years ended 31 December 2005 and 2004 is made up as follows:

2005 2004

Expenses:Interest - group and associated companies 325 672Other interest 46,060 50,963Loss on group and associated companies 2,205 8,279Amortisation of goodwill on the acquisition of equity investments (Note 27) 5,512 4,569Remuneration of participating securities - -Depreciation of investment in property (Note 27) 112 153Exchange losses 79,312 66,015Financial discount allowed 1,508 986Charges relating to bank guarantees -Others 16,578 16,325

151,612 147,962 Net financial expenses (30,922) (29,781)

120,690 118,181

Income:Interest - group and associated companies 2,539 3,791Other interest 4,542 2,962Gain on group and associated companies 50,710 33,738Income from properties - 121Income from marketable securities and other financial applications 178 156Exchange gain 59,510 74,035Financial discount received 87 510Gain on the sale of treasury applications - -Other interest and similar income - -Other financial income 3,124 2,868

120,690 118,181

The amount of tEuros 46,060 recorded in the caption “Financial expenses - other interest” is net of tEuros 1,897 relating to interest capitalised during the year ended 31

December 2005 (Note 28) and includes the costs of the accounts receivable securitisation operation in the amount of tEuros 6,097 (Note 34) and late payment interest

relating to the legal processes regarding the subsoil occupation rates in the amount of tEuros 301 (Note 46).

The caption “Financial expenses - other”, in the amount of tEuros 16,578, includes essentially (i) tEuros 4,657 and tEuros 949 corresponding to charges for bank guarantees

of the subsidiaries Transgás - Soc. Portuguesa de Gás Natural, S.A. and Transgás Atlântico - Sociedade Portuguesa de Gás Natural Liquefeito, S.A., respectively, and (ii)

tEuros 5,537 relating to bank services.

The amount of tEuros 3,124 in the caption “Other financial income” includes tEuros 1,389 relating to amounts re-charged by the subsidiary Transgás - Sociedade

Portuguesa de Gás Natural, S.A. to the associated company EMPL - Europe Maghreb Pipeline, Ltd., relating to charges for guarantees borne on account of the latter.

The loss and gain on group and associated companies in 2005 and 2004 is made up as follows:


2005 2004

Loss:Central E, S.A. (b) (c) 599 576Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. (a) 588 -Ao Sol - Energias Renováveis, Lda (d) 370 -Petrogal Moçambique, Lda. 353 -Energin - Sociedade de Produção de Electricidade e Calor, S.A. (a) (c) 103 309Ecogen - Serviços de Energia Descentralizada, S.A. (b) (c) 79 107Gásfomento Sur Andalucia, S.A. (b) 41 -Fast Access - Operações e Serviços de Informação Comércio Electrónico, S.A. (b) 34 348Gásfomento Energia, S.A. (b) (c) 19 3Número Um - Reparação de Automóveis, Lda. (a) 11 10Petrogal Guiné-Bissau, Lda. (a) 7 960Terparque - Armazenagem de Combustíveis, Lda. (b) 1 -Petróleos de Portugal - Petrogal, S.A. - 3,657GDP - Gás de Portugal, S.G.P.S., S.A. - 1,046Petrogal Angola, Lda. - 743Tagusgás - Empresa de Gás do Vale do Tejo, S.A. - 221EMPL - Europe Maghreb Pipeline, Ltd. - 170CLC - Companhia Logística de Combustíveis, S.A. - 129

2,205 8,279

Gain:EMPL - Europe Maghreb Pipeline, Ltd. (b) 31,543 16,921CLH - Compañía Logistica de Hidrocarburos, S.A. (b) 7,022 5,148Gasoduto Extremadura, S.A. (b) 3,315 2,461Gasoduto Al-Andaluz, S.A. (b) 2,664 3,008Setgás - Sociedade de Produção e Distribuição de Gás, S.A. (b) 1,855 1,444Empresa Nacional de Combustíveis - Enacol, SARL (a) (b) 1,766 -Galp Exploração Serviços do Brasil, Lda. (b) 470 -Energin - Sociedade de Produção de Electricidade e Calor, S.A. (c) 458 -Petrogal Angola, Lda. (a) (b) 412 -Petrogal Guiné-Bissau, Lda. (b) 380 51Metragaz, S.A. (b) 371 234Brisa Access, S.A. (a) (b) 220 46Medigás - Sociedade Distribuidora de Gás Natural do Algarve, S.A. (a) 77 -Número Um - Reparação de Automóveis, Lda. (b) 59 14Enerfin - Sociedade de Eficiência Energética, S.A. (b) 36 146Gásfomento Sur Andalucia, S.A. (a) 30 2Ecogen - Serviços de Energia Descentralizada, S.A. (a) (c) 15 -Galp Serviexpress - Serviços de Distribuição e Comercialização de Produtos Petrolíferos, S.A. (b) 10 -TIGS - Engenharia e Manutenção, S.A. (b) 3 5Tagusgás - Empresa Gás do Vale do Tejo, S.A. (b) 3 -Saaga - Sociedade Açoreana de Armazenagem de Gás, S.A. (a) 1 1Portgás - Sociedade de Produção e Distribuição de Gás, S.A. (d) - 3,780Galp Power, S.G.P.S., S.A. - 363Fast Access - Operações e Serviços de Informação Comércio Electrónico, S.A. - 114

50,710 33,738

(a) The gain and loss on these companies correspond to differences recorded in the year ended 31 December 2005 between the estimated and actual results for 2004 recorded in accordance with the equity method.(b) The gain and loss relating to these companies correspond to the results for the year of the subsidiary and associated companies recorded by Galp in accordance with the equity method and the effect of incorporating the changes in their

shareholders’ equity.(c) These companies have negative shareholders’ equity, the amount of tEuros 791 having been recognised by corresponding charge to the caption “Provisions - Other provisions” (Note 46):

2005 2004

Central E, S.A. 599 576Energin - Sociedade de Produção de Electricidade e Calor, S.A. 103 309Fast Access - Operações e Serviços de Informação Comércio Electrónico, S.A. - 348Ecogen - Serviços de Energia Descentralizada, S.A. 79 107Gásfomento Energia, S.A. 10 -

791 1,340

(d) Participations sold in the year ended 31 December 2005.

The loss on group and associated companies in the amount of tEuros 2,205 was recorded against the captions: (i) “Equity investments in group companies” - tEuros 7

(Note 2); (ii) “Equity investments in associated companies” - tEuros 74 (Note 3); (iii) “Provisions for risks and charges - investments” - tEuros 791 (Note 46) and (iv)

other captions - tEuros 1,333.

The gain on group and associated companies in the amount of tEuros 50,710 was recorded against the captions: (i) “Equity investments in group companies” - tEuros

1,263 (Note 2); (ii) “Equity investments in associated companies” tEuros 41,864 (Note 3); “Provisions for risks and charges - investments” - tEuros 473 (Note 46); (iv)

“Securities and other financial applications” tEuros 7,022 (Note 27) and other captions tEuros 88.

:: 45. Consolidated Extraordinary Items ::

Consolidated extraordinary items for the years ended 31 December 2005 and 2004 are made up as follows:


2005 2004

Expenses:Donations 2,360 1,836Doubtful debts 472 170Loss on inventories 321 126Loss on fixed assets 10,154 7,750Fines and penalties 2,149 4,244Increase in amortisation and provisions 9 149Prior year adjustments 6,430 1,299Provisions for restructuting costs (Note 46) 8,068 -Retirement benefits 9,051 9,028Other 3,223 5,786

42,237 30,388Net extraordinary items 69,879 32,277

112,116 62,665

Income:Reimbursement of taxes 7 94Recovery of debts - 2Gain on inventories 319 19Gain on fixed assets 50,892 3,893Contractual penalties 172 50Decrease in provisions (Note 46) 6,883 16,318Prior year adjustments 908 1,384Amortisation of investment subsidies (Note 49) 30,835 32,563Retirement benefits (Note 46) 298 319Other 21,802 8,023

112,116 62,665

The amount of tEuros 9,051 in the caption “Extraordinary expenses - retirement benefits” includes amortisation for the year of the increase in the liability due to updating

the assumptions used in the actuarial studies as of 1 January 2001, of which tEuros 8,063 relates to the pension plan (Note 21) and tEuros 988 relates to healthcare and

life insurance (Note 46).

The caption “Other extraordinary expenses” in 2005 includes essentially: (i) tEuros 1,330 relating to a provision for the subsidiary Galpgest - Petrogal Estaciones de

Servicio, S.A. to cover losses with cards and (ii) tEuros 246 corresponding to the recognition for the year of capitalised pre-exploration costs.

The caption “Gain on fixed assets” in the amount of tEuros 50,892 includes tEuros 47,961 relating to gain on the sale in 2005 of the investment in Portgás - Soc. de

Produção de Gás, S.A. to the company EDP - Energias de Portugal, S.A.. (Nota 3).

The caption “Extraordinary income - retirement benefits”, in the amount of tEuros 298, includes the amortisation of the change in the assumptions of the pension plans,

in the amount of tEuros 5 (Note 21) and amortisation of the change in the liability assumptions relating to healthcare and life insurance in the amount of tEuros 293

(Note 46).

The caption “Other extraordinary income” in the amount of tEuros 21,720 is made up essentially of: (i) tEuros 8,959 relating to the excess of estimated tax and (ii) tEuros

10,778 corresponding to indemnity for part of the insurance relating to the accident in the Leixões terminal in July 2004.

:: 46. Changes in Provisions ::

The changes in the Group’s provisions in the year ended 31 December 2005 were as follows:


Beginning Transfers and EndingBalance Increases Decreases Adjustments Balance

Provisions for retirement benefitsProvisions for pensions (Note 21):

Early retirement 25,134 3,494 (4,325) 4 24,307Pre retirement 25,667 1,795 (8,301) 3,222 22,383Covered by the pension funds 5,325 19,623 (26,148) 6,525 5,325Pensions - retirement benefits 6,708 409 (1,019) 30 6,128Special flexible retirement age regime 8,835 1,241 (3) - 10,073Retirement bonus 5,883 720 (294) - 6,309Voluntary social insurance 412 78 (441) - 49

77,964 27,360 (40,531) 9,781 74,574

Other retirement benefits:Healthcare 105,297 25,395 (9,418) 121 121,395Llife insurance 1,155 446 (100) (15) 1,486Defined contribution plan minimum benefit - 1,566 - - 1,566

106,452 27,407 (9,518) 106 124,447

Other provisions:Provision for taxes 2,954 426 (432) - 2,948Litigation in process 21,556 923 (1,143) - 21,336Equity investments 4,192 2,606 (1,449) - 5,349Restructuring 12,662 8,068 (4,155) (3,222) 13,353Other provisions 27,730 8,145 (4,389) (252) 31,234Impairment of assets (Spain) 13,039 11,534 (5,107) 315 19,781

82,133 31,702 (16,675) (3,159) 94,001

266,549 86,469 (66,724) 6,728 293,022

Increase in provisions:

The increase column in the amount of tEuros 86,469 includes tEuros 294 relating to beginning balances of the company Petróleos de Valência, S.A. Sociedad Unipersonal

that was incorporated into the consolidation perimeter in 2005 (Note 1).

Consequently, the increase in provisions, totalling tEuros 86,175, was recorded as follows:

i) tEuros 19,839 relating to other provisions was recorded in the caption “Provisions” in the consolidated statement of profit and loss;

ii) tEuros 45,718 was recorded in the caption “Personnel costs” in the consolidated statement of profit and loss;

iii) tEuros 17,119 was recorded in the caption “Extraordinary costs”, of which tEuros 8,068 by increase in the provision for restructuring costs of the Group (Note 45), and

tEuros 9,051 was recorded in the caption “Other extraordinary costs - Retirement benefits” (Note 45);

iv) tEuros 1,604 by charge to the caption “Financial costs”:

• mEuros 791 (Note 44) relating to appropriation of the losses of associated companies and recognition, in the year ended 31 December 2005, of the differences

between the estimated results for the year 2004 and actual results.

• tEuros 512 relating to exchange adjustment at 31 December 2005, of the provision for abandonment of the exploration installations in Blocks 1 and 14;

• mEuros 301 (Note 44) recorded in the financial cost caption of the consolidated statement of profit and loss, corresponds to late payment interest for 2005, relating

to the provision for litigation regarding subsoil occupation rates.

v) tEuros 1,815 relating to provisions for equity investments was recorded in the caption “Adjustments in equity investments in subsidiary and associated companies”

and corresponds essentially exchange differences in the subsidiary Petrogal Angola, Lda. (Note 2);

vi) tEuros 80 by corresponding entry to other captions.

Increase in other provisions:

The increase in other provisions, totalling tEuros 8,145, corresponds essentially to:

i) tEuros 2,500 relating to recognition of a provision for decontamination of the ground of the Sines Refinery;

ii) tEuros 1,000 relating to recognition of a provision for indemnities to company of the sector;

iii) tEuros 1,141 relating to an increase in the provision for costs of abandoning the Block 1 exploration installations, of which tEuros 1,081 refers to increase in the

provision and tEuros 60 refers to exchange adjustment of the liability at 31 December 2005. This provision is to cover all the costs to be incurred by the Company at

the end of the useful production life of that petroleum area;

iv) mEuros 1,178 relating to an increase in the provision for costs of abandoning the Block 14, estimated, by application to the estimated abandonment costs, of a

coefficient calculated by the proportion of the production in each amortisation period, over the volume of proved reserves developed at the end of that period plus

production for the period. Of the amount of tEuros 1,178, tEuros 726 refers to increase in the provision and tEuros 452 refers to exchange adjustment of the liability

at 31 December 2005;

v) tEuros 450 corresponding to costs resulting from solid waste of the Sines Refinery;

vi) tEuros 735 corresponding to the estimated provision for service stations revamping;

vii) tEuros 100 relating to the recognition of a provision for decontamination of the Sá Carneiro Airport soil.

Increase in provisions - asset impairment:

The increase of tEuros 8,369 in the provision for asset impairment refers to impairment losses relating to the assets of the service station network in Spain.

Transfers:

The amount of tEuros 6,728 corresponds essentially to transfer of tEuros 6,525 from “Provisions - Retirement benefits” to the caption “Deferred costs - Retirement

benefits”.


The amount of tEuros 3,222 corresponds to transfer from the provision for restructuring costs to the provision for pre-retirement costs, relating to the liability for

pre-retirement payments to current employees covered by the Galp Energia Group’s reorganisation process and re-dimensioning of the labour force (Note 21).

Decrease in provisions:

The decrease in provisions, totalling tEuros 66,724, is made up as follows:

The amount of tEuros 7,654 relating to the decrease in provisions was recorded by corresponding entry to: i) the extraordinary income caption “Decrease in provisions”

in the amount of tEuros 6,883 (Note 45), ii) the extraordinary income caption “Retirement benefits” in the amount of tEuros 298 (Note 45) and (iii) the income caption

“Financial income - gain on group companies” in the amount of tEuros 473 (Note 44).

The decrease of tEuros 298 in the provision for retirement benefits (Note 45) corresponds to amortisation of the amount resulting from the change in assumptions (Note

23 j)).

Utilisation of the provision for retirement benefits in the amount of tEuros 49,751 corresponds mainly contributions made to the Pension Fund and benefits paid in

the amounts of tEuros 26,235 and tEuros 14,267, respectively (Note 21), plus benefits of tEuros 8,735, tEuros 508 and tEuros 6 paid, relating to the Petrogal and GDP

Sub-Groups and other companies, respectively, not covered by the Pension Fund, namely healthcare and life insurance.

The direct utilisation of the provision for restructuring, in the amount of tEuros 4,155, includes tEuros 249 and tEuros 3,906 relating to payment, by the GDP and Petrogal

Groups, respectively, of indemnities for termination of labour contracts by mutual agreement.

Provision for equity investments

The provision for equity investments serves to cover negative shareholders’ equity of the following companies excluded from the consolidation:


By directCaption Utilisation Decrease

Provision for retirement benefits (49,751) (298)Provision for taxes (432) -Litigation in process (308) (835)Equity investments (976) (473)Restructuring (4,155) -Other provisions (3,287) (1,102)Asset impairment (161) (4,946)

(59,070) (7,654)

Companies excluded from the consolidation (Note 2):Petrogal Angola, S.A. 1,815

Associated Companies (Note 3):Central E, S.A. 2,575Energin - Sociedade de produção de electricidade e calor, S.A. 673Gásfomento Energia, S.A. 10Ecogen - Serviços de energia descentralizada, S.A. 276

5,349

Provisions - other provisions:

The balance of the caption “Provisions - provisions for other risks and charges” in the amount of tEuros 31,234 at 31 December 2005 is made up essentially as follows:

i) tEuros 7,300 to cover soil decontamination costs of some installations occupied by the company, where a decision has already been taken, due legal obligation;

ii) tEuros 5,835 relating to a provision for interest income recorded up to 2003 under a contract ceding the rights to use telecommunications infrastructures, to cover the

possible cancellation of the current contract (Note 52);

iii) tEuros 5,632 to cover the cost of abandoning the exploration installations in Blocks 1 and 14 in Angola. This provision is to cover the total costs to be incurred by Galp

Exploração at the end of the useful production life of those oil fields. The provision for costs of abandoning Block 14 is estimated by applying, to the total estimated

abandonment cost, a coefficient corresponding to the proportion of the volume of production in each amortisation period, to the volume of proven developed reserves

at the end of that period plus production for the period;

iv) tEuros 3,737 to cover costs of discharging effluents by the Sines Refinery (Nota 62);

v) tEuros 3,677 to cover the effect of adjustments to taxable income subject to Corporate Income Tax (Nota 51);

vi) tEuros 1,344 relating to a provision to cover estimated losses of means of payment of the Spanish network;

vii) tEuros 1,000 relating to a provision to cover indemnities payable to a company of the sector.

Provisions for other risks and charges - Asset impairment:

The balance of the caption “Provision for asset impairment” in the amount of tEuros 19,781 is to cover potential losses on the service stations in Spain.

Provision for litigation in process:

The amount of tEuros 21,336 in the caption “Provision for litigation in process” includes tEuros 9,566 relating to processes regarding subsoil occupation rates (Note 59).

Provision for restructuring:

The Provision for Restructuring costs, in the amount of tEuros 13,353, is to cover costs being incurred by the Group to improve its performance and operating costs and

maintain its competitiveness in relation to the market. This process, started in prior years, includes not only a reduction in operating costs in the short term, but also

optimisation of the organisation structures, improvement of the systems, processes and practices and rationalisation of the operating assets. At 31 December 2005 this

restructuring plan had already been approved and duly defined by the Boards of Directors of the respective Group companies.


2005 2004

Provision for retirement benefits:

As explained in Note 21, Petrogal has recorded, in the caption “Provisions for pensions”, the present value of its past service liability for pensions due to early retirement,

pre-retirement, Social Security of pre-retired personnel, voluntary social insurance of early retired personnel and retirement bonuses not covered by “Fundo de Pensões

Petrogal”. In addition, the GDP Group companies include, in the caption provisions for pensions, Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A.’s

liability to reimburse the retirement supplements payable by EDP to its retired personnel and pensioners relating to the Company, as well as retirement and survivor

supplements payable to retired personnel at the time of constitution of the Fund, which are not covered by the GDP Pension Fund.

The amount of the actuarial liability was calculated by a specialised entity using the assumptions and methods described in Note 21.

As mentioned in Note 23.j), at 31 December 2005 the Group had a provision to cover its past service liability for healthcare, life insurance of current personnel and the

total liability for the remaining personnel and for the defined contribution plan minimum benefit. The present value of the past service liability and the actuarial

assumptions and methods used are as follows:


Health Care Life Insurance Minimum Benefit DC Plan

Petrogal 2005 2004 2005 2004 2005

Technical interest rate 4.25% 4.75% 4.25% 4.75% 4.25%Rate of increase of costs 4.00% 4.00% 3.00% 4.00% 3.00%Current and pre-retired employee mortality table TV 88/90 TV 73/77 TV 88/90 TV 73/77 TV 88/90Retired personnel mortality table TV 73/77 TV 73/77 TV 73/77 TV 73/77 TV 73/77Incapacity table EVK 80-50% EVK 80-50% EVK 80-50% EVK 80-50% EVK 80-50%Normal retirement age 65 65 65 65 65

Method Projected Unit Credit Method Projected Unit Credit Method

Liability and corresponding coverage:i) Healthcare:

Total liability: 198,377 173,970

Coverage:By provisions 113,251 97,886Change in assumptions and methodology (Note 23 j)) - 903Unrecognised (gain) and loss (Note 23.i)) 85,126 75,181

198,377 173,970

ii) Life insurance:


Coverage:By provisions 1,208 990Change in assumptions and methodology (Note 23 j)) - (15)Unrecognised (gain) and loss (Note 23.i)) 1,075 937

2,283 1,912

iii) CD plan minimum benefit:

Total liability: 680 -

Coverage:By provisions 855 -Unrecognised (gain) and loss (Note 23.i)) (175) -

Total 680 -

2005 2004



GDP 2005 2004 2005 2004 2005





Coverage:By provisions 7,903 7,259Change in assumptions and methodology (Note 23 j)) - (278)Unrecognised (gain) and loss (Note 23.i)) 4,170 4,606

12,073 11,587

ii) Life Insurance:


Coverage:By provisions 208 127Change in assumptions and methodology (Note 23 j)) - 46Unrecognised (gain) and loss (Note 23.i)) 112 44

320 217




Total 152 -

2005 2004



Others 2005 2004 2005 2004 2005






357 368

ii) Life insurance:



117 68




Total 450 -

Evolution in 2005 of the liability for healthcare and life insurance of Petrogal, companies of the GDP Group and other Group companies was as follows:

CD PlanPetrogal Healthcare Life Insurance Minimum Benefit Total

Total liability at 31 December 2004 173,970 1,912 - 175,882Current service cost 2,170 59 820 3,049Interest cost 8,048 88 35 8,171Benefits paid in the year (8,653) (82) - (8,735)Actuarial (gain)/loss for the year 22,842 306 (175) 22,973

Total liability at 31 December 2005 198,377 2,283 680 201,340

COSTS FOR THE YEAR 2005Interest and current service cost 10,218 147 855 11,220Amortisation of the corridor excess 12,898 167 - 13,065Amortisation of the change in assumptions 903 (15) - 888

24,019 299 855 25,173

The current service and interest cost, totalling tEuros 12,774, was recorded by the above mentioned companies in the consolidated statement of profit and loss caption

“Personnel costs”.

The increase of tEuros 4,549 and the decrease of tEuros 1,743 in the liability, resulting from updating the financial and demographic assumptions in 2001 were recognised

in the financial statements as explained in Note 23.j). In 2005, tEuros 988 and tEuros 293, relating to partial amortisation of these amounts, were recognised in

consolidated extraordinary expenses and income, respectively (Note 45).

As explained in Note 23.i), only the part of the actuarial gains and losses that exceeds the limits defined for the “corridor” are recorded in the financial statements, these

being amortised as from the year subsequent to that in which they are determined, as explained below.

As a result of the excess of the “corridor” at 31 December 2005, tEuros 13,777 relating to amortisation for the year was recorded in “Personnel costs”.


CD PlanGDP Group Healthcare Life Insurance Minimum Benefit Total

Total liability at 31 December 2004 11,587 216 - 11,803Current service cost 199 22 194 415Interest cost 532 10 9 551Benefits paid in the year (506) (2) - (508)Actuarial (gain)/loss for the year 261 74 (51) 284

Total liability at 31 December 2005 12,073 320 151 12,545

COSTS FOR THE YEAR 2005Interest and current service cost 731 32 203 966Amortisation of the corridor excess 697 6 - 703Amortisation of the change in assumptions (278) 46 - (232)

1,150 84 203 1,437

CD PlanOthers Healthcare Life Insurance Minimum Benefit Total

Total liability at 31 December 2004 368 68 - 436Current service cost 37 23 490 550Interest cost 17 3 18 38Benefits paid in the year (6) - - (6)Actuarial (gain)/loss for the year (59) 23 (58) (94)

Total liability at 31 December 2005 357 116 450 924

COSTS FOR THE YEAR 2005Interest and current service cost 54 26 508 588Amortisation of the corridor excess 8 1 - 9Amortisation of the change in assumptions 33 6 - 39

96 34 508 636

The following table shows, by benefit plan, the liability included in the “corridor” mechanism, and the limits thereof:

The excess of the “corridor”, in the amount of tEuros 69,247, relating to the liability for healthcare, life insurance and defined contribution plan minimum benefit, will be

recognised as a cost in future years based on the average expected period of service of the employees covered by the plans (Petrogal 4.28; Gásfomento 24.08; Lisboagás

5.12; Beiragás 26.80; Galp Energia 26.94 for life isurance, 21.68 for health insurance; Galp Power 25.96; Galp Serviços 29.98; GDP Distribuição 14.53; Lusitâniagas 27.65;

Petrogal Exploração 32.44; Transgás 22.48 and Transgás Atlântico 30.98). Consequently, costs, net of income, in the amount of tEuros 16,048, resulting from amortisation

of the excess of the “corridor”, will be recognised in 2006.

:: 47. Finance Leasing ::

As mentioned in Note 23.c), the Group records fixed assets acquired under finance lease contracts in accordance with the financial method. At 31 December 2005 the

Group had liabilities as lessee for lease instalments not yet due amounting to tEuros 878, of which tEuros 833 is a long-term liability.


Unrecognised “Corridor” Excess of the Amount to beBenefits (Gain) and Loss Interval (10%) “Corridor” Interval Recognised in 2006

Petrogal GroupHealthcare 85,124 19,838 65,286 15,254Life insurance 1,076 228 848 198CD plan minimum benefit (175) 68 (107) (5)

86,025 20,134 66,027 15,447

GDP GroupHealthcare 4,170 1,207 3,063 585Life insurance 112 32 81 13CD plan minimum benefit (51) 15 (36) (2)

4,231 1,254 3,108 596

OthersHealthcare 116 36 81 4Life insurance 47 12 35 1CD plan minimum benefit (58) 75 (4) -

105 123 112 5

90,362 21,511 69,247 16,048

Investment subsidies received in 2005 amounted to tEuros 71,691.

These subsidies are being recognised in the consolidated statement of profit and loss over the period of useful life of the corresponding fixed assets. During 2005 the

amount of tEuros 30,835 (Note 45) was recognised, of which tEuros 8,664 (Note 53) refers to the desulphurisation projects in the Sines and Porto refineries.

The amount of tEuros 53,812 includes tEuros 49,820, recorded in the caption “Other debtors”, receivable from the Portuguese Government for desulphurisation of the

Sines and Porto refineries, and tEuros 3,992 relating to subsidies receivable relating to natural gas network expansion incentive programs (Note 52).


Program GDP Petrogal Others 2005 2004

RegenAmount received 79,361 - - 79,361 79,361

79,361 - - 79,361 79,361

Energy programAmount received 163,530 - - 163,530 163,126

163,530 - - 163,530 163,126

Interreg IIAmount received 143,069 - - 143,069 129,091Amount receivable - - - - 13,999

143,069 - - 143,069 143,090

Trans-EnergyAmount received 90,490 - - 90,490 90,439Amount receivable 1,128 - - 1,128 3,969

91,618 - - 91,618 94,408

ProtedeAmount received 19,708 - - 19,708 19,708

19,708 - - 19,708 19,708

Operational Economy ProgramAmount received 231,889 - 300 232,189 202,871Amount receivable 2,864 - - 2,864 11,363

234,753 - 300 235,053 214,234

Desulphurisation of SinesAmount received - 13,203 - 13,203 -Amount receivable - 26,310 - 26,310 39,513

- 39,513 - 39,513 39,513

Desulphurisation of PortoAmount received - 11,797 - 11,797 -Amount receivable - 23,510 - 23,510 35,307

- 35,307 - 35,307 35,307

OthersAmount received - 9,592 - 9,592 6,652

- 9,592 - 9,592 6,652

Total 732,039 84,412 300 816,751 795,399

:: 49. Investment Subsidies ::

At 31 December 2005 and 2004 investment subsidies received and receivable were as follows:

:: 50. Raw, Subsidiary and Consumable Materials, and Finished and Intermediate Products ::

At 31 December 2005 and 2004 these captions were made up as follows:


2005 2004

Raw, subsidiary and consumable materials:Crude oil 68,791 91,835Other raw materials 33,244 25,231Materials in transit 84,329 86,420

186,364 203,486Adjustment to the amount of inventories (Note 32) (5,569) (6,733)

180,795 196,753

Finished and semi finished goods:Finished goods 247,992 237,190Semi finished goods 128,395 109,534Finished goods in transit 16,527 721

392,914 347,445Adjustment to the amount of inventories (Note 32) (3) (1,311)

392,911 346,134

Work in process 327 45Merchandise 187,588 134,196

Adjustment to the amount of inventories (Note 32) (184) (416)

187,404 133,780Advances on account of purchases 4,828 3

766,265 676,715

The caption “Merchandise” at 31 December 2005, in the amount of tEuros 187,588, corresponds essentially to natural gas in the pipeline and inventory of the subsidiary

Galp Energia España, S.A..

Inventories on consignment at 31 December 2005 (including ISP) consisted essentially of finished goods amounting to tEuros 22,621.

At 31 December 2005 the Group’s liabilities to other oil companies for the constitution of oil reserves, which can only be paid by the delivery of products, amounted to

tEuros 330,595 and are reflected in the caption “Advances on account of sales”.

In November 2004, Petrogal and Petrogal Trading Limited, under Decree-law 339-D/2001 of 28 December, entered into a crude acquisition, sale and exchange contract

with the “Entidade Gestora de Reservas Estratégicas de Produtos Petroliferos, EPE” (“EGREP”) for finished goods for the constitution of strategic reserves.

Under the contract entered into in 2004 the crude acquired by EGREP was stored, in a non segregated form, in Petrogal’s installations, where it should remain so that

EGREP can audit it in terms of quantity and quality, whenever it so wishes.

In accordance with the contract Petrogal must, when so required by EGREP, exchange the crude sold for finished products, receiving in exchange an amount representing

the refining margin as of the date of exchange.

:: 51. State and Other Public Entities ::

At 31 December 2005 and 2004 the balances with these entities were as follows:

The tax on petroleum products payable relates essentially to tax on products shipped during the month of December.

Income tax for the year ended 31 December 2005 included in the consolidated statement of profit and loss is made up as follows:

As from 31 December 2001, Galp Energia, and some of its subsidiaries, became subject to corporate income tax under the special regime applicable to groups of

companies, taxable income being determined in Galp Energia. However, estimated income tax of Galp and its subsidiaries is recorded based on their taxable results.

The following could affect income tax payable in the future:

i) In accordance with applicable Portuguese legislation, corporate income tax returns are subject to review and correction by the tax authorities for a period of four years

(Social Security can be reviewed over a period of 10 years up to 31 December 2000, inclusive and five years as from 2001), except when there are tax losses, tax

benefits have been granted or there is litigation in progress where, depending on the circumstances, the period can be extended or suspended. In 2001, the tax

authorities reviewed Petrogal’s tax returns for the years 1997 to 1999, their proposed corrections to these tax returns being summarised in paragraph ii) below. In

addition, in 2004 Petrogal’s tax returns for the years 2000 to 2002 were inspected by the tax authorities, their proposed corrections being summarised in paragraph

(iii) below. The Group’s tax returns for the years 2002 to 2005 are still subject to review. Galp’s Board of Directors believes that possible corrections arising from

inspections by the tax authorities of these tax returns will not have a significant impact on the financial statements as of 31 December 2005. Social Security is subject

to review during a period of ten year up to 31 December 2000, inclusive and five years as from 2001;


Receivables Payables2005 2004 2005 2004

Value Added Tax 12,999 12,099 139,405 134,085ISP - Tax on petroleum products - - 172,230 170,525Personal and Corporate Income Tax Withheld - - 6,643 4,147Social Security contributions 6 - 4,112 3,918Corporate Income Tax 1,667 456 51,638 48,514Others 131 144 90 66

14,803 12,699 374,118 361,255

Estimated DeferredTax Tax Total

Petrogal Sub-Group 87,386 (16,482) 70,904GDP Sub-Group 52,190 575 52,765Others (320) (114) (434)

Total 139,256 (16,021) 123,235

ii) As mentioned in paragraph i) above, in 2001 the corporate income tax returns for the years 1997, 1998 and 1999 were inspected by the tax authorities, which resulted

in proposed additional assessments of tEuros 68, tEuros 429 and tEuros 3,361, respectively, communicated to Petrogal. As Petrogal does not agree with the proposed

additional assessments, it contested those for the years 1998 and 1999. Petrogal’s management believes that the bases presented in the appeals are valid and the

Company’s position is fair. Consequently, the financial statements as of 31 December 2005 do not include any provision for these contingencies;

iii) As mentioned in paragraph i) above, in 2004 the corporate income tax returns for the years 2000, 2001 and 2002 were inspected by the tax authorities, which resulted

in proposed additional assessments communicated to Petrogal of tEuros 740, tEuros 10,806 and tEuros 2,479, respectively, and which to date have resulted in an

actual additional income tax assessment of tEuros 11,865 (of which tEuros 8,371 was paid in January 2006) which has been fully paid. However, to date Petrogal is

still waiting for the actual additional income assessments relating to the other above mentioned proposed assessments. Therefore, based on the accounting principle

of prudence, Petrogal has recorded a provision to cover the additional assessments resulting from the above mentioned proposals in the amount of tEuros 3,677 (Note

46). In addition, in 2005 Petrogal recorded an accrual of tEuros 1,261 for compensating interest. As it disagrees with some of the additional assessments, Petrogal

will appeal against them;

iv) As 40% of the depreciation of the revaluation of fixed assets recorded by Petrogal is not deductible for corporate income tax purposes, taxable income for 2005 and

future years will be increased by tEuros 4,243 and tEuros 15,029, respectively. However, the tax effect resulting from this has been recognised through the recording

of deferred taxes, as mentioned in paragraph vii) below;

v) During the year ended in 31 December 2005 Petrogal made a contribution of tEuros 23,770 to the Pension Fund. In accordance with Portuguese legislation, when the

amount of the contribution to the Pension Fund recognised in the statement of profit and loss or resulting from a negative change in shareholders’ equity, plus the

amount of other social payments, comply with the limits/conditions of Portuguese Corporate Income Tax Code, no correction will be made to taxable income.

In the year ended 31 December 2005 Petrogal included, for purposes of the limits/conditions of the Corporate Income Tax Code, the amount of tEuros 17,245

corresponding to the part of the above mentioned contribution recognised as a cost for 2005, which resulted in increase in taxable income of tEuros 11,388;

vi) In accordance with current legislation gains and losses resulting from the recognition of the results of subsidiaries and associated companies through application of

the equity method are not considered as income or expenses for Corporate Income Tax purposes in the year they are recognised for accounting purposes, dividends

being taxed in the year they are attributed. In conformity with Portuguese Accounting Directive 28, deferred tax liabilities relating to undistributed profits of the

subsidiaries have not been recorded;


vii) Corporate Income Tax recorded as an expense for the year ended in 31 December 2005 has been adjusted for the effect of deferred taxes in accordance with the

Portuguese Accounting Directive 28. At 31 December 2005 there were temporary differences that resulted in deferred tax assets and liabilities recorded by the Group,

as follows:


GDP PetrogalSub-Group Sub-Group Others Total

Deferred Tax assets:Relating to prior years:Relating to provisions, adjustments and cost estimates recorded in prior years and nottax deductible in those years 8,816 84,532 (18) 93 330Tax losses carried forward from previous years 880 4,506 (1) 5,385Changes in the amortisation rates of rights of transport natural gas 1,272 - - 1,272Others - 3,304 69 3,373

Sub-total 10,968 92,342 50 103,360

Relating to the year:Relating to provisions, adjustments and cost estimates recorded in the year and nottax deductible in the year, net of utilisation and decreases in 2005 154 10,159 169 10,482Tax losses carried forward net of amounts utilised during the year - 3,060 - 3,060Adjustment of deferred taxes of prior years (1) - 15 14Others (978) 1,780 90 892

(825) 14,999 274 14,448

Total deferred tax assets (Note 53) 10,143 107,341 324 117,808

Deferred tax liabilities:Relating to prior years:Revaluation of tangible fixed assets 1,921 5,391 - 7,312Non taxed gains of prior years 1,113 - - 1,113Deferral in accordance with the “corridor” mechanism of the contribution for 2002 not recognised in the statement of profit and loss - 5,500 - 5,500Increase in the liability of the pension fund - (439) - (439)Others - 1,397 1 1,398

Sub-total 3,034 11,849 1 14,884

Relating to the year:Depreciation for the year of the revaluation of tangible fixed assets (220) (1,167) (1) (1,388)Others (30) (157) - (187)

(250) (1,324) (1) (1,575)

Total deferred tax liabilities (Note 53) 2,784 10,525 - 13,309

:: 52. Other Debtors and Creditors ::


Under the “Shareholders’ Agreement between the State and Petrocontrol regarding compensation due to Petrogal”, dated 21 December 1998, Petrogal had the right to

receive tEuros 49,820 from the Ministry of the Economy at 31 December 2005. This amount is to subsidise the investments made by Petrogal relating to desulphurisation

of diesel fuel in the Oporto and Sines refineries. This receivable was recorded by corresponding entry in the caption “Deferred income - subsidies for investment in fixed

assets” (Note 53).

The amount of tEuros 25,002 receivable from EDP includes tEuros 17,984 corresponding exercise in 2003 of the put option right relating to the sale of 217,055 Oni S.G.P.S.,

S.A. shares, for the amount of tEuros 14,964 plus interest of tEuros 3,020. This account receivable also includes tEuros 7,018 corresponding to the net balance of credits

relating to collections of electricity invoices by the GDP Group on account of EDP and the collection of gas invoices by EDP on account of the GDP Group.

The caption means of payment in the amount of tEuros 11,547 corresponds to amounts receivable for sales by visa/multibanco cards which at 31 December 2005 were

pending collection.


2005 2004

Short Term Medium and Long Term Short Term Medium and Long Term

Other Debtors:The Portuguese State (Note 49) 49,820 - 74,820 -The EDP Group - Energias de Portugal, S.A. 25,002 - 20,542 -Means of payment 11,547 - 8,527 -Group and associated companies 6,833 - 8,831 -Contract ceding the rights to use telecommunications infrastructures 7,162 21,485 7,162 28,647Loan to Sonangol under the Block 14 production contract 4,856 - 4,227 -Subsidies receivable (Note 49) 3,992 - 29,360 -Tax on petroleum products 3,236 - - -Personnel 2,868 - 4,075 66Pension fund payment recovery 2,060 - 1,191 -Petrobrás consortium 1,847 - - -Fundo Regional de Abastecimento dos Açores 1,220 - 912 -Judi Serviços 998 - 999 -Debit balances of suppliers 784 - 4,316 -Public entities 715 - 435 -Spanish tax agency 675 - - -Guarantee deposits and pledges 277 - 341 458Loans to clients - 2,890 - 2,344Cross selling promotion between Galp and Sonae points - - 2,357 -A.C.Cymbron, Lda. - Payment for the acquisition of shares - - 858 -Others 16,799 929 17,929 788

140,691 25,304 186,882 32,303

Ajustment to doubtful debtors (Note 32) (3,703) - (3,514) -

136,988 25,304 183,368 32,303

Other Creditors:Guarantee deposits and guarantees received 13,779 699 13,116 1,989Indemnities payable to EDP 3,500 - 3,500 -Personnel 1,493 - 4,170 -Credit balances of clients 1,415 - 6,822 -Accounts payable to the partners of Block 14 in Angola 996 - - -Accounts payable for the subscription of capital 551 - 196 -Accounts payable to the partners of Block 1 in Angola 487 - -Acquisition of shares Sacor Maritima, S.A. 398 - 408 -Retained Guarantees 122 - 211 -Prepayments on account of strategic reserves - - 15,000 -Others 14,878 2,428 17,219 2,165

37,619 3,127 60,642 4,154

The amount of tEuros 6,833 under the caption “Other debtors - Group and associated companies” relates to companies not consolidated in accordance with the full

consolidation method and includes essentially accounts receivable of tEuros 3,567 and tEuros 1,574 from EMPL -Europe Maghreb Pipeline, Ltd and Tagusgás - Empresa

de Gás do Vale do Tejo, S.A..

The amount receivable, relating to the Contract Ceding the Rights to Use Telecommunications Infrastructures entered into on 1 July 1999 for a 20 year period, is receivable

in successive equal annual instalments of tEuros 7,162 up to 31 July 2009, each instalment being increased by interest at market rates. Income resulting from this contract

is recorded in deferred income and recognised in the statement of profit and loss on a straight-line basis over the period of the contract, which ends on 1 June 2019.

During the year ended 31 December 2005 income of tEuros 497 was recognised (of which tEuros 149 corresponds to interest). During this and the preceding year the

subsidiary Transgás - Sociedade Portuguesa de Gás Natural, S.A. did not recognise any income and a provision of tEuros 5,835 was recorded for interest income recognised

in prior years (Note 46). The balance of deferred income at 31 December 2005, to be recognised in future years, amounts to tEuros 71,992 (Note 53).

The loan of tEuros 4,856 to Sonangol results from an agreement made with all the members of the Block 14 Joint Venture. The loan is being repaid by appropriation by

Galp Exploração of the part of the oil production of Block 14, corresponding to Sonangol.

The amount of tEuros 3,992 reflected in the caption “Subsidies receivable” corresponds to subsidies relating to natural gas network expansion programs.

The caption “Other debtors - Pension fund payment recovery” in the amount of tEuros 2,060 corresponds to amounts receivable from BPI Pensões relating to the amount

of pensions processed in December and not yet reimbursed.

The amount of tEuros 1,847 relating to the Petrobrás Consortium corresponds to co-participation in the costs of that entity in the Blocks in which Petrogal Brasil is operator.

The account receivable from Fundo Regional de Abastecimento dos Açores corresponds to compensation receivable by Galp Açores under agreements entered into with

that entity to sell fuel at a price specified by the Autonomous Government of that region.

The amount of tEuros 13,779 reflected in the liability caption “Guarantee deposits and guarantees received” includes tEuros 11,964 relating to Petrogal’s responsibility at

31 December 2005 for guarantees received for ceding gas bottles.

The amount of tEuros 3,500 reflected in the caption “Other creditors” relates to the indemnity agreed in 1988/1989 between EDP- Electricidade de Portugal, S.A. and

PGP - Petroquimica e Gás de Portugal (GDP’s predecessor), in the case of selling the Cabo Ruivo land subsequently, which in the meantime was ceded by EDP to PGP.

This land, which was sold in prior years, was part of Cabo Ruivo - Sociedade de Gestão de Instalações de Equipamentos, S.A.’s assets, Lisboagás GDL - Sociedade

Distribuidora de Gás Natural de Lisboa, S.A. having assumed this responsibility as a result of its merger with the company Cabo Ruivo effective as of 1 January 2003.

The caption “Accounts payable for the subscription of capital” in the amount of tEuros 551 at 31 December 2005 corresponds to the unpaid capital subscribed for by

Petrogal in Galp Serviexpress - Serviços de Distribuição e Comercialização de Produtos Petrolíferos, S.A. , Petrogal Angola, Lda , Fast Access - Operações e Serviços de

Informação e Comércio Electrónico, S.A, and Petrogal Trading Limited in the amounts of tEuros 197, tEuros 1, tEuros 220 and tEuros 127, respectively. The remaining

amount of tEuros 6 is due to Galp Serviços’ unpaid participation in the subscribed capital of Galp Exploração Serviços do Brasil, Lda..

The amount of tEuros 14,756 in the caption “Other creditors” includes tEuros 5,013 relating to the sale of properties in Bairro da Bobadela, the deeds not yet having been

signed.

The amount of tEuros 2,428 in the medium and long term caption “Other creditors - Others” includes tEuros 1,486 relating to notes payable.


:: 53. Accruals and Deferrals ::

The balance of these captions at 31 December 2005 and 2004 is made up as follows:


2005 2004

Accrued income:Estimated sales of gas not yet invoiced 73,618 53,872Services rendered to be invoiced 10,991 4,561Accrued interest 5,629 7,668Sale of finished goods by the service stations to be invoiced 4,010 3,951Crude petroleum sold and not invoiced - Block 14 - 2,956Petroleum swap Block 14 1,486 -Trade discount receivable on purchases made in 2004 1,446 1,299Other accued income 807 1,614

97,987 75,921

Deferred costs:Deferred tax assets (Note 51) 117,808 103,360Costs relating to service station concession contracts 59,960 62,599Retirement benefits (Notes 21) 65,762 59,097Capitalised pre-production costs (Note 23.o)) 40,165 37,792Interest, exchange loss and other financial costs 4,704 4,612Catalyser costs 4,615 3,846Prepaid paper market premiums 416 3,314Prepaid rent 1,617 1,592Personnel costs 3 1,066Multi-annual costs - maintenance of equipment - 806Deferred insurance 5,401 635Other deferred costs 8,752 3,635

309,203 282,354

Accrued costs:Vacation pay, vacation subsidy and corresponding personnel costs 24,353 25,364Personnel costs - Productivity bonus 11,042 17,565Deferred tax liabilities (Note 51) 13,309 14,884Supplies and services 13,908 8,319Major overhaul - Porto Refinery 5,078 5,523Major overhaul - Sines Refinery 7,255 4,740Major overhaul - Tanks 1,025 1,864Accrued interest 2,983 3,970Discounts, bonuses and volume discounts on sales 6,539 3,129Financial expenses 2,247 2,297Liability for prizes under the Fast GALP cards 5,675 1,238Estimated Tax on Petroleum Income - Block 14 - 361Crude petroleum swap Block 14 1,825 -Charges with purchases and sales - 183Accrued insurance 543 153Accrued remuneration 1,220 52Galp Frota commission 10 13Other accrued costs 7,724 3,978

104,736 93,633

Deferred income:Subsidies for investment in fixed assets 644,262 653,719 Cession of fibre optic capacity (Note 52) 71,992 72,340 Amounts received from clients 9,467 8,779 Differences on the acquisition of equity investments (Note 10) 7,252 7,634 Deferred income on service rendered 5,702 315 Other deferred income 4,633 1,607

743,308 744,394

The caption “Accrued income - estimated sales of gas not yet invoiced” refers essentially to invoices of natural gas consumed, to be issued in the following month.

The amount of tEuros 5,629 reflected in the caption “Accrued income - accrued interest”, includes tEuros 5,439 relating to interest to be invoiced to E3G -

Telecomunicações, S.A. for ceding the right to use infrastructures.

The amount of tEuros 4,010 in the caption “Sale of finished goods by the service stations to be invoiced” relates to amounts purchased in 2005 through Galp Frota cards

to be invoiced in 2006.

The accrued income and accrued costs relating to commodity swaps are to hedge transactions carried out in December 2005, for which the financial flows will be realised

in January 2006. These operations were realised to smooth the price of Brent on sales transactions from Block 14 in 2006 and, as they are swaps indexed to the monthly

price of Brent, they generate real transactions monthly, the cost/income having to be recognised in the month to which the hedge relates.

Deferred costs relating to contracts for the concession of service stations are amortised over the period of the concessions, which varies from 20 to 25 years.

The amount of tEuros 40,165 recorded in the caption “Deferred costs - capitalised pre-production costs”, includes tEuros 13,558 relating to costs incurred by the subsidiary

Petrogal Brasil in its petroleum exploration and production activity, which is in a pre-operating phase and tEuros 26,604 relating to GDP Group companies, which

capitalised overhead costs up to the start-up of operations (Note 23 o)).

The amount of tEuros 4,704 recorded in the caption “Interest, exchange loss and other financial costs”, includes tEuros 1,087 relating to the initial costs incurred on the

accounts receivable securitisation operation realised in 2003, which are being amortised over the period of the operation.

The amount of tEuros 416 reflected in the deferred costs caption “Prepaid paper market premiums” refers to premiums on options over commodities paid in 2005 to

hedge transactions to be made in 2006..

The accrued costs caption “Supplies and services” at 31 December 2005 and 2004 corresponds to the accrual of several costs for which the Group had not yet received

the corresponding invoices at those dates.

As explained in Note 23.b) Petrogal accrues multi-annual recurring repair and maintenance costs over the period between two repairs, the accrual relating to each period

being recorded as an expense by credit to accrued costs. Therefore in the years ended 31 December 2005 and 2004 Petrogal recorded costs of tEuros 9,636 and tEuros

9,280 relating to the estimated cost of repairs in the Sines and Oporto refineries.

The amount of tEuros 5,675 corresponds to Petrogal’s liability for the points issued in 2005 relating to “Fast Galp” cards, which are expected to be exchanged for prizes

in the following years.

As explained in Note 52, in 1998 Petrogal recorded tEuros 74,820 regarding the subsidy receivable from the Portuguese Government for investment in the

desulphurisation of diesel fuel in the Sines refinery (which started operating in 1997) and the Porto refinery (which started operating in 1998). Consequently in 2005

Petrogal recorded income of tEuros 8,664 (Note 49) regarding fuel hydrodesulphurisation in those refineries. At 31 December 2005 the balance of the caption “Deferred

income - Subsidies for investment in fixed assets” was tEuros 23,497.

The amount of tEuros 9,467 reflected in deferred income corresponds to co-participation received by the Group from clients for the construction of specific natural gas

branch pipelines and is being recognised as income over the period of the concession.


:: 54. Minority Interest ::

At 31 December 2005 and 2004 the liability caption “Minority interest” refers to the following subsidiaries:

:: 55. Changes in Shareholders’ Equity ::

The changes in the shareholders’ equity captions in 2005 were as follows:

Profit for the year ended 31 December 2004 was distributed as follows, in accordance with a decision of the Shareholders’ General Meeting held on 24 May 2005:


2005 2004

Lusitaniagás - Companhia de Gás do Centro, S.A. 8,819 6,937Beiragás - Companhia de Gás das Beiras, S.A. 5,000 4,523Gasoduto Campo Maior - Leiria - Braga, S.A. 4,566 4,435Gasoduto Braga - Tuy, S.A. 3,360 3,392Sopor - Sociedade Distribuidora de Combustíveis, S.A. 3,030 3,080Saaga - Sociedade Açoreana de Armazenagem de Gás, S.A. 1,817 2,377Duriensegás - Sociedade Distribuidora de Gás Natural do Douro, S.A. 1,217 696Probigalp - Ligiantes Betuminosos, S.A. 914 877Carriço Cogeração Sociedade de Geração de Electricidade e Calor, S.A. 349 (52)Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A. 165 -Powercer - Sociedade de Cogeração da Vialonga, S.A. 97 12Sempre a Postos - Produtos Alimentares e Utilidades, Lda. 48 418GITE - Galp International Trading Establishment 44 38CLCM - Companhia Logística de Combustíveis da Madeira, S.A. (a) (1,605) 75Combustiveis Líquidos, Lda. (48) (52)Natgás - Companhia Portuguesa de Gás natural, S.A. - 80Galpfer - Distribuición de Lubricantes, S.L. - 45Água Solar, S.A. - (1)

27,773 26,880

(a) At 31 December 2005 this subsidiary had negative shareholders’ equity. The Board of Directors of the subsidiary made a proposal under which the existing shareholders would make a supplementary capital contribution to the company inproportion to their shareholdings and shareholders’ loans of tEuros 6,800 would be repaid in full. Consequently, the Group only recognised accumulated losses in proportion to its participation in that subsidiary, and so the minority interestbalance is debit.

Beginning Appropriation EndingBalance Increases Decreases of Profits Balance

Capital 829,251 - - - 829,251Share premium account 82,006 - - - 82,006Consolidation differences (Note 10) 81,254 - - - 81,254Adjustments in equity investments in subsidiary and associated companies (33,573) 24,139 (3,585) - (13,019)Legal reserve 40,296 - - 16,653 56,949Other reserves 27,977 - - - 27,977Retained earnings 527,076 - - 150,561 677,637Consolidated net profit for the year 333,064 441,959 - (333,064) 441,959

1,887,351 466,098 (3,585) (165,850) 2,184,014

Dividends (Note 27) 165,850Legal reserve 16,653Retained earnings 150,561

Consolidated net profit for the year 333,064

Legal reserve

In accordance with current legislation the Company must transfer a minimum of 5% of its annual net profit to a legal reserve until the reserve reaches 20% of share

capital. The legal reserve and share premium account cannot be distributed to the shareholders but may in certain circumstances be used to absorb losses after all the

other reserves have been used up.

Adjustments in equity investments in subsidiary and associated companies

The balance of this caption and the changes in 2005 correspond to the variation between years of the accumulated translation adjustments resulting from the translation

of the foreign currency financial statements of subsidiaries, as follows:

:: 56. Capital ::

At 31 December 2005 the Company’s share capital was made up of 165,850,127 shares of 5 Euros each, 8,000,000 shares being class A shares and the remaining

157,850,127 shares being class B shares. The class A shares have the following special rights:

i) Approve the election of three, four or more members of the Board of Directors, depending on whether it is composed of eleven, thirteen or more members;

ii) The right that certain decisions are not approved, against the majority of votes to which they are entitled.


Adjustments in Equity Investments in Subsidiary and Associated Companies Change Increases Decreases

Exchange differences:Petrogal Moçambique, Lda. (917) - (917)Petrogal Trading Limited 754 754 -Petrogal Brasil, Lda. 796 796 -Petrogal Angola, Lda. (329) a) - (329)EMPL, LTD. 5,813 b) 5,813 -Metragaz, S.A. 32 b) 32 -

6,149 7,395 (1,246)

Other changes in shareholders’ equity:Subsidiaries of Galp Exploração e Produção Petrolífera, Lda. 163 163 -Empresa Nacional de Combustíveis - Enacol, S.A.R.L. (6) b) - (6)Petrogal Angola, Lda. (2,212) a) - (2,212)Tagus Re, S.A. 16,227 c) 16,227 -Galp Exploração Serviços do Brasil, Lda 355 a) 355 -Others (122) - (122)

14,405 16,745 (2,340)

20,554 24,140 (3,586)

a) Companies excluded from the consolidation (Note 2)b) Associated companies (Note 3)c) This amount results from the inclusion of Galp Energia for the first time in the consolidation perimeter.

:: 57. Shareholders ::

At 31 December 2005 the Company’s fully subscribed and paid up share capital was held as follows:

In the year ended 31 December 2005 the shareholder Parpública - Participações Públicas, S.G.P.S., S.A. acquired, from the State, 13,373,134 shares of Galp Energia,

becoming holder of 20,388,309 shares representing 12.29% of the share capital (Introductory Note).

:: 58. Petroleum Reserves ::

At 31 December 2005 the proven and developed crude oil reserves relating to the Company’s oil exploration operations were located in Angola, the Group’s share

amounting to 6,997 thousand barrels.

In the year ended 31 December 2005 production relating to the Company totalled 1,551 thousand barrels.

:: 59. Contingent Liabilities ::

At 31 December 2005, the Group had the following contingent liabilities:

i) At 31 December 2005 the Company had a contingent liability relating to a court action regarding the re-privatisation process of Driftal - Plastificantes de Portugal, S.A.

involving an indemnity request of tEuros 19.952. Galp’s Board of Directors, supported by its lawyer’s opinion, believes that the Group will not incur any costs as a result

of this process and so no provision has been recorded for this matter. However a bank guarantee of that amount has been given (Note 22);

ii) The Municipal Council of Lisbon is demanding from the subsidiary Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. the payment of tEuros 1,891

for 1994/95, tEuros 1,016 for 1996, tEuros 1,044 for 1997, tEuros 1,069 for 1998, tEuros 1,093 for 1999, tEuros 1,145 for 2001, tEuros 1,189 for 2002, tEuros 1,238

for 2003 and tEuros 1,288 for 2004 relating to licences for occupying the public thoroughfare with underground gas pipes;

iii) The Municipal Council of Vila Franca de Xira is demanding from Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. the payment of tEuros 104 for

1994/95, tEuros 71 for 2002, tEuros 77 for 2003 and tEuros 216 for 2005 relating to rates for occupying the subsoil in those years;

iv) The Municipal Council of Oeiras is demanding from Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. the payment of tEuros 23 for 1998 and

tEuros 26 for 2001 relating to rates for occupying the subsoil in those years;


Eni Portugal Investment, SpA 33.34%Portuguese State 17.72%REN - Rede Eléctrica Nacional, S.A. 18.30%EDP - Energias de Portugal, S.A. 14.27%Parpública - Participações Públicas, S.G.P.S., S.A. 12.29%Iberdrola, S.A. 4.00%Portgás - Sociedade de Produção e Distribuição de Gás, S.A. 0.04%Setgás - Sociedade de Produção e Distribuição de Gás, S.A. 0.04%

100.00%

v) The Municipal Council of Sintra is demanding from Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. the payment of tEuros 10 for 1998, tEuros

553 for 1999, tEuros 276 for 2000, tEuros 469 for 2002, tEuros 490 for 2003, tEuros 545 from 2004 and tEuros 607 for 2005, relating to rates for occupying the subsoil;

vi) The Municipal Council of Cascais is demanding from Lisboagás GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. the payment of tEuros 403 relating to rates

for occupying the subsoil in 2001.

Lisboagás, GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A., based on legal opinions, decided to legally contest in the Tax Court, the payments demanded by

the Municipal Councils. The requests for suspension of execution have been granted and execution is suspended until the case is judged.

The Company’s Board of Directors believes that as a result of these processes Lisboagás, GDL - Sociedade Distribuidora de Gás Natural de Lisboa, S.A. will only be required

to pay a maximum of tEuros 9,566 (Note 46).

:: 60. Cash and Cash Equivalents ::

Cash and cash equivalents at 31 December 2005 and 2004 is made up as follows:

The beginning balance of cash and cash equivalents has a difference of tEuros 9,859 in relation to the 31 December 2004 balance, due to the inclusion in the consolidation

perimeter of Tagus RE, S.A., Gasinsular - Combustíveis do Atlântico, S.A. and Fast Access - Operações e Serviços de Informação e Comércio Electrónico, S.A. (Note 1).

The caption “Other treasury applications” corresponds essentially to the application of excess cash of the Group companies Gasoduto de Campo Maior-Leiria-Braga, S.A.,

Galpgeste - Gestão de Áreas de Serviço, Lda., C.L.C. - Companhia Logística de Combustíveis, S.A., Gasoduto Braga-Tuy, S.A., Powercer - Sociedade de Cogeração da

Vialonga, S.A., Galp Exploração e Produção Petrolífera, Lda., Petrogal Brasil, and Transgás - Sociedade Portuguesa de Gás Natural, S.A.. in the amounts of tEuros 6,620,

tEuros 2,800, tEuros 1,950, tEuros 1,000, tEuros 1,000, mEuros 800, mEuros 642 and 5 mEuros, respectively.


2005 2004

Cash 6,923 16,245Demand deposits 119,628 147,644Terms deposits 19,774 50,857Negotiable securities 1,235 6,492Other treasury applications 14,817 12,855

162,377 234,093Bank overdrafts (Note 34) (72,015) (176,058)

Total cash and its equivalents 90,362 58,035

:: 61. Contingent Assets ::

Following the sale in 1999 of 40% of OPTEP S.G.P.S., S.A.’s share capital, corresponding to 440,000 shares with a nominal value of Euros 5 per share, the base selling

price of tEuros 189,544 was established contractually, of which tEuros 74,818 was attributed to the 093X segment and tEuros 114,726 to the E3G/Edinet segment.

The sale by GDP, S.G.P.S., S.A. and Transgás - Sociedade Portuguesa de Gás Natural, S.A. to EDP, S.A. was established with the condition that if OPTEP S.G.P.S., S.A., 093X

or any other entity directly or indirectly controlled or participated in by EDP sells or in any other way disposes of to a third party a participation equivalent to 5% of

Optimus, that is 450,000 shares with a nominal value of Euros 5 per share, during a period of 3 years as from the date of signature of the agreement (24 June 1999),

the difference between the amount of tEuros 74,818 and the sales price would be divided between the parties, as follows:

On 28 September 2000 the parties (GDP S.G.P.S., S.A., Transgás S.G.P.S., S.A., Transgás - Sociedade Portuguesa de Gás Natural, S.A. and EDP, S.A.) made an amendment

to this agreement, under which the deadline for dividing the potential gain on the future sale of Optimus shares was extended to 31 December 2003.

On 22 March 2002 EDP announced the sale of the participation in OPTEP S.G.P.S., S.A., the company that holds a participation of 25,49% in Optimus, to Thorn Finance,

S.A.. The sales price was fixed at tEuros 315,000, which means that Thorn Finance valued Optimus at tEuros 1,235,779, therefore higher than the value established

between EDP, S.A., GDP S.G.P.S., S.A. and Transgás - Sociedade Portuguesa de Gás Natural, S.A., which was tEuros 748,197. Therefore, there will be an upside of tEuros

30,253 for the GDP Group companies, to be paid by EDP, which will be divided equally between GDP S.G.P.S., S.A. and Transgás S.G.P.S., S.A..

As EDP has not agreed to the GDP Group’s expectations, this account receivable has not been recorded.

:: 62. Information on Environmental Matters ::

The principal challenges to refining operations are compliance with the reduction of greenhouse gas emissions in the period from 2008 to 2012 defined in the Kyoto

Agreement, reduction of the proportion of sulphur in the fuel consumed in the facilities and increased energy efficiency.

Decree-Law 233/2004 of 14 December with the text given to it by 243-A/2004 of December and as amended by Decree-Law 230/2005 of 29 December established

the greenhouse gas emissions commercial regime (Diploma CELE) which applies to the industrial activity gas emissions listed on Appendix I thereof, which does not

include the Galp Energia Group’s installations.

The installations covered by Emissions Trading in the three year 2005/ 2008 period are the Sines and Porto Refineries, both of Petrogal, and the Co-generating installations

of the companies Carriço Cogeração -Sociedade de Geração de Electricidade e Calor, S.A and Powercer - Sociedade de Cogeração da Vialonga, S.A of the Galp Power

Group.

Joint Order 686-E/2005 of 13 September 2005 approved the list of existing emission trading participants and the allocation of their respective emission licences for the

2005/2008 period.


tEuros for each 220,000 Shares EDP GDP Group

Between 37,409 and 42,397 0% 100%Between 42,397 and 52,373 25% 75%More than 52,373 75% 25%

Therefore annual licences were allocated to the installations of the following companies:

The Galp Energia Group has not recognised in its financial statements the possible valuation or devaluation of these licences as it believes that a regulated market to

enable the appropriate registration and recognition of such variations does not exist.

However, if an insufficiency of licences occurs the appropriate provisions will be recorded, if that becomes appropriate. As shown above, at 31 December 2005 the licences

allocated are for less than the volume of gas emitted only in the case Powercers’ installations and there for a quantity considered to be insignificant for purposes of the

financial statements as of that date. The licences allocated to the Group at 31 December 2005 exceed the volume of gases emitted and so no provision was recorded

for the year.

In the preceding year Petrogal was notified to pay of rates established in the General Regime of Effluents of Stº André (RGESA), relating to effluents discharged by the

Sines Refinery, in the amount of tEuros 1,263. In addition Petrogal was notified to pay penalised rates for discharges, which that Regulation considers to be “prohibited”,

in the amount of tEuros 25,000. Petrogal’s Board of Directors, based on legal opinions, disagrees with the criteria used for classifying the discharges, as well as their

legality, as it considers that the rules that give rise to them are unconstitutional. Consequently, a judicial appeal against that payment and subsequent costs is in progress,

a provision of tEuros 3,37 (Note 46) having been recognised in 2004, which has been maintained and is considered to be adequate based on the regulations prior to

RGESA.

In 2005 the following quantities of greenhouse gases (Ton/CO2) were emitted by the above installations:


Ton/CO2

Company Installation Licences Allocted

Petrogal Sines Refinery 2,313,908 Porto Refinery 951,969

Petrogal Group Subtotal 3,265,877

Carriço Cogeração Co-generation 139,284 Powercer Co-generation 38,498

Galp Power Group Subtotal 177,782

Galp Energia Group Total 3,443,659

Gas Emitted Ton/CO2

Company Installation in 2005 Licences on hand

Petrogal Sines Refinery 2,063,718 2,313,908 Porto Refinery 945,319 951,969

Petrogal Group Subtotal 3,009,037 3,265,877

Powercer Co-generation 38,809 38,498 Carriço Cogeração Co-generation 112,556 139,284

Galp Power Group Subtotal 151,365 177,782

Galp Energia Group Total 3,160,402 3,443,659

Note: Pro-forma values of CO2 gas emitted, subject to environmental audit

:: 63. Subsequent Events ::

In the year ended 31 December 2005 Amorim Energia B.V. signed a contract to buy the shares of Galp Energia, S.G.P.S., S.A., held by EDP - Energias de Portugal, S.A.,

representing 14.27% of its capital, the operation also including an option to buy 18.3% of the shares held by REN - Rede Eléctrica Nacional, S.A..

In addition, in January 2006 Amorim Energia B.V. acquired from Portgás - Sociedade de Produção de Gás, S.A., its 0.4% participation in the Company’s capital.

The shareholders at 31 December 2005 (Note 57) have not been adjusted to reflect the effect of these operations as registration of the sale of the shares between the

above entities only took place in 2006.

:: 64. Discontinued Operations ::

Resolution of the Council of Ministers 169/205 of 24 October approved the national energy strategy, having the purpose, among others, of making the regulated assets

of the natural gas sector (receipt, transport and storage) autonomous, as well as the operation of their linkage with the company operating the electricity transport

network.

In the national energy strategy the Council of Ministers has proclaimed, among others, the following competitive structural framework for the electricity and gas sectors:

i) revision of the concession contract with Transgás - Sociedade Portuguesa de Gás Natural, S.A., namely sale of part of its assets and liabilities through spin-off of its

transport and storage operations and sale of Transgás Atlântico, S.A., operator of the liquid natural gas terminal, and consequent revision of the sub-concession contract

between Transgás, S.A e a Transgás Atlântico, S.A.;

ii) integration, in one company, of the electricity and natural gas transport networks, the current storage installations and of the liquid gas terminal, ensuring legal

separation between these two energy lines; and

iii) separation of the commercialisation and distribution activities, both in the case of electricity and of natural gas.

The Galp Group estimates that at 31 December 2005 the non current assets and liabilities relating to the operations to be spun off are as follows in general terms,

negotiations being in progress to determine the assets to be spun off, as well as the current assets and liabilities. Consequently the following amounts are estimates.


The sale of this business segment is expected to be realised in 2006, the price and form of the sale not having been agreed or the negotiation process concluded.

:: 65. Explanation Added for Translation ::

These financial statements are a translation of financial statements originally issued in Portuguese in accordance with generally accepted accounting principles in Portugal

and the format and disclosures required by the Official Chart of Accounts (“Plano Oficial de Contabilidade - POC”), some of which may not conform to or be required by

generally accepted accounting principles in other countries. In the event of discrepancies, the Portuguese language version prevails.


(tEuros)

Assets, Net:Fixed Assets

Tangible assets 830,000Investments 83,000Medium and long term receivables 20,000

933.000

Liability:Medium and Long Term Liabilities

Provisions 9,000Loans 309,000

318,000

Accruals and DeferralsInvestment subsidies 264,000

264,000

:: The Accountant :: :: The Board of Directors ::

• Carlos Alberto Nunes Barata • Francisco Luis Murteira Nabo

• José António Marques Gonçalves

• Giancarlo Rossi

• André Freire de Almeida Palmeiro Ribeiro

• Rui Manuel Janes Cartaxo

• João Pedro Leitão Pinheiro de Figueiredo Brito

• Fernando Manuel dos Santos Gomes

• Camillo Gloria

• Diogo Mendonça Rodrigues Tavares

• Manuel Carlos Costa da Silva

• Federico Ermoli

• Angelo Mario Taraborrelli

• Giorgio Puce

• José Rodrigues Pereira dos Penedos

• Joaquim Augusto Nunes Pina Moura

individual accounts

annual report 2005 :: individual financial statements166

balance sheets as of 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

2005 2004

Assets Notes Gross Amort., Dep. and Adjust. Net Net

FIXED ASSETS:Intangible assets:

Industrial property and other rights 8 and 10 3 (2) 1 2

3 (2) 1 2

Tangible assets:Transport equipment 10 and 15 452 (429) 23 175Administrative equipment 10 535 (481) 54 76Other tangible fixed assets 10 87 (43) 44 54

1,074 (953) 121 305

Investments:Equity investments in group companies 10 and 16 2,224,139 - 2,224,139 1,928,674Loans to group companies 10 and 16 18,013 - 18,013 20,095Equity investments in associated companies 16 - - - -Securities and other financial applications 10 and 16 115 - 115 115Other loans granted 10 90 - 90 90

2,242,357 - 2,242,357 1,948,974

CURRENT ASSETS:Current receivables:

Clients, current accounts 16 49,478 - 49,478 3,237Group companies 16 156,662 - 156,662 269,040Advances to suppliers 11 - 11 11State and other public entities 28 30 - 30 26Other debtors 49 18,651 - 18,651 18,717

224,832 - 224,832 291,031

Bank deposits and cash:Bank deposits 51 996 - 996 867Cash 51 9 - 9 8

1,005 - 1,005 875

ACCRUALS AND DEFERRALS:Accrued income 50 787 - 787 1,207Deferred costs 50 582 - 582 175

1,369 - 1,369 1,382

Total amortisation and depreciation (955)

Total adjustments

Total assets 2,470,640 (955) 2,469,685 2,242,569

The accompanying notes form an integral part of the balance sheet as of 31 December 2005.

167individual financial statements :: annual report 2005

Shareholders’ equity and liabilities Notes 2005 2004

SHAREHOLDERS’ EQUITY:Capital 36 and 40 829,251 829,251Share premium account 40 82,006 82,006Adjustments in equity investments in subsidiary and associated companies 40 68,235 47,681Reserves:

Legal reserve 40 56,949 40,296Other reserves 40 27,977 27,977

Retained earnings 40 677,637 527,076Net profit for the year 40 441,959 333,064

Total Shareholders’ Equity 2,184,014 1,887,351

LIABILITIES:PROVISIONS:

Provision for pensions 34 688 187Provision for life insurance and healthcare 34 298 182Other provisions 34 2,575 3,597

3,561 3,966

MEDIUM AND LONG TERM LIABILITIES:Bank loans 48 26,252 45,474

26,252 45,474

CURRENT LIABILITIES:Bank loans 48 26,324 28,959Suppliers, current accounts 6,222 3,234Suppliers, invoices pending - 34Group companies 16 168,164 226,770Suppliers of fixed assets, current accounts 15 21 109State and other public entities 28 47,616 40,526Other creditors 49 91 169

248,438 299,801

ACCRUALS AND DEFERRALS:Accrued costs 50 7,420 5,977

Total shareholders’ equity and liabilities 2,469,685 2,242,569


statements of profit and loss by naturefor the years ended 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

Expenses Notes 2005 2004

External supplies and services 32,969 33,891Personnel costs:

Remuneration 9,261 9,100Social charges:Pensions 34 801 286Others 2,624 12,686 2,277 11,663

Amortisation and depreciation 10 177 445

Other indirect taxes 239 250Other operating costs 302 541 213 463

(A) 46,373 46,462

Loss on group and associated companies 45 1,411 6,975

Interest and similar costs:Relating to group companies 45 3,244 2,447Others 45 15,339 19,994 9,353 18,775

(C) 66,367 65,237

Extraordinary costs 46 5,869 980

(E) 72,236 66,217

Income tax for the year 6 (117) (4,331)

(G) 72,119 61,886

Consolidated net profit for the year 441,959 333,064

514,078 394,950

The accompanying notes form an integral part of the statement of profit and loss for the year ended 31 December 2005.


Income Notes 2005 2004

Services rendered 16 20,159 19,503Supplementary income 16 43,352 8,810

(B) 63,511 28,313

Gain on group and associated companies 45 446,150 350,617

Other interest and similar income:Relating to group companies 45 3,270 5,243Other 45 812 450,232 9,500 365,360

(D) 513,743 393,673

Extraordinary income 46 335 1,277

(F) 514,078 394,950

Operating profit/(loss) (B) - (A) 17,138 (18,149)Net financial income (D-B) - (C-A) 430,238 346,585Current profit (D) - (C) 447,376 328,436Extraordinary items (5,534) 297Profit before income tax (F) - (E) 441,842 328,733Net profit for the year (F) - (G) 441,959 333,064


statements of profit and loss by functionsfor the years ended 31 december 2005 and 2004(Amounts expressed in thousands of Euros)

Notes 2005 2004

Services rendered 16 20,159 19,503Cost of services rendered (20,159) (19,503)

Gross result - -

Other operating income 39,192 10,906Distribution costs - -Administrative costs (8,361) (8,117)Other operating costs (26,694) (19,830)

Operating profit/(loss) 4,137 (17,041)

Net financial costs (7,034) 2,132Gain (loss) on subsidiary and associated companies 45 444,739 343,642Gain (loss) on other investments - -Unusual or infrequent items - -

Current profit 441,842 328,733

Income tax on current profit 6 117 4,331

Current profit after income tax 441,959 333,064

Extraordinary items - -Income tax on extraordinary items - -

Net profit 441,959 333,064

Earnings per share 2.66 2.01

The accompanying notes form an integral part of the statement of profit and loss for the year ended 31 December 2005.


statements of cash flowsfor the years ended 31 december 2005 and 2004(Amounts expresseed in thousands of Euros)

Notes 2005 2004

Operating activities:Received from clients 28,801 66,434Paid to suppliers (37,960) (22,826)Paid to personnel (11,264) (10,947)

Flows generated by operations (20,424) 32,661

(Payment)/receipt of income tax 2,048 (64,246)Other (payments)/receipts relating to operating activities (1,329) (1,754)

Flows generated before extraordinary items (19,704) (33,339)

Payments relating to extraordinary items (94) (41)

(94) (41)

Flows from operating activities (1) (19,799) (33,380)

Investment activities:Receipts relating to:

Dividends 10 264,059 -Interest and similar income 2,868 3,367Loans granted 197,109 871,221

464,037 874,588

Payments relating to:Investments 10 (4,765) (1,368)Loans granted (165,877) (603,350)

(170,642) (604,718)

Flows from investing activities (2) 293,394 269,870

Financing activities:Receipts relating to:

Loans obtained 277,150 450,287

277,150 450,287

Payments relating to:Loans obtained (316,451) (625,131)Interest and similar costs (11,001) (7,284)Dividends/profits distribution 40 (213,928) (44,923)Loans granted - -

(541,379) (677,338)

Flows from financing activities (3) (264,229) (227,051)

Variation in cash and cash equivalents (4) = (1) + (2) + (3) 9,366 9,439Effect of exchange differences (3,086) (30)Cash and cash equivalents at the beginning of the year 51 (5,347) (14,756)Cash and cash equivalents at the end of the year 51 933 (5,347)

The accompanying notes form an integral part of the statement of cash flows for the year ended 31 December 2005.

annual report 2005 :: notes to the individual financial statements172

:: 1. Introductory Note ::

The Galp Energia, S.G.P.S., S.A. (hereinafter referred to as Galp or the Company), was incorporated as a Government owned corporation under Decree-Law 137-A/99 of 22

April 1999, with the name of “Galp - Petróleos e Gás de Portugal, S.G.P.S., S. A.”, having adopted its present name of Galp Energia, S.G.P.S., S. A. on 13 September 2000.

The Company’s head office is in Lisbon and its corporate objects are the management of other companies, having as of the date of its incorporation grouped the State’s

direct participations in the following companies: Petróleos de Portugal - Petrogal, S.A.; GDP - Gás de Portugal, S.G.P.S., S.A. and Transgás - Sociedade Portuguesa de Gás

Natural, S.A..

Galp’s initial capital, in the amount of Euros 411,383,565, was fully paid up in kind by transfer of the investments held by the State in the above mentioned companies.

In September 1999 another capital increase was made by the State, after which the Company’s capital became Euros 502,164,785.

Galp’s privatisation process was started under Decree-Law 261-A/99 of 7 July, with the opening of the Company’s capital to the remaining shareholders of Petróleos de

Portugal - Petrogal, S.A. and Transgás - Sociedade Portuguesa de Gás Natural, S.A.. For this purpose a further capital increase was made, limited to them, essentially in

kind by transfer of their participations in these companies.

Therefore, at 31 December 1999 a capital increase of Euros 327,085,850 was made, subscribed for by Petrocontrol, S.G.P.S., S. A. (“Petrocontrol”), EDP - Electricidade de

Portugal, S. A. (“EDP”), Caixa Geral de Depósitos, S. A., Portgás - Sociedade de Produção e Distribuição de Gás, S. A. and Setgás - Sociedade de Produção e Distribuição

de Gás, S. A., increasing the Company’s capital to Euros 829,250,635.

On 13 July 2000, following agreements entered into on 17 January 2000, the companies ENI Portugal Investment, SpA. (“ENI”) and Iberdrola, S.A. (“Iberdrola”), defined

as strategic partners, signed Purchase and Sale of Share Contracts and Strategic Partnership Agreements with the Portuguese State, under which they acquired 11% and

4%, respectively, of Galp’s share capital. Simultaneously Petrocontrol sold all its participation in Galp, the ENI Group having acquired 22.34% and EDP 11%.

The third phase of the privatisation process was approved under Decree Law 124/2003 of 20 June. Following this Decree Law, REN - Rede Eléctrica Nacional, S.A. (REN)

acquired 18.3% of Galp’s share capital, of which 13.5% from Caixa Geral de Depósitos and the remaining 4.8% from the Portuguese State. In addition, Parpública -

Participações Públicas S.G.P.S., S.A. acquired 0.75% and 3.48% in 2003 and 2004, and in 2005 it acquired a further 8.06% of Galp’s share capital from the Portuguese

State. Galp’s shareholder structure after these operations is shown in Note 37.

In the beginning of 2006 there was a further change in the Company’s shareholder structure (Note 53).

The notes which follow are numbered as defined in the Official Chart of Accounts ("Plano Oficial de Contabilidade - POC"). The numbers not included herein are either

not applicable to the Company or not significant to the accompanying financial statements.

notes to the financial statements as of 31 december 2005(Translation of notes originally issued in Portuguese - Note 54)

(Amounts expressed in thousands of Euros - tEuros)

173notes to the individual financial statements :: annual report 2005

:: 2. Accounts Not Comparable with the Preceding Year ::

The amounts for the year ended 31 December 2004, included in the accompanying financial statements for comparative purposes, are presented in conformity with the

model resulting from the changes introduced by Decree-Law 35/2005 of 17 February.

:: 3. Basis of Presentation and Principal Accounting Policies ::

The accompanying financial statements were prepared on a going concern basis from the accounting records of the company, maintained in accordance with generally

accepted accounting principles in Portugal.

The accompanying financial statements reflect only the Company’s non consolidated accounts, prepared as required by law for approval by the Shareholders’ General

Meeting. Although the investments are recorded in accordance with the equity method, which is in accordance with generally accepted accounting principles, the financial

statements do not include the effect of a full consolidation of assets, liabilities income and expenses. The consolidated financial statements reflect the following

differences in relation to the non consolidated financial statements:

Note 16 shows financial information of the Group and associated companies.

The principal valuation criteria used in preparing the financial statements are as follows:

a) Intangible assets

Intangible assets, which consist of software utilisation licences, are amortised on a straight-line basis over a period of three years (Note 8).

b) Tangible assets

Tangible assets are recorded at cost. Depreciation is provided on a straight-line basis over the following estimated periods of useful life of the assets:

c) Financial leasing

Fixed assets acquired under finance lease contracts and the related liabilities are recorded as capital leases. Under this method the cost of the fixed assets is recorded

under tangible assets, the related liability is recorded, and the interest included in the lease instalments and depreciation of the fixed assets, calculated as explained in

Note 3.b), are recorded in the statement of profit and loss for the period to which they relate.

Increase/(Decrease)

Total assets, net 3,829,267Total liabilities (excluding minority interest) 3,801,494Total shareholders’ equity -Net profit for the year -Total income 10,997,202

Years

Transport equipment 4Administrative equipment 5 to 8Other tangible fixed assets 8

d) Investments

Investments in group and associated companies are recorded using the equity method of accounting, under which they are initially recorded at cost, which corresponds

to the amount attributed for purposes of paying up the capital in kind (Note 1), which is then increased or decreased to the amount corresponding to the proportion

owned of the net equity of these companies. The difference relating to the first application of the equity method was recorded in the shareholders’ equity caption

“Adjustments in equity investments in group and associated companies” (Note 40).

In accordance with the equity method, investments are adjusted annually by the amount corresponding to the parent company’s share in the net results of the group

and associated companies by credit or charge to the statement of profit and loss for the period (Note 45). Dividends received from these companies are recorded as

decreases in the amount of the investments.

As mentioned in line h) below, the accumulated effect of currency translation adjustments on the financial statements of subsidiaries expressed in foreign currencies is

recorded in the shareholders’ equity caption “Adjustments in equity investments in group and associated companies”.

Investments corresponding to participations of less than 20% in the capital of other companies are stated at cost in the caption “Securities and other financial

applications”.

Loans to group and associated companies are stated at their nominal value.

Estimated losses on the realisation and/or recovery of investments are recorded in the caption “Provisions for investments” (Note 34).

e) Accruals basis

Income and expenses are recorded on an accruals basis, by which income and expenses are recorded in the period to which they relate independently of when they are

received or paid. Differences between the amounts received and paid and the related income and expenses are recorded in accrual and deferral captions (Note 50).

f) Deferred taxes

Deferred taxes refer to timing differences between the amount of assets and liabilities for accounting and for tax purposes.

Deferred tax assets and liabilities are calculated and evaluated annually using the tax rates expected to be in force when the timing differences reverse.

Deferred tax assets are recorded only when there is reasonable expectation of sufficient future taxable income to use them. Timing differences underlying deferred tax

assets are reassessed at each balance sheet date, in order to recognise deferred tax assets not recorded previously, due to not fulfilling the conditions needed for them

to be recorded and/or to reduce the amounts of deferred tax assets recorded based on the current expectation of their future recovery (Note 6).


g) Healthcare, life insurance retirement benefits and CD plan minimum benefit

The costs to be incurred by the Company on healthcare and life insurance and retirement benefits relating to the former employees of GDP - Gás de Portugal, S.G.P.S.,

S.A. are recognised over the period in which the employees entitled to these benefits are work for the Company, the liability being reflected in the balance sheet caption

“Provision for healthcare and life insurance” (Note 34). Payments to the beneficiaries are recorded each year as reductions in the provisions.

When this procedure is adopted for the first time, the cost of the past service liability must be amortised on a systematic basis, in accordance with the expected average

number of working years of the employees taking part in the plan, as from the beginning of the recording of those benefits. This procedure is in accordance with the

International Accounting Standard 19.

At the end of each accounting period, the Company obtains an actuarial valuation of the amount of its liability and compares this with the provisions recorded in order

to determine the additional amount to be recorded (Note 34).

Actuarial gains and losses determined annually for each benefit granted, resulting from adjusting the actuarial assumptions, experience adjustments or the benefits

scheme, are only recorded if the accumulated net amount of these actuarial gains and losses (total deviation) at the end of the period exceeds, in absolute amount,

10% of total liability, this being recognised on a straight-line basis in the statement of profit and loss as from the year subsequent to that in which it is determined, in

accordance with the expected average number of working years of the employees taking part in the benefits plan. This procedure is in accordance with the International

Accounting Standard 19.

The cost of the past service liability resulting from the first recording of these benefits, in the amount of tEuros 94 (Note 34), was recorded in the liability caption “Provision

for retirements benefits” by corresponding entry to the account “Provision for retirement benefits - past service costs not recognised”. These balances will be recognised

on a straight-line basis, as from 2002, in the statement of profit and loss caption “Extraordinary expenses” in accordance with the expected average number of working

years of the employees taking part in the benefits plan.

The provision at 31 December 2005 includes only the liability relating to former employees of GDP, S.G.P.S., S.A. which are employees of the Company.

h) Translation of foreign currency financial statements

Exchange differences arising on the translation to Euros of the foreign currency financial statements of subsidiary and associated companies are included in the

shareholders’ equity caption “Adjustments in equity investments in group and associated companies”. These financial statements are translated at the following rates:

i) exchange rate in force at the balance sheet date for all assets and liabilities;

ii) average exchange rate for the year for the statement of profit and loss captions; and

iii) historical exchange rate for the remaining shareholders’ equity captions.

:: 6. Income Tax ::

In accordance with current legislation, tax returns are subject to review and correction by the tax authorities for a period of four years (ten years for social security up to

2000, inclusive, and five years as from 2001). Consequently, the Company’s tax returns for the years from 2002 to 2005 are still subject to review.


The Company’s management believes that any adjustment to the tax returns that could result from reviews carried out by the tax authorities to these tax returns will

not have a significant effect on the financial statements as of 31 December 2005.

Under current Portuguese legislation tax losses can be carried forward for offset against taxable income for a period of six years.

The Company and some of its subsidiaries are taxed on a consolidated basis, in accordance with the special regime for taxation of groups of companies, their taxable

results being determined in Galp. However, estimated income tax of the Company and its subsidiaries is recorded based on their taxable results, which for the year ended

31 December 2005 represents an account receivable from and payable to these companies of tEuros 8,140 (Note 16) and tEuros 112,106 (Note 16), respectively.

At 31 December 2005 there were temporary differences that originated deferred taxes recorded by the Company, as follows:

Income tax for the year recorded in the statement of profit and loss by nature is made up as follows:

In accordance with current tax legislation, gains and losses on group and associated companies resulting from application of the equity method of accounting are not

considered for tax purposes in the year they are recorded. In compliance with Portuguese Accounting Directive 28, deferred tax liabilities relating to undistributed profits

of subsidiaries were not recorded. Therefore, at 31 December 2005 the Company had current income tax payable of tEuros 53, and an accounting profit for the year

before income tax of tEuros 441,842.

:: 7. Average Number of Employees ::

The average number of employees of the Company in 2005 and 2004 was 130 and 107, respectively, and was 150 at 31 December 2005.

:: 8. Industrial Property and Other Rights ::

At 31 December 2005 this caption was made up as follows:


Deferred tax assetsRelating to prior years:

Non tax deductible provisions recorded in 2003 less provisions considered as tax deductible and decrease in prior year provisions (Nota 50) 101

101

Relating to the year:Non tax deductible provisions recorded during the year less utilisation and decreases in provisions in 2005 170

170

Total deferred tax assets (Note 50) 271

Estimated current income tax (Note 28) 53Deferred tax assets (170)

(117)

Gross Accumulated Amortisation Net

Industrial property and other rights:Software and licences 3 (2) 1

3 (2) 1

:: 10. Changes in Fixed Assets ::

During the year ended 31 December 2005 the changes in intangible and tangible fixed assets and investments, and in the respective accumulated amortisation and

depreciation accounts were as follows:

The increase of tEuros 3,014 in the caption “Loans to group companies” corresponds to loans to Galp Power, S.G.P.S., S.A..

The decrease of tEuros 5,096 in the caption “Loans to group companies” corresponds to:

i) repayment of shareholders’ loans of tEuros 3,954 by Galp Power, S.G.P.S., S.A.;

ii) repayment of loans of tEuros 1,142 by Porten - Portugal Energia, S.A..


Beginning Sales/ Equity EndingAssets Balance Increases Decreases Write-Offs Method Balance

Intangible assets:Industrial property and other rights 238 - - (235) - 3

238 - - (235) - 3

Tangible assets:Transport equipment 1,180 - (587) (141) - 452 Administrative equipment 490 45 - - - 535 Other tangible fixed assets 87 - - - - 87

1,757 45 (587) (141) - 1,074

Investments:Investment in group companies 1,928,674 4,765 - - 290,700 2,224,139 Loans to group companies 20,095 3,014 (5,096) - - 18,013 Securities and other financial applications 115 - - - - 115 Other loans granted 90 - - - - 90

1,948,974 7,779 (5,096) - 290,700 2,242,357

1,950,969 7,824 (5,683) (376) 290,700 2,243,434

Beginning EndingAccumulated amortisation and depreciation Balance Increases Sales Write Offs Balance

Intangible assets (Note 8):Industrial property and other rights 236 1 - (235) 2

236 1 - (235) 2

Tangible assets:Transport equipment 1.005 99 (546) (129) 429 Administrative equipment 414 67 - - 481 Other tangible fixed assets 33 10 - - 43

1.452 176 (546) (129) 953

1.688 177 (546) (364) 955

The changes during the year ended 31 December 2005 in the caption “Investments in group companies” were as follows:

In addition, in 2005 the Company received tEuros 93,014 corresponding to dividends declared in 2004 relating to the year 2003 from the subsidiary Petróleos de Portugal

- Petrogal, S.A., that were recorded as a receivable at 31 December 2004.

:: 15. Financial Leasing ::

Tangible fixed assets acquired under finance and operating lease contracts reflected on the balance sheet are a follows:

At 31 December 2005 the Company had liabilities under lease contracts totalling tEuros 21.


Beginning balance 1,928,674

Coverage of losses:Porten - Portugal Energia, S.A. 812 Galp Power, S.G.P.S., S.A. 3,954

4,766

Effect of applying the equity method to results for the year (Note 45):Positive 446,150 Negative (812)

445,338

Effect of applying the equity method to other changes in shareholders’ equity of subsidiaries (Note 40):Other changes in shareholders’ equity 16,227 Translation adjustments 4,327

20,554

Dividends received:Petróleos de Portugal - Petrogal, S.A. (166,394)Galp Serviços, S.A. (4,651)

(171,045)

Decrease in provisions to cover loss in Galp Power, S.G.P.S., S.A. (Note 34) (1,621)Negative equity variation in Petróleos de Portugal - Petrogal, S.A. due to employee bonuses granted (Nota 46) (2,527)

(4,148)

Ending balance 2,224,139

Captions Gross Accumulated Depreciation Net

Transport equipment 452 429 23

452 429 23

:: 16. Group Companies ::

At 31 December 2005 and 2004 investments in group and associated companies were as follows:

Securities and other financial applications at 31 December 2005 are made up as follows:

The asset and liability balances with the main group companies at 31 December 2005 were as follows:


31 December 2005 2005 2004

Head Office Total Assets Total Liabilities Shareholders’ Equity Net Result % Amount % Amount

Petróleos de Portugal - Petrogal, S.A. (a) Lisbon 3,036,403 1,587,882 1,448,521 225,134 100.00% 1,448,372 100.00% 1,377,473 GDP - Gás de Portugal, S.G.P.S., S.A. (b) Lisbon 863,341 98,723 764,618 219,516 100.00% 769,535 100.00% 544,146 Galp Serviços, S.A. Lisbon 18,157 14,453 3,704 1,471 100.00% 3,704 100.00% 6,867 Galp Power, S.G.P.S., S.A. Lisbon 21,233 19,711 1,522 (812) 100.00% 1,522 100.00% -Porten - Portugal Energia, S.A. Bucelas 1,116 110 1,006 6 100.00% 1,006 189

2,224,139 1,928,674

Central E, S.A. (c) Lisbon 1,018 13,705 (12,687) (2,773) 20.30% - 20.30% -

- -

2005 2004

Head Office % Amount % Amount

Adene - Agência para a Energia, S.A. Lisbon 10.98% 114 10.98% 114 OEINERGE - Ag. Munic. En. e Amb. de Oeiras Oeiras 1.45% 1 1.45% 1

115 115

(a) For purposes of applying the equity method, in 2005 shareholders’ equity was adjusted for the effect of minority participations of these companies in other subsidiaries of the Galp Group(b) For purposes of applying the equity method, shareholders’ equity of this subsidiary was adjusted for the effect of goodwill resulting from the transfer of a participation in Transgás-Sociedade Portuguesa de Gás Natural, S.A. in 1999, when Galp

Energia S.G.P.S., S.A. was founded (Introductory Note). As a result of that adjustment, goodwill is being amortised over the period of the concession granted to that subsidiary to acquire and transport natural gas.(c) At 31 December 2005 this company had negative shareholders’ equity and so the effect of applying the equity method was to record a provision of tEuros 2,575 (Note 34).

Clients Group Loans to Group Other Debtors AccruedAsset Balances Current Accounts Companies Companies (Note 10) (Note 49) Income (Note 50)

Beiragás, S.A. 26 - - - 12 CLC - Companhia Logística de Combustíveis, S.A. - - - - 6 CLT - Companhia Logística de Terminais Marítimos, Lda. - 15 - - -Dianagás, S.A. - 45 - - -Eival - Soc. Emp. Inv. Ar. Gases, S.A. - 36 - - -Galp Açores, S.A. - - - - 9 Galp Exploração e Produção Petrolífera, Lda. 57 - - - 29 Galp Madeira, S.A. - - - - 6 Galp Power, S.G.P.S., S.A. 89 - 18,013 - 63 Galp Serviços, S.A. 65 2,074 - - 29 Galpgeste, Lda. - 535 - - 7 Gasinsular, S.A. - 2,387 - - 21 GDP - Distribuição, S.G.P.S., S.A. 2,556 20 - - 47 GDP - Gás de Portugal, S.G.P.S., S.A. 8,202 47 - - 7 Lisboagás, S.A. 80 6,812 - - 16 Lusitaniagás, S.A. 18 - - - 8 Galp Energia España, S.A. 67 15 - 191 -Petróleos de Portugal - Petrogal, S.A. 37,828 107,105 - - 358 Sempre a Postos, Lda. - - - - 9 Setgás - Soc. Prod. Distribuição de Gás, S.A. 15 - - - 8 Soturis, S.A. - 150 - - -Tagus RE, S.A. 39 - - - -Tagusgás - Empresa de Gás do Vale do Tejo, S.A. 15 - - - 5 Tanquisado - Terminais Marítimos, S.A. - 247 - - -Transgás - Sociedade Portuguesa de Gás Natural, S.A. 152 34,796 - - 37 Transgás Atlântico, S.A. - 2,063 - - 6 Transgás Industria, S.A. 36 137 - - -Sacor Marítima, S.A. - - - - 6 Other group companies 187 178 - - 98

49,432 156,662 18,013 191 787

The loan of tEuros 18,013 to Galp Power, S.G.P.S., S.A. bears interest at the Euribor 6 month rate plus a spread of 3% and does not have a defined repayment date.

The asset and liability balances with group companies are made up as follows:

Loans received by and given to group companies totalling tEuros 160,024 and tEuros 43,887, respectively, bear interest at market rates.


Group Suppliers AccruedLiability Balances Companies Current Accounts Costs

CLT - Comp. Logística Term. Marítimos, Lda. (901) - -Driftal, S.A. (180) - -Eival - Soc. Emp. Inv. Ar. Gases, S.A. (13) (5) -Galp Açores, S.A. (15,000) - (44)Galp Madeira, S.A. (16,000) - (165)Galp Power, S.G.P.S., S.A. (652) - -Galp Serviços, S.A. (9) (941) (2)Galpgeste, Lda. (12) - -Gásfomento, S.A. (141) - -GDP - Distribuição, S.G.P.S., S.A. (887) - (3)GDP - Gás de Portugal, S.G.P.S., S.A. (21,257) (36) (24)Lisboagás, S.A. - (22) (16)Medigás, S.A. (88) - -Petróleos de Portugal - Petrogal, S.A. (1,549) (574) (319)Porten Portugal Energia, S.A. (624) - -Sacor Marítima, S.A. (53,700) - (279)Soturis, S.A. (1,774) - (1)Tanquisado - Terminais Marítimos, S.A. (4,024) - (25)Sinecogeração-Cogeração da Refinaria de Sines, S.A. (144) - -Transgás - Sociedade Portuguesa de Gás Natural, S.A. (48,085) (40) (34)Transgás Armazenagem, S.A. (6) - -Transgás Atlântico, S.A. (2,615) - -Transgás Industria, S.A. (4) - -Transgás S.G.P.S., S.A. (494) - (5)Other group companies (5) (35) -

(168,164) (1,653) (917)

Asset Liability

Special regime for taxing groups of companies 112,106 8,140

Loans given and received:CLT - Companhia Logística de Terminais Marítimos, Lda. - 900 Galp Açores, S.A. - 15,000 Galp Madeira, S.A. - 16,000 Galp Serviços, S.A. 1,500 -Gasinsular, S.A. 2,387 -GDP - Gás de Portugal, S.G.P.S., S.A. - 21,000 Petróleos de Portugal - Petrogal, S.A. 40,000 -Soturis, S.A. - 1,750 Tanquisado - Terminais Marítimos, S.A. - 4,000 Transgás - Sociedade Portuguesa de Gás Natural, S.A. - 47,674 Sacor Marítima, S.A. - 53,700

43,887 160,024

Others 669 -

156,662 168,164

The asset and liability captions relating to group companies include amounts receivable and payable resulting from the adoption of the special regime for taxation of

groups of companies under Galp as follows (Note 6):


Group Companies Asset Liability

Relating to prior years:Driftal, S.A. 8 151GDP - Gás de Portugal, S.G.P.S., S.A. 43 247 GDP - Distribuição, S.G.P.S., S.A. 18 479 Galp Power, S.G.P.S., S.A. - 1 Medigás, S.A. - 61 Petróleos de Portugal - Petrogal, S.A. - 106 Soturis, S.A. - 21 Eival - Soc. de Empreend., Inv. e Arm. De Gases, S.A. 13 -Transgás Atlântico, S.A. 20 2,610 Other companies 1 14

103 3,690

Relating to the year 2005 (Note 28):CLT, Lda. 15 1 Dianagás, S.A. 45 -Driftal, S.A. - 28 Eival - Soc. de Empreend., Inv. e Arm. De Gases, S.A. 22 -Galp Power, S.G.P.S., S.A. - 653 Galp Serviços, S.A. 571 9Galpgeste, S.A. 535 12 Gásfomento - 141 GDP - Distribuição, S.G.P.S., S.A. - 408 GDP - Gás de Portugal, S.G.P.S., S.A. 1 10 Lisboagás, S.A. 6,812 -Medigás, S.A. - 26 Petróleos de Portugal - Petrogal, S.A. 66,625 1,444Porten - Portugal Energia, S.A. - 622 Sinecogeração - Cogeração da Refinaria de Sines, S.A. - 144 Soturis, S.A. 150 4 Tanquisado - Terminais Marítimos, S.A. 243 24 Transgás - Sociedade Portuguesa de Gás Natural, S.A. 34,796 411 Transgás Armazenagem, S.A. 8 6Transgás Atlântico, S.A. 2,043 4 Transgás Industria, S.A. 137 4 Transgás S.G.P.S., S.A. - 493 Other companies - 6

112,003 4,450

112,106 8,140

Transactions with group companies in the year ended 31 December 2005 were as follows:

Services rendered in the amount of tEuros 20,159 corresponds essentially re-charged overhead costs of qualified personnel working for the Company, in the area of

services rendered to Group companies.

The caption “Supplementary income” corresponds to re-charged amounts incurred by the Company during the year for strategic consultancy services, image development,

marketing and publicity and risk hedging operations.

:: 25. Receivables from and Payables to Personnel ::

At 31 December 2005 and 2004 the Company had the following receivables from and payables to personnel:


External Supplies Interest Expense Services Supplementary Interest IncomeTransactions and Services (Note 45) Rendered Income (Note 45)

Petróleos de Portugal - Petrogal, S.A. 5,634 1,395 13,885 34,544 515Galp Serviços, S.A. 4,781 40 - 385 -Transgás - Sociedade Portuguesa de Gás Natural, S.A. 454 - 2,150 69 151Lisboagás, S.A. 280 - - 327 25GDP - Distribuição, S.G.P.S., S.A. 42 - 2,909 307 -Lusitaniagás - Comp Gás do Centro, S.A. 23 - - 31 -Galp Exploração e Produção Petrolífera, Lda. 25 - - 278 1,465Galp Power, S.G.P.S., S.A. 27 - - 491 941Setgás - Soc. Prod. Distribuição de Gás, S.A. - - - 28 -Soturis, S.A. - 20 - 76 -Beiragás - Comp. Gás das Beiras, S.A. 6 - - 120 -Galp Energia España, S.A. 28 - - - -CLC - Companhia Logística de Combustíveis, S.A. - - - 21 -CLT - Comp. Logística Term. Marítimos, Lda. - 15 - 4 -Galp Açores, S.A. - 46 - 19 -Galp Madeira, S.A. - 173 - 11 58Galpgeste, Lda. 273 - - 9 -Gasinsular, S.A. - - - - 39GDP - Gás de Portugal, S.G.P.S., S.A. - 365 920 6,161 41Sacor Marítima, S.A. - 1,081 - 14 -Sempre a Postos, Lda. - - - 27 -Petrogal Trading Limited - - - 70 -Porten - Portugal Energia, S.A. - - - - 35Tagus RE, S.A. - 76 - 55 -Transgás Atlântico, S.A. - - - 12 -Transgás Industria, S.A. - 8 295 9 -Transgás S.G.P.S., S.A. 5 - - - -Tanquisado - Terminais Marítimos, S.A. - 25 - 7 -Other Galp Energia Group companies 25 - - 190 -

11,603 3,244 20,159 43,265 3,270

2005 2004

Receivables (Note 49) 196 450 Payables (Note 49) (65) (85)

:: 28. State and Other Public Entities ::

At 31 December 2005 and 2004 there were no overdue accounts payable to the State and other Public Entities.

The balances with these entities were made up as follows:

The liability caption “Corporate income tax - estimated tax” at 31 December 2005 is made up as follows:

:: 32. Bank Guarantees ::

At 31 December 2005 the Company had a bank guarantee in the amount of tEuros 2,394 with Banco Comercial Português.

:: 34. Changes in Provisions ::

During the year ended 31 December 2005 there were the following changes in provisions:


2005 2004

Asset BalancesVAT - Value Added Tax recoverable - 13 Corporate Income Tax recoverable 30 13

30 26

Liability BalancesCorporate Income Tax - Estimated tax 43,408 40,055 VAT - Value Added Tax payable 3,939 268 Corporate income tax withheld at source 153 123 Social security 116 80

47,616 40,526

Ending Balance (47,586) (40,500)

Subsidiaries (Note 16)

Corporate Income Tax Relating to The Company (Note 6) Receivable Payable Total

Corporate Income Tax - Estimated tax (53) 2,494 (112,003) (109,562)Corporate income tax withheld by third parties 19 1,956 - 1,975ICorporate Income Tax - Payments on account 64,179 - - 64,179

Total 64,145 4,450 (112,003) (43,408)

Caption Beginning Balance Increases Decreases Ending Balance

Provision for pensions (a) 187 504 (3) 688

187 504 (3) 688

Other retirement benefits - healthcare and life insurance (Note 3. g) 182 121 (5) 298

182 121 (5) 298

Other provisions (Note 16) 3,597 599 (1,621) 2,575

3,597 599 (1,621) 2,575

3,966 1,224 (1,629) 3,561

(a) This provision includes the defined contribution plan minimum benefit (incapacity and survivor).

The amount of tEuros 1,224 relating to the increase in provisions includes:

i) tEuros 625 relating to the provision for pensions and provision for healthcare, which was recorded by charge to the statement of profit and loss captions “Personnel costs”

in the amount of tEuros 588 and “Extraordinary costs” in the amount of tEuros 37 (Note 46);

ii) tEuros 599 (Note 45), to cover negative equity of subsidiary and associated companies, by charge to the statement of profit and loss caption “Financial costs”.

The amount of tEuros 213, relating to the Company’s contribution for 2005 to the defined contribution pension plan was also charged to the caption “Personnel costs”.

The amount of tEuros 1,629, relating to the decrease in provisions, was recorded by corresponding entry of tEuros 1,621 to the caption “Equity investments in group

companies” (Note 10), tEuros 3 to the extraordinary income caption “Others” and tEuros 5 by direct utilisation.

The caption “Other provisions” at 31 December 2005 corresponds essentially to the Company’s liability for the accumulated losses of its subsidiary Central E, S.A. in the

amount of tEuros 2,575 (Note 16).

The financial and demographic assumptions used to calculate the Company’s liability for healthcare, life insurance and pensions were as follows:


2005 2004

Technical interest rate 4.25% 4.75%Salary increase rate 3.00% 3.00%Current and pre-retired employee mortality table TV 88/90 TV 73/77Retired personnel mortality table TV 73/77 TV 73/77Normal retirement age 65 65Method Projected Unit Credit Projected Unit Credit



Coverage:By provisions 241 152Change in assumptions and methodology (Note 3 g)) - 33Unrecognised (gain) and loss (Note 3.g)) 116 183

357 368

ii) Life insurance:


Coverage:By provisions 57 30Change in assumptions and methodology (Note 3 g)) - 5Unrecognised (gain) and loss (Note 3.g)) 44 18

101 53

iii) Retirement benefits


Coverage:By provisions 225 187Change in assumptions and methodology (Note 3 g)) - (3)Unrecognised (gain) and loss (Note 3.g)) 54 46

279 230

iv) CD plan minimum benefit


Coverage:By provisions 463 -Unrecognised (gain) and loss (Note 3.g)) (46) -

417 -

Evolution of the Company’s liability for life insurance, healthcare and pensions recorded in 2005 was as follows:

Current service cost, interest cost, amortisation of the excess of the “corridor” determined at 31 December 2004 (corridor mechanism) totalling tEuros 588, was recorded

by the Company in the statement of profit and loss caption “Personnel costs”.

As a result of the increase of tEuros 94 in the liability when these benefits started being recognised as explained in Note 3 g), in 2005 the Company recognised, as

extraordinary cost and income, the amounts of tEuros 34 and tEuros 3, respectively, relating to amortisation for the year.

As explained in Note 3.g), actuarial gains and losses are recognised in the financial statements by the full amount of the accumulated deviation - not recognised. The

part exceeding 10% of the limit defined for the “corridor” is amortised as from the year following that in which it is determined, as follows:

The total gains and losses not recognised which exceed, in absolute amount, the “corridor” limit (10% of the liability), are recognised in the statement of profit and loss

as from the year subsequent to that in which they are computed, in accordance with the expected average number of working years of the employees covered by the

plans, which are 21.68, 26.94 and 22.18 years for healthcare, life insurance and CD plan minimum benefits, respectively, and 16.94 years for the former employees of

GDP, S.G.P.S.. Therefore, it is already known that in 2006 the cost of tEuros 6.3 relating to amortisation of the excess of the “corridor” now determined will be recorded.

:: 36. Capital ::

At 31 December 2005 the Company’s capital consisted of 165,850,127 shares of five Euros each, 8,000,000 being class A shares and the remaining 157,850,127 being

class B shares. The class A shares have the following special rights:

i) To approve the election of three, four or five members of the Board of Directors depending on whether it is composed by eleven, thirteen or more members;

ii) To reject certain decisions, against the majority of votes cast.


Life Retirement CD PlanHealthcare Insurance Benefits Minimum Benefit Total

Total liability at 31 December 2004 368 53 230 - 651Current service cost 36 19 29 446 530Interest cost 17 2 11 17 47Actuarial (gain)/loss for the year (59) 27 9 (46) (69)Others (5) (0) - - (5)

Total liability at 31 December 2005 357 101 279 417 1,154

COSTS FOR THE YEAR 2005Interest and current service cost 54 21 40 463 578Amortisation of the “corridor” excess 8 1 1 - 10Amortisation of the change in assumptions 32 5 (3) - 34

94 27 38 463 622

Unrecognised “Corridor” Excess of the Amount to beBenefits (gain) and Loss Interval (10%) “Corridor” Interval Recognised in 2006

Healthcare 116 36 80 4Life insurance 44 10 34 1Retirement benefits 54 28 26 2CD plan minimum benefit (46) 42 (4) -

:: 37. Shareholders ::

The capital at 31 December 2005 was fully subscribed and paid up and was held by the following entities:

In the year ended 31 December 2005 the shareholder Parpública - Participações Públicas, S.G.P.S., S.A. acquired, from the State, 13,373,134 shares of Galp Energia,

becoming holder of 20,388,309 shares, representing 12.29% of the Company’s capital (Introductory Note).

:: 40. Changes in the Shareholders’ Equity Captions ::

The changes in the shareholders’ equity captions in the year ended 31 December 2005 were as follows:

By decision of the Shareholders’ General Meeting held on 24 May 2005, profit for the year ended 31 December 2004 was appropriated as follows:

In addition, in 2005 the Company paid the remaining dividends declared in 2004 relating to profit for 2003, in the amount of tEuros 48,078, which were still payable at

31 December 2004.

Legal reserve

Portuguese legislation establishes that at least 5% of annual net profit must be appropriated to a legal reserve until this reserve equals the statutory minimum

requirement of 20% of share capital. The legal reserve and the bond premium account are not available for distribution to the shareholders, but may be used to increase

capital or to absorb losses once other reserves and retained earnings have been exhausted.


The Portuguese State 17.72%ENI Portugal Investment, SpA 33.34%REN - Rede Eléctrica Nacional, S.A. 18.30%EDP - Electricidade de Portugal, S.A. 14.27%Iberdrola, S.A. 4.00%Parpública - Participações Públicas, S.G.P.S., S.A. 12.29%Portgás - Sociedade de Produção e Distribuição de Gás, S.A. 0.04%Setgás - Sociedade de Produção e Distribuição de Gás, S.A. 0.04%

100.00%

Legal reserve 16,653Retained earnings 150,561Dividends 165,850

Net profit 333,064

Beginning Appropriation EndingBalance Increases of Profits Balance

Capital 829,251 - - 829,251Share premium account 82,006 - - 82,006Adjustments in equity investments in group and associated companies (Note 10) 47,681 20,554 - 68,235Legal reserve 40,296 - 16,653 56,949Other reserves 27,977 - - 27,977Retained earnings 527,076 - 150,561 677,637Net profit for the year 333,064 441,959 (333,064) 441,959

1,887,351 462,513 (165,850) 2,184,014

Adjustments in equity investments in subsidiary and associated companies

The opening balance of the caption “Adjustment in equity investments in group and associated companies” corresponds essentially to the effect of adjustments made

directly to their shareholder equity accounts by the subsidiaries of Petróleos de Portugal - Petrogal, S.A. and GDP - Gás de Portugal, S.G.P.S., S.A., when they recorded

deferred taxes for the first time, in the amount of tEuros 78,830. In addition, the opening balance and amounts recorded in this caption in 2005 correspond to the variation

between years of the accumulated balance of currency translation adjustments resulting from the translation of the foreign currency financial statements of subsidiarie

:: 43. Remuneration of the Members of the Corporate Boards ::

The remuneration of the members of the corporate boards in 2005 and 2004 amounted to tEuros 2,334 and tEuros 2,336, respectively.

:: 45. Net Financial Income ::

Net financial income for the years ended 31 December 2005 and 2004 is made up as follows:

The loss and gain on group and associated companies in 2005 is made up as follows:

The total loss on group and associated companies in the amount of tEuros 1,411 was recorded by corresponding entry to the caption “Investments” in the amount of

tEuros 812 (Note 10) and “Other provisions” in the amount of tEuros 599 (Note 34).

The gain in the amount of tEuros 446,150 mEuros (Note 10) was recorded as an increase in the amount of investments, as explained in Note 3. d).


2005 2004

Expenses:Interest - bank loans 3,970 4,716Interest - Late payment - 3Interest - Shareholders´ loans (Note 16) 3,244 2,447Interest - Others 37 32Loss on group and associated companies 1,411 6,975Exchange loss 10,857 4,289Other 475 313

19,994 18,775

Net financial income 430,238 346,585

450,232 365,360

Income:Interest income - group and associated companies (Note 16) 3,270 5,243Interest income - other 33 44Gain on group and associated companies (Note 10) 446,150 350,617Exchange gain 777 8,888Financial discounts received 2 458Other - 110

450,232 365,360

Loss Gain

Petróleos de Portugal - Petrogal, S.A. - 225,129GDP S.G.P.S., S.A. - 219,544Galp Serviços - Serviços e Consultoria de Apoio à Gestão Empresarial, S.A. - 1,471Galp Power, S.G.P.S., S.A. 812 -Porten Portugal Energia, S.A. - 6Central E, S.A. 599 -

1,411 446,150

:: 46. Extraordinary Items ::

Extraordinary items for the years ended 31 December 2005 and 2004 are made up as follows:

The amount of tEuros 2,527 in the caption “Extraordinary costs” corresponds to bonuses attributed by Petróleos de Portugal- Petrogal,S.A. to employees, out of profit for

2004, recorded as a decrease in the participation in that company.

The amount of tEuros 2,476 corresponds to remuneration of employees ceded in prior years, which the Company was only informed of in 2005.

:: 48. Loans ::

At 31 December 2005 and 2004 this caption was made up as follows:

Foreign loans at 31 December 2005 were in US Dollars and amounted to tUSD 61,940, of which tUSD 30,970 is medium and long term. These loans bear interest at the

variable 6 month USD LIBOR (London Inter-bank Offer Rate) rate plus a spread of 2.35% and cap of 5.35%.

In 2005 the Company repaid two instalments in the amount of tUSD 30,969 including exchange loss of tEuros 3,086.

The medium and long term amount of tEuros 26,252 is repayable in 2 half yearly instalments as from June 2007.


2005 2004

Costs:Donations 792 702Loss on fixed assets 3 249Increase in amortisation - 7Prior year adjustments 2,476 3Bonuses attributes by subsidiaries to employees (Note 10) 2,527 -Retirement benefits (Note 34) 37 19Other 34 -

5,869 980

Net extraordinary items (5,534) 297

335 1,277

Income:Gain on fixed assets 128 3Prior year adjustments - -Retirement benefits (Note 34) 3 3Other 204 1,271

335 1,277

2005 2004

Short Term Medium and Long Term Short Term Medium and Long Term

Bank loansForeign loans 26,252 26,252 22,737 45,474Bank overdrafts (Note 51) 72 - 6,222 -

26,324 26,252 28,959 45,474

:: 49. Other Debtors and Creditors ::


The amount of tEuros 17,984 receivable from EDP refers to a put option, exercised in 2003, relating to the sale of 217,055 Oni S.G.P.S., S.A. shares for the amount of

tEuros 14,964 plus interest of tEuros 3,020.

:: 50. Accruals and Deferrals ::


:: 51. Cash and Cash Equivalents ::

Cask and cash equivalents at 31 December 2005 and 2004 was made up as follows:


2005 2004

Other DebtorsPersonnel (Note 25) 196 450EDP - Energias de Portugal, S.A. 17,984 17,984Guarantees 213 213Group and associated companies (Note 16) 191 -Others 67 70

18,651 18,717

Other CreditorsPersonnel (Note 25) 65 85Group and associated companies - 57Others 26 27

91 169

2005 2004

Accrued income (Note 16):Interest 75 353 Other 712 854

787 1,207

Deferred costs:Deferred tax assets (Note 6) 271 101 Other 311 74

582 175

Accrued costs:Vacation pay, vacation subsidy and related charges 1,319 1,163 Performance bonus 835 1,449 Cost of personnel ceded 3,748 2,325 Interest 691 717 Services and supplies obtained 827 220 Other - 103

7,420 5,977

2005 2004

Cash 9 8Demand deposits 996 867Bank overdrafts (Note 48) (72) (6,222)

933 (5,347)

:: 52. Derivative Financial Instruments ::

The Company is exposed to short term and medium and long term interest rate risk on its foreign loans, which bear interest based on the 6 month LIBOR (London

Inter-bank Offer Rate) rate (Note 48).

Under its interest rate risk management strategy, which has the objective of reducing financial costs and exposure of the loan cash flows to market fluctuations, the

Company has contracted an interest rate swap, as follows:

Fair value at 31 December 2005 was determined by external valuation. Fair value at 31 December 2005 does not indicate future gain or loss, as it can be reversible.

The fair value of derivatives negotiated on liquid markets is based on their price estimated by specialised financial institutions, based on the present value of their

estimated future cash flows.

As the Company follows the historical cost principle, it has not recognised these financial derivative instruments at fair value at 31 December 2005.

:: 53. Subsequent Events ::

In the year ended 31 December 2005 Amorim Energia B.V. signed a contract to buy the shares of Galp Energia, S.G.P.S., S.A., held by EDP - Energias de Portugal, S.A.,

representing 14.27% of its capital, the operation also including an option to buy 18.3% of the shares held by REN - Rede Eléctrica Nacional, S.A..

In addition, in January 2006 Amorim Energia B.V. acquired from Portgás - Sociedade de Produção de Gás, S.A., its 0.4% participation in the Company’s capital.

The shareholders at 31 December 2005 (Note 37) have not been adjusted to reflect the effect of these operations as registration of the sale of the shares between the

above entities only took place in 2006.

:: 54. Explanation Added for Translation ::

These financial statements are a translation of financial statements originally issued in Portuguese in accordance with generally accepted accounting principles in Portugal

and the format and disclosures required by the Official Chart of Accounts (“Plano Oficial de Contabilidade - POC”), some of which may not conform to or be required by

generally accepted accounting principles in other countries. In the event of discrepancies, the Portuguese language version prevails.


Fair Value of Type of Derivative Interest Rate Nominal Value Maturity Derivatives in tEuros

IR Swap Paid 5.1375% Received Libor USD 6m tUSD 20,000 02-11-2011 (282)

Note: Fair value in brackets means loss to the Company.

:: The Accountant :: :: The Board of Directors ::

• Carlos Alberto Nunes Barata • Francisco Luis Murteira Nabo

• José António Marques Gonçalves

• Giancarlo Rossi

• André Freire de Almeida Palmeiro Ribeiro

• Rui Manuel Janes Cartaxo

• João Pedro Leitão Pinheiro de Figueiredo Brito

• Fernando Manuel dos Santos Gomes

• Camillo Gloria

• Diogo Mendonça Rodrigues Tavares

• Manuel Carlos Costa da Silva

• Federico Ermoli

• Angelo Mario Taraborrelli

• Giorgio Puce

• José Rodrigues Pereira dos Penedos

• Joaquim Augusto Nunes Pina Moura

191single auditor’s report and opinion :: annual report 2005

In compliance with the law and the Company’s bye-laws, and in the discharge of our functions, we hereby present our report and opinion on the Management Report

of “GALP ENERGIA, S.G.P.S., S.A.”, subscribed by the Board of Directors, and the accompanying financial statements for the year ended 31 December 2005, which comprise

the analytical balance sheet, the statements of income by nature and by functions, the statement of cash flows and the respective appendices, such documents containing

all the consolidated information on the GALP Group.

We monitored the company’s management and activity and maintained the minimum necessary contacts with the Executive Committee and with GALP SERVIÇOS, from

which we obtained all the information requested, which we considered essential for the performance of our duties.

During the year, we analysed all the financial information on a monthly basis, verifying the content of the minutes of the meetings of the Board of Directors and of the

Executive Committee, as required to understand the decision-making process.

We analysed the results, the evolution of the financial situation, sales, costs and investments, all within the framework of the various businesses.

We were permanently concerned with verifying budget control and assessing the profitability of the subsidiaries.

We obtained information on the more important companies forming the Group’s portfolio and on the relations which they maintain with GALP ENERGIA.

We maintained an open dialogue with the statutory auditors of the Group companies and with the external auditors of GALP ENERGIA.

The management report discloses relevant information, which is indispensable for an understanding of the evolution of the activities carried out.

Our report presents the key aspects of management in the various business areas, disclosing the more relevant events occurred in the course of 2005.

The Single Auditor believes that reference to the following aspects is essential in order to provide an overall perspective:

a) Restructuring of the energy sector and its implications for GALP ENERGIA;

b) Approval of the Strategic Plan;

c) Preparation of the initial public offering (IPO) for sale of part of the share capital, to be launched in the Stock Exchange;

d) Preparation of the unbundling of the gas activities.

In particular, the following decisions should be highlighted:

• The Group’s reorganisation and restructuring;

• The reinforcement of production capacity viewing the reduction of dependence with regard to future supplies ;

• Greater emphasis on alternative energies, and increased diversification of the offer of products.

We wish to express our satisfaction with the results obtained in 2005, emphasising the historical high reached by the quantities processed in the refineries and the

favourable external background for refining margins.

single auditor´s report and opinion

The financial statements were prepared in accordance with the Portuguese Official Plan of Accounts (Plano Oficial de Contas) and with the principles therein established,

despite the fact that the company has already implemented accounting records in accordance with the International Financial Reporting Standards (IFRS).

Legally, this was a lawful decision, but the forthcoming IPO and expected floating of the company’s share capital will make adoption of the IFRS obligatory, with significant

impacts on results. One such impact will arise from the IAS’s prohibition of adoption of the LIFO method for inventory valuation of raw materials.

The Management Report provides an explanation on the evolution of operating costs and the factors behind this evolution.

We stress as the reasons for the increase in staff costs the change in the discount rate used in the calculation of the actuarial responsibilities with pensions in the main

subsidiaries, as well as the use of a new mortality table updated for current life expectancy for employees in active service and those having taken early retirement. For

retired employees the former mortality table was maintained.

The adoption of the “corridor method”, which has the merit of preventing a distortion of results due to fluctuations in the actuarial value of liabilities, explains why

important liabilities are not reflected in the balance sheet, such liabilities being described in item 21 of the Appendix.

We have assessed the adjustments to the impairment of asset values and the provisions for restructuring and other liabilities whose existence was recognised by the

Executive Committee.

Item 62 of the Appendix provides information on environmental issues, namely gas emissions and emission permits obtained.

The Management Report does not expressly refer to the expectable evolution of the company, as set forth in paragraph c) of the Commercial Companies Code, even

though some indications as to the future of the company may be inferred from the text of the report.

In the exercise of our functions, we did not detect any breach of legal and statutory regulations, nor have any facts occurred after the end of the reporting year come to

our knowledge liable of affecting our opinion.

OPINION

In light of the above, it is our opinion that:

• The Management Report and Accounts for fiscal 2005 globally meet the requirements of the Commercial Companies Code;

• The financial statements submitted by the Board of Directors meet the required conditions for approval;

• The appropriation or earnings proposed in the Management Report should be approved.

Finally, we wish to express our recognition to the Executive Committee and to the departments of GALP SERVIÇOS with which we maintained contacts, for their

collaboration, as well as for their professionalism and commitment which facilitated the performance of our works.


THE SINGLE AUDITOR

Pedro Manuel da Silva Leandro

in representation of Pedro Leandro e António Belém, SROC Nº 96

annual report 2005 :: single auditor’s report and opinion192

193legal certification of the consolidated accounts :: annual report 2005

INTRODUCTION

1. We examined the consolidated financial statements of "GALP ENERGIA, S.G.P.S., S.A." which include the consolidated balance sheet at 31/12/2005, (which shows a

total balance of 6,298,952 thousand euros and a total of equity of 2,184,014 thousand euros, including a net profit of 441,959 thousand euros), the consolidated

income by nature and function and the consolidated cash flow statement of the year ended at that date as well the corresponding Notes.

RESPONSIBILITIES

2. It is of the Board of Director‘s responsibility to prepare consolidated financial statements that present a true and appropriate view of the financial situation of the group

of the companies included in the consolidation, the consolidated result of its operations and the consolidated cash flow statements, as well as the adoption of adequate

accounting policies and criteria and the maintenance of a appropriate internal control system.

3. Our responsibility consists on expressing a professional and independent opinion, based on our audit of those financial statements.

SCOPE

4. Our audit was carried in accordance with the Technical Standards and Auditing Guidelines issued by the Association of Certified Public Accountants, which required that

the audit must be planned and implemented with the objective to provide a reasonable assurance that the financial statements are free of any relevant materially

distortions. To this end, the audit involved:

• Verifying the consolidated financial statements of the group of the companies included in the consolidation appropriated examined and for the other situations,

using random checks to verify documents supporting the figures shown in the financial and the evaluation of the estimates, based on judgments and criteria

defined by the Board of Directors used in the preparation of the accounts;

• Verifying the consolidated operations;

• Assessing the appropriateness of the accounting policies adopted and their disclosure, in view of the circumstances;

• Verifying the applicability of the ongoing principle; and

• Assessing the overall adequate presentation of the financial statements.

5. Our examination also enclosed the verification of the agreement of the constant financial information of the Annual Report with the consolidated financial statements.

6. We believe that the audit carried out provides an acceptable base for us to express an opinion on these financial statements.

OPINION

7. In our opinion, the related consolidated financial statements give a true and fair view in all the relevant material aspects, the consolidated financial position of "GALP

ENERGIA, S.G.P.S., S.A." at 31/12/2005, and the consolidated result of its operations and the consolidated cash flows statements for the year ended at that date, in

accordance with the generally accepted accounting principles in Portugal.


Pedro Leandro e António Belém, SROC Nº 96

represented by Pedro Manuel da Silva Leandro

legal certification of the consolidated accounts

annual report 2005 :: legal certification of the individual accounts194

INTRODUCTION

1. We examined the financial statements of "GALP ENERGIA, S.G.P.S., S.A." which include the balance sheet at 31/12/2005, (which shows a total balance of 2.469.685

thousand euros and a total of equity of 2.184.014 thousand euros, including a net profit of 441.959 thousand euros), the income by nature and function and the cash

flow statement of the year ended at that date as well the corresponding Notes.

RESPONSIBILITIES

2. It is of the Board of Director ‘s responsibility to prepare financial statements that present a true and appropriate view of the financial situation of the Company, the

results of its operations and the cash flows, as well as the adoption of adequate accounting policies and criteria and the maintenance of a appropriate internal control

system.

3. Our responsibility consists of expressing a professional and independent opinion, based on our audit of those financial statements.

SCOPE

4. Our audit was carried in accordance with the Technical Standards and Auditing Guidelines issued by the Association of Certified Public Accountants, which they required

that the audit must be planned and implemented with the objective to provide a reasonable assurance that the financial statements are free of any relevant materially

distortions. To this end, the audit involved:

• Using random checks to verify documents supporting the figures shown in the financial and the evaluation of the estimates, based on judgments and criteria

defined by the Board of Directors used in the preparation of the accounts;

• Assessing the appropriateness of the accounting policies adopted and their disclosure, in view of the circumstances;

• Verifying the applicability of the ongoing principle; and

• Assessing the overall adequate presentation of the financial statements.

5. Our examination also enclosed the verification of the agreement of the constant financial information of the Annual Report with the financial statements.

6. We believe that the audit carried out provides an acceptable base for us to express an opinion on these financial statements.

OPINION

7. In our opinion, the related financial statements give a true and fair view in all the relevant material aspects, the financial position of "GALP ENERGIA, S.G.P.S., S.A." at

31/12/2005, and the result of its operations and the cash flows statements for the year ended at that date, in accordance with the generally accepted accounting

principles.


Pedro Leandro e António Belém, SROC Nº 96

represented by Pedro Manuel da Silva Leandro

legal certification of the individual accounts

195auditors’s report :: annual report 2005

INTRODUCTION

1. We have examined the accompanying consolidated and non-consolidated financial statements of Galp Energia, S.G.P.S., S.A. ("the Company "), which comprise the

consolidated and non-consolidated balance sheets as of 31 December 2005 that reflect totals of 6,298,952,000 Euros and 2,469,685,000 Euros, respectively, and

shareholders’ equity of 2,184,014,000 Euros, including net profit of 441,959,000 Euros, the consolidated and non-consolidated statements of profit and loss by nature

and by functions and the consolidated and non-consolidated statements of cash flows for the year then ended and the corresponding notes.

RESPONSIBILITIES

2. The preparation of consolidated and non-consolidated financial statements that present a true and fair view of the financial position of the Company and the companies

included in the consolidation, the consolidated and non-consolidated results of their operations and their consolidated and non-consolidated cash flows, as well the

adoption of adequate accounting policies and criteria and the maintenance of appropriate systems of internal control are the responsibility of the Board of Directors.

Our responsibility is to express a professional and independent opinion on these consolidated and non-consolidated financial statements, based on our examination.

SCOPE

3. Our examination was performed in accordance with the auditing standards (“Normas Técnicas e as Directrizes de Revisão/Auditoria”) issued by the Portuguese Institute

of Statutory Auditors (“Ordem dos Revisores Oficiais de Contas”), which require that the examination be planned and performed with the objective of obtaining

reasonable assurance about whether the consolidated and non-consolidated financial statements are free of material misstatement. Our examination included

verifying, on a test basis, evidence supporting the amounts and disclosures in the consolidated and non-consolidated financial statements and assessing the significant

estimates, based on assumptions and criteria defined by the Board of Directors, used in their preparation. Our examination also included verifying the consolidation

procedures used, application of the equity method of accounting and that the financial statements of the companies included in the consolidation were adequately

examined, assessing the adequacy of the accounting principles used, their uniform application and their disclosure, taking into consideration the circumstances,

verifying the applicability of the going concern concept and assessing the adequacy of the overall presentation of the consolidated and non-consolidated financial

statements. We believe that our examination provides a reasonable basis for expressing our opinion.

OPINION

4. In our opinion, the consolidated and non-consolidated financial statements referred to in paragraph 1 above present fairly, in all material respects, the consolidated

and non-consolidated financial position of Galp Energia, S.G.P.S., S.A. as of 31 December 2005 and the consolidated and non-consolidated results of its operations and

its consolidated and non-consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles in Portugal.


DELOITTE & ASSOCIADOS, SROC S.A.

Represented by António Marques Dias

auditors’ report

:: Edition ::

Galp Energia, S.G.P.S., S.A.Direcção de Comunicação (Communication Department)

Rua Tomás da Fonseca, Torre C1600-209 Lisboa

Phone: (+351) 217 242 500Fax: (+351) 217 242 965www.galpenergia.com

:: Design and Production ::

:: Photos ::

Manuel Aguiar, Paulo Aguiar, Pedro Ferreira and Image Bank

www.galpenergia.com

Documents

Annual Report 2005 - Galp Energia