Tubos Reunidos, S.A. and subsidiaries Consolidated AAAA.pdf · Tubos Reunidos, S.A. and subsidiaries Audit Report, Consolidated annual accounts as at 31 December 2008 and Directors’

Tubos Reunidos, S.A.and subsidiaries

Audit Report,Consolidated annual accounts as at 31 December 2008and Directors’ Report for 2008

PricewaterhouseCoopers Auditores, S.L. – R. M. Madrid, hoja 87.250-1, folio 75, tomo 9.267, libro 8.054, sección 3ª

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Free translation of the auditor’s report on the consolidated annual accounts originally issued inSpanish. In the event of a discrepancy, the Spanish language version prevails

AUDITOR´S REPORT OF THE CONSOLIDATED ANNUAL ACCOUNTS

To the shareholders of Tubos Reunidos, S.A.

We have audited the consolidated annual accounts of Tubos Reunidos, S.A. (Parent company) and itssubsidiaries (the Group), consisting of the consolidated balance sheet as at 31 December 2008, theconsolidated income statement, the consolidated statement of changes in equity, the consolidated cashflow statement and the related notes to the consolidated annual accounts for the year then ended, thepreparation of which is the responsibility of the Directors of the Parent Company. Our responsibility is toexpress an opinion on the consolidated annual accounts taken as a whole, based on the workperformed in accordance with auditing standards generally accepted in Spain, which require theexamination, on a test basis, of evidence supporting the consolidated annual accounts and anevaluation of their overall presentation, the accounting principles applied and the estimates made.

For comparative purposes and in accordance with Spanish Corporate Law, the Parent Company’sDirectors have presented, for each item in the consolidated balance sheet, the consolidated incomestatement, the consolidated statement of changes in equity, the consolidated cash flow statement andthe related notes to the consolidated annual accounts, the corresponding amounts for the previous yearas well as the amounts for 2008. Our opinion refers solely to the 2008 consolidated annual accounts.On 7 April 2008 we issued our audit report on the consolidated annual accounts for 2007 in which weexpressed an unqualified opinion.

In our opinion, the accompanying consolidated annual accounts for 2008 present fairly, in all materialrespects, the consolidated financial position of Tubos Reunidos, S.A. and its subsidiaries as at 31December 2008 and the consolidated results of their operations, changes in consolidated net equityand consolidated cash flows for the year then ended and contain all the information necessary for theirinterpretation and comprehension in accordance with International Financial Reporting Standardsadopted by the European Union, applied on a basis consistent with the preceding year.

The accompanying consolidated Directors' Report for 2008 contains the information that the ParentCompany's Directors consider relevant to the Group's position, the evolution of its business and othermatters and does not form an integral part of the consolidated annual accounts. We have verified thatthe accounting information contained in the aforementioned Directors' Report coincides with that of theconsolidated annual accounts for 2008. Our work as auditors is limited to checking the consolidatedDirectors' Report within the scope already mentioned in this paragraph and it does not include a reviewof information other than that obtained from the accounting records of Tubos Reunidos, S.A. and itssubsidiaries.

PricewaterhouseCoopers Auditores, S.L.

Original in Spanish signed by Francisco Javier DomingoAudit Partner

27 February 2009

The Directors of the Company "TUBOS REUNIDOS, S.A.” holding tax identification number A -48/011555 and domiciled in Amurrio (Álava), in accordance with Article 171 of the Spanish Companies Act hereby prepare the annual accounts and Directors’ Report for TUBOS REUNIDOS, S.A. AND SUBSIDIARIES for 2008, as follows: Consolidated Annual Accounts: • Contents: Two (2) pages of official stationary numbered 0J0977234 and 0J0977403. • Consolidated balance sheets: One (1) page of official stationary numbered 0J0977236. • Consolidated Income Statements: One (1) page of official stationary numbered 0J0977237. • Consolidated statement of changes in equity: One (1) page of official stationary numbered

0J0977238. • Consolidated cash flow statements: One (1) page of official stationary numbered 0J0977239. • Consolidated notes to the annual accounts: Written on ninety-five (95) pages of official

stationary, numbered 0J0977240 through 0J0977334. Directors’ report: Written on eight (8) pages of official stationary, numbered 0J0977335 through 0J0977342, together with the Annual Corporate Governance Report (ACGR): Written on fifty four (54) pages of official stationary, numbered 0J0977343 through 0J0977396. The Company's Directors state that, to the best of their knowledge, the annual accounts prepared in accordance with applicable accounting standards present a true and fair view of the Company's equity, financial situation and the results obtained by the Company and the companies included in consolidation taken as a whole, and that the Directors’ Report includes a faithful analysis of the business results and development and the position of the Company and its consolidated group taken as a whole, together with the description of the main risks and uncertainties faced. For all appropriate purposes and as an introduction to the aforementioned accounts and report, this document is hereby signed by:

Mr. Pedro Abásolo Albóniga (Chairman)

Mr. F. Javier Déniz Hernández (CEO)

Mr. Emilio Ybarra Aznar (Vice-Chairman)

Mr. Pello Basurco Aboitiz

Mr. Alberto Delclaux de la Sota Mr. Francisco Esteve Romero

Mr. Joaquín Gómez de Olea Mr. Juan José Iribecampos Zubia

Mr. Enrique Portocarrero Zorrilla Lequerica Mr. Luis Maria Uribarren Axpe

Ms. Leticia Zorrilla de Lequerica

Amurrio (Alava), 25 February 2009

TUBOS REUNIDOS, S.A. AND SUBSIDIARIES Consolidated Annual Accounts and Consolidated Directors' Report for the year ended 31 December 2008

TUBOS REUNIDOS, S.A. AND SUBSIDIARIES

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Contents of the Consolidated Annual Accounts for Tubos Reunidos, S.A. and Subsidiaries

Note Page CONSOLIDATED BALANCE SHEET CONSOLIDATED INCOME STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS

1 General information 1 2 Summary of the main accounting policies 3 2.1 Basis of presentation 3 2.2 Basis of consolidation 16 2.3 Segment reporting 18 2.4 Foreign currency transactions 19 2.5 Property, plant and equipment 20 2.6 Investment properties 22 2.7 Intangible assets 22 2.8 Losses due to impairment of assets 25 2.9 Financial assets 26 2.10 Derivative financial instruments and hedging 29 2.11 Inventories 29 2.12 Trade receivables 30 2.13 Cash and cash equivalents 30 2.14 Share capital 30 2.15 Trade payables 31 2.16 Borrowings 31 2.17 Taxes 31 2.18 Employee benefits 32 2.19 Provisions 33 2.20 Revenue recognition 34 2.21 Leases 35 2.22 Non-current assets held for sale 35 2.23 Dividend payment 36 2.24 Environment 36 2.25 Current and non-current balances 36

3 Financial risk management 36 3.1 Financial risk factors 36 3.2 Accounting for derivative financial instruments and hedging activities 41 3.3 Fair value estimation 41 3.4 Capital risk management 42

4 Critical accounting estimates and judgments 43 4.1 Critical accounting estimates and assumptions 43 4.2 Critical judgments in applying the entity’s accounting policies 45

5 Segment reporting 45 6 Property, plant and equipment 50 7 Intangible assets 54 8 Investment properties 56 9 Non-current financial assets 57 9.1 Shareholdings in Group companies 58 9.2 Shareholdings recorded using the equity method 59 9.3 Available-for-sale financial assets 59 9.4 Credit quality of financial assets 60

10 Derivative financial instruments 60


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Note Page

11 Deferred tax assets 61 12 Inventories 61 13 Trade and other receivables 63 14 Other current financial assets 65 15 Cash and cash equivalents 66 16 Capital and share premium 66 17 Reserves and retained earnings 69 18 Minority interests 74 19 Deferred income 74 20 Payables 75 21 Borrowings 79 22 Deferred taxes 81 23 Retirement benefit commitments 82 24 Provisions 83 25 Operating revenues 84 26 Other revenues 84 27 Employee benefit expenses 85 28 Other expenses 86 29 Other net gains/(losses) 86 30 Financial income and expense 87 31 Income tax 87 32 Earnings per share 89 33 Dividends per share 89 34 Cash generated from operations 90 35 Contingencies 91 36 Commitments 91 37 Related-party transactions 91 38 Other information 94

DIRECTORS' REPORT FOR 2008


CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2008 AND 2007 (Thousand euros) ASSETS Note 2008 2007 Property, plant and equipment 6 309,324 292,770 Other intangible assets 7 3,854 1,415 Investment properties 8 8,607 - Non-current financial assets 9 13,341 20,288 Deferred tax assets 11/22 13,168 12,924 NON-CURRENT ASSETS 348,294 327,397 Inventories 12 177,683 160,369 Trade and other receivables 13 165,302 154,821 Current tax assets - 6,685 9,061 Other current assets - 37 63 Other current financial assets 14 32,997 100,065 Cash and other cash equivalents 15 18,993 10,637 CURRENT ASSETS 401,697 435,016 TOTAL ASSETS 749,991 762,413

LIABILITIES AND EQUITY Share capital 16 17,468 20,493 Share premium account 16 387 387 Other reserves 17 51,208 51,208 Retained earnings 17 179,148 292,679 Cumulative exchange differences 17 (1,991) (2,170) Less: Treasury shares 16 (2,343) - Less: Interim dividend 17 (12,170) (14,427) EQUITY ATTRIBUTED TO HOLDERS OF EQUITY INSTRUMENTS IN THE PARENT 231,707 348,170 Minority interests 18 8,138 8,319 NET EQUITY 239,845 356,489 DEFERRED INCOME 19 47,984 47,650 Borrowings 21 135,285 70,375 Deferred tax liabilities 22 23,118 22,638 Provisions 24 20,664 23,822 Other non-current liabilities 20 20,118 13,034 NON-CURRENT LIABILITIES 199,185 129,869 Borrowings 21 80,955 75,791 Trade and other payables 20 137,252 131,855 Current tax liabilities - 33,703 20,759 Derivative financial instruments 10 11,005 - Other current liabilities 20 62 - CURRENT LIABILITIES 262,977 228,405 TOTAL LIABILITIES AND EQUITY 749,991 762,413 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts


CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 (Thousand euros) Note 2008 2007 Net turnover 25 728,360 637,208 Other income 26 10,024 4,567 Changes in inventories of finished goods and work in progress 12 15,426 12,755 Supplies 12 (369,197) (300,934) Employee benefit expenses 27 (118,514) (111,239) Amortization 6/7/9 (21,242) (19,345) Other expenses 28 (114,133) (96,719) Other net gains/(losses) 29 1,167 (3,350) OPERATING PROFIT 131,891 122,943 Financial income 30 1,124 4,592 Financial expenses 30 (14,574) (9,277) Exchange differences (net) 30 (5,423) (4,764) Result on changes in fair value of financial instruments 30 (3,140) 734 Impairment and results obtained from disposal of financial instruments 30 9 - Stake in profits obtained by associated companies and combined businesses consolidated using the equity method 9 13 (28) PROFIT BEFORE TAX FROM CONTINUING OPERATIONS 109,900 114,200 Income tax expense 31 (28,104) (28,530) PROFIT FOR THE YEAR 81,796 85,670 Minority interests 18 50 (569) PROFIT ATTRIBUTABLE TO HOLDERS OF PARENT EQUITY INSTRUMENTS 81,846 85,101

Year ended

31 December Note 2008 2007 Earnings per share attributable to Company shareholders during the year ( expressed in euros per share) - Basic 32 0,466 0,415 - Diluted 32 0,466 0,415 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 (Thousand euros)

Attributable to the Company’s shareholders

Share capital

(Note 16)

Treasury shares

(Note 16)

Share premium (Note 16)

Revaluation reserves and

other reserves (Note 17)

Accumulated exchange

differences (Note 17)

Retained earnings (Note 17)

Interim dividend for

the year (Note 17)

Minority interests (Note 18) Total equity

Balance at 31 December 2006 20,493 - 387 51,208 (1,885) 222,948 (5,635) 7,989 295,505

Distribution of 2006 profits

- Dividends - - - - - (15,370) 5,635 (239) (9,974)

Interim dividend - - - - - - (14,427) - (14,427)

Other movements - - - - (285) - - - (285)

Profit for 2007 - - - - - 85,101 - 569 85,670

Balance at 31 December 2007 20,493 - 387 51,208 (2,170) 292,679 (14,427) 8,319 356,489

Purchases of treasury shares - (172,343) - - - - - - (172,343)

Share capital reduction (3,025) 170,000 - - - (166,975) - - -

Distribution of 2007 profits

- Dividends - - - - - (28,402) 14,427 (131) (14,106)

Interim dividend - - - - - - (12,170) - (12,170)

Other movements - - - - 179 - - - 179

Profit for 2008 - - - - - 81,846 - (50) 81,796

Balance at 31 December 2008 17,468 (2,343) 387 51,208 (1,991) 179,148 (12,170) 8,138 239,845 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts


CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 (Thousand euros) Year ended

31 December Notes 2008 2007 Cash flows from operating activities Cash generated from operations 34 188,235 29,836 Interest paid - (13,282) (9,277) Taxes paid - (7,213) - Net cash generated from operating activities 167,740 20,559 Cash flows from investing activities Payables due to the acquisition of assets 20 10,366 5,258 Acquisition of property, plant and equipment 6 (37,418) (37,710) Revenues from sale of property, plant and equipment 34 502 2,822 Acquisition of intangible assets 7 (1,052) (804) Acquisition of investment properties 8 (8,910) - Disposals of available-for-sale financial assets 6,965 2,296 Net cash used in investing activities (29,547) (28,138) Cash flows from financing activities Acquisition and write-off of treasury shares 16 (172,343) - Additions of outside resources received to acquire treasury shares 16 95,000 - Draw down of outside resources 21 (26,218) 29,438 Dividends paid to the Company’s shareholders 17 (26,145) (24,162) Dividends paid to minority interests 18 (131) (239) Net cash used in financing activities (129,837) 5,037 Net (decrease)/increase in cash and cash equivalents 8,356 (2,542) Cash and bank overdrafts at beginning of the year 15 10,637 13,179 Cash and bank overdrafts at the end of the year 15 18,993 10,637 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts

TUBOS REUNIDOS, S.A. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS FOR 2008 AND 2007 (Thousand euros)

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1. General information a) Composition of the Group and its Activities Tubos Reunidos, S.A. (T.R.), engages in the manufacture of seamless steel pipes. Its registered address for corporate and tax purposes is located in Amurrio (Alava), together with its only production center. The company is the parent of a group consisting of several companies (see accompanying table) that engage in activities in the seamless pipe, distribution, automotive and other industries. The list of subsidiaries, all of which are consolidated using the full consolidation method, as the Company has a majority stake and control in all cases, is as follows:

Company and registered address Activity %

Owned by the group

company: Auditor Productos Tubulares, S.A.U. Valle de Trápaga (Vizcaya) (PT)

Industrial 100 T.R. SCD

Almacenes Metalúrgicos, S.A. (ALMESA) Güeñes (Vizcaya)

Trading 100 T.R. PwC

T.R. Aplicaciones Tubulares de Andalucía, S.A. (TRANDSA) Chiclana (Cádiz)

Industrial 100 T.R. PwC

Industria Auxiliar Alavesa, S.A. (INAUXA) Amurrio (Alava)

Industrial 62,5 T.R. PwC

Aceros Calibrados, S.A. (ACECSA) Pamplona (Navarra)

Industrial 100 T.R. -

T.R. Comercial, S.A. Amurrio (Alava)

Trading 100 T.R. -

Aplicaciones Tubulares, S.L. Bilbao (Vizcaya)

Dormant 100 T.R. -

T.R. América, Inc. Houston (Texas)

Trading 100 T.R. -

Depósitos Tubos Reunidos-Lentz, T.R. Lentz, S.A. (TR-Lentz) Comunión (Alava)

Industrial 50 T.R. Attest

Aplicaciones Tubulares, C.A. (ATUCA) Edo. Miranda (Venezuela)

Trading 100 T.R. -

Clima, S.A.U. (CLIMA) Bilbao

Holding company 100 T.R. -

Profesionales de Calefacción y Saneamiento, S.L. (PROCALSA) Barcelona

Trading 100 Almesa PwC

Almesa Internet, S.A. Güeñes (Vizcaya)

Holding company 100 Almesa -

Macrofluidos, S.A. Oporto (Portugal)

Trading 100 Almesa -


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In 2008 the shareholding (100%) in Agrelo, S.L. was acquired through its subsidiary Almacenes Metalúrgicos, S.A., for a total cost of €0.9 million. This company engages in the marketing of pipes and related products in the construction industry and is located in La Coruña, it is not included within the scope of consolidation due to its low relative importance (Note 9). The value of the interest held in these companies is recorded by Tubos Reunidos, S.A. at the net amount of €22.4 million (2007: €22.4 million) and by Almacenes Metalúrgicos, S.A. at the next amount of €7.2 million (2007: €6.3 million). The list of companies associated with the Group, all of which are consolidated using the equity method (Note 9), is as follows:

Company and registered address Activity % Owned by the group

company: Landais Outsourcing, S.L. (Vizcaya) Computer services 30 P.T. Cash Sallen Business, S.L. (Madrid) R&D 25 P.T. Perimetral Sallen Technologies, S.L. (Madrid) R&D 25 P.T. A subsidiary of Almesa with a net carrying value of €145 thousand (2006: €145 thousand) is excluded from consolidation due to the fact that it has little significance for the consolidated annual accounts (Note 9). The companies that were not consolidated in 2008 and 2007 do not carry out relevant activity levels with respect to the consolidated figures and do not record any significant payables, liabilities or contingencies at the Group level. The annual accounts for 2007 were prepared by the Company's Board of Directors on 27 February 2008 and were approved by shareholders at a General Meeting held on 25 June 2008. The annual accounts for 2008 have been prepared by the Board of Directors on 25 February 2009 and have yet to be approved by shareholders at a General Meeting. However, Management understands that they will be approved without modification.


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b) Merger project At the meeting held on 7 May 2008 the Board of Directors of the Parent Company approved the merger project involving Tubos Reunidos, S.A. and Larreder, S.L.U. (Condesa Group). This Merger Project establishes the merger of Larreder, S.L.U. (Target Company) into Tubos Reunidos, S.A. (Acquiring Company and parent of Tubos Reunidos Group), through the dissolution without liquidation of the former and the transfer of all of the target company's equity to the Acquiring Company and the universal acquisition of all of its assets and liabilities, including all rights and obligations, relating to the Target Company. The Company reported the suspension of the aforementioned merger process to the Spanish Stock Market Commission as a relevant event on 26 November 2008, in accordance with the agreement reached by both parties. 2. Summary of the main accounting policies The main accounting policies adopted when preparing these consolidated annual accounts are described below. These policies have been applied consistently in all years presented in these consolidated annual accounts. 2.1 Basis of presentation The Group’s consolidated financial statements at 31 December 2008 have been drawn up in accordance with the International Financial Reporting Standards adopted for use in the European Union (IFRS-EU) and approved under European Commission Regulations in force at 31 December 2008. The consolidated annual accounts have been prepared on a historical cost basis, as modified by the revaluation of available-for-sale financial assets and financial assets and liabilities (including derivatives) at fair value with changes in the income statement.


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IFRS The preparation of consolidated annual accounts in conformity with IFRS-EU requires the use of certain critical accounting estimates. The application of IFRS also requires that management exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 4. a) Standards adopted early In 2007 the Group adopted IFRIC 11, “IFRS 2 – Group and the Treasury Share Transactions”. This interpretation provides guidance to determine whether a share-based transaction involving an entity's own equity instruments or group companies must be recognized as an equity-settled or cash-settled transaction in the individual accounts of the parent company and group companies. The application of this interpretation has no effect on the Group’s accounts. b) Rules, amendments and interpretations of rules entering into force in 2008 IAS 39 – (Revised) “Financial Instruments: Recognition and measurement” and IFRS 7 (Amendment) “Financial Instruments: Disclosures”- Reclassification of financial instruments. These revisions allow for the reclassification, under exceptional circumstances (current financial crisis), the financial assets included under the category "held for trading" by deducting them from the category of "items stated at fair value through changes in profit and loss". The Company did not apply this measure in 2008. IFRIC 14, “IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction” addresses the guidelines for evaluating the limit established by IAS 19 regarding the amount of a surplus that can be recognized as an asset. It also explains how the pension asset/liability may be affected by minimum financing obligations established by contract or by law. This interpretation does not have any effect on the Group's accounts, given that the Company has a financing deficit and it is not subject to minimum financing requirements.


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c) Standards, amendments and interpretations that enter into force in 2008 but

whose application does not have any effect on the Group's accounts. The following interpretation (which has not yet been adopted by the European Union) of existing standards is mandatory for years commencing as from 1 January 2008, although it has no effect on the Group's operations: • IFRIC 12, “Service Concession Agreements" d) Rules, amendments and interpretations of existing standards that have not yet

entered into force and which the Group has not adopted early. At the date these accounts were prepared, the IASB had published the interpretations set out below which, except in the case of IFRS-EU 8, have not yet been approved by the European Union. These interpretations are of mandatory compliance in all years starting as from 1 January 2009 and subsequent years, although the Group has not adopted them: • IAS 23 (Revised), “Borrowing costs” (in force as from 1 January 2009). This

Standard requires companies to capitalize borrowing costs that are directly attributable to the acquisition, construction, production of a qualified asset (any which necessarily requires a substantial period of time before being ready for use or for sale) as part of the cost of the asset. The option to recognize borrowing costs immediately as an expose of the period is eliminated. The Group will apply the revised IAS 23 as from 1 January 2009, although at the moment the Group is still analyzing its effects.

• IAS 1 (Revised), “Presentation of financial statements" (in force as from 1 January

2009). This revised standard prohibits the presentation of income and expense items (i.e. changes in equity due to transactions with non-shareholder third parties) in the statement of changes in equity and requires the changes in equity due to transactions with non-shareholder third parties be presented separate from changes in equity due to transactions with shareholders. All changes in equity due to transactions with non-shareholders third parties must be presented in an income statement, although companies may choose to present a single statement (statement of total revenues) or two statements (an income statement and a statement of total revenues). When a company re-expresses or reclassifies the comparative information it must present a balance sheet re-expressed at the beginning of the comparative period, in addition to the balance sheet at the end of the current year and the comparative period. The Group will apply IAS 1 (Revised) as from 1 January 2009. It is likely that both the income statement and the statement of total revenues will be presented as income statements.

• IFRS 2 (Revised) “Share-based payments” (in force as from 1 January 2009). This

amendment addresses the conditions for the irrevocable nature of the granting of rights and cancellations. It clarifies that only service and performance conditions may be considered to be concession conditions. Other characteristics of share-based payments are not considered to be concession conditions, but rather they must be included in the calculation of fair value at the concession date in transactions with employees and third-parties that render similar services, such that they have no effect on the number of awards that are expected to consolidate or the subsequent valuation at the concession


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date. All cancellations initiated by the company and by third-parties must receive the same accounting treatment. The Group will apply IFRS 2 (Revised) as from 1 January 2009. It is not expected to have a significant effect on the Group's financial statements.

• IAS 32 – (Revised) “Financial Instruments: Presentation” and IAS 1 (Revised)

“Presentation of financial statements"-"Puttable instruments and obligations arising on liquidation" (in force as from and January 2009). These amendments require companies to reclassify financial instruments that may be surrendered and instruments (or their components) that give rise to a company obligation to provide a third-party with a fraction of its net assets in the event of equity liquidation, provided that the instrument has certain characteristics and meets certain conditions. The Group will apply IAS 32 and IAS 1 (Revised) as from 1 January 2009 although they are not expected to have any effect on the financial statements.

• IFRS 1 (Revised) "First-time adoption of IFRS” and IAS 27 "Consolidated and

separate financial statements" (in force as from 1 January 2009). The amended standard allows first-time adopters to use the fair value or the carrying value resulting from applying the above accounting principles as an attributed cost of investments in subsidiaries, combined businesses and associated companies in the separate financial statements. The revision also eliminates the definition of the cost method from IAS 27 and replaces it with the requirement to present dividends as revenues in the separate financial statements for the investor. This revision does not have any effect on the Group's financial statements.

• IAS 27 (Revised), “Consolidated and separate financial statements" (in force as

from 1 July 2009). The revised standard requires that all transactions with minority shareholders be recorded under equity, provided that there are no changes in control, such that these transactions no longer have an effect on goodwill and do not lead to any profit or loss. The revision also covers the accounting treatment to be applied when control is lost. Any minority shareholding maintained must again be measured at fair value and the effect recorded in the income statement. The Group will apply IAS 27 (Revised) on a prospective basis to transactions with minority shareholders as from 1 January 2010.


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• IFRS 3 (Revised) "Business combinations" (in force as from 1 July 2009). The

revised standard maintains the acquisition method for business combinations, although significant changes are introduced. For example, all payments are recognized at fair value at the date of acquisition, and the contingent payments that are classified as liabilities are measured at each closing date at fair value, and all changes are recorded in the income statement. An accounting policy option is introduced at the business combination level, consisting of measuring minority shareholdings at fair value or the proportional value of the net assets and liabilities recorded by the acquired company. All transaction costs are taken to expenses. The Group will apply IFRS 3 (Revised) on a prospective basis to all business combinations as from 1 January 2010.

• IFRS 1 (Revised) "First-time adoption of IFRS" (in force as from 1 January 2009). As

part of its annual improvement project, in 2007 the Board proposed to revise IFRS 1 to make it more understandable for users and design it such that it can better accommodate future changes. In this version, revised in November 2008, the previous version is essentially maintained but within a modified structure. This revised standard has yet to be adopted by the European Union.

• IAS 39 (Revised) "Items that may be designated as hedges" (in force as from 1 July

2009). This revision introduces two significant changes when it prohibits designating inflation as a component that may be hedge on a fixed-rate debt and including the temporary value in the hedged risk when options are designated to be hedges. This revised standard has yet to be adopted by the European Union.

Improvement project published by the IASB in May 2008, which was adopted by the European Union in January 2009 and affects the following standards and interpretations.


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- IFRS 5 (Revised) “Non-current assets held for sale and discontinued

operations" (and relating to the revision of IFRS 1 "First time adoption of IFRS") (in force as from 1 July 2009). This revision clarifies that all assets and liabilities at a subsidiary must be classified as held for sale if control over the subsidiary is lost as a result of a partial plan covering its sale. In the event that it meets the conditions to be considered a discontinued operation, the relevant breakdowns regarding the subsidiary must be included. As a result, IFRS 1 has also been adapted to take into account this revision, such that its application is prospective as from the date of transition to IFRS. The Group will adopt IFRS 5 (Revised) on a prospective basis with respect to all partial sales of subsidiaries that take place as from 1 January 2010.

- IAS 23 (Revised), “Borrowing costs” (in force as from 1 January 2009). The

definition of borrowing costs has been revised so that interest is calculated in accordance with the effective interest rate defined under IAS 39 (Financial Instruments: Recognition and measurement". This eliminates the inconsistent terminology between IAS 39 and IAS 23. The Group will apply IAS 23 (Revised) on a prospective basis with respect to the borrowing costs associated with qualifying assets as from 1 January 2009.

- IAS 28 (Revised) "Investments in associates" (and the relevant amendments

to IAS 32 "Financial instruments: Presentation" and IFRS 7: “Financial instruments: Disclosures") (in force as from 1 January 2009). An investment in an associate is considered to be a separate asset for the purposes of calculating value impairment. Any impairment loss is not attributed to specific assets included under the investment, for example, goodwill. Any reversal of impairment losses are recognized as an adjustment to the investment balance to the extent that the recoverable amount of the investment has increased. The Group will apply IAS 28 (Revised) to the impairment tests applied to investments in subsidiaries and related impairment losses as from 1 January 2009.


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- IAS 36 (Revised), “Asset impairment” (in force as from 1 January 2009). In cases where fair value, less selling costs, is calculated based on discounted cash flows equivalent breakdowns of value-in-use calculations must be presented. The Group will apply IAS 36 (Revised) and will present, if appropriate, the breakdowns required for impairment tests as from 1 January 2009.

- IAS 38 (Revised), “Intangible assets” (in force as from 1 January 2009). An

interim payment may only be recognized when made as a prepayment to obtain a right to access certain assets or services. For this reason, the expense for sending catalogs is recorded at the time that they become available and not at the time they are distributed to customers, which the policy currently applied. The Group will start to apply IAS 38 (Revised) as from 1 January 2009, although it is believed that this revision will not affect the Group's operations.

- IAS 19 (Revised), “Employee compensation” (in force as from 1 January 2009).

- This revision clarifies that improvements to a plan that give rise to a change to

the extent that the promised benefits will be affected by future salary increases and be considered a reduction, whereas revisions that give rise to a change in benefits attributable to past services give rise to a negative past service costs, provided that there is a decrease in the present value of the defined benefit obligation.

- The definition for yields given by assets linked to the plan has been modified to

indicate that plan administration costs are deducted from the calculation of the yield from linked assets only to the extent that those costs have been excluded from the measurement of the defined benefit obligation.

- The distinction between short and long-term employee benefits is based on

whether or not the benefits will be settled within 12 months following the date on which the services have been rendered, or after that time.

- IAS 37 “Provisions, contingent assets and liabilities" requires that contingent

liabilities be broken down, and not only recognized, in the financial statements. IAS 19 has been revised in line with this standard.


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The Group will apply IAS 19 (Revised) as from 1 January 2009, although currently it has no employee compensation plans of this type.

- IAS 39 – (Revised) “Financial Instruments: Recognition and measurement" (in

force as from 1 January 2009):

- This revision clarifies that it is possible that there may be movements towards and from the category of financial assets at fair value through changes in profit and loss in cases in which a derivative starts (or ends) being classified as a hedging instrument in a hedge for cash flow or net investments.

- The definition of a financial asset or liability at fair value through changes in

profit and loss also changes, to the extent that they refer to items held for trading. A financial asset or liability that forms part of a financial instrument portfolio that is managed together, and for which there is evidence of a recent short-term profit, is included in that portfolio as from initial recognition.

- The current guidelines for designating and documenting hedging relationships

stipulate that a hedging instrument must involve a third-party outside the unit that is presenting financial information and uses as an example a company segment. This means that in order to apply hedge accounting at the segment level, the segment must meet hedge accounting requirements. The revision eliminates examples of segments to make them coherent with IFRS 8 "Operating segments" which requires that segment reporting be based on the information presented to the members of management responsible for taking decisions. For the purposes of segment reporting, currently each subsidiary designates the cash contracts held with the group to hedge cash flows such that this hedge is presented in the segment to which the hedged item pertains. This presentation is coherent with the information managed at the decision-taking level (see Note 3.1). After the revision enters into force, the hedge will continue to be in effect and will be reflected in the segment to which the hedged item pertains (Information supplied to members of management that take decisions), although the Group will not formally document or test this hedging relationship.


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- When a debt instrument is again measured, once the hedge accounting at fair

value has ceased, the revision clarifies that the revised effective interest rate method must be used

The Group will apply IAS 39 (Revised) as from 1 January 2009. Its application is not expected to have any effect on the Group’s income statement.

- IAS 1 (Revised), “Presentation of financial statements" (in force as from 1

January 2009). This revision clarifies that some, and not all, financial instruments classified as held for trading, in accordance with IAS 39 "Financial instruments: Recognition and measurement" are examples of current assets and liabilities, respectively. The Group will apply this revision as from 1 January 2009 and it is not expected to have any effect on its financial statements.

- Other minor changes to IFRS 7 “Financial instruments: Disclosures”, IAS 8

“Accounting policies, changes in accounting estimates and errors”, IAS 10 “Events after the reporting period”, IAS 18 “Revenue” and IAS 34 “Interim financial reporting”, are not likely to have an effect on the Group’s financial statements and have not been analyzed in detail.

• IFRIC 16 “Hedges of a net investment in a foreign operation" (in force as from 1

October 2008). This interpretation addresses the accounting treatment to be applied to hedges of a net investment, including the fact that the hedge of the net investment relates to differences in the functional currency and not presentation, as well as the fact that the hedging instrument may be maintained anywhere within the Group. The requirements of IAS 21 "Effects of changes in foreign exchange rates" are applicable to the hedged item. The Group will apply IFRIC 16 as from 1 January 2009. It is not expected to have any material effect on the Group's financial statements.


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• IFRS 8 "Operating Segments", is mandatory for years commencing as from 1 January 2009. IFRS 8 replaces IAS 14 and unifies the requirements for presenting financial information by segments with the US standard SFAS 131 "Disclosures about segments of an enterprise and related information". The new Standard requires a management approach under which segment information is presented on the same basis as which it is used for internal purposes. The Group will apply IFRS 8 as from 1 January 2009. The expected impact of this standard is still being evaluated in detail by Management, although the number of segments being reported is not expected to change, presenting the information in line with the internal information prepared and supplied to decision-making bodies.

• IFRIC 17 “Distributions of non-Cash assets to owners” This interpretation

addresses how distributions of non-cash assets should be measured when a company distributes dividends to shareholders. This interpretation demands that interim dividends be recorded when they have been appropriately authorized, the dividend must be measured at the fair value of the net assets to be distributed and the difference between the fair value of the dividend paid and the carrying value of the net assets distributed must be recognized in the income statement. This interpretation is applicable on a prospective for all years starting as from 1 July 2009 and has yet to be adopted by the European Union.

• IAS 27 (revised in May 2008) and IFRS 1 “Cost of investing in a subsidiary, a

combined business and an associate”, allowing first-time adopters of IFRS to apply fair value or carrying value determined under the preceding system to measure the initial cost of investments in subsidiaries, combined businesses and associates in separate financial statements. The revision also eliminates the definition of the cost method from IAS 27 and replaces it with the requirement to present dividends as revenues in the separate financial statements for the investor. This modification has no effect on the Group.


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e) Standards, amendments and interpretations of existing standards that have not yet entered into force and which are not relevant to the Group's operations.

At the date these accounts were prepared, the IASB had published the interpretations listed below, which are mandatory for all years starting as from 1 January 2008 but which are not relevant within the context of the Group's activities: • IFRIC 13, “Customer loyalty programs" (in force as from 1 July 2008). IFRIC 13

states that in those cases in which assets or services are rendered together with a loyalty incentives (for example, loyalty points or free products), the agreement is considered to be a multiple item contract and the amount received or to be received from the customer must be attributed among the components on a fair value basis. IFRIC 13 is not relevant for the Group's operations given that none of the Group's companies have customer loyalty programs.

• The revisions listed below relate to the improvement project published by the IASB in

May 2008 and were adopted by the European Union in January 2009:

- IAS 16 (Revision) “Property, plant and equipment" (and the relevant revision of IAS 7 "Cash flow statement") (in force as from 1 January 2009). Those companies whose primary activity consists of leasing and subsequently selling assets will present the amount received from those sales as revenues and assets must be reclassified to inventories at the time that the asset becomes held-for-sale. As a result, IAS 7 is amended indicating that cash flows that derive from the acquisition, rental and sale of those assets will be classified as cash flows from operating activities. This revision will not have any impact on the Group's activities given that no group company engages in the rental and sale of assets.

- IAS 27 (Revised), “Consolidated and separate financial statements" (in force

as from 1 January 2009). In those cases in which an investment in a subsidiary is accounted for in accordance with IAS 39 “Financial instruments: Recognition and measurement”, are classified as held-for-sale in accordance with the IFRS 5 " Non-current assets held-for-sale and discontinued operations”, and will continue to be subject to IAS 39. This revision will not have any impact on the Group given that it applies the policy of accounting for investments in subsidiaries at cost in the separate financial statements.


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- IAS 28 (Revised) "Investments in associates" (and the relevant amendments

to IAS 32 "Financial instruments: Presentation" and IFRS 7 "Financial instruments: Disclosures") (in force as from 1 January 2009). When an investment in an associate is accounted for in accordance with IAS 39 "Financial instruments: Recognition and measurement", only certain breakdowns established by IAS 28 must be included, in addition to the requirements of IAS 32 "Financial instruments: Presentation" and IFRS 7 "Financial instruments: Disclosures”. This revision will not have any effect on the Group's operations, given that the Group's policy regarding investments in associates is that they are recognized in accordance with the equity method.

- IAS 29 (Revised), “Financial reporting in hyperinflationary economies" (in

force as from 1 January 2009). The standard's guidelines are revised to clarify that certain assets and liabilities must be measured at fair value instead of at historic cost. This revision will not have any effect on the Group's operations, since no subsidiary or associate operates in hyperinflationary economies.

- IAS 31 (Revised) "Interests in joint ventures" (and relevant amendments to IAS

32 and IFRS 7) (in force as from 1 January 2009). When an investment in a joint venture is recorded in accordance with IAS 39, only certain breakdowns established by IAS 31 are required, in addition to those required by IAS 32 "Financial instruments: Presentation" and IFRS 7 "Financial instruments: Disclosures”.

- IAS 38 (Revised), “Intangible assets” (in force as from 1 January 2009). This

revision eliminates the mention of "on rare occasion, or perhaps never" to justify the use of a method that results in a depreciation rate that is lower than the result of applying the straight-line method. This revision will not have any effect on the Group's operations, given that all intangible assets are amortized in accordance with the straight-line method.


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- IAS 40 (Revised) "Investment property" (and relevant amendments to IAS 16)

(in force as from 1 January 2009). Properties that are under construction or under development for future use as investment properties are included within the scope of IAS 40. Therefore, when the fair value model is used, these properties must be measured at their fair value. However, when the fair value of investment properties under construction cannot be reliably determined, the property will be measured at cost until the date on which construction ends or the date on which the fair value may be reliably determined, if earlier. This revision will not have any effect on the Group's operations since investment properties are stated at cost.

- IAS 41 (Revised), “Agriculture” (in force as from 1 January 2009). A market

discount rate must be used in those cases in which the fair value is calculated based on discounted cash flows and the prohibition against considering biological transformation when calculating fair value is eliminated. This revision will not have any effect on the Group's operations given that it does not carry out any activities in the agricultural area.

- IAS 20 (Provision) "Accounting for government grants and disclosure of

government assistance" (in force as from 1 January 2009). The benefit of a loan at a lower-than-market rate granted by a public entity is measured at the difference between the carrying value in accordance with IAS 39 "Financial instruments: Recognition and measurement", and the amount received recognized in accordance with IAS 20.

- Other minor revisions of IAS 20 "Accounting for government grants and

disclosure of government assistance", IAS 29 "Financial reporting in hyperinflationary economies", IAS 40 "Investment properties" and IAS 41 "Agriculture", included in the IASB’s improvement project in May 2008, do not have an effect on the Group's financial statements due to the reasons indicated above.


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• IFRIC 15 “Agreements for the construction of real estate" (in force as from 1

January 2009). This interpretation addresses whether IAS 18 "Revenue" or IAS 11 "Construction contract" should be applied to certain transactions. It is likely that IAS 18 will be applicable to a larger number of transactions. This interpretation is not relevant to the Group's operations given that revenues are recorded in accordance with IAS 18 and not IAS 11. This interpretation has yet to be adopted by the European Union.

After analyzing the new accounting standards and interpretations not yet adopted by the European Union to be applied in years commencing 1 January 2008 or afterwards, the Company does not expect them to have any significant effect on the consolidated annual accounts. 2.2 Basis of consolidation a) Subsidiaries Subsidiaries are all those companies where the Group is able to manage the financial and operations policies which are generally accompanied by a shareholding involving more than half of the voting rights. When evaluating whether the Group controls another company the existence and the effect of potential voting rights that may currently be exercised or converted are taken into consideration. Subsidiaries are consolidated as from the date on which control is transferred to the Group and they are excluded from consolidation on the date that control is no longer held. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.


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The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. Acquisition cost is the fair value of the assets delivered, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus all costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the acquisition cost is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. b) Minority transactions and interests The Group applies the policy of treating transactions with minority shareholdings as transactions with third parties outside the Group. The disposal of minority interests gives rise to gains and/or losses for the Group, which is recognized in the income statement. The acquisition of minority shareholdings gives rise to Goodwill, which is the difference between the price paid and the relevant proportion of the carrying value of the subsidiary’s net assets. c) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes, if applicable, Goodwill (net of any accumulated impairment loss) identified during the acquisition. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost.


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The Group’s share in the profits/(losses) that arise subsequent to the acquisition of Associates is recognized in the income statement and its share in movements in reserves taking place after the acquisition is recognized under reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share in the losses obtained by an associate is equal to or exceeds its shareholding, including any other unsecured receivables, the Group does not recognize any additional losses unless it has incurred obligations, or made payments, on behalf of the Associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Gains or losses deriving from the dilution of associates are recognized in the income statement. d) Consolidated Annual Accounts Group Company annual accounts used in the consolidation process all relate to the period ended 31 December in each year. Note 1 provides details identifying each subsidiary and associate included within the scope of consolidation. 2.3 Segment reporting A business segment is a group of assets and transactions the aim of which are to supply products or services subject to risks and returns which differ from those of other business segments. A geographical segment aims to supply products or services in a specific economic environment subject to risks and returns which differ from those of other segments operating in different economic environments. Segment reporting by the Group is primarily by business and secondarily on a geographical basis (Note 5).


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2.4 Foreign currency transactions a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated annual accounts are presented in euro, which is the parent company’s functional and presentation currency. b) Transactions and balances Foreign currency transactions are translated to the functional currency using the exchange rates in force at the transaction dates. Foreign currency gains and losses resulting from the settlement of transactions and translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currency are recognized in the income statement, except when deferred in equity in accordance with hedge accounting. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed through conversion differences resulting from changes in the amortized cost of the security and other changes in the its carrying value. Translation differences are recognized under profit and loss for the year and other changes in the carrying value are recognized under equity. Translation differences concerning other non-monetary items, such as equity instruments recognized at fair value through changes in the profit and loss, are presented as part of the gain or loss affecting fair value. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity. c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) The assets and liabilities on each balance sheet presented are translated at the closing

exchange rate at the balance sheet date;


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(ii) The income and expenses in each income statement are translated at the average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates existing at the transaction dates, in which case income and expenses are translated at the rates on the transaction dates); and

(iii) All resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 2.5 Property, plant and equipment Property, plant and equipment is recognized at cost less depreciation and accumulated impairment losses, except for land, if any, which is presented net of impairment losses. Historic cost includes the expense is directly attributable to the acquisition of the items concerned. Subsequent costs are included in the carrying value of the asset or are recognized as a separate asset, only when it is likely that future profits associated with those items will flow to the Group and when the cost of the item may be reliably determined. The carrying value of the replaced component is eliminated from the accounts. All other repairs and maintenance expenses are charged to the income statement in the year in which they are incurred. No depreciation is charged on land. Depreciation of other assets is calculated on a straight-line basis in order to allocate costs to residual values based on the estimated useful lives of the assets in question:


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Estimated years

of useful life Buildings 30 – 50 Plant and machinery 10 – 18 Fixtures, fittings, tools and furnishings 10 Other assets 6 – 15 The residual value and useful life of assets is reviewed, and adjusted if necessary, at each balance sheet date. When an asset’s carrying value exceeds its estimated recoverable value, carrying value is reduced immediately to the recoverable amount (Note 2.8). Gains and losses obtained on the sale of property, plant and equipment is calculated by comparing the revenue obtained against the carrying value and are included in the income statement under “Other net gains/(losses)” (Note 29).


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2.6 Investment properties Investment properties consist of land and buildings (industrial premises), as well as residential housing, that are owned and maintained to obtain profits through their sale and are not occupied by the Company. The assets included under this heading are presented at acquisition cost less accumulated depreciation and any impairment losses. To calculate depreciation of property investments the straight-line method is used in accordance with the estimated useful life of those assets, which ranges between 30 and 50 years. 2.7 Intangible assets a) Emission rights Emission rights awarded to the parent company or to subsidiaries in accordance with the National Assignment Plan (Law 1/2005, 9 March) are recorded as an intangible asset at fair value (market value at the time of assignment) crediting Deferred Revenues. Emission rights acquired subsequently to comply with coverage requirements for the emission of gases produced by the consolidated companies are stated at acquisition cost. Deferred revenues are credited to the income statement (Other revenues) in accordance with the expensing of the emissions associated with the rights received free of charge. The expenses generated due to the emission of greenhouse gases are recorded in accordance with the use of the emission rights, assigned or acquired, to the extent that such gases are emitted during the production process, crediting the relevant provision account. Emission rights recorded as intangible assets are canceled as the balancing entry in the provision for the costs generated by the emissions made at the time they are delivered to the Government to offset commitments.


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b) Computer applications Computer software acquired is capitalized on the basis of the costs incurred in its acquisition and tailoring for specific use. These costs are amortized over the estimated useful lives of the assets (4 to 8 years). Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. The costs directly related to the production of unique computer programs that may be identified and are controlled by the Group, and when it is likely that they will generate profits exceeding costs from more than one year, are recognized as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer program development costs recognized as assets are amortized over the programs’ estimated useful lives (not more than 6 years).


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c) Research and development expenses Research expenses are recognized as an expense when incurred. The costs incurred by development projects (relating to the design and testing of new or improved products) are recognized as an intangible asset when it is likely that the project will be successful, taking into account its technical and commercial viability, management has the intention to complete the project, and there are the necessary technical and financial resources to do so, the Company has the capacity to use or sell the assets generating probable profits and its costs may be reliably estimated. Other development costs are recognized as an expense when incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Development costs with a definite useful life which are capitalized are amortized as from the start of the commercial production of the product on a straight line basis over the period over which profits are expected to be generated, without exceeding five years. Development assets are subjected to impairment tasks in accordance with IAS 36. d) Concessions, patents and licenses Concessions, patents and licenses acquired from third parties are stated at a historic cost. Those acquisitions made through business combinations are recognized at fair value at the acquisition date. Trademarks and licenses have a definite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight line method to assign the cost of trademarks and licenses over their estimated useful lives (4 to 6 years).


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e) Goodwill Goodwill represents the amount paid for the acquisition of customer portfolio rights. This intangible asset, which has a definite life, is amortized over the period over which this change is expected to generate profits for the Group (Note 7). Goodwill generated by business combinations on the acquisition of unconsolidated subsidiaries (Notes 1 and 9) are recorded as an increase in the value of the investment and is calculated as the difference between the fair value of the acquired assets and the amount paid for the acquisition. Goodwill deriving from transactions in 2008 has not undergone any impairment. 2.8 Losses due to impairment of assets Assets that have an indefinite useful life are not depreciated and are tested on an annual basis for potential impairment. Assets subject to depreciation are tested for impairment losses provided that an event or change in circumstances indicates that the carrying value may not be recoverable. An impairment loss is recognized when the carrying value of the asset exceeds its recoverable value. The recoverable amount is the fair value of an asset less the higher of costs deriving from its sale or its value-in-use. For the purposes of evaluating impairment losses, assets are grouped at the lowest level at which there are identifiable separate cash flows (cash generating units). Non-financial assets, other than goodwill, which have suffered from impairment are tested at each balance sheet date to determine if there has been any reversal of the loss.


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2.9 Financial assets 2.9.1 Classification The Group classifies its investments in the following categories: at fair value through changes in profit and loss, loans and receivables, held-to-maturity and financial assets available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of investments at the time of initial recognition. a) Financial assets at fair value through profit or loss Financial assets acquired for trading and those recognized at fair value through profit or loss are financial assets held for trading. A financial asset is classified under this category if it is acquired mainly for the purpose of being sold in the short-term. Derivatives are also classified as acquired for trading purposes. Assets in this category are classified as current assets. Assets in this category are classified as current assets. b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and accounts receivable are included under trade and other accounts receivable in the balance sheet (Note 13).


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c) Financial assets held to maturity Financial assets held to maturity are non-derivative financial assets with payments that are fixed or may be determined and set maturity dates that for which Group management has the intention and capacity to hold until maturity. If the Group sells an immaterial amount of held-to-maturity financial assets, the entire category would be reclassified as available for sale. These financial assets available for sale are included under non-current assets, except for those that mature within 12 months as from the balance sheet date. d) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. 2.9.2 Recognition and measurement Purchases and sales of investments are recognized on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognized at fair value and transaction costs are taken to the income statement. Investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and assets held to maturity are recorded at their amortized cost in accordance with the effective interest rate method.


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Profits and losses that derive from changes in the fair value of the financial assets at fair value through profit and loss category are included in a specific account under the heading Financial income and expense in the year in which they arise. Dividend revenues for this type of financial asset are recognized in the income statement under “Other revenues” when the Group’s right to receive the payment is established. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available for sale are analyzed by separating the differences arising with respect to the amortized cost of the security and other changes in its carrying value. Translation differences relating to monetary securities are recognized in the income statement. Changes in fair value of the securities classified as available for sale are recognized in equity. Changes in fair value of the securities classified as available for sale are recognized in equity. Unrealized gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognized in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities. The fair values of listed investments are based on current bid prices. If there is no active market for the financial asset (and for unlisted securities), the Group establishes a fair value using measurement techniques that include the use of recent market transactions between interested and duly informed parties, with reference to other substantially similar instruments, an analysis of discounted cash flows and models for setting option prices that make maximum use of market inputs, relying as little as possible on the company’s specific inputs.


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The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. Impairment loss tests for receivables are described in Note 2.12. 2.10 Derivative financial instruments and hedging Derivatives are initially recognized at fair value on the date on which the derivative contract was concluded and subsequently they are restated at fair value. The method applied to recognize the resulting gain or loss depends on whether or not the derivative has been designated to be a hedging instrument, and if so, the nature of the item that it is hedging. In 2008 or 2007 the Group did not designate contracted derivatives to be hedges, in accordance with the requirements of IFRS 7. Changes in fair value are recognized in the income statement. 2.11 Inventories Inventories are stated at the lower of cost and net realizable value. The cost is mainly determined using the average cost method. The cost of finished products and work in progress includes design costs, raw material costs, direct labor costs, other direct costs and manufacturing overheads (based on normal operating capacity). However, it does not include interest costs. The net realizable value is the estimated selling price in the ordinary course of business, less applicable variable costs of sales. Obsolete or slow-moving items are written down to their realizable value.


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2.12 Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is raised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The existence of significant financial difficulties on the part of the debtor, the likelihood that the debtor will enter into bankruptcy or financial reorganization, or the absence of payments or default are considered to be indicators that a receivable has become impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The carrying value of the asset is reduced to the extent that the provision is applied and the amount of the loss is recognized in the income statement. When a receivable is uncollectible, it is adjusted against the provision for receivables. Any subsequent recovery of previously written-off amounts is recognized in the income statement. Financing through the discounting of bills is not written off from trade receivables until collected and is recorded as bank financing. Certain contracts are entered into with banking institutions under which all risks and benefits relating to receivables, as well as their control, is transferred. In those cases, receivables are eliminated from the balance sheet at the time the risks and benefits are transferred to the banking institution. In order to hedge against certain customer collection risks, insurance policies covering receivables are obtained to cover default risks through the payment of insurance premiums. 2.13 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 2.14 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options, for the acquisition of a business, are included in the cost of acquisition as part of the purchase consideration. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders. When these shares are sold, any amount received, net of any incremental cost on the transaction which is directly attributable and the corresponding income tax effects, is included in equity attributable to the Company’s shareholders.


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2.15 Trade payables Suppliers are initially recognized at their fair value and subsequently they are stated at their amortized cost using the effective interest rate method. 2.16 Borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently measured at repayment cost, and any difference between the amount received (net of transaction cost and the repayment value is recognized in the income statement over the term of the loan, using the effective interest rate method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 2.17 Taxes a) Corporate income tax The parent company is taxed under the consolidated reporting system together with certain subsidiaries (Note 31). Corporate income tax expense for the year consists of current and deferred taxes and is calculated based on reported profits before taxes, as increased or decreased for any permanent and/or temporary differences envisaged in current or pending tax legislation governing the calculation of the corporate income tax base in the various countries in which its subsidiaries operate. The tax is recognized in the income statement for the year. Tax credits and deductions and the tax effect of applying tax-loss carryforwards that have not been capitalized are treated as a reduction in the corporate income tax expense for the year in which they are applied or offset.


32

b) Deferred taxes Deferred income tax is calculated, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated annual accounts. However, if the deferred taxes arise from the initial recognition of a liability or an asset on a transaction other than a business combination that at the time of the transaction has no effect on the tax gain or loss, they are not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred tax assets deriving from tax credits in respect of available tax losses and corporate income tax allowances and deductions to which the company is entitled are recognized to the extent that there will be sufficient taxable profits in the future against which to offset the temporary differences. In the case of investment deductions, the balancing entry for the recognized amounts is the deferred revenues account. The accounting entry recording a reduction in expenses is apportioned in accordance with the period over which the property, plant and equipment generating the tax credits are depreciated (Notes 19). Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. 2.18 Employee benefits a) Pension obligations Some Group companies operate several pension plans, in all cases defined contribution plans, which are financed through payments to external voluntary retirement plan management companies (EPSVs). Members are employees of Tubos Reunidos, S.A. and Productos Tubulares, S.A. (in 2008, 1,435 members and in 2007, 1,456 members) that have voluntarily joined the plan. A defined contribution plan is a pension plan under which the Group makes fixed contributions to an independent entity on a contractual basis and will not have any legal or implicit obligation to make additional contributions if the fund does not hold sufficient assets to pay all employees the benefits for current year and prior year services. The pension entity does not assume any risk during the period in which the contributions are capitalized, and does not guarantee any minimum interest for members. The contributions are recognized as benefits for employees in the income statement each year. b) Retirement awards Based on their employment regulations, some Group companies recognize benefits for employees that voluntarily retire. These bonuses call for the payment (lump sum) of certain


33

amounts established in agreements with employees, based on the years the employees concerned have worked for each company. They are quantified in accordance with actuarial financial assumption criteria applied to external insurance companies and an expense and liability is recognized by affected companies, although the effect of these items on these consolidated annual accounts is absolutely insignificant. c) Severance indemnities and benefits Severance indemnities are paid to employees in accordance with current legislation as a result of a decision taken by Group companies to terminate their employment contracts. These include indemnities agreed as a result of layoff plans applied before retirement age. Similarly, the Group recognizes benefits when it has demonstrably undertaken to cease and / or reduce the employment of its current workers in accordance with a formal detailed plan. d) Variable compensation plans The Group recognizes a liability and expense at certain companies, consisting of variable remuneration based on formulas that take into account the development and results of the businesses. The Group recognizes a provision when it must do so by contract or, when for any other reason, this remuneration becomes payable. 2.19 Provisions The provisions for specific liabilities and charges are recognized when: (i) The Group has a present obligation, legal or implicit, as a result of past events; (ii) It is more probable than not that an outflow of funds will be required to settle the

obligation; and


34

(iii) The amount can be reliably estimated. Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the probability of an outflow with respect to any item included in the same class of obligations may be regarded as remote. Provisions are carried at the present value of the payments that are expected to be necessary to settle the obligation, using a rate before taxes that reflects the evaluation of the current market for the temporary value of money and the specific risks relating to the obligation. The increase in the provision due to the passage of time is recognized as an interest expense. 2.20 Revenue recognition Ordinary revenues comprise the fair value of compensation received or to be received for the sale of goods and services during the course of the Group’s ordinary business, net of value added tax, rebates and discounts and after eliminating sales within the Group. The Group recognizes revenues when the amount may be valued reliably, it is likely that the future financial benefits will flow to the company and the specific conditions for each of the Group's activities are met. Revenue is recognized as follows: a) Sales of goods Sales of goods are recognized when a Group entity has transferred all risks and significant benefits of products to the customer, as well as control, the customer has accepted the products and collectability of the related receivables is reasonably assured. b) Sales of services Sales of services are recognized in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.


35

c) Interest income Interest income is recognized using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognized either as cash is collected or on a cost–recovery basis as conditions warrant. d) Dividend income Dividend income is recognized when the right to receive payment is established. 2.21 Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as property, plant and equipment. Finance leases are recognized at the lease's inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The payment obligation deriving from the lease, net of the finance charge, is recognized under payables classified by maturity. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment under finance lease are depreciated on the basis of the useful lives of equivalent assets. Leases in which a significant portion of the risks and rewards of ownership are retained by the lesser are classified as operating leases. Payments made under operating leases (net of any incentives received from the lesser) are charged to the income statement on a straight- line basis over the period of the lease. 2.22 Non-current assets held for sale Non-current assets (or disposal groups) are classified as assets held for sale and are recognized at the lower of carrying value and fair value less selling costs, if the carrying value is mainly recovered through a sale instead of continuing use. At 31 December 2007 and 2008 the Group holds no assets for sale.


36

2.23 Dividend payment Dividend distribution to the Company’s shareholders is recognized, if payment is pending, as a liability in the Group’s consolidated annual accounts in the year in which the dividends are approved by the Parent Company’s General Shareholders’ Meeting and/ or Board of Directors. 2.24 Environment Expenses deriving from business actions taken to protect and improve the environment are recorded as an expense in the year incurred. When such expenses lead to additions of property, plant and equipment with the purpose of minimizing the environmental impact and improving the environment, they are capitalized as an increase in the value of fixed assets. Expenses generated in respect of greenhouse gas emissions (Law 1/2005, 9 March 2005) are recognized at their fair value or at the cost of the rights allocated or acquired, and when the gases are emitted in the production process, by crediting the relevant provision account. 2.25 Current and non-current balances Long-term balances, under both assets and liabilities, are considered to include those amounts maturing in more than 12 months of the end of the accounting period. 3. Financial risk management 3.1 Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk, interest rate risk on borrowings and the risk of price changes affecting raw materials. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize the potential adverse effects on the Group’s financial performance. Risk management is controlled by the Finance Departments at each Group company under the supervision and coordination of the Parent Company's Financial Management, in accordance with the policies approved by the Board of Directors. The Group's operating units identify, evaluate and hedge against financial risks in close cooperation with the Group's Central Management.


37

a) Market risk (i) Foreign exchange risk The Group operates internationally and is therefore exposed to foreign exchange risk arising from currency transactions, primarily with respect to the US dollar. Basically, foreign exchange risk arises when future transactions, mainly commercial transactions, are denominated in a currency other than the euro, which is the Group’s functional currency. To control the exchange rate risk deriving from future commercial transactions, Group companies sell in foreign currency (€216 million in 2008 and €130 million in 2007) and purchase in foreign currency (€83 million in 2008 and €38 million in 2007), thereby offsetting the risk of fluctuations in the exchange rate for a significant part of its foreign currency transactions. In addition, Group companies use term agreements negotiated by the Financial Departments in each unit within the Group with various financial institutions (Note 10). The Group's risk management policy is to cover around 50% of each of US dollar denominated transactions (mainly exports) for the following 12 months, using risk hedge instruments such as exchange insurance and currency options at the forward euro/dollar rate, whether leveraged or not, forward plus a European or US threshold, etc. If at 31 December 2008 the euro had fallen/risen by 5% compared with the US dollar and the variable values remained constant, profit after taxes for the year would have been approximately €2,022 thousand higher/lower (2007: €961 thousand), mainly due to differences on exchange due to the conversion of accounts receivable denominated in US dollars. (ii) Price risk The Group is exposed to securities price risk due to the investments maintained by the Group which are classified in the consolidated balance sheet at fair value through changes in profit and loss and available-for-sale. To manage the price risk deriving from securities investments the Group diversifies its portfolio. The portfolio has been diversified in accordance with the limits stipulated by the Group. Most investments in securities are listed on the Spanish Stock Market (Notes 9 and 14). If the listed price of these securities had increased/decreased by 5%, profits after taxes would have increased/decreased by approximately €54 thousand (2007: €295 thousand) as a result of the gain/loss on securities stated at fair value through profit and loss and available for sale. The Group is not exposed to listed commodities prices as is stated under Note 3.1.d). (iii) Interest rate risk on borrowings


38

The Group does not have significant exposure to interest rate risk. Long-term borrowings are issued at variable interest rates and the Group's policy is to continuously monitor interest-rate developments as well as the effect that a hypothetical change in rates would have on its financial statements. Interest rate sensitivity included in the annual accounts is limited to the direct effect of a change in interest rates for financial instruments subject to the interest rates recognized in the balance sheet. The sensitivity of the income statement prepared by the Group to a 1% change in interest rates (which in 2008 gives rise to an increase of around 21% (22% in 2007) with respect to current rates) is relatively low since it would give rise to an effect of approximately 1.9% on profit before taxes in 2008 (0.91% in 2007). b) Credit risk The credit risk is managed by group. The credit risk that derives from cash amounts, as well as financial assets and deposits is considered to be insignificant given the credit ratings of the institutions with which the Group operates. The Group has established policies for securing practically all risk deriving from sales transactions and almost all sales are carried out with credit risk hedges and collection insurance. All of the Group's customers have a risk classification. When an order is received the solvency of each customer is analyzed and appropriate risk coverage is requested from the insurance company. In the case of the seamless pipe and automotive segments, the insurance policy is obtained from Compañía Española de Seguro de Crédito a la Exportación (CESCE) and in the Distribution segment this coverage is obtained from Crédito y Caución. In order to accept an order the credit risk must be covered by CESCE or Crédito y Caución. If this is not the case the order is suspended until other potential risk coverage may be obtained, such as: Customer guarantees (confirmed letter of credit, confirming, etc.), bank discount without recourse (factoring/forfeiting) and, finally, prepayment. Cases in which a sale takes place with the Group at risk are minimal and extraordinary.


39

In the seamless pipe segment, 76% of sales are covered by CESCE (74% in 2007) and the rest are covered through customer guarantees consisting of letters of credit (18% in 2008 and 20% in 2007) and factoring without recourse agreements involving financial institutions (4% in 2008 and 3% in 2007). The remaining 2% involved prepayments. In the Distribution segment, the coverage provided by Crédito y Caución totaled 94% of all sales made during the period (2007, 93%). Therefore the Group does not have significant concentrations of credit risk since this figure is determined, mainly, by the percentage not covered in the event of insolvency, as agreed with each insurance company. With CESCE the coverage amounts to 90% of the commercial risk and 99% of political risk whereas Crédito y Caución covers 80% of commercial risk. The deadline for reporting potential default to CESCE and/or Crédito y Caución is 90 days after the due date. During this period the Group manages the collection of the outstanding amounts and, if no satisfactory payment agreement can be reached, reports the default to the relevant insurance company and allocates a provision for insolvency in the amount of the unsecured debt. c) Liquidity risk The prudent management of the liquidity risk entails holding sufficient cash and negotiable securities, as well as available financing through sufficient credit facilities and the capacity to settle market positions. In view of the dynamic nature of the Group companies’ businesses, each unit’s financial management, following instructions from the Finance Department, aims to maintain flexibility in funding by keeping committed credit lines available. In addition, in certain situations, the Group uses liquidity financial instruments (factoring without recourse through which risks and benefits of accounts receivable are transferred), to maintain liquidity levels and the structure of working capital required by its activity plans. Working capital (current assets less current liabilities) is adequately managed by means of tight control over working capital, limits on the amount of credit exposure to any financial institution and permanent monitoring of levels of borrowings and fund generation. Management monitors liquidity reserve projections for the Group (which includes credit availability (Note 21), cash and cash equivalents (Note 15) and current financial assets (Note 14) based on expected cash flows.


40

The liquidity reserve at 31 December 2008 and 2007 is as follows: 2008 2007 Liquidity reserve Cash and other liquid resources (Note 15) 18,993 10,637 Other current financial assets (Note 14) 32,997 100,065 Lines of credit not drawn down (Note 21) 54,792 143,373 Liquidity reserve 106,782 254,075 Net borrowings Bank loans and overdrafts (Note 21) 216,240 146,166 Cash and other liquid resources (Note 15) (18,993) (10,637) Other current financial assets (Note 14) (32,997) (100,065) Net borrowings 164,250 35,464 Bearing in mind that borrowings include long-term debt reflected in the balance sheet in the amount of €135 million, and considering the Group's capacity to generate cash, no liquidity problems are expected. The following table shows an analysis of financial liabilities, grouped by maturity date, recorded by the Group and which will be settled within the outstanding terms at the balance sheet date up until the maturity date established in the relevant contract. The amounts reflected in the table relate to cash flows (including interest that will be paid in the case of bank borrowings) stipulated in the relevant contract, without any discount. The balances payable within 12 months equal the carrying value of these items, given that the discounting effect is not significant.

Less than

1 year

Between 1 and 2 years

Between 2 and 5 years

More than 5 years

At 31 December 2008 Bank loans and overdrafts (Note 21) 80,955 29,648 112,189 4,183 Accounts payable (Note 20) 137,314 10,632 7,328 2,158 At 31 December 2007 Bank loans and overdrafts (Note 21) 75,791 16,951 46,842 6,582 Accounts payable (Note 20) 131,855 6,206 5,739 1,089


41

Derivative financial instruments not classified as hedges and obtained for currency transactions are settled at their net amount, and their maturity deadlines are indicated in Note 10. Liquidity management carried out by the Finance Departments at the companies, Gordon aided by the management of the Finance Department at the Parent Company, does not present any liquidity tensions that cannot be covered using current or future financial resources that the Group may have. d) Risk of change in the price of raw materials The Group protects itself against the risk of changes in raw material prices, fundamentally scrap, by diversifying markets and suppliers, continuously monitoring supply and demand on a timely basis and managing inventory volume. 3.2 Accounting for derivative financial instruments and hedging activities The Company only records derivatives relating to foreign currency exchange rates, to which it has not applied hedge accounting since they do not comply with the conditions for applying this accounting policy in accordance with IFRS-EU. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently restated at their fair value. Changes in the fair value of any derivative which does not qualify for hedge accounting are recognized immediately in the income statement. 3.3 Fair value estimation Most of the financial instruments obtained by the Group are traded on active markets. The instruments that do not meet this condition are not relevant. The fair value of financial instruments is based on year end market prices. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price.


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The carrying value less the provision for impairment of accounts receivable and payable is assumed to approximate fair values, due to the short-term nature of the trade accounts receivable. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 3.4 Capital risk management The Group’s objectives with respect to capital management are to safeguard its capacity to continue as a going concern and obtain a yield for shareholders and benefits for other holders of equity instruments. To achieve this objective, the Group attempts to maintain an optimal capital structure while reducing its cost. In order to maintain or adjust the capital structure, the Group may use the amount of dividends payable to shareholders, the possibility of refunding capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital using the leveraging index, which is in line with industry practices. This index is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including non-current and current liabilities) less cash and cash equivalents and other current financial assets. Capital is calculated as equity, as is reflected in the consolidated accounts, plus net debt. In 2008 the Group's strategy, which has not changed since 2006, consisted of maintaining a leveraging index of around 50%. Leveraging indices at 31 December 2007 and 2008 were as follows: 2008 2007 Borrowings 462,162 358,274 Less: Cash and cash equivalents and other current financial assets (51,990) (110,702) Net debt 410,172 247,572 Equity 239,845 356,489 Total capital 650,017 604,061 Leverage ratio 63% 41%


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The increase in the leverage ratio in 2008 is mainly due to the use of funds to acquire treasury shares (Note 16). The estimated generation of funds in coming years will allow the situation to be returned to 2007 levels. 4. Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgments that may give rise to material adjustments to the carrying amounts of assets and liabilities within the next financial year are discussed below. 1. Corporate income tax The status of tax regulations applicable to certain Group companies entails the need for estimated calculations and a final quantification of the uncertain tax. Tax is calculated based on Management's best estimates according to the current situation as regards tax legislation and taking into account expected developments in this area (Note 31). Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact income tax in the period in which such determination is made. 2. Personnel benefits The Group makes estimates with respect to retirement bonuses, retirement benefits and/or schedule reductions for current employees based on the amount of the benefits to be paid and the group of employees to which the benefits are applicable, in accordance with past experience regarding employee responses to the benefits and actuarial criteria and assumptions generally applicable to these cases.


44

Any change in the number of employees that definitively take the indicated benefits or in accordance with the assumptions taken into account, would have an effect on the carrying value of the relevant provisions, as well as on the income statement. These estimates are re-measured at the end of each financial year and the provisions are adjusted to match the best estimates available at each closing date (Note 24). 3. Measurement of production activities As a result of the development of certain production activities the Group has estimated the provisions that are necessary to reflect the required expense (due to the impairment of assets) to adapt installed capacity to the current situation and market projections, as well as the decline in the value of property, plant and equipment and associated assets. The estimates made have been based on the development of the businesses over the past few years and market trends and costs. As a result, the improvement of the product-market circumstances taken into account would give rise to a decrease in the provisions created in this respect, which would have a positive effect on profits in the year this takes place. In 2008 there have been no events that allow for an evaluation of whether or not impairments estimated in 2007 and prior years have reversed (Note 6 .d)) 4. Fair value of derivatives or other financial instruments The fair value of the financial instruments used by the Group, consisting mainly of insurance and currency options, is stated in the reports provided by the financial institutions with which the transactions have been contracted and has been compared by the Company’s financial management with the historical analyses of the instruments analyzed. In 2008 and 2007 Company management considers that variances exceeding 10% (upward or downward) in the estimates made will not significantly affect the amounts recorded in the accounts.


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4.2 Critical judgments in applying the entity’s accounting policies The most significant judgments and estimates that have been taken into consideration when applying the accounting policies described under Note 2 relate to: - An estimate of current and deferred corporate income tax for the year in accordance

with the comments made in Notes 2.17 and 31. - Estimates of the useful lives of property, plant and equipment. In 2008 and 2007

changes in the estimates regarding the useful lives of current assets did not give rise to a significant effect on depreciation figures for the year.

- An estimate of the provisions relating to the employment adaptation plan, as is

described under Notes 2.18 and 24. 5. Segment reporting

a) Primary reporting format: business segments The Group is organized on a worldwide basis into four main business segments: (i) Seamless pipes (ii) Distribution (iii) Automotive industry (iv) Other operations The Group's other operations mainly consist of the manufacturing of high density polyethylene tanks and the manufacture of boiler and isometric pressure components. None of them constitute a separate reporting segment.


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The results per segment for the year ended 31 December 2007 are as follows:

Seamless

pipes Distribution Automotive Other Group Total gross segment sales 493,026 143,974 35,424 24,287 696,711 Inter-segment sales (14,527) (44,782) - (194) (59,503)

Sales 478,499 99,192 35,424 24,093 637,208 Operating profit 120,649 2,762 1,403 (1,871) 122,943 Net financial costs (Note 30) (6,509) (1,797) (74) (335) (8,715) Share in profits obtained by associates (28) - - - (28)

Profit before taxes 114,112 965 1,329 (2,206) 114,200

Income tax (29,548) 267 (101) 852 (28,530) Minority interests - - (460) (109) (569)

Profit for year 84,564 1,232 768 (1,463) 85,101

The results per segment for the year ended 31 December 2008 are as follows:

Seamless

pipes Distribution Automotive Other Group Total gross segment sales 625,851 138,830 36,847 30,225 831,753 Inter-segment sales (65,728) (37,558) - (107) (103,393)

Sales 560,123 101,272 36,847 30,118 728,360 Operating profit 128,828 2,251 542 270 131,891 Net financial costs (Note 30) (19,521) (2,135) (135) (213) (22,004) Share in profits obtained by associates 13 - - - 13

Profit before taxes 109,320 116 407 57 109,900

Income tax (28,223) (95) 402 (188) (28,104) Minority interests - - (303) 353 50

Profit for year 81,097 21 506 222 81,846


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Other segment items included in the income statement are as follow:

2008 2007

Seamless

pipes Distributi

on Automo

tive Other Group Seamless

pipes Distribu

tion Automo

tive Other Group Depreciation of property, plant and equipment (Note 6) 15,829 952 2,427 1,233 20,441 14,300 907 2,343 1,270 18,820

Amortization of intangible assets (Note 7) 107 69 86 24 286 156 34 74 22 286

Depreciation of investment property (Note 8) - - - 179 179 - - - - -

Reversal (net) due to the impairment of inventories (Note 12) (460) 123 31 - (306) 1,199 (1,066) 25 - 158

Loss (net) due to the impairment of trade receivables (Note 13) (286) 335 - 464 513 722 85 (18) - 789

Transactions between segments are carried out under market terms and conditions. Segment assets and liabilities at 31 December 2007 and investments in assets during the year then ended are as follows:

Seamless

pipes Distribution Automotive Other

(*) Consolidation adjustments Group

Assets 606,499 123,412 25,750 35,574 (29,120) 762,115 Associates 298 - - - - 298

Total assets 606,797 123,412 25,750 35,574 (29,120) 762,413

Liabilities 299,078 88,091 12,858 26,333 (20,436) 405,924

Investments in assets (Notes 6 and 7) 34,108 1,124 1,789 1,493 - 38,514 (*) These consolidation adjustments basically relate to the elimination of intra-group company balances.


48

Segment assets and liabilities at 31 December 2008 and investments in assets during the year then ended are as follows:

Seamless

pipes Distribution Automotive Other

(*) Consolidation adjustments Group

Assets 633,712 119,368 28,270 31,479 (63,149) 749,680 Associates 311 - - - - 311

Total assets 634,023 119,368 28,270 31,479 (63,149) 749,991

Liabilities 429,721 79,286 14,058 21,749 (34,668) 510,146

Investments in assets (Notes 6 and 7) 35,605 2,860 2,127 388 - 40,980 (*) These consolidation adjustments basically relate to the elimination of intra-group company balances. The information provided in this Note includes all assets (except for investments in subsidiaries) and liabilities relating to each segment in accordance with the balance sheets for each of the Group companies included in each segment.

b) Secondary reporting format: geographical segments The Group's four business segments mainly operate in 3 geographic areas, although they are managed on a worldwide basis. The Company is based in Spain, which in turn is the place at which the Group's main operating companies are located.


49

Group sales are mainly made in the following markets: 2008 2007 Sales Spain 268,105 268,017 European Union 160,560 161,960 Rest of the world 299,695 207,231 Total sales 728,360 637,208 Sales are assigned on the basis of the country where the customer is located. Group assets are located in the following countries: 2008 2007 Total assets Spain 710,992 746,444 European Union 5,032 3,663 Rest of the world 33,967 12,306 Total assets 749,991 762,413 Total assets are assigned on the basis of the assets’ location. Investments in Associates (Note 9) are included in the Spain segment. Practically all investments in property, plant and equipment and intangible assets have been made in plants located in Spain (Note 1).


50

6. Property, plant and equipment Details and movements of the different categories of Property, plant and equipment are shown in the table that follows: 2007

Land and buildings

Plant and machinery

Fixtures, fittings, tools

and furnishings

In progress and

prepayments Other assets Total

COST Opening balance 187,214 411,684 12,338 382 19,759 631,377 Acquisitions 5,436 26,940 3,172 781 1,381 37,710 Disposals (50) (992) (1,835) (537) (571) (3,985) Transfers 7 221 11 (217) (32) (10)

Closing balance 192,607 437,853 13,686 409 20,537 665,092

DEPRECIATION Opening balance 41,841 287,643 6,162 - 16,637 352,283 Appropriations 2,251 15,246 486 - 837 18,820 Disposals (50) (729) (107) - (38) (924) Transfers - - - - - -

Closing balance 44,042 302,160 6,541 - 17,436 370,179

PROVISIONS Opening balance - 1,744 - - - 1,744 Appropriation - 399 - - - 399

Closing balance - 2,143 - - - 2,143

NET BOOK Opening balance 145,373 122,297 6,176 382 3,122 277,350

Closing balance 148,565 133,550 7,145 409 3,101 292,770


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2008

Land and buildings

Plant and machinery

Fixtures, fittings, tools

and furnishings

In progress and

prepayments Other assets Total

COST Opening balance 192,607 437,853 13,686 409 20,537 665,092 Acquisitions 4,528 28,090 3,438 862 500 37,418 Disposals (88) (81) (198) (89) (121) (577) Transfers (627) 222 - (222) - (627)

Closing balance 196,420 466,084 16,926 960 20,916 701,306

DEPRECIATION Opening balance 44,042 302,160 6,541 - 17,436 370,179 Appropriations 2,284 17,429 693 - 35 20,441 Disposals - (71) (57) - (121) (249) Transfers (124) - - - - (124)

Closing balance 46,202 319,518 7,177 - 17,350 390,247

PROVISIONS Opening balance - 2,143 - - - 2,143 Disposals - (408) - - - (408)

Closing balance - 1,735 - - - 1,735

NET BOOK Opening balance 148,565 133,550 7,145 409 3,101 292,770

Closing balance 150,218 144,831 9,749 960 3,566 309,324


52

a) Revaluations At 31 December 1996, some Group companies revalued property, plant and equipment at that date in accordance with relevant legislation (Regional Law 4/1997 (7 February), Regional Law 6/1996 (21 November) and Royal Decree 2607/1996 (20 December)) for a net effect of €13.7 million. At 31 December 2008 this restatement has been fully amortized (2007: €16k). b) Property, plant and equipment subject to guarantees Various elements of property, plant and equipment are subject to guarantees securing loans and institutional payment deferrals totaling €420 thousand (2007: €1068 thousand). c) Insurance The Group has taken out a number of insurance policies to cover risks relating to property, plant and equipment. The coverage provided by these policies is considered to be sufficient. d) Impairment losses As a result of the development of the Group's seamless tube activity, as well as market trends and the cost of that activity in 2005 the Group estimated (based on the recovery values of assets calculated in accordance with future cash flows) the provisions that would be necessary to adapt the measurement of certain property, plant and equipment and inventories involved with that activity to their future in-use value. In 2007 a provision was made for the carrying value of one of the Parent Company's production plants, which was eliminated at the end of the year.


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e) Finance leases Land, buildings, machinery and other assets include the following amounts in respect of finance leases under which the Group is the Lessee: 2008 2007 Capitalized finance lease cost 6,470 7,579 Accumulated depreciation (2,314) (1,974) Net carrying value 4,156 5,605 The amounts payable for these finance leases is recorded under Payables (current and non-current) (Note 20).


54

7. Intangible assets Set out below is an analysis of the main intangible asset classes showing movements in assets generated internally and other intangible assets: 2007

Emission rights Computer

applications Development

expenses

Concessions, Patents and

Licenses Total COST Opening balance 3,058 1,859 1,904 271 7,092 Additions 623 131 - 50 804 Disposals (2,858) - (1,878) - (4,736) Transfers - 10 - - 10

Closing balance 823 2,000 26 321 3,170

DEPRECIATION Opening balance - 1,315 1,904 128 3,347 Appropriations - 228 - 58 286 Disposals - - (1,878) - (1,878) Transfers - - - - -

Closing balance - 1,543 26 186 1,755

NET BOOK Opening balance 3,058 544 - 143 3,745

Closing balance 823 457 - 135 1,415


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2008

Emission

rights Computer

applications Development

expenses

Concessions, Patents and

Licenses Goodwill Total COST Opening balance 823 2,000 26 321 - 3,170 Additions 2,510 402 - 198 452 3,562 Disposals (823) (13) - - - (836)

Closing balance 2,510 2,389 26 519 452 5,896

DEPRECIATION Opening balance - 1,543 26 186 - 1,755 Appropriations - 124 - 163 - 287

Closing balance - 1,667 26 349 - 2,042

NET BOOK Opening balance 823 457 - 135 - 1,415

Closing balance 2,510 722 - 170 452 3,854


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8. Investment properties Movements in investment properties are as follows: 2008

Land and buildings

Cost Opening balance - Transfers 8,910 Closing balance 8,910 Depreciation Opening balance - Transfers 124 Appropriations 179 Closing balance 303 Carrying Opening balance -

Closing balance 8,607 Investment properties consist of land, industrial premises and residential housing owned for subsequent sale. Currently no rental income whatsoever is generated from these properties. Part of these property investments were recorded as investments during their construction process.


57

9. Non-current financial assets Movements in the accounts included in non-current financial assets break down as follows: 2007 Movements in the accounts included in non-current financial assets break down as follows:

31 December

2006 Additions Fair value

adjustment Disposals

31 December

2007 Shareholdings in Group companies (Note 1) 145 - - - 145

Equity shareholdings (Note 1) 326 - - (28) 298 Shareholdings in associated companies (Note 1) 44 - - (44) -

Loans to associates 84 - - (84) -

Other loans 1,513 808 - - 2,321

Deposits and guarantees 232 36 - (46) 222 Financial assets at fair value through profit or loss. 19,929 - 242 (20,171) - Available-for-sale financial assets 225 25,770 - (8,693) 17,302

22,498 26,614 242 (29,066) 20,288 Additions to Available for sale financial assets were acquired practically at the end of the year and no adjustments for changes in fair value against equity have been made.


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2008 Movements in the accounts included in non-current financial assets break down as follows:

31 December

2007 Additions Fair value

adjustment Disposals

31 December

2008 Shareholdings in Group companies (Note 1) 145 945 - - 1,090

Equity shareholdings (Note 1) 298 13 - - 311

Other loans 2,321 - - (2,282) 39

Deposits and guarantees 222 5 - - 227 Available-for-sale financial assets 17,302 5,903 5 (11,536) 11,674

20,288 6,866 5 (13,818) 13,341 9.1 Shareholdings in Group companies The shareholding relates to the following investments: - 75% investment in the company APC-Gestión, S.L. (APC), located in Leon, for book

value of €145 thousand, which engages in advisory and management services in the construction and construction development area. At 31 December 2008 the investee company's total assets and equity amounted to €236 thousand and €157 thousand, respectively. This subsidiary obtained a €9 thousand profit during the year.

- Furthermore, the addition during the year relates to the investment in 100% of the

company Agrelo, S.L., located in La Coruña and which engages in the marketing of pipes and other products. At 31 December 2008 the investee company's total assets and equity amounted to €2,182 thousand and €561 thousand, respectively. This subsidiary obtained a €15 thousand profit during the year.

The fair value of the acquired assets and liabilities does not significantly different from

the carrying value of the acquired company. At the time of the business combination, goodwill totaling €0.4 million was generated and assigned to the future profit of the acquired business.


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9.2 Shareholdings recorded using the equity method The group's share in the profits of equity consolidated companies (all of them in Spain, Note 1), none of which are listed on a stock market, as well as in all assets and liabilities, is as follows:

Total

2008 2007

Profit for the year assigned to the

group Group value

Company Assets Liabilities Equity Assets Liabilities Equity 2008 2007 2008 2007

Landais Outsourcing, S.L. 194 58 136 180 66 114 7 1 41 34

Cash Sallen Business, S.L. 1.130 739 391 2.597 2.192 405 (3) (4) 98 101

Perimetral Sallen Technologies, S.L. 567 122 445 665 12 653 9 (25) 172 163

13 (28) 311 298

9.3 Available-for-sale financial assets Available-for-sale financial assets include: 2008 2007 Bonds, debentures and other financial instruments 10,729 4,832 Investment funds 743 7,688 Other 202 4,782 11,674 17,302 The fair value of unlisted securities is based on expected cash flows. All of them generate market interest rates. Maximum exposure to the credit risk at the financial asset reporting date is their carrying value.


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9.4 Credit quality of financial assets Both available for sale financial assets and financial assets at fair value through changes in profit and loss (Note 14) relate mainly to issues made by top level Spanish financial institutions with a minimum rating of A1 granted by independent agencies and to investment funds managed by entities of recognized prestige, whose assets are on deposit in top level Spanish or international institutions. 10. Derivative financial instruments Foreign currency exchange insurance contracts covering transactions carried out in US dollars are included in this section: 2008 2007 Assets Liabilities Assets Liabilities Foreign currency forwards - 11,005 397 - - 11,005 397 - At 31 December 2008 the Group records term currency contracts for transactions that have been carried out or are highly likely to be carried out for a total amount of USD$258.1 million (2007: USD$31.6 million), which all mature in 2009 (USD$103.3 million in the first quarter, USD$73.5 in the second, USD$53.1 in the third quarter and USD$28.2 in the fourth quarter). At 31 December 2008 the fair value of term currency contracts totals a loss of €11,005 thousand (2007: gain of €397 thousand).


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11. Deferred tax assets The breakdown of the balance under Deferred tax assets (Note 22), in accordance with their origin, is as follows: 2008 2007

Temporary differences 8,825 9,844 Negative tax bases 558 637 Tax credits for investments and other items 3,785 2,443

Total 13,168 12,924 The Group has recorded the future offset of tax-loss carry forwards, temporary differences and deductions. In the case of investment deductions, they are taken to results based on the period over which the property, plant and equipment that generated the tax credits are depreciated (Notes 2.17 and 19). The movements in deferred tax assets in 2007 and 2008 are broken down in Note 22. Deferred tax assets in respect of tax losses available for offset and the other tax credits yet to be applied are recognized insofar as the realization of the relevant tax benefit through future tax profits is probable. 12. Inventories 2008 2007

Goods purchased for resale 24,280 26,121 Supplies for production 54,561 54,095 Materials 13,425 10,502 Semi-finished products 23,481 32,402 Finished products 61,936 37,249

177,683 160,369


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At 31 December 2008 approximately €1 million in pre-payments to raw material suppliers (2007: €2 million) is recorded under the heading "Suppliers and other payables". The cost of inventories recognized as an expense and included in the cost of goods sold breaks down as follows:

Goods

Materials and supplies for production

Work in progress and finished

goods Total 2007

Opening balance 21,562 53,687 52,125 127,374

Purchases 114,080 196,662 - 310,742

Other external expenses 1,339 4,322 4,771 10,432

Closing balance (26,121) (64,597) (69,651) (160,369)

Cost of inventories 110,860 190,074 (12,755) 288,179

2008

Opening balance 26,121 64,597 69,651 160,365

Purchases 98,050 262,690 - 360,740

Other external expenses 1,449 8,556 340 10,345

Closing balance (24,280) (67,986) (85,417) (177,683)

Cost of inventories 101,340 267,857 (15,426) 353,771 The change in provisions for obsolete and slow-moving inventories during the years was as follows: Total At 1 January 2007 7,452

Appropriations 2,176

Reversals (2,018)

At 31 December 2007 7,610

Appropriations 2,833

Reversals (3,139)

At 31 December 2008 7,304


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The provisions have been estimated based on rotation statistics and an individual analysis of the conditions and value of the various items that make up the Group’s inventories, taking into account the net recoverable value of the various items concerned. 13. Trade and other receivables 2008 2007

Trade receivables 169,250 159,655 Less: Provision for impairment losses on receivables (5,998) (5,485)

Trade receivables – Net 163,252 154,170

Other receivables (personnel and other items) 2,028 640 Accounts receivable from related parties (Note 36) 22 11

Total 165,302 154,821 Receivables are stated at nominal values, which do not differ from their fair values, in accordance with their cash flows discounted at market rates. There is no concentration of credit risk with respect to trade receivables, as the Group has a large number of customers, internationally dispersed. At 31 December 2008 the amount of trade and other receivables discounted at banks totaled €25,668 thousand (2007:€26,938 thousand) and the transaction was recorded as a bank loan (Note 21). In addition, certain agreements have been concluded with banking institutions to sell receivables, thereby transferring risks and benefits and eliminating €10.7 million from the balance sheet (€7.1 million in 2007). The Group manages credit risk by classifying the risk presented by each customer and by ensuring the collection of invoices using the services of CESCE and Crédito y Caución, in accordance with the hedging criteria and percentages indicated under Note 3.1.b).


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Outstanding receivables are not considered to include balances that have exceeded the nominal maturity date when they are within normal collection periods established with various customers, which range between 30 and 120 days. At 31 December 2008 there were no balances that exceeded the established collection agreements and were not taken into consideration in the relevant impairment provisions. Trade receivables not subject to impairment losses relate to independent customers for which there is no recent default history. All of these trade receivable balances fall due within 12 months (2007: less than 12 months). At 31 December 2008 all receivables, whether outstanding or not, that may be considered to be of doubtful recovery at that date, have been covered by provisions. The allocation of the relevant impairment provision has been made by estimating the reasonable loss that would be associated with each customer, less the amounts guaranteed by the insurance companies. The movement in the provisions for impairment losses in 2007 and 2008 relates to the following amounts and items: Total At 1 January 2007 4,696 Appropriations 1,093 Recovery and cancellation of balances (304) At 31 December 2007 5,485

Appropriations 1,810 Recovery and cancellation of balances (1,297) At 31 December 2008 5,998 Receivables that have suffered an impairment loss relate mainly to balances with specific collection problems identified on an individual basis. In accordance with the collection activity that is being carried out, a high percentage of these receivables is expected to be recovered (although at an unknown time). Other accounts included in accounts receivable do not contain assets that have suffered impairment.


65

The credit quality of trade receivables that have not shown impairment losses may be classified as satisfactory, to the extent that in practically all cases they consist of risks that have been accepted and are covered by credit risk insurance companies and/or financial institutions. The maximum exposure to credit risk at the date this information is presented is the fair value of each of the receivables indicated above, and in any case, taking into consideration the aforementioned credit insurance coverage. The carrying amount of Group foreign currency receivables is denominated in the following currencies: 2008 2007 US dollar 53,368 25,353 Canadian dollar 543 2,839 Pound sterling 652 916 54,563 29,108 14. Other current financial assets 2008 2007

Opening balance 100,065 26,607 Movement during the year (63,932) 72,966 Fair value adjustment (3,136) 492

Closing balance 32,997 100,065 All current financial assets relate to Financial assets at fair value through changes in profit and loss, and in all cases involved market value investments (listed on organized markets), or short-term operations with repurchase agreements, and the yields obtained on these investments in 2007 and 2008 are in line with financial market yields during those years for similar instruments (average yield -2.27% in 2008 and 4.7% in 2007). Changes in the fair value of these assets are recorded under financial income and expense in the income statement (Note 30).


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This heading breaks down as follows at 31 December 2008 and 2007: 2008 2007

Short-term fixed income securities 31,007 91,677 Short-term securities portfolio 1,402 8,277 Other 588 111

32,997 100,065 15. Cash and cash equivalents 2008 2007

Cash and banks 18,993 10,637

18,993 10,637 16. Capital and share premium

No. shares (thousand)

Share capital

Share premium account

Treasury shares Total

1 January 2007 204,930 20,493 387 - 20,880 Balance at 31 December 2007 204,930 20,493 387 - 20,880 Purchases of treasury shares - - - (172,343) (172,343) Share capital reduction through the write-off of treasury shares (30,249) (3,025) - 170,000 166,975 Balance at 31 December 2008 174,681 17,468 387 (2,343) 15,512


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a) Share capital 2007 The total number of authorized ordinary shares is 51,232,500, each with a par value of €0.4. All shares issued have been fully paid in. At an Extraordinary General Meeting held by Tubos Reunidos, S.A. on 26 September 2007 shareholders approved the split of the Company's shares and the subsequent acquisition of treasury shares to reduce share capital, in accordance with the following terms: ü A split of the current 51,232,500 shares to 204,930,000 new shares, i.e. in the

proportion of four shares with a par value of €0.10 each for each 1 share with a par value of 0.40 shares (4x1), taking effect as from 8 October 2007.

ü A share capital reduction (Article 170 LSA) through the acquisition of up to

€3,024,911.20 and a maximum of 7,562,278 treasury shares, before the split (30,249,112 treasury shares after the split). The acquisition offer addresses all shareholders of Tubos Reunidos, S.A. The offered purchase price for each share has been established at €22.48, equivalent to €5.62 per share after the split.

The Public Offer was approved by the National Stock Market Commission on 5 December 2007. 2008 After the approval obtained at the Extraordinary General Meeting held on 26 September 2007 30,249,112 shares were acquired to be subsequently written off to reduce share capital. After the aforementioned share capital reduction, the total number of authorized ordinary shares forming the Company's share capital is 174,680,888 shares with a par value of €0.10 each. All shares issued have been fully paid in.


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The companies that hold an interest in the Tubos Reunidos, S.A. equal to or exceeding 10% are as follows: 2008 2007

Number of shares % shareholding Number of

shares % shareholding BBVA Group 40,881,325 23.4 49,708,152 24,25 All of the Parent Company's shares are listed on the stock markets in Bilbao and Madrid. Since 1 July 2005 there listed in the OPEN mode in the Market Interconnection System (SIBE). The Company's shares form part of the Ibex Small Cap index, and entered into the Ibex Medium Cap index in January 2009. The listed price at 31 December 2008 was €2.08 per share (2007: €4.85 per share before the split). b) Share premium account This reserve is freely available for distribution. c) Treasury shares At 31 December 2008 the Company owned 810,668 treasury shares. Independent of the transactions involving treasury shares described in the preceding paragraphs, movement in treasury shares during 2008 is broken down in the following table: 2008 Number of

shares Amount (K€) Opening balance - - Acquisitions 1,054,091 2,917 Sales (243,423) (574) Closing balance 810,668 2,343 Clima, S.A.U., a wholly-owned subsidiary, concluded a liquidity agreement with Norbolsa, S.V, S.A. in order to carry out transactions involving the Company's ordinary shares. At 31 December 2008 Clima S.A.U. owned 810,668 shares with a value of €2,343 thousand.


69

17. Reserves and retained earnings Movements in Reserves and retained earnings are as follows:

Other parent

company reserves

Effect of first

conversion to IFRS

Reserves in companies

consolidated using the full consolidation

method

Reserves in companies consolidated using the

equity method

Cumulative exchange

differences Profit/loss for the year

Interim dividend Total

At 31 December 2006 65,451 49,995 98,270 33 (1,885) 60,407 (5,635) 266,636 Distribution of profit: - to reserves 24,775 - 20,267 (5) - (45,037) - - - to dividends - - - - - (15,370) 5,635 (9,735) Other movements - - - - (285) - - (285) Interim dividend - - - - - - (14,427) (14,427) Profit/(loss) for the year - - - - - 85,101 - 85,101 At 31 December 2007 90,226 49,995 118,537 28 (2,170) 85,101 (14,427) 327,290

Distribution of profit:: - to reserves 26,770 - 29,957 (28) - (56,699) - - - to dividends - - - - - (28,402) 14,427 (13,975) Share capital reduction (166,975) - - - - - - (166,975) Other movements - - - - 179 - - 179 Interim dividend - - - - - - (12,170) (12,170) Profit/(loss) for the year - - - - - 81,846 - 81,846 At 31 December 2008 (49,979) 49,995 148,494 - (1,991) 81,846 (12,170) 216,195

Other parent company reserves At the end of 2008 and 2007 the composition of the heading Other Parent Company Reserves was as follows: 2008 2007

Legal reserve 4,099 4,099 Voluntary reserve (53,811) 86,127 (49,712) 90,226


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Legal reserve Appropriations to the legal reserve have been made in compliance with Article 214 of the Spanish Companies Act which stipulates that 10% of the profits for each year must be transferred to this reserve until it represents at least 20% of share capital. The legal reserve is not available for distribution. Should it be used to offset losses in the event of no other reserves being available, it must be replenished out of future profits. At 31 December 2008 and 2007 the legal reserve had been funded up to the level required by law. Voluntary reserve The voluntary reserve is freely available for distribution.

First-adoption reserve The amounts recorded relate to the effects of the first conversion stated in the opening balance sheet at 1 January 2004 and the effects of adopting IAS 32 and 39, effective 1 January 2005.

Reserves in companies consolidated using full consolidation method At 31 December 2008 and 2007, unavailable accumulated reserves and profits originating from consolidated associated companies relate to the following: 2008 2007 Legal reserve 6,368 6,170 Balance sheet restatement reserves (in accordance with local legislation) 732 732 7,100 6,902 The legal reserve has been recorded in accordance with Article 214 of the Spanish Companies Act and may be used to offset losses.


71

Reserves in companies consolidated using the equity method These items relate to the subsidiaries of Productos Tubulares, S.A., as follows: 2008 2007 - Landais Outsourcing, S.L. 31 30 - Cash Sallen Business, S.L. (13) (9) - Perimetral Sallen Technologies, S.L. (18) 7 - 28

Interim dividend During 2008 the Board of Directors approved the following interim dividends charged against profits for the year: i) Approval of an interim dividend totaling €6.1 million on 1 October 2008 and paid in

October 2008. The accounting statement prepared at the unconsolidated parent company level, with the legal requirements to establish the existence of sufficient liquidity to distribute that dividend, is as follows:

Accounting statement at 31 July 2008 (thousand euros): Assets Liabilities Non-current assets 168,293 Capital 17,468 Inventories 79,506 Reserves and profits 64,240 Receivables

110,586

Adjustments and changes in value

34,307

Cash and banks 24,865 Non-current liabilities 151,754 Current liabilities 115,481 383,250 383,250


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ii) Furthermore, at a meeting held on 17 December 2008 the Board of Directors approved an interim dividend totaling €6.1 million, establishing the payment date as 12 January 2009 and therefore at 31 December it continues to be recorded under "Other current liabilities" (Note 20).

The accounting statement prepared at the unconsolidated parent company level, with the legal requirements to establish the existence of sufficient liquidity to distribute that dividend, is as follows:

Accounting statement at 31 October 2008 (thousand euros): Assets Liabilities Non-current assets 181,099 Capital 17,468 Inventories 74,832 Reserves and profits 75,202 Receivables

95,414

Adjustments and changes in value

37,197

Cash and banks 25,705 Non-current liabilities 143,491 Current liabilities 103,692 377,050 377,050 During 2007 the Board of Directors approved the following interim dividends charged against profits for the year: a) Meeting held on 26 September: A gross amount of €0.025 per share for a total amount

of €5.1 million. The individual net profit totaling €31.6 million (in accordance with the General Accounting Plan) was used as a reference and it was effectively paid on 5 October.

b) Meeting held on 28 November: A gross amount of €0.045 per share for a total amount

of €9.3 million. Of this dividend, €4.2 million was considered to be extraordinary dividends, representing €0.02 (gross) per share. The individual net profit totaling €42.6 million (in accordance with the General Accounting Plan) was used as a reference and it was effectively paid on 27 December 2007.

In accordance with Article 216 of the Spanish Companies Act, the relevant statements guaranteeing sufficient liquidity to pay these dividends were prepared.


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Consolidated results The contribution of each company included in the scope of consolidation to consolidated results, indicating the part that pertains to minority interests, is as follows: 2008 2007

Company/ subgroup

Consolidated profit

Profit attributed to

minority shareholders

Consolidated profit

Profit attributed to

minority shareholders

Tubos Reunidos, S.A. 131,997 - 55,172 -

Productos Tubulares, S.A. 39,259 - 37,680 -

Other consolidated companies 2,080 (50) 2,781 569

173,336 (50) 95,633 569

Consolidation adjustments (91,490) - (10,532) -

81,846 (50) 85,101 569

Proposal for the distribution of results The proposal for distributing the parent company’s 2008 results and other reserves that will be presented to shareholders at the General Meeting (on the basis of non-consolidated balances prepared under GAAP) and the approved distribution for 2007 is as follows: 2008 2007

Available for distribution Profit/(loss) for the year 131,997 55,172

Distribution Voluntary reserves 106,726 26,770 Dividends 25,271 28,402

131,997 55,172


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Stock options There were no stock option plans involving the Parent Company’s shares at the 2008 or 2007 year end. 18. Minority interests Movements in this heading in 2007 and 2008 are as follows: 2008 2007

Opening balance 8,319 7,989 Distribution of dividends (131) (239) Profit/(loss) for the year (50) 569

Closing balance 8,138 8,319 The distribution by company is set out below: Company/ subgroup 2008 2007

Inauxa (Note 1) 5,009 4,836 TR Lentz (Note 1) 3,129 3,483

8,138 8,319 19. Deferred income The balance in this caption breaks down as follows: 2008 2007

Investment based tax deductions 47,498 46,964 Other deferred income 486 518 Greenhouse gas emission rights (Notes 2.7 and 7) - 168

47,984 47,650


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The amount relating to commission rates paid with respect to 2008 profits totaled €2310 thousand (2007: €599 thousand). Movements in tax credits originating from investments were as follows: 2008 2007

Opening balance 46,964 14,504 Generated in the year 4,178 15,417 Transfers - 17,536 Credit to profits for the year (Note 26) (3,644) (493)

Closing balance 47,498 46,964 The tax credits generated by the group were recorded and attributed to results in accordance with the criteria described under Note 2.17. 20. Payables a) Other non-current liabilities This heading includes the following items and amounts: 2008 2007

Finance leases 1,414 1,998 Fixed asset suppliers 11,089 5,773 Other payables 7,615 5,263

20,118 13,034 The heading Other payables basically includes loans from official organizations at a subsidized rate totaling €6.4 million (2007: €4.3 million) to finance investments in assets and research and development projects.


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Leases Lease liabilities involve the following maturity dates: 2008 2007

Liabilities finance lease - minimum lease payments: Less than 1 year 1,010 1,254 Between 1 and 3 years 1,310 1,973 Between 3 and 5 years 340 600

2,660 3,827 Future finance lease charges (284) (891)

Present value 2,376 2,936 The present value of finance lease liabilities is as follows: 2008 2007

Less than 1 year 962 938 Between 1 and 3 years 1,183 1,516 Between 3 and 5 years 231 482

2,376 2,936 The amounts falling due within 1 year are recorded under the heading Suppliers and other payables.


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A summary of the finance lease conditions in force at the end of 2007 and 2008 is set out in the following table: 2007

Item Term Cost

Amount of the purchase

option Installments

paid (1) Land and buildings 10 years 4,036 46 542 Land and buildings 5 years 297 5 75 Machinery 6 years 181 3 9 Machinery 5 years 2,595 49 516 Other assets 5 years 470 13 82

7,579 116 1,224 (1) Includes the finance charge paid in each installment. 2008

Item Term Cost

Amount of the purchase

option Installments

paid (1) Land and buildings 10 years 3,232 33 517 Land and buildings 5 years 297 5 75 Machinery 5 years 2,595 49 516 Other assets 5 years 346 7 76

6,470 94 1,184 (1) Includes the finance charge paid in each installment. These contracts did not require specific guarantees independent of the solvency of the Company/Group.


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Other non-current liabilities The rest of the non-current liabilities present the following maturity schedule: 2008 2007 Between 1 and 2 years 9,449 4,690 Between 2 and 5 years 7,097 5,257 More than 5 years 2,158 1,089 18,704 11,036 These amounts primarily relate to asset suppliers, amounts owed to public entities and other payables. b) Suppliers, other payables and other current liabilities This heading includes the following items and amounts: 2008 2007 Trade payables 94,123 100,201 Accrued wages and salaries 15,613 12,919 Other payables 12,194 6,111 Fixed asset suppliers 15,322 12,624 137,252 131,855 Other current liabilities 62 - The fair value (updated cash flows) of these liabilities does not differ from their carrying value in the accounting records. At 31 December 2007 and 2008, the heading Accrued wages and salaries mainly record the payroll for the month of December, variable compensation accrued during the year as well as other fixed compensation items payable in accordance with the collective wage agreement. At 31 December 2008, the heading Other payables recorded the interim dividend approved in December 2008 in the amount of €6.1 million (Note 17.e) which was paid on 12 January 2009.


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21. Borrowings 2008 2007

Non-current Bank loans 135,285 70,375

135,285 70,375

Current Short-term portion of long-term loans 23,153 16,940 Import financing 6,844 6,120 Drawdowns from lines of credit 23,313 25,020 Bills discounted pending maturity (Note 13) 25,668 26,938 Export pre-payments 163 251 Interest and other payables 1,814 522

80,955 75,791

Total borrowings 216,240 146,166 As is indicated in Note 3.1.a).iii), the Group does not have significant exposure to interest rates, therefore it maintains its loans at a variable rate without utilizing any financial instruments to hedge against this risk. Average effective interest rates during the year are as follows: % 2008 2007 Loans and credit from financial institutions 5.2% 4.6% Fixed asset suppliers 5.1% 4.6% Import financing 5.1% 4.3% Discounted bills 4.7% 4.4% Export pre-payments 4.8% 4.4%


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Non-current borrowings have the following maturities: 2008 2007 Between 1 and 2 years 28,665 16,951 Between 2 and 5 years 103,086 46,842 More than 5 years 3,534 6,582

135,285 70,375 In order to acquire treasury shares in the Parent Company and subsequently write them off (Note 16), in 2008 the Group drew down from bank financing consisting of lines of credit maturing between 2 and 5 years, with a total limit of €95 million in accordance with the agreement concluded in 2007. The carrying amount of the group’s borrowings is all denominated in euros: The carrying amount and fair value (based on the discounting of cash flows at market rates) of current and non-current borrowings do not significantly differ since in all cases the owed amounts accrue interest at market rates. The Group has the following unused credit lines: 2008 2007 Variable rate: – maturing in less than one year 22,884 23,986 – maturing in more than one year (*) 31,908 119,387

54,792 143,373 (*) In 2007 €95 million was recorded for the financing of the Public Offering described under Note

16.


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22. Deferred taxes Deferred tax assets are as follows: 2008 2007

Deferred tax assets: – Deferred tax assets to be recovered in more than 12 months - - – Deferred tax assets to be recovered in 12 months 13,168 12,924

13,168 12,924 Movements in 2007 and 2008 under Deferred tax assets were as follows:

Deferred tax assets Temporary differences Tax losses

Investment tax credits Total

At 31 December 2006 10,818 637 1,889 13,344 Generated in the year 2,486 - 15,417 17,903 Application (3,460) - (14,863) (18,323) At 31 December 2007 9,844 637 2,443 12,924

Generated in the year 2,179 - 1,347 3,526 Application (3,198) (79) (5) (3,282) At 31 December 2008 8,825 558 3,785 13,168 Temporary differences relate basically to provisions that will be tax deductible in the future.


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Deferred tax assets in respect of tax losses available for offset are recognized insofar as the realization of the relevant tax benefit through future tax profits is probable. The Group does not have any deferred tax assets yet to be recognized. Deferred tax liabilities relate to the tax effect of the restatement of land due to the application IFRS 1 at 1 January 2004, and there have been no movements in this respect in the 2007 and 2008 except for the adjustment of the tax rate (€3.1 million in 2007) and other minor movements in 2008 (€0.5 million). No reversal is expected in the short-term since this amount will only be settled when the land is sold. 23. Retirement benefit commitments The provision for pensions and other similar obligations reflected the following movements: Amount 1 January 2007 442 Appropriations charged against the income statement (Note 24) - Applications (78)

Balance at 31 December 2007 364

Appropriations charged against the income statement (Note 24) 40 Applications (112)

Balance at 31 December 2008 292 These payables are recorded under the heading Provisions (Note 24). At 31 December 2008 and 2007, this heading records commitments with the employees of certain subsidiaries (Note 2.18.b)).


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24. Provisions

Workforce restructuring

scheme

Provision for

production activities

Pensions (Note 23) Other Total

At 31 December 2006 19,748 2,790 442 4,680 27,660

Debit/(credit) to the income statement:

Allocation to provisions 1,136 - - 1,529 2,665

Applied during the year (1,776) (85) (78) (2,986) (4,925)

Transfers - - - (1,578) (1,578)

At 31 December 2007 19,108 2,705 364 1,645 23,822

Debit/(credit) to the income statement:

Allocation to provisions 2,449 - 40 2,545 5,034

Applied during the year (4,974) (846) (112) (1,160) (7,092)

Transfers (*) (1,100) - - - (1,100)

At 31 December 2008 15,483 1,859 292 3,030 20,664 (*) Recorded under accrued wages and salaries (Note 20) a) Workforce restructuring scheme: This heading records the estimated cost to adapt and

renew the payroll as stipulated in the Group's Competitiveness Plan, which covers the elimination of employment between 2004 and 2008 through future payments up until complete and definitive retirement is obtained. The Parent Company first obtained an early retirement agreement covering 100 employees, the application of which ended in 2005. This Plan continued to be implemented in 2007 and 2008 at several Group companies through the formal agreement of several types of dismissal/leave affecting 32 employees in 2007 and 41 employees in 2008. The Group has made its estimates in accordance with its experience in similar situations in prior years. A total of 151 employees have definitively availed themselves of these plans and the payments agreed under these arrangements end in 2013.


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b) Provision for production activities: This basically relates to the expenses that are

necessary to adapt payroll and certain balances for the production activity carried out by the Group company Productos Tubulares, S.A. (Note 1) to the situation and market projections. The estimation criteria for personnel costs were similar to those used in the aforementioned Payroll Adaptation Plan.

c) Other provisions mainly record the expenses generated by the emission of CO2 gases

during the production process, which totaled €2,310 thousand (€655 thousand in 2007), to the extent that these emissions give rise to the consumption of the assigned emission rights (note 38.b). Furthermore, this heading includes provisions to cover litigation relating to commercial claims.

25. Operating revenues 2008 2007

Sales of goods 728,360 637,208

Total ordinary revenues 728,360 637,208 Practically all amounts denominated in foreign currency invoiced to customers, €215 million, took place in US dollars (€130 million in 2007). 26. Other revenues 2008 2007

Own work capitalized 687 717 Other operating income 9,337 3,850

10,024 4,567 In 2008 €2,310 thousand was taken to the income statement to recognize the consumption of emission rights (Note 2.7) (2007: €599 thousand).


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27. Employee benefit expenses 2008 2007 Wages, salaries and similar remuneration 93,336 85,896 Staff welfare expenses 20,507 20,857 Pension contributions and allocations 4,671 4,486 118,514 111,239 The average number of employees at the Group, by category, and members of the Board of Directors, is as follows: 2008 2007 Unskilled workers 1,304 1,361 Employees 740 722 Directors 11 10 2,055 2,093 At 31 December 2008 these numbers were distributed as follows: 2008 2007 Female Male Total Female Male Total Unskilled workers 19 1,209 1,228 39 1,281 1,320 Employees 206 516 722 201 558 759 Directors 1 10 11 1 9 10 226 1,735 1,961 241 1,848 2,089


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28. Other expenses This heading breaks down as follows: 2008 2007 External services (109,747) (91,573) Taxes (953) (922) Losses, impairment and changes in provisions for commercial transactions (1,492) (710) Other ordinary expenses (1,941) (3,514) (114,133) (96,719) 29. Other net gains/(losses) This heading includes the following items and amounts: 2008 2007 Net profit/(loss) deriving from the disposal of assets (45) (239) Non-recurring revenues 210 942 Non-recurring expenses - (4,482) Reversal of provisions 1,002 429 1,167 (3,350)


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30. Financial income and expense 2008 2007

Financial income – Income from shareholdings in capital and other finance income 1,124 4,592 – Net gains on foreign currency transactions (5,423) (4,764) – Fair value gains on financial instruments - 734 – Impairment and losses on disposal of financial instruments 9 - Financial costs – Interest on bank loans and credit facilities (14,574) (9,277) – Fair value losses on financial instruments: (3,140) -

(22,004) (8,715) 31. Income tax 2008 2007 Corporate income tax payable for the year 27,734 15,991 Deferred taxes 370 12,539

28,104 28,530 Since 1998 the Parent Company has been taxed under the consolidated reporting system. The tax Group is currently made up as follows: - Tubos Reunidos, S.A. (parent) - Productos Tubulares, S.A.U. - Tubos Reunidos Comercial, S.A. - Aplicaciones Tubulares, S.L. - Clima, S.A.


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The Group’s income tax differs from the theoretical amount that would have been obtained had the weighted average tax rate applicable to Group companies been used, as follows: 2008 2007

Profit before taxes 109,900 114,200

Tax calculated at nominal tax rates 30,849 32,031 Consolidation adjustments (930) - Adjustment of tax rates - (1,763) Tax deductions arising in the year (1,663) (704) Application of tax credits for investments (Note 19) - (493) Other (152) (541)

Tax expense 28,104 28,530 The average weighted tax rate, in nominal terms, applicable to the Group is 28.07% (28.04% in 2007). The legislation applicable to the settlement of corporate income tax for 2008 is Regional Law 24/1996 (5 July), with the amendments established by Regional Law 13/2007 (26 March), which is in force, although several appeals have been filed in this respect. The company’s Directors have calculated the amounts in respect of this tax for 2008 and those years open to inspection pursuant to regional regulations in force at the end of each year, the view taken being that the final outcome of the aforementioned appeals will not have a significant impact on the annual accounts taken as a whole. The Company has applied tax legislation in force at all times and, in any event, the impact of the judgment on the figures presented in these consolidated annual accounts will not be significant. The years open to a tax inspection vary depending on the consolidated Group company although, in general, the returns for the past three or four years are open to inspection.


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32. Earnings per share Basic Basic earnings per share are calculated by dividing the profit attributable to the Company’s shareholders by the weighted average number of ordinary shares in the year, excluding treasury shares acquired by the Company (Note 15). 2008 2007 Profit attributable to the company’s shareholders 81,846 85,101 Weighted average number of outstanding ordinary shares (thousand) 175,491 204,930 Basic earnings per share (€ per share) 0,466 0,415 Diluted Diluted earnings per share are calculated by adjusting the weighted average number of outstanding ordinary shares to reflect the conversion of all potentially dilutive ordinary shares. The Company has no potentially dilutive ordinary shares. 33. Dividends per share A comparison of the gross dividend per share charged against 2007 and 2008 profits is as follows:

2008 2007

Date of approval Amount in

euros Item Date of approval Amount in

euros Item October 2008 0,035 1st Interim October 2007 0,0250 1st Interim December 2008 0,035 2nd Interim November 2007 0,0454 2nd Interim (*) 0,035 3rd Interim February 2008 0,035 3rd Interim (*) 0,04 Supplementary June 2008 0,045 Supplementary

0,145 TOTAL 0,1504 (*) Pending approval, in accordance with the distribution proposal for 2008 profits.


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34. Cash generated from operations 2008 2007 Profit for the year 81,796 85,670 Adjustments: – Taxes (Note 31) 28,104 28,530 – Depreciation and impairment of property, plant and equipment (Note 6) 20,441 19,219 – Amortization of intangible assets (Note 7) 287 286 – Depreciation of investment property (Note 8) 179 - – (Profit)/ loss on the sale of property, plant and equipment (*) 45 239 – Other revenues relating to assets (subsidies, etc.) (3,676) (713) − Net allocations to provisions (Note 24) 5,034 2,665 – (Gains)/Losses in fair value (including gains on disposal) of assets at fair

value with changes in results (Note 30) 3,131 (734) – (Gains)/Losses in fair value of derivative financial instruments 11,005 - – Interest income and shareholdings (Note 30) (1,124) (4,592) – Interest expense (Note 30) 14,574 9,277 – Share in loss/(profit) of associates (note 9) (13) 28 Changes in working capital; – Inventories (17,314) (31,885) – Trade and other receivables (10,481) (10,621) – Other financial assets at fair value through profit or loss and other financial

investments 65,082 (76,790) – Trade and other payables (8,835) 9,257 Cash generated from operations 188,235 29,836 (*) In the cash flow statement, revenues from the sale of property, plant and equipment include:

2008 2007

Carrying value (Note 6) 547 3,061

Gain /(loss) on the sale of property, plant and equipment (Note 29) (45) (239)

Proceeds from sale of property, plant and equipment 502 2,822


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35. Contingencies The Group has contingent liabilities in respect of bank and other guarantees arising in the ordinary course of business totaling €11.2 million (2007: €5.9 million). It is not anticipated that any material liabilities will arise from contingent liabilities. Furthermore, at the end of 2007 the Parent Company had provided 2 guarantees to the Spanish Stock Market Commissions totaling €170 million to secure the transaction described under Note 15. These guarantees were canceled after the operation was carried out on 15 January 2008. 36. Commitments

a) Commitments to purchase fixed assets Investment commitments at the balance sheets dates (not incurred) totaled €22.3 million in 2008 and €8.55 million in 2007.

b) Financing of investment commitments These investments will be financed using payment agreements reached with the suppliers of equipment and other assets, as well as the cash generated by the Group's activity. 37. Related-party transactions The following transactions were carried out with related parties: a) Transactions with Associates and Group companies not included in the consolidation 2008 2007

Acquisition of goods and services 415 516

Sales of goods and services 178 32


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All purchases and sales of goods and services are made at market prices similar to those applicable to non-related third parties. Financing transactions are carried out with BBVA Group at market prices.

Year-end balances with Associates deriving from sales and purchases of goods and services

2008 2007

Receivables 22 11

Payables 371 76

Compensation for key management and directors The aggregate annual compensation for the 6 Managing Directors and similar positions at Group Companies, that directly report to the Governing Bodies or the CEO amounted to €1,730 thousand in 2008 (2007: €726). The amounts relating to Directors is set out in section d) below.

Remuneration for Directors of the parent company The amounts accrued during the year by the members of the Board of Directors of Tubos Reunidos, S.A. as Directors of the company and other Group companies, of any type and for any reason, including the wages and salaries for Directors that have executive duties within the Group, totaled €3,848 thousand (2007: €2,567 thousand). Furthermore, in 2007 loans totaling €700 thousand were granted to members of the Board of Directors which were fully repaid during the year and generated interest at the legal rate. In 2008 the Company did not grant any loans to the members of the Board of Directors.


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Shareholdings, positions, functions and activities of the directors in companies with similar activities In accordance with the provisions of Article 127 ter of the Spanish Companies Act, introduced by Law 26/2003 (17 July), the Directors hereby report the following positions at companies with the same, similar or supplementary corporate purpose as that constituting the corporate purpose of the parent company, or all group companies, except for Tubacex, S.A. and Condesa Group:

Name of the Director Name of the Group company Position Pedro Abásolo Albóniga Productos Tubulares, S.A. Chairman Pedro Abásolo Albóniga Industria Auxiliar Alavesa, S.A. Voting member Pedro Abásolo Albóniga ALMESA Internet, S.A. Voting member Pello Basurco Aboitiz Productos Tubulares, S.A. Vice-Chairman Pello Basurco Aboitiz Almacenes Metalúrgicos, S.A. Voting member Francisco Javier Déniz Hernández Productos Tubulares, S.A. Voting member Francisco Javier Déniz Hernández Almacenes Metalúrgicos, S.A. Voting member Francisco Javier Déniz Hernández Industria Auxiliar Alavesa, S.A. Voting member Francisco Javier Déniz Hernández TR Aplicaciones Tubulares de Andalucía, S.A. Sole Administrator Francisco Javier Déniz Hernández Almesa Internet, S.A. Chairman Emilio Ybarra Aznar Productos Tubulares, S.A. Voting member Luís María Uribarren Axpe Grupo Condesa Director Luís Maria Uribarren Axpe Tubacex, S.A. Voting member Juan José Iribecampos Zubia Grupo Condesa Director Juan José Iribecampos Zubia Tubacex, S.A. Voting member Messrs. Luis María Uribarren Axpe and Juan José Iribecampos Zubia are majority shareholders of Condesa Group, a manufacturer of welded steel pipes, and through the company Bagoeta, S.L. they held an indirect 18% stake in Tubacex, S.A., a manufacturer of stainless steel pipes.


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38. Other information Fees of auditors and their group or related companies The audit fees for all audit firms examining Group companies totaled €252 thousand (2007: €192 thousand). The main auditor has rendered other services to group companies totaling €63k (2007: €148). In addition, other companies that use the PricewaterhouseCoopers trademark have invoiced €83k for other services rendered (2007: €65 thousand). Environmental issues The Group’s property, plant and equipment include facilities aimed at environmental protection and improvement. The Group also carries out work with own employees and external specialist support, as part of the environmental strategic plan which has been implemented to minimize the environmental risks associated with its operations and improve environmental management. The amounts of both the investments made and the expenses accrued in 2008 in relation to environmental protection and improvement have totaled €3,237 thousand and €3,011 thousand (2007: €3,918 thousand and €1,607 thousand) and are recorded under the relevant headings in “Property, plant and equipment” under assets in the accompanying balance sheet and “Other expenses ” in the accompanying income statement. The amount of rights regulated by the National Assignment Plan (Notes 2.7 and 7) assigned to Tubos Reunidos, S.A. and subsidiaries during the period of time the National Assignment Plan is in force and the annual distribution for 2008 through 2012, is as follows Rights

assigned (Ton)

2008 111,564 2009 111,564 2010 111,564 2011 111,564 2012 111,564 Total 557,820 • For 2008 the expenses deriving from the consumption of emission rights, recorded as a

balancing entry of the relevant provision (Note 24) amounted to €2,310 thousand (2007: €599 thousand).


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• The estimated consumption of emission rights for 2009 does not exceed the number of assigned rights. The rights consumed in 2008 did not exceed the assigned rights for that year.

• Group management does not expect any type of penalty or contingency to arise from

compliance with the requirements established in Law 1/2005.

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At the start of 2008, activity levels in advanced economies remained relatively strong, despite the increase in raw material prices, continued financial turbulence which had started in the summer of 2007, and the real estate crisis in several countries. However, 2008 will become known in history as that of the financial collapse which extended to the real economy and generated an international recession without comparison. Furthermore, throughout 2008 there were very significant oscillations in fundamental aspects of the world economy. The erratic development of raw material prices and oil products and the volatility of the dollar exchange rate with other currencies made it difficult to carry out normal business, including the steel business. The cutback in the availability of financial resources was added to the above, giving rise to the paralysis of activities throughout the world in practically all markets and products. However, the activities carried out and the profits obtained by the manufacturers of seamless steel pipes in general and Tubos Reunidos Group in particular, were very positive in 2008 and similar to a record year such as 2007. Consolidated revenues in 2008 amounted to €728.4 million, 14.3% higher than in 2007, of which 76.9% relate to the main business of the Seamless Steel Pipes, 13.9% to Distribution, 5.1% to automotive and the rest to other industrial businesses (Polyethylene tanks and Tubular metal fabrication. Growth has focused on special products within the main business, fundamentally pipes for oil, easily exceeding the objectives established in the Strategic Plan. The rising trend for raw material prices (scrap and alloys) continued moderately in the first part of the year and then grew spectacularly as from the month of April. There was a similar behavior exhibited by energy and shipping costs. This increase required significant sales efforts to pass it onto the market, which was obtained in a very satisfactory manner. As a result, 2008 profits are once again excellent, with consolidated profit after taxes totaling €81.8 million, representing an increase of 12.29% on a profit per-share basis. EBITDA totaled €153.1 million (+7.6% over 2007), representing 21% of revenues which rises to 25.9% in the main seamless steel pipe business. These figures, which were attained after accounting close using criteria of maximum prudence and future hedging within the limits accepted by current legislation, reveal the success and appropriateness of the Strategic Plan, and even the profit objectives established in that Plan have been exceeded.

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The magnificent financial situation and structure of Tubos Reunidos Group allowed it to easily take on the Public Offering for 14.7% of the Company's share capital, which was carried out in January 2008, resulting in a total payment of €170 million. The treasury shares acquired was written off in February. After this transaction, consolidated equity at 31 December 2008 totals €239.8 million, permanent capital totals €487.0 million and working capital totals €138.7 million. Net bank borrowings totaled only €164.2 million. This represents a healthy financial position and a competitive advantage given the current uncertainty in the general economy. The notes to the consolidated annual accounts, presented and prepared by the Board of Directors in accordance with International Accounting Standards, provide details of the primary risks and uncertainties affecting the businesses carried out by Tubos Reunidos Group. As a result of the strategic objective of moving towards a higher added value product mix, over the past few years Tubos Reunidos Group has started a process to raise the technological level of its processes and its personnel. In cooperation with laboratories and technological centers, the Group has developed and launched numerous R&D+I projects. In 2008 these efforts were recognized through the prestigious business innovation award granted by the Basque Government. Competitiveness, increased profits and compliance with environmental and occupational safety and hygiene regulations continue to be the objective of industrial investments which totaled €3.2 million at Tubos Reunidos Group in 2008. In addition, a project to install a new alloy boiler pipe finishing production line has commenced (approved in 2007 with an extraordinary budget of €20 million) which will be completed and will enter into service in the spring of 2009. On 21 July 2008 and in accordance with the authorization from shareholders at the General Meeting held on 27 June 2008, and the provisions of Stock Market Commission Circular 3/2007 (19 December) Tubos Reunidos concluded a liquidity agreement with Norbolsa, SV, S.A. The details of this agreement and the transactions carried out in accordance with its conditions have been duly reported to the Spanish Market Commission as relevant events and may be consulted on its website. In summary, in 2008 1,054,091 treasury shares were acquired and 243,423 were sold, with a balance of 810,668 treasury shares held at 31 December. In 2009 the Company is experiencing an exceptional period with a very complex environment with a general reduction of demand in the seamless steel pipe industry and in the overall economy in general. This makes estimating probable events in the near future impossible. The only certainty we have is that uncertainty rules the near future. At the end of 2008 Tubos Reunidos Group assume the presidency of “ESTA SEAMLESS PRESIDENT’S GROUP” coinciding with this period of uncertainty described above, to which threats and damages may be added. We refer to the aggressive price and manufacturing behavior of a series of Chinese manufacturers in the European Market. Unfair and uncompetitive action on the part of these manufacturers is summarized in the following points:

• Enjoyment of subsidies from both regional and national governments. • Increase in EU sales by 40 times in four years. • Increase in new capacities, which in 2008 gave rise to 3,000,000 tons, when the

apparent consumption of the EU is 2 1/2 million. • The rest of the world's markets are unable to absorb such overcapacity. • Chinese price levels are ridiculous and do not respond to real cost criteria.

Having this take place in an atmosphere of serious deterioration of activity in the European Union, has accelerated the defense of the pipe industry before the EU in a procedure called "Threat of Injury", which is completely new action against those Chinese manufacturers. It will be very important to quickly put a stop to Chinese exports, to prevent the damage they cause in our markets. As a result of this scenario of uncertainty and falling markets will force both Tubos Reunidos Group and the rest of the seamless steel pipe manufacturers, and the steel manufacturing industry in general, to make production more flexible and adapt them at all times throughout 2009. Some key factors for the income statement, such as the Euro/US dollar parity, the

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price of raw materials, financial costs and inflation rates, are expected to be favorable over the course of 2009 and moderate the impact of the market situation. Tubos Reunidos Group will continue to implement the principles of its Strategic Plan which, together with the management talent of an experienced team, has been the basis of the brilliant financial results obtained over the past few years. Finally, we report on those issues established by Article 116 bis of the Stock Market Act, as worded by Law 6/2007 (12 April).

a) Capital structure Share capital at the date of this report totals €17,468,088.80, represented by 174,680,888 shares with a par value of €0.10 each.

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This share capital reflects the situation after the write off of the 30,249,112 treasury shares with a par value of €0.10 each, which was reported to the Spanish Stock Market Committee through Relevant Event dated 25 February 2008. The shares were acquired in the public offering authorized by the Spanish Stock Market Commission on 5 December 2007 and ended on 10 January 2008. There are no different classes or series of shares and all shares have the same voting and financial rights.

b) Restriction on the transfer of shares There are no restrictions on the transfer of Company shares.

c) Significant shareholdings In accordance with the records kept by the Company and the Spanish Stock Market Commission, at the date of this report, significant shareholders of Tubos Reunidos, holding 3% or more of the Company's capital, are as follows:

Number of shares

Shareholder Direct Indirect Total % Interest

Banco Bilbao Vizcaya Argentaria (BBVA) 40,881,325 40,881,325 23.403%

Concerted Action Zorrilla Lequerica Puig Group 17,857,683 17,857,683 10.223%

Mr. Guillermo Barandiarán Alday 7,868,448 3,240,000 11,108,448 6.359%

Ms. Carmen de Miguel Nart 6,666,218 6,666,218 3.816%

Mr. Emilio Ybarra Churruca 5,819,474 5,819,474 3.331%

Mr. Santiago Ybarra Churruca 5,819,474 5,819,474 3.331% The percentage shareholding relates to the number of shares in Tubos Reunidos (174,680,888) after the write-off of the treasury shares acquired through the public offering (see section a)).

d) Restrictions to voting rights There no restrictions to voting rights. All shareholders may attend the General Meeting, regardless of the number of shares held. Each share entitles the holder to one vote and Resolutions are adopted, in all cases, with the majority votes established by the Spanish Companies Act, without any attendance quorums or reinforced majorities.

e) Para-social agreements Neither the Spanish Stock Market Commission nor the Companies Register has been informed of any para-social agreements involving the Company.

f) Regulations applicable to the appointment and replacement of Board Members and modification of the Company's bylaws

The by-laws state that the governing body shall be made up of a Board of Directors composed of a minimum of 4 members and a maximum of 14, appointed by Shareholders at a General Meeting, without any form or special majority being required for this purpose. The term of appointment is four years and board members may be reappointed once or more times for periods of the same maximum duration. The removal of a Board Member from office is the responsibility of the General Meeting, which must adopt the relevant Resolution by a majority vote. The Board of Directors' Regulations state that it will try to choose candidates to be Board Members who are persons of renowned competence, experience and prestige. The Board Regulations cover certain cases in which Board Members should offer their resignations and the Board should accept, if deemed advisable: a) on reaching 70 years of

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age, b) in the legally contemplated cases of incompatibility or prohibition, c) if they are found guilty of delinquent activity or are the subject of disciplinary sanction for serious or very serious misdemeanor investigated by supervisory authorities, d) if they are seriously admonished by the Board of Directors for having breached their obligations as Directors. In addition, the Regulations stipulate that Directors affected by nomination, reelection and removal Resolutions must abstain from taking part in deliberations and voting concerning these cases. General legislation established in the Spanish Companies Back, Articles 144 and subsequent, is applicable to the amendment of the bylaws.

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g) Powers of the Members of the Board of Directors and, in particular, those relating to the possibility of issuing or repurchasing shares

The Board of Directors has not been authorized by Shareholders to issue shares. As regards the repurchase of shares, normally a request will be made at every Shareholder Meeting to authorize the purchase of treasury shares. Specifically, shareholders at the last General Meeting held on 27 June 2008, authorized the purchase of company and subsidiary treasury shares using whatever method of acquisition, up to the maximum number of shares permitted by commercial legislation (5%) at a price equivalent to the market price at the date on which the transaction takes place, and such authorization is granted for eighteen months. It should be indicated that at 31 December 2008 the Company indirectly held 810,668 treasury shares, as a result of the liquidity agreement concluded with Norbolsa SV, S.A. on 2 July 2008. With regard to the specific powers of the members of the Board, only the CEO has habitual power over the everyday management of the Company, as well as being empowered by the Board to incorporate and take an interest in other companies and agree to the creation of branch, delegation or representative offices by determining the manner in which they should be established, their powers and the matters they should deal with, and to guarantee or endorse third-party obligations.

h) Significant agreements entered into by the Company, which will come into force, be modified or terminated in the event of a change in the control of the Company resulting from a public offering, and their effects.

Tubos Reunidos has not entered into an agreement of the kind referred to in this section.

i) Agreements between the Company and its Directors, management personnel or employees which provide for severance benefits when the latter resign or are unfairly dismissed or if the employment relationship ends as a result of a public offering.

At 31 December 2008 Tubos Reunidos has no severance compensation agreements with its Directors, management personnel or employees for cases of resignation, unfair dismissal or as a result of a public offering, nor for any other reason, notwithstanding the severance benefits to which employees are entitled at all times in accordance with employment legislation.

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“In accordance with the provisions of Article 202.5 of the Spanish Companies Back, as worded by Law 16/2007, this Directors' Report presents a separate section containing the 2008 Annual Corporate Governance Report (ACGR) for Tubos Reunidos, as it is a company whose shares are listed on the stock market". Amurrio (Álava), 25 February 2009

Documents

Tubos Reunidos, S.A. and subsidiaries Consolidated AAAA.pdf · Tubos Reunidos, S.A. and subsidiaries Audit Report, Consolidated annual accounts as at 31 December 2008 and Directors’