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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of November, 2004

Commission File Number 1-15106
 

 
PETRÓLEO BRASILEIRO S.A. - PETROBRAS
(Exact name of registrant as specified in its charter)
 

Brazilian Petroleum Corporation - PETROBRAS
(Translation of Registrant's name into English)
 

Avenida República do Chile, 65
20035-900 - Rio de Janeiro, RJ
Federative Republic of Brazil
(Address of principal executive office)
 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. 

Form 20-F ___X___ Form 40-F _______

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No___X____


 


PETROBRAS ANNOUNCES THIRD QUARTER OF 2004 RESULTS
(Rio de Janeiro – November 30, 2004) – PETRÓLEO BRASILEIRO S.A. – PETROBRAS today announced its consolidated results stated in U.S. dollars, prepared in accordance with U.S. GAAP.

PETROBRAS reported consolidated net income of U.S.$ 4,483 million and consolidated net operating revenues of U.S.$ 26,751 million for the nine-month period ended September 30, 2004, compared to consolidated net income of U.S.$ 5,665 million and consolidated net operating revenues of U.S.$ 22,648 million for the nine-month period ended September 30, 2003.

COMMENTS FROM THE CEO, MR. JOSÉ EDUARDO DE BARROS DUTRA

I am pleased to present our results for the nine-month period ended September 30, 2004. The company’s noteworthy performance is due to the combination of actions and efforts carried out by our employees and workforce, at both the operational level as well as the administrative level.

During this quarter we continued to fulfill the goals and objectives established in our strategic plan. During the nine-month period ended September 30, 2004, our capital expenditures totaled U.S.$ 4.765 billion and additionally made an acquisition of a 100% stake in Sophia do Brasil S.A.(formerly Agip do Brasil S.A.).

On September 15, 2004 we issued U.S.$ 600 million of Global Notes in the international capital markets. This operation marked our return to the international capital markets since our last issuance in December 2003. The wide bond placement, reaching various categories of investors in numerous geographical locations, reflected the market’s recognition of our credit quality in the international capital markets, as confirmed by our improved foreign currency debt rating from Ba2 to Ba1, just one level away from investment grade according to Moody’s Investor Services.

In recent months, the international petroleum market has experienced extreme price volatility, along with subsequent pressure on the costs of services and materials consumed by companies in the energy sector. In our efforts to preserve our profitability, we have conducted price adjustments throughout the period, without compromising the loyalty of our clients or our market share.

We also launched Platform P-43 on October 13, 2004. It will operate in the Barracuda field in the Campos Basin, with estimated production capacity of 150,000 barrels per day. Platform P-43 will play a key role in contributing to Brazil’s oil production goals.

On September 17, 2004, our Board of Directors approved a dividend in the form of interest on own capital. The approved amount totals U.S.$ 1,144 million, which corresponds to U.S.$ 1.04 per ordinary and preferred share. The dividend was provisioned in the financial statements for the nine-month period ended September 30, 2004 and will be distributed by February 15, 2005.

Shortly after September 30, 2004, the parent company and 7 subsidiaries began the implementation of an Integrated Management System – SAP/R3 – which will be an important tool for integrating and facilitating our businesses, increasing our competitiveness and placing us on an even playing field with the largest international oil companies.

All of these efforts translate into returns, not just for our shareholders but also for our employees, suppliers, clients, and in the communities where we operate.

Financial Highlights

        For the nine-month period ended September 30,
2Q-2004 3Q-2004 3Q-2003   Income statement data 2004 2003
11,961 14,095 11,314   Sales of products and services 37,232 31,300
8,595 10,221 8,218   Net operating revenues 26,751 22,648
(423) (114) (199)   Financial income (expense), net (924) 117
1,307 1,839 1,897   Net income 4,483 5,665
        Basic and diluted earnings per common and preferred share    
1.19 1.68 1.73   Before effect of change in accounting principle 4.09 4.54
1.19 1.68 1.73   After effect of change in accounting principle 4.09 5.17
           
        Other data    
49.3 44.9 50.3   Gross margin (%) (1) 47.5 51.2
15.2 18.0 23.1   Net margin (%) (2) 16.8 25.0
66 65 67   Debt to equity ratio (%) (3) 65 68
           
  Financial and Economic Indicators
35.36 41.54 28.41   Brent crude (U.S.$/bbl) 36.28 28.65
3.0429 2.9773 2.9324   Average Commercial Selling Rate for U.S. Dollars (R$/U.S.$) 2.9732 3.1334
3.1075 2.8586 2.9234   Period-end Commercial Selling Rate for U.S. Dollars (R$/U.S.$) 2.8586 2.9234

(1) Gross margin equals net operating revenues less cost of sales divided by net operating revenues.
(2) Net margin equals net income divided by net operating revenues.
(3) Debt to equity ratio equals total liabilities divided by the sum of total liabilities and total shareholders’ equity.


  U.S. $ million
Balance sheet data 09.30.2004 12.31.2003 Percent Change (09.30.2004 versus 12.31.2003) 09.30.2003
Total assets 57,261  53,612  6.8  48,360 
    Cash and cash equivalents 7,080  9,610  (26.3) 7,124 
Short-term debt 409  1,329  (69.2) 1,566 
Total long-term debt 13,529  13,033  3.8  11,593 
Total project financings 5,743  5,908  (2.8) 4,600 
Total capital lease obligations 1,402  1,620  (13.5) 1,900 
Net debt (1) 14,003  11,980  16.9  12,237 
Shareholders´ equity (2) 19,954  17,152  16.3  16,077 
Total capitalization (3) 41,037  39,042  5.1  35,736 

  U.S. $ million  
Reconciliation of Net debt 09.30.2004 12.31.2003 09.30.2003  
Total long-term debt 13,529  13,033  11,593   
    Plus short-term debt 409  1,329  1,566   
    Plus total project financings 5,743  5,908  4,600   
    Plus total capital lease obligations 1,402  1,620  1,900   
    Less cash and cash equivalents 7,080  9,610  7,124   
    Less Junior Notes(4)   300  298 
Net debt (1) 14,003  11,980  12,237   

(1) Our net debt is not computed in accordance with U.S. GAAP and should not be considered in isolation or as a substitute for total long-term debt calculated in accordance with U.S. GAAP. Our calculation of net debt may not be comparable to the calculation of net debt by other companies. Management believes that net debt is an appropriate supplemental measure that helps investors assess our liquidity and assists management in targeting leverage improvements. Please see the table above for a reconciliation of net debt to total long-term debt.
(2) Shareholders’ equity includes unrecognized losses in the amount of U.S.$ 1,605 million at September 30, 2004, U.S.$ 1,588 million at December 31, 2003 and U.S.$ 1,645 million at September 30, 2003, in each case related to “Amounts not recognized as net periodic pension cost”.
(3) Total capitalization means shareholders’ equity plus short-term debt, total long-term debt, total project financings and total capital lease obligations
(4) In May 2004, PFL and the PF Export Trust, executed an amendment to the Trust Agreement allowing the Junior Trust Certificates to be set-off against the related Notes.

OPERATING HIGHLIGHTS
        For the nine-month period
ended September 30,
2Q-2004 3Q-2004 3Q-2003   2004 2003
      Average daily crude oil and gas production    
1,630  1,692  1,727      Crude oil and NGLs (Mbpd) (1) 1,656  1,708 
1,461  1,523  1,562          Brazil 1,487  1,549 
169  169  165          International 169  159 
2,136  2,208  2,046      Natural gas (Mmcfpd) (2) 2,160  1,992 
1,572  1,620  1,524          Brazil 1,590  1,488 
564  588  522          International 570  504 
 
      Crude oil and NGL average sales price (U.S. dollars per bbl)    
32.88  36.13  26.16          Brazil (3) 32.94  27.09 
25.15  28.31  21.29          International 26.30  22.69 
                
      Natural gas average sales price (U.S. dollars per Mcf)    
1.90  1.77  1.87          Brazil 1.86  1.75 
1.14  1.09  1.07          International 1.14  1.31 
             
      Lifting costs (U.S. dollars per boe)    
             Crude oil and natural gas – Brazil      
10.09  10.72  8.69          Including government take (4) 10.18  8.44 
4.16  4.10  3.61          Excluding government take (4) 4.18  3.30 
2.50  2.53  2.43      Crude oil and natural gas – International 2.49  2.36 
      Refining costs (U.S. dollars per boe)    
1.45  1.18  1.07          Brazil 1.27  1.05 
1.23  1.22  1.17          International 1.20  1.13 
      Refining and marketing operations (Mbpd)    
2,125  2,125  2,085      Primary Processed Installed Capacity 2,125  2,085 
                 Brazil      
1,996  1,996  1,956              Installed capacity 1,996  1,956 
1,670  1,659  1,674              Output of oil products 1,685  1,651 
84% 86% 84%             Utilization 86% 83%
                 International      
129  129  129              Installed capacity 129  129 
96  104  96              Output of oil products 100  92 
74% 79% 75%             Utilization 76% 73%
73  77  80  Domestic crude oil as % of total feedstock processed 76  81 
         Imports (Mbpd)      
493  439  360          Crude oil imports 450  322 
62  166  125          Oil product imports 101  121 
128  137  91          Import of gas, alcohol and others 123  86 
         Exports (Mbpd)      
189  208  242          Crude oil exports 196  223 
266  258  201          Oil product exports 240  215 
13          Fertilizer and other exports



 

222  271  120          Net imports 233  82 
         Sales Volume (thousand bpd)      
1,565  1,676  1,542          Oil Products 1,577  1,500 
26  38  39          Alcohol and Others 31  32 
205  217  194          Natural Gas 205  172 



 

1,796  1,931  1,775              Total 1,813  1,704 
450  497  440          Distribution 459  427 
(396) (469) (385)         Inter-company sales (417) (382)



 

1,850  1,959  1,830      Total domestic market 1,855  1,749 
461  472  469          Exports 441  455 
205  190  219          International sales 215  229 
247  223  121          Other operations (5) 201  139 



 

913  885  809      Total international market 857  823 



 

2,763  2,844  2,639      Total 2,712  2,572 



 

(1) Includes production from shale oil reserves.
(2) Does not include liquefied natural gas. Includes reinjected gas.
(3) Crude oil and NGL average sales price in Brazil includes intra-company transfers and sales to third parties.
(4) Government take includes royalties, special government participation and rental of areas.
(5) Includes third-party sales by our international subsidiary, Petrobras International Finance Company (PIFCo).

ANALYSIS OF OPERATING HIGHLIGHTS

Exploration and Production

Domestic crude oil and NGL production decreased 4.0% to 1,487 thousand barrels per day for the nine-month period ended September 30, 2004, as compared to 1,549 thousand barrels per day for the nine-month period ended September 30, 2003. This decrease was primarily due to: (1) an interruption in production of DP-Seillean in the Jubarte field for scheduled inspections; (2) the shut-down of wells located in the Marlim Sul and Voador fields due to the high production of water and sand; (3) a temporary shut-down of the P-40 production platform - (Marlim Sul) due to elevated water production and limited oil processing at the platform; (4) a shut-down of some Albacora wells for maintenance on turbo-compressors; and (5) a scheduled stoppage of the Linguado, Pampo and Enchova platforms.

International crude oil and NGL production increased 6.3% to 169 thousand barrels per day for the nine-month period ended September 30, 2004, as compared to 159 thousand barrels per day for the nine-month period ended September 30, 2003, principally due to the consolidation of Petrobras Energia Participaciones S.A. (PEPSA) and Petrolera Entre Lomas S.A. (PELSA) as of May 2003, as well as increased production of Bolivian gas, driven by increased demand in the Brazilian market.

Lifting Costs

Our lifting costs in Brazil, excluding government take, increased 26.8% to U.S.$ 4.18 per barrel of oil equivalent for the nine-month period ended September 30, 2004, from U.S.$ 3.30 per barrel of oil equivalent for the nine-month period ended September 30, 2003. This increase was primarily due to: (1) maintenance and technical services for well restoration, drilling rigs and special ships (these prices are tied to international oil prices); (2) additional maintenance materials and services at ocean terminals, transport lines and installations associated with our health, safety and environmental program; and (3) higher personnel expenses primarily related to: overtime payments as set forth in our collective bargaining agreement; an increase in our workforce; and a revision in the actuarial calculations relating to future health care and pension benefits.

Our lifting costs in Brazil, including government take (comprised of royalties, special government participation and rental of areas), increased 20.6% to U.S.$ 10.18 per barrel of oil equivalent for the nine-month period ended September 30, 2004, from U.S.$ 8.44 per barrel of oil equivalent for the nine-month period ended September 30, 2003, due primarily to the higher operating expenses mentioned above and increased expenses from special governmental participation due to the higher average reference price for domestic oil. The increase in these costs was partially offset by the 4.0% reduction in production from certain fields, principally at the Marlim and Marlim Sul oil fields, which have a higher special participation rate.

Our international lifting costs increased 5.5% to U.S.$ 2.49 per barrel of oil equivalent for the nine-month period ended September 30, 2004, as compared to U.S.$ 2.36 per barrel of oil equivalent for the nine-month period ended September 30, 2003. This increase was primarily due to increased expenses for personnel, materials and services contracted at Block 18 in PEPSA-Ecuador and intervention in wells in Argentina

Refining costs

Domestic unit refining costs increased 20.9% to U.S.$ 1.27 per barrel of oil equivalent for the nine-month period ended September 30, 2004, as compared to U.S.$ 1.05 per barrel of oil equivalent for the nine-month period ended September 30, 2003. This increase was primarily due to: (1) higher personnel expenses primarily related to: overtime payments as set forth in our collective bargaining agreement; an increase in our workforce; and a revision in the actuarial calculations relating to future health care and pension benefits; (2) an increase in costs related to planned stoppages at certain refineries; and (3) third-party services, mainly for corrective maintenance.

International unit refining costs increased 6.2% to U.S.$1.20 per barrel of oil equivalent for the nine-month period ended September 30, 2004, as compared to U.S.$ 1.13 per barrel of oil equivalent for the nine-month period ended September 30, 2003. This increase was primarily due to increased expenses for personnel, materials, maintenance and contracted services – which primarily consisted of environmental and quality control consulting, in Argentina.

Sales Volume

Our domestic sales volume, consisting primarily of sales of diesel oil, gasoline, jet fuel, naphtha, fuel oil and liquefied petroleum gas, increased 6.1% to 1,855 thousand barrels per day for the nine-month period ended September 30, 2004, as compared to 1,749 thousand barrels per day for the nine-month period ended September 30, 2003. The increase in sales volume was primarily due to the rise in the sales of diesel oil, gasoline, jet fuel and LPG as a result of the rebound in 2004 after the contraction of the Brazilian economy during 2003. This increase was partially offset by a reduction in the sales of fuel oil. The decrease in fuel oil consumption during the nine-month period ended September 30, 2004, in relation to the same period in 2003, reflected the increased use of products that serve as substitutes for fuel oil, such as imported coke, coal (domestic and imported), wood, biomass, and natural gas.

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We earn income from:

Our expenses include:

Fluctuations in our financial condition and results of operations are driven by a combination of factors, including:

RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2003

The comparison between our results of operations for the nine-month period ended September 30, 2004 and the nine-month period ended September 30, 2003 has been significantly impacted by the 5.1% decrease in the average Real/U.S. dollar exchange rate in the nine-month period ended September 30, 2004 as compared to the average Real/U.S. dollar exchange rate in the nine-month period ended September 30, 2003. For ease we refer to this change in average exchange rate as the “5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.”

We acquired PEPSA and PELSA in May 2003. The results of operations for the nine-month period ended September 30, 2003 only include PEPSA and PELSA’s results from June to September of 2003.

Revenues

Net operating revenues increased 18.1% to U.S.$ 26,751 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 22,648 million for the nine-month period ended September 30, 2003. This increase was primarily attributable to an increase in the prices and in sales volume in both the domestic market and outside Brazil (international sales), which includes sales conducted by PEPSA and PELSA, and to the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.

Consolidated sales of products and services increased 19.0% to U.S.$ 37,232 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 31,300 million for the nine-month period ended September 30, 2003, primarily due to the increases mentioned above.

Included in sales of products and services are the following amounts which we collected on behalf of the federal or state governments:

Cost of sales

Cost of sales for the nine-month period ended September 30, 2004 increased 27.0% to U.S.$ 14,046 million, as compared to U.S.$ 11,058 million for the nine-month period ended September 30, 2003. This increase was principally a result of:

Depreciation, depletion and amortization

We calculate depreciation, depletion and amortization of exploration and production assets on the basis of the units of production method. Depreciation, depletion and amortization expenses increased 37.2% to U.S.$ 1,814 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 1,322 million for the nine-month period ended September 30, 2003. This increase was primarily attributable to the following:

Exploration, including exploratory dry holes

Exploration costs, including exploratory dry holes increased 40.5% to U.S.$ 437 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 311 million for nine-month period ended September 30, 2003. This increase was primarily attributable to the following:

Selling, general and administrative expenses

Selling, general and administrative expenses increased 39.9 % to U.S.$ 1,989 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 1,422 million for the nine-month period ended September 30, 2003.

Selling expenses increased 53.1% to U.S.$ 1,095 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 715 million for the nine-month period ended September 30, 2003. This increase was primarily attributable to the following:

General and administrative expenses increased 26.4% to U.S.$ 894 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 707 million for the nine-month period ended September 30, 2003. This increase was primarily attributable to the following:

Research and development expenses

Research and development expenses increased 31.4% to U.S.$ 180 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 137 million for nine-month period ended September 30, 2003. This increase was primarily related to our additional investments in programs for environmental safety, deepwater and refining technologies of approximately U.S.$ 36 million and the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.

Equity in results of non-consolidated companies

Equity in results of non-consolidated companies increased to a gain of U.S.$ 141 million for the nine-month period ended September 30, 2004, as compared to a gain of U.S.$ 103 million for the nine-month period ended September 30, 2003.

During 2004 we recognized a gain of U.S.$ 21 million resulting from the full nine months consolidation of PEPSA and PELSA.

Financial income

We derive financial income from several sources, including interest on cash and cash equivalents. The majority of our cash equivalents are short-term Brazilian government securities, including securities indexed to the U.S. dollar. We also hold U.S. dollar deposits.

Financial income increased to U.S.$ 545 million for the nine-month period ended September 30, 2004 as compared to U.S.$ 493 million for the nine-month period ended September 30, 2003. This increase was primarily attributable to an increase in financial interest income from short-term investments, which amounted U.S.$ 274 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 199 million for the nine-month period ended September 30, 2003, primarily due to the effect of the 1.1% appreciation of the Real against the U.S. dollar in the nine-month period ended September 30, 2004 as compared to the 17.3% appreciation of the Real against the U.S. dollar in the nine-month period ended September 30, 2003. A breakdown of financial income and expenses is shown in Note 8 in our unaudited consolidated financial statements as of September 30, 2004.

Financial expense

Financial expense increased 55.9% to U.S.$ 1,430 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 917 million for the nine-month period ended September 30, 2003. This increase was primarily attributable to an increase in our debt and an increase of approximately U.S.$ 248 million in financial expenses resulting from PEPSA’s hedge operations; and a loss of U.S.$ 113 million on repurchase of our own securities.

Monetary and exchange variation on monetary assets and liabilities, net

Monetary and exchange variation on monetary assets and liabilities, net generated a loss of U.S.$ 39 million for the nine-month period ended September 30, 2004, as compared to a gain of U.S.$ 541 million for the nine-month period ended September 30, 2003. The decrease in monetary and exchange variation on monetary assets and liabilities, net is primarily attributable to the effect of a 1.1% appreciation of the Real against the U.S. dollar during the nine-month period ended September 30, 2004, as compared to a 17.3% appreciation of the Real against the U.S. dollar during the nine-month period ended September 30, 2003.

Employee benefit expense

Employee benefit expense consists of financial costs associated with expected pension and health care costs. Our employee benefit expense increased 19.7% to U.S.$ 468 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 391 million for the nine-month period ended September 30, 2003. This rise in costs was primarily attributable to the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003, and an increase of U.S.$ 55 million from the annual actuarial calculation of our pension and health care plan liability.

Other taxes

Other taxes, consisting of miscellaneous value-added, transaction and sales taxes, increased 54.0% to U.S.$ 345 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 224 million for nine-month period ended September 30, 2003. This increase was primarily attributable to the following:

Other expenses, net

Other expenses, net are primarily composed of gains and losses recorded on sales of fixed assets, general advertising and marketing expenses and certain other non-recurring charges. Other expenses, net for the nine-month period ended September 30, 2004 decreased to an expense of U.S.$ 501 million, as compared to an expense of U.S.$ 756 million for the nine-month period ended September 30, 2003.

The most significant charges for the nine-month period ended September 30, 2004 were:

The most significant charges for the nine-month period ended September 30, 2003 were:

Income tax (expense) benefit

Income before income taxes, minority interest and accounting changes decreased to U.S.$ 6,188 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 7,220 million for the nine-month period ended September 30, 2003. As a result, we recorded an income tax expense of U.S.$ 1,604 million for the nine-month period ended September 30, 2004, as compared to an expense of U.S.$ 2,014 million for the nine-month period ended September 30, 2003.

The reconciliation between the tax calculated based upon statutory tax rates to income tax expense and effective rates is shown in Note 4 to our unaudited consolidated financial statements as of September 30, 2004.

Cumulative effect of change in accounting principle

As of January 1, 2003, we generated a gain of U.S.$ 697 million (net of U.S.$ 359 million of taxes) resulting from the adoption of SFAS No. 143 – Accounting for Asset Retirement Obligations. The adjustment was due to the difference in the method of accruing end of life asset retirement obligations under SFAS 143, as compared with the method required by SFAS 19 – Financial Accounting and Reporting by Oil and Gas Producing Companies.

THE PETROLEUM AND ALCOHOL ACCOUNT

The ANP/STN Integrated Audit Committee submitted, on June 23, 2004, its final report certifying and approving the balance of the Petroleum and Alcohol Accounts for the period from July 1, 1998 to December 31, 2001, together with monetary restatement through present date. The conclusion of this audit process for the Petroleum and Alcohol account and the parties concurrence as to final amount establishes the basis for concluding the settlement process between the Federal Government and us.

We and the Federal Government reached an agreement whereby the Federal Government issued National Treasury Bonds - H (NTN-H) into a federal depositary on our behalf to support the balance of the Petroleum and Alcohol account.

As of June 30, 2004, there were 138,791 National Treasury Notes – series H (NTN-H), in the amount of US$ 56 million, at which time the balance of the Petroleum and Alcohol account was US$ 241 million. Upon maturity of the NTNs-H, the Federal Government made US$ 3 available to us and the remaining US$ 53 million was deposited in an account in our name, however, such amount is restricted from use by order of STN. The legal, valid, and binding nature of the account is not affected by any difference between the balance of the account and the value of the outstanding bonds. As defined by Provisional Measure No. 123 dated June 26, 2003, made into Law No. 10.742 dated October 6, 2003, the settlement of accounts should have been completed by June 30, 2004. We have been in contact with the STN with a view to resolving the differences in order to resolve remaining issues between the parties in order to conclude the settlement process as established by Provisional Measure No. 2.181-45, of August 24, 2001.

The remaining balance of the Petroleum and Alcohol Accounts may be paid as follows: (1) National Treasury Bonds of the same amount as the final balance determined as a result of the process for the matching of accounts; (2) settlement of the balance of Petroleum and Alcohol Accounts, on the date of the matching of accounts with any other amounts that might be owed by us to the Federal Government, including taxes; or (3) a combination of (1) and (2).

The following summarizes the changes in the Petroleum and Alcohol Account for the nine-month period ended September 30, 2004:

  U.S. $ million
Balance as of December 31, 2003 239 
Reimbursements - principally subsidies paid to fuel alcohol producers
Result of audit conducted by the Federal Government 16 
Charges on intercompany loans
Translation gain
 
Balance as of September 30, 2004 264 
 

BUSINESS SEGMENTS

NET INCOME BY BUSINESS SEGMENT

  U.S. $ million
For the nine-month period ended
September 30,
  2004 2003
Exploration and Production 4,402  4,715
Supply (2) 648  1,346
Gas and Energy (176) (214)
International (1) (2) 142  159
Distribution 102  87
Corporate (536) (228)
Eliminations (99) (200)
 

Net income 4,483  5,665
 

(1)

Since June 1, 2003, the international business segment includes the Argentine operations of PEPSA and PELSA (both acquired in May 2003).

(2)

Net operating revenues and the cost of sales relative to the periods prior to 3Q-2004 were reclassified between the International segment and the Supply segment in relation to offshore operations that were being allocated to the International segment. There was no significant impact on the results reported for these segments.

Exploration and Production

Our exploration and production segment includes our exploration, development and production activities in Brazil, as well as sales of crude oil in the domestic and foreign markets and transfers of natural gas to our Gas and Energy segment.

Consolidated net income for our exploration and production segment decreased 6.6% to U.S.$ 4,402 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 4,715 million for the nine-month period ended September 30, 2003. This decrease was primarily attributable to:

• a U.S.$ 907 million increase in cost of sales as a result of an increase in our production costs, despite the 4.0% decrease in oil and NGL production;

• a U.S.$ 245 million increase in depreciation, depletion and amortization expenses, mainly because of an increase of approximately U.S.$ 241 million resulting from higher depreciation associated with the Dourado, Roncador, Marlim Sul and Jubarte Fields due to PP&E addition and because of the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003; and

• the cumulative effect of a change in accounting principles relating to future liabilities for site restoration costs, which led to an increase in our net income of U.S.$ 697 million, net of taxes, in the nine-month period ended September 30, 2003.

These effects were partially offset by a U.S.$ 2,042 million increase in net operating revenues, primarily related to the positive effects of higher international index oil prices on the sales/transfer prices of domestic oil and the 6.9% increase in natural gas production, despite the 4.0% decrease in oil and NGL production and despite the lower price increases of heavy crude in the international market compared to lighter crude. The spread between the average price of domestic oil sold/transferred and the average Brent price rose from U.S.$ 1.56/bbl in the nine-month period ended September 30, 2003, to U.S.$ 3.34/bbl in the nine-month period ended September 30, 2004.

Supply

Our supply segment includes refining, logistics, transportation and the purchase of crude oil, as well as the purchase and sale of oil products and fuel alcohol. Additionally, this segment includes the petrochemical and fertilizers division, which includes investments in domestic petrochemical companies and our two domestic fertilizer plants.

Our supply segment registered net income of U.S.$ 648 million for the nine-month period ended September 30, 2004, a decrease of 51.9% as compared to net income of U.S.$ 1,346 million for the nine-month period ended September 30, 2003. This decrease was primarily a result of:

• an increase of U.S.$ 3,202 million in the cost of sales, mainly attributable to: (1) an increase in the cost to acquire oil and oil products because of higher international prices, despite the increased spread between heavy and light crude and decreased volumes of oil product imports; (2) a lower share of domestic oil in processed throughput (76.0% in the nine-month period ended September 30, 2004 and 81.0% in the nine-month period ended September 30, 2003); (3) increased freight costs; (4) higher unit refining costs; (5) increased depreciation costs due to investments in refining facilities; and (6) an increase in the volume of oil products sold in the domestic and foreign markets of 5% and 8%, respectively;

• an increase of U.S.$ 149 million in sales, general and administrative expenses, primarily related to an increase in sales expenses arising from heavier sales volumes sold and additional freight costs; and

• financial income, net in the amount of U.S.$ 1 million in the nine-month period ended September 30, 2004, as compared to U.S.$ 149 million in the nine-month period ended September 30, 2003, resulting mainly from the effect of the 1.1% appreciation of the Real against the U.S. dollar in the nine-month period ended September 30, 2004 as compared to the 17.3% appreciation of the Real against the U.S. dollar in the nine-month period ended September 30, 2003.

These effects were partially offset by an increase of U.S.$ 2,442 million in net operating revenues, primarily related to the increased volume of sales in the domestic and foreign markets, the increase in the average realization value of oil products sold in the domestic market and the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.

Gas and Energy

Our gas and energy segment consists principally of the purchase and sale and transportation of natural gas produced in or imported into Brazil. Additionally, this segment includes our domestic electricity production, purchase and sale activities as well as investments in domestic natural gas transportation companies, state owned natural gas distributors and thermoelectric companies.

Consolidated net loss for our gas and energy segment decreased 17.8% to U.S.$ 176 million for the nine-month period ended September 30, 2004, as compared to a net loss of U.S.$ 214 million for the nine-month period ended September 30, 2003. This resulting net loss was primarily a result of:

• a U.S.$ 418 million increase in net operating revenues primarily due to: (1) the 19.2% increase in the volume of natural gas sold, as a result of the substitution of natural gas for fuel oil by industries and for gasoline for vehicle use, plus increased supply to thermoelectric plants; (2) an increase in revenues as a result of the start of operations of some thermoelectric power plants at the end of 2003; (3) the effects of the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003 on sales of natural gas and; (4) the adoption of FIN 46, resulting in the consolidation of six thermoelectric power plants for which we recorded losses in equity in 2003. These increases were partially offset by a reduction in the average realization value of natural gas;

Net operating revenues for 2004 vs 2003 were positively influenced by:

• a U.S.$ 205 million provision for nonreimbursable contractual contingency payments, related to our investments in thermoelectric power plants, taken in the nine-month period ended September 30, 2003; and

• a U.S.$ 179 million decrease in minority interest losses, primarily related to the net income of Transportadora Brasileira Gasoduto Bolivia-Brasil S.A. – TBG.

These positive effects on consolidated net loss were partially offset by the following items:

• a U.S.$ 628 million increase in cost of sales primarily due to: (1) a 19.2% increase in the volume of natural gas sold; (2) the increase in the share of Bolivian gas in our natural gas sales, from 38.0% in the nine-month period ended September 30, 2003 to 46.3% in the nine-month period ended September 30, 2004; (3) the effects of the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003; (4) the start of operations of some thermoelectric power plants at the end of 2003; and (5) the adoption of FIN 46, resulting in the consolidation of six thermoelectric power plants for which we recorded losses in equity in 2003;

• a loss of U.S.$ 63 million because some thermoelectric power plants remained unexpectedly idle; and

• a U.S.$ 24 million increase in depreciation, depletion and amortization, because of the adoption of FIN 46, resulting in the consolidation of six thermoelectric power plants for which we recorded losses in equity in 2003.

International

The international segment represents our international activities conducted in 13 countries, which include Exploration and Production, Supply, Distribution and Gas and Energy.

Consolidated net income for our international segment was U.S.$ 142 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 159 million for the nine-month period ended September 30, 2003. The decrease in net income was primarily attributable to the following effects, most of them associated with the consolidation of PEPSA and PELSA:

• an increase of U.S.$ 1,396 million of net operating revenues, which primarily reflects the effects of increased international oil prices, increased gas sales from Bolivia, and increased sales volumes by PEPSA, primarily in Argentina, Bolivia and Colombia;

• an increase of U.S.$ 742 million in cost of sales;

• financial expenses, net, of U.S.$ 391 million in the nine-month period ended September 30, 2004 as compared to U.S.$ 45 million for the nine-month period ended September 30, 2003, primarily as a result of the Argentine Peso/U.S. dollar exchange rate as well as from losses associated with PEPSA’s hedge operations that totaled U.S.$ 248 million;

• an increase of U.S.$ 141 million in depreciation, depletion and amortization;

• an increase of U.S.$ 130 million in exploration, including exploratory dry holes and impairment, which represents a write-off of the signing bonus for Block 34 in Angola relating to identified dry wells (U.S.$ 72 million) and the write-off of exploration expenses in Ecuador and the United States (U.S.$ 45 million); and

• an increase of U.S.$ 91 million in selling, general and administrative expenses.

Distribution

Our distribution segment represents the oil product and fuel alcohol distribution activities conducted by our majority owned subsidiary, Petrobras Distribuidora S.A. - BR in Brazil.

In accordance with our strategic objectives to increase market share in the LPG distribution segment and consolidate the automotive fuels distribution market in determined regions of Brazil, our distribution business now includes the operations of the company Sophia do Brasil S.A. (formerly Agip do Brasil S.A), which was acquired in August 2004.

Consolidated net income for our distribution segment increased 17.2% to U.S.$ 102 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 87 million for the nine-month period ended September 30, 2003, primarily attributable to the U.S.$ 988 million increase in net operating revenues, mainly reflecting the 8.0% increase in sales volume, the consolidation of Sophia do Brasil S.A. as of August 2004 and effects of the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.

These effects were partially offset by the following items:

• an increase of U.S.$ 848 million in the cost of sales, mainly attributable to the 8.0% increase in sales volume and the 5.1% increase in the average value of the real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003; and

• an increase of U.S.$ 82 million in selling, general and administrative expenses, mainly due to an increase of the provision for doubtful accounts, increased expenses for marketing and distribution of products and to the effects of the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.

Our participation in the Brazilian fuel distribution market through the nine-month period ended September 30, 2004 represented 35.5% of all sales, including Sophia do Brasil S.A., which sales were 2.9% of all sales, as opposed to 31.5% in the nine-month period ended September 30, 2003.

Corporate

Our corporate segment includes those activities not attributable to other segments, including corporate financial management, overhead related to central administration and other expenses, including actuarial expenses related to our pension and health care plans.

Consolidated net loss for the units that make up our corporate segment increased to U.S.$ 536 million during the nine-month period ended September 30, 2004, as compared to a net loss of U.S.$ 228 million during the nine-month period ended

September 30, 2003. This increase in net loss was primarily attributable to:

• financial expenses, net, of U.S.$ 217 million in the nine-month period ended September 30, 2004 as compared to financial income, net, of U.S.$ 380 million in the nine-month period ended September 30, 2003, resulting mainly from the effect of the 1.1% appreciation of the Real against the U.S. dollar in the nine-month period ended September 30, 2004 as compared to the 17.3% appreciation of the Real against the U.S. dollar in the nine-month period ended September 30, 2003;

• an increase of U.S.$ 76 million in employee benefit expense, primarily attributable to the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003, and to the increase of U.S.$ 55 million from the annual actuarial calculation of our pension and health care plan liability;

• an increase of U.S.$ 79 million in other taxes, mainly attributable to the increase in the PASEP/COFINS taxes on financial income, primarily as a result of the change in the COFINS tax rate, from 3.0% to 7.6%, beginning February 1, 2004, and the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003; and

• an increase of U.S.$ 50 million in selling, general and administrative expenses, mainly as a result of the increase in expenses related to personnel, technical consulting services in connection with our increased outsourcing of selected non-core general and administrative activities and of the 5.1% increase in the average value of the Real against the U.S. dollar in the nine-month period ended September 30, 2004, as compared to the nine-month period ended September 30, 2003.

These effects were partially offset by a U.S.$ 511 million increase in gains associated with income tax benefits, principally deferred tax.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal uses of funds are for capital expenditures, dividend payments and repayment of debt. We have historically met these requirements with internally generated funds, short-term debt, long-term debt, project financings and sale and lease back agreements. We believe these sources of funds, together with our strong cash and cash equivalents on hand, will continue to allow us to meet our currently anticipated capital requirements.

Financing Strategy

The objective of our financing strategy is to help us achieve the targets set forth in our new Strategic Plan released on May14, 2004, which provides for capital expenditures of U.S.$ 53.6 billion from 2004-2010. We also aim to increase the average life of our debt portfolio and reduce our cost of capital through a variety of medium and long-term financing arrangements, including supplier financing, project financing, bank financing, securitizations and the issuances of debt and equity securities.

Government Regulation

The Ministry of Planning, Budget and Management controls the total amount of medium and long-term debt that we and our Brazilian subsidiaries are allowed to incur through the annual budget approval process (Plano de Dispêndio Global, or PDG). Before issuing medium and long-term debt, we and our Brazilian subsidiaries must also obtain the approval of the National Treasury shortly before issuance.

All of our foreign currency denominated debt, as well as the foreign currency denominated debt of our Brazilian subsidiaries requires registration with the Central Bank. The issuance of debt by our international subsidiaries, however, is not subject to registration with the Central Bank or approval by the National Treasury. In addition, all issuances of medium and long-term notes and debentures require the approval of our board of directors. Borrowings that exceed the approved budget amount for any year also require approval from the Brazilian Senate.

Sources of Funds

Our Cash Flow

At September 30, 2004, we had cash and cash equivalents of U.S.$ 7,080 million as compared to U.S.$ 7,124 million at September 30, 2003.

Operating activities provided net cash flows of U.S.$ 5,032 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 6,241 million for the nine-month period ended September 30, 2003. This decrease was due primarily to the increase in inventories through the imports of crude oil to cover the lower production and higher demand in the domestic market in the nine-month period ended September 30, 2004.

Net cash used in investing activities increased to U.S.$ 5,326 million for the nine-month period ended September 30, 2004, as compared to U.S.$ 4,120 million for the nine-month period ended September 30, 2003. This increase was due primarily to our investments in capital expenditures associated with our operating activities and to the acquisition of Sophia do Brasil S.A..

Financing activities used net cash flows of U.S.$ 2,256 million during the nine-month period ended September 30, 2004, as compared to U.S.$ 921 million in net cash provided during the nine-month period ended September 30, 2003. This change in the balance of the cash flows was due primarily to higher dividend and short-term debt payments in the nine-month period ended September 30, 2004, and the decreased amount of Global Notes issued in the international capital markets during the nine-month period ended September 30, 2004 as compared to issuances during the same period in 2003.

Short-Term Debt

Our outstanding short-term debt serves mainly to support our imports of crude oil and oil products, and is provided almost completely by international banks and under our commercial paper program. At September 30, 2004, our short-term debt (excluding current portions of long-term obligations) decreased to U.S.$ 409 million as compared to U.S.$ 1,329 million at December 31, 2003. The decreased use of short-term credit facilities was related to our decision to use cash to pay for a portion of our imports. Our short-term debt is denominated principally in U.S. dollars.

Long-Term Debt

Our total outstanding consolidated long-term debt consists primarily of the issuance of securities in the international capital markets and debentures in the domestic capital markets and amounts outstanding under facilities guaranteed by export credit agencies and multilateral agencies, as well as financing from the Banco Nacional de Desenvolvimento Econômico e Social (the Brazilian National Development Bank, or BNDES) and other financial institutions. Outstanding long-term debt, plus the current portion of our long-term debt, totaled U.S.$ 13,529 million at September 30, 2004, as compared to U.S.$ 13,033 million at December 31, 2003. The increase in our long-term debt was due primarily to the issuance, through our subsidiary Petrobras International Finance Company (PIFCo), of U.S.$ 600 million Global Notes for 98.638% of their face value, with annual coupon of 7.75% due 2014. The issuance reflects our efforts to continue to lengthen our debt profile.

Project Finance

Since 1997, we have utilized project financings to provide capital for our large exploration and production and related projects, including some natural gas processing and transportation systems. All of these projects, and their related debt obligations, are on-balance sheet and accounted for under the line item “Project Financings”.

Outstanding project financing, plus the current portion of our project financing, totaled U.S.$ 5,743 million at September 30, 2004, as compared to U.S.$ 5,908 million at December 31, 2003.

A financing structure that involves the special purpose company (SPC) Companhia Locadora de Equipamentos Petrolíferos – CLEP, formerly Langstrand Holdings S.A, has been formed as a conduit through which we will sell and subsequently lease back assets related to the production of oil in the Campos Basin. Major Pension funds, including PREVI, PETROS, VALIA, FUNCEF, FAPES and REAL GRANDEZA, are the primary investors in CLEP in equal portions. The project is expected to be operational for 10 years, after which we will have the right to acquire the SPC’s shares or the project’s assets.

As of September 30, 2004, CLEP had raised U.S.$ 1,736 million, which together with previous capital of U.S.$ 63 million brought total capitalization to U.S.$1,799 million, which amount was fully transferred to us as advances to fund the intended sale of the assets. U.S.$ 1,700 million of the total amount raised was completed through the issuance of 8.0% Medium Term Notes due 2004. These notes were purchased by the exclusive offshore investment fund and are considered as repurchased securities.

Extinguished securities

At September 30, 2004 and December 31, 2003, we had amounts invested abroad in an exclusive investment fund that held debt securities of some of our group companies in the amount of U.S.$ 2,112 million and U.S.$ 920 million, respectively. These securities are considered to be extinguished, and thus the related amounts, together with applicable interest have been removed from the presentation of marketable securities and long-term debt in the amount of U.S.$ 291 million and U.S.$ 207 million and project finance in the amount of U.S.$ 1,821 million and U.S.$ 713 million, at September 30, 2004 and December 31, 2003, respectively.

Off Balance Sheet Arrangements

At September 30, 2004, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Uses of Funds

Capital Expenditures

In the pursuit of the goals outlined in our strategic plan we continue to prioritize capital expenditures for the development of crude oil and natural gas production projects through internal investments and through structured undertakings with partners.

We invested a total of U.S.$ 4,765 million in the nine-month period ended September 30, 2004, a 15.8% increase from our investments in the nine-month period ended September 30, 2003. Our investments in the nine-month period ended September 30, 2004 were primarily directed towards increasing our production capabilities in the Campos Basin, modernizing our refineries and expanding our pipeline transportation and distribution systems. Of the total amount of capital expenditures in the nine-month period ended September 30, 2004, U.S.$ 3,050 million were made in connection with exploration and development projects mainly in the Campos Basin (64.0% of our total capital expenditures for the nine-month period ended September 30, 2004), which includes investments financed through project financing structures.

The following table sets forth our consolidated capital expenditures (including project financings and investments in thermoelectric power plants) for each of our business segments for the nine-month periods ended September 30, 2004 and 2003:

Activities

    U.S.$ million
For the nine-month period
ended September 30,
    2004  2003 
Exploration and Production 3,050  2,293 
Supply 924  1,060 
Gas and Energy 154  254 
International:
    Exploration and Production 383  280 
    Supply 34 
    Distribution 13  14 
    Gas and Energy 13 
Distribution 77  79 
Corporate 127  115 
   

Total capital expenditures 4,765  4,114 
   

Income Statement
(in millions of U.S. dollars, except for share and per share data)

  For the nine-month period
ended September 30,
2Q-2004 3Q-2004 3Q-2003   2004 2003
11,961  14,095  11,314  Sales of products and services 37,232  31,300 
      Less:    
(2,777) (3,149) (2,495)     Value-added and other taxes on sales and services (8,533) (7,059)
(589) (725) (601)     CIDE (1,948) (1,593)



 

8,595  10,221  8,218  Net operating revenues 26,751  22,648 
(4,358) (5,630) (4,086)     Cost of sales (14,046) (11,058)
(630) (651) (564)     Depreciation, depletion and amortization (1,814) (1,322)
(81) (233) (110)     Exploration, including exploratory dry holes (437) (311)
          Impairment - (27)
(608) (810) (518)     Selling, general and administrative expenses (1,989) (1,422)
(62) (66) (46)     Research and development expenses (180) (137)



 

(5,739) (7,390) (5,324)         Total costs and expenses (18,466) (14,277)
48  39      Equity in results of non-consolidated companies 141  103 
299  100  280      Financial income 545  493 
(428) (495) (361)     Financial expense (1,430) (917)
(294) 281  (118)     Monetary and exchange variation on monetary assets and liabilities, net (39) 541 
(152) (156) (129)     Employee benefit expense (468) (391)
(169) (75) (78)     Other taxes (345) (224)
(157) (241) (176)     Other expenses, net (501) (756)



 

(853) (547) (581)   (2,097) (1,151)
2,003  2,284  2,313  Income before income taxes and minority 6,188  7,220 



 

          interests and accounting change    
      Income tax expense:    
(618) (255) (741)     Current (1,467) (2,253)
(158) (16) 371      Deferred (137) 239 



 

(776) (271) (370)         Total income tax expense (1,604) (2,014)
80  (174) (46) Minority interest in results of consolidated subsidiaries (101) (238)



 

1,307  1,839  1,897  Net income before accounting change effect 4,483  4,968 



 

Cumulative effect of accounting change, net of income tax 697 



 

1,307  1,839  1,897  Net income for the period 4,483  5,665 



 

      Weighted average number of shares outstanding    
634,168,418  634,168,418  634,168,418      Common/ADS 634,168,418  634,168,418 
462,369,507  462,369,507  462,369,507      Preferred/ADS 462,369,507  461,048,616 
      Basic and diluted earnings per share    
          Common/ADS and Preferred/ADS    
1.19 1.68 1.73         Before effect of change in accounting principle 4.09  4.54 
1.19  1.68  1.73          After effect of change in accounting principle 4.09  5.17 



 

Selected Balance Sheet Data
(in millions of U.S. dollars, except for share data)

  As of
September
30, 2004
As of
December
31, 2003
Assets
Current assets
    Cash and cash equivalents 7,080  9,610 
    Accounts receivable, net 3,729  2,905 
    Inventories 4,512  2,947 
    Other current assets 2,780  2,438 
 

        Total current assets 18,101  17,900 
 
Property, plant and equipment, net 33,759  30,805 
 
Investments in non-consolidated companies and other investments 1,437  1,173 
 
Other assets
    Petroleum and Alcohol Account – Receivable from Federal Government 264  239 
    Government securities 316  283 
    Goodwill on PEPSA and PELSA 183  183 
    Advances to suppliers 526  416 
    Prepaid Expenses 232  190 
    Others 2,443  2,423 
 

        Total other assets 3,964  3,734 
 
    Total assets 57,261  53,612 
 

Liabilities and shareholders' equity
Current liabilities
    Trade accounts payable 2,938  2,261 
    Short-term debt 409  1,329 
    Current portion of long-term debt 1,357  1,145 
    Current portion of project financings 1,017  842 
    Capital lease obligations 267  378 
    Other current liabilities 5,142  5,266 
 

        Total current liabilities 11,130  11,221 
 
Long-term liabilities
    Long-term debt 12,172  11,888 
    Project financings 4,726  5,066 
    Employee benefits obligation ­ Pension 2,279  1,895 
    Employee benefits obligation - Health care 1,878  1,580 
    Capital lease obligations 1,135  1,242 
    Thermoelectric liabilities 1,107  1,142 
    Other liabilities 2,438  2,059 
 

        Total long-term liabilities 25,735  24,872 
 
Minority interest 442  367 
 
Shareholders' equity
    Shares authorized and issued:
    Preferred stock –2004 and 2003 - 462,369,507 shares 4,772  2,973 
    Common stock – 2004 and 2003 - 634,168,418 shares 6,929  4,289 
    Reserves and others 8,253  9,890 
 

        Total shareholders' equity 19,954  17,152 
 

    Total liabilities and shareholders’ equity 57,261  53,612 
 

Statement of Cash Flows Data
(in millions of U.S. dollars)

For the nine-month period
ended September 30,
2Q-2004 3Q-2004 3Q-2003   2004 2003
      Cash flows from operating activities    
1,307  1,839  1,897      Net income for the period 4,483  5,665 
          Adjustments to reconcile net income to net cash provided by operating activities    
559  674  599          Depreciation, depletion and amortization 1,839  1,330 
49  260  144          Loss on property, plant and equipment 420  289 
346  (273) 93          Foreign exchange and monetary loss 204  (243)
        Cumulative effect of accounting change, net of income tax (697)
(24) 151  (387)         Others 97  (104)
 
              Decrease (increase) in assets    
(350) (315) 133          Accounts receivable, net (848) 55 
(512) (469) (14)         Inventories (1,455) (95)
(10) 33  199          Advances to suppliers (39) 598 
(20) (63) (102)         Recoverable taxes (272) (288)
(100) 138  (216)         Others (97) (207)
 
          Increase (decrease) in liabilities    
61  310  176          Trade accounts payable 635  (218)
174  (135) 254          Taxes payable, other than income taxes (40) 31 
(16) (217) (120)         Income taxes (91) 104 
26  (46) (227)         Contingencies (89) (150)
292  (178) 12          Other liabilities 285  171 



 

1,782  1,709  2,441  Net cash provided by operating activities 5,032  6,241 



 

 
      Cash flows from investing activities    
(1,632) (1,810) (1,582)     Additions to property, plant and equipment (4,765) (4,114)
(41) (471) (2)     Others (561) (6)
 



 

(1,673) (2,281) (1,584) Net cash used in investing activities (5,326) (4,120)



 

 



 

(743) 193  715  Cash flows from financing activities (2,256) 921 



 

 



 

(634) (379) 1,572  Increase (decrease) in cash and cash equivalents (2,550) 3,042 



 

 
(485) 474  (47) Effect of exchange rate changes on cash and cash 20  781 
 
8,104  6,985  5,599  Cash and cash equivalents at beginning of period 9,610  3,301 



 

6,985  7,080  7,124  Cash and cash equivalents at the end of period 7,080  7,124 



 

Income Statement by Segment

  Nine-month period ended September 30, 2004

U.S.$ million
  E&P SUPPLY GAS
&
ENERGY
INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
STATEMENT OF INCOME
 
Net operating revenues to third parties 1,906  14,715  1,154  2,237  6,739    26,751 
Inter-segment net operating revenues 12,022  5,834  293  406  119  (18,674)
 







 
Net operating revenues 13,928  20,549  1,447  2,643  6,858  (18,674) 26,751 
 
Cost of sales (5,176)  (18,470) (1,383)  (1,349)  (6,190)    18,522  (14,046)
Depreciation, depletion and amortization (1,021)  (344)  (76)  (319)  (29)  (25)  (1,814) 
Exploration, including exploratory dry holes and impairment (292)  (145)  (437) 
Selling, general and administrative expenses (178)  (680)  (119)  (229)  (372)  (411)  (1,989) 
Research and development expenses (85)  (40)  (5)  (1)  (3)  (46)  (180) 
 







Cost and expenses (6,752)  (19,534) (1,583)  (2,043)  (6,594)  (482)  18,522  (18,466)
 
Equity in results of non-consolidated companies 24  49  67  141 
Financial income (expenses), net (242)  (60)  (391)  (15)  (217)  (924) 
Employee benefit expense (2)  (13)  (453)  (468) 
Other taxes (6)  (20)  (20)  (26)  (38)  (235)  (345) 
Other expenses, net (72)  (54)  (112)  (44)  (42)  (177)  (501) 
 







 
Income (loss) before income taxes and minority interest and accounting change 6,856  964  (279)  206  156  (1,563)  (152)  6,188 
 
Income tax benefits (expense) (2,449)  (288)  107    (54)  1,027  53  (1,604) 
Minority interest (5)  (28)  (4)  (64)  (101) 
 







 
Net income (loss) 4,402  648  (176)  142  102  (536)  (99)  4,483 
 








Income Statement by Segment

  Nine-month period ended September 30, 2003

U.S.$ million
  E&P SUPPLY GAS
&
ENERGY
INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
STATEMENT OF INCOME
 
Net operating revenues to third parties 1,722  13,065  858  1,234  5,769  22,648 
Inter-segment net operating revenues 10,164  5,042  171  13  101  (15,491)
 







Net operating revenues (*) 11,886  18,107  1,029  1,247  5,870  (15,491) 22,648 
 
Cost of sales (*) (4,269) (15,268) (755) (607) (5,342) 15,183  (11,058)
Depreciation, depletion and amortization (776) (280) (52) (178) (21) (15) (1,322)
Exploration, including exploratory dry holes and impairment (323) (15) (338)
Selling, general and administrative expenses (103) (531) (58) (138) (290) (361) 59  (1,422)
Research and development expenses (66) (30) (8) (33) (137)
 







Cost and expenses (5,537) (16,109) (873) (938) (5,653) (409) 15,242  (14,277)
 
Equity in results of non-consolidated companies 18  54  32  (1) 103 
Financial income (expenses), net (228) 149  (41) (45) (56) 380  (42) 117 
Employee benefit expense (1)  (13) (377) (391)
Other taxes (18) (3) (11) (36) (156) (224)
Other expenses, net (119) (106)  (358) (16) 24  (181) (756)
 







 
Income (loss) before income taxes and minority interest and accounting change 6,002  2,040  (192) 269  136  (744) (291) 7,220 
 
Income tax benefits (expense) (1,984) (671) 161  (79) (48) 516  91  (2,014)
Minority interest (23) (183) (31) (1) (238)
 







 
Income before effect of change in accounting principle 4,018  1,346  (214) 159  87  (228) (200) 4,968 
 
Cumulative effect of change in accounting principle, net of taxes 697  697 
 
 







 
Net income (loss) 4,715  1,346  (214) 159  87  (228) (200) 5,665 
 







 

(*) Net operating revenues and the cost of sales relative to the periods prior to 3Q-2004 were reclassified between the International segment and the Supply segment in relation to offshore operations that were being allocated to the International segment. There was no significant impact on the results reported for these segments.


Other Expenses, Net by Segment

  Nine-month period ended September 30, 2004

U.S.$ million
  E&P SUPPLY GAS
&
ENERGY
INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
Institutional Relations and Culture Projects   (2)       (20) (128)    (150)
Unscheduled stoppages on installations and production equipment (32) (29)                (61)
Contractual losses with transport services (Ship-or-Pay)        (51)          (51)
Thermoelectric power plants – idle capacity     (63)             (63)
Losses resulted from Legal Proceedings (9) (6) (1)    (4) (5)    (25)
INSS Contingencies for joint liability (32)                  (32)
Others (17) (48) (18) (44)    (119)
 







 
  (72) (54) (112) (44) (42) (177)    (501)
 








  Nine-month period ended September 30, 2003

U.S.$ million
  E&P SUPPLY GAS
&
ENERGY
INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
Losses on financial exposure -Thermoelectric power plants       (205)             (205)
Institutional Relations and Culture Projects    (2)          (73)    (75)
Unscheduled stoppages on installations and production equipment (104) (49)                (153)
Losses resulted from Legal Proceedings (8) (33)          (35)    (76)
Adjustment of Market Value of Turbines for Thermoelectrics Plants       (114)             (114)
INSS Contingencies for joint liability (52) (2)          (1)    (55)
Dividends                  
Other 45  (29) (39) (16) 24  (72)    (87)
 







 
  (119) (106) (358) (16) 24  (181)    (756)
 







Selected Balance Sheet Data by Segment

  Nine-month period ended September 30, 2004

U.S.$ million
  E&P SUPPLY GAS
&
ENERGY
INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
Current assets 2,614  6,347  1,104  1,941  1,615  6,021  (1,541) 18,101 
 







Cash and cash equivalents 956  518  195  455  90  4,866  - 7,080 
Other current assets 1,658  5,829  909  1,486  1,525  1,155  (1,541) 11,021 
 
Investments in non-consolidated companies
    and other investments 652  193  481  23  81  - 1,437 
 







Property, plant and equipment, net 18,477  5,621  4,178  4,022  988  494  (21) 33,759 
 







Non current assets 1,852  307  708  328  202  5,843  (5,276) 3,964 
 







Petroleum and Alcohol Account 264  - 264 
Government securities held-to-maturity 316  - 316 
Other assets 1,852  307  708  328  202  5,263  (5,276) 3,384 
 







Total assets 22,950  12,927  6,183  6,772  2,828  12,439  (6,838) 57,261 
 









  Year ended December 31, 2003

U.S.$ million
  E&P SUPPLY GAS
&
ENERGY
INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
Current assets 2,057  4,871  528  1,738  1,208  9,466  (1,968) 17,900 
 







Cash and cash equivalents 1,042  575  109  445  33  7,406  9,610 
Other current assets 1,015  4,296  419  1,293  1,175  2,060  (1,968) 8,290 
 
Investments in non-consolidated
    Companies and other investments 463  151  449  22  82  1,173 
 







Property, plant and equipment, net 16,742  4,980  4,174  4,181  442  336  (50) 30,805 
 







Non current assets 970  285  751  306  208  4,479  (3,265) 3,734 
 







Petroleum and Alcohol Account 239  239 
Government securities held-to-maturity 283  283 
Other assets 970  285  751  306  208  3,957  (3,265) 3,212 
 







Total assets 19,775  10,599  5,604  6,674  1,880  14,363  (5,283) 53,612 
 








Selected Data for International Segment

  Nine-month period ended September 30, 2004

U.S.$ million

INTERNATIONAL
  E&P SUPPLY GAS
&
ENERGY
DISTRIB. CORPOR. ELIMIN. TOTAL
 
INTERNATIONAL
 
ASSETS 4,605  1,218  708  182  2,520  (2,461) 6,772 
 







STATEMENT OF INCOME
 
Net Operating Revenues 1,355  1,556  320  638  16  (1,242) 2,643 
 







Net operating revenues to third parties 521  767  300  633  16    2,237 
Inter-segment net operating revenues 834  789  20    (1,242) 406 
 







Net income 128  120  53  (55) (89) (15) 142 
 









  U.S.$ million

INTERNATIONAL
  E&P SUPPLY GAS
&
ENERGY
DISTRIB. CORPOR. ELIMIN. TOTAL
 
INTERNATIONAL
 
ASSETS (As of December 31, 2003) 4,401  1,161  568  150  2,384  (1,990) 6,674 
 







STATEMENT OF INCOME
(Nine-month period ended September 30, 2003)
 
Net Operating Revenues 671  734  107  448  (722) 1,247 
 







Net operating revenues to third parties 335  343  105  442    1,234 
Inter-segment net operating revenues 336  391    (722) 13
 







Net Income 160  34  29  (75) 159 
 







This press release contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and that may be incapable of being realized. Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements, which speak only as of the date made.

http: //www.petrobras.com.br/ri/english


Contacts:
Petróleo Brasileiro S.A – PETROBRAS
Investor Relations Department
Raul Adalberto de Campos– Executive Manager
E-mail:
petroinvest@petrobras.com.br
Av. República do Chile, 65 - 4th floor
20031-912 – Rio de Janeiro, RJ
(55-21) 2534-1510 / 2534-9947


This document may contain forecasts that merely reflect the expectations of the Company’s management. Such terms as “anticipate”, “believe”, “expect”, “forecast”, “intend”, “plan”, “project”, “seek”, “should”, along with similar or analogous expressions, are used to identify such forecasts. These predictions evidently involve risks and uncertainties, whether foreseen or not by the Company. Therefore, the future results of operations may differ from current expectations, and readers must not base their expectations exclusively on the information presented herein.







Consolidated Financial Information


Petróleo Brasileiro S.A. –
Petrobras and Subsidiaries



September 30, 2004 and 2003
with Review Report of Independent Registered
Public Accounting Firm




 

PETRÓLEO BRASILEIRO S.A. – PETROBRAS AND SUBSIDIARIES

CONSOLIDATED FINANCIAL INFORMATION


Contents


Review Report of Independent Registered Public Accounting Firm 1 
Consolidated Balance Sheets 2 
Consolidated Statements of Income 4 
Consolidated Statements of Cash Flows 6 
Consolidated Statements of Changes in Shareholders' Equity 7 
Notes to the Consolidated Financial Statements 10 
 
 
1. Basis of financial statements preparation 10 
2. Accounting changes 11 
3. Derivative Instruments, Hedging and Risk Management Activities 12 
4. Income taxes 14 
5. Inventories 15 
6. Receivable from Federal Government 15 
7. Financings 18 
8. Financial income (expenses) 20 
9. Project financings 21 
10. Capital leases 23 
11. Thermoelectric plant obligations 23 
12. Employees’ postretirement benefits and other benefits 24 
13. Shareholders’ equity 25 
14. Acquisitions 27 
15. 6th bidding for exploratory blocks of ANP 31 
16. Commitments and contingencies 31 
17. Segment information 36 
18. Subsequent Events 44 
19. Event Subsequent to review report date - Capital Restructuring of the International Area 45 

 

Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Petróleo Brasileiro S.A. - PETROBRAS

We have reviewed the condensed consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and subsidiaries as of September 30, 2004 and the related condensed consolidated statements of income, cash flows and changes in shareholders' equity for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and subsidiaries as of December 31, 2003, and the related consolidated statements of income and cash flows for the year then ended not presented herein, and in our report dated February 13, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG
Auditores Independentes S/S

Paulo José Machado
Partner

Rio de Janeiro, Brazil
November 10, 2004

1


 

Contents

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
Expressed in Millions of United States Dollars

  September 30, December 31,
  2004  2003 
 
  (unaudited) (Note1)
Assets
 
Current assets
    Cash and cash equivalents 7,080  9,610 
    Accounts receivable, net 3,729  2,905 
    Inventories (Note 5) 4,512  2,947 
    Deferred income tax 267  256 
    Recoverable taxes 1,172  917 
    Advances to suppliers 453  504 
    Other current assets 888  761 
 
 
  18,101  17,900 
 
 
Property, plant and equipment, net 33,759  30,805 
 
 
Investments in non-consolidated companies and other investments 1,437  1,173 
 
Other assets
    Accounts receivable, net 746  528 
    Advances to suppliers 526  416 
    Petroleum and alcohol account – receivable
        from Federal Government (Note 6)
264  239 
    Government securities 316  283 
    Marketable securities 46  340 
    Restricted deposits for legal proceedings and guarantees 594  543 
    Recoverable taxes 534  467 
    Goodwill on PEPSA and PELSA ( Note 14) 183  183 
    Prepaid expenses 232  190 
    Other assets 523  545 
 
 
  3,964  3,734 
 
 
 
Total assets 57,261  53,612 
 

The accompanying notes are an integral part of these consolidated financial statements.

2


 

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 2004 and December 31, 2003
Expressed in Millions of United States Dollars

  September 30, December 31,
  2004  2003 
 
  (unaudited) (Note 1)
Liabilities and shareholders’ equity
 
Current liabilities
    Trade accounts payable 2,938  2,261 
    Income tax 58  148 
    Taxes payable, other than income taxes 2,138  2,157 
    Short-term debt (Note 7) 409  1,329 
    Current portion of long-term debt (Note 7) 1,357  1,145 
    Current portion of project financings (Note 9) 1,017  842 
    Current portion of capital lease obligations (Note 10) 267  378 
    Accrued interest 195  181 
    Dividends and interest on capital payable 1,165  1,139 
    Contingencies (Note 16) 117  84 
    Payroll and related charges 556  581 
    Advances from customers 267  258 
    Employee benefits obligation - Pension 124  160 
    Other payables and accruals 522  558 
 
 
  11,130  11,221 
 
Long-term liabilities
    Long-term debt (Note 7) 12,172  11,888 
    Project financings (Note 9) 4,726  5,066 
    Employee benefits obligation - Pension 2,279  1,895 
    Employee benefits obligation - Health care 1,878  1,580 
    Capital lease obligations (Note 10) 1,135  1,242 
    Deferred income tax 1,485  1,122 
    Provision for abandonment of wells 425  396 
    Thermoelectric liabilities (Note 11) 1,107  1,142 
    Contingencies (Note 16) 198  271 
    Other liabilities 330  270 
 
 
  25,735  24,872 
 
 
Minority interest 442  367 
 
 
Shareholders’ equity
    Shares authorized and issued
        Preferred share – 2004 and 2003- 462,369,507 shares 4,772  2,973 
        Common share - 2004 and 2003 - 634,168,418 shares 6,929  4,289 
    Capital reserve 124  118 
        Retained earnings
            Appropriated 5,105  10,696 
            Unappropriated 18,584  14,957 
    Accumulated other comprehensive income
        Cumulative translation adjustments (14,235) (14,450)
        Amounts not recognized as net periodic pension cost, net of tax (1,605) (1,588)
        Unrealized gains on securities, net of tax 280  157 
 
  19,954  17,152 
 
Total liabilities and shareholders’ equity 57,261  53,612 
 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

Contents

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
September 30, 2004 and 2003
Expressed in Millions of United States Dollars
(except number of shares and earnings per share)
(Unaudited)

  Nine-month period ended
  September 30,
 
  2004  2003 
 
 
Sales of products and services 37,232  31,300 
    Less:
        Value-added and other taxes on sales and services (8,533)  (7,059) 
        Contribution of intervention in the economic domain charge – CIDE (1,948)  (1,593) 
 
 
Net operating revenues 26,751  22,648 
 
 
    Cost of sales 14,046  11,058 
    Depreciation, depletion and amortization 1,814  1,322 
    Exploration, including exploratory dry holes 437  311 
    Selling, general and administrative expenses 1,989  1,422 
    Impairment 27 
    Research and development expenses 180  137 
 
 
Total costs and expenses 18,466  14,277 
 
 
    Equity in results of non-consolidated companies 141  103 
    Financial income (Note 8) 545  493 
    Financial expenses (Note 8) (1,430)  (917) 
    Monetary and exchange variation on monetary assets and liabilities, net (Note 8) (39)  541 
    Employee benefit expense (468)  (391) 
    Other taxes (345)  (224) 
    Other expenses, net (501)  (756) 
 
 
  (2,097)  (1,151) 
 
 
Income before income taxes and minority interest and accounting change 6,188  7,220 
 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)
September 30, 2004 and 2003
Expressed in Millions of United States Dollars
(except number of shares and earnings per share)
(Unaudited)

  Nine-month period ended 
  September 30, 
 
  2004  2003 
 
 
Income tax expense (Note 4)
    Current (1,467)  (2,253) 
    Deferred (137)  239 
 
 
  (1,604)  (2,014) 
 
 
Minority interest in results of consolidated subsidiaries (101)  (238) 
 
 
Income before effect of change in accounting principle 4,483  4,968 
 
 
Cumulative effect of change in accounting principle, net of taxes 697 
 
 
Net income for the period 4,483  5,665 
 
 
Net income applicable to each class of shares
    Common/ADS 2,593  3,276 
    Preferred/ADS 1,890  2,389 
 
 
Net income for the period 4,483  5,665 
 
 
Basic and diluted earnings per share (Note 13)
    Common/ADS and Preferred/ADS
        Before effect of change in accounting principle 4.09  4.54 
        After effect of change in accounting principle 4.09  5.17 
 
Weighted average number of shares outstanding
    Common/ADS 634,168,418  634,168,418 
    Preferred/ADS 462,369,507  461,048,616 
 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

Contents

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, 2004 and 2003
Expressed in Millions of United States Dollars
(Unaudited)

  Nine-month period ended
  September 30,
 
  2004  2003 
 
Cash flows from operating activities
    Net income for the period 4,483  5,665 
    Adjustments to reconcile net income to net cash provided by operating activities:
        Depreciation, depletion and amortization 1,839  1,330 
        Loss on sale of property, plant and equipment 420  289 
        Equity in results of non-consolidated companies (141) (103)
        Minority interest in loss of subsidiaries 101  238 
        Deferred income taxes 137  (239)
        Foreign exchange and monetary loss (gain) 204  (243)
        Cumulative effect of change in accounting principle, net of taxes (697)
 
    Decrease (increase) in assets:
        Accounts receivable, net (848) 55 
        Petroleum and Alcohol Account (22) (13)
        Interest receivable on government securities (34) (139)
        Inventories (1,455) (95)
        Recoverable taxes (272) (288)
        Advances to suppliers (39) 598 
        Others (40) (55)
    Increase (decrease) in liabilities
        Trade accounts payable 635  (218)
        Payroll and related charges (44) 128 
        Taxes payable, other than income taxes (40) 31 
        Income taxes (91) 104 
        Employee post-retirement benefits, net of unrecognized pension obligation 567  336 
        Contingencies (89) (150)
        Other liabilities (239) (293)
 
Net cash provided by operating activities 5,032  6,241 
 
Cash flows from investing activities
    Additions to property, plant and equipment (4,765) (4,114)
    Effect on cash from merger with subsidiaries and affiliates 231 
    Investments (58) (54)
    Acquisition of Sophia do Brasil S.A. (450)
    Others (53) (183)
 
Net cash used in investing activities (5,326) (4,120)
 
Cash flows from financing activities
    Short-term debt, net of issuances and repayments (853) 627 
    Proceeds from issuance of long-term debt 1,458  3,021 
    Principal payments on long-term debt (897) (1,085)
    Payments of project finacing (408) (182)
    Proceeds from project finacing 538  59 
    Payment of finance lease obligations (300) (645)
    Dividends paid to shareholders (1,794) (874)
 
Net cash (used in) provided by financing activities (2,256) 921 
 
Increase (decrease) in cash and cash equivalents (2,550) 3,042 
Effect of exchange rate changes on cash and cash equivalents 20  781 
Cash and cash equivalents at beginning of period 9,610  3,301 
 
Cash and cash equivalents at end of period 7,080  7,124 
 

The accompanying notes are an integral part of these consolidated financial statements.

6


 

Contents

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
September 30, 2004 and 2003
Expressed in Millions of United States Dollars (except per-share amounts)
(Unaudited)

  Nine-month period ended
  September 30,
 
  2004  2003 
 
Preferred shares
    Balance at January 1 2,973  2,459 
    Capital increase from issuance of preferred shares 130 
    Capital increase from undistributed earnings reserve 1,799  384 
 
 
    Balance at September 30 4,772  2,973 
 
 
Common shares
    Balance at January 1 4,289  3,761 
    Capital increase from undistributed earnings reserve 2,640  528 
 
 
    Balance at September 30 6,929  4,289 
 
 
Capital reserve – fiscal incentive
    Balance at January 1 118  89 
    Transfer from unappropriated retained earnings 22 
 
 
    Balance at September 30 124  111 
 
 
Accumulated other comprehensive income
 
Cumulative translation adjustments
    Balance at January 1 (14,450) (17,306)
    Change in the period 215  2,806 
 
 
    Balance at September 30 (14,235) (14,500)
 
 
Amounts not recognized as net periodic pension cost
    Balance at January 1 (1,588) (1,361)
    Increase in additional minimum liability (26) (430)
    Tax effect on above 146 
 
 
    Balance at September 30 (1,605) (1,645)
 

The accompanying notes are an integral part of these consolidated financial statements.

7


 

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
September 30, 2004 and 2003
Expressed in Millions of United States Dollars (except per-share amounts)
(Unaudited)

  Nine-month period ended
  September 30,
 
  2004  2003 
 
Unrecognized gains (losses) on available for sale securities    
    Balance at January 1 157  (11) 
    Unrealized gains 186  140 
    Tax effect on above (63)  (47) 
 
 
    Balance at September 30 280  82 
 
 
Appropriated retained earnings
 
    Legal reserve
        Balance at January 1 1,089  643 
        Transfer from unappropriated retained earnings, net of gain or loss on translation 12  134 
 
 
        Balance at September 30 1,101  777 
 
 
    Undistributed earnings reserve
        Balance at January 1 9,372  4,778 
        Capital increase (4,439) (912)
        Transfer from (to) unappropriated retained earnings, net of gain or loss on translation (1,167)  848 
 
 
        Balance at September 30 3,766  4,714 
 

The accompanying notes are an integral part of these consolidated financial statements.

8


 

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
September 30, 2004 and 2003
Expressed in Millions of United States Dollars (except per-share amounts)
(Unaudited)

  Nine-month period ended
  September 30,
 
  2004  2003 
 
    Statutory reserve    
        Balance at January 1 235  164 
        Transfer from unappropriated retained earnings, net of gain or loss on translation 35 
 
 
        Balance at September 30 238  199 
 
 
Total appropriated retained earnings 5,105  5,690 
 
 
Unappropriated retained earnings
 
    Balance at January 1 14,957  16,085 
    Net income for the period 4,483  5,665 
        Dividends (per share: 2004 - US$ 1.82 to common and preferred shares; 2003 - US$ 1.49 to common and preferred shares) (2,002)  (1,634)
Appropriation (to) fiscal incentive reserves (6) (22)
    Appropriation from (to) reserves 1,152  (1,017)
 
 
    Balance at September 30 18,584  19,077 
 
 
Total shareholders' equity 19,954  16,077 
 
 
Comprehensive income is comprised as follows:
 
    Net income for the period 4,483  5,665 
    Cumulative translation adjustments 215  2,806 
    Amounts not recognized as net periodic pension cost (17) (284)
    Unrealized gain on available-for-sale securities 123  93 
 
 
    Total comprehensive income 4,804  8,280 
 

The accompanying notes are an integral part of these consolidated financial statements.

9


 

Contents

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Expressed in Millions of United States Dollars
(except when specifically indicated)

Contents

1. Basis of financial statements preparation

The accompanying unaudited condensed consolidated financial statements of Petróleo Brasileiro S.A. - PETROBRAS (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements and the accompanying notes should be read in conjunction with the consolidated financial statements for the year ended December 31, 2003 and the notes thereto.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The consolidated financial statements as of September 30, 2004 and for the nine-month periods ended September 30, of 2004 and 2003, included in this report, are unaudited. However, in management's opinion, such consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the interim periods are not necessarily indicative of trends or of results expected for the full year ending December 31, 2004.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on the Company’s net income or shareholders’ equity.

Pursuant to Rule 436 (c) under the Securities Act of 1933 (the “Act”), this is not a “report” and should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Act and therefore, the independent accountant’s liability under section 11 does not extend to the information included herein.

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Contents

2. Accounting changes

a) Interpretation No. 46 (FIN 46) - Consolidation of Variable Interest Entities

The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46) - Consolidation of Variable Interest Entities in January of 2003. FIN 46 provides guidance on when certain entities should be consolidated or the interests in those entities disclosed by enterprises that do not control them through a majority voting interest.

This interpretation was applied immediately to variable interests entities created after January 31, 2003. For variable interests in special purpose entities created before February 1, 2003, FIN 46 was adopted at December 31, 2003. For variable interests in operating entities, FIN 46 was required to be adopted in the first quarter of 2004.

The Company adopted FIN 46 in its December 31, 2003 annual financial statements, for variable interest in special purpose entities. Such adoption resulted in the full consolidation of a number of special purpose entities related to project financing arrangements and three thermoelectrics plants that had been previously accounted as capital lease. Their consolidation did not have a significant impact on the Company’s financial condition or operating results.

Furthermore, the adoption of FIN 46 resulted in the consolidation of three other thermoelectrics plants where PETROBRAS has contracts to bear risks in the energy market. The effect of the consolidation of the balance sheets of these three thermoelectrics at December 31, 2003 was an increase in fixed assets of US$ 1,142 and an increase in liabilities of US$ 1,142. Results of operations for these companies were consolidated beginning January 1, 2004, and generated a net loss during the nine-month period ended September 30, 2004 in the amount of US$ 319.

The Company has determined that it has no variable interests in operating entities and thus has not consolidated additional entities during the nine-month periods ended September 30, 2004.

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2. Accounting changes (Continued)

b) SFAS No. 143 - Accounting for asset retirement obligations

As of January 1, 2003, PETROBRAS adopted SFAS No. 143 - Accounting for Asset Retirement Obligations ("SFAS 143"). The cumulative adjustment for the change in accounting principle reported in the first quarter of 2003 was an after-tax income of US$ 697 (net of US$ 359 deferred income tax effects).

Contents

3. Derivative Instruments, Hedging and Risk Management Activities

The Company is exposed to a number of market risks arising from the normal course of its business. Such market risks principally involve the possibility that changes in interest rates, currency exchange rates or commodity prices will adversely affect the value of the Company's financial assets and liabilities or future cash flows and earnings. The Company maintains an overall risk management policy that is developed under the direction of the Company's executive officers.

The Company may use derivative and non-derivative instruments to implement its overall risk management strategy. However, by using derivative instruments, the Company exposes itself to credit and market risk. Credit risk is the failure of a counterparty to perform under the terms of the derivative contract. Market risk is the adverse effect on the value of a financial instrument that results from a favorable change in interest rates, currency exchange rates, or commodity prices. The Company addresses credit risk by restricting the counterparties to such derivative financial instruments to major financial institutions. Market risk is managed by the Company's executive officers. The Company does not hold or issue financial instruments for trading purposes.

a) Foreign Currency Risk Management

The Company’s foreign currency risk management strategy may involve the use of derivative instruments to protect against foreign exchange rate volatility, which may impair the value of certain of the Company’s obligations. The Company currently uses zero-cost foreign exchange collars to implement this strategy.

12


 

3. Derivative Instruments, Hedging and Risk Management Activities (Continued)

a) Foreign Currency Risk Management (Continued)

During 2000, the Company entered into three zero cost foreign exchange collars to reduce its exposure to variations between the U.S. Dollar and the Japanese Yen, and between the U.S. Dollar and Euro relative to long-term debt denominated in foreign currencies with a notional amount of approximately US$ 470. The Company does not use hedge accounting for these derivative instruments. These collars establish a ceiling and a floor for the associated exchange rates. If the exchange rate falls below the defined floor, the counterparties will pay to the Company the difference between the actual rate and the floor rate on the notional amount. Conversely, if the exchange rate rises above the defined ceiling, the Company will pay to the counterparties the difference between the actual rate and the ceiling rate on the notional amount. The contracts expire upon the maturity date of each note.

As of December 31, 2003, the Company had a fair value asset of US$ 26 associated with its Euro zero cost collar contracts. As of September 30, 2004 the Company had a fair value asset of US$ 23 associated with its Euro zero-cost collar contracts. The yen collar expired in 2003.

b) Commodity Price Risk Management

The Company is exposed to commodity price risks as a result of the fluctuation of crude oil and oil product prices. The Company’s commodity risk management activities primarily consist of futures contracts traded on stock exchanges and options and swaps entered into with major financial institutions. The futures contracts provide economic hedges to anticipated crude oil purchases and sales, generally forecast to occur within a 30 to 360 day period, and reduce the Company’s exposure to volatile commodity prices.

The Company's exposure on these contracts is limited to the difference between contract value and market value on the volumes hedged. Crude future contracts are marked to market and related gains and losses are recognized currently under earnings, irrespective of when physical crude sales occur. During the nine-month periods ended September 30, 2004 and 2003, the Company carried out economic hedging activities on 38.05% and 51.16%, respectively, of its total traded volume (imports and exports). The open positions on the futures market, compared to spot market value, resulted in a loss of US$ 17.5 and US$ 0.6 during the nine-month periods ended September 30, 2004 and 2003, respectively.

13


 

3. Derivative Instruments, Hedging and Risk Management Activities (Continued)

c) Interest Rate Risk Management

The Company’s interest rate risk is a function of the Company’s long-term debt and, to a lesser extent, short-term debt. The Company’s foreign currency floating rate debt is principally subject to fluctuations in LIBOR and the Company’s floating rate debt denominated in Reais is principally subject to fluctuations in the Brazilian long-term interest rate (TJLP), as fixed by the Brazilian Central Bank. The Company currently does not utilize derivative financial instruments to manage its exposure to fluctuations in interest rates. However, the Company has been studying various forms of derivatives to reduce exposure to interest rate fluctuations and may use these financial instruments in the future.

d) Risk Management Activity at PEPSA

PEPSA also uses derivative instruments such as options, swaps and others, mainly to mitigate the impact of changes in crude oil prices, interest rates and future exchange rates. Such derivative instruments are designed to mitigate specific exposures, and are assessed periodically to assure high correlation of the derivative instrument to the risk exposure identified and to assure the derivative is highly effective in offsetting changes in cash flows inherent in the covered risk. PEPSA qualifies for hedge accounting treatment for its crude oil derivative instruments and its interest rate swap derivative instruments.

Contents

4. Income taxes

Substantially all of the Company’s taxable income is generated in Brazil and is therefore subject to the Brazilian statutory tax rate. The following table reconciles the tax calculated based upon statutory tax rates to the income tax expense recorded in these consolidated financial statements.

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4. Income taxes (Continued)

  Nine-month period ended September, 30 
 
  2004  2003 
 
 
Income before income taxes, minority interest and accounting changes 6,188  7,220 
 
 
Tax expense at statutory rates (2,104) (2,455)
Adjustments to derive effective tax rate:
    Equity in non-consolidated companies 48  35 
    Non-deductible post-retirement and health-benefits (109) (77)
    Change in valuation allowance 174 
    Tax benefit on interest on shareholders’ equity 511  357 
    Others 50  (48)
 
 
Income tax expense per consolidated statement of income (1,604) (2,014)
 

Contents

5. Inventories

  September 30, December 31,
  2004  2003 
 
Products
    Oil products 1,475  858 
    Fuel alcohol 62  67 
 
  1,537  925 
Raw materials, mainly crude oil 2,037  1,280 
Materials and supplies 856  708 
Others 82  34 
 
  4,512  2,947 
 

Contents

6. Receivable from Federal Government

a) Deregulation of the Brazilian fuel market

In accordance with the Petroleum Law and subsequent legislation, the fuel market in Brazil was deregulated in its entirety as of January 1, 2002. Therefore, as of that date, the Petroleum and Alcohol account would no longer be used to reimburse expenses in connection with the Federal Government’s regulation of the prices of oil products and fuel alcohol. Accordingly, the Petroleum and Alcohol account will only include changes in amounts with triggering events that occurred before December 31, 2001, in accordance with Law No. 10,453, of May 13, 2002, and ANP regulations.

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6. Receivable from Federal Government (Continued)

b) Changes in the petroleum and alcohol account

The following summarizes the changes in the Petroleum and Alcohol Account for the nine-month period ended September 30, 2004:

  Nine-month period ended
  September 30, 2004
 
Opening balance 239 
Reimbursements - principally subsidies paid to fuel alcohol producers
Result of audit conducted by the Federal Government 16 
Charges on intercompany loans
Translation gain
 
Ending balance 264 
 

c) Certification by the Federal Government

The Federal Government certified the balance of the Petroleum and Alcohol Account as of June 30, 1998.

The ANP/STN Integrated Audit Committee submitted, on June 23, 2004, its final report certifying and approving the balance of the Petroleum and Alcohol Accounts for the period from July 1, 1998 to December 31, 2001, together with monetary restatement through that date. The conclusion of this audit process for the Petroleum and Alcohol account and the parties concurrence as to final amount establishes the basis for concluding the settlement process between the Federal Government and PETROBRAS.

d) National Treasury Bonds Series H (NTN-H)

The Company and the Federal Government reached an agreement whereby the Federal Government issued National Treasury Bonds - H (NTN-H) into a federal depositary on behalf of the Company to support the balance of the Petroleum and Alcohol account.

As of June 30, 2004, there were 138,791 National Treasury Notes – series H (NTN-H), in the amount of US$ 56, at which time the balance of the Petroleum and Alcohol account was US$ 241. Upon maturity of the NTNs-H, the Federal

Government made US$ 3 available to PETROBRAS and the remaining US$ 53 was deposited in an account in the Company’s name, however, such amount is restricted from use by order of STN. The legal, valid, and binding nature of the account is not affected by any difference between the balance of the account and the value of the outstanding bonds.

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6. Receivable from Federal Government (Continued)

e) Settlement of the Petroleum and Alcohol Accounts with the Federal Government

As defined by Provisional Measure No. 123 dated June 26, 2003, made into Law No. 10,742 dated October 6, 2003, the settlement of accounts should have been completed by June 30, 2004. PETROBRAS has been in contact with the STN in order to resolve remaining issues between the parties necessary to conclude the settlement process as established by Provisional Measure No. 2,181-45, of August 24, 2001.

The remaining balance of the Petroleum and Alcohol account may be paid as follows:

Contents

7. Financings

a) Short-term debt

The Company's short-term borrowings are principally sourced from commercial banks and include import and export financing denominated in United States dollars, as follows:

  September 30,
2004
December 31,
2003
 
Imports - oil and equipment 287  872 
Working capital 111  447 
Others 11  10 
 
  409  1,329 
 

The average weighted interest rate on short-term debt at September 30, 2004 was 5,7%.

17


7. Financings (Continued)

b) Long-term debt

Composition

  September 30,
2004
December 31,
2003
 
Foreign currency
    Notes (3) 6,584  5,462 
    Financial institutions 3,000  3,591 
    Suppliers’ credits 1,014  728 
    Senior exchangeable notes 330  338 
    Sale of future receivables (1) 1,726  1,767 
    Assets related to export program be offset against
    sales of future receivables(1) (300)
    Repurchased securities (2) (291) (207)
 
  12,063  11,679 
 
Local currency
    Debentures 742  666 
    National Economic and Social Development
        Bank – BNDES 382  358 
    Debentures – (related party) 251  262 
    Others 91  68 
 
  1,466  1,354 
 
Total 13,529  13,033 
Current portion of long-term debt (1,357) (1,145)
 
  12,172  11,888 
 

(1)  

In May 2004, PFL and the PF Export Trust, executed an amendment to the Trust Agreement allowing the Junior Trust Certificates, that amounted to U.S$ 300 million as of September 30, 2004, to be set-off against the related Notes, rather than paid in full, after fulfillment of all obligations pursuant to the Senior Trust Certificates. The effect of this amendment is that amounts related to the Junior Trust Certificates are now presented net, rather than gross, in these financial statements.


(2)  

At September 30, 2004 and December 31, 2003, the Company had amounts invested abroad in an exclusive investment fund that held debt securities of some of the PETROBRAS group companies in the total amount of US$ 2,112 and US$ 920, respectively. These securities are considered to be extinguished, and thus the related amounts, together with applicable interest have been removed from the presentation of marketable securities and long-term debt, US$ 291 and US$ 207, respectively, and project finance, US$ 1,821 and US$ 713, respectively. Gains and losses on extinguishment are recognized as incurred. Subsequent reissueances of notes at amounts greater or lesser than par are recorded as premmium or discounts and are amortized over the life of the notes. In the nine-month period ended September 30, 2004, PETROBRAS recognized net losses on extinguishement of debt of US$113 and reinsurance premium of US$ 83. See also Note 9.


(3)  

On September 15, 2004, the subsidiary PETROBRAS INTERNATIONAL FINANCE COMPANY (“PIFCO”) placed Global Notes in the international market for 98.638% of their US$ 600 face value, with annual coupon of 7.75%, and maturity in 2014. The Company intends to use the funds raised with this security issue for corporate purposes and meet its strategy of extending terms and reducing the cost of its debt.

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7. Financings (Continued)

b) Long-term debt (Continued)

Composition of foreign currency denominated debt by currency

  September 30,
2004
December 31,
2003
 
Currency
    United States dollars 11,117 10,621
    Japanese Yen 531 628
    Euro 415 429
    Others - 1
 
  12,063 11,679
 

Maturities of the principal of long-term debt

The long-term portion at September 30, 2004 becomes due in the following years:

2005 311
2006 1,450
2007 2,159
2008 1,345
2009 937
2010 and thereafter 5,970
 
  12,172
 

Composition of long-term debt by annual interest rate

Interest rates on long-term debt were as follows:

  September 30,
2004
December 31,
2003
 
Foreign currency
    6% or less 4,828 4,365
    Over 6% to 8% 2,019 2,154
    Over 8% to 10% 4,978 4,990
    Over 10% to 15% 238 170
 
  12,063 11,679
 
Local currency
    6% or less 440 668
    Over 8% to 10% 973 -
    Over 10% to 15% 53 686
 
  1,466 1,354
 
  13,529 13,033
 

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Contents

8. Financial income (expenses)

Financial expenses, financial income and monetary and exchange variation on monetary assets and liabilities, net, allocated to income for the nine-month periods ended September 30, 2004 and 2003 are shown as follows:

Nine-month period ended September 30,
 
  2004  2003 
 
Financial expenses
    Loans and financings (915) (515)
    Capitalized interest 164  126 
    Leasing (79) (118)
    Project financing (230) (188)
    Extinguishment of debt (113)
    Other (257) (222)
 
  (1,430) (917)
 
Financial income
    Investments 274  199 
    Advances to suppliers 24  28 
    Government Securities 19  31 
    Other 228  235 
 
  545  493 
 
Monetary and exchange variation
    Monetary and exchange variation on monetary assets 288  (215)
    Monetary and exchange variation on monetary liabilities (327) 756 
 
  (39) 541 
 

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Contents

9. Project financings

Since 1997, the Company has utilized project financing to provide capital for the continued development of the Company’s exploration and production and related projects.

Prior to December 31, 2003, the Company’s arrangements with respect to these projects were considered as capital leasing transactions for accounting purposes. Effective December 31, 2003, the Company adopted FIN 46 and the project financing special purpose entities were consolidated on a line by line basis. Thus, at September 30, 2004 and December 31, 2003, the project finance obligation represents the debt of the consolidated SPE with the third-party lender.

The Company’s responsibility under these contracts is to complete the development of the oil and gas fields, operate the fields, pay for all operating expenses related to the projects and remit a portion of the net proceeds generated from the fields to fund the special purpose companies’ debt and return on equity payments. At the conclusion of the term of each financing project, the Company will have the option to purchase the leased or transferred assets from the consolidated special purpose company.

The following summarizes the liabilities related to the projects that were in progress at September 30, 2004 and December 31, 2003:

  September 30,
2004
December 30,
2003
 
Barracuda/Caratinga 2,329  2,555 
Cabiúnas 980  857 
Espadarte/Voador/Marimbá (EVM) 797  826 
Marlim 609  680 
Nova Marlim 542  475 
Albacora 87  126 
Pargo, Carapeba, Garoupa and Cherne (PCGC) 72  76 
Nova Transportadora do Sudeste 192  172 
Nova Transportadora do Nordeste 116  114 
Companhia Locadora de Equipamentos Petrolíferos – CLEP
(former Langstrand Holdings S.A). 1,799  700 
PDET ONSHORE 41  40 
Repurchased securities (1,821) (713)
 
  5,743  5,908 
Current portion of project financing (1,017) (842)
 
  4,726  5,066 
 

21


9. Project financings (Continued)

At September 30, 2004, the long-term portion of project financing becomes due in the following years:

2005 919 
2006 1,150 
2007 945 
2008 695 
2009 773 
2010 and thereafter 244 
 
  4,726 
 

As of September 30, 2004, the amounts of cash outlay commitments assumed related to consolidated structured project financings are presented as follows:

Cabiúnas 45 
Nova Transportadora do Sudeste – NTS 324 
Nova Transportadora do Nordeste – NTN 413 
 
  782 
 

CLEP Project

A financing structure that involves a special purpose company (SPC) Companhia Locadora de Equipamentos Petrolíferos – CLEP, formerly Langstrand Holdings S.A, has been formed as a conduit through which PETROBRAS will sell and subsequently lease back assets related to the production of oil in the Campos Basin. PREVI, PETROS, VALIA, FUNCEF, FAPES and REAL GRANDEZA, pesions institutions, are the primary investors in CLEP in equal proportions. The project is expected to be operational for 10 (ten) years, after which PETROBRAS will have the right to acquire the SPC’s shares or the project’s assets.

As of September 30, 2004, CLEP had raised US$ 1,736, which together with previous capital of US$ 63 brought total capitalization to US$1,799, which amount was fully transferred to PETROBRAS as advances to fund the intended sale of the assets. The US$ 1,700 raised was completed through the issuance of Medium Term Notes, with interest rate 8% and due date 2004, such notes were purchased by the PFICo exclusive offshore investment fund and are considered as repurchased securities.

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Contents

10. Capital leases

The Company leases certain offshore platforms and vessels, which are accounted for as capital leases. At September 30, 2004, these assets had a net book value of US$ 1,624 (US$ 1,749 at December 31, 2003).

The following is a schedule by year of the future minimum lease payments at September 30, 2004:

2004 100 
2005 332 
2006 292 
2007 274 
2008 242 
2009 300 
2010 and thereafter 313 
 
Estimated future lease payments 1,853 
   
Less amount representing interest at 6.2% to 12.0% annual (433)
Less amount representing executory costs (18)
 
Present value of minimum lease payments 1,402 
Less current portion (267)
 
Long-term portion 1,135 
 

Contents

11. Thermoelectric plant obligations

As a result of adoption of FIN 46 at December 31, 2003, the Company consolidates six thermoelectric plants. Previously, three of these thermoelectric plants were accounted for as capital leases, and therefore, their consolidation did not have a material impact on the Company’s financial condition. For the other three thermoelectric plants, the Company was deemed the primary beneficiary because of contractual obligations concerning third-party interests, with amounts equal to the contingency payments required to be funded under the contracts recognized to the extent the related payments are deemed probable and can be estimated in accordance with the provisions of SFAS 5.

At December 31, 2003, as a result of adoption of FIN 46, the Company consolidated the thermoelectric plants and recognized a corresponding liability. Thus, it is no longer necessary to recognize any additional liability for future payments expected to be made under the agreements with the sponsors of the thermoelectric plants. The Company will recognize any losses from operations of the plant if and when incurred. For the nine-month period ended September 30, 2004, the Company recognized losses related to its energy business amounted to US$ 319.

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11. Thermoelectric plant obligations

Acquisition of Eletrobolt Thermoelectric Plant

On August 13, 2004, the Board of Directors of PETROBRAS approved the financial conditions for the acquisition of 100% interest of Eletrobolt Thermoelectric plant. This plant is one of the three “merchant” type plants that the Company was deemed the primary beneficiary because of contractual obligations concerning third-party interests and has been consolidating its financial statements since December 31, 2003. PETROBRAS will pay US$ 159 in 30 fixed monthly installments as well as US$ 30 after the elapsing of a period of 7 years. As the purchase price closely approximates the book value of assets recorded in Electrobolt and previously consolidated, this transaction has immaterial impact to the financial statements.

Contents

12. Employees’ postretirement benefits and other benefits

The Company sponsors a contributory defined benefit pension plan covering substantially all of its employees and provides certain health care benefits for a number of active and retired employees. In 2003, the Company made contributions of US$ 175 to pension and health care plans.

Net periodic benefit cost includes the following components:

  Nine-month period ended September 30,
 
  2004 2003
 

  Pension
Benefits
Health
Care
Benefits
Pension
Benefits
Health
Care
Benefits
 



Service cost – benefits earned during the period 99  33  71  27 
Interest on projected benefit obligation 639  253  498  179 
Expected return on plan assets (450) (347)
Amortization of unrecognized transition obligation 52 
Gain on translation 17  14  30  18 
Recognized actuarial loss 180  59  142  46 
 



  485  359  446  270 
Employee contributions (81) (64)
 



Net periodic benefit cost 404  359  382  270 
 



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Contents

13. Shareholders’ equity

The Company’s subscribed and fully paid-in capital at September 30, 2004 and December 31, 2003 consisted of 634,168,418 common shares and 462,369,507 preferred shares.

On January 29, 2003, the Board of Directors of the Company, approved the issuance of 9,866,828 preferred shares of the Company in connection with the public offer by the Company to acquire publicly traded shares of Petrobras Distribuidora - BR, at an issue price of US$ 12.38 (R$ 45.08) per share. As a result, the capital of the Company increased by US$ 122.

On May 9, 2003, the Board of Directors of the Company approved the issue of 567,010 preferred shares of the Company in connection with the public offer by the Company to acquire publicly traded shares of Petrobras Distribuidora - BR, at an issue price of R$ 45.08 per share. As a result, the capital of the Company increased by US$ 8.

At the Ordinary General Meeting held on March 29, 2004, the shareholders’ of PETROBRAS approved an increase in the Company’s capital to US$ 11,701, through the capitalization of part of revenue reserves accrued during previous financial years, in the amount of US$ 4,439, and without the issuance of new shares, in accordance with article 169, paragraph 1, and article 199 of Law No. 6,404/76. This capitalization aimed to bring the Company’s capital in line with the investments of an oil company given intensive use of capital and extended operating cycles.

The Ordinary General Meeting held on March 29, 2004 also approved an increase in the Company’s authorized capital (paragraph 1, article 4, of the Company’s by-laws) from R$ 30,000 million to R$ 60,000 million, through the issuance of up to 200,000,000 (two hundred million) preferred shares for payment in cash, assets and credit capitalization.

The dividends related to the fiscal year ended December 31, 2003, approved at the Ordinary General Meeting held on March 29, 2004, in the amount of US$ 857 (excluding the portion of interest on shareholders’ equity which was made available to shareholders on February 13, 2004), were made available to shareholders on May 21, 2004.

25


13. Shareholders’ equity (Continued)

On September 17, 2004, the Board of Directors of PETROBRAS approved the distribution of interest on shareholders’ equity to shareholders in the amount of US$ 1,144, as provided for in articles 8 and 9, sole paragraph of the Company’s articles of incorporation, article 9 of Law No. 9,249/95 and Decrees No. 2,673/98 and No. 3,381/00.

This amount will be made available to shareholders up to February 15, 2005, based on their shareholdings at September 30, 2004, corresponding to US$ 1.04 per common and preferred share, and will be discounted from the dividends that come to be determined based on adjusted net income for 2004, and monetarily adjusted by reference to the Selic variation if paid before December 31, 2004, from the date of actual payment through to the end of that year. For amounts to be paid in 2005, the amount to be distributed will be monetarily adjusted based on the Selic variation as from December 31, 2004 to the date of beginning of payment.

Basic and diluted earnings per share amounts have been calculated as follows:

Nine-month period ended September 30,
 
  2004 2003
 
Income before effect of change in accounting principle 4,483  4,968 
Cumulative effect of change in accounting principle,net of taxes 697 
 
Net income for the period 4,483  5,665 
 
Less priority preferred share dividends (274) (228)
Less common shares dividends, up to the priority preferred
shares dividends on a per-share basis (376) (313)
 
Remaining net income to be equally allocated to common and
preferred shares 3,833  5,124 
 
Weighted average number of shares outstanding
    Common/ADS 634,168,418  634,168,418 
    Preferred/ADS 462,369,507  461,048,616 
 
Basic and diluted earnings per share
    Common and Preferred
        Before effect of change in accounting principle 4.09  4.54 
        After effect of change in accounting principle 4.09  5.17 

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Contents

14. Acquisitions

a) Acquisition of Sophia do Brasil S.A. (former Agip do Brasil S.A.)

On August 9, 2004, the Company’s subsidiary, Petrobras Distribuidora S.A. – BR, acquired from ENI B.V. 100% of the capital of its Brazilian subsidiary Sophia do Brasil S.A., formerly Agip do Brasil S.A., assuming its control from that date.

The purchase price paid for Sophia do Brasil S.A. was based on an economic valuation model of expected future earnings of Sophia do Brasil S.A., which considered relevant factors, including the potential effects of the economic situation of Brazil. The acquisition of Sophia do Brasil totaled US$ 511. The Company paid US$ 225 in cash, and settled a debt of US$ 225 that Agip do Brasil had with ENI BV. An additional amount of US$ 61 related to subsequent purchase price adjustments will be paid in November.

The acquisition of Sophia do Brasil S.A was recorded using the purchase method of accounting and the financial statements of Sophia do Brasil S.A. were included in the consolidated PETROBRAS financial statements, beginning in August 2004. Sophia do Brasil S.A. is in the process of obtaining valuations of fixed assets and intangible assets, and thus the purchase price is subject to change. However, final purchase price allocation will be based on the fair market value of the assets acquired and the liabilities assumed as of the acquisition date as determined by independent appraisers.

Sophia do Brasil S.A is a liquified petroleum gas (LPG), fuel and lubricant distributor, and has 21% share in the LPG market in Brazil, 3.7% of total fuel distribution domestic market with a network of more than 1,500 service stations and, 3% share in the Brazilian lubrificant distribution market.

The acquisition of Agip do Brasil S.A. contributes toward achieving the objectives established in Petrobras' Strategic Planning for its subsidiary BR of expanding its share in the LPG distribution segment, and also of consolidating its penetration in the automotive fuel distribution market in certain regions of the country.

The following unaudited pro forma summary financial information presents the consolidated results of operations as if the acquisition of Sophia do Brasil S.A. had occurred at the beginning of the periods presented.

27


14. Acquisitions (Continued)

a) Acquisition of Sophia do Brasil S.A. (former Agip do Brasil S.A.) (Continued)

Consolidated income statements data for the nine-month periods ended September 30, 2004 and 2003, respectively:

  Nine-month period ended September, 30
 
  2004 2003
 

  As reported Pro forma
(unaudited)
As reported Pro forma
(unaudited)
 



Net operating revenues 26,751  27,852  22,648  23,855 
Costs of sales (14,046) (14,989) (11,058) (12,116)
Net income for the period 4,483  4,475  5,665  5,697 
Basic and diluted earnings per share 4.09  4.08  5.17  5.20 

b) Acquisition of an interest in Petrobras Energia Participaciones S.A. – PEPSA - (formerly known as Perez Companc S.A.) and Petrolera Entre Lomas S.A. - PELSA (formerly known as Petrolera Perez Companc S.A.)

On October 17, 2002, the Company signed the Final Share Acquisition Agreement completing the acquisition of a controlling interest PEPSA and PELSA.

On May 13, 2003, the Argentine antitrust agency approved the purchase of 58.62% of the capital stock of PEPSA and 39.67% of the capital stock of PELSA. As a result of the purchase of a 39.67% interest in the capital stock of PELSA, together with the purchase of 18.87% of PEPSA’s interest in the capital stock of PELSA, the Company has a controlling interest in PELSA equal to 50.73% and thus has consolidated the entity.

The purchase price paid for PEPSA and PELSA was based on an economic valuation model of expected future earnings of those companies, which considered relevant factors, including the potential effects of the economic situation of Argentina. The Company paid US$ 739 in cash and US$ 338 in bonds to the Perez Companc family for the shares of PEPSA and PELSA.

The acquisition was consummated principally to expand PETROBRAS operations into geographical markets where the Company had little activity. Through the acquisition of PEPSA and PELSA, PETROBRAS was able to gain immediate access to the Argentine market and brand recognition. The goodwill of US$ 183 generated by the transaction is attributed principally to downstream activities.

28


14. Acquisitions (Continued)

b) Acquisition of an interest in Petrobras Energia Participaciones S.A. – PEPSA - (formerly known as Perez Companc S.A.) and Petrolera Entre Lomas S.A. - PELSA (formerly known as Petrolera Perez Companc S.A.) (Continued)

The acquisition of PEPSA and PELSA was recorded using the purchase method of accounting and the financial statements of PEPSA and PELSA were included in the consolidated PETROBRAS financial statements, beginning on May 13, 2003. The purchase price for PEPSA and PELSA was allocated based on the fair market value of the assets acquired and the liabilities assumed as of the acquisition date as determined by independent appraisers.

PEPSA operates principally in the areas of oil field exploration and production, refining, transport and commercialization, electricity generation, transmission and distribution, and petrochemicals. Its activities are primarily based in Argentina, but PEPSA also operates in Bolivia, Brazil, Ecuador, Peru and Venezuela. PELSA operates primarily in the oil and gas exploration and production industry in Argentina.

The following unaudited pro forma summary financial information presents the consolidated results of operations as if the acquisition of PEPSA and PELSA had occurred at the beginning of the periods presented.

Consolidated income statements data for the nine-month period ended September 30, 2003.

  As reported Pro forma
(unaudited)
 

Net operating revenues 22,648  23,195 
Costs and expenses (14,277) (14,649)
Financial income, net 117  (64)
Others (1,268) (1,237)
Income tax expense (2,014) (2,023)
Minority interest (238) (250)
Cumulative effect of change in accounting principles
net of taxes 697  700 
Net income for the period 5,665  5,672 
 
Basic and diluted earnings per share 5.17  5.17 

29


14. Acquisitions (Continued)

c) Acquisition of Triunfo’s shares by PETROQUISA

The Company’s subsidiary, Petrobras Química S.A. – PETROQUISA decided to exercise its preemptive right in the acquisition of shares held by PRIMERA Indústria e Comércio Ltda. in the capital of Petroquímica Triunfo S.A. (Triunfo) in response to the put option.

After exercise of its preemptive right on May 14, 2004, PETROQUISA, which had previously held 45.22% of voting capital and 59.92% of capital stock of Petroquímica Triunfo increased its interest to 70.45% of voting capital and 85.04% of its capital stock. The results of Triunfo have been included to the Petrobras Consolidated Financial Statements since May of 2004. Triunfo is in the process of obtaining valuations of fixed assets, thus the allocation of the purchase price is subject to refinement. Due to inmateriality, the Company has not prepared pro forma information respective to this business combination.

The acquisition was consummated principally to expand PETROBRAS’ petrochemical activities according to the Strategic Plan approved in May 14, 2004.

The Company paid US$32 (R$ 101 million) in cash and this purchase price was based on an economic valuation model of expected future earnings of Petroquímica Triunfo S.A.

Petroquímica Triunfo S.A. produces low-density polyethylene and has an installed capacity of 160,000 tons per year. Triunfo’s activities are exclusively in Brazil.

d) Acquisition of interest of GASMIG

On August 25, 2004, PETROBRAS, through its subsidiary PETROBRAS GÁS S.A. – GASPETRO, agreed to the acquisition of 40% interest of the capital of Companhia de Gás de Minas Gerais – GASMIG, according to the Association Agreement with Companhia Energética de Minas Gerais – CEMIG, dated August 11, 2004, in order to promote natural gas consumption in the Minas Gerais State. The investment amounts to US$ 50, to be adjusted based on the December 31, 2003 balance sheet.
The implementation of the agreement is still pending approval from the Minas Gerais State Legislature.

30


Contents

15. 6th bidding for exploratory blocks of ANP

In August 2004, PETROBRAS acquired 107 (one hundred and seven) new exploratory blocks out of the 154 (one hundred and fifty four) blocks included in the 6th bidding process conducted by the National Petroleum Agency - ANP. To date, the Agency offered a total of 913 blocks, of which 294 were onshore and 619 were offshore.

PETROBRAS acquired 55 blocks with exclusivity and other 52 in a consortium with other companies, being the operator of 32 of these.

The total bonus leasehold expense which PETROBRAS will be required to pay at contract execution is equal to US$ 153.

The execution of new concession contracts must be finalized during 2004.

Contents

16. Commitments and contingencies

PETROBRAS is subject to a number of commitments and contingencies arising in the normal course of its business. Additionally, the operations and earnings of the Company have been, and may be in the future, affected from time to time in varying degrees by political developments and laws and regulations, such as the Federal Government's continuing role as the controlling shareholder of the Company, the status of the Brazilian economy, forced divestiture of assets, tax increases and retroactive tax claims, and environmental regulations. The likelihood of such occurrences and their overall effect upon the Company are not readily determinable.

a) Litigation

The Company is a defendant in numerous legal actions involving civil, tax, labor, corporate and environment issues arising in the normal course of its business. Based on the advice of its internal legal counsel and management’s best judgment, the Company has recorded accruals in amounts sufficient to provide for losses that are considered probable and reasonably estimable. The following presents these accruals by nature of claim:

31


16. Commitments and contingencies (Continued)

a) Litigation (Continued)

  September 30,
2004
December 31,
2003
 

Labor claims 22  22 
Tax claims 54  39 
Civil claims 110  90 
Commercials claims and other contingencies 29  109 
 

  215  260 
 
Contingencies for joint liability 100  95 
 

Total 315  355 
 

Current Contingencies (117) (84)
 

Long-term Contingencies 198  271 
 

As of September 30, 2004 and December 31, 2003, in accordance with Brazilian law, the Company had paid US$ 594 and US$ 543, respectively, into federal depositories to provide collateral for these and other claims until they are settled. These amounts are reflected in the balance sheet as restricted deposits for legal proceedings and guarantees.

On November 23, 1992, PORTO SEGURO IMÓVEIS LTDA., a minority shareholder of PETROQUISA, filed a suit against PETROBRAS in the State Court of Rio de Janeiro related to alleged losses resulting from the sale of a minority holding by PETROQUISA in various petrochemical companies included in the National Privatization Program introduced by Law No. 8,031/90.

In this suit, the plaintiff claims that PETROBRAS, as the majority shareholder in PETROQUISA, should be obliged to reinstate the “loss” caused to the net worth of PETROQUISA, as a result of the acts that approved the minimum sale price of its holding in the capital of privatized companies. A decision was handed down on January 14, 1997 that considered PETROBRAS liable with respect to PETROQUISA for losses and damages in an amount equivalent to US$ 3,406.

32


16. Commitments and contingencies (Continued)

a) Litigation (Continued)

In addition to this amount, PETROBRAS was required to pay the plaintiff 5% of the value of the compensation as a premium (see art. 246, paragraph 2 of Law No. 6,404/76), in addition to attorneys’ fees of approximately 20% of the same amount. However, since the award would be payable to PETROQUISA and PETROBRAS holds 99.0% of its capital, the effective disbursement if the ruling is not reversed will be restricted to 25% of the total award. PETROBRAS filed an appeal with the State Court of Rio de Janeiro, and received a favorable decision from the Third Civil Court on February 11, 2003, which, by a majority vote, accepted PETROBRAS’ appeal to reverse the judgment and ruled the plaintiff’s case to be without grounds, the revising judge’s decision that held the case to be partially with grounds to reduce the amount of compensation to US$ 1,538 being overruled. Against this decision, Porto Seguro filed another appeal (motion to reverse or annul) with the State Court of Rio de Janeiro and the Fourth Civil Court handed down a unanimous decision on March 30, 2004 requiring PETROBRAS to indemnify PETROQUISA and Porto Seguro the amounts of US$ 1,538 and US$ 384 respectively (the latter representing 5% in premium and 20% in attorney’s fees). In view of this decision, PETROBRAS will file special and extraordinary appeals with the Superior Court of Justice and the Supreme Court respectively. Based on its legal counsels advice, PETROBRAS’ Administration does not expect to obtain an unfavorable decision in the case and assesses the risk of loss to be possible.

b) Notification from the INSS - joint liability

The Company received various tax assessments related to social security amounts payable as a result of irregularities in presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3,048/99.

33


16. Commitments and contingencies (Continued)

b) Notification from the INSS - joint liability (Continued)

The Company made a provision for this contingency in the amount of US$ 105 at December 31, 2002, as it considers the chance of success in a defense filed against the INSS to be remote.

On September 29, 2003, the Company received additional INSS tax assessments related to the joint liability for irregularities in presentation of contractors’ documentation related to periods subsequent to past notifications. At December 31, 2003 the balance of contingencies associated with this joint liability was US$ 193.

On September 28, 2004, the Company set up a new provision for contingencies for joint liability, related to new assessments in the amount of US$ 30, and as of September 30, 2004 the cumulative balance of Contingencies for joint liability amounted to US$ 229. PETROBRAS had disbursed US$ 129 in connection with administrative suits filed by the INSS claiming the Company’s joint liability, US$ 5 of this amount was disbursed in the third quarter of 2004.

Internally, procedures were revised to improve the inspection of contracts and require the presentation of documents, as stipulated in the legislation, to substantiate the payment of INSS amounts due by contractors. PETROBRAS continues to analyze each tax assessment received in order to recover amounts, as permitted through administrative processes of the INSS.

c) Tax assessments - internal revenue service of Rio de Janeiro

The Internal Revenue Service of Rio de Janeiro filed two Tax Assessments against the Company in connection with Withholding Tax (IRRF) on foreign remittances of payments related to charter of vessels of movable platform types for the years 1998 through 2002.

The Internal Revenue Service, based on Law No. 9,537/97, Article 2, considers that drilling and production platforms cannot be classified as sea-going vessels and therefore should not be chartered but leased. Based on this interpretation, overseas remittances for servicing chartering agreements would be subject to withholding tax at the rate of 15% or 25%.

The Company disagrees with the Internal Revenue Service’s interpretation as to charter contracts, given that the Federal Supreme Court has already ruled that, in the context of its judgment with respect to the IPI (Federal VAT) tax, offshore platforms are to be classified as sea-going vessels. Additionally, the 1994 and 1999 Income Tax Regulations support the “non-taxation” (RIR/1994) and the “zero tax rate” (RIR/1999) for the remittances in question.

34


16. Commitments and contingencies (Continued)

c) Tax assessments - internal revenue service of Rio de Janeiro (Continued)

On June 27, 2003, the Internal Revenue Service served a tax assessment notice on the Company amounting to R$ 3,064 million (US$ 1,066) covering the period from 1999 to 2002.

Using the same arguments, on February 17, 2003, another tax assessment notice had already been issued for R$ 93 million (US$ 32) with respect to 1998, against which, on March 20, 2003, the Company filed an appeal. According to the fiscal authorities, the Company should have withheld that tax, incident on remittances made to abroad for payment of the hiring of vessels of the mobile platform type, used in oil exploration and production.

PETROBRAS has defended itself against these tax assessments: i) the smaller in value has been confirmed by the first administrative level, and the corresponding appeal has been already filed by the Company, and waits judgment; ii) no first level decision has been issued so far with regard to the other one, with greater value. Based on its legal counsels advice, the Company’s Administration does not expect to obtain an unfavorable decision in this case, and thus has assessed risk of loss to be remote.

d) Environmental matters

The Company is subject to various environmental laws and regulations. These laws regulate the discharge of oil, gas or other materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of such materials at various sites.

During 2000 the Company implemented an environmental excellence and operational safety program - PEGASO - (Programa de Excelência em Gestão Ambiental e Segurança Operacional). The Company made expenditures of approximately US$ 2,882 from 2000 to September 30, 2004 under this program.

During the periods ended September 30, 2004 and 2003 the Company made expenditures of approximately US$ 501 and US$ 515 respectively, under this program, including US$ 153 and US$ 169 through the Programa de Integridade de Dutos (Pipeline Integrity Program) through which it conducts inspections of, and improvements to, the Company’s pipelines.

35


Contents

17. Segment information

The following presents the Company's assets by segment:

  As of September 30, 2004
 
  Exploration
And
Production
Supply  Gas and
Energy
International
(see separate
disclosure)
Distribution Corporate Eliminations Total

Current assets 2,614  6,347  1,104  1,941  1,615  6,021  (1,541) 18,101 

 
    Cash and cash equivalents 956  518  195  455  90  4,866  7,080 
    Other current assets 1,658  5,829  909  1,486  1,525  1,155  (1,541) 11,021 
 
Investments in non-consolidated companies
    and other investments 652  193  481  23  81  1,437 

 
Property, plant and equipment, net 18,477  5,621  4,178  4,022  988  494  (21) 33,759 

 
Other assets 1,852  307  708  328  202  5,843  (5,276) 3,964 

 
    Petroleum and Alcohol Account 264  264 
    Government securities 316  316 
    Other 1,852  307  708  328  202  5,263  (5,276) 3,384 

 
Total assets 22,950  12,927  6,183  6,772  2,828  12,439  (6,838) 57,261 

36


17. Segment information (Continued)

  As of September 30,2004
 
  International
 
  Exploration
and
Production
Supply Gas and
Energy
Distribution Corporate Eliminations Total 

Current assets 997  649  267  87  836  (895) 1,941 

 
Cash and cash equivalents 106  60  281    455 
Other current assets 891  589  265  81  555  (895) 1,486 
 
Investments in non-consolidated companies
    and other investments 158  49  223  51  481 

 
Property, plant and equipment, net 3,172  511  199  86  54  4,022 

 
Other assets 278  19  1,579  (1,566) 328 

 
Total assets 4,605  1,218  708  182  2,520  (2,461) 6,772 

37


17. Segment information (Continued)

  As of December 31, 2003
 
  Exploration
And
Production
Supply  Gas and
Energy
International
(see separate
disclosure)
Distribution Corporate Eliminations Total

Current assets 2,057  4,871  528  1,738  1,208  9,466  (1,968) 17,900 

 
    Cash and cash equivalents 1,042  575  109  445  33  7,406  9,610 
    Other current assets 1,015  4,296  419  1,293  1,175  2,060  (1,968) 8,290 
 
Investments in non-consolidated companies
    and other investments 463  151  449  22  82  1,173 

 
Property, plant and equipment, net 16,742  4,980  4,174  4,181  442  336  (50) 30,805 

 
Other assets 970  285  751  306  208  4,479  (3,265) 3,734 

 
    Petroleum and Alcohol Account 239  239 
    Government securities 283  283 
    Other 970  285  751  306  208  3,957  (3,265) 3,212 

 
Total assets 19,775  10,599  5,604  6,674  1,880  14,363  (5,283) 53,612 

38


17. Segment information (Continued)

  As of December 31, 2003
 
  International
 
  Exploration
and
Production
Supply Gas and
Energy
Distribution Corporate Eliminations Total 

Current assets 806  463  167  71  670  (439) 1,738 

 
Cash and cash equivalents 178  42  216  445 
Other current assets 628  421  163  66  454  (439) 1,293 
 
Investments in non-consolidated companies
    and other investments 128  121  199  - 449 

 
Property, plant and equipment, net 3,301  565  202  64  49  - 4,181 

 
Other assets 166  12  15  1,664  (1,551) 306 

 
Total assets 4,401  1,161  568  150  2,384  (1,990) 6,674 

39


17. Segment information (Continued)

Revenues and net income by segment are as follows:

  Nine - month period ended September 30, 2004
 
  Exploration
And
Production
Supply  Gas and
Energy
International
(see separate
disclosure)
Distribution Corporate Eliminations Total

Net operating revenues to third parties 1,906  14,715  1,154  2,237  6,739    26,751 
Inter-segment net operating revenues 12,022  5,834  293  406  119  (18,674)

 
Net operating revenues 13,928  20,549  1,447  2,643  6,858  (18,674) 26,751 
 
Cost of Sales (5,176) (18,470) (1,383) (1,349) (6,190)   18,522  (14,046)
Depreciation, depletion and amortization (1,021) (344) (76) (319) (29) (25) (1,814)
Exploration, including exploratory dry holes
    and impairment (292) (145) (437)
Selling, general and administrative expenses (178) (680) (119) (229) (372) (411) (1,989)
Research and development expenses (85) (40) (5) (1) (3) (46) (180)

 
Costs and expenses (6,752) (19,534) (1,583) (2,043) (6,594) (482) 18,522  (18,466)
 
Equity in results of non-consolidated companies 24  49  67  141 
 
Financial income (expenses), net (242) (60) (391) (15) (217) (924)
Employee benefit expense (2) (13) (453) (468)
Other taxes (6) (20) (20) (26) (38) (235) (345)
Other expenses, net (72) (54) (112) (44) (42) (177) (501)

 
Income (loss) before income taxes and
    minority interest and accounting change 6,856  964  (279) 206  156  (1,563) (152) 6,188 
 
Income tax benefits (expense) (2,449) (288) 107  (54) 1,027  53  (1,604)
 
Minority interest (5) (28) (4) (64) (101)

 
Net income (loss) 4,402  648  (176) 142  102  (536) (99) 4,483 

40


17. Segment information (Continued)

  Nine - month period ended September 30, 2004
 
  International
 
  Exploration
and
Production
Supply Gas and
Energy
Distribution Corporate Eliminations Total 

Net operating revenues to third parties 521  767  300  633  16  2,237 
Inter-segment net operating revenues 834  789  20    (1,242) 406 

 
Net operating revenues 1,355  1,556  320  638  16  (1,242) 2,643 
 
Cost of Sales (342) (1,309) (249) (661) (15) 1,227  (1,349)
Depreciation, depletion and amortization (250) (46) (9) (6) (8) (319)
Exploration, including exploratory dry
    holes and impairment (145) (145)
Selling, general and administrative expenses (77) (38) (5) (46) (63) (229)
Research and development expenses         (1)   (1)

 
Costs and expenses (814) (1,393) (263) (713) (87) 1,227  (2,043)
 
Equity in results of non-consolidated companies 15  43  67 
Financial income (expenses), net (301) (6) (84) (391)
Other taxes (4) (5) (5) (12) (26)
Other expenses, net (41) (14) (44)

 
Income (loss) before income taxes and
    minority interest 200  170  69  (80) (138) (15) 206 
 
Income tax benefits (expense) (77) (47) (14) 28  110 
 
Minority interest (3) (2) (3) (61) (64)

 
Net income (loss) 128  120  53  (55) (89) (15) 142 

41


17. Segment information (Continued)

  Nine - month period ended September 30, 2003
 
  Exploration
And
Production
Supply  Gas and
Energy
International
(see separate
disclosure)
Distribution Corporate Eliminations Total

Net operating revenues to third parties 1,722  13,065  858  1,234  5,769  22,648 
Inter-segment net operating revenues 10,164  5,042  171  13  101  (15,491)

 
Net operating revenues 11,886  18,107  1,029  1,247  5,870  (15,491) 22,648 
 
Cost of Sales (4,269) (15,268) (755) (607) (5,342) 15,183  (11,058)
Depreciation, depletion and amortization (776) (280) (52) (178) (21) (15) (1,322)
Exploration, including exploratory dry holes
    and impairment (323) (15) (338)
Selling, general and administrative expenses (103) (531) (58) (138) (290) (361) 59  (1,422)
Research and development expenses (66) (30) (8) (33) (137)

 
Costs and expenses (5,537) (16,109) (873) (938) (5,653) (409) 15,242  (14,277)
 
Equity in results of non-consolidated companies 18  54  32  (1) 103 
Financial income (expenses), net (228) 149  (41) (45) (56) 380  (42) 117 
Employee benefit expense (1) (13) (377) (391)
Other taxes (18) (3) (11) (36) (156) (224)
Other expenses, net (119) (106) (358) (16) 24  (181) (756)

 
Income (loss) before income taxes and
    minority interest 6,002  2,040  (192) 269  136  (744) (291) 7,220 
 
Income tax benefits (expense) (1,984) (671) 161  (79) (48) 516  91  (2,014)
Minority interest (23) (183) (31) (1) (238)

 
Income before effect of change in accounting principle 4,018  1,346  (214) 159  87  (228) (200) 4,968 

 
Cumulative effect of change in accounting principle,
    net of taxes 697  697 

 
Net income (loss) 4,715  1,346  (214) 159  87  (228) (200) 5,665 

Net Operating Revenues and the COGS relative to the periods prior to the third quarter of 2004 were reclassified between the International segment and the Supply segment in relation to offshore operations that were being allocated to the International segment. There was no significant impact on the results reported for these segments.

42


17. Segment information (Continued)

  Nine - month period ended September 30, 2003
 
  International
 
  Exploration
and
Production
Supply Gas and
Energy
Distribution Corporate Eliminations Total

Net operating revenues to third parties 335  343  105  442    1,234 
Inter-segment net operating revenues 336  391    (722) 13 

 
Net operating revenues 671  734  107  448  (722) 1,247 
 
Cost of Sales (191) (648) (71) (414) (9) 726  (607)
Depreciation, depletion and amortization (139) (31) (4) (2) (2)   (178)
Exploration, including exploratory dry holes
    and impairment (15)   (15)
Selling, general and administrative expenses (42) (20) (1) (21) (54)   (138)

 
Costs and expenses (387) (699) (76) (437) (65) 726  (938)
 
Equity in results of non-consolidated companies (2)   32    32 
Financial income (expenses), net (40) (5) (1)     (45)
Other taxes (2) (4)   (4) (1)   (11)
Other expenses, net (27)   (16)
 

Income (loss) before income taxes and
    minority interest 216  33  30  (23) 269 
 
Income tax benefits (expense) (57)     (1) (21)   (79)
 
Minority interest (1) (1) (31)   (31)

 
Net income (loss) 160  34  29  (75) 159 

43


17. Segment information (Continued)

Capital expenditures incurred by segment for the nine-month periods ended September 30, 2004 and 2003 are as follows:

Nine-month period ended September 30, 
 
  2004  2003 
 
Exploration and Production 3,050  2,293 
Supply 924  1,060 
Gas and Energy 154  254 
International
    Exploration and Production 383  280 
    Supply 34 
    Distribution 13  14 
    Gas and Energy 13 
Distribution 77  79 
Corporate 127  115 
 
  4,765  4,114 
 

Contents

18. Subsequent Events

a) Implementation of the Integrated SAP R/3 Management System

On October 4, 2004, PETROBRAS (Parent Company) and other seven subsidiaries implemented the integrated SAP R/3 management system at the Company (Enterprise Resource Planning – ERP) comprising several computer programs to process data related to the Company’s standard processes using one database which is updated in real time. This new system will allow control over the Company’s activities related to production, refining, distribution, purchases, inventories and finance, among others, using only one IT system.

This integration expedites and facilitates business analyses. The new system allows the Company’s database to be maintained permanently updated, which results in increased process safety and control.

b) Acquisition of shares of CEG-RIO

On October 4, 2004, PETROBRAS, through its subsidiary PETROBRAS GÁS S.A – GASPETRO, exercised its option to purchase shares of CEG-RIO, as contrated with the company GÁS NATURAL SGD. The transaction covered 65,580 thousand common shares (9.86% of total common shares) and 181,920 thousand preferred shares (13.68% of total preferred shares) and the price paid was approximately US$ 17.

44


18. Subsequent Events (Continued)

b) Acquisition of shares of CEG-RIO (Continued)

With this acquisition, GASPETRO increased its participation to 26.19% of the common shares and 43.01% of the preferred shares of CEG-RIO.

Contents

19. Event Subsequent to review report date - Capital Restructuring of the International Area

On November 12, 2004, PETROBRAS’ Board of Directors approved a transaction to re-organize the Company’s assets in Argentina. Petrobras’ decision immediately followed a meeting of the Board of Directors of Petrobras Energía S.A. (Buenos Aires Stock Exchange: PESA) that approved such reorganization.

Under the transaction, PESA will absorb certain Argentine subsidiaries of Petrobras. As a consequence of the restructuring, PPSL shall receive newly issued shares of PESA.

Following this, under the terms of a further restructuring transaction that is still pending approval by the PEPSA shareholders, Petrobras, through PPSL intends to transfer to PESA its ownership in three companies: Eg3 S.A., Petrobras Argentina S.A. and Petrolera Santa Fe S.R.L..

Petrobras currently holds 99.6% of Eg3 S.A., 100.0% of Petrobras Argentina S.A. and 100.0% of Petrolera Santa Fe S.R.L. Petrobras, through PPSL, currently holds 58.6% of Petrobras Energia Participaciones (PEPSA), a holding company which holds 98.2% equity interest in PESA. At completion of the full restructuring transaction as envisioned, Petrobras through PPSL, will receive 230,194,137 newly issued shares of PESA. Upon completion of the transaction, Petrobras, through PPSL will hold, directly and indirectly, 67.2% of PESA.

These changes, do not affect the Company’s financial position or operating results as of or for the nine months ended September 30, 2004, nor will they have an effect on future financial statements of Petrobras as the restructuring is among entities under common control that are already consolidated to Petrobras.

45



 

 
SIGNATURE
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 30, 2004

 
PETRÓLEO BRASILEIRO S.A – PETROBRAS
By:
/S/  José Sergio Gabrielli de Azevedo

 
José Sergio Gabrielli de Azevedo
Chief Financial Officer and Investor Relations Director
 

 

 
FORWARD-LOOKING STATEMENTS

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.