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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 April, 2004
Commission File Number 1-15106
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PETROLEO 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 Republica 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
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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
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INCORPORATION BY REFERENCE
THIS REPORT ON FORM 6-K IS INCORPORATED BY REFERENCE INTO THE REGISTRATION
STATEMENT ON FORM F-3, FILE NO. 333-92044, OF PETROLEO BRASILEIRO S.A --
PETROBRAS AND PETROBRAS INTERNATIONAL FINANCE COMPANY.
[PETROBRAS LOGO]
PETROBRAS ANNOUNCES FISCAL YEAR 2003 RESULTS
(Rio de Janeiro - April 08, 2004) - PETROLEO 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.$ 6,559 million and
consolidated net operating revenues of U.S.$ 30,797 million for the year ended
December 31, 2003 ("2003"), compared to consolidated net income of U.S.$ 2,311
million and consolidated net operating revenues of U.S.$ 22,612 million for the
year ended December 31, 2002 ("2002").
COMMENTS FROM THE CEO, MR. JOSE EDUARDO DE BARROS DUTRA
We are completing our first year of management at the Company. It was a year of
multiple successes but also of great challenges in light of our many goals,
including transparency in our actions and fostering innovations within the
Company's administration. The year 2003 also marked our 50-year anniversary, and
we sought to remember the accomplishment of those who helped build what is today
one of the world's largest oil companies.
Market confidence in our Company allowed us to raise U.S.$ 5.4 billion in the
international capital markets during the year. In particular, investor demand
for issuances of our global notes exceeded the actual amount issued on several
occasions, and our notes sold in record time. Demand was strong notwithstanding
the fact that these notes do not have any additional guarantee or political risk
insurance. They are important milestones for the Company, not only for the
reduction in costs and lengthening of our debt maturity profile (the 15-year
bonds issued on December 10, 2003 are of the longest maturity ever issued by the
Company), but also because we were able to diversify our investor base. A
significant portion of these notes were acquired by investors from the high
grade and high yield markets, which are comprised of North American investors
who are typically more interested in financing companies within the United
States.
Among our principal achievements in 2003 we would like to highlight: (1) the
revision of our strategic plan, (2) the implementation of a new human resources
policy directive, (3) the improvement of the bidding process, particularly in
relation to platforms P-51 and P-52, and (4) the ongoing efforts to increase our
share in the natural gas and energy market. The intent of these efforts is to
increase operating efficiency and not only obtain higher returns for our
shareholders but also contribute significantly to Brazilian society in general.
In 2003, we received various awards recognizing our successes on a number of
fronts, including the award for Bond of the Year from Euromoney Magazine for our
U.S.$ 500 million issuance in June and the Investor's Choice for Best Website
Award given by MZ Consult.
We arrived at the end of this first year determined to overcome new challenges
and always vigilant of our goal to keep the Company on its path of positive
results, without losing sight of transparency, ethics and social and
environmental responsibility.
Financial Highlights
U.S. $ million
(except earnings per share or unless otherwise noted)
Year ended December 31,
3Q-2003 4Q-2003 4Q-2002 Income statement data 2003 2002
----------------------
11,314 11,390 8,294 Sales of products and services 42,690 32,987
8,218 8,149 5,930 Net operating revenues 30,797 22,612
(199) (253) (578) Financial income (expense), net (136) (1,700)
1,897 894 73 Net income 6,559 2,311
Basic and diluted earnings per common and
preferred share
Before effect of change in accounting
1.73 0.82 0.07 principle 5.35 2.13
After effect of change in accounting
1.73 0.82 0.07 principle 5.98 2.13
Other data
----------
50.3 46.5 43.1 Gross margin (%) (1) 49.9 49.1
23.1 11.0 1.2 Net margin (%) (2) 21.3 10.2
67 68 71 Debt to equity ratio (%) (3) 68 71
Financial and Economic Indicators
---------------------------------
28.41 29.41 25.91 Brent crude (U.S.$/bbl) 28.84 24.76
Average Commercial Selling Rate for U.S.
2.9324 2.9000 3.6714 Dollars (R$/U.S.$) 3.0745 2.9236
Period-end Commercial Selling Rate for U.S.
2.9234 2.8892 3.5333 Dollars (R$/U.S.$) 2.8892 3.5333
(1) Gross margin is calculated as net operating revenues less cost of sales
divided by net operating revenues.
(2) Net margin is calculated as net income divided by net operating revenues.
(3) Debt to equity ratio is calculated as total liabilities divided by the sum
of total liabilities and total shareholders' equity.
U.S. $ million
Balance sheet data 12.31.2003 12.31.2002 Percent Change
(12.31.2003 versus 12.31.2002)
Total assets 53,612 32,154 66.7
Cash and cash equivalents 9,610 3,301 191.1
Short-term debt 1,329 671 98.1
Total long-term debt 13,033 7,714 68.9
Total project financings 5,908 4,039 46.3
Total capital lease obligations 1,620 2,256 (28.2)
Net debt (1) 11,980 11,229 6.7
Shareholders' equity (2) 17,152 9,301 84.4
Total capitalization (2) (3) 39,042 23,981 62.8
U.S. $ million
Reconciliation of Net debt 12.31.2003 12.31.2002
Total long-term debt 13,033 7,714
Plus short-term debt 1,329 671
Plus total project financings 5,908 4,039
Plus total capital lease obligations 1,620 2,256
Less cash and cash equivalents 9,610 3,301
Less Junior Notes 300 150
Net debt (1) 11,980 11,229
(1) Net debt includes short-term debt, total long-term debt, total project
financings and total capital leasing obligations less cash and cash
equivalents and Junior Notes in the amount of U.S.$ 300 million in 2003 and
U.S.$ 150 million in 2002. 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.$
1,588 million at December 31, 2003 and U.S.$ 1,361 million at December 31,
2002, 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.
OPERATING HIGHLIGHTS
Year ended December 31,
3Q-2003 4Q-2003 4Q-2002 2003 2002
Average daily crude oil and gas production
1,727 1,680 1,491 Crude oil and NGLs (Mbpd) (1) 1,701 1,535
1,562 1,513 1,455 Brazil 1,540 1,500
165 167 36 International 161 35
2,046 2,058 1,578 Natural gas (Mmcfpd) (2) 2,010 1,650
1,524 1,536 1,416 Brazil 1,500 1,512
522 522 162 International 510 138
Crude oil and NGL average sales price (U.S.
dollars per bbl)
26.16 26.79 22.81 Brazil (3) 27.01 22.29
22.19 23.76 23.62 International 23.77 23.00
Natural gas average sales price (U.S. dollars per
Mcf)
1.87 1.89 1.02 Brazil 1.79 1.22
1.07 1.15 1.55 International 1.26 1.34
Lifting costs (U.S. dollars per boe)
Crude oil and natural gas - Brazil
8.69 9.18 7.50 Including government take (4) 8.62 7.04
3.61 4.04 3.06 Excluding government take (4) 3.48 3.04
2.43 2.74 2.48 Crude oil and natural gas - International 2.46 2.08
Refining costs (U.S. dollars per boe)
1.07 1.53 0.81 Brazil 1.17 0.91
1.17 1.29 0.92 International 1.17 0.94
Refining and marketing operations (Mbpd)
2,103 2,103 2,022 Primary Processed Installed Capacity 2,103 2,022
Brazil
1,974 1,974 1,931 Installed capacity 1,974 1,931
1,643 1,584 1,583 Primary throughput 1,603 1,622
84% 81% 82% Utilization 82% 84%
International
129 129 91 Installed capacity 129 91
96 94 64 Primary throughput 94 63
75% 73% 71% Utilization 73% 69%
Domestic crude oil as % of total feedstock
80 79 77 processed 80 79
Imports (Mbpd)
360 310 298 Crude oil imports 319 326
125 57 213 Oil product imports 105 216
91 102 72 Import of gas, alcohol and others 89 64
Exports (Mbpd)
242 260 212 Crude oil exports 233 233
214 184 182 Oil product exports 213 206
13 2 4 Fertilizer and other exports 6 10
------------ ---------- ----------- ------------- ------------
107 23 185 Net imports 61 157
Sales Volume (thousand bpd)
1,542 1,537 1,608 Oil Products 1,510 1,600
39 36 74 Alcohol and Others 33 44
194 190 178 Natural Gas 177 156
------------ ---------- ----------- ------------- ------------
1,775 1,763 1,860 Total 1,720 1,800
440 457 500 Distribution 435 467
(385) (424) (443) Inter-company sales (393) (425)
------------ ---------- ----------- ------------- ------------
1,830 1,796 1,917 Total domestic market 1,762 1,842
469 446 398 Exports 452 449
219 227 180 International sales 242 79
121 138 109 Other operations (5) 141 129
------------ ---------- ----------- ------------- ------------
809 811 687 Total international market 835 657
------------ ---------- ----------- ------------- ------------
2,639 2,607 2,604 Total 2,597 2,499
------------ ---------- ----------- ------------- ------------
(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 increased 2.7% to 1,540 thousand barrels
per day for 2003, as compared to 1,500 thousand barrels per day for 2002,
largely due to the start-up of new wells in the Marlim, Espadarte (ESPF) and
Albacora fields and installation of the production system in the Marlim Sul
field. The start-up of FPSO Brazil in the Roncador field in December 2002, and
the start-up of production in the Jubarte field in October 2002 and the Coral
field in February 2003, also contributed to increased production for 2003.
International crude oil and NGL production increased to 161 thousand barrels per
day for 2003, as compared to 35 thousand barrels per day for 2002, principally
due to the inclusion of production from Petrolera Santa Fe, 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.) in Argentina, Ecuador, Venezuela and Bolivia into our production results.
Part of this increase was offset by the reduced production in mature fields in
Angola, Colombia and the United States.
Reserves
Our proved reserves in Brazil, estimated by management in accordance with the
rules and regulations of the U.S. Securities and Exchange Commission (the
"SEC"), amounted to 10.40 and 10.05 billion barrels of oil equivalent for 2003
and 2002, respectively. Total production reached 615 million barrels of oil
equivalent for 2003, as compared to 604 million barrels of oil equivalent for
2002. As of December 31, 2003, our proved reserves to production ratio was 16.9
years.
Lifting Costs
Our lifting costs in Brazil, excluding government take, increased 14.5% to U.S.$
3.48 per barrel of oil equivalent for 2003, from U.S.$ 3.04 per barrel of oil
equivalent for 2002. This increase was primarily related to increases in sea and
air transport expenses incurred in connection with our production operations.
Lifting costs also rose because of (1) increased consumption of materials and
maintenance services at ocean terminals, (2) higher expenses associated with
equipment and installation that provide operational support for these
activities, (3) salaries, benefits and charges incurred in connection with
salary readjustments for our larger workforce and (4) updating actuarial
calculations of postretirement benefits obligations.
Our lifting costs in Brazil, including government take (comprised of royalties,
special government participation and rental of areas), increased 22.4% to U.S.$
8.62 per barrel of oil equivalent for 2003, from U.S.$ 7.04 per barrel of oil
equivalent for 2002, due to the new special participation charge assessed to the
greater volume of production from the Marlim Sul field, the inclusion of the
Canto do Amaro and Roncador fields as fields subject to the special
participation tax and to the increase in domestic reference prices for domestic
crude oil.
Our international lifting costs increased 18.3% to U.S.$ 2.46 per barrel of oil
equivalent for 2003, as compared to U.S.$ 2.08 per barrel of oil equivalent for
2002. This increase was primarily due to the incorporation of the higher unit
lifting costs of Petrolera Santa Fe, PELSA and PEPSA, as well as the higher unit
lifting cost associated with the start of production of the San Antonio block in
Bolivia. This increase was partially offset by the decrease in maintenance
expenses at the Arauca field and the reduced consumption of natural gas and
diesel oil at the Upia field, both in Colombia.
Refining costs
Domestic unit refining costs increased 28.6% to U.S.$ 1.17 per barrel of oil
equivalent for 2003, as compared to U.S.$ 0.91 per barrel of oil equivalent for
2002, principally due to the higher costs of chemical products and catalyzers,
higher labor costs and higher costs for technical services to improve our
operating performance as well as planned stoppages at our refineries.
International unit refining costs increased 24.5% to U.S.$ 1.17 per barrel of
oil equivalent for 2003, as compared to U.S.$ 0.94 per barrel of oil equivalent
for 2002. This increase was primarily due to the incorporation of the higher
unit refining costs of PELSA and PEPSA in Argentina, as well as increased
expenses related to maintenance at the catalytic cracker units and boilers of
Eg3, our Argentine subsidiary that focuses on distribution.
Sales Volume
Our domestic sales volume, consisting primarily of sales of diesel oil,
gasoline, jet fuel, naphtha, fuel oil and liquefied petroleum gas, decreased
4.3% to 1,762 barrels per day for 2003, as compared to 1,842 barrels per day for
2002. The decrease in sales volume was primarily due to the contraction of the
Brazilian economy and the consequent loss of purchasing power among the
population.
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We earn income from:
o domestic sales, which consist of sales of crude oil and oil products (such
as diesel oil, gasoline, jet fuel, naphtha, fuel oil and liquefied
petroleum gas), natural gas and petrochemical products;
o export sales, which consist primarily of sales of crude oil and oil
products;
o international sales (excluding export sales), which consist of sales of
crude oil, natural gas and oil products that are purchased, produced and
refined abroad; and
o other sources, including services, investment income and foreign exchange
gains.
Our expenses include:
o costs of sales (which is comprised of labor expenses, cost of operating and
purchases of crude oil and oil products and others); maintaining and
repairing property, plants and equipment; depreciation and amortization of
fixed assets and depletion of oil fields, and costs of exploration;
o selling, general and administrative expenses; and
o interest expense, monetary and foreign exchange losses.
Fluctuations in our financial condition and results of operations are driven by
a combination of factors, including:
o the volume of crude oil, oil products and natural gas we produce and sell;
o changes in international prices of crude oil and oil products, which are
denominated in U.S. dollars;
o related changes in domestic prices of crude oil and oil products, which are
denominated in Reais;
o Brazilian political and economic conditions;
o fluctuations in the Real/U.S. dollar exchange rate; and
o the amount of taxes and duties that we are required to pay with respect to
our operations, by virtue of our status as a Brazilian company and our
involvement in the oil and gas industry.
RESULTS OF OPERATIONS FOR 2003 COMPARED TO 2002
The comparison between our results of operations for 2003 and 2002 has been
affected by the 5.2% rise in the average Real/U.S. dollar exchange rate for 2003
as compared to the average Real/U.S. dollar exchange rate for 2002. For ease, we
refer to this change in the average exchange rate as the "5.2% decrease in the
value of the Real against the U.S. dollar in 2003, as compared to 2002."
Revenues
Net operating revenues increased 36.2% to U.S.$ 30,797 million for 2003, as
compared to U.S.$ 22,612 million for 2002. This increase was primarily
attributable to the alignment in 2003 of prices of certain oil products in the
Brazilian market with international prices of such products prevailing at the
end of 2002. The increase in net operating revenues was also attributable, to a
lesser extent, to an increase in sales volume outside Brazil (international
sales), which includes sales conducted by PEPSA and PELSA. This increase was
partially offset by a 4.3% reduction in sales volume in the domestic market,
primarily due to a decrease in Brazilian consumer demand.
Consolidated sales of products and services increased 29.4% to U.S.$ 42,690
million for 2003, as compared to U.S.$ 32,987 million for 2002, primarily as a
result of the increase in the price of certain oil products in the international
markets and the increase in sales volume outside Brazil (international sales).
Included in sales of products and services are the following amounts which we
collected on behalf of the Brazilian federal or state governments:
o Value-added and other taxes on sales of products and services and social
security contributions. These taxes increased 21.1% to U.S.$ 6,348 million
in 2003, as compared to U.S.$ 5,241 million in 2002, primarily due to the
increase in sales of products and services; and
o CIDE, the per-transaction tax due to the federal government, which
increased 8.0% to U.S.$ 5,545 million in 2003, as compared to U.S.$ 5,134
million in 2002. This increase was primarily attributable to the increase
in sales of products and an increase in the CIDE rate charged on certain
oil products. The increase was partially offset by the effect of the 5.2%
decrease in the value of the Real against the U.S. dollar in 2003, as
compared to 2002.
Cost of sales
Cost of sales for 2003 increased 34.0% to U.S.$ 15,416 million, as compared to
U.S.$ 11,506 million in 2002. This increase was principally a result of:
o an increase in taxes and charges imposed by the Brazilian government, which
amounted to U.S.$ 3,081 million in 2003, as compared to U.S.$ 2,014 million
in 2002. These taxes and charges included the special participation charge
(an additional charge payable in the event of high production and/or
profitability from our fields), which increased to U.S.$ 1,625 million in
2003, as compared to U.S.$ 917 million in 2002, as a result of our
increased production of crude oil during 2003, the inclusion of the Canto
do Amaro and Roncador fields as fields subject to the special participation
tax and the increase in domestic reference prices for domestic crude oil;
o a net increase in cost of sales outside Brazil, excluding PEPSA and PELSA,
of approximately U.S.$ 800 million, attributable to an increase in our
sales volume, lifting costs and prices in the international markets;
o a net increase of U.S.$ 634 million attributable to increased consumption
of materials and maintenance services at ocean terminals, higher expenses
associated with oil transport lines, including equipment and installation
that provide operational support for these activities, and salaries,
benefits and charges incurred in connection with salary readjustments for
our larger workforce;
o a U.S.$ 561 million increase in the cost of imports primarily attributable
to the increase of crude oil and oil product prices in the international
markets; and
o a U.S.$ 431 million increase in costs associated with the consolidation of
PEPSA and PELSA.
These increases were partially offset by:
o a decrease of approximately U.S.$ 379 million in cost of sales related to
the 4.3% reduction in our domestic sales volumes; and
o a decrease of U.S.$ 39 million in cost of sales as expressed in U.S.
dollars caused by the 5.2% decrease in the value of the Real against the
U.S. dollar in 2003, as compared to 2002.
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 decreased 7.5% to U.S.$ 1,785 million for
2003, as compared to U.S.$ 1,930 million for 2002. This decrease was primarily
attributable to the 5.2% decrease in the value of the Real against the U.S.
dollar in 2003, as compared to 2002, and to the effect of the adoption of SFAS
143 in 2003. In 2002, U.S.$ 284 million in abandonment costs were recognized as
depreciation, depletion and amortization in accordance with SFAS 19. In 2003, as
result of the adoption of SFAS 143, U.S.$ 21 million of depreciation on the
asset retirement obligations was recorded under depreciation, depletion and
amortization, while accretion expenses was recorded under exploration, including
exploratory dry holes. The decrease in depreciation, depletion and amortization,
was partially offset by an increase of depreciation, depletion and amortization
expenses of approximately U.S.$ 182 million incurred in connection with the
activities of PEPSA and PELSA.
Exploration, including exploratory dry holes
Exploration costs, including exploratory dry holes increased 17.7% to U.S. $ 512
million for 2003 as compared to U.S.$ 435 million for 2002. This increase was
primarily attributable to the increase of approximately U.S.$ 49 million in
exploration costs, including exploratory dry holes in connection with the
consolidation of PEPSA and PELSA and the recognition of U.S.$ 43 million in
accretion expense associated with abandonment costs. The increase in exploration
costs, including exploratory dry holes, was partially offset by the effect of
the 5.2% decrease in the value of the Real against the U.S. dollar in 2003, as
compared to 2002.
Impairment of oil and gas properties
For 2003, we recorded an impairment charge of U.S.$ 70 million, as compared to
an impairment charge of U.S.$ 75 million for 2002. In 2003, the impairment
charge was related to certain of our oil and gas producing properties in Brazil,
Colombia and Angola. In 2002, the impairment charge was related to certain of
our oil and gas producing properties in Brazil and Angola. These charges were
recorded based upon our annual assessment of our fields using prices consistent
with those used in our overall strategic plan and discounted at a rate of 13%, a
rate consistent with the rate used for internal project valuations.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 20.1% to U.S.$ 2,091
million for 2003, as compared to U.S.$ 1,741 million for 2002.
o Selling expenses increased 5.6% to U.S.$ 1,020 million for 2003, as
compared to U.S.$ 966 million for 2002. This increase was primarily
attributable to the consolidation of PEPSA and PELSA, which resulted in a
U.S.$ 37 million increase in our 2003 selling expenses.
o General and administrative expenses increased 38.2% to U.S.$ 1,071 million
for 2003, as compared to U.S.$ 775 million for 2002. This increase was
primarily attributable to an increase of U.S.$ 65 million in expenses
related to technical consulting services from our increased outsourcing of
selected non-core general and administrative activities, an increase of
U.S.$ 41 million in expenses related to our profit sharing program, an
increase of U.S.$ 43 million in expenses related to employee training, an
increase of U.S.$ 57 million in general and administrative expenses
recognized in connection with the consolidation of PEPSA and PELSA and an
increase of U.S.$ 40 million in connection with the line by line
consolidation of three thermoelectric power plants, which were consolidated
in accordance with FIN 46. This increase in general and administrative
expenses was partially offset by the effect of the 5.2% decrease in the
value of the Real against the U.S. dollar in 2003, as compared to 2002.
Research and development expenses
Research and development expenses increased 36.7% to U.S.$ 201 million for 2003,
as compared to U.S.$ 147 million for 2002. This increase was primarily related
to our additional investments in programs for environmental safety, deepwater
and refining technologies of approximately U.S.$ 62 million, and was partially
offset by the effect of the 5.2% decrease in the value of the Real against the
U.S. dollar in 2003, as compared to 2002.
Equity in results of non-consolidated companies
Equity in results of non-consolidated companies registered a gain of U.S.$ 141
million for 2003, as compared to a loss of U.S.$ 178 million for 2002. This
increase was primarily attributable to:
o a gain of U.S.$ 62 million for 2003 from our investments in natural gas
distribution and petrochemical companies, as compared to a gain of U.S.$ 14
million for 2002;
o a gain of U.S.$ 59 million for 2003, as compared to a loss of U.S.$ 95
million for 2002, from our equity investments in Compania Mega, an
Argentine company that is engaged in natural gas activities, and which was
adversely affected by the devaluation of the Argentine Peso against the
U.S. dollar in 2002; and
o a gain of U.S.$ 21 million for 2003, as compared to a loss of U.S.$ 98
million for 2002, from our investments in thermoelectric power plants. The
equity results for 2003 do not include our interests in three
thermoelectric power plants that were consolidated in accordance with FIN
46.
Financial income
We derive financial income from several sources, including:
o 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 balances in U.S. dollar deposits;
o long-term Brazilian government securities we acquired in connection with
the privatization of our petrochemical assets; and
o Government receivables, primarily the Petroleum and Alcohol Account.
Financial income decreased 47.3% to U.S.$ 602 million for 2003, as compared to
U.S.$ 1,142 million for 2002. This decrease was primarily attributable to a
reduction in financial interest income from short-term investments, which
declined 79.5% to U.S.$ 163 million for 2003, as compared to U.S.$ 793 million
for 2002. The reduction in financial income was also attributable to the 5.2%
decrease in the value of the Real against the U.S. dollar for 2003, as compared
to 2002. This decrease was partially offset by an increase of financial income
of approximately U.S.$ 80 million resulting from the consolidation of PEPSA and
PELSA in our 2003 financial results.
Financial expense
Financial expense increased 61.1% to U.S.$ 1,247 million for 2003, as compared
to U.S.$ 774 million for 2002. This increase was primarily attributable to our
additional debt and an increase of approximately U.S.$ 194 million in financial
expenses resulting from the consolidation of PEPSA and PELSA in our 2003
financial results.
Monetary and exchange variation on monetary assets and liabilities, net
Monetary and exchange variation on monetary assets and liabilities, net
registered a gain of U.S.$ 509 million for 2003, as compared to a loss of U.S.$
2,068 million for 2002. Approximately 90% of our long-term indebtedness was
denominated in foreign currencies during each of 2003 and 2002. The fluctuation
in monetary and exchange variation on monetary assets and liabilities, net was
primarily attributable to the effect of the 18.2% appreciation of the Real
against the U.S. dollar during 2003, as compared to a 52.3% depreciation of the
Real against the U.S. dollar during 2002.
Employee benefit expense
Employee benefit expense consists of financial costs associated with expected
pension and health care costs. Our employee benefit expense increased 31.9% to
U.S.$ 595 million for 2003, as compared to U.S.$ 451 million for 2002. This rise
in costs was attributable to an increase of U.S.$ 166 million from the annual
actuarial calculation of our pension and health care plan liability. The
increase was partially offset by the effect of the 5.2% decrease in the value of
the Real against the U.S. dollar in 2003, as compared to 2002.
Other taxes
Other taxes, consisting of miscellaneous value-added, transaction and sales
taxes, decreased 7.5% to U.S.$ 333 million for 2003, as compared to U.S.$ 360
million for 2002. This decrease was primarily attributable to the 5.2% decrease
in the value of the Real against the U.S. dollar in 2003, as compared to 2002,
and the decrease of U.S.$ 61 million in the PASEP/COFINS taxes payable in
respect of foreign exchange gains on assets, resulting from transactions with
affiliates with assets denominated in foreign currencies.
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
nonrecurring charges. Other expenses, net for 2003 increased to an expense of
U.S.$ 1,026 million, as compared to an expense of U.S.$ 857 million for 2002.
The most significant charges for 2003 were:
o a U.S.$ 183 million loss related to our investments in certain
thermoelectric power plants resulting from our contractual obligations with
certain power plants to cover losses when decreased demand for power and
electricity lead to lower prices;
o a U.S.$ 198 million expense for general advertising and marketing expenses
unrelated to direct revenues;
o a U.S.$ 173 million expense for unscheduled stoppages of plant and
equipment;
o a U.S.$ 130 million expense for legal liability and contingencies related
to pending lawsuits. Please see Note 22 to our consolidated financial
statements;
o a U.S.$ 114 million expense for a lower of cost or market adjustment with
respect to turbines we originally expected to use in connection with our
thermoelectric projects, but which we no longer intend to use for such
projects;
o a U.S.$ 97 million provision for expected losses on the sale of property,
plant and equipment related to off-shore production;
o a U.S.$ 56 million increase in contractual losses from compliance with our
ship or pay commitments with respect to our investments in the OCP pipeline
in Ecuador; and
o a U.S.$ 55 million provision for tax assessments received from the
Instituto Nacional de Seguridade Social (National Social Security
Institute, or INSS). Please see Note 22 to our consolidated financial
statements.
The most significant charges for 2002 were:
o a U.S.$ 459 million loss related to our investments in certain
thermoelectric power plants;
o a U.S.$ 111 million expense for unscheduled stoppages of plant and
equipment;
o a U.S.$ 105 million provision for notifications of tax assessments received
from the INSS;
o a U.S.$ 96 million expense for general advertising and marketing expenses
unrelated to direct revenues; and
o a U.S.$ 29 million expense for regularization of the Petroleum and Alcohol
Account.
Income tax (expense) benefit
Income before income taxes, minority interest and accounting changes increased
to U.S.$ 8,773 million for 2003, as compared to U.S.$ 3,232 million for 2002. As
a result, we recorded an income tax expense of U.S.$ 2,663 million for 2003, as
compared to an expense of U.S.$ 1,153 million for 2002.
The reconciliation between the tax calculated based upon statutory tax rates to
income tax expense and effective rates is discussed in Note 4 to our
consolidated financial statements as of December 31, 2003.
Cumulative effect of change in accounting principle
In the first quarter of 2003, we registered 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 site restoration costs under SFAS 143, as
compared with the method required by SFAS 19 - Financial Accounting and
Reporting by Oil and Gas Producing Companies. Under SFAS 19, we had accrued
upstream site restoration costs ratably over the productive lives of the assets.
Under SFAS 143, we record the fair value of asset retirement obligations as
liabilities on a discounted basis when they are incurred, which is typically at
the time the related assets are installed. The income adjustment described above
resulted from reversing the higher liability accumulated under SFAS 19 in order
to adjust it to a lower present value amount resulting from transition to SFAS
143. Please see Note 3 to our consolidated financial statements as of December
31, 2003.
INCREASE OF AUTHORIZED CAPITAL
On June 10, 2002, our shareholders approved a change in our by-laws authorizing
a capital increase of up to R$ 30 billion (U.S.$ 10.4 billion) by deliberation
of the Board of Directors through the issuance of up to 200 million shares.
The General Extraordinary Shareholders Meeting, held in conjunction with the
General Ordinary Meeting on March 29, 2004, approved an increase in authorized
capital from R$ 30 billion (U.S.$ 10.4 billion) to R$ 60 billion (U.S.$ 20.8
billion).
THERMOELECTRIC PLANT OBLIGATIONS
As a result of adopting FIN 46 at December 31, 2003, we now consolidate 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 our financial condition. For the other three thermoelectric
plants, we were deemed the primary beneficiary because of contractual
obligations concerning third party interests that required us to bear energy
market risk.
The consolidation of the three thermoelectrics formerly treated as capital
leases resulted in U.S.$ 375 million being reclassified from capital lease
obligations to long-term debt obligations. The impact of changing the
obligations related to these three plants from the minimum value of future lease
payments to the debt outstanding with third party lenders was immaterial. At
December 31, 2003, the consolidation of the three thermoelectrics previously
accounted for as contractual obligations concerning third party interests
resulted in an increase to assets and long-term obligations of U.S.$ 1,142
million.
At December 31, 2002, we had commitments with thermoelectric plants related to
(a) the supply of natural gas for the production of energy and the purchase of
all or a portion of the energy generated by these plants and (b) commitments to
reimburse certain allocations as defined by the Consortium Agreements. At
December 31, 2002, the recorded provision for future losses related to our
energy business amounted to U.S.$ 205 million. On May 7, 2003, the Executive
Board authorized an increase in the above-mentioned accounting provision of an
additional U.S.$ 205 million, primarily due to depressed sales of energy
following the energy rationing program and the lack of a well-defined regulatory
framework for the energy sector. The provisions for future losses made in 2002
and early 2003, totaling U.S.$ 410 million, were utilized during the course of
2003.
At December 31, 2003, as a result of the adoption of FIN 46 and the
consolidation of the six thermoelectric plants, it is no longer necessary to
recognize any liability for future payments expected to be made under the
agreements with the sponsors of these six thermoelectric plants. We will now
recognize any losses from operations of these six thermoelectric plants if and
when they occur.
The following chart summarizes amounts recognized in connection with our
participation in the Brazilian Government's Thermoelectric Priority Energy
Program for 2003 and 2002:
U.S.$ million
2003 2002
--------------- --------------
Beginning balance as of January 1, 205
Provision during 2002 for potential losses during 2003 201
Additional Provision in March of 2003 for potential losses during 2003 205
Cumulative Translation Adjustments 57 4
Losses realized during 2003 (445)
Excess of provision estimated in 2002 (22)
--------------- --------------
Ending balance as of December 31, 205
=============== ==============
Amounts recognized in our financial results:
Losses during the year 205 258
Provision during 2002 for potential losses during 2003 (1) 201
Excess of provision estimated for 2003 (22)
--------------- --------------
Total effect on our financial results 183 459
=============== ==============
(1) As a result of the adoption of FIN 46 in our December 31, 2003 annual
financial statements, no provision for losses relating to thermoelectric power
plants to be incurred in 2004 was booked.
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, we, through an indirectly controlled company, signed an
agreement to purchase 58.62% of the capital of PEPSA and 39.67% of the capital
of PELSA which together with PEPSA's interests brings our ownership interest in
PELSA to 50.73%. On May 13, 2003, the Argentine antitrust authorities approved
these purchases.
The acquisitions of PEPSA and PELSA were recorded using the purchase method of
accounting.
Because the statements of income of PEPSA and PELSA for the period from May 13,
2003 to May 31, 2003 are not available, we have consolidated the statements of
income of PEPSA and PELSA as of June 1, 2003. We believe that the inclusion of
the statements of income of PEPSA and PELSA for the period from May 13, 2003 to
May 31, 2003 would not have materially affected our net income for 2003.
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
U.S.$ million
Year ended December 31,
2003 2002
---------------------------------- ---------------------------------
Pro forma Pro forma
As reported (unaudited) As reported (unaudited)
--------------- ----------------- --------------- ----------------
Net operating revenues 30,797 31,350 22,612 23,736
Costs and expenses (20,075) (20,435) (15,834) (16,675)
Financial expenses, net (136) (344) (1,700) (2,442)
Others (1,813) (1,797) (1,846) (1,832)
Income tax expense (2,663) (2,665) (1,153) (1,108)
Minority interest (248) (260) 232 382
Cumulative effect of change in accounting
principles, net of taxes 697 697
Net income for the period 6,559 6,549 2,311 2,061
Basic and diluted earnings per share 5.98 5.97 2.13 1.90
BUSINESS SEGMENTS
NET INCOME BY BUSINESS SEGMENT
U.S. $ million
Year ended December 31,
2003 2002
Exploration and Production 5,504 3,413
Supply 1,738 711
Gas and Energy (196) (190)
International (1) 101 (114)
Distribution 138 91
Corporate (496) (1,280)
Eliminations (230) (320)
------------------ ---------------------
Net income 6,559 2,311
================== =====================
(1) At December 31, 2003, the international business segment includes the
Argentine operations of Petrolera Santa Fe (acquired in October 2002),
PEPSA and PELSA (both acquired in May 2003).
Exploration and Production
Our exploration and production segment includes our exploration, development and
production activities in Brazil, as well as sales of crude oil and natural gas
in the domestic and foreign markets.
Consolidated net income for our exploration and production segment increased
61.3% to U.S.$ 5,504 million for 2003, as compared to U.S.$ 3,413 million for
2002. This increase was primarily attributable to:
o a U.S.$ 2,652 million increase in net operating revenues as a result of the
increase in the price of crude oil in the international markets and a 2.7%
increase in production of crude oil, NGL and natural gas;
o the cumulative effect of a change in accounting principle related to future
liabilities for asset retirement obligations, which led to an increase in
our net income of U.S.$ 697 million, net of taxes;
o a U.S.$ 626 million reduction in financial expenses, net primarily related
to the effects of the 18.2% appreciation of the Real against the U.S.
dollar during 2003, as compared to a 52.3% depreciation of the Real against
the U.S. dollar during 2002; and
o a U.S.$ 423 million reduction in depreciation, depletion and amortization
primarily attributable to the 5.2% decrease in the value of the Real
against the U.S. dollar in 2003, as compared to 2002, as well as the
beneficial effect of adopting SFAS 143, as described in Note 3 to our
consolidated financial statements.
These effects were partially offset by a U.S.$ 1,325 million increase in cost of
sales, primarily composed of:
o an increase of approximately U.S.$ 152 million in costs related to crude
oil, natural gas and NGL volumes sold or transferred to other business
segments; and
o an increase of approximately U.S.$ 1,067 million in taxes and charges
imposed by the Brazilian government.
Supply
Our supply segment includes refining, logistic, transportation and the purchase
of 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.
Consolidated net income for our supply segment increased to U.S.$ 1,738 million
for 2003, as compared to U.S.$ 711 million for 2002.
This increase was primarily attributable to an increase of U.S.$ 6,377 million
in net operating revenues. This increase in net operating revenues was primarily
due to the alignment in 2003 of prices of certain oil products in the Brazilian
market with international market prices of such products at the end of 2002 and
to our refineries' increased processing of higher value added products.
This increase was partially offset by the increase of U.S.$ 4,702 million in
cost of sales, mainly due to the increase in import prices of crude oil and oil
products and increases in prices of products transferred from other segments,
notwithstanding the following facts:
o the 6.2% decrease in volume of sales within the supply segment as a result
of a decrease in Brazilian consumer demand;
o the higher participation of domestic crude oil in the total feedstock
processed (80% in 2003 and 79% in 2002); and
o the streamlining of logistical expenses, mainly freight costs.
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 electric energy purchase and sale activities
as well as investments in domestic natural gas transportation companies, state
owned natural gas distributors and thermoelectric companies.
Our gas and energy segment registered a net loss of U.S.$ 196 million for 2003,
as compared to a net loss of U.S.$ 190 million for 2002. This result was
affected primarily by the following factors:
o a U.S.$ 467 million increase in losses with minority interest, primarily
related to the effects on the net loss of Transportadora Brasileira
Gasoduto Bolivia-Brasil S.A. - TBG related to the 18.2% appreciation of the
Real against the U.S. dollar during 2003, as compared to a 52.3%
depreciation of the Real against the U.S. dollar during 2002;
o a U.S.$ 451 million increase in cost of sales primarily due to a 13.5%
increase in the volume of natural gas sold and to the start of operations
of some thermoelectric power plants at the end of 2003;
o a U.S.$ 114 million expense for a lower of cost or market adjustment in gas
turbines;
o a U.S.$ 562 million increase in net operating revenues primarily due to the
increase of natural gas prices and to the 13.5% increase in the volume of
natural gas sold;
o a U.S.$ 183 million decrease in losses related to our investments in
thermoelectric power plants; and
o a U.S.$ 150 million increase in the results of non-consolidated companies,
primarily due to gains from our investments in natural gas distribution
companies and the adoption of FIN 46, resulting in the consolidation of
three thermoelectric power plants for which we recorded losses in equity in
2002.
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 increased to a net gain of
U.S.$ 101 million for 2003, as compared to a net loss of U.S.$ 114 million for
2002. This increase was primarily attributable to:
o a U.S.$ 1,342 million increase in net operating revenues resulting from the
increase of oil products prices in the international markets and an
increase in the volume of sales conducted by PEPSA and PELSA; ando
o a U.S.$ 157 million increase in the results of non-consolidated companies,
primarily due to a gain of U.S.$ 59 million in our equity investments in
Compania Mega during 2003, as compared to a loss of U.S.$ 95 million during
2002.
This increase was partially offset by the following factors, primarily
attributable to PEPSA and PELSA's operations:
o a U.S.$ 586 million increase in cost of sales;
o a U.S.$ 182 million increase in depreciation, depletion and amortization;
o a U.S.$ 160 million increase in debt expense net;
o a U.S.$ 118 million increase in selling, general and administrative
expenses;
o a U.S.$ 69 million increase in exploration, including exploratory dry holes
and impairment; and
o a U.S.$ 56 million increase in contractual losses from compliance with our
ship or pay commitments with respect to our investments in the OCP pipeline
in Ecuador.
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.
Consolidated net income for our distribution segment increased 51.6% to U.S.$
138 million for 2003, as compared to U.S.$ 91 million for 2002. This increase
was primarily attributable to a U.S.$ 1,453 million increase in net operating
revenues as a result of the increase of oil products sales prices to refineries
(we increased these sales prices in order to maintain our gross margin).
This effect was partially offset by a 6.0% decrease in the volume of oil
products sold within the distribution segment in 2003 as compared to the volume
sold in 2002; the decrease in our market share in the Brazilian oil products
market to 31.5% for 2003, as compared to 32.9% for 2002; and the increase of
U.S.$ 1,396 million in our cost of sales in 2003, reflecting the increase in
prices of oil products purchased from refineries.
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
pension and health care plans.
Consolidated loss for the units that make up our corporate segment decreased
61.3% to a net loss of U.S.$ 496 million during 2003, as compared to a net loss
of U.S.$ 1,280 million during 2002. This decrease was primarily attributable to
the reduction of U.S.$ 1,268 million in financial expenses net, primarily
attributable to the effect of the 18.2% appreciation of the Real against the
U.S. dollar during 2003, as compared to a 52.3% depreciation of the Real against
the U.S. dollar during 2002.
This decrease was partially offset by:
o a U.S.$ 160 million increase in general and administrative expenses,
primarily due to higher expenses related to technical consulting services
in non-core general and administrative activities and employee training
expenses;
o a U.S.$ 160 million increase in expenses related to employee benefits; and
o a U.S.$ 73 million increase in expenses related to institutional relations
and cultural projects.
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. In 2004, our major cash needs
include announced capital expenditures of U.S.$ 5,066 million.
Financing Strategy
The objective of our financing strategy is to help us achieve the targets set
forth in our Strategic Plan, which provides for capital expenditures of U.S.$
27.1 billion from 2004 to 2007. 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.
To that end, we took advantage of market conditions in 2003 to extend our
maturity profile and capture decreased financing costs. We went from issuing a
5-year note bearing an interest rate of 9.0% in the beginning of the year to
issuing a 15-year note with an 8.375% coupon on December 10, 2003. At the time
of the issuance, the 15-year maturity was a record for Brazilian corporations.
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 Dispendio 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.
In accordance with Senate Resolution N(0) 96/89 the level of our borrowings is
subject to an annual maximum amount, exclusive of certain permitted commercial
obligations, based on shareholders' equity, debt service expense and other
factors as of the prior year and subject to certain ongoing quarterly
adjustments. For 2003, the maximum level of debt that we and our Brazilian
subsidiaries could incur was set at U.S.$ 932 million. The maximum level was set
at U.S.$ 824 million for 2002 and U.S.$ 1,211 million for 2001.
All of the foreign currency denominated debt of we and 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 December 31, 2003, we had cash and cash equivalents of U.S.$ 9,610 million
compared to U.S.$ 3,301 million at December 31, 2002. This increase in cash was
a result of:
o the increase in our net operating revenues during 2003, which was primarily
driven by the increase in crude oil prices;
o the proceeds from the issuance of greater amounts of debt in the
international capital markets; and
o the adoption of FIN 46 which resulted in an increase in cash and cash
equivalents of U.S.$ 1,049 million.
Operating activities provided net cash flows of U.S.$ 8,569 million in 2003, as
compared to U.S.$ 6,287 million in 2002. This increase was due primarily to a
36.2% increase in net operating revenues.
Net cash used in investing activities decreased to U.S.$ 5,519 million in 2003,
as compared to U.S.$ 6,656 million in 2002. This decrease was due primarily to
adoption of FIN 46.
Financing activities provided net cash flows of U.S.$ 2,376 million for 2003, as
compared to U.S.$ 1,614 million in net cash used in 2002. This increase was due
primarily to net issuances of short and long-term debt, which was partially
offset by an increase in our repayments of short and long-term debt.
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 December 31, 2003, our short-term
debt (excluding current portions of long-term obligations) increased to U.S.$
1,329 million as compared to U.S.$ 671 million at December 31, 2002. This
increase was due to the inclusion of PEPSA's short term debt in our consolidated
balance sheets and our increased use of short-term credit facilities. 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 Economico e Social (the National Bank for
Economic and Social Development, or BNDES) and other financial institutions.
Outstanding long-term debt, plus the current portion of our long-term debt,
totaled U.S.$ 13,033 million at December 31, 2003, as compared to U.S.$ 7,714
million at December 31, 2002. Included in these figures at December 31, 2003 are
the following international debt issuances:
Notes Principal Amount
9.00% Notes due 2004(1) EUR 91 million
10.00% Notes due 2006 U.S.$250 million
6.625% Step Down Notes due 2007(1) EUR 134 million
9.125% Notes due 2007(2) U.S.$500 million
9.875% Notes due 2008(2) U.S.$450 million
6.750% Senior Trust Certificates due 2010(3) U.S.$95 million
Floating Rate Senior Trust Certificates due 2010(3) U.S.$55 million
9.750% Notes due 2011(2) U.S.$600 million
6.600% Senior Trust Certificates due 2011(3) U.S.$300 million
Floating Rate Senior Trust Certificates due 2013(3) U.S.$300 million
4.750% Senior Exchangeable Notes due 2007(4) U.S.$338 million
Global Step-up Notes due 2008(5) U.S.$400 million
9.125% Global Notes due 2013(6) U.S.$750 million
8.375% Global Notes due 2018(6) U.S.$750 million
3.748% Senior Trust Certificates due 2013(3) U.S.$200 million
6.436% Senior Trust Certificates due 2015(3) U.S.$550 million
9.375% Notes due 2013(7) U.S.$100 million
__________
(1) Euro; U.S.$1.2635 = EUR 1.00 at December 31, 2003.
(2) Issued by PIFCo to finance oil trading activities, with support from us
through a standby purchase agreement and with insurance against 18 months of
inconvertibility and transfer risk for interest payments.
(3) Issued in connection with our exports prepayment program.
(4) Issued by PIFCo on October 17, 2002 in connection with our acquisition of
PEPSA.
(5) The Global Step-up Notes bear interest from March 31, 2003 at a
rate of 9.00 % per year until
April 1, 2006 and at rate of 12.375% per year thereafter, with interest
payable semi-annually, and were issued by PIFCo to finance oil trading
activities, with support from us through a standby purchase agreement.
(6) Issued by PIFCo for general corporate purposes including oil trading
activities, with support from us through a standby purchase agreement.
(7) Issued by PEPSA on October 31, 2003 to cancel existing liabilities.
On March 31, 2003, PIFCo issued U.S.$400 million of 9.00% Global Step-Up Notes
due 2008. These notes bear interest from March 31, 2003 at the rate of 9.00% per
year until April 1, 2006 and at a rate of 12.375% thereafter. This transaction
represented our first issuance under our U.S.$ 8 billion universal shelf
registration statement filed with the SEC in July 2002.
On May 21, 2003, Petrobras Finance Ltd., a subsidiary of PIFCo, received U.S.$
550 million in 6.436% Senior Trust Certificates due 2015, and U.S.$ 200 million
in 3.748% Senior Trust Certificates due 2013 in connection with our exports
prepayment program. On July 2, 2003, PIFCo issued Global Notes in an aggregate
principal amount of U.S.$ 500 million due July 2013. The notes bear interest at
the rate of 9.125% per annum, payable semiannually. On September 18, 2003, PIFCo
issued an additional U.S.$ 250 million in Global Notes, which form a single
fungible series with its U.S.$ 500 million Global Notes due July 2013. On
December 10, 2003, PIFCo issued U.S.$ 750 million of 8.375% Global Notes due
2018.
We describe the average interest rates on our long-term debt in Note 12 to our
consolidated financial statements.
In addition to issuing foreign currency denominated debt in the international
capital markets, we have historically issued Real-denominated debentures in the
local capital markets. These debentures are floating-rate obligations, and the
coupon is based on an index plus a fixed spread.
We did not issue any Real-denominated debentures in 2003. In 2002, we issued R$
1,525 million (U.S.$ 432 million) in Real-denominated debentures. Outstanding
debentures totaled U.S.$ 928 million at December 31, 2003, as compared to U.S.$
688 million at December 31, 2002.
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". The special purpose companies established to finance these
projects are consolidated in accordance with FIN 46. Under the contractual
arrangements, we are responsible for completing the development of the oil and
gas fields, operating the fields, paying all operating expenses relating to the
projects and remitting a portion of the net proceeds generated from the fields
to fund the special purpose companies' debt and return on equity payments. At
the end of each financing project, we have the option to purchase the project
assets from the special purpose company or, in some cases, acquire control over
the special purpose company itself.
During 2003, we made capital expenditures of U.S.$ 1,316 million (20.1% of our
total capital expenditures) in connection with exploration and development
projects in the Campos Basin, which are being financed through project
financings.
The following summarizes the liabilities related to the projects that were in
progress at December 31, 2003 and 2002:
U.S.$ million
As of December 31,
----------------------------------
2003 2002
----------------- ---------------
Barracuda/Caratinga 2,555 1,481
Cabiunas 857 673
Espadarte/Voador/Marimba (EVM) 826 575
Marlim 680 635
Nova Marlim 475 508
Albacora 126 123
Pargo, Carapeba, Garoupa and Cherne (PCGC) 76 44
Malhas project 286
Langstrand Holdings S.A. 700
PDET Onshore 40
Repurchased securities (713)
----------------- ---------------
5,908 4,039
Current portion of project financings (842) (239)
----------------- ---------------
5,066 3,800
================= ===============
At 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.$ 713 million related to project financings. These securities are considered
to be extinguished, and thus the related amounts, together with applicable
interest have been removed from the presentation of project finance.
At December 31, 2003, the long-term portion of project financings becomes due in
the following years:
U.S.$ million
-----------------------
2005 1,295
2006 838
2007 1,231
2008 569
2009 and thereafter 1,133
-----------------------
Total 5,066
=======================
Off Balance Sheet Arrangements
As noted above, all of our project financings are on-balance sheet. At December
31, 2003, 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.
Net Debt
Our net debt totaled U.S.$ 11,980 million at December 31, 2003, a 6.7% increase
from net debt of U.S.$ 11,229 million at December 31, 2002, primarily due to the
inclusion of PEPSA's and PELSA's net debt of U.S.$ 1,788 million in our net debt
totals and our issuance of U.S.$ 5,400 million in long-term debt in the
international capital markets during 2003. These increases were partially offset
by increase in cash and cash equivalents as a result of the increase in net cash
provided by operating activities. For a reconciliation of net debt to total
long-term debt, please see page 3.
Uses of Funds
Budgeted Capital expenditures
In 2003, we continued 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.$
6,551 million in 2003, a 33.4% increase from our investments in 2002.
Our increased capital expenditures in 2003 were primarily directed towards
increasing our production capabilities in the Campos Basin, modernizing our
refineries, expanding our pipeline transportation and distribution systems and,
to a lesser extent, investing in energy and gas related activities, including
investments in thermoelectric power plants. We spent U.S.$ 3,658 million (55.8%)
in 2003 in our domestic exploration and production activities, which includes
our exploration and production segment and our project financings.
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 2003 and 2002:
Activities
--------------------------------------------------------------------------------
U.S.$ million
Year ended December 31,
2003 2002
---------------- --------------
o Exploration and Production 3,658 3,156
o Supply 1,451 945
o Gas and Energy 694 268
o International:
o Exploration and Production 428 224
o Supply 18 8
o Distribution 33 2
o Gas and Energy 1 4
o Distribution 106 139
o Corporate 162 165
---------------- --------------
Total capital expenditures 6,551 4,911
================ ==============
Our Strategic Plan contemplates total budgeted capital expenditures of U.S.$
27.1 billion in the period from 2004 through 2007, approximately U.S.$ 22.7
billion of which will be directed towards our activities in Brazil, while U.S.$
4.4 billion will be directed to our activities abroad. We expect that the
majority of our capital expenditures from 2004 through 2007, approximately U.S.$
18.0 billion, will be directed towards exploration and production, of which
U.S.$ 14.2 billion are designated for our activities in Brazil.
We are in the process of reviewing our Strategic Plan and intend to release a
new version in April 2004 that could revise our forecasts for capital
expenditures for 2004-2007.
Dividends
Based on our financial results and cash available for distribution, the General
Shareholders' Meeting held on March 29, 2004 approved a distribution of
dividends of U.S.$ 1,955 million (U.S.$ 1.78 per share). The U.S.$ 1,127 million
already distributed to shareholders on February 13, 2004 in the form of interest
on capital was deducted from this amount. The dividend includes an additional
U.S.$ 436 million of interest on capital.
Risk Management Activities
We are exposed to a number of market risks arising in the normal course of
business. We may use derivative and non-derivative instruments to manage these
risks. For a description of our risk management activities, see Note 23 to our
consolidated financial statements.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2003.
The table does not include employee postretirement benefits, deferred income tax
or trade accounts payable.
Payments due by period
U.S.$ million
----------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 1-3 3-5 More than
year years years 5 years
------------- ------------- ------------- ------------- ------------
Long-Term Debt Obligations 13,033 1,145 2,458 3,376 6,054
Capital (Finance) Lease Obligations 2,025 388 619 500 518
Project Finance Obligations 5,908 842 2,133 1,800 1,133
Operating Lease Obligations 6,421 1,008 2,147 1,134 2,132
Purchase Obligations 360 267 15 14 64
------------- ------------- ------------- ------------- ------------
Total 27,747 3,650 7,372 6,824 9,901
============= ============= ============= ============= ============
Income Statement
(in millions of U.S. dollars, except for Year ended
share and per share data) December 31,
-------------------------------
3Q-2003 4Q-2003 4Q-2002 2003 2002
-------------- ------------ ------------ --------------- --------------
11,314 11,390 8,294 Sales of products and services 42,690 32,987
Less:
Value-added and other taxes on sales and
(1,629) (1,693) (1,354) services (6,348) (5,241)
(1,467) (1,548) (1,010) CIDE (5,545) (5,134)
-------------- ------------ ------------ --------------- --------------
8,218 8,149 5,930 Net operating revenues 30,797 22,612
(4,086) (4,358) (3,375) Cost of sales (15,416) (11,506)
(564) (463) (402) Depreciation, depletion and amortization (1,785) (1,930)
(110) (201) (134) Exploration, including exploratory dry holes (512) (435)
(43) (75) Impairment (70) (75)
(518) (669) (365) Selling, general and administrative expenses (2,091) (1,741)
(46) (64) (44) Research and development expenses (201) (147)
-------------- ------------ ------------ --------------- --------------
(5,324) (5,798) (4,395) Total costs and expenses (20,075) (15,834)
1 38 (169) Equity in results of non-consolidated companies 141 (178)
393 (4) 228 Financial income 602 1,142
(474) (217) (252) Financial expense (1,247) (774)
Monetary and exchange variation on monetary
(118) (32) (554) assets and liabilities, net 509 (2,068)
(129) (204) (106) Employee benefit expense (595) (451)
(78) (109) (43) Other taxes (333) (360)
(176) (270) (621) Other expenses, net (1,026) (857)
-------------- ------------ ------------ --------------- --------------
(581) (798) (1,517) (1,949) (3,546)
Income before income taxes and minority
2,313 1,553 18 interests and accounting change 8,773 3,232
-------------- ------------ ------------ --------------- --------------
Income tax expense:
(741) (346) (130) Current (2,599) (1,269)
371 (303) 327 Deferred (64) 116
-------------- ------------ ------------ --------------- --------------
(370) (649) 197 Total income tax expense (2,663) (1,153)
Minority interest in results of consolidated
(46) (10) (142) subsidiaries (248) 232
-------------- ------------ ------------ --------------- --------------
1,897 894 73 Net income before accounting change effect 5,862 2,311
-------------- ------------ ------------ --------------- --------------
Cumulative effect of accounting change, net of
income tax 697
-------------- ------------ ------------ --------------- --------------
1,897 894 73 Net income for the period 6,559 2,311
============== ============ ============ =============== ==============
Weighted average number of shares outstanding
634,168,418 634,168,418 634,168,418 Common/ADS 634,168,418 634,168,418
462,369,507 462,369,507 451,935,669 Preferred/ADS 462,369,507 451,935,669
Basic and diluted earnings per share
Common/ADS and Preferred/ADS
1.73 0.82 0.07 Before effect of change in accounting principle 5.35 2.13
1.73 0.82 0.07 After effect of change in accounting principle 5.98 2.13
============== ============ ============ =============== ==============
Selected Balance Sheet Data
(in millions of U.S. dollars, except for share data)
As of December 31,
-------------------------------
2003 2002
-------------- --------------
Assets
Current assets
Cash and cash equivalents 9,610 3,301
Accounts receivable, net 2,905 2,267
Inventories 2,947 2,540
Other current assets 2,438 2,214
-------------- --------------
Total current assets 17,900 10,322
Property, plant and equipment, net 30,805 18,224
Investments in non-consolidated companies and other investments 1,173 334
Other assets
Petroleum and Alcohol Account - Receivable from Federal Government 239 182
Government securities 283 176
Goodwill on PEPSA and PELSA 183
Advances to suppliers 416 450
Investment in PEPSA and PELSA 1,073
Prepaid Expenses 190 100
Others 2,423 1,293
-------------- --------------
Total other assets 3,734 3,274
Total assets 53,612 32,154
============== ==============
Liabilities and shareholders' equity
Current liabilities
Trade accounts payable 2,261 1,702
Short-term debt 1,329 671
Current portion of long-term debt 1,145 727
Current portion of project financings 842 239
Capital lease obligations 378 349
Other current liabilities 5,266 3,575
-------------- --------------
Total current liabilities 11,221 7,263
Long-term liabilities
Long-term debt 11,888 6,987
Project financings 5,066 3,800
Employee benefits obligation - Pension 1,895 1,363
Employee benefits obligation - Health care 1,580 1,060
Capital lease obligations 1,242 1,907
Thermoelectric liabilities 1,142
Other liabilities 2,059 609
-------------- --------------
Total long-term liabilities 24,872 15,726
Minority interest 367 (136)
Shareholders' equity Shares authorized and issued:
Preferred stock -2003 - 462,369,507 (2002 -451,935,669 shares) 2,973 2,459
Common stock - 2003 and 2002 - 634,168,418 shares 4,289 3,761
Reserves and others 9,890 3,081
-------------- --------------
Total shareholders' equity 17,152 9,301
============== ==============
Total liabilities and shareholders' equity 53,612 32,154
============== ==============
Statement of Cash Flows Data
(in millions of U.S. dollars)
Year ended December 31,
--------------------------------
3Q-2003 4Q-2003 4Q-2002 2003 2002
------------ ---------- ---------- ---------------- --------------
Cash flows from operating activities
1,897 894 73 Net income for the period 6,559 2,311
Adjustments to reconcile net income to net cash
provided by operating activities
599 475 327 Depreciation, depletion and amortization 1,805 1,951
Loss on property, plant and equipment and dry hole
83 98 107 costs 326 297
93 149 869 Foreign exchange and monetary loss (94) 2,714
Cumulative effect of accounting change, net of
income tax (697)
(326) 309 149 Others 266 (37)
Decrease (increase) in assets
133 (532) 111 Accounts receivable, net (477) (541)
Petroleum and Alcohol Account - Receivable from
(3) (2) (68) Federal Government (15) (157)
(14) 339 209 Inventories 244 (1,139)
199 (36) 22 Advances to suppliers 562 (797)
(18) (16) Interest receivable (157) (10)
(315) 164 212 Others (179) (487)
Increase (decrease) in liabilities
176 62 180 Trade accounts payable (156) 669
134 (75) 267 Taxes payable 60 441
(215) 501 200 Other liabilities 522 1,072
------------ ---------- ---------- ---------------- --------------
2,441 2,328 2,642 Net cash provided by operating activities 8,569 6,287
------------ ---------- ---------- ---------------- --------------
Cash flows from investing activities
(1,582) (2,437) (1,337) Additions to property, plant and equipment (6,551) (4,911)
(1,073) Share interest (1,073)
(17) 54 (302) Investments in thermoelectric (447)
1,049 Effect on cash as a result of adoption of FIN 46 1,049
(73) (153) Investments in non-consolidated companies (73) (153)
Effect on cash from merger with subsidiaries and
affiliates 231
(188) (26) Restricted deposits for legal proceedings (188) (84)
15 196 3 Others 13 12
------------ ---------- ---------- ---------------- --------------
(1,584) (1,399) (2,888) Net cash used in investing activities (5,519) (6,656)
------------ ---------- ---------- ---------------- --------------
715 1,455 (279) Cash flows from financing activities 2,376 (1,614)
------------ ---------- ---------- ---------------- --------------
------------ ---------- ---------- ---------------- --------------
1,572 2,384 (525) Increase (decrease) in cash and cash equivalents 5,426 (1,983)
------------ ---------- ---------- ---------------- --------------
Effect of exchange rate changes on cash and cash
(47) 102 214 equivalents 883 (2,076)
5,599 7,124 3,612 Cash and cash equivalents at beginning of period 3,301 7,360
------------ ---------- ---------- ---------------- --------------
7,124 9,610 3,301 Cash and cash equivalents at the end of period 9,610 3,301
============ ========== ========== ================ ==============
Income Statement by Segment
Year ended December 31, 2003
U.S.$ million
GAS
&
E&P SUPPLY ENERGY INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
STATEMENT OF INCOME
Net operating revenues to third parties 2,369 17,024 1,229 2,298 7,877 30,797
Inter-segment net operating revenues 13,329 6,695 250 129 138 (20,541)
------- ------- ------- ------- ------- ------- ------- -------
Net operating revenues 15,698 23,719 1,479 2,427 8,015 (20,541) 30,797
Cost of sales (6,154) (19,944) (1,045) (1,398) (7,257) 20,382 (15,416)
Depreciation, depletion and amortization (955) (397) (87) (288) (29) (29) (1,785)
Exploration, including exploratory dry
holes and impairment (452) (130) (582)
Selling, general and administrative
expenses (123) (732) (149) (208) (416) (554) 91 (2,091)
Research and development expenses (92) (50) (6) (53) (201)
------- ------- ------- ------- ------- ------- ------- -------
Cost and expenses (7,776) (21,123) (1,287) (2,024) (7,702) (636) 20,473 (20,075)
Equity in results of non-consolidated
companies 25 56 62 (2) 141
Financial income (expenses), net (317) 146 (78) (129) (62) 506 (202) (136)
Employee benefit expense (595) (595)
Other taxes (9) (24) (19) (25) (48) (208) (333)
Other expenses, net (224) (100) (387) (55) (1) (259) (1,026)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
minority interest and accounting
change 7,372 2,643 (236) 256 202 (1,194) (270) 8,773
Income tax benefits (expense) (2,506) (874) 196 (154) (63) 698 40 (2,663)
Minority interest (59) (31) (156) (1) (1) (248)
------- ------- ------- ------- ------- ------- ------- -------
Income before effect of change in
accounting principle 4,807 1,738 (196) 101 138 (496) (230) 5,862
Cumulative effect of change in
accounting principle, net of taxes 697 697
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) 5,504 1,738 (196) 101 138 (496) (230) 6,559
======= ======= ======= ======= ======= ======= ======= =======
Income Statement by Segment
Year ended December 31, 2002
U.S.$ million
GAS
&
E&P SUPPLY ENERGY INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
STATEMENT OF INCOME
Net operating revenues to third
parties 2,346 12,073 747 986 6,460 22,612
Inter-segment net operating
revenues 10,700 5,269 170 99 102 (16,340)
------- ------- ------- ------- ------- ------- ------- -------
Net operating revenues 13,046 17,342 917 1,085 6,562 (16,340) 22,612
Cost of sales (4,829) (15,242) (594) (812) (5,861) 15,832 (11,506)
Depreciation, depletion and
amortization (1,378) (358) (45) (106) (24) (19) (1,930)
Exploration, including
exploratory dry holes and
impairment (449) (61) (510)
Selling, general and
administrative expenses (177) (584) (54) (90) (442) (394) (1,741)
Research and development
expenses (74) (37) (5) (31) (147)
------- ------- ------- ------- ------- ------- ------- -------
(6,907) (16,221) (698) (1,069) (6,327) (444) 15,832 (15,834)
Cost and expenses
Equity in results of non-
consolidated companies 11 (94) (95) (178)
Financial income (expenses), net (943) (13) (18) 31 5 (762) (1,700)
Employee benefit expense (2) (14) (435) (451)
Other taxes (18) (9) (12) (36) (285) (360)
Other expenses, net (160) 5 (495) 14 (10) (231) 20 (857)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes and minority interest 5,036 1,104 (397) (46) 180 (2,157) (488) 3,232
Income tax benefits (expense) (1,623) (386) (104) (64) (58) 914 168 (1,153)
Minority interest (7) 311 (4) (31) (37) 232
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) 3,413 711 (190) (114) 91 (1,280) (320) 2,311
======= ======= ======= ======= ======= ======= ======= =======
Other Expenses, Net by Segment
Year ended December 31, 2003
U.S.$ million
---------------------------------------------------------------------------------
GAS
&
E&P SUPPLY ENERGY INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
------ --------- ---------- --------- ---------- ---------- -------- -------
Provisions for losses on financial exposure-
Thermoelectric power plants (183) (183)
Adjustment to market value of turbines for the
thermoelectric plants (114) (114)
Institutional Relations and Culture Projects (2) (27) (169) (198)
Stoppages on installations and production equipment (112) (61) (173)
Losses as a result of Legal Proceedings (10) (33) (16) (71) (130)
Losses on property, plant and equipment related
to Off-Shore production (97) (97)
Contractual losses with transport services
(Ship-or-Pay) (56) (56)
INSS Contingencies (52) (2) (1) (55)
Others 47 (2) (90) 17 26 (18) (20)
------ --------- ---------- --------- ---------- ---------- -------- -------
(224) (100) (387) (55) (1) (259) (1,026)
====== ========= ========== ========= ========== ========== ======== =======
Year ended December 31, 2002
U.S.$ million
----------------------------------------------------------------------------------
GAS
&
E&P SUPPLY ENERGY INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
-------- --------- ---------- -------- -------- ---------- ------- --------
Provisions for losses on financial exposure -
Thermoelectric power plants (459) (459)
Stoppages on installations and production
equipment (86) (25) (111)
INSS Contingencies (37) (29) (39) (105)
Institutional Relations and Culture Projects (96) (96)
Losses as a result of Legal Proceedings (22) (10) (26) (58)
Regularization of Petroleum and Alcohol accounts (29) (29)
Dividends 7 7
Others (15) 62 (36) 14 (10) (41) 20 (6)
-------- --------- ---------- -------- -------- ---------- ------- --------
(160) 5 (495) 14 (10) (231) 20 (857)
======== ========= ========== ======== ======== ========== ======= ========
Selected Balance Sheet Data by Segment
Year ended December 31, 2003
U.S.$ million
GAS
&
E&P SUPPLY 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 6 463 151 449 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
-------- ---------- --------- ----------- -------- ------------ ---------- ---------
Year ended December 31, 2002
U.S.$ million
GAS
&
E&P SUPPLY ENERGY INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
----------- --------- ---------- ---------- --------- ---------- --------- ---------
Current assets 1,181 4,323 819 736 973 3,249 (959) 10,322
----------- --------- ---------- ---------- --------- ---------- --------- ---------
Cash and cash equivalents 1 509 16 211 59 2,505 3,301
Other current assets 1,180 3,814 803 525 914 744 (959) 7,021
Investments in non-consolidated companies
and other investments 7 168 70 11 16 62 334
----------- --------- ---------- ---------- --------- ---------- --------- ---------
Property, plant and equipment, net 11,611 3,186 1,881 1,024 296 226 18,224
----------- --------- ---------- ---------- --------- ---------- --------- ---------
Non current assets 385 211 556 1,092 141 1,943 (1,054) 3,274
----------- --------- ---------- ---------- --------- ---------- --------- ---------
Petroleum and Alcohol Account 182 182
Government securities 176 176
Other assets 385 211 556 1,092 141 1,585 (1,054) 2,916
----------- --------- ---------- ---------- --------- ---------- --------- ---------
Total assets 13,184 7,888 3,326 2,863 1,426 5,480 (2,013) 32,154
=========== ========= ========== ========== ========= ========== ========= =========
Selected Data for International Segment
Year ended December 31, 2003
U.S.$ million
INTERNATIONAL
GAS
&
E&P SUPPLY ENERGY DISTRIB. CORPOR. ELIMIN. TOTAL
------- ----------- ----------- ----------- ----------- ----------- -----------
INTERNATIONAL
ASSETS 4,401 1,161 568 150 2,384 (1,990) 6,674
======= =========== =========== =========== =========== =========== ===========
STATEMENT OF INCOME
Net Operating Revenues 1,069 1,631 162 621 14 (1,070) 2,427
------- ----------- ----------- ----------- ----------- ----------- -----------
Net operating revenues to third parties 535 998 159 592 14 2,298
Inter-segment net operating revenues 534 633 3 29 (1,070) 129
------- ----------- ----------- ----------- ----------- ----------- -----------
Net income 54 50 50 (6) (59) 12 101
======= =========== =========== =========== =========== =========== ===========
Year ended December 31, 2002
U.S.$ million
INTERNATIONAL
GAS
&
E&P SUPPLY ENERGY DISTRIB. CORPOR. ELIMIN. TOTAL
---------- ----------- ----------- ----------- ----------- ----------- -----------
INTERNATIONAL
ASSETS 1,638 349 39 160 1,479 (802) 2,863
========== =========== =========== =========== =========== =========== ===========
STATEMENT OF INCOME
Net Operating Revenues 284 918 36 377 4 (534) 1,085
---------- ----------- ----------- ----------- ----------- ----------- -----------
Net operating revenues to third parties 96 473 36 377 4 986
Inter-segment net operating revenues 188 445 (534) 99
---------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (5) 32 (41) (100) (114)
========== =========== =========== =========== =========== =========== ===========
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.
CONSOLIDATED FINANCIAL
STATEMENTS
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
December 31, 2003, 2002 and 2001, together
With Report of Independent Auditors
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
Consolidated FINANCIAL STATEMENTS
Contents
Report of Independent Auditors.....................................1
Consolidated Balance Sheets........................................2
Consolidated Statements of Income..................................4
Consolidated Statements of Cash Flows..............................6
Consolidated Statements of Changes in Shareholders' Equity.........8
Notes to the Consolidated Financial Statements
1. The Company and its operations.........................11
2. Summary of significant accounting policies.............12
3. Accounting change......................................27
4. Income taxes...........................................32
5. Cash and cash equivalents..............................35
6. Government securities..................................36
7. Accounts receivable, net...............................37
8. Inventories............................................39
9. Property, plant and equipment, net.....................39
10. Investments in non-consolidated companies
and other investments..................................43
11. Receivable from Federal Government.....................44
12. Financings.............................................46
13. Financial income (expenses), net.......................53
14. Project financings.....................................54
15. Capital leases.........................................60
16. Thermoelectric plant obligations.......................61
17. Employees' postretirement benefits and
other benefits.........................................63
18. Shareholders' equity...................................75
19. International acquisitions.............................81
20. Petrobras Distribuidora - BR...........................84
21. Accounts - temporary agreement on price
stabilization in Argentina.............................85
22. Commitments and contingencies..........................85
23. Derivative instruments, hedging and risk
management activities..................................97
24. Financial instruments.................................102
25. Segment information...................................104
26. Related party transactions............................117
Supplementary Information on Oil and Gas Exploration
and Production Activities (Unaudited)..........................114
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
PETROLEO BRASILEIRO S.A. - PETROBRAS:
We have audited the accompanying consolidated balance sheet of PETROLEO
BRASILEIRO S.A. - PETROBRAS and subsidiaries as of December 31, 2003, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Petroleo
Brasileiro S.A. - PETROBRAS as of December 31, 2002 and for the years ended
December 31, 2002 and 2001, were audited by other auditors whose report dated
February 13, 2003, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PETROLEO
BRASILEIRO S.A. - PETROBRAS and subsidiaries at December 31, 2003, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
Effective January 1, 2003, the Company adopted SFAS No. 143 - Accounting for
Asset Retirement Obligations ("SFAS 143"). Additionally, at December 31, 2003
the Company adopted FIN 46 "Consolidation of Variable Interest Entities" as
discussed in Note 3.
ERNST & YOUNG
Auditores Independentes S/S
Paulo Jose Machado
Partner
Rio de Janeiro, Brazil
February 13, 2004
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
Expressed in Millions of United States Dollars
--------------------------------------------------------------------------------
As of December 31,
---------------------------------------
2003 2002
------------------- -------------------
Assets
Current assets
Cash and cash equivalents (Note 5) 9,610 3,301
Accounts receivable, net (Note 7) 2,905 2,267
Inventories (Note 8) 2,947 2,540
Deferred income tax (Note 4) 256 271
Recoverable taxes 917 672
Advances to suppliers 504 794
Other current assets 761 477
------------------- -------------------
17,900 10,322
------------------- -------------------
Property, plant and equipment, net (Note 9) 30,805 18,224
------------------- -------------------
Investments in non-consolidated companies
and other investments (Note 10) 1,173 334
------------------- -------------------
Other assets
Accounts receivable, net (Note 7) 528 369
Advances to suppliers 416 450
Petroleum and alcohol account - receivable
from Federal Government (Note 11) 239 182
Government securities (Note 6) 283 176
Marketable securities 340 208
Unrecognized pension obligation (Note 17) - 61
Restricted deposits for legal proceedings
and guarantees (Note 22(a)) 543 290
Recoverable taxes 467 156
Goodwill in PEPSA and PELSA (Note 19) 183 -
Investment in PEPSA and PELSA (Note 19) - 1,073
Prepaid expenses 190 100
Other assets 545 209
------------------- -------------------
3,734 3,274
------------------- -------------------
Total assets 53,612 32,154
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
Expressed in Millions of United States Dollars
--------------------------------------------------------------------------------
As of December 31,
---------------------------------------
2003 2002
------------------- -------------------
Liabilities and shareholders' equity
Current liabilities
Trade accounts payable 2,261 1,702
Income tax 148 119
Taxes payable, other than income taxes 2,157 1,682
Short-term debt (Note 12) 1,329 671
Current portion of long-term debt (Note 12) 1,145 727
Current portion of project financings (Note 14) 842 239
Current portion of capital lease obligations (Note 15) 378 349
Accrued interest 181 120
Dividends and interest on capital payable (Note 18) 1,139 307
Contingencies (Note 22) 84 318
Payroll and related charges 581 283
Advances from customers 258 119
Ventures under consortium agreements 166 106
Employee benefits obligation - Pension (Note 17) 160 89
Other payables and accruals 392 432
------------------- -------------------
11,221 7,263
------------------- -------------------
Long-term liabilities
Long-term debt (Note 12) 11,888 6,987
Project financings (Note 14) 5,066 3,800
Employee benefits obligation - Pension (Note 17) 1,895 1,363
Employee benefits obligation - Health care (Note 17) 1,580 1,060
Capital lease obligations (Note 15) 1,242 1,907
Deferred income tax (Note 4) 1,122 259
Provision for abandonment of wells (Note 3 (a)) 396 -
Thermoelectric liabilities (Note 3 (b)) 1,142 -
Contingencies (Note 22) 271 50
Other liabilities 270 300
------------------- -------------------
24,872 15,726
------------------- -------------------
Minority interest 367 (136)
------------------- -------------------
Shareholders' equity
Shares authorized and issued (Note 18)
Preferred share - 2003 - 462,369,507 shares
(2002 - 451,935,669 shares) 2,973 2,459
Common share - 2003 and 2002 - 634,168,418 shares 4,289 3,761
Capital reserve (Note 18) 118 89
Retained earnings
Appropriated (Note 18) 10,696 5,585
Unappropriated 14,957 16,085
Accumulated other comprehensive income
Cumulative translation adjustments (14,450) (17,306)
Amounts not recognized as net periodic pension
cost, net of tax (Note 17) (1,588) (1,361)
Unrealized gains (losses) on securities, net of tax 157 (11)
------------------- -------------------
17,152 9,301
------------------- -------------------
Total liabilities and shareholders' equity 53,612 32,154
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars (except number
of shares and earnings per share)
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Sales of products and services 42,690 32,987 34,145
Less:
Value-added and other taxes on sales and services (6,348) (5,241) (8,627)
Contribution of intervention in the economic
domain charge - CIDE (5,545) (5,134) -
Specific parcel price - PPE - - (969)
--------------- --------------- ---------------
Net operating revenues 30,797 22,612 24,549
--------------- --------------- ---------------
Cost of sales 15,416 11,506 12,807
Depreciation, depletion and amortization 1,785 1,930 1,729
Exploration, including exploratory dry holes 512 435 404
Selling, general and administrative expenses 2,091 1,741 1,751
Impairment (Note 9 (b)) 70 75 145
Research and development expenses 201 147 132
--------------- --------------- ---------------
Total costs and expenses 20,075 15,834 16,968
--------------- --------------- ---------------
Equity in results of non-consolidated companies (Note 10) 141 (178) (8)
Financial income (Note 13) 602 1,142 1,375
Financial expense (Note 13) (1,247) (774) (808)
Monetary and exchange variation on monetary assets and
liabilities, net (Note 13) 509 (2,068) (915)
Employee benefit expense (595) (451) (594)
Other taxes (333) (360) (295)
Loss on government securities (Note 6) - - (1,099)
Other expenses, net (1,026) (857) (445)
--------------- --------------- ---------------
(1,949) (3,546) (2,789)
--------------- --------------- ---------------
Income before income taxes and minority interest and
accounting change 8,773 3,232 4,792
--------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars (except number
of shares and earnings per share)
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Income tax expense (Note 4)
Current (2,599) (1,269) (1,196)
Deferred (64) 116 (193)
--------------- --------------- ---------------
(2,663) (1,153) (1,389)
--------------- --------------- ---------------
Minority interest in results of consolidated subsidiaries (248) 232 88
--------------- --------------- ---------------
Income before effect of change in accounting principle 5,862 2,311 3,491
--------------- --------------- ---------------
Cumulative effect of change in accounting principle,
net of taxes 697 - -
--------------- --------------- ---------------
Net income for the year 6,559 2,311 3,491
=============== =============== ===============
Net income applicable to each class of shares
Common/ADS 3,793 1,349 2,038
Preferred/ADS 2,766 962 1,453
--------------- --------------- ---------------
Net income for the year 6,559 2,311 3,491
=============== =============== ===============
Basic and diluted earnings per share (Note 18 (b))
Common/ADS and Preferred/ADS
Before effect of change in accounting principle 5.35 2.13 3.21
After effect of change in accounting principle 5.98 2.13 3.21
Weighted average number of shares outstanding
Common/ADS 634,168,418 634,168,418 634,168,418
Preferred/ADS 462,369,507 451,935,669 451,935,669
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Cash flows from operating activities
Net income for the year 6,559 2,311 3,491
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, depletion and amortization 1,805 1,951 1,731
Dry hole costs 207 198 194
Loss on property, plant and equipment 119 99 811
Loss on government securities - - 1,099
Minority interest in loss (income) of subsidiaries 248 (232) (88)
Deferred income taxes 64 (116) 193
Foreign exchange and monetary loss (gain) (138) 2,714 807
Accretion expense - asset retirement obligation 43 - -
Impairment of oil and gas properties 70 75 145
Provision for uncollectible accounts 25 56 421
Gain on exchange of businesses with Repsol-YPF - - (500)
Cumulative effect of change in accounting principle, net of taxes (697) - -
Equity in the results of non-consolidated companies (141) 178 8
Others 1 2 (93)
Decrease (increase) in assets
Accounts receivable, net (477) (541) (102)
Petroleum and Alcohol Account (15) (157) 1,173
Interest receivable on government securities (157) (10) (243)
Inventories 244 (1,139) 232
Advances to suppliers 562 (797) (240)
Prepaid expenses 96 (31) (206)
Recoverable taxes (365) (190) (422)
Others 90 (266) (47)
Increase (decrease) in liabilities
Trade accounts payable (156) 669 (64)
Payroll and related charges 222 95 84
Taxes payable, other than income taxes 60 441 212
Employee postretirement benefits, net of unrecognized
pension obligation 535 177 (61)
Risk management activities 41 68 123
Accrued interest 62 158 58
Contingencies (78) 365 37
Abandonment (29) - -
Other liabilities (231) 209 (10)
--------------- --------------- ---------------
Net cash provided by operating activities 8,569 6,287 8,743
--------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Cash flows from investing activities
Additions to property, plant and equipment (6,551) (4,911) (4,254)
Investment in Perez Companc S.A - PEPSA - (1,073) -
Investments in thermoelectric plants - (447) (15)
Investment in non-consolidated companies (73) (153) (207)
Dividends received from non-consolidated companies 13 11 24
Restricted deposits for legal proceedings (188) (84) (140)
Effect on cash from merger with subsidiaries and affiliates 231 - -
Effect on cash of FIN 46 adoption 1,049 - -
Others - 1 -
--------------- --------------- ---------------
Net cash used in investing activities (5,519) (6,656) (4,592)
--------------- --------------- ---------------
Cash flows from financing activities
Short-term debt, net issuances and repayments 321 (367) (1,648)
Proceeds from issuance of long-term debt 4,629 1,937 2,347
Principal payments on long-term debt (1,315) (1,173) (1,023)
Project financing funding (payments) (208) (746) 760
Payment of finance lease obligations (108) (247) (465)
Dividends paid to shareholders (941) (999) (1,702)
Dividends paid to minority interests (2) (19) (23)
--------------- --------------- ---------------
Net cash provided by (used) in financing activities 2,376 (1,614) (1,754)
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 5,426 (1,983) 2,397
Effect of exchange rate changes on cash and cash equivalents 883 (2,076) (863)
Cash and cash equivalents at beginning of year 3,301 7,360 5,826
--------------- --------------- ---------------
Cash and cash equivalents at end of year 9,610 3,301 7,360
=============== =============== ===============
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Supplemental cash flow information:
Cash paid during the year for
Interest 622 200 393
Income taxes 2,384 812 951
Withholding income tax on financial investments 47 120 178
--------------- --------------- ---------------
Non-cash investing and financing transactions during the year
Capital lease obligations - 144 406
Project finance expenditures funded by special purpose
companies - 946 1,121
Net assets acquired in purchased business combination with
Repsol-YPF - - 424
Transfer of Government securities to PETROS - 313 2,140
Consolidation of merchant type thermoelectrics 1,142 - -
Exchange of BR shares for PETROBRAS preferred shares 130 - -
Recognition of asset retirement obligation - FAS 143 114 - -
--------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars (except per-share amounts)
--------------------------------------------------------------------------------
Year ended December 31,
----------------------------------------------
2003 2002 2001
--------------- --------------- --------------
Preferred shares
Balance at January 1 2,459 1,882 1,882
Capital increase with issue of preferred shares 130 - -
Capital increase with undistributed earnings reserve 384 577 -
--------------- --------------- ---------------
Balance at December 31 2,973 2,459 1,882
--------------- --------------- ---------------
Common shares
Balance at January 1 3,761 2,952 2,952
Capital increase with undistributed earnings reserve 528 809 -
--------------- --------------- --------------
Balance at December 31 4,289 3,761 2,952
--------------- --------------- --------------
Capital reserve - fiscal incentive
Balance at January 1 89 128 37
Transfer from (to) unappropriated retained earnings 29 (39) 91
--------------- --------------- --------------
Balance at December 31 118 89 128
--------------- --------------- --------------
Accumulated other comprehensive income
Cumulative translation adjustments
Balance at January 1 (17,306) (11,854) (9,159)
Change in the year 2,856 (5,452) (2,695)
--------------- --------------- ---------------
Balance at December 31 (14,450) (17,306) (11,854)
--------------- --------------- ---------------
Amounts not recognized as net periodic pension cost
Balance at January 1 (1,361) (1,867) (1,516)
(Increase) decrease in additional minimum liability (344) 724 (524)
Tax effect on above 117 (218) 173
--------------- --------------- ---------------
Balance at December 31 (1,588) (1,361) (1,867)
--------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars (except per-share amounts)
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Unrecognized gains (losses) on securities
Balance at January 1 (11) 13 65
Unrealized gains (losses) 254 (36) (77)
Tax effect on above (86) 12 25
--------------- --------------- ---------------
Balance at December 31 157 (11) 13
--------------- --------------- ---------------
Appropriated retained earnings
Legal reserve
Balance at January 1 643 768 648
Transfer from (to) unappropriated
retained earnings, net of gain or loss
on translation 446 (125) 120
--------------- --------------- ---------------
Balance at December 31 1,089 643 768
--------------- --------------- ---------------
Unrealized income reserve
Balance at January 1 - - 1,471
Transfer from (to) unappropriated retained earnings - - (1,471)
--------------- --------------- ---------------
- - -
--------------- --------------- ---------------
Undistributed earnings reserve
Balance at January 1 4,778 5,886 3,648
Capital increase (912) (1,386) -
Transfer from unappropriated retained earnings, net of
gain or loss on translation 5,506 278 2,238
--------------- --------------- ---------------
Balance at December 31 9,372 4,778 5,886
--------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
December 31, 2003, 2002 and 2001
Expressed in Millions of United States Dollars (except per-share amounts)
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Statutory reserve
Balance at January 1 164 215 221
Transfer from (to) unappropriated retained earnings, net
of gain or loss on translation 71 (51) (6)
--------------- --------------- ---------------
Balance at December 31 235 164 215
--------------- --------------- ---------------
Total appropriated retained earnings 10,696 5,585 6,869
--------------- --------------- ---------------
Unappropriated retained earnings
Balance at January 1 16,085 15,124 14,456
Net income for the year 6,559 2,311 3,491
Dividends (per share: 2003 - US$ 1.49 to common and preferred
shares; 2002 - US$ 1.19 to common and preferred shares;
2001 - US$ 1.62 to common and preferred shares) (1,635) (1,287) (1,851)
Appropriation (to) from fiscal incentive reserve (29) (39) 91
Appropriation to reserves (6,023) (24) (1,063)
--------------- --------------- ---------------
Balance at December 31 14,957 16,085 15,124
--------------- --------------- ---------------
Total shareholders' equity 17,152 9,301 13,247
=============== =============== ===============
Comprehensive income (loss) is comprised as follows:
Net income for the year 6,559 2,311 3,491
Cumulative translation adjustments 2,856 (5,452) (2,695)
Amounts not recognized as net periodic pension cost (227) 506 (351)
Unrealized gain on available-for-sale securities 168 (24) (52)
--------------- --------------- ---------------
Total comprehensive income (loss) 9,356 (2,659) 393
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Expressed in Millions of United States Dollars
(except when specifically indicated)
--------------------------------------------------------------------------------
1. The Company and its operations
PETROLEO BRASILEIRO S.A. - PETROBRAS is Brazil's national oil company and,
directly or through its subsidiaries (collectively, "PETROBRAS" or the
"Company"), is engaged in the exploration, exploitation and production of
oil from reservoir wells, shale and other rocks, and in the refining,
processing, trade and transport of oil and oil derivatives, natural gas and
other fluid hydrocarbons, in addition to other energy related activities.
Additionally, PETROBRAS may promote the research, development, production,
transport, distribution and marketing of all sectors of energy, as well as
other related or similar activities.
PETROBRAS was incorporated under Law No. 2,004 on October 3, 1953. Until
November of 1995, PETROBRAS was the exclusive agent of the Brazilian
Federal Government (the "Federal Government") for purposes of exploiting
the Federal Government's constitutional and statutory control over
activities involving exploration, production, refining, distribution,
import, export, marketing and transportation of hydrocarbons and oil
products in Brazil and its continental waters. When adopted in 1953, the
relevant provisions of the Brazilian constitution and statutory law gave
the Federal Government a monopoly in these areas subject only to the right
of companies then engaged in oil refining and the distribution of oil and
oil products to continue those activities in Brazil. Therefore, except for
limited competition from those companies in their grandfathered activities,
PETROBRAS had a monopoly over its businesses for approximately 42 years. As
a result of a change in the Brazilian constitution in November of 1995, and
the subsequent and ongoing implementation of that change, PETROBRAS has
ceased to be the Federal Government's exclusive agent in Brazil's
hydrocarbons sector and up to 2001 had been operating in an environment of
gradual deregulation and increasing competition.
In accordance with Law No. 9,478 ("Petroleum Law") and Law No. 9,990, dated
August 6, 1997 and July 21, 2000, respectively, the fuel market in Brazil
was totally liberalized beginning January 1, 2002 permitting other
companies to produce and sell on the domestic market, and also to import
and export oil products.
The Company also has oil and gas operations in international locations,
with the most significant international operations being in other Latin
American countries.
2. Summary of significant accounting policies
In preparing these consolidated financial statements, the Company has
followed accounting policies that are in accordance with accounting
principles generally accepted in the United States of America ("U.S.
GAAP"). The preparation of these financial statements requires the use of
estimates and assumptions that affect the assets, liabilities, revenues and
expenses reported in the financial statements, as well as amounts included
in the notes thereto.
Estimates adopted by management include: oil and gas reserves, pension and
health care liabilities, environmental obligations, depreciation, depletion
and amortization, abandonment costs, contingencies and income taxes. While
the Company uses its best estimates and judgments, actual results could
differ from those estimates as future confirming events occur.
(a) Basis of financial statements preparation
The accompanying consolidated financial statements of PETROLEO
BRASILEIRO S.A. - PETROBRAS (the Company) have been prepared in
accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP) and the rules and regulations of the
Securities and Exchange Commission (SEC). U.S. GAAP differs in certain
respects from Brazilian accounting practice as applied by PETROBRAS in
its statutory financial statements prepared in accordance with
Brazilian Corporate Law and regulations promulgated by the Brazilian
Securities Commission (CVM).
The U.S. dollar amounts for the years presented have been translated
from the Brazilian Real amounts in accordance with Statement of
Financial Accounting Standards SFAS No. 52 - Foreign Currency
Translation ("SFAS 52") as applicable to entities operating in
non-hyperinflationary economies. Transactions occurring in foreign
currencies are first remeasured to the Brazilian Real and then
translated to the U.S. dollar, with remeasurement gains and losses
being recognized in the statements of income. While PETROBRAS has
selected the U.S. Dollar as its reporting currency, the functional
currency of PETROBRAS is the Brazilian Real.
The Company has translated all assets and liabilities into U.S.
dollars at the current exchange rate (R$ 2.8892 and R$ 3.5333 to US$
1.00 at December 31, 2003 and 2002, respectively), and all accounts in
the statements of income and cash flows (including amounts relative to
local currency indexation and exchange variances on assets and
liabilities denominated in foreign currency) at the average rates
prevailing during the year. The net translation gain/ (loss) in the
amount of US$ 2,856 in 2003 (2002 - US$ (5,452) and 2001 - US$
(2,695)) resulting from this remeasurement process was excluded from
income and presented as a cumulative translation adjustment ("CTA")
within Other Comprehensive Income in the statement of changes in
shareholders' equity.
(b) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries in which (a) the Company
directly or indirectly has either a majority of the equity of the
subsidiary or otherwise has management control, or (b) the Company has
determined itself to be the primary beneficiary of a variable interest
entity in accordance with FIN 46 (Note 3(b)). Intercompany accounts
and transactions are eliminated.
The following majority-owned subsidiaries and variable interest
entities are consolidated:
Subsidiary companies Activity
-------------------------------------------------- ----------------------------
Petrobras Quimica S.A. - PETROQUISA Petrochemical
Petrobras Distribuidora S.A. - BR Distribution
BRASPETRO Oil Services Company - BRASOIL International operations
BRASPETRO Oil Company - BOC International operations
PIB - Petrobras Internacional - BRASPETRO B.V. (1) International operations
Petrobras Energia Ltda. Energy
Petrobras Negocios Eletronicos S.A. Corporate
Petrobras Gas S.A. - GASPETRO Gas transportation
Petrobras International Finance Company - PIFCO Marketing
Petrobras Transporte S.A. - TRANSPETRO Transportation
Downstream Participacoes S.A. Refining and distribution
Petrobras Netherlands BV Explorations and Production
UTE Nova Piratininga Ltda. Energy
TERMOR Participacoes S.A. Energy
TERMORIO S. A. (3) Energy
TERMOBAHIA Ltda. (3) Energy
Ibiritermo S. A. (3) Energy
EVM Leasing Co. (2) Explorations and Production
Companhia Petrolifera Marlim (2) Explorations and Production
NovaMarlim Petroleo S.A. (2) Explorations and Production
Nova Transportadora do Sudeste S.A.(2) Transportation
Nova Transportadora do Nordeste S.A.(2) Transportation
Barracuda e Caratinga Holding Company B.V. (2) Explorations and Production
Cayman Cabiunas Investments Co. Ltda. (2) Explorations and Production
Langstrand Holdings S.A.(2) Explorations and Production
Albacora Japan Petroleum Limited Company(2) Explorations and Production
Companhia de Recuperacao Secundaria (2) Explorations and Production
PDET ONSHORE S.A. (2) Explorations and Production
MPX Termoceara Ltda. (4) Energy
SFE - Sociedade Fluminense de Energia Ltda. (4) Energy
Consorcio Macae Merchant (4) Energy
(1) Parent Company of Petrobras Energia S.A-PEPSA. (former Perez
Companc S.A.-PECOM) and Petrolera Entre Lomas S.A. - PELSA
(former Petrolera Perez Companc S.A.)
(2) Consolidated according to FIN 46, commencing December 31, 2003.
Formerly were special purpose entities formed in connection with
project finance transactions.
(3) Consolidated according to FIN 46, commencing December 31, 2003.
Formerly were accounted for as capital leases pursuant to SFAS
13. See Notes 15 and 16.
(4) Consolidated according to FIN 46, commencing December 31, 2003.
Formerly were not consolidated to PETROBRAS financial statements,
see Note 16.
(c) Cash equivalents
Cash equivalents consist of highly liquid investments that are readily
convertible into cash and have an original maturity of three months or
less at date of acquisition.
(d) Accounts receivable
Accounts receivable is stated at estimated realizable values. An
allowance for doubtful accounts is provided in an amount considered by
management to be sufficient to meet probable future losses related to
uncollectible accounts.
(e) Inventories
Inventories are stated as follows:
o Raw materials comprise principally crude oil inventories, which
are stated at the lower of average cost or market value.
o Oil products and fuel alcohol are stated, respectively, at
average refining and purchase cost, adjusted when applicable to
their realizable value.
o Materials and supplies are stated at average purchase cost, not
exceeding replacement value and imports in transit are stated at
identified cost.
(f) Investments in non-consolidated companies
The Company uses the equity method of accounting for all long-term
investments for which it owns between 20% and 50% of the investee's
outstanding voting stock or has the ability to exercise significant
influence over operating and financial policies of the investee. The
equity method requires periodic adjustments to the investment account
to recognize the Company's proportionate share in the investee's
results, reduced by receipt of investee's dividends.
(g) Government and marketable securities
The Company holds National Treasury Bonds "Series B" (NTN-B) issued by
the Federal Government which are accounted for as available-for-sale
securities in accordance with SFAS No. 115 - Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"). The Company
has maintained junior trust notes received in connection with the
structured finance program as held-to-maturity, and additionally has
certain available-for-sale investments in companies with publicly
traded shares.
(h) Property, plant and equipment
o Costs incurred in oil and gas producing activities
The successful efforts method of accounting is used for oil and
gas exploration, development and production activities.
o Property acquisition costs
Costs of acquiring developed or undeveloped leaseholds including
lease bonus, brokerage, and other fees are capitalized. The costs
of undeveloped properties that become productive are transferred
to a producing property account.
o Exploratory costs
Exploratory wells that find oil and gas in an area requiring a
major capital expenditure before production can begin are
evaluated annually to assure that commercial quantities of
reserves have been found or that additional exploration work is
underway or planned. Exploratory costs related to areas where
commercial quantities have been found are capitalized, and
exploratory costs where additional work is underway or planned
continue to be capitalized pending final evaluation. Exploratory
well costs not meeting either of these tests are charged to
expense. All other exploratory costs (including geological and
geophysical costs) are expensed as incurred. Exploratory dry
holes are expensed.
o Development costs
Costs of development wells including dry holes, platforms, well
equipment and attendant production facilities are capitalized.
o Production costs
Costs incurred with producing wells are expensed as incurred.
o Abandonment costs
Through December 31, 2002, the Company recorded abandonment costs
in accordance with SFAS No. 19 - Financial Accounting and
Reporting by Oil and Gas Production Companies ("SFAS 19"). Under
SFAS 19, the estimated costs of dismantlement and removal of oil
and gas related facilities are accrued over the properties'
production lives using the unit-of-production method and
recognized as accumulated depreciation, depletion and
amortization as the expense is recorded. Effective January 1,
2003, the Company adopted SFAS 143 for abandonment costs (see
Note 3(a) for information related to the new accounting policy
for abandonment costs commencing from January 1, 2003).
o Depreciation, depletion and amortization
Depreciation, depletion and amortization of leasehold costs of
producing properties are recorded using the unit-of-production
method applied on a field by field basis as a ratio of proved
reserves produced. Leased production platforms are depreciated on
a straight-line basis over the estimated useful lives of the
platforms. Depreciation, depletion and amortization of all other
capitalized costs (both tangible and intangible) of proved oil
and gas producing properties are recorded using the
unit-of-production method applied on a field by field basis as a
ratio of proved developed reserves produced. Prior to January 1,
2003, estimated dismantlement, restoration and abandonment costs
and estimated salvage values are taken into account in
determining amortization and depreciation provisions.
Other plant and equipment are depreciated on a straight-line
basis over the following estimated useful lives:
Building and improvements 25 years
Equipment and other assets 3-25 years
Platforms 10-25 years
Pipelines 30 years
o Impairment
In accordance with SFAS No. 144 - Impairment of Long-Lived Assets
("SFAS 144"), management reviews long-lived assets, primarily
property, plant and equipment to be used in the business and
capitalized costs relating to oil and gas producing activities,
whenever events or changes in circumstances indicate that the
carrying value of an asset or group of assets may not be
recoverable on the bases of undiscounted future cash flows. The
reviews are carried out at the lowest level of assets to which
the Company is able to attribute identifiable future cash flows.
The net book value of the underlying assets is adjusted to their
fair value using a discounted future cash flows model, if the sum
of the expected undiscounted future cash flows is less than the
book value.
o Maintenance and repairs
The actual costs of major maintenance, including turnarounds at
refineries and vessels, as well as other expenditures for
maintenance and repairs, are expensed as incurred.
o Capitalized interest
Interest is capitalized in accordance with SFAS No. 34 -
Capitalization of Interest Cost ("SFAS 34"). Interest is
capitalized on specific projects when a construction process
involves considerable time and involves major capital
expenditures. Capitalized interest is allocated to property,
plant and equipment and amortized over the estimated useful lives
of the related assets. Interest is capitalized at the Company's
weighted average cost of borrowings.
(i) Revenues, costs and expenses
Revenues from sales of crude oil and oil products, petrochemical
products and others are recognized on an accrual basis when the title
is transferred to the customer. Revenues from sales of natural gas are
accounted for when the natural gas is transferred to the customer.
Subsequent adjustments to revenue based on production sharing
agreements or volumetric delivery differences are not significant.
Costs and expenses are accounted for on an accrual basis.
(j) Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109
- Accounting for Income Taxes ("SFAS 109"), which requires an asset
and liability approach to recording current and deferred taxes. The
effects of differences between the tax bases of assets and liabilities
and the amounts recognized in the financial statements have been
treated as temporary differences for the purpose of recording deferred
income taxes.
PETROBRAS records the tax benefit of all net operating losses as a
deferred tax asset and recognizes a valuation allowance for any part
of this benefit which management believes that will not be recovered
against future taxable income using a "more likely than not"
criterion.
(k) Employee postretirement benefits
The Company sponsors a contributory defined-benefit pension plan
covering substantially all of its employees, which is accounted for by
the Company in accordance with SFAS No. 87 - Employers' Accounting for
Pensions ("SFAS 87").
In addition, the Company provides certain health care benefits for
retired employees and its dependents. The cost of such benefits is
recognized in accordance with SFAS No. 106 - Postretirement Benefits
Other Than Pensions ("SFAS 106").
The Company also contributes to the national pension, social security
and redundancy plans at rates based on payroll, and such contributions
are expensed as incurred. Further indemnities may be payable upon
involuntary severance of employees but, based on current operating
plans, management does not believe that any amounts payable under this
plan will be significant.
(l) Environmental and remediation costs
Environmental costs relating to current operations are expensed or
capitalized, as appropriate, depending on whether such costs are
expected to provide future economic benefits. Liabilities are
recognized when the costs are considered probable and can be
reasonably estimated.
(m) Accounting for the effect of Federal Government regulation
As provided in the Petroleum Law, the fuel market in Brazil was
totally liberalized as of January 1, 2002 permitting other companies
to produce and sell on the domestic market and, also, import and
export oil products. Additionally, as of January 1, 2002, PETROBRAS is
no longer required to charge the prices established by the Federal
Government on the sale of oil products, and the realization price is
no longer established by a formula adjusted to the international
market. Therefore the specific parcel price (Parcela de Preco
Especifico - PPE) is no longer collected.
Considering the liberation of the market and current legislation, as
from January 1, 2002, the Petroleum and Alcohol Account will no longer
be used to reimburse expenses related to the supply of oil products
and fuel alcohol to PETROBRAS and third parties. The movements in the
account during 2002 relate only to (i) payments and adjustments
mandated by the Agencia Nacional do Petroleo - ANP ("ANP") with no
impact on the income statement and (ii) adjustments resulting from the
audit of the account by the ANP.
The impact of Federal Government regulation on the Company's balance
sheet and operating structure has been recorded in the Petroleum and
Alcohol Account as of, and for the years ended, December 31, 2003,
2002 and 2001 (see Note 11). The impact of this regulation is recorded
in the income statement to correspond with underlying transactions
when compliance with applicable law has occurred and collection is
reasonably assured.
The Contribuicao de Intervencao no Dominio Economico (Contribution of
Intervention in the Economic Domain Charge - CIDE) on the importation
and sale of fuels was established by Law No. 10,336 dated December 19,
2001.
The CIDE is a per-transaction payment to the Brazilian Government
required to be made by producers, blenders and importers upon sales
and purchases of specified oil and fuel products at a set amount for
different products based on the unit of measurement typically used for
such products.
The Company's income statement for the year ended December 31, 2001
were impacted by Federal Government regulation in the amount of US$
1,066.
(n) Compensated absences
The liability for future compensation of employees for vacations is
accrued as earned.
(o) Earnings per share
Earnings per share are computed using the two-class method, which is
an earnings allocation formula that determines earnings per share for
both preferred shares, which are participating securities and common
shares. The preferred shares participate in dividends and
undistributed earnings with the common shares at a predetermined
formula. Such formula allocates the net income, as if all of the net
income for each year had been distributed, first to the preferred
shares in an amount equal to the preferred shares' priority minimum
annual dividend of the higher of 3% of their shareholders equity or 5%
of their paid-in capital as stated in the statutory accounting
records, then to common shares in an amount equal to the preferred
shares' priority dividend on a per share basis and any remaining net
income is allocated equally to the common and preferred shares. Each
American Depositary Share (ADS) for common shares represent one share
of the Company's common shares or one share of the Company's preferred
shares and, in each case, is presented together with earnings per
share.
(p) Research and development costs
Research and development costs are charged to expense when incurred.
(q) Accounting for derivatives and hedging activities
The Company adopted SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS
No. 137 - Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of SFAS No. 133 ("SFAS 137") and SFAS
No. 138 - Accounting for Certain Derivative Instruments and Certain
Hedging Activities ("SFAS 138"), on January 1, 2001. SFAS 133 requires
that all derivative instruments be recorded in the balance sheet of
the Company as either an asset or a liability measured at fair value.
SFAS 133 requires that changes in the derivative's fair value be
recognized in earnings/losses unless specific hedge accounting
criteria is met. For derivatives accounted for as hedges, fair value
adjustments are recorded to earnings/losses or other comprehensive
income, a component of shareholders' equity, depending upon the type
of hedge and the degree of hedge effectiveness. The Company has
determined that none of its derivative financial instruments that had
been previously treated as hedges qualified for hedge accounting under
the new standard. The net-of-tax cumulative-effect recorded on January
1, 2001 to recognize the Company's derivative financial instruments
were not significant.
The Company may use derivative financial instruments to mitigate the
risk of unfavorable price movements on crude oil purchases. These
instruments are marked-to-market on a current basis and associated
gains and losses are recognized currently in the income statement.
The Company may also use derivative financial instruments to mitigate
the risk of unfavorable exchange-rate movements affecting its foreign
currency-denominated indebtedness. Gains and losses from changes in
the fair value of these contracts are recognized in income currently,
in the same line item as foreign exchange gains and losses arising on
the Company's outstanding debt balance.
PEPSA also uses derivative instruments such as swaps, options,
futures, and other instruments, principally to mitigate the impact of
changes in crude oil prices, exchange rates and interest rates.
PEPSA's crude oil derivative instruments and interest rate swap
instruments are designed to mitigate specific exposures and thus
qualify as cash flow hedges under SFAS 133. As cash flow hedges, the
gains and losses associated with the derivative instrument are
deferred and recorded in other comprehensive income until the
underlying hedge transaction impacts earnings, with the exception of
any ineffective portions. Derivative instruments not qualifying for
hedge accounting are marked-to-market through earning on a current
basis.
(r) Recently issued accounting pronouncements
EITF Issue 86-12, "Accounting by Insureds for Claims-Made Insurance
Policies", EITF Issue 03-3, "Accounting for Claims-Made Insurance
Policies by the Insured Entity", and EITF Abstracts Topic D-79,
"Accounting for Retroactive Insurance Contracts Purchased by Entities
Other than Insurance Enterprises", address various aspects of the
accounting for retroactive insurance contracts and claims-made
insurance policies by the insured entity. EITF Issue 03-8 finished
discussion in November of 2003 and has the purpose to codify the
guidance set forth in the aforementioned pronouncements. The Company
contracts claims made insurance policies on a prospective basis only
and records provisions, as applicable, for all probable losses that
may result under SFAS No. 5 - Accounting for Contingencies ("SFAS 5").
(s) Reclassifications
Certain prior years' amounts have been reclassified to conform with
the current year's presentation. These reclassifications had no impact
on the Company's net income or shareholders' equity.
3. Accounting change
(a) 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 primary impact of SFAS
143 is to change the method of accruing for upstream site restoration
costs. These costs were previously accrued ratably over the productive
lives of the assets in accordance with SFAS No. 19 - Financial
Accounting and Reporting by Oil and Gas Producing Companies ("SFAS
19"). At the end of 2002, the cumulative amount accrued under SFAS 19
was US$ 1,166.
This provision for abandonment was recognized as a component of
accumulated depreciation, depletion and amortization as of December
31, 2002, with no separate provision for abandonment liability being
disclosed on the face of the financial statements. Under SFAS 143, the
fair value of asset retirement obligations are recorded as liabilities
on a discounted basis when they are incurred, which is typically at
the time the related assets are installed. Amounts recorded for the
related assets will be increased by the amount of these obligations
and depreciated over the related useful lives of such assets. Over
time, the amounts recognized as liabilities will be accreted for the
change in their present value until the related assets are retired or
sold.
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). The effect of this
accounting change on the balance sheet, was a US$ 1,056 reduction to
the abandonment provision, and a US$ 359 increase in deferred income
tax liabilities, see Note 4. Additionally, the change in accounting
principle resulted in a US$ 16 increase to property, plant and
equipment at original asset acquisition date, with accumulated
depreciation through January 1, 2003 of US$ 9 on proved developed
properties. Further, on January 1, 2003, PETROBRAS established an
abandonment liability with respect to proved undeveloped reserves in
the amount of US$ 44.
This adjustment is due to the difference in the method of accruing
site restoration costs under SFAS 143 compared with the method
required by SFAS 19. Under SFAS 19, site restoration costs are accrued
on a unit-of-production basis of accounting as the oil and gas are
produced. The SFAS 19 method matches the accruals with the revenues
generated from production and results in most of the costs being
accrued in early field life, when production is at the highest level.
Because SFAS 143 requires accretion of the liability as a result of
the passage of time using an effective interest method of allocation,
a significant portion of costs will be accrued towards the end of
field life, when production is at the lowest level. The cumulative
income adjustment described above results from reversing the higher
liability accumulated under SFAS 19 in order to adjust it to the lower
present value amount resulting from transition to SFAS 143. This
amount being reversed in transition, which was previously charged to
operating earnings under SFAS 19, will again be charged to earnings
under SFAS 143 in future years.
Measurement of assets retirement obligations is based on currently
enacted laws and regulations, existing technology and site-specific
costs. There are no assets legally restricted to be used in the
settlement of asset retirement obligations.
A summary of the annual changes in the abandonment provision are
presented as follows:
Assets Liabilities
------------- --------------
Balance as of December 31, 2002 - 1,166
Reversion of provision - (1,056)
Assets related to proved developed property 16 -
Accumulated depreciation (9) -
Assets related to proved undeveloped property 44 44
------------- --------------
Balance as of January 1, 2003 51 154
PEPSA acquisition 11 28
Depreciation and impairment (29) -
Accretion expenses - 43
Liabilities incurred 114 114
Liabilities settled - (14)
Cumulative translation adjustment 15 71
------------- --------------
Balance as of December 31, 2003 162 396
============= ===============
The following unaudited pro-forma financial information presents the
asset retirement obligation as if FAS 143 adoption had occurred at
January 1, 2001 using current rates and assumptions.
Assets Liabilities
------------- --------------
Beginning balance as of January 1, 2001 - 1,588
Reversal of provision 97 (1,333)
------------- --------------
Asset retirement obligation balances at
January 1, 2001 97 255
Depreciation (2) -
Liabilities settled - (14)
Actualization of provision, at net present value - 33
Cumulative translation adjustment (15) (39)
------------- --------------
Balance as of December 31, 2001 80 235
Depreciation (2) -
Liabilities settled - (30)
Actualization of provision, at net present value - 29
Cumulative translation adjustment (27) (80)
------------- --------------
Balance as of December 31, 2002 51 154
============= ==============
The following unaudited pro-forma summary financial information presents
the consolidated results of operations as if the adoption of FAS 143 had
occurred at the beginning of the periods presented.
2002 2001
--------------------------------------------------------
Pro forma Pro forma
As reported (unaudited) As reported (unaudited)
------------- ------------- -------------- -------------
Net operating revenues 22,612 22,612 24,549 24,549
Cost of sales 11,506 11,506 12,807 12,807
Depreciation, depletion and amortization 1,930 1,651 1,729 1,649
Exploration, including exploratory dry holes 435 464 404 437
Impairment 75 75 145 145
Others (1,658) (5,434) (906 ) (4,672)
Income tax expense (1,153) (1,238) (1,389 ) (1,405)
Minority interest 232 232 88 88
Cumulative effect of change in accounting
principle, net of tax - - - 816
Net income for the year 2,311 2,476 3,491 4,338
Basic and diluted earnings per share 2.13 2.28 3.21 3.99
(b) 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. Under FIN 46, entities are required to be consolidated by an
enterprise that has a controlling financial interest in such entities
when equity investors of that enterprise do not have significant
capital risk, the obligation to absorb the majority of expected
losses, or the right to receive the majority of expected returns from
such entities. Entities identified with these characteristics are
called variable interest entities and the interest that enterprises
have in these entities are called variable interests. These interests
may derive from certain guarantees, leases, loans or other
arrangements that result in risks and rewards to the enterprise with
the controlling financing interest in such entities, irrespective of
such enterprises' voting interest in such entities.
The interpretation requires that if a business enterprise has a
controlling financial interest in a variable entity, the assets,
liabilities and results of the activities of the variable interest
entity must be included in the consolidated financial statements with
those of the business enterprise. This interpretation applies
immediately to variable interest entities created after January 31,
2003. For variable interest entities created before February 1, 2003,
FIN 46 must be adopted in the first reporting period ending after
December 15, 2003.
The Company adopted FIN 46 in its December 31, 2003 annual financial
statements. Such adoption resulted in the consolidation of a number of
special purpose entities related to project financing arrangements in
which the Company has an interest, and which were deemed to be
variable interest entities for which the Company was the primary
beneficiary. These entities are detailed above in Note 2 (b). Prior to
adoption of FIN 46, a significant portion of the Company's share of
commitments and debt obligations, as well as fixed asset
contributions, were already included in the consolidated financial
statements as the project financing transactions qualified as capital
leases.
Thus, adoption of FIN 46 related to the special purpose companies
formed in connection with project finance arrangements did not have a
significant impact on the Company's financial condition. While
PETROBRAS does not have specific assets set aside and established as
collateral for these special purpose entities, the Company does have
certain contractual obligations relating to the debt of the special
purpose entities.
Three thermoelectric plants were also consolidated at December 31,
2003 as a result of the adoption of FIN 46. However, as these
thermoelectric plants had previously been accounted for as capital
leases, their consolidation did not have a material impact on the
Company's financial condition.
Furthermore, PETROBRAS has determined that it is the primary
beneficiary of three additional plants for which it has certain
contractual obligations to bear energy market risk. The effect of the
consolidation of these three thermoelectrics 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 will only be consolidated in
2004.
(c) EITF 01-08 - Determining whether an arrangement contains a lease
EITF 01-08 "Determining Whether an Arrangement Contains a Lease,"
expands former guidance respective to determination of whether an
arrangement contains a lease that is within the scope of SFAS No. 13 -
Accounting for Leases, ("SFAS 13") and offers specific guidance
related to transportation and other energy contracts that may qualify
as leases. Adoption of this EITF in 2003 did not have a significant
impact on the Company's accounting for its energy and transportation
contracts.
(d) EITF 02-6 - Classification in the statement of cash flows of payments
made to settle an asset retirement obligation
PETROBRAS has adopted the presentation outlined in EITF 02-6 -
Classification in the Statement of Cash Flows of Payments made to
Settle an Asset Retirement Obligation within the Scope of SFAS 143,
with immaterial changes to prior classification of such costs as
investment activities.
4. Income taxes
Income taxes in Brazil comprise federal income tax and social contribution,
which is an additional federal income tax. The statutorily enacted tax
rates applicable in the years are presented as follows:
Year ended December 31, - %
--------------------------------------------------------
2003 2002 2001
------------------- ------------------ -----------------
Federal income tax rate 25 25 25
Social contribution 9 9 9 to 12
------------------- ------------------ -----------------
Composite tax rate 34 34 34 to 37
=================== ================== =================
During 2001, the Company recognized a benefit in the amount of US$ 111,
relating to the reversal of a tax provision established in previous years
in connection with the privatization of certain affiliates of PETROQUISA
included in the National Privatization Program (PND) due to expiration of
the statute of limitations.
Also during 2001, certain changes were introduced in the Brazilian tax
legislation, including a requirement that earnings from foreign
subsidiaries be included in the determination of current taxes payable in
Brazil. As a result, the Company recorded a provision of US$ 100 relating
to income taxes on its foreign subsidiaries undistributed taxable income
generated since 1996.
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 this consolidated financial statements.
Year ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Income before income taxes, minority
interest and accounting changes 8,773 3,232 4,792
=============== ============== ==============
Tax expense at statutory rates (2,983) (1,099) (1,629)
Adjustments to derive effective tax rate:
Reversal of income tax - - 111
Non-deductible postretirement health-benefits (107) (73) (73)
Tax on unremitted earnings of foreign subsidiaries - - (100)
Foreign income subject to different tax rates - - 94
Change in valuation allowance 150 (204) (38)
Tax benefit on interest on shareholders' equity 364 241 307
Income taxes regarding abandonment liabilities adjustments
related to the year ended December 31, 2002 (61) - -
Others (26) (18) (61)
--------------- -------------- --------------
Income tax expense per consolidated statement of income (2,663) (1,153) (1,389)
=============== ============== ==============
TBG, a subsidiary of GASPETRO, has accumulated tax loss and negative income
tax and social contribution carryforwards amounting to US$ 469 (US$ 768 in
2002) as of December 31, 2003, which could be offset against future taxable
income to a limit of 30% of annual income, based on Law No. 9,249/95, which
in the opinion of the TBG management, will occur within the useful life of
the Bolivia-Brazil Gas Pipeline project.
However, considering the long estimated term for utilization, these tax
credits, totaling US$ 159 (US$ 239 - 2002), were provided for in a
valuation allowance in the consolidated financial statements for December
31, 2003 and 2002. The accounting recognition of these credits is reviewed
annually.
The major components of the deferred income tax accounts in the
consolidated balance sheet are as follows:
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
Current Assets
Inventories 13 39
Lease obligations 82 96
Provision for profit sharing 97 41
Provision for loss on Energy - 70
Provision for INSS 23 12
Other temporary differences 41 13
------------------- ------------------
Net current deferred tax assets 256 271
=================== ==================
Non-current
Assets
Employees' postretirement benefits, net of
unrecognized pension obligation 764 531
Deferred assets 130 51
Tax loss carryforwards 69 243
Investments 65 2
Lease obligations 330 618
Project financing 109 706
Provision for notification from INSS 47 26
Other temporary differences 289 140
Valuation allowance (54) (239)
------------------- ------------------
1,749 2,078
=================== ==================
Liabilities
Capitalized exploration and development costs 1,635 670
Property, plant and equipment 1,131 1,638
Other temporary differences 105 29
------------------- ------------------
2,871 2,337
=================== ==================
Net long-term deferred tax liabilities (1,122) (259)
=================== ==================
As a result of the NTN-P swap transaction in 2001, described in Note 6,
the income tax on interest on government securities held-to-maturity,
which payment had been deferred, became payable and the corresponding
provision for income tax and social contribution was transferred to
current liabilities on December 28, 2001.
4. Income taxes--Continued Year
Although realization of net deferred tax assets is not assured, management
believes that, except where a valuation allowance has been provided, such
realization is more likely than not to occur. The amount of the deferred
tax asset considered realizable could, however, be reduced if estimates of
future taxable income are reduced. Tax loss carryforwards do not expire
and are available for offset against future taxable income, limited to 30%
of taxable income in any individual year. The following presents the
changes in the valuation allowance for the end years ended December 31,
2003, 2002 and 2001:
Year ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Balance at January 1, (239) (170) (147)
Reductions (additions) 80 (69) (23)
------------------- ------------------ ------------------
Balance at December 31, (159) (239) (170)
=================== ================== ==================
5. Cash and cash equivalents
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
Cash 765 661
Investments - local currency 4,926 2,216
Investments - U.S. dollars 3,919 424
------------------ ------------------
9,610 3,301
================== ==================
Cash includes US$ 1,049 at December 31, 2003, as a result of incorporation of
certain special purpose entities pursuant to the FIN 46 consolidation. See Note
12 relating to repurchased securities held in an exclusive fund.
6. Government securities
On December 28, 2001, PETROBRAS entered into a contract with the Federal
Government to exchange the restricted National Treasury Bonds "Series P"
(NTN-P) for unrestricted National Treasury Notes - Series B (NTN-B) with a
face value of US$ 3,239. The NTN-P had previously been accounted for as
held-to-maturity securities. The NTN-B were created on July 4, 2001 by
means of Federal Decree No. 3,859. The exchange was accounted for at fair
value and a loss of US$ 1,099 was recorded in the results of operations
for 2001. The NTN-B were classified as available-for-sale, and on December
28, 2001, the Company transferred NTN-B notes with a fair value of US$
1,475 to PETROS, the Company's current pension plan for employees (see
Note 17) to increase pension assets.
On December 30, 2002, the Company effectively transferred a portion of the
NTN-B with a fair value of US$ 388 to PETROS to further increase plan
assets.
The Company has retained title to NTN-B amounting to US$ 283 as of
December 31, 2003 (US$ 176 as of December 31, 2002). These bonds have been
advanced to PETROS and the Company intends to utilize them to provide
incentives for participants to migrate from the PETROS Plan to the
PETROBRAS VIDA, the Company's new pension plan for employees (see Note
17). Accordingly, as the Company still has the risks and rewards relating
to the bonds, they are accounted for as securities available-for-sale and
their corresponding earnings will be recorded on an amortized cost basis,
with changes in fair value presented in the statement of shareholders'
equity as a component of other comprehensive income.
The NTN - B are denominated in reais, earn interest at 6% annually plus
the variation of the IPCA (Consumer Price Index - Adjusted) and mature in
2031.
7. Accounts receivable, net
Accounts receivable consisted of the following:
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
Trade
Third parties 3,730 2,827
Related parties (Note 26) 483 510
------------------ ------------------
4,213 3,337
Less: allowance for uncollectible accounts (780) (701)
------------------ ------------------
3,433 2,636
Less: long-term accounts receivable, net (528) (369)
------------------ ------------------
Current accounts receivable, net 2,905 2,267
================== ==================
As of December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Allowance for uncollectible accounts
Balance at January 1, (701) (708) (312)
Additions (79) (56) (421)
Write-offs - 63 25
--------------- --------------- ---------------
Balance at December 31 (780) (701) (708)
=============== =============== ===============
Allowance on short-term receivables (106) (77) (66)
--------------- --------------- ---------------
Allowance on long-term receivables (674) (624) (642)
--------------- --------------- ---------------
7. Accounts receivable, net--Continued
At December 31, 2003 and 2002, long-term receivables include US$ 581 and
US$ 569 respectively relating to payments made by the Company to suppliers
and subcontractors on behalf of certain contractors. These contractors had
been hired by the subsidiary BRASOIL for the construction/conversion of
vessels into FPSO ("Floating Production, Storage and Offloading") and FSO
("Floating, Storage and Offloading") and failed to make the payments to
their suppliers and subcontractors. The Company made the payments to avoid
further delays in the construction/conversion of the vessels and
consequent losses to BRASOIL.
Based on opinions from the legal advisers of BRASOIL, these payments can
be reimbursed, since they represent a right of BRASOIL with respect to the
contractors, for which reason judicial action was filed with international
courts to seek financial reimbursement. However, as a result of the
uncertainties with regards to the probability of receiving all the amounts
disbursed, the Company recorded a provision for uncollectible accounts for
all credits that are not backed by collateral. The balances of this
provision amounted US$ 509 and US$ 497 as of December 31, 2003 and 2002.
The Company prevailed in the lawsuit filed with an American court by the
insurance companies Fidelity & Guaranty Company and American Home
Assurance Company, which had attempted to obtain, since 1997, a legal
ruling in the United States to exempt the insurance companies from the
obligation to pay the sum insured for the construction of platforms P-19
and P-31. As a result of a court decision by the first level of the
Federal District Court of the Southern District of New York, the Company
was entitled to receive losses and damages in the amount of US$ 237, plus
interest and reimbursement of legal expenses through the settlement date.
This decision is pending appeal to the Appeals Court of the State of New
York, and therefore the Company has not recognized this amount in the
financial statements.
8. Inventories
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
------------------------------------------
Products
Oil products 858 982
Fuel alcohol 67 86
--------------------- -------------------
925 1,068
Raw materials, mainly crude oil 1,280 990
Materials and supplies 708 482
Others 34 -
--------------------- -------------------
2,947 2,540
===================== ===================
At December 31, 2003 and 2002, there were no inventories requiring an
obsolescence provision.
9. Property, plant and equipment, net
(a) Composition of balance
Property, plant and equipment, at cost, are summarized as follows:
As of December 31,
------------------------------------------------------------------------------
2003 2002
--------------------------------------- --------------------------------------
Accumulated Accumulated
Cost depreciation Net Cost depreciation Net
------------ ------------ ------------- ------------ ------------ ------------
Buildings and improvements 587 (298) 289 383 (215) 168
Oil and gas assets 25,741 (12,305) 13,436 17,465 (10,374) 7,091
Equipment and other assets 11,597 (5,574) 6,023 6,635 (3,491) 3,144
Capital lease - platforms,
vessels and
thermoelectric plants 2,743 (994) 1,749 3,351 (852) 2,499
Rights and concessions 531 (83) 448 121 (4) 117
Land 136 - 136 105 - 105
Materials 294 - 294 184 - 184
Expansion projects -
Construction and
installations
in progress:
Exploration and - -
production 4,817 4,817 3,477 3,477
Supply 2,442 - 2,442 1,105 - 1,105
Gas and Energy 1,020 - 1,020 243 - 243
Distribution 106 - 106 64 - 64
Corporate 31 - 31 - - -
Other 14 - 14 27 - 27
------------ ------------ ------------- ------------ ------------ ------------
50,059 (19,254) 30,805 33,160 (14,936) 18,224
============ ============ ============= ============ ============ ============
During 2003, the Company capitalized US$ 184 of interest cost (2002 - US$
139; 2001 - US$ 123).
9. Property, plant and equipment--Continued
(a) Composition of balance--Continued
The property, plant and equipment account at December 31, 2003 and 2002,
respectively, includes US$ 678 and US$ 292 of assets under construction
that are intended to be sold or transferred into structured financing
deals. These assets include natural gas pipelines and other oil and gas
projects at 2003, and thermoelectric plants, natural gas pipelines and
other oil and gas projects at 2002. Additionally, the property, plant and
equipment account at December 31, 2003 and 2002, respectively, includes
US$ 978 and US$ 653 of assets under agreements with investors.
The property, plant and equipment balance at December 31, 2003, includes
US$ 5,775 of assets consolidated as a result of the adoption of FIN 46. Of
this amount, US$ 3,718 was previously included in the property, plant and
equipment balance at December 31, 2002 for special purpose project
financing entities and certain thermoelectric plants accounted for as
capital leases. The increase to property, plant and equipment resulting
from the adoption of FIN 46 is related to the consolidation of three
thermoelectric plants which were previously only recognized as guarantees;
see Note 16.
(b) Impairment
For the years ended December 31, 2003, 2002 and 2001, the Company recorded
impairment charges of US$ 70, US$ 75 and US$ 145, respectively. During
2003, US$ 65 of the impairment charge was related to producing properties
in Brazil, principle amounts were related to the Company's Fazenda Belem
on-shore field (US$ 15) in Rio Grande do Norte, and the Lamarao on-shore
field (US$ 4) in Bahia. During 2002, US$ 75 of the impairment charge was
related to producing properties in Brazil, primarily recorded in the
Company's Voador field (US$ 42) in the Campos basin, Caravelas field (US$
15) in the Santos basin and Massape field (US$ 4) in the Reconcavo basin.
9. Property, plant and equipment--Continued
(b) Impairment--Continued
During 2001, US$ 129 of the impairment charge was related to producing
properties in Brazil and was primarily recorded in the Company's Voador
field (US$ 88) in the Campos basin and Caravelas field (US$ 30) in the
Santos basin. The remaining US$ 16 were recorded in the international
segment primarily in the Company's Upia field (US$13) located in Colombia.
These charges were recorded based upon the Company's annual assessment of
the fields using pricing and other assumptions consistent with those used
in the Company's overall strategic plan.
(c) Return of exploration areas to the ANP
During 2003, PETROBRAS returned to the ANP the rights to over twenty two
exploratory concessions where it had not made any oil or gas discoveries.
Thus, total concessions returned are as follows: 113 (one hundred and
thirteen) of the 115 (one hundred and fifteen) concessions granted to the
Company on August 6, 1998; 2 (two) of the 5 (five) exploratory concessions
areas acquired under the "BID 1" in June of 1999; and 50% of the original
areas related to 8 (eight) exploratory concession areas acquired under the
"BID 2", in June of 2000.
(d) 5th ANP auction of exploratory blocks
The Company acquired 88 (eighty-eight) new exploratory concessions of the
908 (nine hundred and eight) blocks offered by ANP in the 5th bid for
exploratory blocks held in August of 2003. The Company has exclusive
rights over 85 (eighty-five) of these concessions and the other 3 (three)
were acquired under a consortium. The Company is not the operator of the
consortium. The costs incurred by the Company in subscription bonus
totaled US$ 7.
10. Investments in non-consolidated companies and other investments
PETROBRAS conducts portions of its business through investments in
companies accounted for using the equity and cost methods. These
non-consolidated companies are primarily engaged in the petrochemicals and
products transportation businesses.
Investments
--------------------------------------
Total ownership 2003 2002
------------------------- ------------------- ------------------
Equity method 20 % - 50% (a) 664 131
Investments available-for-sale 8% - 16% 331 85
Investments at cost 178 118
------------------- ------------------
Total 1,173 334
=================== ==================
(a) As described further in this Note, certain thermoelectrics with
ownership of 10% to 50% are also accounted for as equity investments
due to particularities of control.
During 2003, the Company acquired PEPSA and PELSA (see Note 19), that hold
interests in other companies that are recorded according to equity method
or at cost. The balance of those investments as of December 31, 2003
amounted to US$ 401 of which US$ 348 was recorded using the equity method.
Those companies operate mainly in exploration and production, refining,
transport and commercialization, electricity generation, transmission and
distribution, and petrochemicals.
At December 31, 2003 and 2002, the Company had investments in companies
with publicly traded shares: BRASKEM S.A., Petroquimica Uniao S.A. - PQU
and Companhia Petroquimica do Sul S.A. - COPESUL. The Company's
investments in these companies with publicly traded shares amounts to less
than 20% of the investee's total voting shares, are classified as
available for sale and have been recorded at market value. The Company has
recorded unrealized gains (losses) for the difference between the fair
value and the cost of the investment on these investments of US$ 207 and
US$ (16) as of December 31, 2003 and 2002, respectively. These holding
(losses) gains are reflected as a component of shareholder's equity, net
of tax, with changes in the unrealized balance recorded as a component of
comprehensive income.
10. Investments in non-consolidated companies and other investments--Continued
The Company also has investments in companies for the purpose of
developing, constructing, operating, maintaining and exploring
thermoelectric plants included in the federal government's Priority
Thermoelectric Energy Program, with equity interests of between 10% and
50%. The balance of the investments as of December 31, 2003 and 2002
includes US$ 46 and US$ 38 respectively, and are included as equity method
investments due to the Company's ability to influence such operations.
The Company's investment in equity of non-consolidated companies generated
equity gains (losses) in results of non-consolidated companies of US$ 141
for the year ended December 31, 2003 (2002 - US$ (178); 2001 - US$ (8)).
11. 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 having occurred before December 31,
2001, in accordance with Law No. 10,453, of May 13, 2002, and ANP
regulations. See additional discussion at Note 2 respective to market
regulation in Brazil and the effect of such on the historical financial
statements.
11. 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 years ended December 31, 2003 and 2002:
Year ended December 31,
----------------------------------
2003 2002
----------------------------------
Opening balance 182 81
Advances (collections) - PPE - (6 )
Reimbursements to third parties: principally subsidies paid to
fuel alcohol producers 5 253
Financial income 10 2
Result of audit conducted by the Federal Government - (29)
Translation gain (loss) 42 (119)
----------------------------------
Ending balance 239 182
==================================
(c) Certification by the Federal Government
The Federal Government certified the balance of the Petroleum and Alcohol
Account as of June 30, 1998.
The changes in the Petroleum and Alcohol Account in the period July 1,
1998 to December 20, 2002 are subject to audits by the ANP. The results of
the audit will be the basis for the settlement of the account with the
Federal Government.
The settlement of the account with the Federal Government should have been
completed by December 31, 2002, according to the provisions of Law No.
10,453 of May 13, 2002, amended by Decree No. 4,491 of November 29, 2002.
On June 26, 2003 Provisional Measure 123, article 11, which was converted
to Law No. 10,742 dated October 6, 2003, extended the term of settlement
of accounts involving reciprocal debits and credits between PETROBRAS and
the Federal Government to June 30, 2004, and in so doing, automatically
extending the term for certification of the outstanding balance in the
Petroleum and Alcohol Account.
11. Receivable from Federal Government--Continued
(d) National Treasury Bonds Series H (NTN-H)
On June 30, 1998, 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. On June 27, 2003, the
National Treasury Secretary issued Administrative Instruction 348,
authorizing the cancellation of 138,791 NTN-H, which expired on June 30,
2003 and were held in guarantee of payment of an outstanding balance in
the Petroleum and Alcohol Account and the issue of new 138,791 NTN-H, with
the same terms as the cancelled bonds but expiring on June 30, 2004. The
value of the outstanding bonds at December 31, 2003 was US$ 59, at which
time the balance of the Petroleum and Alcohol Account was US$ 239. 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.
The Brazilian Government, upon the Company's consent, can effect the
cancellation of all or a portion of the bonds' outstanding balance. The
NTN-H will mature on June 30, 2004 and currently PETROBRAS has no other
rights on those bonds; withdrawal or transfers are not allowed.
12. 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:
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
Import - oil and equipment 872 286
Working capital 447 385
Others 10 -
------------------- ------------------
1,329 671
=================== ==================
12. Financings--Continued
(a) Short-term debt--Continued
The weighted average annual interest rates on outstanding short-term
borrowings were 3.79 % and 3.86% at December 31, 2003 and 2002,
respectively.
(b) Long-term debt
o Composition
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
Foreign currency
Notes 5,462 2,234
Financial institutions 3,591 2,240
Sale of future receivables 1,767 900
Suppliers' credits 728 876
Senior exchangeable notes 338 338
Repurchased securities (1) (207) -
------------------- ------------------
11,679 6,588
------------------- ------------------
Local currency
Debentures 666 500
National Economic and Social Development
Bank - BNDES (state-owned company, see Note 26) 358 403
Debentures (state-owned company, see Note 26) 262 188
Others 68 35
------------------- ------------------
1,354 1,126
------------------- ------------------
Total (2) 13,033 7,714
Current portion of long-term debt (1,145) (727)
------------------- ------------------
11,888 6,987
=================== ==================
(1) At 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$ 920.
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$ 207, and project finance, US$ 713. See also
Note 14.
(2) Includes US$ 375 related to thermoelectric plants consolidated
under FIN 46. See additional discussion at Note 16.
12. Financings--Continued
(b) Long-term debt--Continued
o Composition of foreign currency denominated debt by currency
As of December 31,
--------------------------------------
2003 2002
------------------ ------------------
Currencies
United States dollars 10,621 5,522
Japanese Yen 628 764
EURO 429 297
Others 1 5
------------------ ------------------
11,679 6,588
================== ==================
o Maturities of the principal of long-term debt
The long-term portion at December 31, 2003 becomes due in the
following years:
2005 1,136
2006 1,322
2007 1,992
2008 1,384
2009 and thereafter 6,054
===================
11,888
===================
As of December 31, 2003, US$ 1,923of long-term debt was related to PEPSA.
12. Financings--Continued
(b) Long-term debt--Continued
o Composition of long-term debt by annual interest rate
Interest rates on long-term debt were as follows:
As of December 31,
--------------------------------------
2003 2002
------------------- ------------------
Foreign currency
6% or less 4,365 3,080
Over 6% to 8% 2,154 1,220
Over 8% to 10% 4,990 2,287
Over 10% to 15% 170 1
------------------- ------------------
11,679 6,588
------------------- ------------------
Local currency
6% or less 668 235
Over 6% to 8% - 390
Over 10% to 15% 686 501
------------------- ------------------
1,354 1,126
------------------- ------------------
13,033 7,714
=================== ==================
On March 31, 2003, the Company issued Global Step-up Notes in an
aggregate principal amount of US$ 400 due April of 2008. The notes will
bear interest from March 31, 2003 at a rate of 9.00% per annum until
April 1, 2006 and at a rate of 12.375% per annum thereafter, with
interest payable semiannually. The Company used the proceeds from this
issuance principally to repay trade-related debt.
On July 2, 2003, the Company issued Global Notes in an aggregate
principal amount of US$ 500 due July of 2013. The notes will bear
interest at the rate of 9.125% per annum, payable semiannually. On
September 18, 2003, the Company issued an additional US$ 250 in Global
Notes, which form a single fungible series with the Company's US$ 500
Global Notes due July of 2013. The Company used the proceeds from these
issuances principally to repay trade-related debt.
On December 10, 2003, the Company issued Global Notes in an aggregate
principal amount of US$ 750 due December of 2018. The notes will bear
interest at the rate of 8.375% per annum, payable semiannually. The
Company used the proceeds from this issuance principally to repay
trade-related debt.
12. Financings--Continued
(b) Long-term debt--Continued
o Composition of long-term debt by annual interest rate
On October 24, 2003, Petrobras Energia S.A. issued US$ 100 notes -
Series R, with a 9.375% annual coupon payable semiannually, and a
9.5% annual yield to maturity, and due date of 2013.
o Structured finance of exports
Respective to the Senior and Junior Notes issued pursuant to the
structured finance program, PETROBRAS and Petrobras Finance Ltd. -
PFL have certain contracts (Master Export Contract and Prepayment
Agreement) between themselves and special purpose entity not related
to PETROBRAS, PF Export Receivables Master Trust ("PF Export"),
relating to the prepayment of export receivables to be generated by
PFL by means of sales on the international market of fuel oil and
other products acquired from PETROBRAS.
As stipulated in the contracts, PFL assigned the rights to future
receivables in the amount of US$ 1,800 (1st and 2nd tranches) to PF
Export, which, in turn, issued and delivered to PFL the following
securities, also in the amount of US$ 1,800:
- US$ 1,500 in Senior Trust Certificates, which were negotiated
by PFL on the international market at face value. The amount
was transferred to PETROBRAS as prepayment for exports to be
made to PFL, according to the prepayment agreement.
- US$ 300 in Junior Trust Certificates, which are held in the
portfolio of PFL. If PF Export incurs any losses on the
receipt of the value of the exports transferred by PFL, these
losses will be compensated by the Junior Trust Certificates.
The assignment of rights to future export receivables represents a
liability of PFL, which will be settled by the transfer of the
receivables to PF Export as and when they are generated. This
liability will bear interest on the same basis as the Senior and
Junior Trust Certificates, as described above.
12. Financings--Continued
(b) Long-term debt--Continued
o Structured finance of exports--Continued
In May of 2003, the PF Export Trust issued to the Company additional
US$ 750 in Senior Trust Certificates and US$ 150 in Junior Trust
Certificates. The Senior Trust Certificates consist of Series 2003-A
of US$ 550 bearing annual interest of 6.436% and due in June of 2015
and Series 2003-B of US$ 200 bearing annual interest due of 5.548%
due in June of 2013. The Junior Trust Certificates were issued with
complementary terms as the new Senior Trust Certificates as they
form a 20% guarantee to the senior trust certificates and expire
ratably. These two new issuances complement the initial structured
finance export prepayment program commenced in December of 2001.
(c) Issue of non-convertible debentures
During 2002, PETROBRAS issued the following book-entry, non-convertible
debentures, without guarantee or preference, in a single issue:
Issue date Quantity Period Index Interest
---------------------------------------------------------- --------------- --------------- ---------------
August 29 750,000 10 years IGPM 11% p.a.
October 4 and 23 775,000 8 years IGPM 10.3% p.a.
The proceeds of these issuances were used for general corporate purposes.
There were no additional issuances in 2003 on non-convertible debentures.
(d) Guarantees and covenants
Financial institutions abroad do not require guarantees from the Company.
The financing granted by BNDES - National Bank for Social and Economic
Development is guaranteed by a lien on the assets being financed
(vessels).
12. Financings--Continued
(d) Guarantees and covenants--Continued
At December 31, 2003 and 2002, GASPETRO had secured certain debentures
issued to finance the purchase of the transportation rights in the
Bolivia/Brazil pipeline with 3,000 shares of its interest in TBG, a
subsidiary of GASPETRO responsible for the operation of the pipeline.
The Company's debt agreements contain affirmative covenants regarding,
among other things, provision of information; financial reporting; conduct
of business; maintenance of corporate existence; maintenance of government
approvals; compliance with applicable laws; maintenance of books and
records; maintenance of insurance; payment of taxes and claims; and notice
of certain events. The Company's debt agreements also contain negative
covenants, including, without limitation, limitations on the incurrence of
indebtedness; limitations on the incurrence of liens; limitations on
transactions with affiliates; limitations on the disposition of assets;
limitation on consolidations, mergers, sales and/or conveyances; negative
pledge restrictions; change in ownership limitations; ranking; use of
proceeds limitations; and required receivables coverages.
The Federal Government guarantees TBG's Multilateral Credit Agency debt,
which had an outstanding balance of US$ 463 and US$ 487 at December 31,
2003 and 2002, respectively. During 2000, the Federal Government, the
Company, TBG, PETROQUISA and Banco do Brasil S.A. entered into an
agreement whereby the revenues of TBG will serve as a counter-guarantee to
this debt until the debt has been extinguished.
PETROBRAS entered into standby purchase agreements in support of the
obligations of its wholly-owned subsidiary under the note issuances in
2001, 2002 and 2003 and their respective indentures. PETROBRAS has the
obligation to purchase from the noteholders any unpaid amounts of
principal, interest or other amounts due under the notes and the indenture
applies, subject to certain limitations, irrespective of whether any such
amounts are due at maturity of the notes or otherwise.
12. Financings--Continued
(e) Lines of credit
At December 31, 2003 and 2002, the Company had fully utilized all
available lines of credit for the purchase of imports. Outstanding lines
of credit at December 31, 2003 and 2002 were US$ 1,689 and US$ 2,771,
respectively. Lines of credit are included in short-term debt and in
suppliers' credits.
13. Financial income (expenses), net
Financial expenses, financial income and monetary and exchange variation
on monetary assets and liabilities, net, allocated to income for the years
ended December 2003, 2002 and 2001 are shown as follows:
Year ended December 31,
----------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Financial expenses
Loans and financings (808) (527) (610)
Capitalized interest 184 139 123
Leasing (117) (51) (88)
Project financing (410) (226) (153)
Other (96) (109) (80)
--------------- -------------- --------------
(1,247) (774) (808)
Financial income
Investments 243 801 893
Advances to suppliers 36 35 34
Government Securities 24 70 243
Other 299 236 205
--------------- -------------- --------------
602 1,142 1,375
Monetary and exchange variation
Monetary and exchange variation on monetary assets (269) 958 179
Monetary and exchange variation on monetary liabilities 778 (3,026) (1,094)
--------------- -------------- --------------
509 (2,068) (915)
--------------- -------------- --------------
(136) (1,700) (348)
=============== ============== ==============
14. 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.
Through 2002 and the majority of 2003, the Company's arrangements with
respect to these projects were considered 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 year-end 2002, the project finance
obligation represents the present value of the future value of capital
lease commitments, while at December 31, 2003, the project finance
obligation represents the debt of the consolidated SPE with the third
party lender.
As the assets related to the project finance special purpose entities and
the related capital lease obligations were already recorded in the
accounts of the Company at December 31, 2003, the adoption of FIN 46
related to the project finance entities did not have a material impact on
the financial statements.
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 December 31, 2003 and 2002:
As of December 31,
--------------------------------------
2003 2002
------------------ ------------------
Barracuda/Caratinga 2,555 1,481
Cabiunas 857 673
Espadarte/Voador/Marimba (EVM) 826 575
Marlim 680 635
Nova Marlim 475 508
Albacora 126 123
Pargo, Carapeba, Garoupa and Cherne (PCGC) 76 44
Malhas project 286 -
Langstrand Holdings S.A. 700 -
PDET ONSHORE 40 -
Repurchased securities (713) -
------------------ ------------------
5,908 4,039
Current portion of project financings (842) (239)
------------------ ------------------
5,066 3,800
================== ==================
14. Project financings--Continued
PETROBRAS has received certain advances in the amount of US$ 593 which are
recorded as project finance obligations and are related to assets under
agreements with investors, which are included to the property, plant and
equipment balance; see Note 9. Such asset and obligation amounts are
presented gross as the obligation can only be settled through delivery of
the fully constructed asset.
At December 31, 2003, the long-term portion of project financings becomes
due in the following years:
2005 1,295
2006 838
2007 1,231
2008 569
2009 and thereafter 1,133
-----------
5,066
===========
As of December 31, 2003, the amounts of cash outlay commitments assumed related
to consolidated structured project financings are presented as follows:
Cabiunas 185
Nova Transportadora do Sudeste - NTS 370
Nova Transportadora do Nordeste - NTN 470
-----------
1,025
===========
14. Project financings--Continued
Barracuda/Caratinga
On June 23, 2000 the Company completed its project finance negotiations
with the Barracuda Caratinga Leasing Company B. V. (BCLC), a special
purpose entity formed by a group of international financial institutions
for the sole purpose of raising US$ 2,500 for the development of the
Barracuda and Caratinga oil and gas fields located in the Campos Basin.
Permanent funding for this project has been raised from two governmental
institutions (Japan's Bank of International Cooperation - JBIC and the
BNDES) and from a syndicate of commercial banks. In conjunction with this
project, the Company will contribute US$ 1,035 of drilling services
through a drilling services contract signed with the Halliburton Company.
From early 2003, KBR has been announcing to the market its intention to
file a Chapter 11 case with the U.S. courts, specifically limited to its
asbestos business; such filing was completed in the second half of
December 2003. As informed by KBR in its official announcements to the
market, the bankruptcy protection proceedings would not directly impact
the remaining businesses, including its obligations under the
Barracuda/Caratinga Project EPC contract.
In the capacity as "Owner's Representative" under the project, at June 17,
2003, PETROBRAS, on behalf of BCLC, finalized negotiations with KBR
involving claims made by KBR for time extensions and project cost
increases. After formal approval from the project sponsors, as
contractually defined, such negotiations resulted in an amendment to the
original agreement, as approved on November 7, 2003. The objectives of
such amendment are to mitigate the risks involved, especially the risk
related to the bankruptcy protection filed by KBR, and ensures asset
construction completion in the shortest period. The original package of
guarantees has been maintained and new guarantees are expected to be
provided by KBR.
On January 12, 2004, KBR officially announced that the judge responsible
for its Chapter 11 filing accepted the position advanced by KBR whereby
bankruptcy proceedings should be limited to its asbestos business, without
prejudice to the development of other businesses of the company, including
the Barracuda/Caratinga project.
14. Project financings--Continued
Cabiunas
On March 1, 2000, the Company completed its project finance negotiations
with the Cayman Cabiunas Investment Co. Ltd., a special purpose entity
formed by the Mitsui and Sumitomo banks for the sole purpose of raising
US$ 850 for the expansion of the Cabiunas Complex located in Macae, in the
state of Rio de Janeiro. Permanent financing was provided by JBIC, a
syndicate of commercial banks led by the Bank of Tokyo-Mitsubishi and the
special purpose company's equity investors.
Espadarte/Voador/Marimba (EVM)
On June 23, 2000, the Company completed its project finance negotiations
with the EVM Leasing Corporation (EVMLC), a special purpose entity formed
by a group of international financial institutions for the sole purpose of
raising US$ 1,600 for the development of the Espadarte, Voador and Marimba
oil and gas fields located in the Campos Basin. Permanent funding for the
EVM project was provided by a syndicate of international financial
institutions, Japanese trading companies, JBIC and BNDES. Bridge financing
in the amount of US$ 300 for this project was prepaid in December of 1999.
Upon closing of the agreement, the Company sold previously identified oil
and gas assets to EVM, who leased them back to the Company.
Marlim
On December 14, 1998, the Company entered into a consortium agreement with
Companhia Petrolifera Marlim (CPM), a single purpose entity formed in
November of 1998 by a group of international financial institutions for
the sole purpose of raising US$ 1,500 for the expansion and continued
development of the Marlim oil field. In December of 1999, CPM raised US$
200 through a medium term note program, and an additional US$ 300 in 2000.
Upon closing of the consortium agreement, the Company sold certain assets
to CPM, who leased them back to the Company. Effective June 30, 1999
PETROBRAS conveyed its remaining assets in the Marlim field to CPM, that
also leased them back to the Company. Additionally, in June of 1999, the
shareholders of CPM and the Company entered into a Stock Option Agreement
granting to the Company a call option at the end of the lease and to the
shareholders of CPM a put option to the Company in the case of default.
14. Project financings--Continued
Nova Marlim
On December 6, 2001, the Company entered into a consortium agreement with
Nova Marlim Petroleo S.A., a special purpose entity formed by a group of
international financial institutions for the sole purpose of raising US$
933 for the complementary development and production optimization of the
Marlim oil field.
Albacora
During 2000, the Company finalized negotiations for two separate financing
projects related to the Albacora oil field located in the Campos basin. On
November 28, 2000, the Company completed its negotiations related to a
project financing arrangement with the Albacora Japan Petroleum Limited
Company (AJP), a special purpose corporation formed in December of 1998
for the sole purpose of providing financing for the continued development
of the Albacora oil field. AJP's operations commenced in December of 2000
with the purchase of certain oil and gas assets from the Company. AJP
provided these assets exclusively to the Company in return for minimum
proceeds of US$ 208 to be generated from the field's production.
Permanent financing was provided by JBIC, the Japan National Oil Company
(JNOC) and certain Japanese trading companies. In addition, in December of
2000, PETROS, the Company's pension plan, agreed to provide funding for
the development of this oil field. During 2000, PETROS advanced US$ 240
for the continued development of the field, and this amount has been
classified together with the AJP financing transaction. AJP does not have
any further funding needs.
Pargo, Carapeba, Garoupa, Cherne and Congro (PCGC)
The PCGC is an offshore development project in the Pargo, Carapeba,
Garoupa, Cherne and Congro fields. The project is a secondary extraction
project using water-injection technology to reestablish the appropriate
level of pressure in the reservoirs to maximize the recovery of oil and
gas in these fields. In addition, the PCGC project includes equipment for
new oil reserves in the Congro field. Management estimates total costs of
the PCGC project to be US$ 134.
14. Project financings--Continued
Malhas Project
In order to implement a pipeline network for the transportation of gas in
the Southeast and Northeast regions (MALHAS Project), the Company, through
its subsidiaries GASPETRO and TRANSPETRO, entered into a consortium with
the SPCs Nova Transportadora do Sudeste (NTS) and Nova Transportadora do
Nordeste (NTN). NTS and NTN will participate in the consortium by
acquiring assets related to the transportation of natural gas (gas
pipelines, citygates and accessories), in the amount of up to US$ 1,000,
US$ 92 of which had already been allocated, to be integrated in the
existing gas pipeline network of PETROBRAS. Funds to be allocated to the
project by NTS and NTN will derive from own capital (10%) and from
financing operations obtained in the financial market.
In addition to NTS and NTN, the MALHAS consortium also includes the
wholly-owned subsidiary of the Company, Transportadora Nordeste Sudeste
(TNS), to which existing gas transportation assets belong, and by
TRANSPETRO, which is responsible for the activities involved in the
operation and maintenance of the consortium assets. Upon commencement of
operations, the consortium will transport the natural gas of PETROBRAS,
which will pay the consortium a fee for the services provided. Revenues
arising from this project will be shared among the consortium members in
accordance with pre-defined contractual terms, and NTS and NTN will
receive funds in an amount necessary to fulfill their financial
obligations. The Company is committed to making prepayments for
transportation capacity to cover any cash shortfalls of the consortium, so
that it may transfer to NTS and NTN the funds necessary for the
fulfillment of their financial obligations under the agreement. The MALHAS
consortium was not operational as of December 31, 2003 and, accordingly,
the Company did not make any payments for gas transportation services.
14. Project financings--Continued
Langstrand Project
Through a financing structure that involves the SPC Langstrand Holdings
S.A., the Company will sell to this company assets related to the
production of oil, located in the Campos Basin, and subsequently will
lease such assets back through a leasing agreement. The funds necessary
for Langstrand to acquire the assets from PETROBRAS will be provided by
shareholders capital (equivalent to US$ 70) and from the financing
operations obtained in the international financial markets through the
issuance of Medium Term Notes backed by Langstrand receivables (lease
payments to be made by PETROBRAS).
Lease payments are due on a semi-annual basis from June of 2004.
Langstrand revenues will arise solely from the semi-annual lease payments
to be made by PETROBRAS for the use of the assets and PETROBRAS also
ensures the payment of additional lease payments in the event that
Langstrand revenues are not sufficient to cover its financial obligations
related to the project. In an event of default, PETROBRAS is committed to
acquire the SPC for the remaining balance of its obligations.
15. Capital leases
In 2002, the Company leased certain offshore platforms, vessels and
thermoelectric plants, which are accounted for as capital leases. At
December 31, 2003, the Company continued to lease these offshore platforms
and vessels, and continued to account for such as capital leases. However,
pursuant to the adoption of FIN 46, three thermoelectric plants which were
previously accounted for as capital leases have been consolidated by the
Company. At December 31, 2003, assets under capital lease had a net book
value of US$ 1,749 (US$ 2,499 at December 31, 2002, including
thermoelectrics).
15. Capital leases--Continued
The following is a schedule by year of the future minimum lease payments
at December 31, 2003:
2004 388
2005 333
2006 286
2007 268
2008 232
2009 and thereafter 518
----------
Estimated future lease payments 2,025
Less amount representing interest at 6.2% to 12.0% annual (400)
Less amount representing executory costs (5)
----------
Present value of minimum lease payments 1,620
Less current portion (378)
----------
Long-term portion 1,242
==========
16. Thermoelectric plant obligations
As a result of adopting FIN 46 at December 31, 2003, the Company now
consolidates six thermoelectric plants. Previously, three of these
thermoelectric were accounted for as capital leases, while the other three
were considered contractual obligations concerning third-party interests,
with amounts equal to 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.
16. Thermoelectric plant obligations--Continued
The consolidation of the three thermoelectrics formerly treated as capital
leases resulted in US$ 375 being reclassified from capital lease
obligations to long-term debt obligations (see Note 15). The impact of
changing the obligations related to these three plants from the minimum
value of future lease payments to the debt outstanding with third party
lenders was immaterial. At December 31, 2003, the consolidation of the
three thermoelectrics previously accounted for as contractual obligations
concerning third party interests resulted in an increase to assets and
long-term obligations of US$ 1,142.
At December 31, 2002, the Company had commitments with thermoelectric
plants related to (a) the supply of natural gas for the production of
energy and the purchase of all or a portion of the energy generated by
these plants and (b) commitments to reimburse certain allocations as
defined per the Consortium Agreements. At December 31, 2002 the provision
for future losses on energy business recorded by the Company amounted to
US$ 205. On May 7, 2003, the Executive Board authorized an increase in the
above-mentioned accounting provision for US$ 205, in the first quarter of
2003 especially considering that the originally expected sales of energy
available through Power Purchase Agreements (PPA's) in 2003 and the
technical supply level of thermoelectric power plants were not confirmed,
principally as a result of a retraction in demand following the energy
rationing program and of the lack of a well defined regulatory framework
for the energy sector. The provisions accrued at year-end 2002 and in the
first quarter of 2003, respective to 2003 exposure was substantially
utilized during the course of the year.
At December 31, 2003 as a result of adoption of FIN 46, the Company has
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.
17. Employees' postretirement benefits and other benefits
(a) Employees' postretirement benefits balances
The balances related to Employees' Postretirement Benefits are
represented as follows:
As of December 31,
-------------------------------------------------
2003 2002
-------------------------------------------------
Health Health
Pension care Pension care
benefits benefits benefits benefits
------------ ---------- ------------- -----------
Current liabilities 160 - 89 -
Long-term liabilities 1,895 1,580 1,363 1,060
------------ ------------------------ -----------
Employees' postretirement benefits obligations 2,055 1,580 1,452 1,060
Accumulated other comprehensive income 2,407 - 2,061 -
Tax effect (819) - (700) -
------------ ------------------------ -----------
Net balance recorded in shareholders' equity 1,588 1,361
Other assets: Unrecognized pension obligations - - 61 -
(b) Pension plan - Fundacao Petrobras de Seguridade Social - PETROS
The Fundacao Petrobras de Seguridade Social (PETROS) and the current
benefits plan (the PETROS Plan)
The Fundacao Petrobras de Seguridade Social (PETROS) was established
by PETROBRAS as a private, legally separate nonprofit pension entity
with administrative and financial autonomy. As such, PETROS has the
following principle objectives:
(i) institute, manage and execute benefit plans for the companies
or entities with which it has signed agreements;
(ii) provide administration and execution services for benefit
plans focused on postretirement payments; and
(iii) promote the well-being of its members, especially with respect
to postretirement payments.
17. Employees' postretirement benefits and other benefits--Continued
(b) Pension plan - Fundacao Petrobras de Seguridade Social -
PETROS--Continued
The Fundacao Petrobras de Seguridade Social (PETROS) and the current
benefits plan (the PETROS Plan)--Continued
The PETROS plan is a contributory defined-benefit pension plan
introduced by PETROBRAS in July of 1970, to supplement the social
security pension benefits of employees of PETROBRAS and its
subsidiaries and affiliated companies. In order to fund its
objectives, PETROS receives monthly contributions from the
sponsoring companies of the PETROS Plan amounting to 12.93% of the
salaries of participants in the plan. Additionally PETROS is funded
by income resulting from the investment of these contributions. The
Company's funding policy is to contribute to the plan annually the
amount determined by actuarial calculations. In the calendar 2003
year, contributions paid totaled US$ 402 (US$ 311 in 2002), and was
deducted from the balance of the provision for benefit obligation
established at December 31, 2003. In the 2003 and 2002 financial
years, these contributions were included in the cost of operations.
The Company's liability related to future benefits to plan
participants is calculated on an annual basis by an independent
actuary, based on the Projected Unit Credit method. The assets that
guarantee the pension plan are presented as a reduction to the net
actuarial liabilities.
The actuarial gains and losses arising from the difference between
the actuarial assumptions and the fair value of plan assets are
respectively recorded as "amounts not recognized as net periodic
pension cost", in shareholders' equity. These gains and losses are
amortized during the average remaining service period of the active
employees of approximately 15 years at December 31, 2003, in
accordance with the procedure established by SFAS 87.
The relation between contributions by the sponsors and participants
of the PETROS Plan, considering only those attributable to the
Company and subsidiaries in the 2003 financial year, was 1.01 (0.94
in 2002). The Company's best estimate of contributions expected to
be paid in 2004 respective to the pension plan approximates US$ 122.
17. Employees' postretirement benefits and other benefits--Continued
(b) Pension plan - Fundacao Petrobras de Seguridade Social -
PETROS--Continued
The Fundacao Petrobras de Seguridade Social (PETROS) and the current
benefits plan (the PETROS Plan)--Continued
According to Constitutional Amendment No. 20, the computation of any
deficit in the defined-benefit plan in accordance with the actuarial
method of the current plan (which differs from the method defined in
SFAS 87), must be equally shared between the sponsor and the
participants.
Therefore, in the event that the deficit computed for December 31,
2003 in accordance with the projected credit unit method (SFAS 87),
is reflected as a technical deficit in the methods adopted by the
PETROS Plan, and results in additional financial contributions,
these additional required contributions shall be divided equally
between the Company and the participants.
Plan assets
Plan assets are invested primarily in government securities,
investment funds, equity instruments and properties.
The table below describes the types of plan assets:
As of December 31,
----------------------------------
2003 2002
---------------- -----------------
Government securities 50% 50%
Investments funds 23% 26%
Equity instruments 13% 9%
Other 14% 15%
---------------- -----------------
100% 100%
================ =================
17. Employees' postretirement benefits and other benefits--Continued
(b) Pension plan - Fundacao Petrobras de Seguridade Social -
PETROS--Continued
Plan assets--Continued
Plan assets includes the following securities of related parties:
As of December 31,
--------------------------
2003 2002
-------------- -----------
PETROBRAS common shares 30 4
PETROBRAS preferred shares 75 35
Government controlled companies 43 22
Government securities 2,662 1,633
Securities of other related parties 184 56
------------- ------------
2,994 1,750
============= ============
In addition, PETROS has agreed to provide certain financing for the
continued development of the Albacora oil and gas field located in
the Campos Basin (see Note 14).
The Company uses 6% as the expected long-term rate of return on
PETROS' assets. The PETROS' portfolio of investments as of December
31, 2003 was comprised of 71% securities, 50% of which were
held-to-maturity government securities that earn interest at 6%
annually plus the IPCA (Consumer Price Index) variation and 23% of
which were Investments Funds that earn interest approximate to the
CDI (Certificado de Deposito Interbancario, or Interbank Deposit
Certificate), which has been yielding more than 6% annually. Thus,
the Company considers a 6% long term interest rate appropriate to
calculate the expected return on assets, as such aligns with the
composition of the PETROS' asset portfolio.
PETROS intends to change its investment strategy for the 2004-2008
years to reflect the evolution of and opportunities expected in the
Brazilian economy for 2004 and beyond. PETROS will continue to
maintain plan assets in various sectors, but percentages by asset
type are expected to differ depending on yield's achievable in the
market while minimizing risk exposure.
PETROS has a significant volume of investments in government
securities, mainly NTN-B bonds, which by an agreement with the
Supplementary Social Security Department will be held-to-maturity.
Thus, the percentage of assets allocated in this investment will
remain the same over the short term.
17. Employees' postretirement benefits and other benefits--Continued
(b) Pension plan - Fundacao Petrobras de Seguridade Social -
PETROS--Continued
PETROBRAS VIDA plan
In May of 2001, the Board of Directors of PETROBRAS approved the
creation of a mixed social security plan, for current and new
employees, based on defined contribution formula for programmable
benefits and a defined benefit formula for risk benefits.
The new plan, PETROBRAS VIDA, was approved by the Coordination and
Control Department of State Companies (DEST) and by the
Supplementary Social Security Department (SPC) in October of 2001,
and ratified by PETROBRAS Board of Directors.
The migration process of participants in the current plan to
PETROBRAS VIDA has been temporarily suspended pursuant to a Federal
Justice ruling. Therefore the impact of migration to the new plan
will only be computed and recognized in the Company's financial
statements in accordance with the requirements of SFAS No. 88 -
Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits ("SFAS 88"), when
the issues being litigated have been resolved and the migration
process finalized.
In August of 2002, pursuant to closure of the PETROS Plan, PETROBRAS
took out a group life insurance policy to cover employees beginning
employment with the Company subsequent to closure of the PETROS
plan; this policy will remain in effect until a new private pension
plan is implemented.
TRANSPETRO
TRANSPETRO maintains a defined-contribution private pension scheme
with PETROS called Plano TRANSPETRO, which receives monthly
contributions equivalent to 5.32% of the payroll of the members and
is equal to the contributions made by the participants.
17. Employees' postretirement benefits and other benefits--Continued
(b) Pension plan - Fundacao Petrobras de Seguridade Social -
PETROS--Continued
PETROBRAS ENERGIA - PEPSA
Defined contribution plan
Petrobras Energia sponsors a defined contribution plan applicable to
all of its employees with salaries above a specified level. Through
this plan, Petrobras Energia provides additional funds at amounts
equivalent to contributions made by employees which are in excess of
legally required amounts. These funds are recognized in accordance
with the accrual method of accounting. Due to significant changes in
the macroeconomic scenario in 2002 and the uncertainties with regard
to the Argentine economic conditions, PEPSA has temporarily
suspended this benefit as from January of 2002. This benefit will be
reinstated when a provisional savings means considered adequate to
this end is identified.
All employees joining PEPSA prior to May 31, 1995 that have
participated in the defined contribution plan without interruption
and that have worked for a required number of years are entitled to
this benefit. The benefit is based on the latest salary amount paid
to the employees that participate in the plan, considering the
number of years worked.
The plan is of a supplemental nature: the benefit received by the
employee corresponds to an amount defined in conformity with the
plan's provisions, after deducting the benefits vested in accordance
with the contribution plan and the government-sponsored pension
scheme, so as the aggregate amount of benefits granted to each
employee under the three plans is equivalent to that defined in the
plan.
As from retirement, the employees are entitled to a fixed monthly
payment.
The plan requires contributions to a fund, payable by PEPSA and not
by the employees, who must contribute to the social security system
based on their total salary. The fund's assets have been transferred
to a trust and invested mainly in bonds, notes, mutual investment
funds and fixed term deposits. The Bank of New York is the trustee
and Watson Wyatt is the managing agent. PEPSA determines the
liability relating to this plan using actuarial calculation methods.
17. Employees' postretirement benefits and other benefits--Continued
(c) Health care benefits - "Assistencia Multidisciplinar de Saude" (AMS)
PETROBRAS and its subsidiaries maintain a health care benefit plan
(AMS), which offers defined benefits and covers all employees
(active and inactive) together with their dependents. The plan is
managed by the Company, with the employees contributing fixed
amounts to cover principal risks and a portion of the costs relating
to other types of coverage in accordance with participation tables
defined by certain parameters including salary levels.
The Company's commitment related to future benefits to plan
participants is calculated on an annual basis by an independent
actuary, based on the Projected Unit Credit method. The health care
plan is not funded or otherwise collateralized by assets. Instead,
the Company makes benefit payments based on annual costs incurred by
plan participants.
The actuarial gains and losses arising from the differences between
the actuarial assumptions and the costs effectively incurred are
respectively included or excluded when defining the net actuarial
liability. These gains and losses are amortized over the average
remaining service period of the active employees.
For measurement purposes, a 5.82% annual rate of increase in the per
capita cost of covered health care benefits was assumed upon
adoption of SFAS 106. The annual rate was assumed to decrease to
2.7% after 50 years.
Assumed health care cost trend rates have a significant effect on
the amounts reported for the postretirement health care plans. A
one-percentage-point change in assumed health care cost rates would
have the following effects:
One percentage One percentage
point-increase point-decrease
---------------------- ----------------------
Effect on total of services and interest cost component 80 (62)
Effect on postretirement benefit obligation 567 (448)
17. Employees' postretirement benefits and other benefits--Continued
(d) Funded status of the plans
The funded status of the plans at December 31, 2003 and
2002, based on the report of the independent actuary, and
amounts recognized in the Company's balance sheets at those
dates, are as follows:
As of December 31,
---------------------------------------------
2003 2002
--------------------- -----------------------
Health Health
Pension care Pension care
benefits benefits benefits benefits
--------------------- ----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year 5,215 1,868 6,460 1,948
Service cost 97 36 54 21
Interest cost 678 243 255 144
Actuarial loss 909 533 975 479
Benefits paid (402) (77) (311) (52)
Acquisitions/Mergers - GASPETRO 25 6 - -
Gain (loss) on translation 1,246 464 (2,218) (667)
------------- ------- ----------- -----------
Benefit obligation at end of year (1) 7,768 3,073 5,215 1,873
------------- ------- ----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 3,715 - 4,299 -
Actual return on plan assets 1,162 - 754 -
Company contributions 98 77 377 52
Employee contributions 95 - 72 -
Benefits paid (402) (77) (311) (52)
Acquisitions/Mergers - GASPETRO 32 - - -
Loss on translation 891 - (1,476) -
------------- ------- ----------- -----------
Fair value of plan assets at end of year 5,591 - 3,715 -
------------- ------- ----------- -----------
Reconciliation:
Funded status (2,177) (3,073) (1,500) (1,873)
Unrecognized actuarial loss 2,529 1,493 2,109 813
Unrecognized transition obligation - - 61 -
------------- ------- ----------- -----------
Net amount recognized 352 (1,580) 670 (1,060)
------------- ------- ----------- -----------
Amounts recognized in the balance sheet consist of:
Employees' postretirement benefits (2,055) (1,580) (1,452) (1,060)
Unrecognized pension obligations - - 61 -
Accumulated other comprehensive income 2,407 - 2,061 -
------------- ------- ----------- -----------
Net amount recognized 352 (1,580) 670 (1,060)
============= ======= =========== ===========
(1) Accumulated benefit obligation, measured at December 31, 2003. While
PETROBRAS is anticipating migration to a new plan, such plan to date
has no participants. Similarly, the Transpetro plan has no
participants to date and the PEPSA plan is defined contribution.
Thus, the accumulated benefit obligation disclosed above is
aggregate to all PETROBRAS group companies.
17. Employees' postretirement benefits and other benefits--Continued
(d) Funded status of the plans--Continued
As discussed in Note 6, on December 30, 2002, the Company
transferred to PETROS NTN-B notes with a fair value of US$ 388.
Net periodic benefit cost includes the following
components:
As of December 31,
2003 2002
----------------------- -------------------------
Health Health
Pension Care Pension Care
benefits benefits benefits benefits
----------- ----------- ------------- -----------
Service cost-benefits earned during the year 97 36 54 21
Interest cost on projected benefit obligation 678 243 255 144
Expected return on plan assets (493) - (164) -
Amortization of initial transitory obligation 75 - 74 -
Gain (loss) on translation 50 87 (13) (51)
Recognized actuarial loss 273 - 154 -
----------- ----------- ------------- -----------
680 366 360 114
Employee contributions (101) - (71) -
----------- ----------- ------------- -----------
Net periodic benefit cost 579 366 289 114
=========== =========== ============= ===========
The main assumptions adopted in 2003 and 2002 for the actuarial
calculation are summarized as follows:
2003 2002
--------------------------------------- ---------------------------------------
Pension benefits Health care Pension benefits Health care
benefits benefits
------------------- ------------------- -------------------- ------------------
Discount rates Inflation: 5% + 6% Inflation: 5% + 6% Inflation: 5% + 6% Inflation: 5% + 6%
Rates of increase in
compensation levels Inflation: 5% + 2% Inflation: 5% + 2% Inflation: 5% + 2% Inflation: 5% + 2%
Expected long-term rate
of return on assets Inflation: 5%+ 6% Not applicable Inflation: 5% + 6% Not applicable
17. Employees' postretirement benefits and other benefits--Continued
(d) Funded status of the plans--Continued
The determination of the expense and liability relating to the
Company's pension plan involves the use of judgment in the
determination of actuarial assumptions. These include estimates of
future mortality, withdrawal, changes in compensation and discount
rate to reflect the time value of money as well as the rate of
return on plan assets. These assumptions are reviewed at least
annually and may differ materially from actual results due to
changing market and economic conditions, regulatory events, judicial
rulings, higher or lower withdrawal rates or longer or shorter life
spans of participants. As of December 31, 2002, the Company decided
to change the assumptions related to the estimate of future
mortality, adopting a new mortality table (GAM-71) more suitable for
the evolution observed in the average life expectancy of the
population made up of Company retired employees.
The Company and its actuarial consultants had been reviewing the
basis for estimating the assumed discount rate for its actuarial
obligations in light of the recent development of a secondary bond
market in Brazil for high-grade long-term government securities.
According to the requirements of SFAS 87, and subsequent
interpretations, the discount rate should be based on current prices
for settling the pension obligation. Applying the precepts of SFAS
87 in historically inflationary environments such as Brazil creates
certain issues as the ability for a company to settle a pension
obligation at a future point in time may not exist as long-term
financial instruments of suitable grade may not exist locally as
they do in the United States.
Although the Brazilian market has been demonstrating signs of
stabilization under the present economic model, as reflected in
market interest rates, it is not yet prudent to conclude that market
interest rates will be stable. Although SFAS 87 offers limited
guidance, the Company considers it appropriate to use actuarial
assumptions which include an estimate of long-term inflation; i.e.
nominal rates. Considering that the rate of return offered on high
grade long-term government securities, a nominal rate of
approximately 9.2% at December 31, 2003, the Company has decided not
to change the discount interest rate that has been used
historically, as it deems such to be consistent with the
requirements of SFAS 87, and subsequent interpretations, for
measurement of defined benefit obligations. The Company may adopt
different assumptions in the future, which may have a significant
impact on the amount of pension liability and expense.
18. Shareholders' equity
The Company's subscribed and fully paid-in capital at December 31, 2003
consisted of 634,168,418 common shares and 462,369,507 preferred shares
and, at December 31, 2002, consisted of 634,168,418 common shares and
451,935,669 preferred shares. The preferred shares do not have any voting
rights and are not convertible into common shares and vice-versa.
Preferred shares have priority in the receipt of dividends and return of
capital.
The Extraordinary Shareholders' Meeting, held jointly with the General
Shareholders' Meeting on March 22, 2002, approved the increase of the
Company's capital stock from US$ 4,834 to US$ 6,220 with the
capitalization of the revenue reserve constituted in prior years, without
issuing new shares.
During the same meeting, PETROBRAS shareholders approved a reform of the
Company's by-laws to adjust them to the modifications introduced by Law
No. 10,303, of October 31, 2001. The principal change introduced by the
new by-laws include an amendment that requires preferred shares to be
given priority in the case of repayment of capital and the receipt of
dividends, of at least 3% of the book value of the shares or 5% calculated
on the portion of capital represented by this class of shares, whichever
is larger, and participation on an equal footing with common shares in
capital increases resulting from the incorporation of reserves and income.
On June 10, 2002 at an Extraordinary Shareholders' Meeting, the Company's
shareholders approved an amendment to the Company's by-laws, to adjust
them to the modifications introduced by Law No. 10,438 of April 26, 2002.
This amendment authorized a change in the corporate purpose of the
Company, to include activities related with energy and its sale, in
addition to providing more flexible means of borrowings. The Company is
also authorized to increase capital, irrespective of an amendment to the
by-laws, as a result of a resolution by the Board of Directors, up to R$
30,000 million, by means of issuing up to 200 million shares, such that
preferred shares do not exceed two-thirds of common shares.
In a Special Meeting of Preferred Shareholders held on June 10, 2002, the
Company's shareholders ratified a resolution taken by the Extraordinary
Shareholders' Meeting authorizing the issue of preferred shares, without
maintaining proportion with common shares.
18. Shareholders' equity--Continued
On December 20, 2002, the Board of Directors approved the Company's share
buyback program, as facilitated by its by-laws, with the main purpose of,
defending the price of its share at times when it is undervalued by the
market. The definition and implementation of the share buyback program is
not intended to jeopardize the investment program or replace the payment
of dividends by the Company.
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, under the terms of the capital increase approved during the
meeting of the Board of Directors of the Company held on November 7, 2002.
As a result, the capital of the Company increased by US$ 122. This
minority interest acquisition, accounted for as a purchase business
combination under SFAS No. 141 - Business Combinations ("SFAS 141"), did
not have a material impact to the financial statements. See also Note 20.
The Extraordinary Shareholders' Meeting, held jointly with the General
Shareholders' Meeting on March 27, 2003, approved an increase in the
Company's capital by capitalizing revenue reserves accrued during previous
years, to the amount of US$ 912, without issuing new shares, in accordance
with Art. 169, paragraph 1 of Law No. 6,404/76.
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.
The management of PETROBRAS will propose to the General Extraordinary
Meeting, to be held together with the General Ordinary meeting on March
29, 2004, an increase in the Company's capital to R$ 32,896,138 thousand,
through the capitalization of revenue reserves accrued during previous
financial years, in the amount of R$ 13,033,504 thousand, and without the
issuance of new shares, in accordance with article 169, paragraph 1, Law
No. 6,404/76. This capitalization will be made in order to bring the
Company's capital in line with the investment requirements of an oil
company given intensive use of capital and extended operating cycles.
Additionally, the Company's management will propose an increase in
authorized capital from R$ 30,000 million to R$ 60,000 million at the
General Extraordinary Meeting.
18. Shareholders' equity--Continued
Current Brazilian law requires that the Federal Government retain
ownership of 50% plus one share of the Company's voting shares.
(a) Dividends and interest on shareholders' equity
In accordance with the Company's by-laws, holders of preferred and
common shares are entitled to a minimum dividend of 25% of annual
net income as adjusted under Brazilian Corporate Law. In addition,
the preferred shareholders have priority in the receipt of an annual
dividend of at least 3% of the book value of the shares or 5% of the
paid-in capital in respect of the preferred shares as stated in the
statutory accounting records. As of January 1, 1996 amounts
attributed to shareholders as interest (see below) can be deducted
from the minimum dividend computation. Dividends are paid in
Brazilian reais. The Company paid US$ 212 in dividends during the
year ended December 31, 2003 (2002 - US$ 602 - 2001 - US$ 424)
Brazilian corporations are permitted to attribute interest on
shareholders' equity, which may either be paid in cash or be used to
increase capital stock. The calculation is based on shareholders'
equity amounts as stated in the statutory accounting records and the
interest rate applied may not exceed the Taxa de Juros de Longo
Prazo (long-term interest rate or the "TJLP") as determined by the
Brazilian Central Bank. Such interest may not exceed the greater of
50% of net income or 50% of retained earnings plus revenue reserves.
Interest on shareholders' equity, is subject to withholding tax at
the rate of 15%, except for untaxed or exempt shareholders, as
established by Law No. 9,249/95. The Company paid US$ 731 in
interest on shareholders' equity during the year ended December 31,
2003 (2002 - US$ 416 - 2001 - US$ 1,301).
On November 13, 2003, the PETROBRAS Board of Directors approved the
distribution of remuneration to shareholders in the form of interest
on shareholders' equity amounting to R$ 3,290 million (US$ 1,139),
in accordance with article 8 and 9, of the Company's by-laws,
article 9 of Law No. 9,249/95 and Decrees No. 2,673/98 and No.
3,381/00. This provision for interest on shareholders' equity
resulted in an income tax benefit in the amount of US$ 364.
18. Shareholders' equity--Continued
(a) Dividends and interest on shareholders' equity--Continued
This remuneration was made available to shareholders at February 13,
2004, based on the shareholdings on November 25, 2003, corresponding
to R$ 3.00 (US$ 1.03 calculated by the year-end exchange rate) per
common and preferred share, and was deducted from the dividend
calculated on adjusted net income for the 2003 financial year.
The General Shareholders' Meeting held on March 27, 2003 approved
the proposed dividends for the 2002 financial year amounting to US$
781; such amount included US$ 307 which was accrued in the 2002
financials, and interest on shareholders' equity approved by the
Board of Directors on January 31, 2003, amounting to US$ 310, and
the balance of dividends, amounting to US$ 164, both of which amount
were reflected in the 2003 financial statements. These amounts, paid
in Brazilian reais, were monetarily restated as from December 31,
2002 up to the date of payment.
The dividends proposal submitted by the Board of Directors for
approval at the General Shareholders' Meeting to be held on March
29, 2004, amounting to US$ 1,955, corresponding to R$ 5.15 per share
(US$ 1.78 per share calculated by year-end exchange rate), include
the portion of interest on shareholders' equity approved by the
Board of Directors on November 13, 2003, amounting to US$ 1,139,
corresponding to R$ 3.00 per share (US$ 1.04 per share calculated by
year-end exchange rate), and also includes the portion of interest
on equity approved by the Board of Directors on February 13, 2004,
amounting to US$ 436, corresponding to R$ 1.15 (US$ 0.40 calculated
by the year-end exchange rate) per common and preferred share, to be
made available based on the shareholders of record as of March 29,
2004, which is the intended date of the General Shareholders'
Meeting that will discuss this subject.
The balance of dividends (US$ 380) and the additional portion of the
interest on shareholders' equity (US$ 436) have been excluded from
the US GAAP financials, but will be paid on a date to be established
by the General Shareholders' Meeting. These amounts are paid in
Brazilian reais and will be monetarily restated as from December 31,
2003 up to the initial date of payment, according to the variation
in the SELIC rate.
18. Shareholders' equity--Continued
(a) Dividends and interest on shareholders' equity --Continued
Brazilian law permits the payment of dividends only from retained
earnings as stated in the statutory accounting records. At December
31, 2003, the Company had appropriated all such retained earnings.
In addition, at December 31, 2003, the undistributed reserve in
appropriated retained earnings, amounting to US$ 9,372, may be used
for dividend distribution purposes, if so approved by the
shareholders, however, the Company's stated intent is to use such
reserve to fund working capital and capital expenditures.
A withholding tax of 15% was payable on distributions dividends
earned from January 1, 1994 through December 31, 1995. No
withholding tax is payable on distributions of dividends earned
since January 1, 1996.
(b) Basic and diluted earnings per share
Basic and diluted earnings per share amounts have been calculated as
follows:
Year ended December 31,
-----------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Income before effect of change in accounting principle 5,862 2,311 3,491
Cumulative effect of change in accounting principle,
net of taxes 697 - -
--------------- --------------- ---------------
Net income for the period 6,559 2,311 3,491
Less priority preferred share dividends (226) (77) (117)
Less common shares dividends, up to the priority
preferred shares dividends on a per-share basis (309) (107) (164)
--------------- --------------- ---------------
Remaining net income to be equally allocated to common
and preferred shares 6,024 2,127 3,210
=============== =============== ===============
Weighted average number of shares outstanding
Common/ADS 634,168,418 634,168,418 634,168,418
Preferred/ADS 462,369,507 451,935,669 451,935,669
=============== =============== ===============
Basic and diluted earnings per share
Common and Preferred
Before effect of change in accounting principle 5.35 2.13 3.21
After effect of change in accounting principle 5.98 2.13 3.21
18. Shareholders' equity--Continued
(c) Capital reserves
o AFRMM
Relates to the Merchant Marine (AFRMM) freight surcharges
levied in accordance with relevant legislation. These funds
are used to purchase, enlarge or repair vessels of the
Company's transport fleet.
o Fiscal incentive reserve
This reserve consists of investments in tax incentives in the
Northeast Investment Fund (FINOR), arising from allocations of
part of the Company's income tax.
(d) Appropriated retained earnings
Brazilian Law and the Company's by-laws require that certain
appropriations be made from retained earnings to reserve accounts
annually. The purpose and basis of appropriation to such reserves is
as follows:
o Legal reserve
This reserve is a requirement for all Brazilian corporations and
represents the annual appropriation of 5% of net income as stated in
the statutory accounting records up to a limit of 20% of capital
stock. The reserve may be used to increase capital or to compensate
for losses, but may not be distributed as cash dividends.
o Undistributed earnings reserve
This reserve is established in accordance with Article 196 of Law
No. 6,404/76 to fund the Company's annual investment program. For
the year ended December 31, 2002, the Company's management retained
US$ 1,834 of which US$ 1,831 relates to net income for the year and
US$ 3 to the remaining balance of retained earnings, to fund the
Company's capital expenditure budget for 2003. This proposal was
approved at the General Shareholders' Meeting held on March 27,
2003.
18. Shareholders' equity--Continued
(d) Appropriated retained earnings--Continued
o Undistributed earnings reserve--Continued
The proposal for appropriation of income for the year ended
December 31, 2003 includes a retention of earnings in the
amount of US$ 4,603, of which US$ 3,773 relates to net income
for the year and US$ 830 to the remaining balance of retained
earnings, to be approved by the General Shareholders' Meeting
to be held on March 29, 2004. This proposal is intended to
cover partially the annual investment program established in
the capital budget for 2004.
o Statutory reserve
This reserve is provided through an amount equivalent to a
minimum of 0.5% of subscribed and fully paid in capital at
year-end. The reserve is used to fund the costs incurred with
research and technological development programs. The
accumulated balance of this reserve cannot exceed 5% of the
capital stock, according to Article 55 of the Company's
by-laws.
19. International acquisitions
(a) 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 with the Perez Companc family and the Fundacion Perez
Companc, completing the acquisition of a controlling interest of
Perez Companc S.A. (currently known as Petrobras Energia
Participaciones S.A - PEPSA), and Petrolera Perez Companc S.A.
(currently known as Petrolera Entre Lomas S.A. - PELSA). In October
of 2002, in accordance with Argentine legislation, the necessary
documentation was submitted to the Argentine antitrust agency (CNDC
- Comision Nacional de Defensa de la Competencia) in order to obtain
approval for the transaction.
19. International acquisitions--Continued
(a) 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
On May 13, 2003, the Argentine antitrust agency (Comision Nacional
de Defensa de la Competencia), an agency reporting to the Argentine
Secretariat of Competition, Deregulation and Consumer Protection
(Secretaria de la Competencia, la Deregulacion y la Defensa del
Consumidor), approved the purchase of 58.62% of the capital stock of
PEPSA and 39.67% of the capital stock of PELSA capital stock by
PETROBRAS Participacoes S.L., a company controlled by PETROBRAS. As
a result of the purchase of a 39.67% interest in the capital stock
of PELSA, together with the purchase of 58.62% 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 to be 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.
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.
19. International acquisitions--Continued
(a) 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
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 year ended December 31.
2003 2002
--------------------------------------------------------
Pro forma Pro forma
As reported (unaudited) As reported (unaudited)
------------- ------------------------------------------
Net operating revenues 30,797 31,350 22,612 23,736
Costs and expenses (20,075) (20,435) (15,834) (16,675)
Financial expenses, net (136) (341) (1,700) (2,442)
Others (1,813) (1,797) (1,846) (1,832)
Income tax expense (2,663) (2,665) (1,153) (1,108)
Minority interest (248) (260) 232 382
Cumulative effect of change in accounting
principles, net of taxes 697 697 - -
Net income for the year 6,559 6,549 2,311 2,061
Basic and diluted earnings per share 5.98 5.97 2.13 1.90
19. International acquisitions--Continued
(b) Acquisition of Petrolera Santa Fe
On October 24, 2002, the Company completed the acquisition of 100%
of Petrolera Santa Fe Southern Cone, Inc., a holding company
incorporated in the British Virgin Islands, parent company of
Petrolera Santa Fe S.R.L (Santa Fe), an Argentine oil and gas
exploration company, for US$ 90, paid in cash on the same date. The
purchase price was less than the estimated fair market value of the
net assets acquired, resulting in a reduction in the acquisition
value assigned to Santa Fe's long-lived assets. In 2002, Santa Fe
produced approximately 10.2 thousand barrels of oil equivalents per
day. The acquisition did not have significant effects on results of
operations on a pro-forma basis.
20. Petrobras Distribuidora - BR
On November 7, 2002, the Board of Directors of the Company approved a
public offer by the Company to acquire the publicly traded shares of
Petrobras Distribuidora S.A. - BR, to cancel its quoted company
registration by means of an exchange for preferred share to be issued by
the Company.
In addition the Board of Directors approved the valuation appraisal of BR
that determined the value of R$ 45.40 (US$ 11.66) for each 1,000 share lot
of BR stock, the valuation appraisal by the Company that established a
value of R$ 64.90 (US$ 16.66) for each share issued by the Company
together with the swap ratio of the Company and BR shares at the rate of
0.7 PETROBRAS shares for 1,000 BR shares, which will be agreed together
with a premium, defined by the specific formula.
On January 29, 2003, a public auction was held in which implementation of
the condition for canceling the registration of the quote company of BR
was verified. On February 5, 2003, CVM cancelled the registration of the
quoted company of BR.
21. Accounts - temporary agreement on price stabilization in Argentina
In January 2003, pursuant to government actions seeking to stabilize the
economic environment in Argentina, the hydrocarbon producing and refining
companies signed a temporary agreement aimed at stabilizing the prices of
crude oil, gasoline and diesel oil in the Argentine market. This
agreement, considering renewals, extends to February 29, 2004. Under this
agreement, deliveries of crude oil must be billed and paid based on a
reference WTI (West Texas Intermediate) price of US$ 28.50 per barrel.
Positive or negative differences between the actual WTI, up to the limit
of US$ 36.00 per barrel, and the reference price are to be realized based
on amounts generated in periods during which the actual WTI price is lower
than US$ 28.50 per barrel. As long as average market WTI prices remain
higher than the reference price, the refining companies will, otherwise,
record a liability to be realized when the WTI price is lower than the
reference price. At December 31, 2003, the amount payable by Argentine
companies within the PETROBRAS system related to the price difference on
the acquisition of crude oil, amounted to US$ 10.
22. 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 predictable.
The Company currently has several contracts to purchase crude oil, diesel
fuel and other oil products, which require the Company to purchase a
minimum of approximately 147,000 barrels per day at respective current
market prices.
22. Commitments and contingencies--Continued
PETROBRAS provided guarantees to the ANP for the minimum exploration
program defined in the concession contracts for exploration areas,
totaling US$ 907. Out of this total, US$ 704 represents a pledge on the
oil to be extracted from previously identified fields already in
production, for areas in which the Company had already made commercial
discoveries or investments at the time where Law No. 9,478 of August 6,
1997 came into force. For areas whose concessions were obtained by bidding
from the ANP, PETROBRAS has given bank guarantees totaling US$ 203 through
December 31, 2003.
PETROBRAS has guaranteed that it will purchase specified volumes of
natural gas that run through TBG pipeline.
In 1993, the Company signed a contract with Yacimentos Petroliferos
Fiscales Bolivianos, the Bolivian state oil company for the purchase of
natural gas. Under this contract, the Company is required to purchase 80%
of the natural gas transported through the Bolivia/Brazil natural gas
pipeline over a 20 year term at contract prices ranging from US$ 1.07 per
MMBTU to US$ 1.17 MMBTU, based upon throughput. The pipeline achieved an
average throughput of 24.64 million cubic meters per day during 2003.
The Company has exclusive supply contracts with certain service stations.
These contracts are typically for seven years and require the Company to
sell product at market prices.
22. Commitments and contingencies--Continued
(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. At December 31,
2003 and 2002, the respective claims by type are as follows:
As of December 31,
------------------- -------------------
2003 2002
------------------- -------------------
Labor claims 22 13
Tax claims 39 13
Civil claims 90 24
Commercials claims and other contingencies 109 -
------------------- -------------------
260 50
Contractual contingencies - thermoelectric plants (see Note 16) - 205
Contingencies for joint liability 95 113
------------------- -------------------
Total 355 368
------------------- -------------------
Current Contingencies (84) (318)
------------------- -------------------
Long-term Contingencies 271 50
=================== ===================
As of December 31, 2003 and 2002, in accordance with Brazilian law,
the Company had paid US$ 543 and US$ 290, 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.
The Company is a party to several contracts related to the
acquisition and upgrade of production Platform P-36, which was lost
in its entirety in 2001. Pursuant to those contracts, the Company
had an obligation to pay the insurance proceeds to a Security Agent
for distribution according to specified clauses established in the
contracts. The Company contends that it is entitled to the insurance
proceeds under the contractual arrangements, and other parties
contend that they are also entitled to such proceeds. The issue is
subject to international proceedings in a British court. Pending
determination of the issue by the international court, the Company
committed to deposit cash collateral in the amount of US$ 175, in
order to facilitate the issuance of a guarantee by a Security Agent,
for the payment of creditors. At December 31, 2003, this amount was
included in the balance sheet as restricted deposits for legal
proceedings and guarantees.
22. Commitments and contingencies--Continued
(a) Litigation--Continued
On May 28, 1981, Kallium Mineracao S.A. brought an action against
Petromisa, a former subsidiary of PETROBRAS, in the Federal Court of
the State of Rio de Janeiro alleging damages of approximately US$
450 relating to the rescission of a contract to develop a potassium
salt mine. On August 10,1999, a decision was handed down that
considered most of the plaintiff's petitions to be without grounds
(losses, damages and loss of profit), requiring only the Company to
reimburse "all expenses incurred as a result of the prospecting
research" carried out, in accordance with amounts to be calculated
in the final award. No award for loss of profit was established in
the decision. In September of 1999 both parties filed appeals with
the appeals court in the state of Rio de Janeiro. Based on the
opinion of its legal advisers, management does not expect an
unfavorable outcome in this case and considers the risk of loss with
respect to this lawsuit to be remote.
On August 8, 1993, Industria Bahiana de Adubos, Importacao e
Exportacao Ltda. filed a lawsuit against the Company in the State
Court of Bahia claiming approximately US$ 129 in damages. The claim
is based upon the Company's refusal to sell fertilizers to the
plaintiff due to the plaintiff's payment default under prior
contracts with the Company. The plaintiff claims that such refusal
harmed its financial condition and, ultimately, caused its
bankruptcy. On December 9, 1993, the trial court decided in favor of
the plaintiff. However, the Company appealed and the decision was
reversed by the State Court of Appeals. Subsequently, the plaintiff
filed a special appeal, which was also found to be without grounds
on June 25, 2002 by the 3rd Panel of the Appeals Court. This Court
dismissed the case and the lawsuit was extinguished.
On November 23, 1992, PORTO SEGURO IMOVEIS 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.
22. Commitments and contingencies--Continued
(a) Litigation--Continued
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 of
1997 that considered PETROBRAS liable with respect to PETROQUISA for
losses and damages in an amount equivalent to US$ 3,406.
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. 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 remote.
The Fisherman's Federation of the State of Rio de Janeiro (FEPERJ)
filed a civil suit against the Company with the Rio de Janeiro State
Court for compensation of miscellaneous damages amounting to US$
224, which it is claiming in the name of its members, as a result of
the oil spill in Guanabara Bay on January 18, 2000. A decision was
handed down on February 7, 2002 which ruled the claim partially
without grounds, rejecting pain and suffering, and requiring the
Company to pay compensation for material damages and loss of profit
to be calculated at the award phase. The ruling expressly declares
that it is not reasonable to consider an award based on the amount
claimed, since it was without economic base.
22. Commitments and contingencies--Continued
(a) Litigation--Continued
Based on its legal counsels opinion, the Company's Administration
believes it is possible that the Company will not prevail in this
case, but that any possible negative judgment would be in an amount
far below the originally filed complaint. As such, the Company
assesses the risk of loss related to this case as possible.
The Sao Paulo tax authorities filed a tax suit against the Company,
alleging that the Company did not pay ICMS levied on interstate
sales of naphtha. However, during the period in which according to
the State of Sao Paulo, the Company should have paid the ICMS, the
Company was subject to a different tax regime (federal) on these
sales, and for this reason enjoyed a tax holiday. The value of the
matter in controversy is US$ 60. There is no guarantee that the
final result of the legal case will be favorable to PETROBRAS, but
even in the case of an unfavorable ruling, management does not
believe that the award could have a material negative impact on the
financial position of PETROBRAS. The Company assesses its risk of
loss in the matter as possible.
PETROBRAS is a defendant in four labor claims filed by the UNIONS OF
PETROLEUM WORKERS of three federal states (Rio de Janeiro, Sao Paulo
and Sergipe), alleging that official inflation rates for 1987, 1989
and 1990 (understatement of the official inflation rate - Bresser,
Summer and Collor Plans) were not fully included in the workers'
salaries.
The lawsuits are at different stages. Based on past favorable
decisions in similar cases and on a final understanding of the TST,
management does not expect an unfavorable decision in these suits.
Three identical cases have been decided in favor of PETROBRAS.
Management assesses risk of loss to be remote.
The Company was sued in court by certain small oil distribution
companies under the allegation that it does not pass on to state
governments the State Value-Added Tax (ICMS) collected according to
the legislation upon fuel sales. These suits were filed in the
states of Goias, Tocantins, Bahia, Para, Maranhao and in the Federal
District.
22. Commitments and contingencies--Continued
(a) Litigation--Continued
Of the total amount related to in legal actions approximately US$
394 up to December 31, 2003, US$ 32 were effectively withdrawn from
the Company's accounts as a result of judicial rulings of advance
relief.
The Company, with the support of the state and federal authorities,
has succeeded in stopping the execution of other withdrawals, and is
making all efforts possible to obtain reimbursement of the amounts
that were previously withdrawn from its accounts.
(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.
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.
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.
22. Commitments and contingencies--Continued
(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.
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.
22. Commitments and contingencies--Continued
(c) Tax assessments - internal revenue service of Rio de
Janeiro--Continued
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 Excelencia em
Gestao Ambiental e Seguranca Operacional). Scheduled to be concluded
in December 2003, the Company made expenditures of approximately US$
2,400 from 2000 to December 31, 2003 under this program.
During the years ended December 31, 2003 and 2002 the Company made
expenditures of approximately US$ 766 and US$ 677 respectively,
under this program, including US$ 225 and US$ 234 through the
Programa de Integridade de Dutos (Pipeline Integrity Program)
through which it conducts inspections of, and improvements to, the
Company's pipelines.
The Company believes that future payments related to environmental
clean up activities resulting from these incidents, if any, will not
be material.
22. Commitments and contingencies--Continued
(d) Environmental matters--Continued
On January 18, 2000, a pipeline from one of the Company's terminals
to a refinery in the Guanabara Bay ruptured, causing a release of
crude oil into the bay. On January 19, 2001, the Rio de Janeiro
State Prosecutor filed a criminal lawsuit against the Company. The
Company is contesting the legal basis for the criminal lawsuit.
Additionally, the Federal Prosecutor has filed criminal lawsuits
against the former president of the Company (that finished) and 9
other employees. The Company cannot predict if the outcome of these
proceedings will have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
In addition, as a result of the spill, on January 27, 2000, the
National Council for the Environment enacted a resolution that
obligated the Instituto Brasileiro do Meio Ambiente e dos Recursos
Naturais Renovaveis (IBAMA), state environmental agencies and local
environmental agencies and non-governmental agencies to evaluate the
control and prevention measures and environmental licensing status
of all industrial facilities for the production of oil and oil
products in Brazil. This resolution also mandated that the Company
perform an independent environmental audit of all of our industrial
installations located in the State of Rio de Janeiro.
Since 2000, the Company implemented independent environmental audits
in all of the Company's plants located in Brazil that was concluded
during December of 2003. The Company implemented 80% of the auditors
recommendations and intend to implement the remaining 20% during
2004.
On July 16, 2000, an oil spill occurred at the Presidente Getulio
Vargas refinery releasing crude oil in the surrounding area. The
Federal and State of Parana Prosecutors have filed a civil lawsuit
against the Company seeking US$ 1,176 in damages, that have already
been contested by the Company. Additionally, there are two other
actions pending, one by the Instituto Ambiental do Parana (Parana
Environmental Institute) and by another civil association called
AMAR that have already been contested by the Company. The Company
cannot predict whether these proceedings will have a material
adverse effect on the financial condition, results of operations or
cash flow of the Company.
22. Commitments and contingencies--Continued
(d) Environmental matters--Continued
On November 4, 2000, the Cypriot flag vessel Vergina II chartered by
PETROBRAS collided with the south pier at the Company's Almirante
Barroso terminal in Sao Sebastiao and spilled oil in the Sao
Sebastiao canal. As a result of the accident, the Company was fined
approximately US$ 30 by various local environmental agencies. The
Company is currently contesting these fines.
On February 16, 2001, the Company's Araucaria-Paranagua pipeline
ruptured and as a result fuel oil was spilled into the Sagrado,
Meio, Neves and Nhundiaquara Rivers located in the state of Parana.
As a result of the accident, the Company was fined approximately US$
80 by the Instituto Ambiental do Parana (Parana Environmental
Institute), which the Company is contesting through administrative
proceedings.
On March 15, 2001, a spill resulting from the accident involving the
P-36 platform occurred, causing a release of diesel fuel and crude
oil. The Company was fined by the Brazilian Environmental Institute
(IBAMA) US$ 3 in April of 2001 for the spill and improper use of
chemicals to disperse the oil. The Company is currently contesting
these fines.
On May 12, 2003, the rupture of a connection socket on a production
line at well FZB-71, on the Belem Farm field, in the city of
Aracati-CE, resulted in the spill of approximately 7 (seven)
thousand liters of oil at an area located far from any communities
or water sources. The Company's Contingency Plan was immediately
activated and cleaning work for the area was carried out. PETROBRAS
was charged with a penalty of US$ 0.04 by the Environment
Superintendency of the State of Ceara (Semace) and up to 90% of this
amount can be reduced by compliance with a Commitment Term entered
into with the referred environmental entity.
22. Commitments and contingencies--Continued
(d) Environmental matters--Continued
On June 3, 2003, a fault in the connection of one of the unloading
arms of vessel Nordic Marita, anchored at the Maritime Terminal
Almirante Barroso (Tebar), in Sao Sebastiao, on the North coast of
Sao Paulo, caused a spill of approximately 27 thousand liters of oil
from Campos Basin. As a result of this accident, PETROBRAS was
charged with a penalty of US$ 0.17 by the Brazilian Institute for
the Environment and Renewable Resources (IBAMA) and of US$ 0.12 by
Basic Sanitation, Technology and Environment Protection Agency of
the State of Sao Paulo (CETESB). An appeal was filed against both
charges based on the understanding that the Company acted in the
most efficient possible manner in order to minimize possible impacts
on the environment.
On August 26, 2003, the rupture of a pipeline between Transpetro's
terminal in Cabiunas (Macae) and Duque de Caxias Refinery caused the
spill of 20 (twenty) liters of oil in an area of the city of
Cachoeiras de Macacu. The Company immediately determined that the
oil located in the service area of the pipeline should be removed,
and took preventive measures to protect a creek, near to the
Soarinhos River, with checks and oil-absorbing materials. In spite
of the effective procedures adopted by PETROBRAS and the non-absence
of environmental damages, the Company received a fine from IBAMA in
the amount of US$ 0.69, but filed an administrative proceeding with
this entity.
The Company's management considers that any expenses incurred to
correct or mitigate possible environmental impacts should not have a
significant effect on operations or cash flows.
22. Commitments and contingencies--Continued
(e) Minimum operating lease payments
The Company is committed to make the following minimum payments
related to operating leases as of December 31, 2003:
2004 1,008
2005 1,127
2006 784
2007 237
2008 200
2009 and thereafter 3,065
---------
Minimum operating lease payment commitments 6,421
=========
The Company paid US$ 1,205, US$ 1,355, and US$ 1,284 in rental
expense on operating leases at December 31, 2003, 2002 and 2001,
respectively.
23. Derivative instruments, hedging and risk management activities
The Company is exposed to a number of market risks arising from the normal
course of 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.
23. Derivative instruments, hedging and risk management activities--Continued
(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.
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 increases 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, 2002 and 2001, the Company had a fair value
obligation of US$ 80 and US$ 119, respectively, associated with its
EURO and Japanese Yen zero cost collar contracts. The Yen zero cost
collar contracts were settled on September 8, 2003, with a cash
payment of US$ 68.
As of December 31, 2003 the Company had a fair value asset of US$ 26
associated with its Euro zero cost collar contracts.
23. Derivative instruments, hedging and risk management activities--Continued
(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 oil future contracts are marked to market and related
gains and losses are recognized currently into earnings,
irrespective of when physical crude sales occur. For the years ended
December 31, 2003, 2002 and 2001, the Company consummated commodity
derivative transaction activities on 72.47%, 42.01% and 21.20%,
respectively, of its total import and export traded volumes.
The open positions on the futures market, compared to spot market
value, resulted in recognized losses of US$ 2, US$ 4 and US$ 6
during the years ended December 31, 2003, 2002 and 2001,
respectively.
A long-term operation was executed on January of 2001 by the sale of
put options for 52 million barrels of West Texas Intermediate (WTI)
oil over a period extending from 2004 to 2007, with the objective to
obtain price protection for this quantity of oil and to provide the
funding institutions of the Barracuda/Caratinga project with a
minimum guaranteed margin to cover the debt servicing. The puts were
structured to ensure that the financial institutions participating
in the financing of the development of the fields receive the price
required to generate the minimum required return on investment. The
Company accounts for the put options on a mark to market basis.
During 2003, 2002 and 2001, the Company realized a net gain of US$ 7
and US$ 8 and US$ 5, respectively.
23. Derivative instruments, hedging and risk management activities--Continued
(b) Commodity price risk management--Continued
The fair value of oil products is based on usual market conditions,
at values prevailing at the closing of the period, considered
relevant for underlying quotations. Option contracts are valued
using the Black & Scholes model, considering parameters advised by
financial institutions of international reputation.
(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 that 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.
23. Derivative instruments, hedging and risk management activities--Continued
(d) Risk Management activity at PEPSA--Continued
PEPSA consummated commodity derivative transactions, referenced to
WTI, for 40% of its total sales volume (corresponding to 11,963
thousand boe) at December 31, 2003. The operations settled in the
year generated a loss in the approximate amount of US$ 67. At
December 31, 2003, the open positions on the futures market, when
compared to their market value, represented a negative result of
approximately US$ 187, if liquidated on that date. These
transactions were accounted for as cash flow hedges in accordance
with SFAS No. 133 - Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133").
Additionally, PEPSA holds an interest rate contract to manage the
volatility of the LIBOR rate implied in a Class C negotiable
instrument, establishing the respective interest rate at 7.93%
annually. If this instruments were to be liquidated, considering the
rates used at the date, a net loss of approximately US$ 6 would be
recorded. This contract qualifies for hedge accounting in accordance
with SFAS 133.
24. Financial instruments
In the normal course of its business, the Company uses various types of
financial instruments. These instruments include recorded assets and
liabilities, and also items such as derivatives, which principally involve
off-balance sheet risk.
(a) Concentrations of credit risk
Substantial portions of the Company's assets including financial
instruments are located in Brazil and substantially all of the
Company's revenues and net income are generated in Brazil. The
Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of its cash equivalents, government
securities, the Petroleum and Alcohol Account, trade receivables and
future contracts.
24. Financial instruments--Continued
(a) Concentrations of credit risk--Continued
The Company takes several measures to reduce its credit risk to
acceptable levels. All cash equivalents in Brazil are maintained
with federal banks in accordance with federal law. Time deposits in
U.S. dollars are placed with creditworthy institutions in the United
States. Additionally, all of the Company's available for sale
securities and derivative contracts are either exchange traded or
maintained with creditworthy financial institutions. The Company
monitors its credit risk associated with trade receivables by
routinely assessing the creditworthiness of its customers. At
December 31, 2003 and December 31, 2002, the Company's trade
receivables were primarily maintained with large distributors.
As described in Note 11, the National Treasury Notes, NTN-H may be
used in the settlement of the Petroleum and Alcohol Account.
(b) Fair value
Fair values are derived either from quoted market prices where
available, or, in their absence, the present value of expected cash
flows. The fair values reflect the cash that would have been
received or paid if the instruments were settled at year end. Fair
values of cash and cash equivalents, trade receivables, the
Petroleum and Alcohol Account, short-term debt and trade payables
approximate their carrying values. The fair value for the Company's
available for sale government securities equals their carrying value
as disclosed in Note 6.
The fair values of other long-term receivables and payables do not
differ materially from their carrying values.
The Company's debt included US$ 11,888 and US$ 7,346 at December 31,
2003 and December 31, 2002 and had estimated fair values of US$
12,690 and US$ 6,791, respectively. The Company's project finance
obligation, resulting from FIN 46 consolidation was US$ 5,066 at
December 31, 2003, and had an estimated fair value of US$ 5,115.
24. Financial instruments--Continued
(b) Fair value--Continued
The call and put portion of the Company's zero cost foreign exchange
collars at December 31, 2003 have a fair value of US$ 31 and US$ 5,
respectively (US$ 8 and US$ 88 at December 31, 2002).
25. Segment information
The following segment information has been prepared in accordance with
SFAS No. 131 - Disclosure about Segments of an Enterprise and Related
information ("SFAS 131"). The Company operates under the following
segments, which are described as follows:
o Exploration and Production - This segment includes the Company's
exploration, development and production activities in Brazil, as
well as sales of crude oil and natural gas in the domestic and
foreign markets.
o Supply - This segment includes the Company's refining, logistic,
transportation and commercialization activities for oil, oil
products and fuel alcohol. Additionally, this segment includes
petrochemical and fertilizers division, which includes investments
in domestic petrochemical companies and the Company's two domestic
fertilizer plants.
o Distribution - This segment represents the oil product and fuel
alcohol distribution activities conducted by the Company's majority
owned subsidiary, Petrobras Distribuidora S.A. - BR in Brazil.
o Gas and Energy - This segment currently encompasses the
commercialization and transportation of natural gas produced in or
imported into Brazil. Additionally, this segment includes the
Company's domestic electric energy commercialization activities as
well as investments in domestic natural gas transportation
companies, state owned natural gas distributors and thermoelectric
companies.
o International - This segment represents the Company's international
activities conducted in 13 countries, which include Exploration and
Production, Supply, Distribution and Gas and Energy.
25. Segment information--Continued
The items that cannot be attributed to the other areas are allocated to
the group of corporate entities, especially those linked with corporate
financial management, overhead related with central administration and
other expenses, including actuarial expenses related with the pension and
health-care plans.
The accounting information by business area was prepared based on the
assumption of controllability, for the purpose of attribution to the
business areas only items over which these areas have effective control.
The main criteria used to record the results and assets by business
segments are summarized as follows:
o Net operating revenues: these were considered to be the revenues
from sales to third parties, plus revenues between the business
segments, based on the internal transfer prices established by the
areas;
o The operating income includes net operating revenue, the costs of
products and services sold, calculated per business segment, based
on the internal transfer price and the other operating costs of each
segment, as well as operating expenses, based on the expenses
actually incurred in each segment;
o Assets: covers the assets relating to each segment.
In periods prior to January 1, 2002, revenue and net income from the gas
and energy activities of the international segment were added to revenue
and net income from the exploration and production activities of the
international segment, as our management did not separate our gas and
energy operations abroad. In addition, the changes in our accounting
systems adopted in connection with our new business segment reporting does
not permit the practicable separation of revenue and cost information for
those prior periods. We do not believe this classification of the gas and
energy revenue and net income information materially changes the overall
segment presentation.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION Expressed in Millions of United
States Dollars (except when specifically indicated)
--------------------------------------------------------------------------------
Segment Segment information - Continued
The following presents the Company's assets by segment:
As of December 31, 2003
-----------------------------------------------------------------------------------
Exploration International
and Gas and (see separate
Production Supply Energy disclosure) Distribution
-----------------------------------------------------------------------------------
Current assets 2,057 4,871 528 1,738 1,208
Cash and cash equivalents 1,042 575 109 445 33
Other current assets 1,015 4,296 419 1,293 1,175
Investments in non-consolidated companies
and other investments 6 463 151 449 22
-----------------------------------------------------------------------------------
Property, plant and equipment, net 16,742 4,980 4,174 4,181 442
-----------------------------------------------------------------------------------
Non current assets 970 285 751 306 208
-----------------------------------------------------------------------------------
Petroleum and Alcohol Account - - - - -
Government securities - - - - -
Other assets 970 285 751 306 208
-----------------------------------------------------------------------------------
Total assets 19,775 10,599 5,604 6,674 1,880
===================================================================================
Corporate Eliminations Total
---------------------------------------------------
Current assets 9,466 (1,968) 17,900
Cash and cash equivalents 7,406 - 9,610
Other current assets 2,060 (1,968) 8,290
Investments in non-consolidated companies
and other investments 82 - 1,173
---------------------------------------------------
Property, plant and equipment, net 336 (50) 30,805
---------------------------------------------------
Non current assets 4,479 (3,265) 3,734
---------------------------------------------------
Petroleum and Alcohol Account 239 - 239
Government securities 283 - 283
Other assets 3,957 (3,265) 3,212
---------------------------------------------------
Total assets 14,363 (5,283) 53,612
===================================================
25. Segment information--Continued
As of December 31, 2003
------------------------------------------------------------------
International
------------------------------------------------------------------
Exploration
and Gas and
Production Supply Energy Distribution
--------------- --------------- --------------- ----------------
Current assets 806 463 167 71
--------------- --------------- --------------- ----------------
Cash and cash equivalents 178 42 4 5
Other current assets 628 421 163 66
Investments in non-consolidated companies
and other investments 128 121 199 -
--------------- --------------- --------------- ----------------
Property, plant and equipment, net 3,301 565 202 64
--------------- --------------- --------------- ----------------
Non current assets 166 12 - 15
--------------- --------------- --------------- ----------------
Other assets 166 12 - 15
--------------- --------------- --------------- ----------------
Total assets 4,401 1,161 568 150
=============== =============== =============== ================
Corporate Eliminations Total
-------------- ---------------- ---------------
Current assets 670 (439) 1,738
-------------- ---------------- ---------------
Cash and cash equivalents 216 - 445
Other current assets 454 (439) 1,293
Investments in non-consolidated companies
and other investments 1 - 449
-------------- ---------------- ---------------
Property, plant and equipment, net 49 - 4,181
-------------- ---------------- ---------------
Non current assets 1,664 (1,551) 306
-------------- ---------------- ---------------
Other assets 1,664 (1,551) 306
-------------- ---------------- ---------------
Total assets 2,384 (1,990) 6,674
============== ================ ===============
25. Segment information--Continued
As of December 31, 2002
----------------------------------------------------------------------------------
Exploration International
and Gas and (see separate
Production Supply Energy disclosure) Distribution
----------------------------------------------------------------------------------
Current assets 1,181 4,323 819 736 973
----------------------------------------------------------------------------------
Cash and cash equivalents 1 509 16 211 59
Other current assets 1,180 3,814 803 525 914
Investments in non-consolidated companies
and other investments 7 168 70 11 16
----------------------------------------------------------------------------------
Property, plant and equipment, net 11,611 3,186 1,881 1,024 296
----------------------------------------------------------------------------------
Non current assets 385 211 556 1,092 141
----------------------------------------------------------------------------------
Petroleum and Alcohol Account - - - - -
Government securities - - - - -
Other assets 385 211 556 1,092 141
----------------------------------------------------------------------------------
Total assets 13,184 7,888 3,326 2,863 1,426
==================================================================================
Corporate Eliminations Total
-------------------------------- --------------
Current assets 3,249 (959) 10,322
-------------------------------- --------------
Cash and cash equivalents 2,505 - 3,301
Other current assets 744 (959) 7,021
Investments in non-consolidated companies
and other investments 62 - 334
-------------------------------- --------------
Property, plant and equipment, net 226 - 18,224
-------------------------------- --------------
Non current assets 1,943 (1,054) 3,274
-------------------------------- --------------
Petroleum and Alcohol Account 182 - 182
Government securities 176 - 176
Other assets 1,585 (1,054) 2,916
-------------------------------- --------------
Total assets 5,480 (2,013) 32,154
================================ ==============
25. Segment information--Continued
As of December 31, 2002
----------------------------------------------------------------------
International
----------------------------------------------------------------------
Exploration
and Gas and
Production Supply Energy Distribution
-------------------------------------------------- -----------------
Current assets 374 215 37 109
-------------------------------------------------- -----------------
Cash and cash equivalents 90 16 - 35
Other current assets 284 199 37 74
Investments in non-consolidated companies
and other investments 9 - - 2
-------------------------------------------------- -----------------
Property, plant and equipment, net 835 126 11 49
-------------------------------------------------- -----------------
Non current assets 420 8 (9) -
-------------------------------------------------- -----------------
Other assets 420 8 (9) -
-------------------------------------------------- -----------------
Total assets 1,638 349 39 160
================================================== =================
Corporate Eliminations Total
--------------------------------- ------------
Current assets 201 (200) 736
--------------------------------- ------------
Cash and cash equivalents 70 - 211
Other current assets 131 (200) 525
Investments in non-consolidated companies
and other investments - - 11
--------------------------------- ------------
Property, plant and equipment, net 3 - 1,024
--------------------------------- ------------
Non current assets 1,275 (602) 1,092
--------------------------------- ------------
Other assets 1,275 (602) 1,092
--------------------------------- ------------
Total assets 1,479 (802) 2,863
================================= ============
25. Segment information--Continued
Revenues and net income by segment are as follows:
Year ended December 31, 2003
----------------------------------------------------------------------------------------
Exploration International
and Gas and (see separate
Production Supply Energy Disclosure) Distribution
---------------- ---------------- ---------------- ---------------- ----------------
Net operating revenues to third
parties 2,369 17,024 1,229 2,298 7,877
Inter-segment net operating revenues 13,329 6,695 250 129 138
---------------- ---------------- ---------------- ---------------- ----------------
Net operating revenues 15,698 23,719 1,479 2,427 8,015
Cost of sales (6,154) (19,944) (1,045) (1,398) (7,257)
Depreciation, depletion and (955) (397) (87) (288) (29)
amortization
Exploration, including exploratory
dry holes and impairment (452) - - (130) -
Selling, general and administrative
expenses (123) (732) (149) (208) (416)
Research and development expenses (92) (50) (6) - -
---------------- ---------------- ---------------- ---------------- ----------------
Costs and expenses (7,776) (21,123) (1,287) (2,024) (7,702)
Equity in results of
non-consolidated companies - 25 56 62 -
Financial income (expenses), net (317) 146 (78) (129) (62)
Employee benefit expense - - - - -
Other taxes (9) (24) (19) (25) (48)
Other expenses, net (224) (100) (387) (55) (1)
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) before income taxes
and minority interest and accounting
change 7,372 2,643 (236) 256 202
Income tax benefits (expense) (2,506) (874) 196 (154) (63)
Minority interest (59) (31) (156) (1) (1)
---------------- ---------------- ---------------- ---------------- ----------------
Income before effect of change in
accounting principle 4,807 1,738 (196) 101 138
---------------- ---------------- ---------------- ---------------- ----------------
Cumulative effect of change in
accounting principle,
net of taxes 697 - - - -
---------------- ---------------- ---------------- ---------------- ----------------
Net income (loss) 5,504 1,738 (196) 101 138
================ ================ ================ ================ ================
Corporate Eliminations Total
---------------- ---------------- ----------------
Net operating revenues to third
parties - - 30,797
Inter-segment net operating revenues - (20,541) -
---------------- ---------------- ----------------
-
Net operating revenues - (20,541) 30,797
Cost of sales - 20,382 (15,416)
Depreciation, depletion and
amortization (29) - (1,785)
Exploration, including exploratory
dry holes and impairment - - (582)
Selling, general and administrative (554) 91 (2,091)
expenses
Research and development expenses (53) - (201)
---------------- ---------------- ----------------
Costs and expenses (636) 20,473 (20,075)
Equity in results of
non-consolidated companies (2) - 141
Financial income (expenses), net 506 (202) (136)
Employee benefit expense (595) - (595)
Other taxes (208) - (333)
Other expenses, net (259) - (1,026)
---------------- ---------------- ----------------
Income (loss) before income taxes
and minority interest and accounting
change (1,194) (270) 8,773
Income tax benefits (expense) 698 40 (2,663)
Minority interest - - (248)
---------------- ---------------- ----------------
Income before effect of change in
accounting principle (496) (230) 5,862
---------------- ---------------- ----------------
Cumulative effect of change in
accounting principle,
net of taxes - - 697
---------------- ---------------- ----------------
Net income (loss) (496) (230) 6,559
================ ================ ================
25. Segment information--Continued
Year ended December 31, 2003
---------------------------------------------------------------------
International
---------------------------------------------------------------------
Exploration
and Gas and
Production Supply Energy Distribution
--------------- ----------------- ---------------- ----------------
Net operating revenues to third parties 535 998 159 592
Inter-segment net operating revenues 534 633 3 29
--------------- ----------------- -------------- ---------------
Net operating revenues 1,069 1,631 162 621
Cost of sales (300) (1,478) (103) (585 )
Depreciation, depletion and amortization (223) (46) (11) (4 )
Exploration, including exploratory dry holes
and impairment (130) - - -
Selling, general and administrative expenses (59) (34) (2) (32 )
--------------- ----------------- -------------- ---------------
Costs and expenses (712) (1,558) (116) (621 )
Equity in results of non-consolidated companies 2 6 (2) -
Financial income (expenses), net (100) (11) - -
Other taxes (3) (5) - (5 )
Other expenses, net (73) (9) 7 -
--------------- ----------------- -------------- ---------------
Income (loss) before income taxes and
minority interest 183 54 51 (5 )
Income tax benefits (expense) (132) (2) - -
Minority interest 3 (2) (1) (1 )
--------------- ----------------- -------------- ---------------
Net income (loss) 54 50 50 (6 )
=============== ================= ============== ===============
Corporate Eliminations Total
---------------- --------------------------------
Net operating revenues to third parties 14 - 2,298
Inter-segment net operating revenues - (1,070) 129
-------------- --------------- ---------------
Net operating revenues 14 (1,070) 2,427
Cost of sales (14) 1,082 (1,398)
Depreciation, depletion and amortization (4) - (288)
Exploration, including exploratory dry holes
and impairment - - (130)
Selling, general and administrative expenses (81) - (208)
-------------- --------------- ---------------
Costs and expenses (99) 1,082 (2,024)
Equity in results of non-consolidated companies 56 - 62
Financial income (expenses), net (18) - (129)
Other taxes (12) - (25)
Other expenses, net 20 - (55)
-------------- --------------- ---------------
Income (loss) before income taxes and
minority interest (39) 12 256
Income tax benefits (expense) (20) - (154)
Minority interest - - (1)
-------------- --------------- ---------------
Net income (loss) (59) 12 101
============== =============== ===============
25. Segment information--Continued
Year ended December 31, 2002
---------------------------------------------------------------------------------
Exploration International
and Gas and (see separate
Production Supply Energy disclosure) Distribution
--------------- --------------- ------------------------------- ---------------
Net operating revenues to third parties 2,346 12,073 747 986 6,460
Inter-segment net operating revenues 10,700 5,269 170 99 102
--------------- --------------- --------------- --------------- ---------------
Net operating revenues 13,046 17,342 917 1,085 6,562
Cost of sales (4,829) (15,242) (594) (812) (5,861)
Depreciation, depletion and amortization (1,378) (358) (45) (106) (24)
Exploration, including exploratory dry holes
and impairment (449) - - (61) -
Selling, general and administrative expenses (177) (584) (54) (90) (442)
Research and development expenses (74) (37) (5) - -
--------------- --------------- --------------- --------------- ---------------
Costs and expenses (6,907) (16,221) (698) (1,069) (6,327)
Equity in results of non-consolidated
companies - 11 (94) (95) -
Financial income (expenses), net (943) (13) (18) 31 5
Employee benefit expense - (2) - - (14)
Other taxes - (18) (9) (12) (36)
Other expenses, net (160) 5 (495) 14 (10)
--------------- --------------- --------------- --------------- ---------------
Income (loss) before income taxes and
minority interest 5,036 1,104 (397) (46) 180
Income tax benefits (expense) (1,623) (386) (104) (64) (58)
Minority interest - (7) 311 (4) (31)
--------------- --------------- --------------- --------------- ---------------
Net income (loss) 3,413 711 (190) (114) 91
=============== =============== =============== =============== ===============
Corporate Eliminations Total
--------------- --------------- ---------------
Net operating revenues to third parties - - 22,612
Inter-segment net operating revenues - (16,340) -
--------------- --------------- ---------------
Net operating revenues - (16,340) 22,612
Cost of sales - 15,832 (11,506)
Depreciation, depletion and amortization (19) - (1,930)
Exploration, including exploratory dry holes
and impairment - - (510)
Selling, general and administrative expenses (394) - (1,741)
Research and development expenses (31) - (147)
--------------- --------------- ---------------
Costs and expenses (444) 15,832 (15,834)
Equity in results of non-consolidated
companies - - (178)
Financial income (expenses), net (762) - (1,700)
Employee benefit expense (435) - (451)
Other taxes (285) - (360)
Other expenses, net (231) 20 (857)
--------------- --------------- ---------------
Income (loss) before income taxes and
minority interest (2,157) (488) 3,232
Income tax benefits (expense) 914 168 (1,153)
Minority interest (37) - 232
--------------- --------------- ---------------
Net income (loss) (1,280) (320) 2,311
=============== =============== ===============
25. Segment information--Continued
Year ended December 31, 2002
--------------------------------------------------------------------
International
--------------------------------------------------------------------
Exploration
and Gas and
Production Supply Energy Distribution
--------------- --------------- --------------- ---------------
Net operating revenues to third parties 96 473 36 377
Inter-segment net operating revenues 188 445 - -
--------------- --------------- --------------- ---------------
Net operating revenues 284 918 36 377
Cost of sales (75) (848) (30) (391)
Depreciation, depletion and amortization (87) (13) - (5)
Exploration, including exploratory dry holes
and impairment (61) - - -
Selling, general and administrative expenses (29) (9) - (19)
--------------- --------------- --------------- ---------------
Costs and expenses (252) (870) (30) (415)
Equity in results of non-consolidated companies - - - -
Financial income (expenses), net 6 (7) (6) -
Other taxes (1) (3) - (4)
Other expenses, net 9 (2) - 1
--------------- --------------- --------------- ---------------
Income (loss) before income taxes and
minority interest 46 36 - (41)
Income tax benefits (expense) (50) - - -
Minority interest (1) (4) - -
--------------- --------------- --------------- ---------------
Net income (loss) (5) 32 - (41)
=============== =============== =============== ===============
Corporate Eliminations Total
---------------- ---------------- ----------------
Net operating revenues to third parties 4 - 986
Inter-segment net operating revenues - (534) 99
---------------- ---------------- ----------------
Net operating revenues 4 (534) 1,085
Cost of sales (2) 534 (812)
Depreciation, depletion and amortization (1) - (106)
Exploration, including exploratory dry holes
and impairment - - (61)
Selling, general and administrative expenses (33) - (90)
---------------- ---------------- ----------------
Costs and expenses (36) 534 (1,069)
Equity in results of non-consolidated companies (95) - (95)
Financial income (expenses), net 38 - 31
Other taxes (4) - (12)
Other expenses, net 6 - 14
---------------- ---------------- ----------------
Income (loss) before income taxes and
minority interest (87) - (46)
Income tax benefits (expense) (14) - (64)
Minority interest 1 - (4)
---------------- ---------------- ----------------
Net income (loss) (100) - (114)
================ ================ ================
25. Segment information--Continued
Year ended December 31, 2001
---------------------------------------------------------------------------------
Exploration International
and Gas and (see separate
Production Supply Energy disclosure) Distribution
--------------- --------------- -------------------------------- ---------------
Net operating revenues to third parties 308 15,969 659 777 6,836
Inter-segment net operating revenues 9,796 5,757 177 71 100
--------------- --------------- ---------------- --------------- ---------------
Net operating revenues 10,104 21,726 836 848 6,936
Cost of sales (3,766) (17,279) (600) (541) (6,310)
Depreciation, depletion and amortization (1,228) (301) (62) (101) (28)
Exploration, including exploratory dry holes
and impairment (463) - - (86) -
Selling, general and administrative expenses (128) (745) (46) (57) (414)
Research and development expenses (63) (40) (3) - -
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses (5,648) (18,365) (711) (785) (6,752)
Equity in results of non-consolidated -
companies - 28 8 (44)
Financial income (expenses), net (372) (112) (242) 12 (1)
Employee benefit expense - - - - -
Other taxes - (14) (3) (2) (36)
Other expenses, net (458) 333 (26) 90 60
--------------- --------------- ---------------- --------------- ---------------
Income (loss) before income taxes and
minority interest 3,626 3,596 (138) 119 207
Income tax benefits (expense) (1,187) (1,058) (38) (91) (101)
Minority interest - - 122 (4) (28)
--------------- --------------- ---------------- --------------- ---------------
Net income (loss) 2,439 2,538 (54) 24 78
=============== =============== ================ =============== ===============
Corporate Eliminations Total
--------------- --------------- ---------------
Net operating revenues to third parties - - 24,549
Inter-segment net operating revenues - (15,901) -
--------------- --------------- ---------------
Net operating revenues - (15,901) 24,549
Cost of sales - 15,689 (12,807)
Depreciation, depletion and amortization (9) - (1,729)
Exploration, including exploratory dry holes
and impairment - - (549)
Selling, general and administrative expenses (361) - (1,751)
Research and development expenses (26) - (132)
--------------- --------------- ---------------
Costs and expenses (396) 15,689 (16,968)
Equity in results of non-consolidated - -
companies (8)
Financial income (expenses), net 364 3 (348)
Employee benefit expense (594) - (594)
Other taxes (240) - (295)
Other expenses, net (1,543) - (1,544)
--------------- --------------- ---------------
Income (loss) before income taxes and
minority interest (2,409) (209) 4,792
Income tax benefits (expense) 1,001 85 (1,389)
Minority interest (2) - 88
--------------- --------------- ---------------
Net income (loss) (1,410) (124) 3,491
=============== =============== ===============
25. Segment information--Continued
Year ended December 31, 2001
-------------------------------------------------------------------
International
-------------------------------------------------------------------
Exploration
and Gas and
Production Supply Energy Distribution
-------------------------------- ---------------- ----------------
Net operating revenues to third parties 217 469 - 90
Inter-segment net operating revenues 178 160 - -
-------------------------------- ---------------- ----------------
Net operating revenues 395 629 - 90
Cost of sales (129) (597) - (76)
Depreciation, depletion and amortization (94) (6) - (1)
Exploration, including exploratory dry holes
and impairment (86) - - -
Selling, general and administrative expenses (36) (9) - (7)
-------------------------------- ---------------- ----------------
Costs and expenses (345) (612) - (84)
Equity in results of non-consolidated companies - - - -
Financial income (expenses), net 13 (1) - -
Other taxes - (1) - (1)
Other expenses, net 100 - - -
-------------------------------- ---------------- ----------------
Income (loss) before income taxes and
minority interest 163 15 - 5
Income tax benefits (expense) (58) (8) - (29)
Minority interest - (4) - -
-------------------------------- ---------------- ----------------
Net income (loss) 105 3 - (24)
================================ ================ ================
Corporate Eliminations Total
---------------- --------------- ----------------
Net operating revenues to third parties 1 - 777
Inter-segment net operating revenues - (267) 71
---------------- --------------- ----------------
Net operating revenues 1 (267) 848
Cost of sales (1) 262 (541)
Depreciation, depletion and amortization - - (101)
Exploration, including exploratory dry holes
and impairment - - (86)
Selling, general and administrative expenses (5) - (57)
---------------- --------------- ----------------
Costs and expenses (6) 262 (785)
Equity in results of non-consolidated companies (44) - (44)
Financial income (expenses), net - - 12
Other taxes - - (2)
Other expenses, net (10) - 90
---------------- --------------- ----------------
Income (loss) before income taxes and
minority interest (59) (5) 119
Income tax benefits (expense) 4 - (91)
Minority interest - - (4)
---------------- --------------- ----------------
Net income (loss) (55) (5) 24
================ =============== ================
25. Segment information--Continued
Capital expenditures incurred by segment for the years ended December 31,
2003, 2002 and 2001 are as follows:
Year ended December 31,
---------------------------------------------------------
2003 2002 2001
------------------ ------------------- ------------------
Exploration and Production 3,658 3,156 2,866
Supply 1,451 945 642
Gas and Energy 694 268 192
International
Exploration and Production 428 224 318
Supply 18 8 3
Distribution 33 2 2
Gas and Energy 1 4 3
Distribution 106 139 86
Corporate 162 165 142
------------------ ------------------- ------------------
6,551 4,911 4,254
================== =================== ==================
The Company's gross sales, classified by geographic destination, are as
follows:
Year ended December 31,
--------------------------------------------
2003 2002 2001
------------- --------------- --------------
Brazil 34,025 27,410 30,122
International 8,665 5,577 4,023
------------- --------------- --------------
42,690 32,987 34,145
============= =============== ==============
The total amounts sold of products and services to the two major customers
in 2003, 2002 and 2001 were US$ 3,498, US$ 2,693, US$ 2,907 and US$ 2,688,
US$ 2,549, US$ 2,871, respectively.
26. Related party transactions
The Company is controlled by the Federal Government and has numerous
transactions with other state-owned companies in the ordinary course of
business.
Transactions with major related parties resulted in the following
balances:
As of December 31,
-----------------------------------------------------------
2003 2002
------------------------------ ----------------------------
Assets Liabilities Assets Liabilities
-------------- -------------- ------------- --------------
PETROS (Pension fund) 283 38 176 21
Banco do Brasil S.A. 6,164 230 1,859 141
BNDES (Note 12 (b)) - 1,299 - 599
Federal Government 94 - 79 -
ANP
Restricted deposits for legal
proceedings 297 - 290 -
Government securities (Note 6) 38 - 28 -
Petroleum and Alcohol Account -
Receivable from Federal Government (Note 11) 239 - 182 -
Others 941 57 721 26
-------------- -------------- ------------- --------------
8,056 1,624 3,335 787
-------------- -------------- ------------- --------------
Current 6,872 128 2,380 62
-------------- -------------- ------------- --------------
Long-term 1,184 1,496 955 725
-------------- -------------- ------------- --------------
26. Related party transactions--Continued
These balances are included in the following balance sheet
classifications:
As of December 31,
------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
Assets Liabilities Assets Liabilities
--------------- -------------- ------------- ---------------
Assets
Current
Cash and cash equivalents 6,128 - 1,859 -
Accounts receivable (Note 7) 284 - 329 -
Other current assets 460 - 192 -
Other
Accounts receivable (Note 7) 199 - 181 -
Government securities 38 - 28 -
Petroleum and Alcohol Account - receivable
from Federal Government (Note 11) 239 - 182 -
Restricted deposits for legal proceedings 297 - 290 -
Pension Fund 283 - 176 -
Other assets 128 - 98 -
Liabilities
Current
Current portion of long-term debt - 59 - 45
Current liabilities - 69 - 17
Short-term debt
Long-term
Long-term debt - 1,212 - 546
Other liabilities - 284 - 179
--------------- -------------- ------------- ---------------
8,056 1,624 3,335 787
=============== ============== ============= ===============
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION Expressed in Millions of United
States Dollars (except when specifically indicated)
--------------------------------------------------------------------------------
26. Related party transactions--Continued
The principal amounts of business and financial operations carried out
with related parties are as follows:
Year ended December 31,
--------------------------------------------------------------------
2003 2002 2001
--------------------- ----------------------------------------------
Income Expense Income Expense Income Expense
--------- ----------- ---------- ----------------------- -----------
Sales of products and services
BRASKEM S.A. 754 - 631 - 929 -
Centrais Elet. do Norte do Brasil
S.A. -
Eletronorte 205 - 159 - 120 -
COPESUL S.A. 545 - 265 - 433 -
Manaus Energia S.A. 425 - 272 - 214 -
Petroquimica Uniao S.A. 543 - 350 - 428 -
Others 729 (164) 638 (308) 834 -
Financial income
Petroleum and Alcohol Account -
Receivable from Federal Government
(Note 11) 10 - 2 - 16 -
Government securities (Note 6) 71 - 84 - 243 -
Others 155 - 760 - 863 -
Financial expenses - (178) - (234) - (118)
Other expenses, net - - - (29) - (405)
--------- ----------- ---------- ----------------------- -----------
3,437 (342) 3,161 (571) 4,080 (523)
========= =========== ========== ======================= ===========
PETROLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION
ACTIVITIES (UNAUDITED)
Expressed in Millions of United States Dollars (except when specifically
indicated)
In accordance with SFAS 69 - Disclosures About Oil and Gas Producing
Activities ("SFAS 69"), this section provides supplemental information on
oil and gas exploration and producing activities of the Company. The
information included in items (i) through (iii) provides historical cost
information pertaining to costs incurred in exploration, property
acquisitions and development, capitalized costs and results of operations.
The information included in items (iv) and (v) present information on
PETROBRAS' estimated net proved reserve quantities, standardized measure
of estimated discounted future net cash flows related to proved reserves,
and changes in estimated discounted future net cash flows.
Beginning in 1995, the Federal Government of Brazil undertook a
comprehensive reform of the country's oil and gas regulatory system. On
November 9, 1995, the Brazilian Constitution was amended to authorize the
Federal Government to contract with any state or privately-owned company
to carry out the activities related to the upstream and downstream
segments of the Brazilian oil and gas sector. This amendment eliminated
PETROBRAS' effective monopoly. The amendment was implemented by the
Petroleum Law, which liberated the fuel market in Brazil beginning January
1, 2002.
The Petroleum Law established a new regulatory framework ending PETROBRAS'
exclusive agency and enabling competition in all aspects of the oil and
gas industry in Brazil. As provided in the Petroleum Law, PETROBRAS was
granted the exclusive right for a period of 27 years to exploit the
petroleum reserves in all fields where the Company had previously
commenced production. However, the Petroleum Law established a procedural
framework for PETROBRAS to claim exclusive exploratory (and, in case of
success, development) rights for a period of up to three years with
respect to areas where the Company could demonstrate that it had
"established prospects." To perfect its claim to explore and develop these
areas, the Company had to demonstrate that it had the requisite financial
capacity to carry out these activities, alone or through financing or
partnering arrangements.
The "International" geographic includes activities in Angola, Argentina,
Bolivia, Colombia, Ecuador, Mexico, Nigeria, Peru, The United States of
America and Venezuela. The Company has immaterial non-consolidated
companies involved in exploration and production activities; the amounts
related to such are in the line item titled "Company's share of
unconsolidated affiliates".
(i) Capitalized costs relating to oil and gas producing activities
The following table summarizes capitalized costs for oil and gas
exploration and production activities with the related accumulated
depreciation, depletion and amortization, and asset retirement
obligation assets:
As of December 31, 2003
Brazil International Worldwide
---------------- -------------------- ----------------
Unproved oil and gas properties 1,253 650 1,903
Proved oil and gas properties 11,924 3,835 15,759
Support equipment 10,336 516 10,852
---------------- -------------------- ----------------
Gross capitalized costs 23,513 5,001 28,514
Depreciation and depletion (11,458) (1,830) (13,288)
---------------- -------------------- ----------------
12,055 3,171 15,226
Construction and installations in progress 4,687 130 4,817
---------------- -------------------- ----------------
16,742 3,301 20,043
Company's share by unconsolidated affiliates - 78 78
---------------- -------------------- ----------------
Net capitalized costs 16,742 3,379 20,121
================ ==================== ================
As of December 31, 2002
------------------------------------------------------
Brazil International Worldwide
---------------- -------------------- ----------------
Unproved oil and gas properties 538 337 875
Proved oil and gas properties 10,049 1,192 11,241
Support equipment 8,062 15 8,077
---------------- -------------------- ----------------
Gross capitalized costs 18,649 1,544 20,193
Depreciation and depletion (10,514) (709) (11,223)
---------------- -------------------- ----------------
8,135 835 8,970
Construction and installations in progress 3,476 - 3,476
---------------- -------------------- ----------------
Net capitalized costs 11,611 835 12,446
================ ==================== ================
(ii) Costs incurred in oil and gas property acquisition, exploration and
development activities
Costs incurred are summarized below and include both amounts
expensed and capitalized:
As of December 31, 2003
-----------------------------------------------
Brazil International Worldwide
(1)
--------------- --------------- ---------------
Property acquisitions
Proved - 2,255 2,255
Unproved 7 6 13
Exploration costs 827 96 923
Development costs 3,025 285 3,310
--------------- --------------- ---------------
3,859 2,642 6,501
=============== =============== ===============
As of December 31, 2002
-----------------------------------------------
Brazil International Worldwide
--------------- --------------- ---------------
Property acquisitions
Proved - 15 15
Unproved 12 4 16
Exploration costs 725 104 829
Development costs 2,691 82 2,773
--------------- --------------- ---------------
3,428 205 3,633
=============== =============== ===============
As of December 31, 2001
-----------------------------------------------
Brazil International Worldwide
--------------- --------------- ---------------
Property acquisitions
Unproved 62 121 183
Exploration costs 528 110 638
Development costs 2,411 119 2,530
--------------- --------------- ---------------
3,001 350 3,351
=============== =============== ===============
(1) Includes PEPSA as of December 31,2003. See also Note 19 for
more information.
(iii) Results of operations for oil and gas producing activities
The Company's results of operations from oil and gas producing
activities for the years ending December 31, 2003, 2002 and 2001 are
shown in the following table. The Company transfers substantially
all of its Brazilian crude oil and gas production to the supply
segment in Brazil. The prices calculated by the Company's model may
not be indicative of the price the Company would have realized had
this production been sold in an unregulated spot market.
Additionally, the prices calculated by the Company's model may not
be indicative of the future prices to be realized by the Company
after January 1, 2002, when full price deregulation began. Gas
prices used are contracted prices to third parties.
Production costs are lifting costs incurred to operate and maintain
productive wells and related equipment and facilities, including
such costs as operating labor, materials, supplies, fuel consumed in
operations and the costs of operating natural liquid gas plants.
Production costs also include administrative expenses and
depreciation and amortization of equipment associated with
production activities.
Exploration expenses include the costs of geological and geophysical
activities and non-productive exploratory wells. Depreciation and
amortization expenses relate to assets employed in exploration and
development activities. In accordance with SFAS 69, income taxes are
based on statutory tax rates, reflecting allowable deductions.
Interest income and expense are excluded from the results reported
in this table.
(iii) Results of operations for oil and gas producing
activities--Continued
As of December 31, 2003
-----------------------------------------------
Brazil International Worldwide
(1)
--------------- --------------- ---------------
Net operating revenues:
Sales to third parties 2,369 535 2,904
Intersegment 13,329 534 13,863
--------------- --------------- ---------------
15,698 1,069 16,767
Production costs (6,154) (355) (6,509)
Exploration expenses (387) (87) (474)
Depreciation, depletion, amortization (955) (217) (1,172)
Impairment of oil and gas properties (65) (5) (70)
--------------- --------------- ---------------
Results before income taxes 8,137 405 8,542
Income tax expense (2,767) (103) (2,870)
--------------- --------------- ---------------
5,370 302 5,672
Company's share of unconsolidated affiliates - 3 3
--------------- --------------- ---------------
Results of operations 5,370 305 5,675
--------------- --------------- ---------------
(1) Includes PEPSA from June 1, 2003.
As of December 31, 2002
-----------------------------------------------
Brazil International Worldwide
--------------- --------------- ---------------
Net operating revenues:
Sales to third parties 2,346 96 2,442
Intersegment 10,700 188 10,888
--------------- --------------- ---------------
13,046 284 13,330
Production costs (4,829) (75) (4,904)
Exploration expenses (392) (43) (435)
Depreciation, depletion, amortization (1,378) (87) (1,465)
Impairment of oil and gas properties (57) (18) (75)
--------------- --------------- ---------------
Results before income taxes 6,390 61 6,451
Income tax expense (2,173) (58) (2,231)
--------------- --------------- ---------------
Results of operations 4,217 3 4,220
--------------- --------------- ---------------
(iii) Results of operations for oil and gas producing
activities--Continued
As of December 31, 2001
-----------------------------------------------
Brazil International Worldwide
--------------- --------------- ---------------
Net operating revenues:
Sales to third parties 308 217 525
Intersegment 9,796 178 9,974
--------------- --------------- ---------------
10,104 395 10,499
Production costs (3,766) (112) (3,878)
Exploration expenses (334) (70) (404)
Depreciation, depletion, amortization (1,228) (94) (1,322)
Impairment of oil and gas properties (129) (16) (145)
--------------- --------------- ---------------
Results before income taxes 4,647 103 4,750
Income tax expense (1,580) (43) (1,623)
--------------- --------------- ---------------
Results of operations 3,067 60 3,127
--------------- --------------- ---------------
(iv) Reserve quantities information
The Company's estimated net proved oil and gas reserves and changes
thereto for the years 2003, 2002 and 2001 are shown in the following
table. Proved reserves are estimated by the Company's reservoir
engineers in accordance with the reserve definitions prescribed by
the Securities and Exchange Commission.
Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved reserves do not include
additional quantities recoverable beyond the term of the concession
or contract, or that may result from extensions of currently proved
areas, or from application of secondary or tertiary recovery
processes not yet tested and determined to be economic.
Proved developed reserves are the quantities expected to be
recovered from existing wells with existing equipment and operating
methods. Proved undeveloped reserves are those volumes which are
expected to be recovered as a result of future investments in
drilling, re-equipping existing wells and installing facilities
necessary to deliver the production from these reserves.
(iv) Reserve quantities information--Continued
In some cases, substantial new investments in additional wells and
related facilities will be required to recover these proved
reserves. Due to the inherent uncertainties and the limited nature
of reservoir data, estimates of reserves are subject to change as
additional information becomes available.
A summary of the annual changes in the proved reserves of crude oil
and natural gas follows:
Oil (millions of barrels) Gas (billions of cubic feet)
------------------------------ ---------------------------------
Brazil International Worldwide Brazil International Worldwide
------- ------------- --------- ------ ------------- ----------
Worldwide Net Proved Developed
and Undeveloped Reserves
Reserves January 1, 2001 8,227.4 128.9 8,356.3 6,266.8 2,173.2 8,440.0
------- ----- ------- ------- ------- -------
Revisions of previous estimates (949.6) (0.3) (949.9) 401.1 13.0 414.1
Extensions, discoveries and
improved recovery 877.6 2.2 879.8 835.3 65.5 900.8
Sales of reserves in place (31.6) (20.2) (51.8) (194.0) (38.8) (232.8)
Production for the year (471.0) (14.6) (485.6) (423.9) (50.7) (474.6)
------- ----- ------- ------- ------- -------
Reserves at December 31, 2001 7,652.8 96.0 7,748.8 6,885.3 2,162.2 9,047.5
------- ----- ------- ------- ------- -------
Revisions of previous estimates 822.0 3.1 825.1 787.0 (49.8) 737.2
Extensions, discoveries and
improved recovery 888.2 10.8 899.0 102.2 9.2 111.4
Sales of reserves in place 23.6 23.6 - 71.5 71.5
Production for the year (529.8) (11.8) (541.6) (446.7) (48.1) (494.8)
------- ----- ------- ------- ------- -------
Reserves at December 31, 2002 8,833.2 121.7 8,954.9 7,327.8 2,145.0 9,472.8
======= ===== ======= ======= ======= =======
Revisions of previous estimates (682.1) (10.8) (692.9) 459.3 (294.8) 164.5
Extensions, discoveries and
improved recovery 1,439.8 55.5 1,495.3 778.3 80.1 858.4
Purchase of reserves in place
- PEPSA - 602.8 602.8 - 1,346.9 1,346.9
Sales of reserves in place - (7.7) (7.7) - (49.5) (49.5)
Production for the year (539.5) (40.8) (580.3) (454.0) (136.8) (590.8)
------- ----- ------- ------- ------- -------
Reserves at December 31, 2003 9,051.4 720.7* 9,772.1 8,111.4 3,090.9* 11,202.3
======= ===== ======= ======= ======= =======
Net proved Developed Reserves
At January 1, 2001 3,780.8 80.1 3,860.9 3,614.3 1,368.4 4,982.7
At December 31, 2001 3,899.4 66.6 3,966.0 3,946.0 1,336.8 5,282.8
At December 31, 2002 3,912.9 94.7 4,007.6 3,892.5 2,043,9 5,936.4
At December 31, 2003 3,629.5 404.1 4,033.6 4,398.1 2,548.4 6,946.5
(*) Includes reserves of 253.2 million barrels of oil and 565.7 billions
of cubic feet of gas attributable to a consolidated subsidiary in
which there is a 41.38 % minority interest.
(v) Standardized measure of discounted future net cash flows relating to
proved oil and gas quantities and changes therein
The standardized measure of discounted future net cash flows,
related to the above proved oil and gas reserves, is calculated in
accordance with the requirements of SFAS 69. Estimated future cash
inflows from production in Brazil are computed by applying year-end
prices based upon the Company's internal pricing methodology for oil
and gas to year-end quantities of estimated net proved reserves.
Estimated future cash inflows from production related to the
Company's International segment are computed by applying year-end
prices for oil and gas to year-end quantities of estimated net
proved reserves. Future price changes are limited to those provided
by contractual arrangements in existence at the end of each
reporting year. Future development and production costs are those
estimated future expenditures necessary to develop and produce
year-end estimated proved reserves based on year-end cost
indicators, assuming continuation of year-end economic conditions.
Estimated future income taxes are calculated by applying appropriate
year-end statutory tax rates. These rates reflect allowable
deductions and are applied to estimated future pre-tax net cash
flows, less the tax basis of related assets. Discounted future net
cash flows are calculated using 10% midperiod discount factors. This
discounting requires a year-by-year estimate of when the future
expenditures will be incurred and when the reserves will be
produced.
The information provided does not represent management's estimate of
PETROBRAS' expected future cash flows or value of proved oil and gas
reserves. Estimates of proved reserve quantities are imprecise and
change over time as new information becomes available. Moreover,
probable and possible reserves, which may become proved in the
future, are excluded from the calculations.
(v) Standardized measure of discounted future net cash flows relating to
proved oil and gas quantities and changes therein--Continued
The arbitrary valuation prescribed under SFAS 69 requires
assumptions as to the timing and amount of future development and
production costs. The calculations are made as of December 31 each
year and should not be relied upon as an indication of PETROBRAS'
future cash flows or the value of its oil and gas reserves.
Brazil International Worldwide
--------------- --------------- ---------------
At December 31, 2003
Future cash inflows 216,112 20,881 236,993
Future production costs (86,666) (5,212) (91,878)
Future development costs (18,727) (1,799) (20,526)
Future income tax expenses (38,982) (4,651) (43,633)
--------------- --------------- ---------------
Undiscounted future net cash flows 71,737 9,219 80,956
10 percent midyear annual discount for
timing of estimated cash flows (36,215) (4,013) (40,228)
Company's share by unconsolidated affiliates - 91 91
--------------- --------------- ---------------
Standardized measure of discounted future
net cash flows 35,522 5,297* 40,819
=============== =============== ===============
At December 31, 2002 210,063 6,759 216,822
Future cash inflows (84,191) (1,625) (85,816)
Future production costs (13,798) (358) (14,156)
Future development costs (37,934) (1,906) (39,840)
--------------- --------------- ---------------
74,140 2,870 77,010
Undiscounted future net cash flows
10 percent midyear annual discount for
timing of estimated cash flows (36,932) (1,364) (38,296)
--------------- --------------- ---------------
Standardized measure of discounted future net
cash flows 37,208 1,506 38,714
=============== =============== ===============
At December 31, 2001 129,989 5,217 135,206
Future cash inflows (56,087) (1,356) (57,443)
Future production costs (9,650) (277) (9,927)
Future development costs (21,810) (1,526) (23,336)
--------------- --------------- ---------------
Undiscounted future net cash flows 42,442 2,058 44,500
10 percent midyear annual discount for timing of
estimated cash flows (21,531) (1,023) (22,554)
--------------- --------------- ---------------
Standardized measure of discounted future net
cash flows 20,911 1,035 21,946
=============== =============== ===============
(*) Includes US$ 1,459 attributable to a consolidated subsidiary in
which there is a 41.38% minority interest.
PETROLEO BRASILEIRO S.A. - PETROBRAS
AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(UNAUDITED)
Expressed in Millions of United States Dollars
(except when specifically indicated)
--------------------------------------------------------------------------------
(v) Standardized measure of discounted future net cash flows relating to
proved oil and gas quantities and changes therein--Continued
The following are the principal sources of change in the
standardized measure of discounted net cash flows:
Brazil International Worldwide
----------------------------------------------------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
----------------------------------------------------------------------
Balance at January 1 37,208 20,911 31,621 1,506 1,035 1,375 38,714 21,946 32,996
Sales and transfers of oil
and gas, net of
production costs (9,151) (7,921) (6,338) (774) (223) (283) (9,925) (8,144) (6,621)
Development costs incurred 3,025 2,691 2,411 273 82 119 3,298 2,773 2,530
Purchases of reserves - - - 3,473 168 - 3,473 168 -
Sales of reserves - - (550) (49) - (163) (49) - (713)
Extensions, discoveries and
improved recovery,
less related costs 6,294 3,908 2,629 535 121 95 6,829 4,029 2,724
Revisions of previous
quantity estimates (4,766) 6,189 (3,944) (349) (45) 163 (5,115) 6,144 (3,781)
Net changes in prices and
production costs (1,398) 18,500 (15,446) 630 613 (507) (768) 19,113 (15,953)
Changes in future
development costs 1,549 (673) (339) (347) 13 (147) 1,202 (660) (486)
Accretion of discount 3,721 3,149 5,670 597 (26) (14) 4,318 3,123 5,656
Net change in income taxes (960) (9,546) 5,197 (198) (232) 397 (1,158) (9,778) 5,594
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Balance at December 31 35,522 37,208 20,911 5,297 1,506 1,035 40,819 38,714 21,946
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* * *
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.
PETROLEO BRASILEIRO S.A--PETROBRAS
By: /s/ Jose Sergio Gabrielli de Azevedo
-------------------------------------
Jose Sergio Gabrielli de Azevedo
Chief Financial Officer and Investor Relations
Director
Date: April 12, 2004